-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBtRmvHAE5CmasMIhTSF79uknGUKOUZskR62WwqreJCOKXoki4kBHyKMNxx4ClrB eFVoIVxohqng7h+XZDXKug== 0000892569-02-000708.txt : 20020415 0000892569-02-000708.hdr.sgml : 20020415 ACCESSION NUMBER: 0000892569-02-000708 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOTHERAPEUTICS INC CENTRAL INDEX KEY: 0000831547 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 930979187 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-28782 FILM NUMBER: 02600440 BUSINESS ADDRESS: STREET 1: 157 TECHNOLOGY DR STREET 2: STE J-821 CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9497886700 MAIL ADDRESS: STREET 1: 157 TECHNOLOGY DR STREET 2: STE J-821 CITY: IRVINE STATE: CA ZIP: 92618 FORMER COMPANY: FORMER CONFORMED NAME: AMERICUS FUNDING CORP DATE OF NAME CHANGE: 19920703 10-K405 1 a80481e10-k405.txt FORM 10-K PERIOD ENDED DECEMBER 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [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 [ ] 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 000-28782 NEOTHERAPEUTICS, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 93-0979187 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 157 TECHNOLOGY DRIVE IRVINE, CALIFORNIA 92618 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 788-6700 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.001 par value Common Stock Purchase Warrants 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting common equity held by non-affiliates of the registrant as of March 22, 2002 was $49,866,601 As of March 22, 2002, there were 26,876,951 shares of the registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant's 2002 Annual Meeting of Stockholders, to be held on June 17, 2002, are incorporated by reference in Part III of this report. TABLE OF CONTENTS
Page ---- PART I Item 1. Business..................................................................... 3 Item 2. Properties................................................................... 26 Item 3. Legal Proceedings............................................................ 26 Item 4. Submission of Matters to a Vote of Security Holders.......................... 26 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 27 Item 6. Selected Financial Data...................................................... 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 30 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................... 43 Item 8. Financial Statements......................................................... 43 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 73 PART III Item 10. Directors and Executive Officers of the Registrant........................... 73 Item 11. Executive Compensation....................................................... 73 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................................. 73 Item 13. Certain Relationships and Related Transactions............................... 73 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 73 SIGNATURES ........................................................................... 84
2 NeoTherapeutics, Inc.'s Annual Report on Form 10-K contains certain words, not limited to, "believes," "may," "will," "expects," "intends," "estimates," "anticipates," "plans," "seeks," or "continues," that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Readers should not put undue reliance on these forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. NeoTherapeutics, Inc.'s actual results may differ materially from the results projected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this Report including the "Risk Factors," and in "ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this item 1. PART I ITEM 1. BUSINESS GENERAL NeoTherapeutics, Inc., was incorporated in Colorado as Americus Funding Corporation (or AFC) in December 1987. In August 1996, AFC changed its name to NeoTherapeutics, Inc. and in June 1997, the Company was reincorporated in the state of Delaware. NeoTherapeutics had four subsidiaries at December 31, 2001: NeoOncoRx, Inc., 90.48% owned by NeoTherapeutics and incorporated in California in November 2000; NeoTherapeutics GmbH, wholly owned by NeoTherapeutics and incorporated in Switzerland in April 1997; NeoGene Technologies, Inc., 88.4% owned by NeoTherapeutics and incorporated in California in October 1999; and NeoTravel, Inc., wholly owned by NeoTherapeutics and incorporated in California in April 2001. Advanced ImmunoTherapeutics, Inc., a previously wholly owned subsidiary of NeoTherapeutics, was merged into NeoTherapeutics in 2001. Unless the context otherwise requires, all references to the "Company", "we", "our", "us" and "NeoTherapeutics" refer to NeoTherapeutics, Inc. NeoTherapeutics GmbH, Advanced ImmunoTherapeutics, NeoTravel, NeoGene, and NeoOncoRx as a consolidated entity. NeoTherapeutics is a development-stage pharmaceutical company engaged in the pharmaceutical business and the functional genomics business. Our pharmaceutical business engages in discovering and developing novel technology platforms for the discovery and development, co-development and out-licensing of therapeutic drugs for nervous system disorders and in the in-licensing and development, co-development and out-licensing of late-stage cancer drugs. Our functional genomics business engages in discovering gene functions and validating novel molecular targets for innovative drug development. We conduct our pharmaceutical activities at NeoTherapeutics and NeoOncoRx, and our functional genomics activities at NeoGene. Financial information about our pharmaceutical business and functional genomics business is provided under "Item 6. SELECTED FINANCIAL DATA" and "Item 8. FINANCIAL STATEMENTS" of this Form 10-K. PHARMACEUTICAL BUSINESS Our pharmaceutical business engages in the discovery and development of novel drugs to treat significant medical diseases or indications associated with nervous system disorders and cancer. We currently have four drug platforms primarily focused on developing drug candidates for the following therapeutic indications: cognition, psychosis, neuroregeneration, and oncology. We have six drug candidates resulting from either our research in each platform or by in-licensing a drug candidate from another pharmaceutical company: Neotrofin(TM), AIT-034, NEO-339, Neoquin(TM), satraplatin, and elsamitrucin. For our nervous system drugs, we built and maintain a resource infrastructure to support our research and discovery of nervous system drug candidates. We believe that this is necessary for discovering novel drug candidates that the nervous system therapeutic market demands. For our oncology drug candidates, while the methods of treating cancer may change significantly within the next five to ten years, we believe that our business plan of in-licensing clinical stage cancer drugs from larger pharmaceutical companies is a cost effective and expedient business strategy. Some of our drug candidates may prove to be beneficial in additional disease indications as our research progresses. Our pharmaceutical business has never produced products or rendered services that generate revenues. 3 PRODUCTS IN DEVELOPMENT Our drug platforms, drug candidates, target indications and phase of development are summarized in the following table:
NERVOUS SYSTEM -------------- DRUG PLATFORM DRUG CANDIDATE TARGET INDICATION PHASE OF DEVELOPMENT - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- COGNITION PLATFORM Neotrofin Alzheimer's disease Phase 1: Ten clinical trials completed and additional studies expected to be conducted in 2002 Phase 2: Four clinical trials completed Phase 2/3 One pivotal clinical trial in progress - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- AIT-034 Dementia Pre-clinical: IND filed in 2001, Phase 1 study expected to begin in 2002 - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- NEO-339 Mild cognitive Pre-clinical: IND expected to be filed in 2002 impairment and attention deficit - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- Novel series of Cognitive and Pre-clinical compounds from attentional disorders which a lead candidate is to be selected - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- PSYCHOSIS PLATFORM NEO-356 Psychosis, Pre-clinical: Development candidate(s) expected schizophrenia, mood to be selected in 2002 disorders - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- Novel series of Psychosis, Pre-clinical compounds from schizophrenia, mood which lead disorders candidate(s) are to be selected - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- NEUROREGENERATION PLATFORM Neotrofin Spinal cord injury Phase 1/2: Phase 1/2 study in progress - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- Parkinson's disease Phase 2: Phase 2 study in progress - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- Peripheral neuropathy Phase 2: Two studies are in progress for the prevention and treatment of chemotherapy-induced peripheral neuropathy - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- Other Pre-clinical neurodegenerative and psychiatric diseases - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- Novel series of Neurodegenerative Pre-clinical compounds from diseases which a lead candidate is to be selected - ------------------------------- --------------------- ---------------------- ----------------------------------------------------
ONCOLOGY -------- DRUG PLATFORM DRUG CANDIDATE TARGET INDICATION PHASE OF DEVELOPMENT - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- ONCOLOGY PLATFORM Satraplatin Prostate cancer Phase 3: Study expected to begin in 2002 - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- Neoquin Bladder cancer Phase 2: Study in progress - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- Radiation Phase 2 sensitization - ------------------------------- --------------------- ---------------------- ---------------------------------------------------- Elsamitrucin Non-Hodgkin's Phase 2: Study expected to begin in 2002 lymphoma - ------------------------------- --------------------- ---------------------- ----------------------------------------------------
4 NERVOUS SYSTEM, DRUGS CANDIDATES AND DEVELOPMENT STRATEGY, AND DISEASE TARGETS NERVOUS SYSTEM The average human brain contains approximately 10 billion nerve cells, or neurons, interconnected through a complex matrix of axons and synapses. Neurons and their interaction with each other control all sensory, motor and cognitive activities. Communication between neurons involves chemical messengers known as neurotransmitters released by the sending neuron and sent across a small gap known as a synapse that bind to corresponding receptors on a receiving neuron. Many psychiatric and neurological disorders, including memory deficits, schizophrenia, depression, anxiety, Parkinson's disease and peripheral neuropathy appear related to progressive cell loss, which results in miscommunication, partial communication or lack of communication between neurons. Cell regeneration is a natural biological process that is involved in the healing of the human body. However, because neurons do not regenerate efficiently, the treatment and healing of nervous system diseases is complicated. Currently available drugs for severe nervous system diseases such as Alzheimer's and Parkinson's disease do not cure the disease, rather, they treat symptoms. For example, some drugs function by increasing or replacing supplies of critical neurotransmitters that temporarily improve synapse activity. However, as more nerve cells die, these drugs become less effective and are effective for shorter time periods. Eventually, too many nerve cells die for these therapeutic drugs to be noticeably effective. Much of neuroscience therapeutic research investigates certain proteins that are necessary for the effective functioning of the nervous system. These proteins are called neurotrophic factors and are necessary to a neuron's early development and long-term function and survival. Neurotrophic factors are involved in the fundamental formation and shaping of the nervous system. The role of neurotrophic factors in neuron development and maintenance, which is supported in part by evidence from animal studies, has led scientists to hypothesize that neurotrophic factors could be used in the treatment of neurodegenerative diseases. One very significant obstacle related to the use of neurotrophic factors for treating nervous system diseases is that the neurotrophic factor molecules are too large to pass through the blood-brain barrier, which is a filter that strictly regulates the entry of molecules into the brain and spinal cord. Therefore, oral administration or injection of neurotrophic factors is not likely to be effective in the treatment of nervous system diseases. The approach we have taken, with our lead compound Neotrofin and some of our other research platforms, is to synthesize bifunctional small molecules which can be administered orally, pass through the blood-brain barrier, and have the predicted target efficacy based upon pharmacologic effects of the compounds from which they were derived (See "Nervous System Drug Candidates and Development Strategy" below). We believe that such a development could represent a major advancement in the treatment of neurological disorders. NERVOUS SYSTEM DRUG CANDIDATES AND DEVELOPMENT STRATEGY We engage in research primarily focused on developing novel drugs that interact with the nervous system and that are therapeutic for neurological and psychiatric diseases. Our scientific strategy is to synthesize proprietary molecules that modify specific biological processes in the nervous system. The methods by which the molecules are synthesized are proprietary and we have patented specific molecules and their methods of use. Our drug discovery platforms are based upon the use of purines and other similarly structured compounds (or Primary Molecule). Structural characteristics are very significant because they are what enable the Primary Molecule to interact with animal and human biology. We then select various other structures from known drugs or naturally occurring molecules that are known to have therapeutic activity (or Secondary Molecules). We link structural components of a Primary Molecule and a Secondary Molecule together attempting to produce a bifunctional molecule (or Bifunctional Molecules) that retains some of the characteristics of each individual molecule and exhibits new characteristics unique to the Bifunctional Molecule. We study Bifunctional Molecules for certain chemical, biochemical, pharmacological and molecular biological, physiological, and behavioral activity, in laboratory and in animal models and clinical tests. Based on our study results, Bifunctional Molecules may become part of our series of proprietary compounds. We conduct the early testing to establish therapeutic potential necessary to obtain patents on these compounds and later conduct pre-clinical testing on the safety and efficacy of our patented compounds. If pre-clinical testing supports appropriate levels of safety and efficacy, we may decide to either file an Investigational New Drug Application (or IND) for conducting clinical trials or out-license the compound to a well-established pharmaceutical company. 