================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K / A
(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, 2001 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 incorporation or (I.R.S. Employer Identification No.)
organization)
102 Witmer Road
Horsham, Pennsylvania 19044
---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
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.[_]
As of March 25, 2002, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was approximately $290,084,000 based on the
last sale price of the Common Stock as reported by the The Nasdaq Stock Market.
This calculation excludes 4,472,706 shares held by directors, executive
officers, and a holder of more than 10% of the registrant's Common Stock.
As of March 25, 2002, there were 14,145,407 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
================================================================================
================================================================================
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS ......................................................................... 1
ITEM 2. PROPERTIES ....................................................................... 19
ITEM 3. LEGAL PROCEEDINGS ................................................................ 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............................. 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS .......................................................................... 21
ITEM 6. SELECTED FINANCIAL DATA .......................................................... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................................ 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................................... 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ............................................................. 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............................... 29
ITEM 11. EXECUTIVE COMPENSATION ........................................................... 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................... 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................................... 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ................. 38
NEOSE, GlycoAdvance, GlycoTherapeutics, and GlycoActives are trademarks of Neose
Technologies, Inc. This Form 10-K also includes trademarks and trade names of
other companies.
================================================================================
EXPLANATORY NOTE
The sole purpose of this Form 10-K/A is to add the information required by
(i) Part III of Form 10-K to the Registrant's Form 10-K, which was originally
filed with the Securities and Exchange Commission on March 29, 2002, pursuant to
General Instruction G(3) of Form 10-K and (ii) Item 9 of Form 10-K.
PART I
ITEM 1. BUSINESS.
Forward-Looking Statements
Some of the statements in this Annual Report on Form 10-K and the Exhibits
contain forward-looking statements within Section 21E of the Securities Exchange
Act of 1934. When used in this Form 10-K and the Exhibits, the words
"anticipate," "believe," "estimate," "may," "expect," "intend," and similar
expressions are generally intended to identify forward-looking statements. These
forward-looking statements include, among others, the statements in Management's
Discussion and Analysis of Financial Condition and Results of Operations about
our:
. expectations for increases in operating expenses;
. expectations for increases in research and development, and
marketing, general and administrative expenses in order to
develop products, manufacture commercial quantities of products
and commercialize our technology;
. expectations for the development, manufacturing, and approval of
new products, including our own proprietary products;
. expectations for incurring additional capital expenditures to
expand our manufacturing capabilities;
. expectations for generating revenue or becoming profitable on a
sustained basis;
. ability to enter into additional collaboration agreements and the
ability of our existing collaboration partners to commercialize
products incorporating our technologies;
. estimate of the sufficiency of our existing cash and cash
equivalents and investments to finance our operating and capital
requirements;
. expected losses; and
. expectations for future capital requirements.
Our actual results could differ materially from those results expressed in,
or implied by, these forward-looking statements. Potential risks and
uncertainties that could affect our actual results include the following:
. our ability to commercialize any products or technologies;
. our ability to maintain our existing collaborative arrangements
and enter into new collaborative arrangements;
. our ability to develop commercial-scale manufacturing facilities;
. our ability to protect our proprietary products, know-how, and
manufacturing processes;
. unanticipated cash requirements to support current operations or
research and development;
. the timing and extent of funding requirements for the activities
of our joint venture with McNeil Nutritionals;
. our ability to attract and retain key personnel; and
. general economic conditions.
These and other risks and uncertainties that could affect our actual
results are discussed in greater detail in this Annual Report on Form 10-K.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance, or achievements. We do not assume responsibility for the
accuracy and completeness of the forward-looking statements.
We do not undertake any duty to update after the date of this Annual Report
on Form 10-K any of the forward-looking statements in this report to conform
them to actual results.
1
RISK FACTORS
You should carefully consider the risks and uncertainties described below.
If any of the following occur, our business, financial condition, or operating
results could be materially harmed. This could cause the trading price of our
common stock to decline, and you may lose all or part of your investment.
Risks Related to Our Business
We have not yet commercialized any products or technologies, and we may never
become profitable.
We have not yet 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. Even if we or our collaborators commercialize one or
more of our technologies or any products that incorporate our technologies, we
may not become profitable. Our ability to achieve profitability is dependent on
a number of factors, including our ability to complete our development efforts
and enter into collaborative agreements with others to incorporate our
technologies into their products or develop and commercialize our own products.
Furthermore, our ability to achieve profitability is dependent upon the
willingness and ability of our collaborators to incorporate successfully our
technologies into, obtain regulatory approval for, and commercialize
successfully their product candidates or our ability to commercialize our own
product candidates.
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 approximately
$13.3 million for the year ended December 31, 1999, approximately $8.5 million
for the year ended December 31, 2000, and approximately $13.3 million for the
year ended December 31, 2001. Given our planned level of operating expenses, we
may continue to incur losses for some time. As of December 31, 2001, we had an
accumulated deficit of approximately $81.6 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 research
and development efforts, expand manufacturing scale-up activities, begin sales
and marketing activities, and to fund research and development of drug
candidates we develop internally. Because our operating expenses will increase
significantly in the near term, we will need to generate significant additional
revenue to achieve profitability. In order to generate revenue, we must continue
to develop technologies from which we can derive revenue either ourselves or
through existing and future collaborations. We may continue to incur substantial
losses even if our revenues increase. As a result, we cannot predict the extent
of future losses or the time required for us to achieve profitability, if at
all.
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 the joint venture to incur additional losses for some time as it explores
establishing a manufacturing arrangement with a third party.
If we fail to obtain necessary funds for our operations, we will be unable to
maintain and improve our technology position.
To date, we have funded our operations primarily through revenues from
corporate collaborations, public and private placements of equity securities,
capital equipment and leasehold financing, 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 through at
least 2003. However, our present and future capital requirements depend on many
factors, including:
. the level of research and development investment required to
maintain and improve our technology position;
. our ability to enter into new agreements with collaborators or to
extend the terms of our existing collaborations, and the terms of
any agreement of this type;
2
. 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, which
commercialization would result in milestone payments and in
royalties;
. 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.
If additional funds are required to operate our business, these funds may
not be available on terms that we find favorable, if at all. We may 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 will be reduced and they may experience
substantial dilution. Any equity securities issued may also provide for rights,
preferences, or privileges senior to holders of our common stock. If we raise
additional funds by issuing debt securities, these debt securities would have
rights, preferences, and privileges senior to holders 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 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.
Our technologies may prove to be ineffective, or it may be years, if ever,
before they lead to commercial products.
Our technologies involve new and unproven approaches. We are developing
manufacturing processes based on our enzymatic glycosylation technology
platform. We intend to use these processes to manufacture enzymes and sugar
nucleotides for use by our potential GlycoAdvance(TM) customers, as well as for
our own use in manufacturing complex carbohydrates for our GlycoAdvance,
GlycoTherapeutics(TM), and GlycoActives(TM) programs. Any evaluation of our
business and prospects must be made in light of the risks and unexpected
expenses and difficulties frequently encountered by companies in an early stage
of development in a new market. For us, these risks include:
. we have limited experience in manufacturing enzymes, sugar
nucleotides, and complex carbohydrates on a commercial scale;
. we may incur unexpected costs, and the costs associated with
manufacturing commercial quantities of these compounds may make
commercialization unprofitable;
. we may fail to overcome the difficulties posed in manufacturing
these compounds, or complete successfully all the other
activities required to commercialize any enzyme, sugar
nucleotide, or complex carbohydrate;
. we may encounter difficulties in locating sufficient sources and
supplies necessary for our business; and
. we may face obstacles and difficulties unknown to us today.
We may find that our technologies fail to remodel therapeutic glycoproteins
to include the proper human sugars. We may also find that our technologies do
not significantly enhance yield improvement, improve the pharmacokinetic
properties of glycoproteins, or are not scaleable in commercial production
processes. Any of these would result in limiting our ability to enter into
additional collaborative agreements or obtain revenues under existing
agreements.
3
We do not expect that we will make commercially available any product
candidates we develop internally or license from third parties for at least five
years, if at all. We may not succeed in our research and product development
efforts, and we may not be able to launch any successfully commercialized
products. Further, after commercial introduction of a new product, discovery of
problems through adverse event reporting could result in restrictions on the
product, including recall or withdrawal from the market and, in certain cases,
civil or criminal penalties resulting from actions by regulatory authorities or
damage from product liability judgments.
Many of these risks are described in more detail elsewhere in this "Risk
Factors" section. Our business could be seriously harmed by adverse developments
in any of these areas.
Our success depends on collaborative relationships, and our failure to enter
into new, or successfully manage our existing and future, collaborations and
license arrangements could prevent us from commercializing our technologies.
In the near term, we intend to rely substantially on collaborative partners
to commercialize our broad technology platform. This strategy entails many
risks, including:
. we may be unsuccessful in entering into collaborative agreements
for the development and 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 remain committed to
developing or commercializing products incorporating our
technologies;
. our collaborators may decide to attempt to develop proprietary
alternatives to our technologies;
. we cannot be sure that our collaborators will share our
perspective on the relative value of our technologies;
. we cannot be sure that our collaborators will commit sufficient
resources to incorporating our technologies into their products;
. the use of our technologies may not advance as rapidly as it
might if we retained complete control of all research,
development, regulatory, and commercialization decisions;
. none of these collaborators is contractually obligated to
introduce or promote products incorporating our technologies, nor
are any of them contractually required to achieve any specific
production schedule;
. our collaborative agreements are generally terminable by our
partners on short notice;
. 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 collaboration agreements. If we fail to
enter into or maintain collaborative agreements, or if any of these events
occurs, we may not be able to commercialize our technologies.
GlycoAdvance. 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 system for
Wyeth's biopharmaceutical compound, recombinant PSGL-Ig. The compound is
currently being evaluated in Phase II clinical trials in patients being treated
for heart attack. Wyeth is evaluating the use of GlycoAdvance in the production
of rPSGL-Ig for Phase III clinical trials and commercial launch. Wyeth may not
obtain regulatory approval for rPSGL-Ig, Wyeth may choose not to commercialize
rPSGL-Ig, Wyeth may choose not to use GlycoAdvance services or products to
commercialize rPSGL-Ig, or we may not succeed in developing an improved
production system for rPSGL-Ig.
Regardless of the success of our technologies, the success of GlycoAdvance
will be dependent on the priorities and actions of Wyeth and any future
collaborative partners, including their success in obtaining regulatory approval
for, and commercial acceptance of, any products incorporating our technologies.
4
GlycoTherapeutics(TM). We have existing collaborative agreements for
GlycoTherapeutics with Progenics Pharmaceuticals, Inc. and Neuronyx, Inc.
Our agreement with Progenics involves the development of proprietary
technologies that enable the manufacture of two gangliosides for use as the
active pharmaceutical ingredients in two cancer vaccines being developed by
Progenics. On May 15, 2001, Progenics announced the initiation of a Phase III
clinical trial with the most advanced of these vaccines to prevent the relapse
of malignant melanoma. Under the terms of the agreement, Progenics has the right
to negotiate with us for the supply of the gangliosides. The agreement does not
provide for future payments unless we reach an agreement with Progenics. Even if
we reach an agreement with Progenics on terms for supplying the gangliosides,
and we successfully complete development of these processes and fulfill all of
our obligations under the agreement, Progenics may not obtain regulatory
approval to market either of these vaccines. Further, even if Progenics obtains
regulatory approval to market either of these vaccines, we cannot be sure that
Progenics will enter into a manufacturing contract with us, that the terms of a
future contract with Progenics will be favorable to us, or that either vaccine
will be commercially successful.
Under our agreement with Neuronyx, we are collaborating in the research
of compounds for the treatment of Parkinson's disease and other neurological
diseases. Even if the research identifies potential target compounds, both
parties must agree to pursue development of the target compounds. If development
proceeds, we would be responsible for the synthesis and manufacturing scale-up
of target compounds, using our proprietary technologies for carbohydrate
synthesis. We may be unable to complete this development successfully. Even if
we successfully complete development of these processes and fulfill all of our
obligations under the agreement, Neuronyx may not obtain regulatory approval to
market any products. Further, even if Neuronyx obtains regulatory approval to
market any of these products, we cannot be sure that any of the products will be
commercially successful.
GlycoActives(TM). We have collaborative agreements with McNeil
Nutritionals and Wyeth Nutrition, a business unit of Wyeth Pharmaceuticals.
The success of our joint venture with McNeil Nutritionals is dependent
upon the joint venture's ability to develop, manufacture, sell, and market
successfully complex carbohydrates, all of which are in early stages.
Under our agreement with Wyeth Nutrition, we are responsible for
developing a large-scale manufacturing process for a potential ingredient in
infant formula. We may be unable to complete this development successfully, or
be successful in commercial scale-up of these processes. Even if we successfully
develop a process and fulfill all of our obligations under the agreement, Wyeth
may fail to obtain regulatory approval to market the ingredient. Even if Wyeth
obtains regulatory approval for the ingredient, Wyeth may elect not to add the
ingredient to any of its products.
If our collaborators fail to develop and commercialize products incorporating
our technologies, we will fail to realize potential revenues.
Our future revenue will depend in part on the realization of milestone
payments and royalties, if any, triggered by our collaborators' successful
commercialization and development of products incorporating our technologies.
The agreements with our collaborators do not obligate them to develop or
commercialize lead compounds identified or manufactured through the use of our
technologies. Our future revenues will therefore depend not only on our and our
collaborators' achievement of development objectives, but also on each
collaborator's own financial, competitive, marketing and strategic
considerations, such as the relative advantages of other companies' products,
including relevant patent and proprietary positions. If a collaborator fails to
develop or commercialize a compound using our technologies, or if a compound
that a collaborator develops is determined to be unsafe or of no therapeutic
benefit, we will not receive any future milestone payments or royalties for that
compound.
We have limited commercial manufacturing capability and experience, and we may
be unable to manufacture the compounds required to commercialize our
technologies.
Commercialization of our technologies requires the manufacture of
enzymes, sugar nucleotides, and complex carbohydrates. We intend to manufacture
enzymes and sugar nucleotides for use by our potential GlycoAdvance
5
customers, as well as for our own use in manufacturing complex carbohydrates for
our GlycoAdvance, GlycoTherapeutics, and GlycoActives programs. 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 United States Food and Drug Administration, or FDA. Our existing facility is
not adequate for large-scale, commercial manufacturing. Therefore, we will need
to develop commercial-scale manufacturing facilities meeting cGMP, or depend on
our collaborators, licensees, or contract manufacturers.
We intend to expand our manufacturing capacity. This expansion will
require significant additional funds and personnel, and compliance with
applicable regulations. We intend to pursue this expansion without any assurance
that we will receive an adequate return on our investment. We may be unable to
design, build, or operate the required facilities. In addition to the normal
scale-up risks associated with any manufacturing process, we may face
unanticipated problems unique to 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 regulations on
cGMP, which are enforced by the FDA through its facilities inspection program.
The manufacture of product at these facilities 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 technologies could be delayed, or we
could breach our obligations under our collaborative agreements.
The failure to obtain or maintain adequate patents, and other intellectual
property protection, could impact our ability to compete effectively.
Our success will depend in part on our ability to obtain commercially
valuable patent claims and to protect our intellectual property. Our patent
position is generally uncertain and involves complex legal and factual
questions. 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 is 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;
. 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 may incur substantial costs in asserting any patent rights and in
defending suits against us relating to intellectual property rights. Such
disputes could substantially delay our product development or commercialization
activities. The United States Patent and Trademark Office or a private party
could institute an interference proceeding relating to our patents or our patent
applications. An adverse decision in any such proceeding could result in the
loss of our intellectual property rights.
In addition to patents and patent applications, we depend upon trade
secrets and proprietary know-how to protect our proprietary technology. We
require all employees, consultants, advisors, and collaborators to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to any other parties. We require that our employees and consultants
disclose and assign to us their ideas, developments, discoveries, and
inventions. These
6
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 United States is uncertain, and is currently
undergoing review and revision in many countries. Further, 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 our or our competitors' foreign patents, which could result in
substantial costs and diversion of our efforts. Finally, some of our patent
protection in the United States is not available to us in foreign countries due
to the 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 we are unable to obtain such licenses, or
obtain such licenses on what we consider to be acceptable terms, our ability to
perform our obligations under our collaborative agreement and research and
development efforts may be delayed while we seek to develop or license
alternative technologies.
We are exposed to intense competition from many sources.
Our potential competitors include both public and private
pharmaceutical, chemical, biotechnology, food, and consumer product companies.
Compared to us, many of these companies have more:
. financial, scientific, and technical resources;
. 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 technology that are
more effective and less costly than we may develop, or that would render our
technology or products, 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 successful in the
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 against our competitors, 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 programs noncompetitive or obsolete. For example,
some companies are producing by enzymatic and other means a limited variety of
complex carbohydrates. Although we do not believe any of these companies
currently has the ability to manufacture a wide variety of human carbohydrate
products in quantities sufficient for commercialization, any of these companies
may develop technologies superior to our technologies. In addition, some
companies are investigating novel methods of chemical synthesis, sometimes with
enzymatic steps, to produce commercial quantities of complex carbohydrates.
These and other efforts by potential competitors may be successful, or other
methods of carbohydrate synthesis that compete with our technologies may be
developed.
7
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.
We may be exposed to product liability and related risks.
The use in humans of compounds incorporating our technologies can
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 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 product
candidates manufactured using our technologies are subject to significant, but
varying, degrees of regulation by a number of government authorities in the
United States and other countries.
Regulation of Pharmaceutical Products
Pharmaceutical product candidates manufactured using our technology
must undergo an extensive regulatory approval process before commercialization.
This process is regulated by the FDA and by comparable agencies in other
countries. Product candidates incorporating our technology are regulated in the
United States in accordance with the federal Food, Drug and Cosmetic Act, the
Public Health Service Act, and other laws. If a product candidate is regulated
as a biologic, the FDA Center for Biologics Evaluation and Research, or CBER,
will require the submission and approval of a Biologic License Application, or
BLA, before commercial marketing. The BLA process generally requires:
. expensive and time-consuming preclinical studies and clinical
trials to establish the safety, potency, purity, and
effectiveness of each compound to be submitted with the FDA;
. compliance with FDA good laboratory, clinical, and manufacturing
practices during testing and manufacturing; and
. continued FDA oversight of product and promotion after marketing
approval is obtained.
It may be many years, if ever, until regulatory approval is obtained,
and regulatory oversight continues after marketing approval for the product
candidate is received.
Each manufacturer of drugs or biologics must be registered with the FDA
and pass an inspection by the FDA prior to approval to manufacture products for
commercial distribution. Failure to pass the inspection results in not receiving
approval to market products. A collaborator's use of our technologies in the
manufacture of a product candidate will require submission of Drug Master Files
with CBER. If we or our collaborators fail to comply with all applicable
regulatory requirements, the following delays or regulatory action could result:
. warning letters;
. fines;
. product recalls or seizures;
8
. operating restrictions;
. refusal of the FDA to complete review of pending market approval
applications or supplements to approval applications;
. withdrawal of previously approved product approvals;
. civil penalties; and
. criminal prosecution.
We have not submitted, and we may never submit, any pharmaceutical
product candidates for marketing approval to the FDA, or any other regulatory
authority. In addition, no collaborator has submitted, and may never submit, any
product candidate incorporating our technologies 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 either the approvals necessary for
commercialization, the desired labeling claims, or coverage or adequate levels
of reimbursement under federal, state, or private healthcare insurance
providers. Any delay in receiving, or failure to receive, these approvals would
adversely affect our ability to generate product revenues or royalties. Even if
all requisite approvals were granted, these approvals may entail commercially
unacceptable limitations on the labeling claims. In addition, once an approval
is granted, both a marketed drug or compound and the manufacturer are subject to
continual review and inspection. Later discovery of previously unknown problems
with a product or manufacturer may result in restrictions or regulatory action
against the product or manufacturer, including withdrawal of the product from
the market. Additional 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.
Regulation of Foods and Food Ingredients
We expect that any products of our joint venture with McNeil
Nutritionals will be regulated as food ingredients. Foods and food ingredients
are subject to the provisions of the federal Food, Drug and Cosmetic Act. Food
ingredients are broadly defined as any substances that may become a component,
or otherwise affect the characteristics, of food. Food ingredients and
ingredients used in animal feed are regulated either as substances generally
recognized as safe, or GRAS, or as food additives.
Food ingredients that are GRAS are excluded from the definition of food
additives. The FDA has affirmed by regulation a number of substances as GRAS,
although it is not required that a substance be affirmed as GRAS by regulation
of the FDA in order to be GRAS. A manufacturer may self-affirm a substance as
GRAS by making an independent determination that qualified experts would
generally agree that the substance is GRAS for a particular use. If the FDA
disagrees with a determination, the manufacturer must complete the food additive
petition process for the substance to be approved by the FDA. Affirmation of
GRAS status either by the manufacturer or regulation of the FDA would allow the
manufacturer to market and sell the additive or the food containing the
additive. Furthermore, a manufacturer's decision to rely on an independent
determination may limit the marketability of that manufacturer's products to
food manufacturers, many of whom require confirmation of GRAS status from the
FDA before they will purchase substances for use in foods from third parties.
Food ingredients that are not GRAS are regulated as food additives. All
new food additives require FDA approval prior to commercialization. Information
supporting the safety of a food additive is submitted to the FDA in the form of
a food additive petition. The food additive petition process is generally
expensive and lengthy. Commercialization of the food additive, if permitted by
the FDA, often occurs several years after the petition is submitted to the FDA.
The petition must establish with reasonable certainty that the food additive is
safe for its intended use at the level specified in the petition. The petition
is required to contain reports of safety investigations of the food additive and
details regarding its physical, chemical, and biological properties. Product
safety studies submitted to the FDA are typically conducted in accordance with
FDA good laboratory practices requirements. If a food additive petition is
submitted, the FDA may choose to reject the petition or deny any desired
labeling claims. Furthermore, the FDA may require the establishment of
regulations that necessitate costly and time-consuming compliance procedures.
9
Regulation of Infant Formula Additives
We are collaborating with Wyeth Nutrition to develop a bioactive
carbohydrate as a potential nutritional additive to infant formula. The
manufacture, composition, and labeling of infant formulas are subject to the
provisions of the United States Infant Formula Act. Prior to commercializing any
potential infant formula additive, an infant formula manufacturer must
demonstrate that its potential additive:
. is GRAS by previous regulation of the FDA, or is self-affirmed as
GRAS by the infant formula manufacturer; or
. is the subject of an approved food additive petition.
Under the United States Infant Formula Act, infant formula
manufacturers are required to notify the FDA of any intent to revise, add, or
substitute any protein, fat, or carbohydrate in infant formula ninety days prior
to the intended date of commercial distribution. During that ninety-day period,
the FDA may request additional information, or deny marketing rights for the new
formula. Wyeth is responsible for all regulatory activities relating to the
infant formula additive. They have not yet made, and may never make, any filings
with the FDA to propose inclusion of an infant formula additive manufactured
using our technology. Furthermore, Wyeth may fail to self-affirm GRAS status of
the potential infant formula additive, impairing their efforts to commercialize
the infant formula additive.
Wyeth may market infant formula containing the additive in foreign
countries. Infant formula regulatory requirements vary widely from country to
country, and may be more or less stringent than the FDA requirements. The time
required to obtain clearances, if required, in foreign countries may be longer
or shorter than that required in the United States.
The use of hazardous materials in our operations may subject us to an
environmental claim 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 collaborators and 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 United
States, 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.
10
BUSINESS
Overview
We develop proprietary technologies for the synthesis and manufacture
of complex carbohydrates. Our enzymatic technology platform makes feasible the
synthesis and modification of a wide range of complex carbohydrates, which are
chains of simple sugar molecules that can be joined together in many different
combinations. Our platform enables the production and manipulation of complex
carbohydrates either as stand-alone carbohydrate molecules or as carbohydrate
structures attached to recombinant therapeutic glycoproteins and glycolipids.
Our GlycoAdvance program uses our technology to complete the human
carbohydrate structures on therapeutic glycoproteins. We are also developing our
technology to create novel glycosylation patterns, and to link other molecules,
such as polyethylene glycol, to glycoproteins. The application of this
technology to proteins potentially results in improved clinical activity and
pharmacokinetic profile, enhanced drug development flexibility, stronger and
additional patent claims, and yield improvements.
Our GlycoTherapeutics program uses our technology to enable the
development of carbohydrate-based therapeutics. Our GlycoActives program uses
our technology to develop novel carbohydrate food and nutritional ingredients.
GlycoAdvance
Overview
Our GlycoAdvance products and services are used to complete, correct,
or improve the carbohydrate structures that are critical portions of therapeutic
glycoproteins. Many biotechnology drugs on the market or in development,
including monoclonal antibodies, are glycoproteins, and their associated
carbohydrates are often critical to the function of the protein. GlycoAdvance
can also be used to attach other molecules, such as polyethylene glycol, to
glycoproteins.
We are pursuing partnerships for GlycoAdvance with pharmaceutical and
biotechnology companies that are developing or marketing glycoprotein drugs. We
are also exploring the use of GlycoAdvance for the development of our own
glycoprotein drugs, as well as its use to enable alternative protein production
systems, such as transgenic animals, plants, insect cells, and fungi such as
yeast.
In 2000, worldwide sales of glycoprotein drugs were approximately $17.5
billion, and there were approximately 360 biotechnology drugs in development to
treat more than 200 diseases. Many of these drug candidates are glycoproteins,
and we expect that many of these compounds could benefit from GlycoAdvance.
Currently, glycoproteins are most often produced in mammalian cell
culture systems, primarily Chinese hamster ovary (CHO) cells. Production in
these systems often results in incomplete or incorrect glycosylation.
Glycosylation refers both to the carbohydrate structures on glycoproteins, and
to the process of creating or modifying these structures. The impact of
incomplete or incorrect glycosylation on a glycoprotein drug can include
suboptimal clinical activity, reduced half-life, greater or more frequent
dosing, and increased side effects. Incomplete glycosylation can also result in
development delays and production inefficiencies, including lower production
yields, higher manufacturing costs, and increased facilities and equipment
requirements. Conventional methods of solving the problems of incomplete or
incorrect glycosylation include choosing different cell types for use in cell
expression systems, re-engineering cells, optimizing cell culture media,
purifying for final product only the most completely glycosylated compounds, and
building additional production facilities. These approaches can be expensive,
time-consuming, and ineffective.
At the present time, GlycoAdvance is being used to remodel therapeutic
glycoproteins, after their production in cell culture, to achieve the desired
glycosylation. The use of GlycoAdvance in the production of therapeutic
glycoproteins may result in improved clinical activity and pharmacokinetic
profile, enhanced drug development
11
flexibility, stronger and additional patent claims, and yield improvements.
GlycoAdvance may permit the development of new therapeutic proteins with unique
characteristics. GlycoAdvance may also permit the continued development of some
drugs by overcoming a variety of development problems associated with poor
glycosylation. Although alternatives to mammalian cell culture systems, such as
transgenic animals, plants, insect cells, and fungi such as yeast, are in use or
being developed, these systems are not now capable of producing glycoproteins
with a fully human glycosylation pattern. We are considering the role of
GlycoAdvance in the development of glycoproteins produced in some of these
alternative systems.
We continue to invest in GlycoAdvance research and development. We are
developing intellectual property and know-how in using glycosylation to improve
antibody function, impart new therapeutic properties to drugs, and extend
half-life, such as through the site-specific addition of polyethylene glycol. We
are also developing new GlycoAdvance enzymes and sugar nucleotides to broaden
the scope of our technology.
Agreement with Wyeth Pharmaceuticals
In December, 2001, we announced our first commercial agreement for
GlycoAdvance. This agreement is with Wyeth Pharmaceuticals, a division of Wyeth,
for use of GlycoAdvance services and products to develop an improved production
system for Wyeth's recombinant PSGL-Ig (P-selectin glycoprotein ligand).
rPSGL-Ig is being developed to treat inflammation and thrombosis associated with
acute coronary syndrome and reperfusion injury. The drug is currently in Phase
II clinical trials for heart attack.
Under the agreement, we will develop processes for the commercial-scale
manufacture of GlycoAdvance enzymes and sugar nucleotides to be used in the
production of rPSGL-Ig, and will license GlycoAdvance technology to Wyeth for
commercial production of the drug, if regulatory approval is obtained. During
commercial production of Wyeths' current rPSGL-Ig, we would receive ongoing
payments tied to yield improvements achieved using GlycoAdvance. In addition,
Wyeth has the option to use GlycoAdvance to develop a next generation rPSGL-Ig,
in which case we would receive development payments and royalties on product
sales.
We will receive license, research, and milestone payments that will total
up to $17 million if all milestones are met. In addition to ongoing product
payments, Neose and Wyeth would also enter into a supply agreement for the
long-term supply of GlycoAdvance process reagents for their commercial
production needs.
The scope of our license to Wyeth is limited to rPSGL-Ig and proteins
similar in amino acid sequence to rPSGL-Ig. This preserves our ability to work
with other companies developing drugs for the same indications.
Feasibility Studies
We have completed more than 20 feasibility studies for pharmaceutical and
biotechnology companies to demonstrate the utility of GlycoAdvance. In general,
these feasibility studies have been conducted with glycoproteins that are being
produced in CHO cell expression systems. In these studies, we have shown that
GlycoAdvance can be used to improve the pharmacokinetic properties of these
glycoproteins.
At the 2001 Biotechnology Industry Organization meeting, Eli Lilly &
Company and Biogen, Inc. presented results of GlycoAdvance feasibility studies
conducted with CHO cell produced glycoproteins. In animal studies, the half-life
of proteins treated with GlycoAdvance were up to three times greater than the
same protein not treated with GlycoAdvance.
Business Strategy
We are actively pursuing collaborations with companies that are developing,
manufacturing, or marketing glycoproteins to use GlycoAdvance services and
products in the research, development, and commercialization of glycoproteins.
We anticipate that these collaborations would provide for up-front license fees,
annual license fees, milestone payments, and royalties, as well as revenues from
the supply of enzymes and sugar nucleotides. These collaborations could be
product specific, as is the case with our Wyeth Pharmaceuticals collaboration,
or research and
12
development pipeline collaborations, where companies integrate GlycoAdvance into
their protein research, development, and manufacturing processes to enable the
accelerated development of better protein drugs.
We are considering opportunities for the use of GlycoAdvance in the
development by Neose of glycoprotein drugs. These include using GlycoAdvance to
develop improved versions of currently marketed glycoproteins as their patent
protection expires; using GlycoAdvance to revive drugs that have been dropped
from development because of glycosylation-related problems; and acquiring,
co-developing, or in-licensing promising drug candidates that will benefit from
GlycoAdvance.
Protein production systems other than mammalian cell culture expression
systems, such as transgenic animals, plants, insect cells, and fungi, offer the
promise of reduced production costs for glycoproteins. Glycosylation in these
systems is often incomplete or incompatible with therapeutic use, resulting in
therapeutic proteins that have poor pharmacokinetic activity or are immunogenic
in humans. We are considering the possibilities of using GlycoAdvance in
conjunction with some of these expression systems to solve their glycosylation
problems.
GlycoTherapeutics
In our GlycoTherapeutics program, we are using our core technologies to
enable the development and production of novel carbohydrate-based drugs. We are
supporting research and development projects on promising, carbohydrate-based
therapeutic approaches. We do not intend to proceed beyond early stage clinical
trials on any carbohydrate-based drug candidates without a suitable partner for
late stage development and commercialization. Our business strategy is to
collaborate with others, allowing us to leverage our proprietary technologies to
participate in the profits of successful drugs while assuming limited financial
and clinical development risk. If we successfully enter into collaborations with
other companies, we anticipate that we will receive up-front license fees,
annual license fees, milestone payments, royalties, and revenues from the supply
of compounds.
Neuronyx, Inc.
We have a research and development collaboration with Neuronyx for the
discovery and development of drugs for treating Parkinson's disease and other
neurological diseases. We also made an equity investment of approximately $1.3
million in Neuronyx. Currently, the collaboration is focusing on the
modification of certain compounds that have previously demonstrated clinical
promise in arresting the progression of Parkinson's disease symptoms. If the
collaboration identifies potential target compounds, development of these
compounds would require the agreement of both parties. If development proceeds,
we are responsible for the synthesis and manufacturing scale-up of target
compounds, using our proprietary technologies for carbohydrate synthesis, and
Neuronyx is responsible for preclinical and clinical development of the
compounds. Neose and Neuronyx each bear their own research and development costs
under the collaboration. If any drugs are commercialized under this
collaboration, Neose will be responsible for manufacturing the drug, and would
receive a transfer payment and royalties based on sales. Parkinson's disease is
a progressive disorder of the central nervous system. There is no known
prevention or cure for Parkinson's disease. Current treatments focus on
controlling symptoms of the disease, but do not slow the progression of the
disease.
Progenics Pharmaceuticals, Inc.