5 Neotrofin(TM): Neotrofin is our most extensively studied compound and has been the primary focus of our research efforts. Neotrofin has been shown in animal studies to enhance working (or recent) memory, the type of memory that is deficient in patients suffering from Alzheimer's disease. In addition, we believe that Neotrofin may help treat memory impairments in the aged, in stroke patients and in patients with traumatic brain injuries. Neotrofin may also help treat patients with nerve damage associated with stroke, spinal cord injury and peripheral neuropathy and neurodegenerative diseases such as Parkinson's disease and Huntington's disease. Our pre-clinical testing involving laboratory animals has indicated that Neotrofin exhibits the following properties and/or effects: o Reduces, delays and prevents memory deficits in aged animals and enhances memory function in young and aged animals. o Protects brain cells against neurotoxic injury. o Causes production of numerous neurotrophic factors. o Causes sprouting of nerve cells in culture and in animals. o Causes proliferation of neural stem cells. o Is safe and effective over a wide range of doses in animals. We are in the midst of a pivotal human clinical trial in Alzheimer's disease patients. Upon completion of this clinical trial, we intend to conduct further human clinical trials. Until completion of the entire human clinical trial process, we cannot assure you that these properties and/or effects can be replicated in humans. We have shown that when administered to neurons in tissue culture, Neotrofin can induce neurite outgrowth effects similar to nerve growth factor, a known protein made up of over 100 amino acids that promotes nerve cell growth and may protect some types of nerve cells from damage. We have also shown that Neotrofin causes the production of mRNA (messenger ribonucleic acid) for multiple neurotrophic factors in tissue culture. In addition, we have demonstrated that oral administration of Neotrofin increases the levels of mRNA and protein for multiple neurotrophic factors in the central nervous system of rats and mice. Other researchers have shown, in animals, that administration of multiple neurotrophic factors may be more effective as a treatment method for neurodegenerative diseases than the administration of a single factor. We believe that Neotrofin's mechanism of action involves activating the genes that lead to the production of a number of different neurotrophic factors. Neurotrophic factors themselves are not orally active and do not pass through the blood-brain barrier. Therefore, should Neotrofin prove to be an effective treatment for neurological disorders, it could have two distinct practical advantages over neurotrophic factors as a treatment for such disorders: (i) it can be administered orally; and (ii) it induces the production of multiple neurotrophic factors in those areas of the brain associated with a variety of deficits. Neurotrophic factors are also implicated in the proliferation, maturation and differentiation of neural stem cells and Neotrofin has been demonstrated to induce proliferation of neural stem cells in animals. The FDA allowed an IND for Neotrofin in June 1997. The first clinical trial of Neotrofin in the United States began in July 1997. Additional Phase 1 clinical trials evaluating safety and pharmacokinetic parameters have been conducted with Neotrofin. The results from the Phase 1 clinical trials indicate that Neotrofin is rapidly absorbed after oral administration and produces no serious side effects, even at high doses. Four Phase 2 clinical trials of Neotrofin have been completed with a range of doses of Neotrofin for a treatment period of one to three months. The Phase 2 studies completed to date demonstrate non-statistically significant improvements in memory and behavior in patients with mild to moderate Alzheimer's disease. One of these studies was initiated in the United States in the third quarter of 1999 to study the effects of oral Neotrofin in the brain using PET (Positron Emission Tomography) imaging technology. The results of this study indicated that certain doses of Neotrofin (500 and 1000 mg/day) demonstrated positive effects on cognition in psychometric tests and positive effects on PET and EEG (electroencephalogram) parameters. As of December 31, 2001, there were Phase 2 clinical trials of Neotrofin being conducted in patients with Alzheimer's disease, Parkinson's disease, spinal cord injury and chemotherapy-induced peripheral neuropathy. If the results from our ongoing Phase 2 clinical trial of Neotrofin in Alzheimer's disease demonstrate statistically significant improvements in memory and behavior in patients, we expect that we will have to conduct additional animal and human studies that will include Phase 3 human clinical studies prior to submitting a New Drug Application (or NDA) for Neotrofin to the FDA, or regulatory agencies in other countries, for marketing approval. 6 AIT-034: AIT-034 has been demonstrated in animal studies to enhance memory and to reverse memory deficits in severely impaired animals that do not respond to Neotrofin. AIT-034 has structural similarities to piracetam, a compound suggested to be both memory enhancing and neuroprotective. However, AIT-034 has been shown to have advantages over piracetam in animal models for learning and memory, with AIT-034 demonstrating a different efficacy profile and higher potency. AIT-034 has been shown to have positive memory enhancing effects in animal models of memory recall and reverse amnesia induced by specific treatments in young, adult and aged mice. The memory enhancing effects of AIT-034 are most pronounced in aged animals (24 month old mice) in which the drug restored learning and memory recall in animals that had no apparent recall capacity, a model in which other memory-enhancing agents were ineffective. Toxicity studies conducted to date indicate that AIT-034 does not induce any systemic toxicity in animals. An IND application for AIT-034 was filed in September 2001 and clinical trials are expected to commence in 2002 upon the completion of additional toxicology studies required by the FDA. The FDA issued new toxicology and safety testing guidelines just prior to our filing the IND. The FDA requested that these additional studies be completed prior to the start of the first clinical trial. NEO-339: NEO-339 was designed and selected for the treatment of mild cognitive impairment, cognitive impairment associated with psychiatric disorders, and attention deficit disorders. We have shown in our research that NEO-339 produces positive effects on the acquisition of memory in certain models of memory in aged rodents, reverses the memory loss effects of certain pharmacological treatments, and improves attention in models of information processing. Based on our research results, we believe that NEO-339 will have greater efficacy and fewer side effects than therapies currently under evaluation for the treatment of mild cognitive impairment and attention deficits associated with aging and dementia. At the present time we intend to file an IND application with the FDA for NEO-339 in 2002. Attention/cognition platform: We synthesized a series of compounds that we believe improve cognition, either by improving attention aspects of behavior or by affecting cognition directly. These compounds are intended to address problems seen in a variety of attention and memory disorders. Compounds from this program are in the discovery phase and have not become development candidates. Psychosis platform: Our psychosis platform consists of the NEO-356 series and other compounds. This platform was designed to create novel compounds for schizophrenia and other psychosis-associated indications with minimal side effects by combining structural components that are known to have anti-psychotic activity with structural components that may enhance treatment of the "negative" symptoms of schizophrenia. In addition, certain of these compounds may improve memory and have other beneficial nervous system effects. We anticipate that a lead compound from this platform will be chosen as a development candidate during 2002. Neuroregeneration platform: We have recently initiated research on additional molecules, some of which are structurally related to Neotrofin, which address specific neurodegenerative diseases or neuroregenerative mechanisms. Currently all compounds from this program are in the discovery phase and have not become development candidates. Our drug discovery program has accelerated its process of synthesizing and testing new compounds. We anticipate that additional compounds from this research will become development candidates within several years. Until extensive further development and testing is completed, which may take many years, if undertaken at all, the therapeutic and other effects of these compounds cannot be established. NERVOUS SYSTEM DISEASE TARGETS Alzheimer's Disease. Alzheimer's disease is a neurodegenerative brain disorder that leads to progressive memory loss and dementia. Alzheimer's disease generally follows a course of deterioration over eight years or more, with the earliest symptom being impairment of short-term memory. Alzheimer's disease is now recognized as the most common cause of severe intellectual impairment in persons over the age of 65 in the United States, with approximately four million Americans diagnosed as suffering from Alzheimer's disease. The number of patients with Alzheimer's disease is expected to reach 14 million by 2050. Alzheimer's disease is the fourth leading cause of death in the United States with approximately 100,000 7 deaths per year. The Alzheimer's Association has estimated that the overall care costs required for the treatment and care of the estimated four million U.S. patients with Alzheimer's disease are $100 billion per year. There are currently four drugs approved for the treatment of Alzheimer's disease in the United States: Cognex(R) (First Horizon), Aricept(R) (Pfizer and Eisai), Exelon(R) (Novartis) and Reminyl(R) (Janssen and Shire). We have two compounds in development, Neotrofin and AIT-034, which have shown therapeutic potential for Alzheimer's disease and dementia. Spinal Cord Injury. There are an estimated 200,000 severely disabled survivors of spinal cord trauma in the United States with approximately 10,000 new injuries each year. The cost of care and services for these individuals is estimated to exceed $10 billion per year. Significant research efforts are currently being focused on the neurotrophic factors that can initiate and support new cell development, guide new or damaged nerves to appropriate targets and maintain neuronal function. Animal studies have shown that some functional restoration is possible with appropriate neurotrophic factors. A major obstacle to the effective use of these neurotrophic factors is the delivery of the appropriate neurotrophic factors to the damaged site. Neotrofin has been shown in mice to cause the production of several neurotrophic factors in the spinal cord after oral administration, demonstrating that it can effectively penetrate the blood-brain barrier. We believe that Neotrofin could be used to stimulate regeneration of nerves damaged by spinal cord injury. We have paid $100,000 to establish a NeoTherapeutics Fellowship as part of the Reeve-Irvine Research Center for spinal cord injury at the University of California, Irvine. We are currently conducting a Phase 1/2 clinical trial to further study the effects of Neotrofin on spinal cord injury. Parkinson's Disease. An estimated 1-1.5 million Americans suffer from Parkinson's disease. Parkinson's disease is a neurodegenerative disease that results as a consequence of the loss of dopamine-producing neurons in the substantia nigra, a structure in the mid-brain thought to be involved in the control of voluntary movement. These cells are responsible for producing and responding to the neurotransmitter dopamine that is deficient in patients with Parkinson's disease. This dopamine deficiency leads to a variety of movement disorders including rigidity, tremor, slowness of movement and poor balance. Dementia is also common in the later stages of the disease. Current therapy consists primarily of dopamine analogs to increase dopamine levels and drugs to alleviate the various movement symptoms. We are currently conducting a Phase 2 clinical trial to study the effects of Neotrofin on Parkinson's disease. Peripheral Neuropathy. An estimated 60% of the 13 million diabetic patients in the United States suffer from some damage to their peripheral nerves leading to numbness and tingling of fingers, hands, toes and feet, weakness in hands and feet, and pain and/or burning sensation in the hands and feet. Peripheral neuropathy is also a major problem experienced by patients undergoing cancer chemotherapy. Chemotherapy-induced peripheral neuropathy is commonly associated with chemotherapeutic agents such as vinca alkaloids, cisplatin and Taxol(R). Chemotherapy-induced peripheral neuropathy is characterized as a variety of symptoms including an abnormal or unexplained tingling, pricking, or burning sensation on the skin (or paresthesias), abnormal sensation, such as the sensation of being pricked by pins and needles or the sensation of insects crawling on the skin (or dysethesias), and a decreased strength in the anticipated reflex actions (or hyporeflexia). Less common are motor and sensory loss, and even less common, involuntary (or autonomic) muscle dysfunction. Peripheral neuropathy also limits the extent of chemotherapy treatment for cancer. Currently there are no FDA approved treatments for chemotherapy-induced peripheral neuropathy. Phase 2 studies of Neotrofin are being conducted in cancer patients, for both the prevention and treatment of chemotherapy-induced peripheral neuropathy. Dementia and Memory Impairment Associated with Aging. Because the populations of developed countries are aging, the costs and social burden of medical care and housing of aged persons suffering from mentally deteriorative diseases are increasing. The availability of a drug to reduce the memory impairments associated with aging would have a positive significant economic impact and would greatly improve the quality of life for the elderly population. Both Neotrofin and AIT-034 have shown to be effective in improving memory associated with aging in mice. Mild Cognitive Impairment. Patients with mild cognitive impairment represent the earliest clinically defined group with memory impairment beyond that expected for normal individuals of the same age and education, but such patients do not meet the clinical criteria for Alzheimer's disease. It is estimated that each year, approximately 15% to 20% of patients with mild cognitive impairment will progress to Alzheimer's disease. Cognition. Impairment of memory and cognition is a serious health care problem that is growing as the number of elderly persons increase. The incidence and prevalence of cognitive deficits increase with age. Drug candidates that alleviate deficits in memory and cognition could potentially enable elderly individuals to lead more independent, higher quality lives. Cognitive deficits are also associated with a number of other neurodegenerative diseases, including multiple sclerosis, amyotrophic lateral sclerosis and Huntington's disease. Stroke. Among older Americans, stroke ranks as the third leading cause of death. An estimated 500,000 people in the United States suffer strokes each year. The costs associated with the treatment and care of stroke patients are estimated to be approximately $25 billion per year. Most therapeutic approaches to treating strokes are directed towards correcting the circulatory deficit or to blocking the toxic effects of chemicals released in the brain at the time of the stroke. Since Neotrofin 8 has the potential to be neuroprotective in addition to enhancing nerve regeneration, we believe that it may prove useful in treating stroke and, as a preventative therapeutic, the onset of nerve tissue damage caused by stroke. Schizophrenia. An estimated 2 million Americans, or 1% of the American population, is affected by schizophrenia. Both men and women are affected in equal numbers, although onset is slightly later in women. People with schizophrenia suffer severe disturbances in thinking, social behavior and emotions such as hearing internal voices not heard by others, or believing that other people are reading their minds, controlling their thoughts, or plotting to harm them. They may exhibit eccentric behavior, social isolation, a "flat" affect, a poor attention span and a lack of motivation. While there are available treatments that can relieve some of the symptoms, these medications cause significant side effects such as involuntary motor activity, weight gain, and social withdrawal. Most people with schizophrenia continue to suffer some symptoms throughout their lives and only one in five individuals recovers completely. The cost of treating patients with schizophrenia in the United States was estimated in 1990 (the most recent information available) at $32.5 billion per year. Neurodegenerative Diseases. The neurodegenerative disorders are a heterogeneous group of diseases of the nervous system. Many are hereditary, some are due to toxic or metabolic processes, and others may result from infections. Many of these diseases have no known causes. Some of the neurodegenerative diseases have age-associated onsets and can be chronic and progressive and without effective treatments. These diseases are often characterized by abnormalities of relatively specific regions of the brain and types of neurons. These cell groups in the different diseases determine the symptoms of the disease. Due to the prevalence, morbidity and mortality of the neurodegenerative diseases, they represent significant medical, social, and financial burdens. Recent investigations in genetics and genomics have identified specific genes for several neurodegenerative disorders. Attention Deficits. Attention problems occur following stroke and traumatic brain injury and are among the most common disabling neurological conditions of adults. They affect the coherent processing of stimuli and production of voluntary action over time, leading to distractibility, errors of action, and poor sustained performance. Attention Deficit Hyperactivity Disorder, commonly referred to as ADD, is the most commonly diagnosed disorder among children. The National Institute of Mental Health estimates that ADD affects three to five percent of school-age children, with about one child in every classroom in the United States in need of help for this disorder. ONCOLOGY, ONCOLOGY DRUGS CANDIDATES AND DEVELOPMENT STRATEGY, AND CANCER AND THERAPEUTIC TARGETS ONCOLOGY Cancer is the second leading cause of death in the United States, killing approximately 25% of all persons. In the United States, approximately 1.3 million new cancer cases were diagnosed and over 550,000 persons died from the disease in 2001, which is an average of approximately 1,500 deaths per day. More than three quarters of all cancers are diagnosed after age 50. Statistics show that men in the United States have a 50% probability and U.S. women have a 33% probability of developing cancer in their lifetime. Accordingly, social demand for improved and novel cancer treatments is very high. In addition, the National Institute of Health estimates that $60 billion was spent in 2000 for all direct cancer-related health expenditures. Cancers with anticipated cases over 100,000 per year include prostate and lung. Cancers with anticipated cases over 50,000 per year include colon, non-Hodgkin's lymphoma, bladder and skin. Cancer is usually a malignant tumor or growth caused when cells multiply uncontrollably, destroying healthy tissue. The different forms are: Sarcomas: a malignant tumor that begins growing in connective tissue such as muscle, bone, fat, or cartilage; Carcinomas: a malignant tumor that starts in the epithelium (a thin layer of tightly packed cells lining internal cavities, ducts, and organs of animals and humans and covering exposed bodily surfaces, especially in healing wounds) of an organ or body part and may spread to other parts of the body; Leukemias: a type of cancer in which white blood cells displace normal blood leading to infection, anemia (a blood condition in which there are too few red blood cells or the red blood cells are deficient in hemoglobin, resulting in poor health), bleeding, and other disorders, and often proves fatal; and Lymphomas: a malignant tumor originating in a lymph node, for example, Hodgkin's lymphoma or any of the range of cancers known as non-Hodgkin's lymphomas. All cancers involve the malfunction of genes that control cell growth and division. Extensive unrestrained proliferation of cancerous cells will result in the person's death. Cancer causing agents include both internal and external factors such as chemicals, radiation, viruses, hormones, immune deficiency conditions, and inherited mutations. The production of cancerous cells most likely results from a combination of factors the body experiences over time. Immediate detection of the initial carcinogenesis is not currently possible using conventional test methodology; therefore, many cancers 9 are far progressed when diagnosed. Much progress has been made in the treatment of cancer, however, the primary general treatment methodologies remain surgery, radiation, chemotherapy, hormones, and immunotherapy. CANCER DRUG CANDIDATES AND DEVELOPMENT STRATEGY Novel cancer drugs are very exciting; however, we believe that traditional chemotherapeutic agents will remain a primary foundation of cancer treatment for the foreseeable future. Currently, we in-license from well-established pharmaceutical companies, cancer drug candidates that are in clinical trials. These drug candidates have the potential to be safe and effective therapeutic agents. We intend to develop and commercialize them in the United States and in world markets through our subsidiary NeoOncoRx. We do not currently have in-house capabilities to perform drug discovery for cancer-related therapies. The drug candidates that we in-license typically have smaller market potentials than larger pharmaceutical companies target. Large pharmaceutical companies typically require at minimum annual sales potential of $250 to $300 million; therefore, these companies are typically motivated to out-license drug candidates with expected sales potential below this market level. Late stage drug candidates generally have a higher success rate with respect to obtaining necessary FDA approval and ultimately being distributed commercially. We believe that our in-licensing of late-stage oncology drug candidates will position us to generate product revenues earlier than if we had attempted to develop oncology drug candidates through in-house drug discovery efforts. Although we are required to make milestone payments and royalty payments under the in-licensing agreements, we expect that our anticipated earlier realization of revenues and contribution to overhead and profit should bring a quicker return on investment. Satraplatin: Currently used in treating a wide range of cancers, platinum derivatives have been available for some time and are one of the most active classes of cytotoxic anti-cancer agents. Satraplatin is a class IV platinum derivative stemming from cisplatin and carboplatin. Like cisplatin and carboplatin, satraplatin produces interstrand and intrastrand crosslinkage in DNA of rapidly dividing cells, thus preventing DNA, RNA, and protein synthesis. One of satraplatin's major advantages over cisplatin and carboplatin is that it has good oral bioavailability and therefore does not have to be administered by intravenous infusion. Oral administration may allow outpatient treatment, thus possibly reducing the cost of patient care. Satraplatin has shown activity against platinum-sensitive tumors, such as ovarian and lung cancer, that is comparable to that of carboplatin and cisplatin. Data from previous satraplatin human clinical studies show particular efficacy in treating prostate cancer. Johnson Matthey PLC developed satraplatin and, in 2001 we in-licensed satraplatin from Johnson Matthey resulting in the transfer of the existing IND for satraplatin to us. We may initiate a Phase 3 clinical study in 2002. Neoquin(TM): In vitro data show that Neoquin (EO9, apaziquone) has higher efficacy than mitomycin-C, a commonly used chemotherapy agent, in treating bladder cancer. It is an inactive prodrug requiring metabolic activation by a catalyst to become toxic to cells. DT-diaphorase, an enzyme found in tumor cells at high concentrations in approximately 40% of bladder cancer patients, acts as a catalyst to activate Neoquin. Neoquin is activated under both aerobic and hypoxic conditions and can selectively kill hypoxic cells, as compared to aerobic cells. In addition, studies have shown Neoquin as a potential radiation sensitizer because of its ability to act on hypoxic cells in tumors that are resistant to radiation therapy and some forms of chemotherapy. Neoquin has the potential to improve treatment of bladder cancer and a wide variety of other cancers. The New Drug Development Office (or NDDO) Research Foundation in the Netherlands developed Neoquin (EO9) and 80 related derivatives and we in-licensed it from them in 2001. We are currently conducting a Phase 2 clinical trial in the United Kingdom of intravesical administration of Neoquin in bladder cancer. Elsamitrucin: Elsamitrucin is an anti-cancer antibiotic, with significant activity against a variety of malignant cell lines in the laboratory and experimental cancers in live animals. Elsamitrucin induces single-strand DNA breaks resulting from drug intercalation between base pairs. A base pair is a chemical unit that forms the bridge linking the complementary strands of DNA or RNA and it consists of a purine linked to a pyrimidine by hydrogen bonds. The single strand DNA break results in cell death. Elsamitrucin also causes the inhibition of topoisomerase II, an enzyme that controls the manipulation of the structure of DNA necessary for replication. Clinical studies of elsamitrucin showed greatest efficacy in intermediate-grade lymphomas. Bristol-Myers Squibb developed elsamitrucin and we in-licensed it from them in 2001. We may initiate a Phase 2 clinical study in 2002. CANCER AND THERAPEUTIC TARGETS Prostate Cancer. Prostate cancer is the most commonly diagnosed malignancy and the second leading cause of cancer death among men in the United States. The American Cancer Society estimated that approximately 180,000 new cases of prostate cancer were diagnosed in the United States during 2000. Furthermore, an estimated 32,000 men die annually from prostate cancer in the United States out of an estimated 165,000 prostate cancer-related deaths worldwide. Current first-line pharmaceutical therapies used in combination with surgery to treat prostate cancer are almost exclusively hormone-based therapies. Unfortunately, such hormone therapies ultimately lose their ability to contain the disease, leaving 10 patients with few second-line treatment options. Approximately 30 percent of all newly diagnosed prostate cancer patients will progress to hormone-refractory metastatic disease. Currently approved therapies are only effective in treating the symptoms and slowing the progression of advanced prostate cancer. We may initiate a Phase 3 study clinical study of satraplatin for the treatment of prostate cancer in 2002. Ovarian Carcinoma. Epithelial carcinoma of the ovary is one of the most common gynecologic malignancies and the fourth most frequent cause of cancer death in women, with half of all cases occurring in women over age 65. Ovarian cancer spreads from the ovaries to the abdominal lining and cavity and invades the bowel, bladder, and lymph node system. The incidence of cancer-positive lymph nodes at primary surgery has been reported to be as high as 24% in stage I, 50% in stage II, 74% in stage III, and 73% in stage IV ovarian cancer. Tumor cells may also block diaphragmatic lymph nodes. The resulting impairment of lymphatic drainage of the abdominal cavity is thought to play a role in development of the abdominal swelling known as ascites in ovarian cancer. It is also common for the cancer to spread to the chest wall lining. Because ovarian cancer does not produce symptoms in its early stages, most women have widespread disease at the time of diagnosis. Partly as a result of this, yearly mortality in ovarian cancer is high, approximately 65% of the incidence rate. Long-term follow-up of treated stage III and stage IV patients reveals a 5-year survival rate of less than 10% even with combined platinum-derivative chemotherapeutic therapy. Early stages of the disease are curable in a high percentage of patients. Numerous clinical trials are in progress to refine existing therapy and test the value of different approaches to postoperative drug and radiation therapy. Platinum-derivative chemotherapy is a very common therapy for stages II, III and IV. The most common platinum agents, cisplatin and carboplatin, require hospital admission for patient chemotherapy administration. Novel drugs are desirable that are more effective with a lower cost of therapy administration, such as outpatient treatment. Satraplatin may have the potential to treat ovarian and other cancers. Bladder Cancer. Bladder cancer is the fifth most commonly diagnosed malignancy and the tenth leading cause of cancer death among persons in the United States. The American Cancer Society estimates that approximately 55,000 new cases of bladder cancer will be diagnosed in the United States during 2001. In the same year, an estimated 13,000 persons will die from bladder cancer in the United States out of an estimated 130,000 bladder cancer-related deaths worldwide. Treatment for bladder cancer is primarily surgical and is used in nearly all cases. Direct administration of immunotherapy or chemotherapy is sometimes used in some types of bladder cancer. Bladder removal (or cystectomy) is often aided by chemotherapy or radiation and has increased treatment efficacy. The higher than average survival rate in bladder cancer cases is dependent on early detection. If discovered after metastases, patient survival rates fall dramatically. New therapies for all stages of bladder cancer are in very high demand. We initiated a Phase 2 clinical study of Neoquin for the treatment of bladder cancer in 2001. Non-Hodgkin's Lymphoma. Non-Hodgkin's lymphoma is the fourth most commonly diagnosed malignancy and the fifth leading cause of cancer death among persons in the United States. The American Cancer Society estimates that approximately 56,000 new cases of Non-Hodgkin's lymphoma will be diagnosed in the United States during 2001. In the same year, an estimated 27,000 persons will die from Non-Hodgkin's lymphoma in the United States out of an estimated 161,000 Non-Hodgkin's lymphoma-related deaths worldwide. Treatment for Non-Hodgkin's lymphoma in its early stages, when the cancer is localized in the lymph node, is usually radiation therapy. Later stage Non-Hodgkin's lymphoma is typically treated with radiation and chemotherapy. Other therapies being used include high-dose chemotherapy in conjunction with bone marrow transplantation and monoclonal antibodies targeting lymph node cells. However, these treatments are only used in selected patients who have relapsed. Like all other cancers, early detection is vital. If discovered in later stages, Non-Hodgkin's lymphoma is often fatal. Novel therapies for Non-Hodgkin's lymphoma are in high demand. We may initiate a Phase 2 clinical study of elsamitrucin for the treatment of Non-Hodgkin's lymphoma in 2002. Radiation Sensitization. Radiotherapy combined with certain chemotherapeutic agents or other drugs have shown increased efficacy in tumor cell death. In 1999, the National Cancer Institute announced that strong consideration should be given to treating cervical cancer patients with cisplatin and radiation concurrently rather than just radiation alone. One reason believed for combining therapies is to make oxygen-starved (or hypoxic) tumor cells more radiosensitive. Hypoxic cells that exist within tumors are difficult to destroy by conventional treatment methods, yet they form up to 30% of any tumor. The higher the percentage of hypoxic cells in a tumor, the worse the prognosis for the patient. Hypoxic tumor cells resist radiation therapy and some forms of chemotherapy. Hypoxic cells are also suspected of developing significantly more malignant, aggressive and treatment-resistant tumors after radiotherapy and/or chemotherapy treatments that have killed off many of the oxygen-rich tumor cells. Rarely do hypoxic cells exist in normal tissue but they are prevalent in tumors due to the poorly formed blood vessels which develop inadequately in the tumor to meet the needs of the fast growing tumor cells. The importance of hypoxia is three-fold. It is known to protect cells from the cytotoxic effects of standard chemotherapy drugs since they are dormant or non-cycling and therefore are less susceptible to cytotoxic agents. Secondly, oxygen significantly enhances the cytotoxic effects of radiation. Thirdly, a higher percentage of hypoxic tumor cells may be indicative of tumors that are stress 11 resistant and of a more malignant phenotype. Standard therapies primarily target better oxygenated cells, leaving the hypoxic cells to repopulate the tumor. For complete and permanent tumor remission, it is essential to target and kill hypoxic cells. One very important key to killing hypoxic tumor cells may be to make them more radiosensitive through the use of chemotherapeutic agents and/or other drugs. Neoquin is a potential radiosensitizer. We may conduct studies to evaluate Neoquin's efficacy as a radiosensitizer in 2002. FUNCTIONAL GENOMICS BUSINESS We began our functional genomics business with the formation of our subsidiary NeoGene Technologies, Inc. in 1999 and entered into a collaborative research agreement with the University of California, Irvine (or UCI) to exploit certain of their functional genomics discoveries. Functional genomics involves understanding the function and purpose of each of the human genes and discovering drugs to combat diseases associated with these genes. Of the 35,000 genes that control the human body, 1,000 are genes that encode a "lock" on the cell that is a special kind of receptor called a G-protein-coupled receptor. Like a car's ignition, if you put the right key into the receptor, it will "turn on" that gene's specific function. The biological function of approximately 140 of these special genes remains unknown. These so-called "orphan genes" each have a natural key called a ligand. Discovering the ligands for orphan genes is only part of our work. The second part of our work is to gain an understanding of the specific function of the gene. So far we have identified genes that may be used to develop drugs that could someday treat diseases such as obesity, asthma, hypertension and epilepsy. Our collaborative research agreement with UCI grants us the exclusive right to all future technology developed by UCI through its research into functional genomics and orphan G-protein-coupled receptors in the laboratory of Dr. Olivier Civelli, in exchange for cash funding and other capital and human resources for laboratory research and potential royalty payments on the commercialization of such technology. We believe that this research complements our pharmaceutical business and may enable us to discover a greater number of drugs that more effectively address a broad array of neurological, cancer and other diseases and conditions not currently part of our pharmaceutical business focus. Our functional genomics' research operations are located in a state-of-the-art facility in Irvine, California near UCI. FUNCTIONAL GENOMICS In 2000, under the auspices of the Human Genome Project of the National Institutes of Health, the entire sequence of the human genetic blueprint was deciphered. Knowledge of the sequence of a gene does not tell what the function and purpose of that gene is in the body. As previously mentioned, understanding the function and purpose of each of the human genes in the body is a process called functional genomics. Of the approximately 35,000 human genes that control all of the body's functionality, approximately 1,000 are in a class called G-protein-coupled receptor, which regulate key cell functions. The purpose and function of over 100 G-protein-coupled receptors remains unknown today. They are called the "orphan" receptors. Using genetic engineering techniques, it has been possible to deduce the function of certain orphan receptor genes, but the process is difficult, labor intensive and expensive. This work involves finding the natural ligand, or molecule, which causes the receptor to become activated to induce its normal function. Drug discovery techniques to find new drugs cannot be used unless the natural ligand, and therefore the natural function, associated with a given receptor are known. When a ligand binds to a G-protein-coupled receptor, a cascade of events occurs, involving several signaling molecules within the cell, which leads to intracellular changes causing the biological response to occur. In order to identify the natural ligand, we first find the location of the receptor in tissues, determine the type of ligand that will most likely to bind to the receptor by analysis of the DNA sequence of the receptor, and then look for molecules within the target tissues that bind to the orphan G-protein-coupled receptor. Only after the natural ligand and the localization of the receptor are found, can we determine the function. Knowing this function then allows us to find drugs that stimulate or inhibit the action of the receptor to treat diseases. 