In May 2001, Bristol-Myers Squibb assigned to Progenics Pharmaceuticals our
agreement with Bristol-Myers to develop two synthetic gangliosides for use in
two cancer vaccines, GMK and MGV. Progenics is continuing with the development
of both vaccines and we are in discussions with them concerning future supply of
material for clinical and commercial use, but we will receive no revenues from
this agreement unless it is renegotiated.
Other Therapeutic Research Programs
We have early-stage research programs in the following areas:
13
. Glycolipids. Through our collaborations with Bristol-Myers and
Neuronyx, we have developed expertise in the synthesis of glycolipids.
We are continuing to develop this technology, and are exploring
applications in inflammatory diseases and cancer.
. Heparins. We are exploring the use of our technology to synthesize
heparin-like molecules. Heparins may have application in a variety of
disesases.
. Immune system regulation. In conjunction with scientists at Harvard
University, we are investigating whether certain carbohydrates may be
useful as regulators of immune response. We are exploring whether
these carbohydrates may be used for the treatment of various
autoimmune conditions, including inflammatory bowel disease, allergic
asthma, and psoriasis.
GlycoActives
In our GlycoActives program, we are applying our technology platform to the
manufacture and development of novel carbohydrate-based food and nutritional
ingredients. Our business strategy is to enter into collaborations with others
for the use of our technologies for the development of these ingredients.
Joint Venture with McNeil Nutritionals
In 1999, we entered into a joint venture with McNeil Nutritionals, a
subsidiary of Johnson & Johnson, to explore the inexpensive, enzymatic
production of complex carbohydrates for use as bulking agents. 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 as it shifted focus to a second generation bulking agent. The joint
venture is exploring establishing a manufacturing arrangement with a third party
to produce these bulking agents.
Wyeth Nutrition- Infant Formula Additive
We entered into an agreement in 1999 with Wyeth Nutrition, a business unit
of Wyeth Pharmaceuticals, to develop a manufacturing process for a bioactive
carbohydrate to be used as an ingredient in Wyeth's infant and pediatric
nutritional formula products. We are responsible for developing a large-scale
manufacturing process for this ingredient. We are receiving contract development
payments, and will receive payments if we achieve the milestones specified in
the agreement. If Wyeth commercializes the ingredient under this agreement, we
will sell product to Wyeth at minimum specified transfer prices. Wyeth is a
leading global infant formula manufacturer with products distributed in more
than 90 countries.
Abbott Laboratories
Abbott Laboratories has a non-exclusive license to use our technology to
manufacture and commercialize, for nutritional purposes only, any complex
carbohydrate naturally found in human breast milk. If Abbott commercializes any
products manufactured using our technology, we will receive fees from Abbott
tied to commercial quantities.
Patents and Proprietary Rights
We solely own 23 issued U.S. patents, and have licensed 68 issued U.S.
patents from 14 institutions. In addition, we own or have licensed over 56
patent applications pending in the United States. There are a number of U.S. and
foreign patent applications related to our owned and licensed patents. 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, Japan Tobacco, Inc., University of
Michigan, Marukin Shoyu Co., Ltd., Celltech Therapeutics Limited, University of
Arkansas, University of British Columbia, Rockefeller University, University of
Alberta, Genencor International, GlycoZym Aps., National Research Council
Canada, Harvard University, University of Washington, Wayne State University,
University of Illinois, and University of Adelaide.
14
Government Regulation
Products manufactured using our technologies, and our manufacturing and
research activities, will typically be subject to significant, but varying,
degrees of regulation by a number of government authorities in the United States
and other countries. The development, manufacture, marketing, and sale of
products manufactured using our technology will be subject to one of the
following regulatory review processes before commercialization:
. pharmaceutical - new drug application or biologic license
application;
. infant formula additive - new infant formula submission; or
. foods and food ingredients - either self-affirmed to be, or
notified as, GRAS (generally recognized as safe) or food additive
petition process.
Our products, systems, and processes are subject to continuing review
subsequent to marketing, and affirmative reporting requirements to the FDA and
other federal, state, or international agencies may be imposed upon us as a
condition of continued marketing approval. Generally, pharmaceuticals are
regulated more rigorously than foods and food ingredients. Infant formula
additives are special types of food ingredients that are regulated more
rigorously than most other types of food ingredients.
Our operations are also subject to regulation under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act, and other similar
federal, state, and local laws, rules, and regulations governing laboratory
activities, waste disposal, handling dangerous materials, and other matters. We
voluntarily comply with the National Institutes of Health Guidelines for
Research Involving Recombinant DNA Technologies.
Regulation of Pharmaceutical Product Candidates
We intend to manufacture enzymes and sugar nucleotides for use by our
potential GlycoAdvance customers, as well as for our own use in manufacturing
complex carbohydrates for our GlycoTherapeutics and GlycoActives programs. Our
collaborators will be responsible for obtaining all required regulatory
approvals for pharmaceutical product candidates incorporating our technologies.
Neose will be responsible for filing Drug Master Files covering the
manufacturing of enzymes and sugar nucleotides for customers. The research and
development activities regarding, and the future manufacturing and marketing of,
all pharmaceutical product candidates incorporating our technologies are and
will be subject to significant regulation by numerous governmental authorities
in the United States and other countries. Pharmaceutical product candidates
intended for therapeutic use in humans are governed principally by the federal
Food, Drug and Cosmetic Act, Public Health Service Act, and FDA regulations in
the United States, and by comparable laws and regulations in foreign countries.
The federal Food, Drug and Cosmetic Act and other federal statutes and
regulations govern the testing, manufacture, safety, effectiveness, marketing,
labeling, storage, record keeping, approval, advertising, and promotion of
pharmaceutical products. The process of completing preclinical and clinical
testing and obtaining FDA approval for a new pharmaceutical product requires a
number of years and the expenditure of substantial resources.
Following drug discovery, the steps required before a new
pharmaceutical product candidate may be marketed in the United States include:
. preclinical laboratory and animal tests;
. the submission to the FDA of an Investigational New Drug
application;
. adequate and well-controlled clinical trials, typically conducted
in three phases, to establish the safety and effectiveness of the
product candidate;
. the submission of a New Drug Application or Biologic License
Application to the FDA; and
. FDA approval of the New Drug Application or Biologic License
Application prior to any promotion, commercial sale, or shipment
of the product.
Preclinical trials, in vitro or in animals, must be conducted to
evaluate the safety of a compound for testing in humans. Various regulations
govern such testing including Good Laboratory Practices or similar international
15
regulations. Clinical trials, conducted according to Good Clinical Practices or
similar international regulations and subject to review by independent oversight
bodies (e.g. Institutional Review Boards), are typically conducted in three
sequential phases. Phase I clinical trials are primarily designed to determine
the metabolic and pharmacologic effects of the product candidate in humans, and
the side effects associated with increasing doses. These studies generally
involve a small number of healthy volunteer subjects, but may be conducted on
people with the disease the product candidate is intended to treat. Phase II
studies are conducted to evaluate the effectiveness of the product candidate for
a particular indication, and involve patients with the disease under study.
These studies also provide evidence of the short-term side effects and risks
associated with the product candidate. Phase III studies are generally designed
to assess the overall benefit-risk relationship of the product candidate. Phase
III trials must demonstrate that substantial evidence of safety and
effectiveness of a product candidate exists in order to obtain FDA approval for
marketing the product candidate. Phase III trials often involve a substantial
number of patients in multiple study centers, and include longer-term
administration of the product candidate than in Phase II trials. A clinical
trial may combine the elements of more than one phase, and often at least two
Phase III studies demonstrating a product candidate's safety and efficacy are
required before marketing approval is received. Typical estimates of the total
time required for completing such clinical testing vary between four and ten
years. For marketing outside the United States, foreign regulatory requirements
govern human clinical trials and marketing approval for product candidates. The
requirements relating to the conduct of clinical trials, product licensing,
pricing, and reimbursement vary widely from country to country. Regulatory
oversight continues after marketing approval for the product candidate is
received. Regulatory bodies may require additional clinical trials be performed
as a condition of receiving marketing approval. Affirmative reporting
obligations are imposed as a condition of continued marketing approval.
Third Party Reimbursement
Our ability and each of our collaborator's ability to commercialize
successfully 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. Significant uncertainty exists as to the reimbursement status of
new therapeutic products and we cannot be sure that third-party reimbursement
would be available for therapeutic products 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 reform proposals, if adopted, could impose limitations on the
prices we will be able to charge in the United States for our products or the
amount of reimbursement available for our products or the amount of
reimbursement available for our products from governmental agencies or
third-party payors.
Regulation of Foods and Food Ingredients
We expect that any products of our joint venture with McNeil
Nutritionals will be regulated as food ingredients. Foods and food ingredients
are subject to the provisions of the federal Food, Drug and Cosmetic Act. Food
ingredients are broadly defined as any substances that may become a component,
or otherwise affect the characteristics, of food. Food ingredients and
ingredients used in animal feed are regulated either as substances generally
recognized as safe, or GRAS, or as food additives.
Food ingredients that are GRAS are excluded from the definition of food
additives. The FDA has affirmed by regulation a number of substances as GRAS,
although it is not required that a substance be affirmed as GRAS by regulation
of the FDA in order to be GRAS. Alternatively, under a new proposed regulatory
framework, a manufacturer may submit GRAS notification to the FDA claiming that
a food ingredient is GRAS. The FDA generally will respond to the notification
within approximately ninety days as to whether there is sufficient evidence to
support the notifier's conclusion that the substance is GRAS. A positive
response from the FDA indicates that it has no objection to the notifier's
conclusion that a substance is a GRAS. A manufacturer also may self-affirm a
substance as GRAS by making an independent determination that qualified experts
would generally agree that the substance is GRAS for a particular use. If the
FDA disagrees with the manufacturer's self-determination or GRAS notification,
the manufacturer generally must submit a food additive petition to obtain
approval to market the food ingredient. Affirmation of GRAS status either by the
manufacturer or regulation of the FDA would allow the manufacturer to market and
sell the additive or the food containing the additive. Furthermore, a
manufacturer's decision to rely on an independent determination may limit the
marketability of that manufacturer's products to food manufacturers, many of
16
whom require confirmation of GRAS status from the FDA before they will purchase
substances for use in foods from third parties.
Food ingredients that are not GRAS are regulated as food additives. All
new food additives require FDA approval prior to commercialization. Information
supporting the safety of a food additive is submitted to the FDA in the form of
a food additive petition. The food additive petition process is generally
expensive and lengthy. Commercialization of the food additive, if permitted by
the FDA, often occurs several years after the petition is submitted to the FDA.
The petition must establish with reasonable certainty that the food additive is
safe for its intended use at the level specified in the petition. The petition
is required to contain reports of safety investigations of the food additive and
details regarding its physical, chemical, and biological properties. Product
safety studies submitted to the FDA are typically conducted in accordance with
FDA good laboratory practices requirements. If a food additive petition is
submitted, the FDA may choose to reject the petition or deny any desired
labeling claims. Furthermore, the FDA may require the establishment of
regulations that necessitate costly and time-consuming compliance procedures.
Regulation of Infant Formula Additives
We are collaborating with Wyeth Nutrition to develop a bioactive
carbohydrate as a potential nutritional additive to infant formula. The
manufacture, composition, and labeling of infant formulas are subject to the
provisions of the United States Infant Formula Act. Prior to commercializing any
potential infant formula additive, an infant formula manufacturer must
demonstrate that its potential additive:
. is GRAS either by previous regulation of the FDA, or is
self-affirmed as GRAS by the infant formula manufacturer; or
. is the subject of an approved food additive petition.
Under the United States Infant Formula Act, infant formula
manufacturers are required to notify the FDA of any intent to revise, add, or
substitute any protein, fat, or carbohydrate in infant formula ninety days prior
to the intended date of commercial distribution. This new infant formula
submission must contain the quantitative formulation of the new infant formula,
a description of any reformulation or change in processing, and assurances that
the new infant formula will not be marketed without complying with the nutrient
and quality factor requirements and cGMP control requirements. Upon
notification, the FDA has a ninety-day period, in which to request additional
information, or deny marketing rights for the new formula. If no response is
received from the FDA within the ninety-day period, the manufacturer may proceed
with commercial sales of the newly formulated product. Under our agreement,
Wyeth is responsible for all regulatory activities relating to the infant
formula additive. Wyeth has not yet made, and may never make, any filings with
the FDA to propose inclusion of an infant formula additive manufactured using
our technology. Their efforts to commercialize any infant formula additive may
be materially and adversely affected if they do not self-affirm GRAS status of
this potential infant formula additive.
Wyeth may market infant formula containing this additive in foreign
countries. Infant formula regulatory requirements vary widely from country to
country, and may be more or less stringent than FDA requirements. The time
required to obtain clearances, if required, in foreign countries may be longer
or shorter than that required in the United States.
Competition
Some companies are producing complex carbohydrates by enzymatic and
other means. We do not believe any of these companies has the ability currently
to manufacture a wide variety of carbohydrates in quantities sufficient for
commercialization. Some companies are investigating novel methods of chemical
synthesis, sometimes with enzymatic steps, to produce commercial quantities of
complex carbohydrates. These and other efforts by potential competitors may be
successful or other methods of carbohydrate synthesis that compete with our
technologies may be developed.
17
Our GlycoAdvance services and products compete with internal efforts
within companies to improve protein glycosylation. This includes efforts to
develop better glycosylating cell lines, optimize cell culture conditions to
improve glycosylation, and construct additional manufacturing capacity.
Other companies are developing technologies that could compete with
GlycoAdvance. This includes the genetic engineering of expression systems to
produce glycoproteins in vivo with improved glycosylation, and developing human
cell lines for glycoprotein production. Other companies are seeking to extend
protein half-life by polyethelyne-glycol or polyglutamate modification, human
albumin fusion, or microsphere encapsulation, while still others are developing
technologies that focus on improving half-life or efficacy. Companies developing
competing technologies are pursuing business strategies that include
collaborations with pharmaceutical and biotechnology companies, as well as the
use of their technologies to develop proprietary products including improved
versions of currently marketed biological products.
Manufacturing
We intend to manufacture enzymes and sugar nucleotides for use by our
anticipated GlycoAdvance customers, and for our own use in proprietary drug
development, and for use in manufacturing complex carbohydrates for our current
and potential GlycoTherapeutics and GlycoActives customers. We will need to
develop commercial-scale manufacturing facilities meeting cGMP, or depend on
collaborators, licensees, or contract manufacturers for the commercial
manufacture of potential products.
During 2001, we committed to spend approximately $17 million to provide
additional cGMP manufacturing capacity in our Horsham, Pennsylvania facility to
support the initial requirements of our anticipated GlycoAdvance customers. In
addition, we entered into a lease during 2002 for a 40,000 square foot building
located in Horsham, Pennsylvania. We intend to convert the facility into
laboratory and office space at an expected cost of approximately $12 million. We
plan to relocate research laboratories and corporate offices from our current
facility in Horsham, Pennsylvania to the new facility, leaving our current
facility available for future expansion of our cGMP manufacturing capacity.
We believe we have the capacity to develop scalable manufacturing
processes required for our collaboration with Wyeth Nutrition in our existing
facilities, although we currently estimate that we will require additional
facilities to produce these ingredients at commercial scale.
Marketing, Distribution, and Sales
We intend to rely substantially on collaborative partners to
commercialize our broad technology platform. These partners would be responsible
for the development, regulatory, approval, sales, marketing, and distribution
activities, for products incorporating our technologies. If we commercialize any
products on our own, we will have to establish or contract for development,
regulatory, sales, marketing, and distribution capabilities. The marketing,
advertising, and promotion of any product manufactured using our technology
would likely be subject to regulation by the FDA or other governmental agencies.
Employees
As of December 31, 2001, we employed 111 individuals, consisting of 81
employees engaged in research and development activities and 30 employees
devoted to business development and administrative activities. Our 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 in the food industry, 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.
18
Executive Officers
The name, age, and position of each of our executive officers as of
March 29, 2002 are as follows:
C. Boyd Clarke, 52, 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, 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., also a biotechnology company. 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.
David A. Zopf, M.D., 59, 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 therapeutics. Dr. Zopf received his A.B. in zoology from Washington
University, and his M.D. from Washington University School of Medicine.
Edward J. McGuire, Ph.D., 64, has served as our Vice President,
Research and Development since 1990. Dr. McGuire was on the faculty of the
University of Pennsylvania from 1985 to 1990. From 1984 to 1985, Dr. McGuire
served as a Senior Researcher at Genetic Engineering, Inc., a biotechnology
company. Dr. McGuire received his B.A. in biology from Blackburn College, and
his Ph.D. in biochemistry/chemistry from the University of Illinois Medical
School.