12 TARGET DEVELOPMENT STRATEGY Of the 20 orphan receptor genes whose functions had been established by the end of 2001, six were discovered as a result of research conducted by Dr. Olivier Civelli of the University of California, Irvine. This is the most discovered by a single group. In September 1999, we entered into a strategic alliance under a collaborative research agreement with UCI that grants us the exclusive right to all technology and products developed by Dr. Civelli and his colleagues in exchange for research funding support in the amount of $2 million over three years. We anticipate that this agreement will be renewed in 2002. Initially, we are focused on discovering and validating new drug development targets. Some of these targets may be new receptor/ligand systems for which we have discovered the function. Others will be new disease targets for which existing G-protein-coupled receptors will be found to have a role. We identify new drug targets that can be developed either internally by NeoGene or our pharmaceutical business, or that can be out-licensed to larger pharmaceutical companies for development. For some of these drug development targets we will purchase chemical libraries for lead generation and/or synthesize new compounds and conduct the early testing to establish the therapeutic potential necessary to obtain patents on new compounds. We intend to seek out established pharmaceutical companies as partners for the development, manufacture and marketing of certain of our compounds. We also plan to engage in providing products and services that utilize our primary functional genomics expertise. These plans may result in revenue from strategic alliances that we enter into with other pharmaceutical companies to co-develop potential biopharmaceutical drug targets. Additionally, we may sell products to other pharmaceutical companies ancillary to our research activities. During 2001, NeoGene licensed two of its G-protein-coupled receptor /ligand systems to Pfizer Inc. Additionally, NeoGene sold a biopharmaceutical product to one company. BUSINESS STRATEGY Marketing and Sales We do not currently sell any significant products or services on a recurring basis and therefore have no marketing, sales, or distribution organization. We intend to enter into strategic alliances with multinational or large regional pharmaceutical companies having substantial financial capacity, marketing capability and clinical development expertise, to assist us in the development, marketing and sale of Neotrofin and our other drug candidates. However, we may seek to retain rights to co-market our products in the United States. We have developed and we in-licensed several drug candidates and drug technology platforms during 2001. As of December 31, 2001 our drug candidate pipeline consisted of six drugs in various stages of development. We believe that the technology platforms we developed and are currently pursuing in both our pharmaceutical business and functional genomics business should continue providing new drug candidates for nervous system diseases, cancer related therapies, and other therapies that we will be able to develop in-house, co-develop with other pharmaceutical companies, or out-license in exchange for milestone payments and royalties. Strategic Alliances We believe that our patented technology platforms provide a major commercial opportunity for developing strategic alliances with larger pharmaceutical companies. We believe that any such alliance would enable us to focus on our inherent strength, namely the exploitation of the technology platforms to develop additional novel drugs. The most common phase in which industry collaborations are completed is the discovery stage, since a license for early stage discoveries generally costs a large pharmaceutical company much less than licensing later stage products. We chose to postpone the structuring of a corporate sponsored licensing agreement for Neotrofin in favor of an early stage, government-assisted development program. By completing strategic alliances later in the development cycle, we hope to enter into a licensing agreement for Neotrofin on terms more favorable to us. We periodically engage in preliminary licensing discussions with one or more multinational or regional pharmaceutical companies with respect to Neotrofin. We anticipate that the terms of any strategic alliance that we enter into for Neotrofin will include an up-front payment, milestone payments, royalties on product sales, and agreements requiring the licensee to purchase drug compounds from us. We have entered into three strategic alliances to in-license niche market oncology drugs. In June 2001, we entered into a licensing agreement with the New Drug Development Office (or NDDO) Research Foundation whereby we acquired exclusive worldwide rights to Neoquin (EO9) and 80 related derivatives for which we paid NDDO an up-front payment. This agreement is subject to certain additional payments based upon achievement of defined milestones. 13 In August 2001, we entered into a licensing agreement with Johnson Matthey whereby we acquired exclusive worldwide rights to satraplatin (JM216) for which we paid Johnson Matthey an up-front payment. This agreement is subject to certain additional payments based upon achievement of defined milestones. One additional payment due in February 2002 was paid. In October 2001, we entered into a licensing agreement with Bristol-Myers Squibb Company whereby we acquired exclusive worldwide rights to elsamitrucin for which we paid Bristol-Myers an up-front payment. This agreement is subject to certain additional payments based upon achievement of defined milestones. In March 2001, we entered into an agreement whereby Pfizer Inc. acquired rights to one of our G-protein-coupled receptor/ligand systems for evaluation in their DrugPfinder program. This agreement provides for up-front payments and milestone payments based upon reaching certain milestones in the discovery and development of drug candidates in this system. As of December 31, 2001, no milestones had yet been reached regarding this agreement. In December 2001, we entered into a second DrugPfinder agreement with Pfizer for an additional G-protein-coupled receptor/ligand system under similar conditions as the previous agreement. Under these agreements, we have and will provide validated cell lines expressing the G-protein-coupled receptor as well as certain controls and supporting materials. In addition we will provide some consulting services to Pfizer. Research Collaborations We currently have several proprietary compounds in various stages of pre-clinical development. From time to time, we evaluate these compounds for efficacy in specialized assays or test models. We locate expert academic researchers and/or contract research organizations to perform the desired tests and provide them, through their respective academic institutions, with grants and/or contracts to perform the designated tests while we maintain proprietary rights to the compounds. We monitor these studies to ensure that these studies are performed to the highest research standards. Production We currently have our compounds manufactured in large scale by third party vendors and have not established plans to build our own manufacturing facilities. In connection with any licensing arrangements we may enter into regarding Neotrofin or any other drug candidate, we intend to retain the rights to control the manufacturing and sale of our compounds to our licensees. Our preliminary estimates indicate that Neotrofin can be manufactured cost effectively. Preliminary manufacturing proposals have also been received for certain other central nervous system and cancer drug candidates and there are no foreseen problems with manufacturing these compounds. DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION The production and marketing of our products and our research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous regulation. The Federal Food, Drug and Cosmetics Act, as amended from time to time, and the regulations promulgated thereunder, as well as other federal and state statutes and regulations, govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of our proposed products. Product development and approval within this regulatory framework take a number of years and involve the expenditure of substantial resources. In addition to obtaining FDA approval for each product, each drug manufacturing establishment must be registered with, and approved by, the FDA. Domestic manufacturing establishments are subject to regular inspections by the FDA and must comply with Good Manufacturing Practices. To supply products for use in the United States, foreign manufacturing establishments must also comply with Good Manufacturing Practices and are subject to periodic inspection by the FDA or by regulatory authorities in certain of such countries under reciprocal agreements with the FDA. Drug product and drug substance manufacturing establishments located in California also must be licensed by the State of California in compliance with local regulatory requirements. Estimated Cost of New Drug Development and Approval The United States system of new drug approval is one of the most rigorous in the world. According to a December 2001 report by the Tufts Center for the Study of Drug Development, it costs an average of $802 million and takes between 10 and 15 years to develop a new prescription medicine and bring it to the U.S. market. Approximately one in 1,000 compounds that enter the pre-clinical testing stage eventually makes it to human testing and only one-fifth of those are ultimately approved for commercialization. In recent years, societal and governmental pressures have created the expectation that drug discovery and development costs can be reduced without sacrificing safety, efficacy and innovation. The need to significantly improve or provide alternative strategies for successful pharmaceutical discovery, research and development remains a major health care industry challenge. 14 Drug Discovery In the initial stages of drug discovery, before a compound reaches the laboratory, typically thousands of potential compounds are randomly screened for activity in an assay assumed to be predictive of a particular disease process. This drug discovery process can take several years. Once a "screening lead" or starting point for drug development is found, isolation and structural determination is initiated. Numerous chemical modifications are made to the screening lead in an attempt to improve the drug properties of the lead. After a compound emerges from this process, it is subjected to further studies on the mechanism of action, further in vitro screening against particular disease targets and finally, in vivo animal screening. If the compound passes these evaluation points, animal toxicology studies are performed to begin to analyze the potential toxic effects of the compound, and if the results indicate acceptable toxicity findings, the compound emerges from the basic research mode and moves into the pre-clinical phase. Pre-clinical Testing During the pre-clinical testing stage, laboratory and animal studies are conducted to show biological activity of the compound against the targeted disease and the compound is evaluated for safety. These tests can take up to three years or more to complete. Investigational New Drug Application After pre-clinical testing, an IND is submitted to the FDA to begin human testing of the drug. The IND becomes effective if the FDA does not reject it within 30 days. The IND must indicate the results of previous experiments, how, where and by whom the studies were conducted, how the chemical compound is manufactured, the method by which it is believed to work in the human body and any toxic effects of the compound found in the animal studies. In addition, the IND clinical protocol must be reviewed and approved by an Institutional Review Board comprised of physicians and lay people at the hospital or clinic where the proposed studies will be conducted. Progress reports detailing the results of both animal studies and human clinical trials must be submitted at least annually to the FDA. Phase 1 Clinical Trials After an IND becomes effective, Phase 1 human clinical trials can begin. These studies, involving small numbers of healthy volunteers or patients, can take up to one year or more to complete. The studies determine a drug's safety profile, including the safe dosage range. The Phase 1 clinical studies also determine how a drug is absorbed, distributed, metabolized and excreted by the body. Additional Phase 1 clinical trials, which may be conducted at any time during the clinical development of a new drug, evaluate interactions between the test drug and drugs commonly used in the target population and safety in patients with compromised organ systems. Phase 2 Clinical Trials In Phase 2 clinical trials, controlled studies of volunteer human patients with the targeted disease assess the drug's effectiveness. These studies are designed primarily to determine the appropriate dose levels and to evaluate the effectiveness of the drug on humans as well as to determine if there are any side effects on humans. These studies can take up to two years or more. Phase 3 Clinical Trials This phase can last up to three years or more and usually involves large numbers of human patients with the targeted disease. During the Phase 3 clinical trials, physicians monitor the human patients to determine drug candidate efficacy and to observe and report any adverse reactions that may result from long-term use of the drug on a large, more widespread, human patient population. New Drug Application (NDA) After completion of all three clinical trial phases, if the data indicates that the drug is safe and effective, an NDA is filed with the FDA. The NDA must contain all of the information on the drug that has been gathered to date, including data from the clinical trials. NDAs are often over 100,000 pages in length. After passage of the Prescription Drug User Fee Act, average review times for new medicine applications dropped from nearly 30 months in 1992 to less than 12 months. Fast Track Review In September 1998, the FDA clarified procedures for accelerating the approval of drugs to be marketed for serious diseases for which the manufacturer can demonstrate the potential to address unmet medical needs. We do not know whether any of our drug candidates will fulfill this requirement because there are drugs currently approved and available for related therapies. However, our drug candidates might qualify for "fast track" classification if the disease indication for which we are seeking approval has no other current therapies available in the market. At this time, we have not requested 15 fast track designation for any of our drug candidates, however, we believe that certain of our oncology drugs may qualify for fast track classification. The FDA also made provisions for priority review of drugs. A drug will qualify for priority review if it provides a significant improvement compared to marketed products in the treatment, diagnosis or prevention of a disease regardless of whether the indication is serious or life-threatening. We believe that some of our drug candidates may qualify for priority review. Approval If the FDA approves the NDA, the drug becomes available for physicians to prescribe to patients for treatment. We must continue to submit periodic reports to the FDA, including descriptions of any adverse reactions reported by doctors prescribing the drug. For certain drugs which are administered on a long-term basis, the FDA may request additional clinical studies (Phase 4) after the drug has begun to be marketed to evaluate long-term effects. The marketing of a drug after FDA approval is subject to substantial continuing regulation by the FDA, including regulation of manufacturing practices and the advertising and promotion of the drug. Certain drugs are removed from the market after receiving FDA approval for a variety of issues ranging, for example, from reports of side effects to unexplained patient death. Some drugs return to the market only after the FDA agrees that issues identified have been adequately addressed or eliminated. In addition to regulations enforced by the FDA, we 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 present and future federal, state or local regulations, all of which are amended from time to time. Our research and development activities involve the controlled use of hazardous materials, chemicals, biological materials and various radioactive compounds. We must comply with safety procedures for handling and disposing of such materials according to the standards prescribed by state and federal regulations, however, no matter how good compliance is with safety procedures, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In addition, under certain circumstances, we may become liable due to violations by our vendors and other partners that are subject to the same standards prescribed by state and federal regulations. For marketing outside the United States, our prospective licensees, or we, are subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs in the respective countries. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. RESEARCH AND DEVELOPMENT Since our inception, we have devoted substantially all of our resources and efforts to research and development. Research and development expenditures are expensed at the time we incur them and were approximately $20.1 million in 1999, $38.8 million in 2000 and $20.6 million in 2001. PATENTS AND PROPRIETARY RIGHTS PHARMACEUTICAL BUSINESS Patents and other proprietary rights are vital to our businesses. Our policy is to seek patent protection for our proprietary compounds and technology, and we intend to protect our technology, inventions and improvements to inventions that are commercially important to the development of our businesses. We also intend to rely on trade secrets, know-how, continuing technology innovations and licensing arrangements to develop and maintain our competitive position. In addition, we have applied for registration of several trademarks, including our name, NeoTherapeutics(TM), and certain of our product candidates. Our pharmaceutical business is the assignee of nine patents issued to Alvin J. Glasky, our Chairman, Chief Executive Officer and Chief Scientific Officer and other inventors. In addition to a number of foreign patents, which have been granted corresponding to issued U.S. patents, we currently have one additional United States patent application allowed and eighteen additional U.S. patent applications and a number of corresponding foreign patent applications on file. Our issued patents expire beginning 2009 through 2019. It is possible that the scope of the coverage claimed in our patent applications could be significantly reduced prior to a patent being issued. All issued, allowed and pending patents were assigned, by the inventors, to our pharmaceutical business. In connection with these assignments, we granted to one of the inventors, Dr. Alvin Glasky, a royalty of two percent of all revenues derived by us from the use and sale of any products that are covered by any of the aforementioned patents or any subsequent derivative patents, in each case for the life of the patent. However, Dr. Glasky will not receive any royalties with respect to sales of products which utilize patent rights licensed to us by McMaster University as described below. In the event we terminate Dr. Glasky's employment without cause, the royalty rate shall be increased to five percent, and in the event Dr. Glasky dies, his estate or family shall be entitled to continue to receive royalties at the rate of two percent. 16 With respect to five issued U.S. patents (US Patent Nos. 5,447,939, 5,801,184, 6,027,936, 6,338,963, and 6,350,752), we entered into a license agreement whereby McMaster University has licensed to us all patent rights belonging to McMaster University contained in such patents. These patents contain a subset of claims to which McMaster University claims patent rights. This agreement calls for annual minimum royalty payments of $25,000 per year to McMaster University, until expiration of the related patent rights, and for us to pay to McMaster University a royalty of five percent of the net sales of all products sold by us that incorporate the patent rights licensed to us by McMaster University. Our pharmaceutical business also maintains a portfolio of patent rights as a result of our in-licensing activities. Currently our pharmaceutical business has rights to six issued U.S. patents and one pending U.S. patent application, along with the corresponding foreign patents for Neoquin, satraplatin and elsamitrucin. FUNCTIONAL GENOMICS BUSINESS We also maintain a functional genomics patent portfolio with one allowed patent application and four applications pending in the United States and corresponding applications in foreign countries. All the patents in the functional genomics portfolio were assigned to the University of California by the inventors and licensed to us. OTHER The patent positions of our pharmaceutical and functional genomic businesses are generally uncertain and involve complex legal and factual issues. Third parties may assert patent or other intellectual property infringement claims against us with respect to our products or technology or other matters. There may be third-party patents and other intellectual property relevant to our products and technology of which we are not aware. Patent litigation is becoming more common in the pharmaceutical industry. Litigation is sometimes necessary to defend against or assert claims of infringement, to enforce our patents, to protect trade secrets we own or to determine the scope and validity of proprietary rights of third parties. No third party has asserted that we are infringing upon their patent rights or other intellectual property, nor are we aware that we are infringing upon any third party's patent rights or other intellectual property. We may, however, be infringing upon a third party's patent rights or other intellectual property, and litigation asserting such claims might be initiated in which we would not prevail or we would not be able to obtain the necessary licenses on reasonable terms, if at all. All such litigation, whether meritorious or not, as well as litigation initiated by us against third parties, is time consuming and very expensive to defend or prosecute and to resolve. If our competitors prepare and file patent applications in the United States that claim technology we also claim, we may have to participate in interference proceedings required by the Patent and Trademark Office to determine priority of invention, which could result in substantial costs, even if we ultimately prevail. Results of interference proceedings are highly unpredictable and may result in us having to try to obtain licenses in order to continue to conduct clinical trials, manufacture or subsequently market certain of our product candidates. We rely on unpatented trade secrets and improvements, unpatented know-how, and continuing technological innovation to develop and maintain our competitiveness. We protect such information with employee, consultant, and corporate partner and/or collaborator confidentiality agreements as such relationships are formed. Confidentiality agreements provide that all confidential information developed or made known to an individual during the course of the employment or consulting relationship shall be kept confidential and shall not be disclosed to third parties except in specified circumstances. Agreements with employees provide that all inventions conceived by the individual while employed by us are our exclusive property. Confidentiality agreements are sometimes not honored, and if breached, we might not have adequate remedies and our trade secrets and improvements, unpatented know-how, and continuing technological innovation might become known. Additionally, our competitors may independently discover our trade secrets and improvements, unpatented know-how, and continuing technological innovation. COMPETITION The pharmaceutical industry is characterized by rapidly evolving technology and intense competition. Many companies of all sizes, including a number of large pharmaceutical companies as well as several specialized pharmaceutical companies, engage in drug research and development and functional genomics activities similar to ours. Our pharmaceutical business competitors that have products on the market or in research and development that are in the same clinical focus as us include Amgen, Inc., Bayer AG, Eli Lilly and Co., Novartis AG, Bristol-Meyers Squibb Company, Glaxo SmithKline, Regeneron Pharmaceuticals, Inc., Vertex Pharmaceuticals, Inc., Guilford Pharmaceuticals, Inc., Cephalon, Inc., Aventis, Elan Corporation, Pfizer, Inc., Janssen Pharmaceutica, Inc. and Shire Pharmaceuticals Group plc,, among others. Competitors that have a strategic and clinical focus similar to ours include Axonyx Inc., Cortex Pharmaceuticals Inc., Curis Inc., Diacrin Inc., Genset SA-ADR, Interneuron Pharmaceuticals Inc., Neurobiological 17 Technologies Inc., Neurocrine Biosciences Inc., Neurogen Corporation, NPS Pharmaceuticals Inc., StemCells, Inc., Synaptic Pharmaceutical Corporation and Titan Pharmaceuticals Inc, among others. Many of our competitors are large-cap companies such as Eli Lilly, Shire Pharmaceuticals, and Bristol-Myers focusing on a wide range of diseases and drug indications, and many are small to medium-cap, public and private companies, often with niche focuses. Our pharmaceutical business, although it is becoming more broadly focused, remains very niched-focused. Companies focused on similar niche-markets are numerous, making the market landscape very diversified and competitive. Technologies under development by other pharmaceutical companies could result in treatments for Alzheimer's disease and other diseases and disorders for which we are developing our own treatments. Several other companies are engaged in research and development of compounds that are similar to our research. In the event that one or more of these programs is successful, the market for some of our product candidates could be reduced or eliminated. Also, over 1,000 novel cancer treatments that utilize significant variants in pharmaceutical strategy are in the research and development pipeline worldwide. Our functional genomics business faces competition from most major pharmaceutical companies, as well as many small pharmaceutical companies, most of which have research programs involving G-protein-coupled receptors similar to our research and development program. In addition there are several academic laboratories that are focused on orphan G-protein-coupled receptors. Successful identification of natural ligands for G-protein-coupled receptors requires considerable resources, freedom and time that are often not available in the industrial setting. Therefore, some of these companies have chosen to pursue a strategy different from ours that searches for alternative ligands that provide binding activity to the receptor in question but often do not provide clear information regarding the natural function of the receptor or the natural ligand. We think that the orphan receptor strategy being pursued by our functional genomics business, although possibly more expensive, is a more effective means of identifying and validating novel drug targets. In addition, colleges, universities, governmental agencies and other public and private research institutions conduct research and are becoming more active in seeking patent protection and licensing arrangements to collect license fees, milestone payments and royalties in exchange for license rights to technologies that they have developed, some of which may directly compete with our technologies. These companies and institutions also compete with us in recruiting highly qualified scientific personnel. Many of our competitors have substantially greater financial, research and development, human and other resources than we do. Furthermore, large pharmaceutical companies have significantly more experience than we do in pre-clinical testing, human clinical trials and regulatory approval procedures, among other things. Although we have begun to conduct clinical trials with respect to Neotrofin and Neoquin, we have not conducted clinical trials or sought the approval of the FDA with respect to any of our other product candidates. Furthermore, if we are permitted to commence commercial sales of any of our product candidates and decide to manufacture and sell such products ourselves, we will also be competing with respect to manufacturing efficiency and marketing capabilities, which are business activities and processes in which we have no prior experience. Any product for which we obtain FDA approval must also compete for market acceptance and market share. For example, a number of drugs intended for the treatment of Alzheimer's disease, memory loss associated with aging, stroke and other neurodegenerative diseases and disorders are on the market or in the later stages of clinical testing. Four drugs are currently approved for the treatment of Alzheimer's disease in the United States: Cognex(R) (tacrine), marketed by First Horizon, Aricept(R) (donepezil), marketed by Pfizer, Inc. and Eisai Co., Ltd., Exelon(R) (rivastigmine), marketed by Novartis, and Reminyl(R) (galantamine), marketed by Janssen and Shire. Additionally, numerous oncology drugs are on the market for each cancer type we are pursuing. For example, cisplatin and carboplatin are the most prevalent platinum-based derivatives used in chemotherapy. Our product candidate, satraplatin, if the FDA ever approves it, would likely compete against these drugs directly. Unless satraplatin is shown to have better efficacy and is as cost effective if not more cost effective than cisplatin and carboplatin, it may not gain acceptance by the medical field and therefore never be successful commercially. We expect technological developments and improvements in the fields of our businesses to continue to occur at a rapid rate and, as a result, expect competition to remain intense. Although we think, based on the preliminary pre-clinical and clinical test results involving certain of our drug candidates, that we will be able to continue to compete in the discovery and early clinical development of drug candidates in our market niche, we may be wrong. Additionally, we do not have sufficient resources to compete with major pharmaceutical companies in the areas of later-stage clinical testing, manufacturing and marketing. EMPLOYEES As of December 31, 2001, we had 79 full-time employees, of which 15 hold Ph.D. degrees and 6 hold M.D. degrees, and 17 part-time employees. We cannot assure you that we will be able to attract and retain qualified personnel in sufficient numbers to meet our needs. Our employees are not subject to any collective bargaining agreements, and we regard our relations with our employees to be good. 18 RISK FACTORS Your investment in our common stock involves a high degree of risk. You should consider the risks described below and the other information contained in this Form 10-K carefully before deciding to invest in our common stock. If any of the following risks actually occur, our businesses, financial condition and operating results would be significantly harmed. As a result, the trading price of our common stock could decline, and you could lose a part or all of your investment. OUR LOSSES WILL CONTINUE TO