George J. Vergis, Ph.D., 41, has served as our Vice President, Business
and Commercial Development since July 2001. 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 cardiovascular,
immunology, and critical care franchises. Prior to his employment at BASF, Dr.
Vergis 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.
A. Brian Davis, 35, has served in a variety of positions since 1994,
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.
Debra J. Poul, Esq., 49, has served as our General Counsel since
January 2000. 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.
ITEM 2. PROPERTIES.
We own, subject to a mortgage, approximately 45,000 square feet of cGMP
manufacturing, laboratory, and corporate office space in Horsham, Pennsylvania.
Our lease of approximately 2,600 square feet of laboratory and office space in
San Diego, California expired in September 2001. In April 2001, we entered into
a new lease agreement for 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.
19
We anticipate our expanded operations in San Diego will allow us to increase our
research and development efforts for our GlycoAdvance program.
In 2001, we committed to make approximately $17 million in capital
expenditures to provide additional cGMP manufacturing capacity in our Horsham,
Pennsylvania facility to support the initial requirements of our anticipated
GlycoAdvance customers. In February 2002, we entered into a lease agreement for
a 40,000 square foot building in Horsham, Pennsylvania. We intend to convert the
facility into laboratory and office space for an expected cost of approximately
$12 million. We plan to relocate research laboratories and corporate offices
from our current facility in Horsham, Pennsylvania to the new facility, leaving
our current facility available for future expansion of our cGMP manufacturing
capacity.
We intend to manufacture enzymes and sugar nucleotides for use by our
anticipated GlycoAdvance customers, and for our own use in proprietary drug
development, and for use in manufacturing complex carbohydrates for our current
and potential GlycoTherapeutics and GlycoActives customers. We will need to
develop commercial-scale manufacturing facilities meeting cGMP, or depend on
collaborators, licensees, or contract manufacturers for the commercial
manufacture of potential products. See "Item 1-Business-Manufacturing."
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 2001.
20
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, 2000
First Quarter ........................................... $60.13 $13.00
Second Quarter .......................................... 45.94 18.63
Third Quarter ........................................... 51.82 33.00
Fourth Quarter .......................................... 52.00 25.75
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 (through March 25, 2002) .................. 38.35 27.31
As of March 25, 2002, there were approximately 200 record holders and
4,500 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.
21
ITEM 6. SELECTED FINANCIAL DATA.
The following Statements of Operations Data for the years ended
December 31, 1997, 1998, 1999, 2000, and 2001, and for the period from inception
(January 17, 1989) through December 31, 2001, are derived from our consolidated
financial statements that have been audited by Arthur Andersen LLP, independent
public accountants. 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,
-------------------------------------------------------------
1997 1998 1999 2000 2001 2001
--------------------------------------------------------------------------------
(in thousands, except per share data)
Statements of Operations Data:
Revenue from
collaborative agreements $ 725 $ 390 $ 422 $ 4,600 $ 1,266 $ 12,633
---------------------------------------------------------------------------------
Operating expenses:
Research and development 8,013 9,912 10,649 12,094 14,857 78,504
Marketing, general and
administrative 3,884 3,635 4,520 5,648 9,374 36,255
---------------------------------------------------------------------------------
Total operating expenses 11,897 13,547 15,169 17,742 24,231 114,759
---------------------------------------------------------------------------------
Gain on sale of marketable
security - - - - 6,120 6,120
Interest income, net 2,108 1,250 1,429 4,642 3,516 14,365
---------------------------------------------------------------------------------
Net loss $ (9,064) $ (11,907) $ (13,318) $ (8,500) $ (13,329) $ (81,641)
=================================================================================
Basic and diluted net loss per
share $ (0.96) $ (1.25) $ (1.25) $ (0.63) $ (0.95)
=============================================================
Basic and diluted weighted-average
shares outstanding 9,405 9,556 10,678 13,428 14,032
=============================================================
As of December 31,
-------------------------------------------------------------
1997 1998 1999 2000 2001
-------------------------------------------------------------
(in thousands)
Balance Sheet Data:
Cash and marketable securities $ 43,303 $ 32,023 $ 33,235 $ 94,762 $ 76,245
Total assets 58,886 46,265 52,239 114,768 105,786
Long-term debt 8,917 8,300 7,300 6,200 5,100
Deficit accumulated during
the development stage (34,587) (46,494) (59,812) (68,312) (81,641)
Total stockholders' equity 46,954 36,013 40,785 104,868 93,946
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with our
consolidated financial statements and related notes included in this Form 10-K.
Overview
Neose develops proprietary technologies for the synthesis and
manufacture of complex carbohydrates. Our enzymatic technology platform makes
feasible the synthesis and modification of a wide range of complex
carbohydrates, which are chains of simple sugar molecules that can be joined
together in many different combinations. Our platform enables the production and
manipulation of complex carbohydrates either as stand-alone carbohydrate
molecules or as carbohydrate structures attached to recombinant therapeutic
glycoproteins and glycolipids.
Our GlycoAdvance program uses our technology to complete the human
carbohydrate structures on therapeutic glycoproteins. We are also developing our
technology to create novel glycosylation patterns, and to link other molecules,
such as polyethylene glycol, to glycoproteins. The application of this
technology to proteins potentially results in improved clinical activity and
pharmacokinetic profile, enhanced drug development flexibility, stronger and
additional patent claims, and yield improvements.
Our GlycoTherapeutics program uses our technology to enable the
development of carbohydrate-based therapeutics. Our GlycoActives program uses
our technology to develop novel carbohydrate food and nutritional ingredients.
As of December 31, 2001, we had an accumulated deficit of approximately
$82 million. We expect additional losses for some time as we expand research and
development efforts, expand manufacturing scale-up activities, and begin sales
and marketing activities.
Critical Accounting Policies
Our significant accounting policies are described in Note 2 to the
consolidated financial statements included in Item 8 of this Form 10-K. We
believe our most critical accounting policies relate to recognition of revenue
and impairment of long-lived assets.
Revenue Recognition
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", issued by the Securities and
Exchange Commission in December 1999. Non-refundable up-front fees are deferred
and amortized to revenue over the related 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.
Impairment of Long-Lived Assets
As required by Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS 121), we assess the recoverability of any 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 operating and 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, 2001.
23
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 replaces SFAS
121 for fiscal years beginning after December 15, 2001. We do not believe SFAS
144 will have a material impact on our consolidated financial position or
results of operations.
Results of Operations
Years Ended December 31, 2001 and 2000
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 expenses increased to approximately $14.9
million in 2001 from $12.1 million in 2000. The increase was primarily
attributable to the addition of 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, which was $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 consolidated statements of operations
for 2000 and 2001. We expect research and development expenses to increase
significantly during 2002.
Marketing, general and administrative expenses increased to
approximately $9.4 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, increased legal and
filing expenses associated with our growing patent portfolio, and non-cash
compensation expense associated with stock options. We expect marketing, general
and administrative expenses to increase significantly during 2002.
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 approximately $0.2 million in 2001 from approximately $0.5 million
in 2000 due to lower average loan balances and lower interest rates during 2001.
Years Ended December 31, 2000 and 1999
Revenues from collaborative agreements increased to approximately $4.6
million in 2000 from approximately $0.4 million in 1999. Payments under our
agreement with Bristol-Myers accounted for approximately $3.3 million of our
collaborative revenues in 2000.
Research and development expenses increased to $12.1 million in 2000
from $10.6 million in 1999. The increase was primarily attributable to
additional services rendered under our current research and development
agreement with Bristol-Myers, and non-cash compensation expense associated with
stock options granted to non-employees. During the year ended December 31, 2000,
our joint venture with McNeil Nutritionals reimbursed Neose approximately $1.6
million for the cost of research and development services and supplies provided
to the joint venture. This amount has been reflected as a reduction of research
and development expense in our consolidated statements of operations.
Marketing, general and administrative expenses increased to $5.6
million in 2000 from $4.5 million in 1999. The increase was primarily
attributable to the hiring of additional business development and administrative
personnel, and the non-cash compensation expense associated with stock options
granted to non-employees.
Interest income increased to $5.1 million in 2000 from $1.9 million in
1999 due to higher average cash and marketable securities balances during 2000
resulting from our public offering of 2.3 million shares of common stock in
24
March 2000. Interest expense increased to $0.5 million in 2000 from $0.4 million
in 1999 due to higher average interest rates, and was partly offset by lower
average loan balances outstanding during 2000.
Liquidity and Capital Resources
We have incurred operating losses each year since our inception. As of
December 31, 2001, we had an accumulated deficit of approximately $82 million.
We have financed our operations through private and public offerings of our
securities, and revenues from our collaborative agreements. We had approximately
$76 million in cash and marketable securities as of December 31, 2001, compared
to approximately $95 million in cash and marketable securities as of December
31, 2000. The decrease for 2001was primarily attributable to the use of cash to
fund our operating loss and capital expenditures, and was partly offset by the
one-time sale of approximately $6.4 million of shares of common stock of Genzyme
General. As part of its acquisition of Novazyme Pharmaceuticals, Inc. in 2001,
Genzyme assumed Novazyme's obligation to pay us $1.6 million in November 2002.
During 1999, 2000, and 2001, we purchased approximately $1.2 million,
$1.7 million, and $10.9 million of property, equipment, and building
improvements. In 2001, we committed to make $17 million in capital expenditures
to provide additional cGMP manufacturing capacity in our Horsham, Pennsylvania
facility to support the initial requirements of our anticipated GlycoAdvance
customers. As of December 31, 2001, we had expended approximately $8.2 million
for this project.
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 system for Wyeths'
biopharmaceutical compound, recombinant PSGL-Ig (P-selectin glycoprotein
ligand). rPSGL-Ig is being developed to treat inflammation and thrombosis
associated with acute coronary syndrome and reperfusion injury. It is currently
being evaluated in Phase II clinical trials for heart attack.
Under the agreement, we will receive license, research, and milestone
payments that would total up to $17 million if all milestones are met. In
addition to ongoing product payments, Neose and Wyeth would also enter into a
supply agreement for the long-term supply of GlycoAdvance process reagents for
their commercial production needs. In December 2001, we received an upfront-fee
of $1 million, which is included in deferred revenue in our consolidated balance
sheet as of December 31, 2001. We will amortize the up-front fee to revenue over
the estimated four-year performance period.
In February 2002, we entered into a lease agreement for a 40,000 square
foot building in Horsham, Pennsylvania. We intend to convert the facility into
laboratory and office space for an expected cost of approximately $12 million.
We plan to relocate research laboratories and corporate offices from our current
facility in Horsham, Pennsylvania to the new facility, leaving our current
facility available for future expansion of our cGMP manufacturing capacity.
We may finance some or all of these capital expenditures through the
issuance of new debt. If we are able to issue new debt, we may be required to
maintain a minimum cash and investments balance, transfer cash into an escrow
account to collateralize some portion of the debt, or both.
In 2001, we announced a stock repurchase program authorizing the
repurchase of up to one million shares of common stock in the open market at
times and prices that we consider appropriate. During 2001, we purchased 6,000
shares of common stock in the open market for approximately $0.2 million.
In 1997, we issued, through the Montgomery County (Pennsylvania)
Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds,
of which $6.2 million remains outstanding. The bonds were issued to finance the
purchase of our previously leased 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 2001, the weighted-average, effective interest rate was
5.3% per year, including letter-of-credit and other fees. The terms of the bond
issuance provide for monthly, interest-only
25
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, 2001, we had restricted funds relating to the bonds of
approximately $0.9 million, which consisted of our monthly payments to an escrow
account plus interest revenue on the balance of 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 a covenant to maintain a minimum
required cash and short-term investments balance of at least two times the
current loan balance. At December 31, 2001, we were required to maintain a cash
and short-term investments balance of $12.4 million. 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.
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 through at least 2003, although changes in
our collaborative relationships or our business, whether or not initiated by us,
may cause us to deplete our cash and short-term investments 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 or when
any products manufactured using our technology are commercialized.
The following table summarizes our obligations to make future payments
under current contracts:
Payments due by period
--------------------------------------------------------------------------------
Less than 1
Total Year 1 - 3 Years 4 - 5 Years After 5 Years
--------------------------------------------------------------------------------
Long-term debt ..................... $ 6,200,000 $ 1,100,000 $ 2,500,000 $ 300,000 $ 2,300,000
Operating leases ................... 11,371,000 517,000 2,299,000 965,000 7,590,000
Construction contract .............. 8,800,000 8,800,000 -- -- --
--------------------------------------------------------------------------------
Total contractual obligations ...... $ 26,371,000 $ 10,417,000 $ 4,799,000 $ 1,265,000 $ 9,890,000
================================================================================
Joint Venture with McNeil Nutritionals
We have a joint venture with McNeil Nutritionals. 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 $0.4 million to zero to reflect our share of the joint venture's
losses. We recorded this amount as research and development expense in our
consolidated 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 as it shifted focus to a second generation bulking
agent. The joint venture is exploring establishing a manufacturing arrangement
with a third party to produce these bulking agents.
During the years ended December 31, 2000 and 2001, the joint venture
reimbursed Neose approximately $1.6 million and $0.8 million, respectively, for
the cost of research and development services and supplies provided to the joint
venture. There were no such reimbursements during the year ended December 31,
1999. This amount has been reflected as a reduction of research and development
expense in our consolidated statements of operations. As of December 31, 2001,
the joint venture owed Neose approximately $0.2 million. This amount is included
in prepaid expenses and other current assets in our consolidated balance sheet.
We expect to provide significantly fewer research and development services
during 2002, thereby significantly reducing our expected reimbursement from the
joint venture.
26
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, 2001, the joint venture had an
accumulated loss since inception of approximately $9.8 million, of which our
share, assuming a 50% ownership interest, is approximately $4.9 million. Until
the joint venture is profitable, McNeil Nutritionals is required to fund, as a
non-recourse, no-interest loan, 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 before any distribution of assets to us. As of December 31,
2001, the joint venture owed McNeil Nutritionals approximately $8.1 million.
We may be required to make additional investments in the joint venture
to fund capital expenditures. If the joint venture builds additional production
facilities, and we wish to have a 50% ownership interest in the joint venture,
we are required to invest up to $8.9 million to fund half of such expenditures.
However, we may elect to fund as little as $1.9 million of the cost of the
facilities, so long as our aggregate investments in the joint venture are at
least 15% of the joint venture's aggregate capital expenditures. In this case,
McNeil Nutritionals will fund the remainder of our half of the joint venture's
capital expenditures, and our ownership percentage will be proportionately
reduced. We have an option, expiring in September 2006, to return to 50%
ownership of the joint venture by reimbursing McNeil Nutritionals for this
amount.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized
Statements of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
which are effective for fiscal years beginning after December 15, 2001. SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. SFAS 142 no longer requires the amortization of
goodwill; rather, goodwill will be subject to a periodic assessment for
impairment by applying a fair-value-based test. In addition, an acquired
intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. Such acquired intangible assets
will be amortized over their useful lives. All of our intangible assets were
obtained through contractual rights and have been separately identified and
recognized in our balance sheets. These intangibles are being amortized over
their estimated useful lives or contractual lives as appropriate. Therefore, we
do not expect the adoption of SFAS 142 in the first quarter of 2002 to have a
material impact on our consolidated financial position or results of operations.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 changes the
accounting for long-lived assets by requiring that all long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell whether
included in reporting continuing operations or in discontinued operations. SFAS
144, which replaces SFAS 121 "Accounting for Impairment of Long-Lived Assets and
for Assets to be Disposed of," is effective for fiscal years beginning after
December 15, 2001. We do not believe SFAS 144 will have a material impact on our
consolidated financial position or results of operations.
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. The
approximate principal amount and weighted-average interest rate per year of our
investment portfolio as of December 31, 2001 was $75.2 million and 3.4%,
respectively.
27
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 $6.2 million of outstanding indebtedness is at an
interest rate that varies weekly, depending on the market rates for AA-rated
taxable and tax-exempt obligations. As of December 31, 2001, the
weighted-average, effective interest rate was approximately 3.4% 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)
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)
2000 Quarter Ended Dec. 31 Sept. 30 June 30 Mar. 31
------------------ ------- -------- ------- -------
Revenue from collaborative agreements $ 301 $ 583 $ 1,769 $ 1,947
Net loss (2,136) (2,478) (2,060) (1,826)
Basic and diluted net loss per share (0.15) (0.18) (0.15) (0.15)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 29, 2002, the Board of Directors, upon recommendation of the audit
committee, decided to no longer engage Arthur Andersen LLP as our independent
public accountants and engaged KPMG LLP to serve as our independent public
accountants for the fiscal year 2002.