INCREASE AS WE EXPAND OUR DEVELOPMENT EFFORTS, AND OUR EFFORTS MAY NEVER RESULT IN PROFITABILITY. Our cumulative losses during the period from our inception in 1987 through December 31, 2001 were approximately $124.1 million, almost all of which consisted of research and development and general and administrative expenses. We lost approximately $26.0 million in 1999, approximately $46.4 million in 2000 and approximately $27.8 million in 2001. We expect our losses to increase in the future as we expand our clinical trials and increase our research and development activities. We currently do not sell any products or services and we may never achieve significant revenues or become profitable. Even if we eventually generate revenues from sales, we nevertheless expect to incur significant operating losses over the next several years. OUR POTENTIAL DRUG PRODUCTS ARE IN VARIOUS STAGES OF CLINICAL AND PRE-CLINICAL DEVELOPMENT AND MAY NOT PROVE SAFE OR EFFECTIVE ENOUGH TO OBTAIN REGULATORY APPROVAL TO SELL ANY OF THEM. We currently are testing our first potential drug product, Neotrofin, in human clinical trials. We are currently conducting clinical trials of Neotrofin for Alzheimer's disease, spinal cord injury and Parkinson's disease. We expect to complete the Alzheimer's trial before the end of the first quarter of 2002 with full data analysis to be completed within approximately sixty days thereafter. We expect the Parkinson's disease and spinal cord injury trials to be completed by the end of 2002. In conjunction with our subsidiary, NeoOncoRx, Inc., we have acquired rights to three anti-cancer drugs that are in clinical trials, and we have commenced a clinical trial of Neotrofin for chemotherapy-induced neuropathy. We expect that we will need to complete additional trials before we will be able to apply for regulatory approval to sell Neotrofin or any of our other potential drug products. Our other proposed products are in pre-clinical development. We cannot be certain that any of our proposed products will prove to be safe or effective in treating disorders of the nervous system, cancer or any other diseases or indications. All of our proposed drugs will require additional research and development, testing and regulatory clearance before we can sell them. We cannot be certain that we will receive regulatory approval to sell any of our proposed drugs. We do not expect to have any products commercially available for at least one year, if at all. OUR EFFORTS TO DISCOVER AND VALIDATE NEW DRUG DEVELOPMENT TARGETS MAY FAIL. We are focused on discovering and validating new drug development targets. Some of these targets may be new receptor/ligand systems or new disease targets for which existing G-protein-coupled receptors will be found to have a role. We may not discover or validate any new drug development targets based on our efforts. In addition, we may not have sufficient funds to purchase chemical libraries necessary for lead generation and/or new compound synthesis and the conducting of early testing to establish therapeutic potential necessary to obtain patents on new compounds. Although we intend to seek out established pharmaceutical companies as partners for the development, manufacture and marketing of certain of our compounds, we may be unsuccessful in negotiating related contracts on reasonable terms for us, if at all. OUR BUSINESS DOES NOT GENERATE THE CASH NEEDED TO FINANCE OUR CURRENT AND ANTICIPATED OPERATIONS AND OUR EXISTING CASH AND INVESTMENT SECURITIES ARE NOT SUFFICIENT TO FUND OUR OPERATIONS FOR THE NEXT 12 MONTHS. We spent cash in 2001 at an average rate in excess of approximately $2.3 million per month, and we expect this rate of spending to continue through the reporting of results from our current pivotal clinical trial for Neotrofin in Alzheimer's disease. The burn-rate after that will be a function of the result of that trial and the timing of our phase 3 clinical study of satraplatin in prostate cancer. If the Alzheimer's trial is positive, we would expect the burn-rate to remain stable. If based on the data we decide not to initiate another pivotal study of Neotrofin in Alzheimer's disease, the burn-rate will decrease significantly. At the present time, our business does not generate cash from operations needed to finance our short-term operations. We will rely primarily on (a.) raising funds through the sale of our securities including under our Sales Agreement with Cantor Fitzgerald & Co., which is on a "best-efforts" basis, and/or (b.) out-licensing our technology, to meet all of our short-term cash needs. We have generated operating losses since our inception and our existing cash and investment securities, including net cash proceeds of $5.8 million raised in March 2002, are not sufficient to fund our current planned pharmaceutical and functional genomics operations for the next 12 months. Therefore, we will need to seek additional funding by the end of July 2002, or sooner, through public or private financings, including equity financings, and through other arrangements to continue operating our businesses. As has been stated by our independent public accountants in their opinion, our current financial position raises substantial doubt as to our ability to continue as a going concern. The results of a clinical trial on our lead drug candidate Neotrofin should be available during the second quarter of 2002. If the results of this trial are sufficiently positive, we expect to be able to raise the capital necessary to fund our currently planned pharmaceutical and functional genomics operations. Additionally, we anticipate that our long-term business plans require that we enter into collaborative partnership agreements and strategic alliance agreements with larger pharmaceutical companies to co-develop, manufacture and market our product candidates. If the results of this trial are negative (or not sufficiently positive), we may not be able to raise additional funds on favorable terms, if at all. Accordingly, we would be forced to significantly change our business plans and restructure our operations to conserve cash, which would likely involve some, combination, or all of the following: - Out-license or sell some or all of our intellectual, technological, and/or tangible property not presently contemplated and at terms that we believe would not be favorable to us; - Reduce the size of our workforce, including the number of our scientific personnel; - Reduce the scope and nature of our research and drug development activities including the possible termination of clinical trials; and - Terminate operating leases and other contractual arrangements. Although no assurance can be given, we believe that we can continue to operate as a going concern and, accordingly, our consolidated financial statements have been prepared assuming that we will continue as a going concern. Consequently, our consolidated financial statements do not include adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that would be required if we were not able to continue as a going concern. 19 We will need substantial additional funds to complete the research and development and clinical trials of Neotrofin before we will be able to submit it to the FDA for approval for commercial sale. We will also need substantial additional funds to support the continued research and development and clinical trials of our other potential products. Since we currently have no products available for commercial sale and minimal revenues from licensing in our genomics division, we must use capital to fund our operating expenses. Our operating expenses, and consequently our capital requirements, will depend on many factors, including: o continued scientific progress in research and development to identify and develop or obtain additional product candidates; o the costs and progress of preclinical and clinical testing of Neotrofin, our anti-cancer drugs and additional drug candidates; o cost involved in filing, prosecuting and enforcing patent claims; o effect of competing technological developments; o cost of manufacturing scale-up; o cost of commercialization activities; o time and cost involved in obtaining regulatory approvals; and o our ability to establish collaborative and other arrangements with third parties, such as licensing and manufacturing agreements. COMPETITION FOR PATIENTS IN CONDUCTING CLINICAL TRIALS MAY PREVENT OR DELAY APPROVAL OF A DRUG CANDIDATE AND STRAIN OUR LIMITED FINANCIAL RESOURCES. Many pharmaceutical companies are conducting clinical trials in patients with Alzheimer's disease, Parkinson's disease, spinal cord injuries and our other targeted diseases and indications. As a result, we must compete with them for clinical sites, physicians and the limited number of patients who fulfill the stringent requirements for participation in clinical trials. In addition, due to a lack of available information about the condition of Alzheimer's disease sufferers in the United States, we cannot be certain how many of the over 4 million patients with Alzheimer's disease in the United States would meet the requirements for participating in our clinical trials. Also, due to the confidential nature of clinical trials, we cannot be certain how many of the eligible Alzheimer's disease, Parkinson's disease, spinal cord injury and cancer patients may be enrolled in competing studies and consequently not available to us. This competition may increase costs of our clinical trials and delay the introduction of our potential products. ANY FAILURE TO COMPLY WITH EXTENSIVE GOVERNMENTAL REGULATION COULD PREVENT OR DELAY PRODUCT APPROVAL OR CAUSE GOVERNMENTAL AUTHORITIES TO DISALLOW OUR PRODUCTS AFTER APPROVAL AND SUBJECT US TO CRIMINAL OR CIVIL LIABILITIES. The FDA and comparable agencies in foreign countries impose many requirements on the introduction of new drugs through lengthy and detailed clinical testing and data collection procedures, and other costly and time consuming compliance procedures. These requirements apply to every stage of the clinical trial process and make it difficult to estimate when Neotrofin or any other of our potential products will be available commercially, if at all. Our proprietary compounds will require substantial clinical trials and FDA review as new drugs. Even if we successfully enroll patients in our clinical trials, patients may not respond to our potential drug products. We think it is prudent to expect setbacks. While we believe that we are currently in compliance with applicable FDA regulations, if we fail to comply with the regulations applicable to our clinical testing, the FDA may delay, suspend or cancel our clinical trials, or the FDA might not accept the test results. The FDA, or any comparable regulatory agency in another country, may suspend clinical trials at any time if it concludes that the trials expose subjects participating in such trials to unacceptable health risks. Further, human clinical testing may not show any current or future product candidate to be safe and effective to the satisfaction of the FDA or comparable regulatory agencies or the data derived from the clinical tests may be unsuitable for submission to the FDA or other regulatory agencies. 20 We cannot predict with certainty when we might submit any of our proposed products currently under development for the regulatory approval required in order to commercially sell the products. Once we submit a proposed product for commercial sale approval, the FDA or other regulatory agencies may not issue their approvals on a timely basis, if at all. If we are delayed or fail to obtain these approvals, our business and prospects may be significantly damaged. If we fail to comply with regulatory requirements, either prior to seeking approval or in marketing our products after approval, we could be subject to regulatory or judicial enforcement actions. These actions could result in: o product recalls or seizures; o injunctions; o civil penalties; o criminal prosecution; o refusals to approve new products and withdrawal of existing approvals; and o enhanced exposure to product liabilities. THE LOSS OF KEY RESEARCHERS OR MANAGERS COULD SIGNIFICANTLY HINDER OUR DRUG DEVELOPMENT PROCESS AND MIGHT CAUSE OUR BUSINESS TO FAIL. Our success depends upon the contributions of our key management and scientific personnel, especially Dr. Alvin Glasky, our Chief Executive Officer and Chief Scientific Officer. Dr. Glasky has led our research and business developments since founding our business in 1987 and is the inventor on several of our patents. Our loss of the services of Dr. Glasky or any other key personnel could delay or preclude us from achieving our business objectives. Although we currently have key-man life insurance on Dr. Glasky in the face amount of $2 million, we believe that the loss of Dr. Glasky's services would damage our research and development efforts substantially. Dr. Glasky has an employment agreement with us that provides for a three year term expiring December 31, 2003, with automatic one-year renewals thereafter unless we or Dr. Glasky gives notice of intent not to renew at least 90 days in advance of the renewal date. In addition to Dr. Glasky, the loss of Dr. Luigi Lenaz, our Vice President, Oncology Division and President of our subsidiary NeoOncoRx, Inc., would damage the development of our anti-cancer business substantially, and the loss of the services of Dr. Olivier Civelli, consultant to our subsidiary NeoGene, Inc., would harm the development of our functional genomics business substantially. Dr. Lenaz has an employment agreement with us that will expire on July 1, 2003, with automatic one year renewals thereafter unless Dr. Lenaz or we gives notice of intent not to renew at least 90 days in advance of the renewal date. Dr. Civelli has a consulting agreement with us that expires on March 22, 2002. This agreement includes one-year renewals thereafter unless Dr. Civelli or we gives notice of intent not to renew at least 15 days in advance of the renewal date. We also will need substantial additional expertise in marketing and other areas in order to achieve our business objectives. Competition for qualified personnel among pharmaceutical companies is intense, and the loss of key personnel, or the inability to attract and retain the additional skilled personnel required for the expansion of our business, could significantly damage our business. IF WE CANNOT PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS ADEQUATELY, THE VALUE OF OUR RESEARCH COULD DECLINE AS OUR COMPETITORS APPROPRIATE PORTIONS OF OUR RESEARCH. We actively pursue patent protection for our proprietary products and technologies. We hold rights to nine U.S. patents and currently have eighteen U.S. patent applications pending, including one which has been allowed. Our issued patents expire between 2009 and 2019. In addition, we have numerous foreign patents issued and patent applications pending corresponding to our U.S. patents. However, our patents may not protect us against our competitors. We may have to file suit to protect our patents or to defend our use of our patents against infringement claims brought by others. Because we have limited cash resources, we may not be able to afford to pursue or defend against litigation in order to protect our patent rights. We also rely on trade secret protection for our unpatented proprietary technology. Trade secrets are difficult to protect. While we enter into proprietary information agreements with our employees, consultants and others, these agreements may not successfully protect our trade secrets or other proprietary information. 