Arthur Andersen's reports on our consolidated financial statements for each
of the years ended 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 the date of
the Board's decision, there were no disagreements with Arthur Andersen on any
matter of accounting principle or practice, 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 our consolidated financial statements for such
years; and there were no reportable events as defined in Item 304(a)(l)(v) of
Regulation S-K.
During the years ended December 31, 2001 and 2000 and through the date of
the Board's decision, we did not consult KPMG LLP 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
our 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.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
You should read Part I, Item 1 "Business - Executives Officers" for a
description of persons who served as our executive officers as of
March 29, 2002. Biographic information of Mr. Clarke, who serves as a director
as well as our President and Chief Executive Officer may be found in Part I,
Item 1.
The following table shows the name, age and position of each of our
executive officers and directors as of March 29, 2002:
------------------------------------------------------------------------------------------------------------------------
Name Age Position
------------------------------------------------------------------------------------------------------------------------
Executive Officers
------------------------------------------------------------------------------------------------------------------------
C. Boyd Clarke 52 President, Chief Executive Officer and Director
------------------------------------------------------------------------------------------------------------------------
A. Brian Davis 35 Acting Chief Financial Officer and Senior Director, Finance
------------------------------------------------------------------------------------------------------------------------
Edward J. McGuire, Ph.D. 64 Vice President, Research and Development
------------------------------------------------------------------------------------------------------------------------
Debra J. Poul, Esq. 49 General Counsel and Corporate Secretary
------------------------------------------------------------------------------------------------------------------------
David A. Zopf, M.D. 59 Executive Vice President
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Directors
------------------------------------------------------------------------------------------------------------------------
Stephen A. Roth 59 Chairman
------------------------------------------------------------------------------------------------------------------------
William F. Hamilton 64 Director
------------------------------------------------------------------------------------------------------------------------
Douglas J. MacMaster, Jr. 71 Director
------------------------------------------------------------------------------------------------------------------------
P. Sherrill Neff 50 Director
------------------------------------------------------------------------------------------------------------------------
Mark H. Rachesky 43 Director
------------------------------------------------------------------------------------------------------------------------
Lindsay A. Rosenwald 47 Director
------------------------------------------------------------------------------------------------------------------------
Lowell E. Sears 51 Director
------------------------------------------------------------------------------------------------------------------------
Jerry A. Weisbach 68 Director
------------------------------------------------------------------------------------------------------------------------
Stephen A. Roth, 59, has served on our Board since 1989, and as Chairman
since 1994. Dr. Roth 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.
William F. Hamilton, 64, 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 the following
publicly-held companies: Digital Lightwave, Inc., a manufacturer of
telecommunications test equipment and Hunt Manufacturing Co., a manufacturer of
art and office supplies. 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., 71, 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.
29
P. Sherrill Neff, 50, has served on our Board since 1994. He served as
President and Chief Financial Officer from December 1994 through January 31,
2002, and as Chief Operating Officer from April 2000 through January 31, 2002.
Mr. Neff is now the Managing Partner of Quaker BioVentures, L.P., a venture
capital firm. From 1993 to December 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 the Pennsylvania Biotechnology
Association, the University City Science Center, 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, 43, 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.
Lindsay A. Rosenwald, 47, has served on our Board since 1989, and served as
our Chairman until August 1994. He is an investment banker, a venture
capitalist, and a fund manager. Dr. Rosenwald has served as Chairman of
Paramount Capital, Inc., an NASD member broker dealer, since 1992; Chairman of
Paramount Capital Investments, LLC, a venture capital firm, since 1996; and
Chairman of Paramount Capital Asset Management, Inc., which manages the
investment of several funds specializing in the biotechnology sector, since
1994. He is a director of Interneuron Pharmaceuticals, Inc. and Keryx
Biopharmaceuticals, Inc., each of which is a publicly-held biotechnology
company. Dr. Rosenwald received his B.S. in finance from Pennsylvania State
University, and his M.D. from Temple University School of Medicine.
Lowell E. Sears, 51, 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. and Dendreon Corporation, each
of 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.
Jerry A. Weisbach, 68, has served on our Board since 1993. From 1988 to
1994, he served as Director of Technology Transfer and Adjunct Professor at The
Rockefeller University. Dr. Weisbach served as Vice President of Warner-Lambert
Company from 1981 to 1987 and President, Pharmaceutical Research Division from
1979 to 1987, where he was responsible for all pharmaceutical research and
development activities. Dr. Weisbach serves as a director of Inkine
Pharmaceutical Company, a publicly held biotechnology company. Dr. Weisbach
received his B.S. in chemistry from Brooklyn College, and his M.A. and his Ph.D.
in chemistry 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 representation 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, 2001, except that William F. Hamilton, a member of our Board of
Directors,failed to report in a timely fashion his exercise on August 20, 2001
of an option to purchase 16,666 shares of common stock.
30
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides information about all compensation earned in
2001, 2000, and 1999 by the individual who served as our Chairman and Chief
Executive Officer during 2001, and the four other most highly compensated
executive officers during 2001.
Long-term
Compensation
Annual Compensation Shares
------------------------ Underlying All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation
---------------------------------- ---- -------- -------- ----------- -------------
Stephen A. Roth 2001 $294,866 $147,433 50,000 $ 5,682(1)(2)
Chairman and Chief Executive 2000 274,294 109,718 50,000 5,472(1)(2)
Officer 1999 263,744 65,936 30,000 5,432(1)(2)
P. Sherrill Neff 2001 288,354 144,177 45,000 5,682(1)(3)
President, Chief Operating 2000 268,237 107,295 50,000 5,472(1)(3)
Officer, and Chief Financial 1999 257,920 64,480 30,000 5,432(1)(3)
Officer
David A. Zopf 2001 200,136 45,021 25,000 5,646(1)(4)
Executive Vice President 2000 180,303 54,091 25,000 4,962(1)(4)
1999 173,368 34,674 12,500 4,966(1)(4)
Edward J. McGuire 2001 173,056 38,938 5,000 4,968(1)(5)
Vice President, Research and 2000 166,400 33,280 15,000 4,629(1)(5)
Development 1999 160,000 32,000 12,500 4,632(1)(5)
George J. Vergis (6) 2001 93,154 47,250 180,000 180(7)
Vice President, Business and
Commercial Development
(1) Includes $432 in each of 2001, 2000, and 1999 in premiums paid by us for
group term life insurance.
(2) Includes $5,250, $5,040, and $5,000 of matching contributions in 2001,
2000, and 1999, respectively, to Dr. Roth's account in our 401(k) plan.
(3) Includes $5,250, $5,040, and $5,000 of matching contributions in 2001,
2000, and 1999, respectively, to Mr. Neff's account in our 401(k) plan.
(4) Includes $5,214, $4,530, and $4,534 of matching contributions in 2001, 2000
and 1999, respectively, to Dr. Zopf's account in our 401(k) Plan.
(5) Includes $4,536, $4,197, and $4,200 of matching contributions in 2001,
2000, and 1999, respectively, to Dr. McGuire's account in our 401(k) Plan.
(6) Dr. Vergis joined Neose in July 2001.
(7) Represents $180 in 2001 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,
our President and Chief Executive Officer. Under this agreement, which includes
non-competition and confidentiality covenants:
. Mr. Clarke is to receive a minimum base salary of $450,000 per
year, and a performance incentive bonus of up to 75% of base
salary based upon the achievement of goals established by the
Board of Directors and Mr. Clarke;
. 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:
31
. 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.
. Mr. Clarke will be reimbursed for job-related expenses and he
will be reimbursed for 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 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, 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 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 event 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. Clark would be
entitled to receive an additional "gross-up" payment to insulate
him from the effect of that tax.
In April 1992, we entered into a one-year employment agreement, extendable
in one-year increments, with David A. Zopf, M.D., our Executive Vice President.
The agreement has been extended through March 31, 2003. The agreement currently
provides for an annual base salary of $240,163 and a bonus of up to 25% of base
salary at the discretion of the Chief Executive Officer. In connection with the
original agreement, the Board of Directors granted Dr. Zopf options, which are
now fully vested, to purchase 26,666 shares of common stock at the fair market
value on the date of grant. The agreement contains certain restrictive
covenants, including provisions relating to non-competition, non-solicitation,
and the non-disclosure of proprietary information during his employment with
Neose and for specified periods thereafter.
In December 1994, we entered into an employment agreement for an initial
period of three years (with automatic one-year extensions) with P. Sherrill
Neff, who served as our President, Chief Operating Officer, and Chief Financial
Officer through January 31, 2002. Under this agreement, which included our
standard non-competition and confidentiality agreement:
. Mr. Neff received a minimum base salary of $225,000 per year, and
a performance incentive bonus of up to 50% of base salary at the
discretion of the Compensation Committee;
. The Board of Directors granted Mr. Neff options, which are fully
vested, to purchase 100,000 shares of common stock at an exercise
price of $5.70 per share; and
32
. We would have been required to continue to pay Mr. Neff for the
shorter of 12 months after termination or the amount of time remaining
in his employment term if Mr. Neff were:
. Involuntarily terminated without cause (as defined in the
agreement); or
. Terminated voluntarily or involuntarily following certain changes
of control of Neose or a sale of all or substantially all of our
assets in a complete liquidation or dissolution.
Mr. Neff resigned from Neose, effective January 31, 2002, and he did not
receive any severance upon termination of his employment.
Retention Agreements
--------------------
In January 2002, we entered into retention agreements with our executive
officers and certain members of senior management, other than Mr. Clarke. In the
event any of these executives is involuntarily terminated without cause or
resigns for good reason (each as defined in the agreement), and provided that
the executive agrees to release us from any obligations we may have incurred in
connection with the executive's employment with us, the executive would receive
on the date of termination a cash payment equal to one year of base salary and
any accrued and unpaid salary or bonuses from periods prior to the termination.
In the event the executive 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, in additional to the above
payments, the executive would continue to be deemed an employee through the
first anniversary of the termination for purposes of any vesting, forfeiture,
survival, exercise or similar term applicable to any stock option, restricted
stock or other equity-based incentive held by the executive immediately prior to
the termination. The payments to each executive are limited to the minimum
extent necessary to ensure that no portion of these payments fail to be tax
deductible to Neose under Section 280G of the Internal Revenue Code.
Retirement and Separation Agreements
------------------------------------
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 will continue to serve as Chairman of the Board of Directors
for a period of one year and will provide consulting services to the Chief
Executive Officer and the board of directors for a period of three years. We
will provide health insurance benefits to Dr. Roth, and pay him $39,623 per
month for twelve months. 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 non-competition
agreement. If he does so, we will continue his health insurance benefits for six
additional months, pay him $39,622 per month 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.
In January 2002, we entered into a Retirement Agreement with Edward J.
McGuire, Ph.D., Vice President, Research and Development. Under this agreement,
Dr. McGuire will remain an employee of Neose until June 30, 2002. Following Dr.
McGuire's retirement, Dr. McGuire will receive annual retirement benefits
through 2006, including $87,500 from the retirement date until December 31,
2002, $125,000 in 2003, and $100,000 in each of 2004, 2005, and 2006. We will
continue to provide Dr. McGuire health insurance benefits through December 31,
2003. We will also provide an office to Dr. McGuire through 2006, during which
time Dr. McGuire shall be available to provide consulting services to us for up
to 10 days per month without further compensation. Dr. McGuire also released us
from any obligations we may have incurred in connection with his employment with
us.
Director Compensation
---------------------
Directors who are also Neose employees receive no additional compensation for
serving as a director. Non-employee directors receive:
* A $14,000 annual retainer, which may be applied, in whole or in part, toward
the acquisition of an option to purchase shares of our common stock;
* Reimbursement for reasonable travel expenses incurred for their attendance at
meetings of the Board of Directors;
* $2,500 for board meetings attended in person;
* $2,000 ($2,500 for the Chairperson) for committee meetings attended in person;
* $1,000 for telephonic meetings lasting longer than thirty minutes;
* Upon initial election or appointment to the Board of Directors, an option to
purchase 30,000 shares of common stock and upon re-election to the Board of
Directors, an option to purchase 10,000 shares of 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 Neose.
33
Option Grant Table
The following table provides information about grants of stock options made
during 2001 to each of the executive officers named in our Summary Compensation
Table.
Individual Grants
----------------------------------------------------- Potential Realizable Value
Number of at Assumed Annual Rates of
Shares Percentage of Stock Price Appreciation for
Underlying Total Options Option Term (3)
Options Granted to Exercise Expiration ----------------------------
Name Granted Employees Price Date 5% 10%
---- ----------- ----------- ------- ---------- ---------- -----------
Stephen A. Roth......... 50,000 (1) 6.9% $34.61 12/19/11 $1,088,302 $ 2,757,971
P. Sherrill Neff........ 45,000 (1) 6.2 34.61 12/19/11 979,472 2,482,174
David A. Zopf........... 25,000 (1) 3.4 29.00 12/13/11 455,949 1,155,463
Edward J. McGuire....... 5,000 (1) 0.7 29.00 12/13/11 91,189 231,093
George J. Vergis........ 175,000 (2) 24.1 38.25 07/11/11 4,583,087 11,262,729
5,000 (2) 0.7 29.00 12/13/11 91,190 231,093
________________
(1) 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.
(2) Each option has a term of ten years from the date of grant. Options for
25,000 shares vested on the date of grant, and options for 66,667 shares
vest ratably over a four-year period, beginning on the first anniversary of
the date of grant. Options for 83,333 shares will vest on the fifth
anniversary of the date of grant, unless certain conditions are met, in
which case some portion of the options may vest as soon as the first,
second, third, or fourth anniversary of the date of grant.
(3) 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.
Aggregated Fiscal Year-End Option Values
The following table provides information about the exercise of stock
options during 2001 and the value of stock options unexercised at the end of
2001 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 (a) Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---------------- ------------ ---------- ----------- ------------- ----------- -------------
Stephen A. Roth....... -- $ -- 350,833 117,500 $ 7,438,905 $ 971,725
P. Sherrill Neff...... 1,000 29,150 441,500 112,500 10,206,705 961,675
David A. Zopf......... 800 21,494 81,315 53,750 2,026,696 566,138
Edward J. McGuire..... 9,500 261,630 70,750 26,250 1,703,903 354,713
George J. Vergis...... -- -- 25,000 155,000 -- 38,100
34
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
The Compensation Committee consists of Dr. Hamilton and Mr. MacMaster, 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, as of April 19, 2001, about the
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;
. Each executive officer named in our Summary Compensation Table;
and
. All directors and executive officers as a group.
As of April 19, 2001, there were 14,274,446 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 of April 19, 2001. 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 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
------------------------ ---------------- -----------
Kopp Investment Advisors, Inc. (1)
7701 France Avenue South
Suite 500
Edina, MN 55455 .............................................. 2,069,871 14.5%
Eastbourne Capital Management, LLC (2)
1101 Fifth Avenue
Suite 160
San Rafael, CA 94901 ......................................... 1,169,600 8.2%
Directors and Executive Officers
Lindsay A. Rosenwald, M.D. (3)(4)
c/o Paramount Capital, Inc.
787 7/th/ Avenue
New York, NY 10019 ...................................... 1,169,039 8.2%
Mark H. Rachesky, M.D. (3)(5)
c/o MHR Fund Management LLC
40 West 57/th/ Street, 33/rd/ Floor
New York, NY 10019 ...................................... 776,141 5.4%
Stephen A. Roth, Ph.D. (3)(6) ................................ 564,724 3.9%
P. Sherrill Neff (3)(7) ...................................... 458,941 3.1%
Edward J. McGuire, Ph.D. (3)(8) .............................. 137,599 1.0%
35
William F. Hamilton, Ph.D. (3) .......................... 114,881 *
Douglas J. MacMaster, Jr. (3) ........................... 89,649 *
Lowell E. Sears (3)(9) .................................. 55,956 *
David A. Zopf, M.D. (3) ................................. 81,878 *
Jerry A. Weisbach, Ph.D. (3)(10) ........................ 64,882 *
C. Boyd Clarke (3) ...................................... 0 *
George J. Vergis (3) .................................... 25,000 *
All current directors and executive officers as a group
(14 persons) (3) ........................................ 3,568,415 23.1%
________
* Less than one percent.
(1) According to a Schedule 13G filed January 30, 2001, Kopp Investment
Advisors, Inc. (KIA) is an investment adviser registered under the
Investment Advisers Act of 1940. It is wholly owned by Kopp Holding Company
(KHC), which is wholly owned by Mr. Leroy C. Kopp. KIA reported sole voting
power over 890,700 shares, sole dispositive power over 715,000 shares and
shared dispositive power over 1,354,871 shares. KHC reported beneficial
ownership of 2,069,871 shares. Mr. Kopp reported beneficial ownership of
2,169,871 shares of which Mr. Kopp reported sole voting power over 100,000
shares and sole dispositive power over 100,000 shares. Of the shares
beneficially owned by KIA, KHC, and Mr. Kopp, 2,094,871 are held in a
fiduciary or representative capacity.