21 WE ARE A SMALL COMPANY RELATIVE TO OUR PRINCIPAL COMPETITORS AND OUR LIMITED FINANCIAL AND RESEARCH RESOURCES MAY LIMIT OUR ABILITY TO DEVELOP AND MARKET NEW PRODUCTS. Many companies, both public and private, including well-known pharmaceutical companies such as Amgen, Inc., Bayer AG, Eli Lilly and Co., Novartis AG, Bristol-Meyers Squibb Company, Glaxo SmithKline, Regeneron Pharmaceuticals, Inc., Vertex Pharmaceuticals, Inc., Guilford Pharmaceuticals, Inc., Cephalon, Inc., Aventis, Elan Corporation, Pfizer, Inc., Janssen Pharmaceutica, Inc. and Shire Pharmaceuticals Group plc, are developing products to treat Alzheimer's disease and certain of the other applications we are pursuing. Competitors that have a strategic and clinical focus similar to ours include Axonyx Inc., Cortex Pharmaceuticals Inc., Curis Inc., Diacrin Inc., Genset SA-ADR, Interneuron Pharmaceuticals Inc., Neurobiological Technologies Inc., Neurocrine Biosciences Inc., Neurogen Corporation, NPS Pharmaceuticals Inc., StemCells, Inc., Synaptic Pharmaceutical Corporation and Titan Pharmaceuticals Inc, among others. Many of these companies have substantially greater financial, research and development, manufacturing, marketing and sales experience and resources than us. As a result, our competitors may be more successful than us in developing their products, obtaining regulatory approvals and marketing their products to consumers. In addition, our functional genomics business faces competition from most major pharmaceutical companies, as well as many small pharmaceutical companies, most of which have research programs involving G-protein-coupled receptors similar to our research and development program. While we believe, based on recent industry publications, that Neotrofin is more advanced in the drug development process than most other drugs seeking to use neurotrophic factors to treat Alzheimer's disease, we cannot be certain that Neotrofin will be the first of these drugs to receive FDA approval, if it receives approval at all. In addition, there are four drugs currently approved for the treatment of Alzheimer's disease in the United States, all of which use a different approach to the disease than Neotrofin. If these treatments are successful, or if other drugs using the neurotrophic factor approach are approved before Neotrofin, or if any of these drugs prove to be more effective than Neotrofin, the market for Neotrofin could be reduced or eliminated. Additionally, numerous oncology drugs are on the market for each cancer type we are pursuing. For example, cisplatin and carboplatin are the most prevalent platinum-based derivatives used in chemotherapy. Our product candidate, satraplatin, if the FDA ever approves it, would likely compete against these drugs directly. Unless satraplatin is shown to have better efficacy and is as cost effective if not more cost effective than cisplatin and carboplatin, it may not gain acceptance by the medical field and therefore never be successful commercially. OUR LIMITED EXPERIENCE AT MANAGING AND CONDUCTING CLINICAL TRIALS OURSELVES MAY DELAY THE TRIALS AND INCREASE OUR COSTS. We will continue managing and conducting some future clinical trials ourselves rather than hiring outside clinical trial contractors. We believe managing and conducting clinical trials ourselves has reduced and will continue to reduce the costs associated with our clinical trials and gives us more control over the clinical trial process. However, while some of our management has had experience at conducting clinical trials, we have limited experience in doing so as a company. While we have not experienced significant delays or increased costs to date by conducting clinical trials ourselves, as we move forward with our self-conducted clinical trials, our limited experience may delay the completion of our clinical trials and increase our costs. HOLDERS OF OUR WARRANTS COULD ENGAGE IN SHORT SELLING TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OR EXERCISE OF THE SECURITIES AND DECREASE THE EXERCISE PRICE OF THE WARRANTS. IF THIS OCCURS, THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE. Short selling is a practice in which an investor borrows shares from a stockholder to sell in the trading market, with an obligation to deliver the same number of shares back to the lending stockholder at a future date. Short sellers make a profit if the price of our common stock declines, allowing the short sellers to sell the borrowed shares at a higher price than they have to pay for shares delivered to the lending stockholder. Short selling increases the number of shares of our common stock available for sale in the trading market, putting downward pressure on the market price of our common stock. Our Class B Warrants may be exercised for shares of our common stock based in some cases on a floating exercise price related to the market price of our common stock. The holders of these securities may benefit from the downward price pressures caused by short selling due to the reduced exercise price that must be paid to obtain shares of common stock upon exercise. In particular, the exercise price of our outstanding Class B Warrants, if we deliver a redemption notice, is equal to the lesser of $33.75 per share (subject to adjustment for stock splits, reverse splits and combinations) and 97% (or 95% if the market price of our common stock is less than $5.00 per share) of the closing bid price of our common stock on the trading day after the redemption notice is delivered. This fact could give the holders of our Class B Warrants incentive to sell short our common stock after receipt of a redemption notice, which could cause the market price to decline. The holders of the Class B Warrants could then exercise their Class B Warrants and use the shares of common stock received upon exercise to replace the shares sold short and thereby profit by the decline in the market price of the common stock 22 caused by their short selling. There are currently outstanding Class B Warrants exercisable for 3,413,600 shares of common stock. The Class B Warrants expire on June 12, 2002. Montrose Investments Ltd. and Strong River Investments, Inc. each hold Class B Warrants to purchase 1,706,800 shares of our common stock, for a total of 3,413,600 shares of our common stock, or approximately 13.0% of the total number of shares of our common stock outstanding, which Class B Warrants have an exercise price of $33.75 per share if we do not deliver a redemption notice. No other investors hold Class B Warrants. These facts give these two investors greater influence over the market price of our stock if we deliver a redemption notice, however, each of these investors make independent investment decisions, and each has agreed to vote any and all shares of our common stock that they own as recommended by our board of directors in any meeting of our stockholders. THE TRADING PRICE OF OUR COMMON STOCK AND THE TERMS OF OUR WARRANTS MUST COMPLY WITH THE LISTING REQUIREMENTS OF THE NASDAQ NATIONAL MARKET OR WE COULD BE DELISTED AND THE LIQUIDITY OF OUR COMMON STOCK WOULD DECLINE. Our common stock is listed on the Nasdaq National Market. To remain listed on this market, we must meet Nasdaq's listing maintenance standards and abide by Nasdaq's rules governing listed companies. If the price of our common stock falls below $1.00 (or under certain conditions, $3.00) per share for an extended period, or if we fail to meet other Nasdaq standards, including minimum stockholders equity of $10 million or minimum market capitalization of $50 million (both of which become applicable to us on November 1, 2002), or violate Nasdaq rules, our common stock could be delisted from the Nasdaq National Market. Nasdaq has established rules regarding the issuance of "future priced securities" or securities convertible into common stock based on a floating conversion price, so that the number of shares of common stock issuable upon conversion of the securities is not known when the securities are sold. These rules may apply to a number of securities we have issued in the past, because the number of shares of our common stock issuable upon conversion of those securities were based upon a future price of our common stock. Nasdaq's concerns regarding these securities include the potential dilution to our existing stockholders if the price of our common stock goes down causing a large number of shares to be issued upon conversion of the securities, and the corresponding potential for excessive return on investment for the purchaser of the convertible securities. In addition, since the holders of future priced securities may benefit from a decrease in the market price of our common stock, those holders may have greater incentive to engage in manipulative practices. In light of these concerns, Nasdaq has indicated that the following rules may be implicated by future priced securities: Stockholders must approve significant issuances of listed securities at a discount to market or book value. Nasdaq rules prohibit an issuer of listed securities from issuing 20% or more of its outstanding capital stock in one transaction or a series of related transactions at less than the greater of book value or the then current market value without obtaining prior stockholder consent. Public interest concerns. Nasdaq may terminate the listing of a security if necessary to prevent fraudulent and manipulative acts and practices or to protect investors and the public interest. With respect to future priced securities, Nasdaq has indicated that it may delist a security if the returns with respect to the future priced security become excessive compared to the returns being earned by public investors in the issuer's securities. Furthermore, some requirements for continued listing, such as the $1.00 (or $3.00) minimum bid price requirement, are outside of our control. Accordingly, there is a risk that Nasdaq may delist our common stock. If our common stock is delisted, we would likely seek to list our common stock on the Nasdaq SmallCap Market or for quotation on the American Stock Exchange or a regional stock exchange, if available. However, listing or quotation on such market or exchange could reduce the market liquidity for our common stock. If our common stock were not listed or quoted on another market or exchange, trading of our common stock would be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities or in what are commonly referred to as the "pink sheets." As a result, an investor would find it more difficult to dispose of, or to obtain accurate quotations for the price of, our common stock. In addition, delisting from the Nasdaq National Market and failure to obtain listing or quotation on such other market or exchange would subject our common stock to so-called "penny stock" rules. These rules impose additional sales practice and market-making requirements on broker-dealers who sell and/or make a market in such securities. Consequently, if our common stock is delisted from the Nasdaq National Market and we fail to obtain listing or quotation on another market or exchange, broker-dealers may be less willing or able to sell and/or make a market in our common stock and purchasers of our common stock may have more difficulty selling such common stock in the secondary market. In either case, the market liquidity of our common stock would decline. 23 THERE ARE A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE IN THE PUBLIC MARKET. THE SALE OF THESE SHARES COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO FALL. ANY FUTURE EQUITY ISSUANCES BY US MAY HAVE DILUTIVE AND OTHER EFFECTS ON OUR EXISTING STOCKHOLDERS. There were 26,876,951 shares of our common stock outstanding as of March 22, 2002. In addition, security holders held options, warrants and other rights as of March 22, 2002 which, if exercised, would obligate us to issue up to an additional 11,068,822 shares of common stock at a weighted average exercise price of $15.43 per share, of which 3,913,693 shares are subject to options or warrants which are currently exercisable at the sole election of the holder at a weighted average exercise price of $7.36 per share. Some of these shares, if issued, would likely be issued at a discount to the prevailing market price. A substantial number of those shares, when we issue them upon exercise, will be available for immediate resale in the public market. In addition, we have the ability to sell up to approximately $10.0 million of our common stock pursuant to a shelf registration that will be eligible for immediate resale in the market. Additionally, we have the ability to sell up to approximately $8 million through a registration statement that we filed in connection with a certain underwriter sales agreement that, with our consent, gives the underwriter the ability to sell our common stock on a "best efforts" basis. Additional shares of our common stock sold, if any, under this agreement will be eligible for immediate resale in the market. The market price of our common stock could fall as a result of such resales due to the increased number of shares available for sale in the market. If all 11,068,822 shares were issued without a corresponding increase in our market capitalization, the market price per share of our common stock may be reduced by approximately 30%, excluding any effects of any other developments or market factors. We have financed our operations, and we expect to continue to finance our operations, by issuing and selling our common stock or securities convertible into or exercisable for shares of our common stock. Any issuances by us of equity securities may be at or below the prevailing market price of our common stock and may have a dilutive impact on our other stockholders. These issuances would also cause our net income, if any, or loss per share to decrease in future periods. As a result, the market price of our common stock could drop. WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS, AND MAY NOT HAVE SUFFICIENT PRODUCT LIABILITY INSURANCE TO COVER ANY CLAIMS, WHICH MAY EXPOSE US TO SUBSTANTIAL LIABILITIES. We may be exposed to product liability claims from patients who participate in our clinical trials, or, if we are able to obtain FDA approval for one or more of our potential products, from consumers of our products. Although we currently carry product liability insurance in the amount of $5 million per occurrence, it is possible that the amounts of this coverage will be insufficient to protect us from future claims. Further, we cannot be certain that we will be able to maintain our existing insurance or obtain or maintain additional insurance on acceptable terms for our clinical and commercial activities or that such additional insurance would be sufficient to cover any potential product liability claim or recall. Failure to maintain sufficient insurance coverage could have a material adverse effect on our business, prospects and results of operations if claims are made that exceed our coverage. THE USE OF HAZARDOUS MATERIALS IN OUR RESEARCH AND DEVELOPMENT EFFORTS IMPOSES CERTAIN COMPLIANCE COSTS ON US AND MAY SUBJECT US TO LIABILITY FOR CLAIMS ARISING FROM THE USE OR MISUSE OF THESE MATERIALS. Our research and development efforts involve the use of hazardous materials, including biological materials, chemicals and radioactive materials. We are subject to federal, state and local laws and regulations governing the storage, use and disposal of these materials and some waste products. We believe that our safety procedures for the storage, use and disposal of these materials comply with the standards prescribed by federal, state and local regulations. However, we cannot completely eliminate the risk of accidental contamination or injury from these materials. If there were to be an accident, we could be held liable for any damages that result, which could exceed our financial resources. We currently maintain insurance coverage of up to $1,000,000 per occurrence for injuries resulting from the hazardous materials we use, and up to $25,000 per occurrence for pollution clean up and removal, however, future claims may exceed these amounts. Currently the costs of complying with federal, state and local regulations are not significant, and consist primarily of waste disposal expenses. We may incur substantially increased costs to comply with regulations, particularly environmental regulations, if we develop our own commercial manufacturing facility. THE MARKET PRICE AND VOLUME OF OUR COMMON STOCK FLUCTUATE SIGNIFICANTLY AND COULD RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL INVESTORS. The stock market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may cause the market price and volume of our common stock to decrease. In addition, the market price and volume of our common stock is highly volatile. Factors that may cause the market price and volume of our common stock to decrease include fluctuations in our results of operations, timing and announcements of our technological innovations or new products or those of our competitors, FDA and foreign regulatory actions, developments with respect to patents and proprietary rights, public concern as to the safety 24 of products developed by us or others, changes in health care policy in the United States and in foreign countries, changes in stock market analyst recommendations regarding our common stock, the pharmaceutical industry generally and general market conditions. In addition, the market price and volume of our common stock may decrease if our results of operations fail to meet the expectations of stock market analysts and investors. While a decrease in market price could result in direct economic loss for an individual investor, low trading volume could limit an individual investor's ability to sell our common stock, which could result in substantial economic loss as well. During 2001, the price of our common stock has ranged between $6.60 and $2.31, and the daily trading volume has been as high as 2,012,143 shares and as low as 10,222 shares, with a recent average from January 2, 2002 up to and including March 22, 2002 of approximately 144,000 shares. OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A SUBSTANTIAL PERCENTAGE OF OUR COMMON STOCK. THEIR OWNERSHIP COULD ALLOW THEM TO EXERCISE SIGNIFICANT CONTROL OVER CORPORATE DECISIONS AND TO IMPLEMENT CORPORATE ACTS THAT ARE