(2) According to a Schedule 13G filed February 1, 2002, Eastbourne Capital
Management, LLC is a registered investment advisor whose clients have the
right to receive or the power to direct the receipt of dividends proceeds
from the sale of these shares and does not hold sole voting power for any
shares.
(3) Includes the following shares of common stock issuable under stock options
that are exercisable within 60 days of April 19, 2002: Rosenwald - 31,979
shares; Rachesky - 20,751 shares; Roth - 350,833 shares; Neff - 354,875
shares; McGuire - 61,250 shares; Hamilton - 58,131 shares; MacMaster -
59,798 shares; Sears - 34,632 shares; Zopf - 60,416 shares; Weisbach -
59,798 shares; Vergis - 25,000; Clarke - 0 and all current directors and
executive officers as a group - 1,142,472 shares.
(4) Includes (i) 75,624 shares of common stock owned by Dr. Rosenwald's wife;
(ii) 30,250 shares of common stock held by Dr. Rosenwald's wife as
custodian for Dr. Rosenwald's children; (iii) 357,694 shares of common
stock held by Aries Select Ltd.; (iv) 167,133 shares of common stock held
by the Aries Select I LLC; (v) 37,942 shares of common stock held by the
Aries Select II LLC; and (vi) 24,500 shares of common stock held by The
Rosenwald Foundation, Inc. Paramount Capital Asset Management, Inc., of
which Dr. Rosenwald is the sole shareholder, serves as the investment
manager to Aries Select Ltd. and also is the General Partner of the Aries
Select I LLC and Aries Select II LLC. Dr. Rosenwald disclaims beneficial
ownership of the shares held by Aries Select Ltd., Aries Select I LLC and
Aries Select II LLC, except to the extent of his pecuniary interest in the
funds. Dr. Rosenwald may be deemed to have voting and investment control
with respect to the shares held by Aries Select Ltd., Aries Select I LLC
and Aries Select II LLC. In addition, Dr. Rosenwald disclaims beneficial
ownership of the shares held by The Rosenwald Foundation. Dr. Rosenwald may
be deemed to share voting and investment power with respect to the shares
held by The Rosenwald Foundation.
(5) 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.
36
(6) 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.
(7) 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.
(8) Includes 20,000 shares of common stock held by Dr. McGuire's wife. Dr.
McGuire disclaims beneficial ownership of the shares held by his wife.
(9) Includes 21,324 shares of common stock owned by the Sears Family Living
Trust, of which Mr. Sears is trustee.
(10) Includes 3,000 shares of common stock held by Dr. Weisbach's children as
custodian for his grandchildren. Dr. Weisbach disclaims beneficial
ownership of the shares held by his children.
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 Acting Chief Financial Officer. Under the
agreement, we agreed to lend to Mr. Davis the amounts necessary to cover all
tuition payments and related costs and fees for an MBA degree from The Wharton
School of the University of Pennsylvania. All amounts provided will bear
interest at the rate of 4.71% per annum. We have agreed to forgive repayment of
the principal amount outstanding in four equal, annual installments commencing
in May 2004 if Mr. Davis has completed the program, received an MBA degree, and
remains employed by Neose on each forgiveness date. We will forgive the accrued
interest as it becomes due. In addition, we will forgive all outstanding
principal and interest in the event Mr. Davis is terminated without cause. As of
December 31, 2001, the aggregate amount outstanding under this agreement was
$71,507.
37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
--------------------
The Consolidated Financial Statements filed as part of this Annual
Report on Form 10-K are listed on the Index to Consolidated 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
Consolidated Financial Statements or Notes thereto.
3. Exhibits. (See (c) below)
--------
(b) Reports on Form 8-K.
-------------------
On October 23, 2001, the Company filed a report on Form 8-K, announcing
under Item 5 that P. Sherrill Neff, President, Chief Operating Officer and Chief
Financial Officer, resigned his executive positions with the Company. Mr. Neff
will remain a member of the Company's board of directors.
On October 24, 2001, the Company filed a report on Form 8-K, announcing
under Item 5 that its board of directors authorized an open market stock
repurchase program enabling the Company to purchase up to one million shares of
outstanding common stock.
On February 1, 2002, the Company filed a report on Form 8-K, announcing
under Item 5 that it entered into a research, development and license agreement
with Wyeth Pharmaceuticals, a division of Wyeth, for the use of Neose's
GlycoAdvance services and products to develop an improved production system for
a Wyeth compound.
(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 Amended and Restated By-Laws. (Exhibit 3.3)(5)
3.3 Certificate of Designation establishing and designating the Series A Junior
Participating Preferred Stock. (Exhibit 3.2)(5)
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)(3)
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)(3)
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)(3)
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)(6)
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)(10)
38
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between
University of Pennsylvania and Neose Technologies, Inc.
(Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between
University of Pennsylvania and Neose Technologies, Inc., as
amended to date. (Exhibit 10.2)(1)
10.3(a)+ Series D Preferred Stock Purchase Agreement, dated as of
December 30, 1992, between Abbott Laboratories and Neose
Technologies, Inc. (Exhibit 10.8(a))(1)
10.3(b)+ Supply Agreement, dated as of December 30, 1992, between
Abbott Laboratories and Neose Technologies, Inc. (Exhibit
10.8(b))(1)
10.3(c)+ Research and License Agreement, dated as of December 30, 1992,
between Abbott Laboratories and Neose Technologies, Inc.
(Exhibit 10.8(c))(1)
10.3(d)+ Amendment to the Research and License Agreement, dated as of
January 18, 1995, between Abbott Laboratories and Neose
Technologies, Inc. (Exhibit 10.8(d))(2)
10.4 Form of Series E Preferred Stock Investors' Rights Agreement.
(Exhibit 10.9)(1)
10.5 Form of Series F Preferred Stock Investors' Rights Agreement.
(Exhibit 10.10)(1)
10.6 Form of Warrant to Purchase Common Stock, dated as of February
23, 1991. (Exhibit 10.11)(1)
10.7 Form of Warrant to Purchase Common Stock, dated as of June 30,
1993. (Exhibit 10.12)(1)
10.8 Form of Warrant to Purchase Common Stock, dated as of February
16, 1994. (Exhibit 10.13)(1)
10.9 Form of Warrant to Purchase Series E Preferred Stock, dated as
of July 29, 1994. (Exhibit 10.14)(1)
10.10 Warrant for the Purchase of Common Stock, dated as of June 30,
1995, between Financing for Science International, Inc. and
Neose Technologies, Inc. (Exhibit 10.15)(1)
10.11++ 1995 Stock Option/Stock Issuance Plan, as amended. (Exhibit
99.1)(4)
10.12++ Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.13++ Employment Agreement, dated April 1, 1992, between David A.
Zopf and Neose Technologies, Inc., as amended to date.
(Exhibit 10.18)(1)
10.14++ Employment Agreement, dated December 1, 1994, between P.
Sherrill Neff and Neose Technologies, Inc. (Exhibit 10.19)(1)
10.15 Agreement for Purchase and Sale of Real Property, dated March
14, 1997, by and between Pennsylvania Business Campus
Delaware, Inc. and Neose Technologies, Inc. (Exhibit 2.1)(3)
10.16 Loan Agreement, dated as of March 1, 1997, between Montgomery
County Industrial Development Authority and Neose
Technologies, Inc. (Exhibit 10.1)(3)
10.17 Participation and Reimbursement Agreement, dated as of March
1, 1997, between Jefferson Bank and CoreStates Bank, N.A.
(Exhibit 10.2)(3)
10.18 Form of CoreStates Bank, N.A. Irrevocable Letter of Credit.
(Exhibit 10.3)(3)
10.19 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)(3)
10.20 Reimbursement Agreement, dated as of March 1, 1997, between
Jefferson Bank and Neose Technologies, Inc. (Exhibit 10.5)(3)
10.21 Specimen of Note from Company to Jefferson Bank. (Exhibit
10.6)(3)
10.22 Mortgage, Assignment and Security Agreement, dated March 20,
1997, between Jefferson Bank and Neose Technologies, Inc.
(Exhibit 10.7)(3)
10.23 Security Agreement, dated as of March 1, 1997, by and between
Jefferson Bank and Neose Technologies, Inc. (Exhibit 10.8)(3)
10.24 Assignment of Contract, dated as of March 20, 1997, between
Jefferson Bank and Neose Technologies, Inc. (Exhibit 10.9)(3)
10.25 Custodial and Collateral Security Agreement, dated as of March
20, 1997, by and among Offitbank, Jefferson Bank, and Neose
Technologies, Inc. (Exhibit 10.10)(3)
10.26 Placement Agreement, dated March 20, 1997, among Montgomery
County Industrial Development Authority, CoreStates Capital
Markets, and Neose Technologies, Inc. (Exhibit 10.11)(3)
10.27 Remarketing Agreement, dated as of March 1, 1997, between
CoreStates Capital Markets and Neose Technologies, Inc.
(Exhibit 10.12)(3)
10.28 Form of Purchase Agreement, dated as of June 25, 1999, between
Neose Technologies, Inc. and the purchasers set forth on the
signature pages thereto. (Exhibit 99.1)(7)
10.29 Form of Amended and Restated Purchase Agreement, dated as of
June 25, 1999, between Neose Technologies, Inc. and the
purchasers set forth on the signature pages thereto. (Exhibit
99.2)(7)
39
10.30+ Research and Development Agreement, dated June 1, 1998,
between Neose Technologies, Inc. and the Pharmaceutical
Research Institute of Bristol-Myers Squibb Company. (Exhibit
99.1)(8)
10.31+ 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)(8)
10.32+ Collaboration and License Agreement, dated November 3, 1999,
between Neose Technologies, Inc. and American Home Products
Corporation. (Exhibit 99.3)(8)
10.33 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)(9)
10.34 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)(9)
10.35++ Employment Offer Letter, dated November 27, 2000, between Eric
Sichel and Neose Technologies, Inc. (Exhibit 10.35)(11)
10.36 Amendment No. 1 to Research and Development Agreement, dated
May 14, 2001, between Neose Technologies, Inc. and the
Pharmaceutical Research Institute of Bristol-Myers Squibb
Company. (Exhibit 99.2)(12)
10.37 Separation of Employment Agreement, dated as of May 18, 2001,
between Eric Sichel and Neose Technologies, Inc. (Exhibit
10.1)(13)
10.38# Research, Development and License Agreement, dated December
19, 2001, between American Home Products Corporation and Neose
Technologies, Inc. (Exhibit 10.1)(14)
10.39*++ Employment Offer Letter, dated effective July 11, 2001 between
George J. Vergis and Neose Technologies, Inc.
10.40* Agreement of Lease, dated as of February 15, 2002, between
Liberty Property Leased Partnership and Neose Technologies,
Inc.
10.41*++ Retirement Agreement, dated as of January 14, 2002, between
Edward J. McGuire and Neose Technologies, Inc.
10.42*++ Retention Agreement, dated as of January 21, 2002, between
David A. Zopf and Neose Technologies, Inc.
10.43*++ Retention Agreement, dated as of January 21, 2002, between
George J. Vergis and Neose Technologies, Inc.
10.44*++ Tuition Reimbursement Agreement, dated as of May 24, 2001,
between A. Brian Davis and Neose Technologies, Inc.
10.45*++ Retention Agreement, dated as of January 21, 2002, between A.
Brian Davis and Neose Technologies, Inc.
10.46*++ Retention Agreement, dated as of January 21, 2002, between
Debra J. Poul and Neose Technologies, Inc.
10.47* Standard Industrial/Commercial Multi-Tenant Lease-Net, dated
February 2, 2001, between Nancy Ridge Technology Center, LLC
and Neose Technologies, Inc. 10.48* First Amendment to Lease,
dated May 18, 2001, between Nancy Ridge Technology Center, LLC
and Neose Technologies, Inc.
10.49* Agreement, dated as of August 24, 2001, between IPS and Neose
Technologies, Inc.
11* Statement re: Computation of Net Loss Per Common Share.
23.1* Consent of Arthur Andersen LLP.
24* Powers of Attorney (included as part of signature page
hereof).
99* Letter to the SEC from Neose Technologies, Inc. regarding
Arthur Andersen LLP.
____________
* Previously filed on March 29, 2002 with Form 10-K.
+ 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.
40
(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 Registration Statement on Form S-1
(Registration No. 333-19629) filed with the SEC on January 13, 1997.
(3) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997.
(4) Filed as an Exhibit to our Registration Statement on Form S-8
(Registration No. 333-73340) filed with the SEC on November 14, 2001.
(5) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC
on October 1, 1997.
(6) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC
on January 8, 1999.
(7) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC
on July 14, 1999.
(8) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC
on February 2, 2000.
(9) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000.
(10) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC
on November 15, 2000.
(11) Filed as an Exhibit to our Annual Report on Form 10-K for the year ended
December 31, 2000.
(12) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC
on May 18, 2001.
(13) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001.
(14) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC
on February 1, 2002.
41
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this amendment to the annual report on
Form 10-K to be signed on our behalf by the undersigned, thereunto duly
authorized.
NEOSE TECHNOLOGIES, INC.
Date: April 30, 2002 By: /s/ C. Boyd Clarke
----------------------------------
C. Boyd Clarke
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment to the annual report on Form 10-K has been signed below by the
following persons on behalf of Neose and in the capacities and on the dates
indicated.
Name Capacity Date
---- -------- ----
/s/ C. Boyd Clarke President, Chief Executive Officer and Director April 30, 2002
------------------------------------- (Principal Executive Officer)
C. Boyd Clarke
/s/ A. Brian Davis Acting Chief Financial Officer April 30, 2002
------------------------------------- (Principal Financial and Accounting Officer)
A. Brian Davis
/s/ Stephen A. Roth* Chairman of the Board April 30, 2002
-------------------------------------
Stephen A. Roth
/s/ William F. Hamilton* Director April 30, 2002
-------------------------------------
William F. Hamilton
/s/ Douglas J. MacMaster, Jr.* Director April 30, 2002
-------------------------------------
Douglas J. MacMaster, Jr.
/s/ P. Sherrill Neff* Director April 30, 2002
-------------------------------------
P. Sherrill Neff
/s/ Mark H. Rachesky* Director April 30, 2002
-------------------------------------
Mark H. Rachesky
/s/ Lindsay A. Rosenwald* Director April 30, 2002
-------------------------------------
Lindsay A. Rosenwald
/s/ Lowell E. Sears* Director April 30, 2002
-------------------------------------
Lowell E. Sears
/s/ Jerry A. Weisbach* Director April 30, 2002
-------------------------------------
Jerry A. Weisbach
*By: /s/ A. Brian Davis
-----------------------------
A. Brian Davis
Attorney-in-Fact
Index to Consolidated Financial Statements
Report of Independent Public Accountants F-2
----------------------------------------------------------
Consolidated Balance Sheets F-3
-----------------------------------------------------------------------
Consolidated Statements of Operations F-4
-------------------------------------------------------------
Consolidated Statements of Stockholders' Equity and Comprehensive Loss F-5
----------------------------
Consolidated Statements of Cash Flows F-8
-------------------------------------------------------------
Notes to Consolidated Financial Statements F-9
--------------------------------------------------------
F-1
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-2
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Balance Sheets
(in thousands, except per share amounts)
December 31,
----------------------
Assets 2000 2001
--------- ----------
Current assets:
Cash and cash equivalents $ 66,989 $ 76,245
Marketable securities 27,773 -
Restricted funds 893 902
Prepaid expenses and other current assets 583 1,635
--------- ---------
Total current assets 96,238 78,782
Property and equipment, net 13,577 22,649
Other assets, net 4,953 4,355
--------- ---------
Total assets $ 114,768 $ 105,786
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,100 $ 1,100
Accounts payable 83 719
Accrued compensation 601 855
Accrued expenses 1,527 2,844
Deferred revenue 389 1,222
--------- ---------
Total current liabilities 3,700 6,740
Long-term debt 6,200 5,100
--------- ---------
Total liabilities 9,900 11,840
--------- ---------
Commitments (Note 11)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued - -
Common stock, $.01 par value, 30,000 shares
authorized; 13,992 and 14,089 shares issued;
13,992 and 14,083 shares outstanding 140 141
Additional paid-in capital 173,757 176,124
Treasury stock, 6 shares at cost in 2001 - (175)
Deferred compensation (717) (503)
Deficit accumulated during the development stage (68,312) (81,641)
--------- ---------
Total stockholders' equity 104,868 93,946
--------- ---------
Total liabilities and stockholders' equity $ 114,768 $ 105,786
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Operations
(in thousands, except per share amounts)
Period from
inception
(January 17,
1989) to
Year Ended December 31, December 31,
----------------------------------
1999 2000 2001 2001
---------------------------------- ------------
Revenue from collaborative agreements $ 422 $ 4,600 $ 1,266 $ 12,633
-------- --------- --------- ----------
Operating expenses:
Research and development 10,649 12,094 14,857 78,504
Marketing, general and administrative 4,520 5,648 9,374 36,255
--------- --------- --------- ---------
Total operating expenses 15,169 17,742 24,231 114,759
--------- --------- --------- ---------
Operating loss (14,747) (13,142) (22,965) (102,126)
Gain on sale of marketable security -- -- 6,120 6,120
Interest income 1,862 5,111 3,704 17,670
Interest expense (433) (469) (188) (3,305)
--------- --------- --------- ----------
Net loss $ (13,318) $ (8,500) $ (13,329) $ (81,641)
========= ========= ========= ==========
Basic and diluted net loss per share $ (1.25) $ (0.63) $ (0.95)
========= ========= =========
Basic and diluted weighted-average
shares outstanding 10,678 13,428 14,032
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(in thousands)
Comprehensive
Convertible Deficit loss
Preferred accumulated Unrealized accumulated
Stock Common Stock Additional during the gains on during the
-------------- --------------- paid-in Treasury Deferred development marketable development
Shares Amount Shares Amount capital Stock compensation stage securities stage
------------------------------------------------------------------------------------------------------
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 -- -- -- -- -- -- -- (460) -- (460)
---------------------------------------------------------------------------------------------------
Balance, December 31, 1990 -- -- 1,764 17 (3) -- -- (460) -- (460)
Sale of stock 1,517 15 420 4 4,499 -- (7) -- -- --
Shares issued pursuant to
consulting and
antidilutive agreements -- -- 145 1 -- -- -- -- -- --
Capital contributions -- -- -- -- 10 -- -- -- -- --
Dividends on preferred
stock -- -- -- -- (18) -- -- -- -- --
Net loss -- -- -- -- -- -- -- (1,865) -- (1,865)
---------------------------------------------------------------------------------------------------
Balance, December 31, 1991 1,517 15 2,329 22 4,488 -- (7) (2,325) -- (2,325)
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 -- -- -- -- -- -- 5 -- -- --
Dividends on preferred
stock -- -- -- -- (36) -- -- -- -- --
Net loss -- -- -- -- -- -- -- (3,355) -- (3,355)
---------------------------------------------------------------------------------------------------
Balance, December 31, 1992 1,777 17 2,474 23 7,529 -- (2) (5,680) -- (5,680)
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 -- -- -- -- -- -- 2 -- -- --
Dividends on preferred
stock -- -- -- -- (36) -- -- -- -- --
Net loss -- -- -- -- -- -- -- (2,423) -- (2,423)
---------------------------------------------------------------------------------------------------
Balance, December 31, 1993 2,027 20 2,478 23 9,508 -- -- (8,103) -- (8,103)
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 -- -- -- -- -- -- -- (6,212) -- (6,212)
---------------------------------------------------------------------------------------------------
Balance, December 31, 1994 4,476 $ 45 2,523 $ 25 $20,597 $ -- $ -- $(14,315) $ -- $(14,315)
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(continued)
(in thousands)
Comprehensive
Convertible Deficit loss
Preferred accumulated Unrealized accumulated
Stock Common Stock Additional during the gains on during the
--------------- -------------- paid-in Treasury Deferred development marketable development
Shares Amount Shares Amount capital Stock compensation stage securities stage
----------------------------------------------------------------------------------------------------
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 -- -- -- -- -- -- -- (5,067) -- (5,067)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1995 5,780 58 3,145 31 31,386 -- (360) (19,382) -- (19,382)
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
common stock and warrants -- -- 65 1 162 -- -- -- -- --
Shares issued pursuant to
employee stock purchase plan -- -- 6 -- 60 -- -- -- -- --
Deferred compensation
related to acceleration of
option vesting -- -- -- -- 106 -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- -- 90 -- -- --
Net loss -- -- -- -- -- -- -- (6,141) -- (6,141)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- -- 8,215 82 60,831 -- (270) (25,523) -- (25,523)
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 -- -- -- -- -- -- -- (9,064) -- (9,064)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1997 -- $ -- 9,525 $ 95 $ 81,807 $ -- $ (361) $(34,587) $ -- $(34,587)
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(continued)
(in thousands)
Comprehensive
Convertible Deficit loss
Preferred accumulated Unrealized accumulated
Stock Common Stock Additional during the gains on during the
-------------- --------------- 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)
Sales 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
stock options -- -- -- -- 1,270 -- (1,270) -- -- --
Amortization of deferred
compensation -- -- -- -- -- -- 1,083 -- -- --
Net loss -- -- -- -- -- -- -- (8,500) -- (8,500)
----------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 13,992 140 173,757 -- (717) (68,312) -- (68,312)
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
stock options -- -- -- -- 1,165 -- (1,165) -- -- --
Amortization of deferred
compensation -- -- -- -- -- -- 1,379 -- -- --
Net loss -- -- -- -- -- -- -- (13,329) -- (13,329)
----------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- $ -- 14,083 $ 141 $176,124 $(175) $ (503) $(81,641) $ -- $ (81,641)
====================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Consolidated Statement of Cash Flows
(in thousands)
Period from
inception
(January 17,
Year ended December 31, 1989) to
---------------------------------------- December 31,
1999 2000 2001 2001
---------- ------------ ---------- ------------
Cash flows from operating activities:
Net loss $ (13,318) $ (8,500) $ (13,329) $ (81,641)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,695 2,051 2,422 10,734
Non-cash compensation 477 1,083 1,379 3,578
Common stock issued for non-cash and other charges -- -- -- 35
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 117 (465) (1,052) (1,635)
Accounts payable 192 (154) 636 719
Accrued compensation 125 146 254 855
Accrued expenses 697 (405) (208) 362
Deferred revenue 805 (416) 833 1,222
--------- -------- --------- ----------
Net cash used in operating activities (9,210) (6,660) (9,065) (65,771)
--------- -------- --------- ----------
Cash flows from investing activities:
Purchases of property and equipment (1,207) (1,455) (9,371) (28,557)
Proceeds from sale-leaseback of equipment -- -- -- 1,382
Purchases of marketable securities (88,662) (81,077) (103,465) (324,327)
Proceeds from sales of marketable securities 8,882 -- -- 11,467
Proceeds from maturities of and other changes in
marketable securities 79,227 76,174 131,238 312,860
Purchase of acquired technology (3,550) (1,000) -- (4,550)
Purchase of preferred stock -- (1,250) -- (1,250)
Restricted cash related to acquired technology (1,500) 1,500 -- --
--------- -------- --------- ----------
Net cash provided by (used in) investing activities (6,810) (7,108) 18,402 (32,975)
--------- -------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of debt -- -- -- 11,955
Repayment of debt (617) (1,000) (1,100) (7,052)
Restricted cash related to debt (317) (108) (9) (831)
Proceeds from issuance of preferred stock, net -- -- -- 29,497
Proceeds from issuance of common stock, net 17,572 68,762 335 136,840
Proceeds from exercise of stock options and warrants 263 2,738 868 4,829
Acquisition of treasury stock -- -- (175) (175)
Dividends paid -- -- -- (72)
--------- -------- --------- ----------
Net cash provided by (used in) financing activities 16,901 70,392 (81) 174,991
--------- -------- --------- ----------
Net increase in cash and cash equivalents 881 56,624 9,256 76,245
Cash and cash equivalents, beginning of period 9,484 10,365 66,989 --
--------- -------- --------- ----------
Cash and cash equivalents, end of period $ 10,365 $ 66,989 $ 76,245 $ 76,245
========= ======== ========= ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 429 $ 481 $ 284 $ 3,303
========= ======== ========= ==========
Non-cash investing activities:
Accrued property and equipment $ - $ 275 $ 1,800 $ 2,075
========= ======== ========= ==========
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 consolidated financial
statements.
F-8
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
Note 1. Background
Neose develops proprietary technologies for the synthesis and
manufacture of complex carbohydrates. Our enzymatic technology platform makes
feasible the synthesis and modification of a wide range of complex
carbohydrates, which are chains of simple sugar molecules that can be joined
together in many different combinations. Our platform enables the production and
manipulation of complex carbohydrates either as stand-alone carbohydrate
molecules or as carbohydrate structures attached to recombinant therapeutic
glycoproteins and glycolipids.
Our GlycoAdvance program uses our technology to complete the human
carbohydrate structures on therapeutic glycoproteins. We are also developing our
technology to create novel glycosylation patterns, and to link other molecules,
such as polyethylene glycol, to glycoproteins. The application of this
technology to proteins potentially results in improved clinical activity and
pharmacokinetic profile, enhanced drug development flexibility, stronger and
additional patent claims, and yield improvements.
Our GlycoTherapeutics program uses our technology to enable the
development of carbohydrate-based therapeutics. Our GlycoActives program uses
our technology to develop novel carbohydrate food and nutritional ingredients.
Neose was initially incorporated in January 1989, and began operations in
October 1990.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Neose
Technologies, Inc. and its wholly-owned subsidiaries, and reflect the
elimination of all significant intercompany accounts and transactions.
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, 2000 and 2001, cash equivalents consisted of securities and obligations of
either the U.S. Treasury or U.S. government agencies.
Marketable Securities
Although we held no marketable securities as of December 31, 2001, we
often invest in marketable securities. 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. Our other marketable
securities are classified as available-for-sale securities and are carried at
fair value, based on quoted market prices, with unrealized gains and losses
reported as a separate component of stockholders' equity. All realized gains and
F-9
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
losses on our available-for-sale securities, computed using specific
identification, and any declines in value determined to be permanent are
recognized in our consolidated statements of operations.
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.
Comprehensive Loss
Our comprehensive loss for the years ended December 31, 1999, 2000, and
2001 was approximately $13.5 million, $8.5 million and $13.3 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.
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 use depreciable
lives of three to seven years for laboratory and office equipment, and seventeen
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. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," we assess the recoverability of any 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, 2001.
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The objective of
this pronouncement is to recognize and measure, using enacted tax laws, the
amount of current and deferred income taxes payable or refundable at the date of
the financial statements as a result of all events that have been recognized in
the financial statements.
Revenue Recognition
Revenue from collaborative agreements consists of up-front fees,
research and development funding, and milestone payments. Non-refundable
up-front fees are deferred and amortized to revenue over the related 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.
F-10
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). The bulletin draws on existing accounting rules and provides specific
guidance on how those accounting rules should be applied, and specifically
addresses revenue recognition for non-refundable technology access fees in the
biotechnology industry. We adopted SAB 101 in the fourth quarter of 2000,
effective for all of 2000. SAB 101 had no impact on our financial position or
results of operations, as our revenue recognition policy was consistent with SAB
101.
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, 1999, 2000,
and 2001, the effects of the exercise of outstanding stock options and warrants
were antidilutive; accordingly, they were excluded from the calculation of
diluted earnings per share. See Notes 9 and 10 for a summary of outstanding
warrants and options.
Fair Value of Financial Instruments
As of December 31, 2001, the carrying values of cash and cash
equivalents, restricted funds, accounts payable, accrued expenses, and accrued
compensation approximate their respective fair values. In addition, we believe
the carrying value of our debt instrument, which does not have a readily
ascertainable market value, approximates its fair value.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized
Statements of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS 141), and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
which are effective for fiscal years beginning after December 15, 2001. SFAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. SFAS 142 no longer requires the amortization of
goodwill; rather, goodwill will be subject to a periodic assessment for
impairment by applying a fair-value-based test. In addition, an acquired
intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. Such acquired intangible assets
will be amortized over their estimated useful lives. All of our intangible
assets were obtained through contractual rights and have been separately
identified and recognized in our consolidated balance sheets. These intangibles
are being amortized over their estimated useful lives or contractual lives as
appropriate. Therefore, we do not expect the adoption of SFAS 142 in the first
quarter of 2002 to have any effect on our consolidated financial position or
results of operations.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 changes the
accounting for long-lived assets by requiring that all long-lived assets be
measured at the lower of the carrying amount or fair value less cost to sell,
whether included in reporting continuing operations or in discontinued
operations. SFAS 144, which replaces SFAS 121 "Accounting for Impairment of
Long-Lived Assets and for Assets to be Disposed of," is effective for fiscal
years beginning after December 15, 2001. We do not believe SFAS 144 will have a
material impact on our consolidated financial position or results of operations.
Reclassification
Certain prior year amounts have been reclassified to conform to our
current year presentation.
F-11
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
Note 3. Collaborative Agreements
Agreement with 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 system for Wyeth's
biopharmaceutical compound, recombinant PSGL-Ig (P-selectin glycoprotein
ligand). rPSGL-Ig is being developed to treat inflammation and thrombosis
associated with acute coronary syndrome and reperfusion injury. It is currently
being evaluated in Phase II clinical trials for heart attack.
Under the agreement, we will develop processes for the commercial-scale
manufacture of GlycoAdvance enzymes and sugar nucleotides to be used in the
production of rPSGL-Ig, and will license GlycoAdvance technology to Wyeth for
commercial production of the drug, if regulatory approval is obtained. During
commercial production of Wyeth's current rPSGL-Ig, we would receive ongoing
payments tied to yield improvements achieved using GlycoAdvance. In addition,
Wyeth has the option to use GlycoAdvance to develop a next generation rPSGL-Ig,
in which case we would receive development payments and royalties on product
sales.
We will receive license, research, and milestone payments that will
total up to $17 million if all milestones are met. In addition to ongoing
product payments, Neose and Wyeth would also enter into a supply agreement for
the long-term supply of GlycoAdvance process reagents for their commercial
production needs. In December 2001, we received an upfront-fee of $1 million,
which is included in deferred revenue in our consolidated balance sheet as of
December 31, 2001. We will amortize the up-front fee to revenue over the
estimated four-year performance period.
Wyeth may not receive regulatory approval to rPSGL-Ig, Wyeth may choose
not to commercialize rPSGL-Ig, Wyeth may choose not to use GlycoAdvance services
or products to commercialize rPSGL-Ig, or we may not succeed in developing an
improved production system for rPSGL-Ig.
Agreement with Wyeth Nutrition
We entered into an agreement in 1999 with Wyeth Nutrition, a business
unit of Wyeth Pharmaceuticals, to develop a manufacturing process for a
bioactive carbohydrate to be used as an ingredient in Wyeth's infant and
pediatric nutritional formula products. We are receiving contract development
payments, and will receive payments if we achieve milestones specified in the
agreement. If Wyeth commercializes an ingredient under this agreement, we will
sell product to Wyeth at minimum specified transfer prices.
In 1999, we received from Wyeth a non-refundable, up-front license fee
of $0.5 million, which we are recognizing as revenue ratably over the estimated
three-year performance period. During the years ended December 31, 1999, 2000,
and 2001, we recorded revenues of $0.2 million, $1.2 million, and $1.2 million,
respectively, from Wyeth.
Under our agreement with Wyeth, we are responsible for developing a
large-scale manufacturing process for a potential ingredient in infant formula.
We may be unable to complete this development successfully, or be successful in
commercial scale-up of these processes. Even if we successfully develop a
process and fulfill all of our obligations under the agreement, Wyeth may fail
to obtain regulatory approval to market the ingredient. Even if Wyeth obtains
regulatory approval for the ingredient, Wyeth may elect not to add the
ingredient to any of its products.
F-12
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
Agreement with McNeil Nutritionals
In 1999, we entered into a joint venture with McNeil Nutritionals, a
subsidiary of Johnson & Johnson, to explore the inexpensive enzymatic production
of complex carbohydrates for use as bulking agents. Neose and McNeil
Nutritionals own the joint venture equally. Each of Neose and McNeil
Nutritionals contributed various intellectual property to the joint venture. In
addition, McNeil Nutritionals contributed to the joint venture the pilot
commercial manufacturing facility, for which 50% of the cost will be reimbursed
by the joint venture. McNeil Nutritionals has the exclusive right to purchase
the joint venture's bulking agent for use in specified consumer product
applications at a constant mark-up over the joint venture's cost of production.
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 as it shifted focus to a second generation bulking
agent. The joint venture is exploring establishing a manufacturing arrangement
with a third party to produce these bulking agents.
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 $0.4 million to zero to reflect our share of the
joint venture's losses. We recorded this amount as research and development
expense in our consolidated 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.
For the year ended December 31, 2001, the joint venture had a net loss
and a loss from continuing operations of approximately $6.5 million. The joint
venture had no revenues during 2001. As of December 31, 2001, the joint venture
had no assets, $0.2 million of current liabilities, and $8.1 million noncurrent
liabilities, which consisted of amounts owed to McNeil Nutritionals.
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 loss. As of December 31, 2001, the joint venture had accumulated
losses since inception of approximately $9.8 million, of which our share,
assuming a 50% ownership interest, is approximately $4.9 million. Until the
joint venture is profitable, McNeil Nutritionals is required to fund, as a
non-recourse, no-interest loan, 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 before any distribution of assets to us.
During the years ended December 31, 2000 and 2001, the joint venture
reimbursed Neose approximately $1.6 million and $0.8 million, respectively, for
the cost of research and development services and supplies provided to the joint
venture. There were no such reimbursements during the year ended December 31,
1999. This amount has been reflected as a reduction of research and development
expense in our consolidated statements of operations. As of December 31, 2001,
the joint venture owed Neose approximately $0.2 million. This amount is included
in prepaid expenses and other current assets in our consolidated balance sheet.
We may be required to make additional investments in the joint venture
to fund capital expenditures. If the joint venture builds additional production
facilities, and we wish to have a 50% ownership interest in the joint venture,
we are required to invest up to $8.9 million to fund half of such expenditures.
However, we may elect to fund as little as $1.9 million of the cost of the
facilities, so long as our aggregate investments in the joint venture are
F-13
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
at least 15% of the joint venture's aggregate capital expenditures. In this
case, McNeil Nutritionals will fund the remainder of our half of the joint
venture's capital expenditures, and our ownership percentage will be
proportionately reduced. We have an option, expiring in September 2006, to
return to 50% ownership of the joint venture by reimbursing McNeil Nutritionals
for this amount.
The success of our joint venture with McNeil Nutritionals is dependent
upon the joint venture's ability to develop, manufacture, sell, and market
successfully complex carbohydrates, all of which are in early stages.
Agreement with Progenics Pharmaceuticals
In May 2001, Bristol-Myers Squibb assigned to Progenics Pharmaceuticals
our agreement with Bristol-Myers to develop two synthetic gangliosides for use
in two cancer vaccines, GMK and MGV. Progenics is continuing with the
development of both vaccines and we are in discussions with them concerning
future supply of material for clinical and commercial use, but we will receive
no revenue from this agreement unless it is renegotiated. During the years ended
December 31, 1999 and 2000, we recorded revenues of $0.2 million and $3.3
million, respectively, from Bristol-Myers. We recorded no revenues related to
this collaboration during 2001.
Note 4. Marketable Securities
As of December 31, 2000, marketable securities consisted of securities
and obligations of either the U.S. Treasury or U.S. government agencies. These
securities are classified as held-to-maturity. Held-to-maturity securities
represent those securities for which we have the intent and ability to hold to
maturity, and are carried at amortized cost. Interest on these securities, as
well as amortization of discounts and premiums, is included in interest income.
During the year ended December 31, 1999, we received proceeds from the
sales of marketable securities of approximately $8.9 million. Realized gains on
these sales for the year ended December 31, 1999 were approximately $0.8
million. We had no sales of marketable securities, or associated realized gains,
during the years ended December 31, 2000 and 2001.
Note 5. Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31, 2000 2001
-------------------------------------------------------------------------------
Building and improvements $ 13,904 $ 14,482
Laboratory and office equipment 6,112 8,227
--------------------------------
20,016 22,709
Less accumulated depreciation (7,139) (8,956)
--------------------------------
12,877 13,753
Land 700 700
Construction-in-Progress -- 8,196
--------------------------------
$ 13,577 $ 22,649
================================
In 2001, we capitalized approximately $0.1 million of interest expense
in connection with the construction-in-progress. Depreciation expense was
approximately $1.4 million, $1.5 million, and $1.8 million for the years ended
December 31, 1999, 2000, and 2001, respectively.
F-14
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
Note 6. Other Assets
Investment in Genzyme General
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 consolidated statement of operations for 2000 due to uncertainty
regarding collectibility. In March 2001, Novazyme committed to pay us
approximately $1.6 million in November 2002 in exchange for restructuring our
agreement. Due to uncertainty regarding collectibility, we elected to defer
recognizing this amount as revenue until receiving payment. 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 of approximately $6.1 million on the sale of Genzyme shares. Genzyme also
assumed Novazyme's obligation to pay us approximately $1.6 million in November
2002. This amount will be reflected as other income in our consolidated
statements of operations upon receipt of the payment.
Acquired Technology
In March 1999, we acquired the carbohydrate-manufacturing patents,
licenses, and other intellectual property of Cytel Corporation for aggregate
consideration of $4.8 million, of which $1.3 million was paid in 2000 to
Epimmune, Inc., Cytel's successor corporation, as it satisfied certain
milestones relating to the acquired patents and licenses. We charged $0.2
million of the $4.8 million to research and development expense in our
consolidated statements of operations in 1998. The acquired intellectual
property consists of core technology with alternative future uses. We have
capitalized, therefore, the remaining $4.6 million as acquired technology, which
is included in other assets in our consolidated balance sheets.
The acquired technology balance is being amortized to research and
development expense in our consolidated statements of operations over eight
years, which is the estimated useful life of the technology. Amortization
expense relating to the acquired technology for the years ended December 31,
1999, 2000, and 2001 was approximately $0.4 million, $0.5 million, and $0.6
million, respectively. The net book value of the acquired technology was $3.7
million and $3.1 million as of December 31, 2000 and 2001, respectively.
Investment in Convertible Preferred Stock
In June 2000, we made an investment of $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 approximately
$0.4 million and $1.0 million for the years ended December 31, 2000 and 2001,
respectively. Our equity investment, which represents an ownership interest of
approximately 4%, was made on the same terms as other unaffiliated investors.
Accordingly, we have stated the 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, 2001.
Note 7. Long-Term Debt
In 1997, we issued, through the Montgomery County (Pennsylvania)
Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds.
The bonds were issued to finance the purchase of our previously leased building
and the construction of a pilot-scale manufacturing facility within our
building. The bonds are
F-15
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
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 1999, 2000, and 2001, the weighted-average,
effective interest rate was 6.5%, 7.5%, and 5.3% 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, 2001, we had restricted funds relating to the bonds of $0.9
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 the land, building, improvements, and certain machinery and
equipment to our bank. The net book value of the pledged assets is $8.4 million
as of December 31, 2001. We have also agreed to a covenant to maintain a minimum
required cash and short-term investments balance of at least two times the
current loan balance. As of December 31, 2001, we were required to maintain a
cash and short-term investments balance of $12.4 million. 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, which was $6.2 million as
of December 31, 2001.
Minimum principal repayments of long-term debt as of December 31, 2001
were as follows (in thousands): 2002--$1,100; 2003--$1,200; 2004--$1,200;
2005--$100; 2006--$200; and thereafter--$2,400 (2007--$100; 2008 through
2011--$200; 2012--$300; 2013--$200; 2014--$300; 2015--$200; 2016--$300; and
2017--$200).
Note 8. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31, 2000 2001
--------------------------------------------------------------------------------
Accrued property and equipment $ 275 $ 1,800
Accrued outside research expenses 400 286
Accrued professional fees 360 340
Accrued other expenses 492 418
---------------------------------
$ 1,527 $ 2,844
=================================
Note 9. Stockholders' Equity
Common Stock
During 2001, we purchased 6,000 shares of our common stock in the open
market for approximately $0.2 million, or an average price of approximately
$29.00 per share.
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
F-16
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
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 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. Some of these
common shares have registration rights.
From 1991 through 1995, we sold 7,196,884 shares of Series A, B, C, D,
E, and F Convertible Preferred Stock. On December 7, 1995, all outstanding
shares of Series B Convertible Preferred Stock converted into 472,249 shares of
common stock. As discussed above, in connection with the initial public
offering, all outstanding shares of Series A, C, D, E, and F converted into
2,410,702 shares of common stock.
Warrant
In June 1995, we granted a warrant to an equipment finance company to
purchase 10,527 shares of common stock at $14.25 per share. The stock warrant,
which expires on June 30, 2002, remained outstanding as of December 31, 2001.
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. 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% acquiror'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. 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 10. Employee Benefit Plans
Stock Option Plans
We have three stock option plans, the 1991, 1992, and 1995 Stock Option
Plans, under which a total of 3,901,666 shares of common stock have been
reserved. 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
F-17
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
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 our stock option plans as of December 31, 1999, 2000,
2001, and changes during each of the years then ended, is presented below:
1999 2000 2001
-----------------------------------------------------------------------------------------
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 1,785,489 $ 12.15 2,152,037 $ 12.41 2,506,901 $ 16.61
Granted 443,626 13.22 616,140 28.94 789,035 32.48
Exercised (35,663) 7.41 (247,501) 11.06 (79,055) 11.28
Canceled (41,415) 14.15 (13,775) 12.89 (104,625) 27.98
-----------------------------------------------------------------------------------------
Balance as of
December 31 2,152,037 $ 12.41 2,506,901 $ 16.61 3,112,256 $ 20.39
=========================================================================================
Options exercisable
as of December 31 1,242,583 $ 11.07 1,412,499 $ 12.29 1,782,271 $ 14.86
=========================================================================================
The following table summarizes information about stock options outstanding as of
December 31, 2001:
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 -- $12.54 658,103 4.2 $ 8.04 586,343 $ 7.79
$12.69 -- $19.00 1,110,480 6.2 $ 14.82 938,005 $ 15.03
$19.44 -- $29.00 878,173 9.2 $ 28.00 158,923 $ 26.99
$30.00 -- $41.13 465,500 9.4 $ 36.78 99,000 $ 35.63
--------- ---------
3,112,256 7.1 $ 20.39 1,782,271 $ 14.86
========= =========
Fair Value Disclosures
We have elected to adopt the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," or SFAS 123. Accordingly, we apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for our stock-based compensation plans. We record deferred
compensation for option grants to employees for the amount, if any, the market
price per share exceeds the exercise price per share. In addition, we record
deferred compensation for option grants to non-employees in the amount of the
fair value per share, as computed using the Black-Scholes option- pricing model
and variable plan accounting. We amortize deferred compensation amounts over the
vesting periods
F-18
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
of each option. We recognized compensation expense of approximately $0.5
million, $1.1 million, and $1.4 million for the years ended December 31, 1999,
2000, and 2001, respectively.
If we had elected to record compensation cost for our stock-based
compensation plans consistent with SFAS 123, our net loss and basic and diluted
net loss per share would have been increased to the pro forma amounts indicated
below (in thousands, except per share data):
Year Ended December 31, 1999 2000 2001
----------------------------------------------------------------------------------------------------
Net loss - as reported $ (13,318) $ (8,500) $ (13,329)
Net loss - pro forma $ (15,853) $ (12,182) $ (21,383)
Basic and diluted net loss per share - as reported $ (1.25) $ (0.63) $ (0.95)
Basic and diluted net loss per share - pro forma $ (1.48) $ (0.91) $ (1.52)
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 1999, 2000, and 2001 grants, respectively:
risk-free interest rate of 5.9%, 4.7%, and 4.9%; expected life of 5.2, 4.3, and
6.1 years; volatility of 60%, 75%, and 75%; 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 1999, 2000, and 2001 was $6.25,
$8.45, and $11.60, respectively. The fair value of the purchase rights was
estimated using the Black-Scholes model with the following weighted-average
assumptions for 1999, 2000, and 2001, respectively: risk-free interest rate of
6.5%, 5.0%, and 4.6%; expected life of eighteen, fourteen, and sixteen months;
volatility of 60%, 70%, and 75%; and a dividend yield of zero.
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, 1999 2000 2001
--------------------------------------------------------------------------------
Exercise Price = Market Value
Options granted 397,366 608,900 610,400
Weighted-average exercise price $ 12.17 $ 29.27 $ 30.96
Weighted-average fair value $ 6.89 $ 17.56 $ 21.29
Exercise Price Greater Than Market Value
Options granted 40,000 -- --
Weighted-average exercise price $ 25.00 $ -- $ --
Weighted-average fair value $ 5.50 $ -- $ --
Exercise Price Less Than Market Value
Options granted 6,260 7,240 178,635
Weighted-average exercise price $ 4.75 $ 4.83 $ 37.67
Weighted-average fair value $ 11.01 $ 11.54 $ 26.85
Employee Stock Purchase Plan
We maintain an employee stock purchase plan, or ESPP, for which 100,000
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
F-19
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
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 46,092, 35,102, and 17,312 shares of common stock remained
available for issuance under the ESPP as of December 31, 1999, 2000, and 2001,
respectively. The total purchases of common stock under the ESPP during the
years ended December 31, 1999, 2000, and 2001, were 15,540 shares at a total
purchase price of approximately $0.2 million, 10,990 shares at a total purchase
price of approximately $0.2 million, and 17,790 shares at a total purchase price
of approximately $0.3 million, respectively. We have not recorded any
compensation expense for the ESPP.
Note 11. Commitments
Leases
In 1999, we entered into a two-year lease agreement for laboratory and
office space in California. This lease expired in September 2001. In April 2001,
we entered into a new 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. Our rental expense for the years ended
December 31, 1999, 2000, and 2001 was approximately $19,000, $77,000, and
$322,000, respectively. Minimum future annual payments under our operating lease
agreements as of December 31, 2001 were as follows (in thousands): 2002--$345;
2003--$349; 2004--$363; 2005--$328; and 2006--$83.
Construction Contract
In October 2001, we entered into an agreement with a construction firm
to renovate and expand our facility in Horsham, Pennsylvania at an expected
total cost of approximately $17 million, of which approximately $8.2 million was
capitalized as construction-in-progress as of December 31, 2001.
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.
Employment Agreements
In January 2002, we entered into a retirement agreement with our Vice
President, Research. Under this agreement, he will terminate his employment
effective June 30, 2002. We have committed to pay a retirement benefit over a
five-year period. We will record approximately $0.5 million, which is the
present value of the retirement benefit, as compensation expense in 2002. In
addition, we have extended the period during which he may
F-20
Neose Technologies, Inc. and Subsidiaries
(a development-stage company)
Notes to Consolidated Financial Statements
exercise his stock options after terminating his employment, and will record
non-cash compensation expense of approximately $1.7 million in 2002 associated
with this option modification.
In January 2002, we entered into retention agreements with certain
employees. Under these agreements, we have committed to pay severance equal to
one years' salary in the event of the involuntary termination of, or the
resignation with good reason by, the covered employees. In certain
circumstances, the employees' stock options would continue to vest and be
exercisable for one year following termination.
Note 12. Income Taxes
As of December 31, 2001, we had net operating loss carryforwards for
federal and state income tax purposes of approximately $9.6 million and $6.3
million, respectively. In addition, we had federal research and development
credit carryforwards of approximately $2.7 million. All of these carryforwards
begin to expire in 2004. Due to the uncertainty surrounding the realization of
the tax benefit associated with these 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, 2000 2001
--------------------------------------------------------------------------------
Benefit of net operating loss carryforwards $ 1,621 $ 1,141
Research and development credit carryforwards 2,129 2,686
Capitalized research and development 11,890 14,532
Start-up costs 9,411 11,906
Nondeductible depreciation and amortization 3,242 3,485
Deferred compensation 905 1,494
Accrued expenses not currently deductible 209 147
Deferred revenue 124 56
Other 4 35
--------------------------
29,535 35,482
Valuation allowance (29,535) (35,482)
--------------------------
$ -- $ --
==========================
Note 13. Related-Party Transactions
Paramount Capital, Inc., of which the sole shareholder is a member of
our Board of Directors, acted as a finder for our private placement of common
stock in June 1999 (see Note 9). We paid Paramount Capital approximately $0.8
million for its assistance in completing the private placement. Entities
affiliated with Paramount Capital purchased 110,000 shares of common stock in
the private placement.
In 1997, we entered into a consulting agreement with an employee of
Paramount Capital. Under the agreement, which may be terminated by either party
upon sixty days prior notice, we are obligated to pay the consultant an annual
amount of $50,000, which was paid in each of the years ended December 31, 1999,
2000 and 2001. During 1999, we granted the consultant an option to purchase
30,000 shares of common stock at an exercise price of $10.38, the market price
on the date of grant. The option vests in equal, annual amounts in 2002 and
2003. In connection with this option grant, we have recorded non-cash
compensation expense of approximately $0.1 million, $0.3 million, and $0.3
million for each of the years ended December 31, 1999, 2000, and 2001,
respectively.
F-21