NOT IN THE BEST INTERESTS OF OUR STOCKHOLDERS AS A GROUP. Our directors and executive officers beneficially own approximately 11.30% of our outstanding common stock as of March 22, 2002. In addition, several of our stockholders, including Montrose Investments Ltd. and Strong River Investments, Inc. have agreed that they will vote any and all shares of our common stock that they own as recommended by our board of directors in any meeting of our stockholders. As of March 22, 2002, these stockholders collectively held warrants that could result in the issuance of up to 4,713,145 additional shares, in addition to shares of our common stock that they may own, or approximately 17.5% of the total number outstanding, if all of those securities were converted or exercised. However, none of the additional shares can be issued at the option of the holder within 60 days of March 22, 2002. As a result of these holdings, our directors and executive officers, if they acted together, could exert substantial influence over matters requiring approval by our stockholders. These matters would include the election of directors and the approval of mergers or other business combination transactions. This concentration of ownership and voting power may discourage or prevent someone from acquiring our business. CERTAIN CHARTER AND BYLAWS PROVISIONS AND OUR STOCKHOLDER RIGHTS PLAN MAY MAKE IT MORE DIFFICULT FOR SOMEONE TO ACQUIRE CONTROL OF US OR REPLACE CURRENT MANAGEMENT. Certain provisions of our Certificate of Incorporation and Bylaws may make it more difficult for someone to acquire control of us or replace our current management. These provisions may make it more difficult for stockholders to take certain corporate actions and could delay, discourage or prevent someone from acquiring our business or replacing our current management, even if doing so would benefit our stockholders. These provisions could limit the price that certain investors might be willing to pay for shares of our common stock. On December 13, 2000, we adopted a Stockholder Rights Plan pursuant to which we have distributed rights to purchase units of our capital Series B Junior Participating Preferred Stock. The rights become exercisable upon the earlier of ten days after a person or group of affiliated or associated persons has acquired 20% or more of the outstanding shares of our common stock or ten business days after a tender offer has commenced that would result in a person or group beneficially owning 20% or more of our outstanding common stock. These rights could delay or discourage someone from acquiring our business, even if doing so would benefit our stockholders. OUR BUSINESSES ARE SOMETIMES INVOLVED, OR PERCEIVED BY THE PUBLIC TO BE INVOLVED, IN ACTIVITIES THAT MAY BE SEEN AS MORALLY UNACCEPTABLE AND THEREFORE MAY BE LEGISLATED AGAINST, PREVENTING US FROM ENGAGING IN CERTAIN RESEARCH AND DEVELOPMENT ACTIVITIES AND EVENTUALLY MARKETING CERTAIN PRODUCT CANDIDATES. Our businesses involve the use of animals for certain research and development activities. Some groups perceive this as inhumane or otherwise morally unacceptable. Additionally, our businesses involve gene research to achieve specifically selected biological result(s): in the case of our functional genomics business, the treatment of diseases or other disease related indications. This too may be perceived as morally unacceptable. If pressure by these groups and others results in legislation that limits or prevents any of our research and development activities, our businesses may be significantly harmed. SIGNIFICANT EVENTS DURING 2001 HAD A NEGATIVE EFFECT ON OUR BUSINESS, THE BUSINESS OF OUR VENDORS AND ASSOCIATES AND OUR ABILITY TO RAISE ADDITIONAL NEEDED FUNDS. On September 11, 2001, terrorists perpetrated the worst attack in history against the United States. The U.S. economy slowed and the fear of future attacks effected companies' perceived ability to safely conduct business. In addition, certain very significant business failures and other negative business events appear to have stymied investors' confidence in the capital markets (or stock markets) and general consumer confidence. We believe that these events have had a negative impact and will likely continue to have a negative impact for a continued unknown duration of time on our business, the business of our vendors and associates, and our ability to raise additional needed funds. 25 ITEM 2. PROPERTIES Our primary research and development and corporate administrative offices are located in a 34,320 square foot facility containing office and laboratory space, constructed for us in Irvine, California. We also entered into a short-term lease that makes available to us an additional 31,640 square feet of office space in a facility adjacent to our primary Irvine facility. We also sub-leased from UCI, a new 10,000 square foot laboratory and administrative facility in Irvine, California adjacent to the University in which we conduct our functional genomics business activities. Each of our facilities is suitable and adequate to undertake each of our business' current research efforts. Depending on certain clinical trial results, we anticipate extending our short-term lease or leasing additional local laboratory space. The primary Irvine facility is occupied under a non-cancelable lease for seven years and contains two five-year options to renew. The base monthly rent for the primary Irvine facility is currently $40,435 which amount is subject to certain cost of living increases, plus taxes, insurance and common area maintenance. The facility adjacent to the primary Irvine facility is occupied under a six-month non-cancelable lease that contains one five-year option to renew. This lease has expired and we are currently occupying the facility on a month-to-month basis. The base monthly rent is $34,417 and is subject to taxes, insurance and common area maintenance. Under our sub-lease with UCI, sub-lease payments are at the rate of 50% of the basic rent charge, subject to certain conditions, including our continuation of specific grant awards to UCI, and commenced during June 2001. Under those conditions, if UCI is not able to pay all or part of their 50% portion of the sublease payment, we are obligated to pay, in addition to our 50% of the sub-lease payment, the amount that UCI is not able to pay. During 2001, we paid approximately 85% of the sublease obligations. The base monthly rent is $26,064, plus taxes, insurance, common area maintenance and scheduled rent increases for succeeding years over the five-year term of the sublease. We lease a small administrative office in Zurich, Switzerland on an expense-sharing basis. The financial and other terms of this lease are ordinary and are not material to our businesses. ITEM 3. LEGAL PROCEEDINGS We are involved in one matter of litigation that we consider ordinary routine litigation incidental to our business. Our policy is to accrue during a period, as a charge to operations, amounts related to legal matters if it is probable that a liability has been incurred and the amount of loss can be reasonably estimated, as required by SFAS No. 5, Accounting for Contingencies. Although it is very difficult to accurately predict the ultimate outcome of pending litigation and threatened litigation, we believe that it will not materially affect our consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2001. 26 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON STOCK As of March 22, 2002, there were 26,876,951 shares of common stock outstanding held of record by approximately 400 stockholders. On March 22, 2002, the closing bid price of our common stock was $1.93 per share. MARKET FOR SECURITIES Our common stock is traded on the Nasdaq Stock Market under the symbol NEOT. The high and low trades of our common stock reported by Nasdaq during each quarter ended in 2000 and 2001 were as follows:
High Low ------ ------- YEAR 2000 Quarter Ended March 31 $ 17.75 $ 16.81 June 30 $ 10.88 $ 10.69 September 30 $ 8.81 $ 7.38 December 31 $ 4.44 $ 3.88 YEAR 2001 Quarter Ended March 31 $ 5.88 $ 5.58 June 30 $ 4.18 $ 3.94 September 30 $ 3.22 $ 3.00 December 31 $ 3.67 $ 3.55
The high and low trades of our common stock reported by Nasdaq reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may not represent actual transactions. DIVIDENDS We have never paid cash dividends on our common stock and we do not intend to pay dividends in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES The following is a summary of transactions involving sales of our securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"), and have not been previously included in a quarterly report on Form 10-Q. Exemption from registration was relied upon under Section 4(2) of the Securities Act for all transactions listed. As of December 18, 2000, Brighton Capital, Ltd. ("Brighton") acquired a five-year warrant to purchase up to 10,000 shares of our common stock at $6.17 per share for its services as a finder with respect to the negotiation and execution of the sale of our securities to a certain investor on December 18, 2000. We made no solicitation in connection with Brighton's acquisition, other than communications with the purchaser of our securities and Brighton; we obtained representations from Brighton regarding its investment intent, experience and sophistication; and the warrant was not acquired in lieu of the payment of fees for services. This warrant replaces the warrant to purchase 10,000 shares of our subsidiary NeoGene Technologies, Inc.'s common stock at $45.00 per share reported as compensation paid to Brighton for the same transaction in our Report on Form 10-K, as amended, filed on April 25, 2001. As of January 25, 2001, a clinical research organization acquired 50,000 shares of our common stock in a settlement of amounts owing following the termination in November 2000 of clinical studies being conducted on our behalf by the clinical research organization. We made no solicitation in connection with the settlement, other than communications with the organization; we obtained representations from the organization regarding its investment intent, experience and sophistication; and the shares were not acquired as part of a plan of financing. 27 As of April 17, 2001, Brighton acquired a five-year warrant to purchase up to 30,000 shares of our common stock at $15.00 per share for its services as a finder with respect to the negotiation and execution of the sale of our securities to certain investors on April 17, 2001. We made no solicitation in connection with Brighton's acquisition, other than communications with the purchasers of our securities and Brighton; we obtained representations from Brighton regarding its investment intent, experience and sophistication; and the warrant was not acquired in lieu of the payment of fees for services. As of May 18, 2001, Brighton acquired a five-year warrant to purchase up to 29,750 shares of our common stock at $15.00 per share for its services as a finder with respect to the negotiation and execution of the sale of our securities to certain investors on May 17, 2001. We made no solicitation in connection with Brighton's acquisition, other than communications with the purchasers of our securities and Brighton; we obtained representations from Brighton regarding its investment intent, experience and sophistication; and the warrant was not acquired in lieu of the payment of fees for services. As of June 29, 2001, NDDO Research Foundation ("NDDO") acquired 30,000 shares of our common stock pursuant to a license agreement with us. Pursuant to the terms of the agreement, the shares may not be sold until one year has elapsed from the date of signing the agreement, but if at one year from the date of signing the agreement their value is less than $100,000 we will pay the NDDO such sum in cash, our common stock, or other negotiable security as will bring their value up to $100,000. We made no solicitation in connection with the agreement, other than communications with NDDO; we obtained representations from the organization regarding its investment intent, experience and sophistication; and the shares were not acquired as part of a plan of financing. As of August 10, 2001, Gruntal & Co., L.L.C. acquired a five-year warrant to purchase up to 125,000 shares of our common stock at an exercise price of $3.80 per share for its services as investment banker and financial advisor to us. We made no solicitation in connection with Gruntal's acquisition, other than communications with Gruntal; we obtained representations from Gruntal regarding its investment intent, experience and sophistication; and the warrant was not acquired in lieu of the payment of fees for services. As of December 7, 2001, Cantor Fitzgerald & Co. ("Cantor") acquired a five-year warrant to purchase up to 107,451 shares of our common stock at an exercise price of $5.12 per share for its services as underwriter of sales of our securities in October and November 2001. We made no solicitation in connection with Cantor's acquisition, other than communications with the purchasers of our securities and Cantor; we obtained representations from Cantor regarding its investment intent, experience and sophistication; and the warrant was not acquired in lieu of the payment of fees for services. As of December 13, 2001, Cantor acquired a five-year warrant to purchase up to 24,688 shares of our common stock at an exercise price of $5.01 per share for its services as underwriter of sales of our securities in December 2001. We made no solicitation in connection with Cantor's acquisition, other than communications with the purchasers of our securities and Cantor; we obtained representations from Cantor regarding its investment intent, experience and sophistication; and the warrant was not acquired in lieu of the payment of fees for services. As of December 13, 2001, a placement agent acquired a five-year warrant to purchase up to 250,000 shares of our common stock for its services as placement agent to us. This warrant may be exercised with respect to 125,000 shares at an exercise price of $4.04 per share, and the warrant may become exercisable with respect to the remaining 125,000 shares if we complete financing transactions with parties introduced to us by the placement agent. To date, the warrant has become exercisable with respect to an additional 6,667 shares of our common stock at an exercise price of $2.00 per share. We made no solicitation in connection with the placement agent's acquisition, other than communications with the placement agent; we obtained representations from the placement agent regarding its investment intent, experience and sophistication; and the warrant was not acquired in lieu of the payment of fees for services. 28 ITEM 6. SELECTED FINANCIAL DATA The following table presents our selected financial data. Financial data for the years ended 1999, 2000 and 2001 and as of December 31, 2000 and 2001 has been derived from our audited financial statements included elsewhere in this Form 10-K and should be read in conjunction with those financial statements and accompanying notes and with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." Financial data for the years ended 1997 and 1998 and as of December 31, 1997, 1998 and 1999 has been derived from our audited financial statements not included herein. CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE INCEPTION TO YEARS ENDED DECEMBER 31: 1997 1998 1999 2000 2001 2001 - ------------------------------------ ---------- ---------- ---------- ---------- ---------- ------------ Revenues $ - $ - $ - $ - $ 41 $ 538 Operating expenses: Research and development 4,508 8,542 20,058 38,767 20,611 95,453 General and administrative 2,342 3,123 3,465 5,107 7,580 25,045 Settlement of litigation - - 2,458 - - 2,458 ---------- ---------- ---------- ---------- --------- ------------ Loss from operations (6,850) (11,665) (25,981) (43,874) (28,150) (122,418) Other income (expense) 688 60 (9) (2,553) 315 (1,655) ---------- ---------- ---------- ---------- ---------- ------------ Net loss $ (6,162) $ (11,605) $ (25,990) $ (46,427) $ (27,835) $ (124,073) Basic and diluted loss per share $ (1.14) $ (2.07) $ (3.68) $ (4.37) $ (1.46) ========== ========== ========== ========== ==========
BALANCE SHEET DATA AT DECEMBER 31: 1997 1998 1999 2000 2001 - --------------------------------- --------- --------- ---------- --------- --------- Cash, cash equivalents and marketable securities $ 9,132 $ 2,867 $ 9,681 $ 11,470 $ 7,157 Property and equipment, net 3,475 3,252 3,161 3,416 4,689 Total assets 13,198 6,826 13,174 15,781 12,825 Current liabilities 2,478 2,364 4,757 5,110 5,212 Long-term debt, less current portion 177 1,126 637 474 464 Other non-current-liabilities - 46 75 87 362 Minority interest in consolidated subsidiaries - - - 7,280 - Total stockholders' equity $ 10,543 $ 3,290 $ 7,705 $ 2,830 $ 6,787
PHARMACEUTICAL BUSINESS FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE INCEPTION TO YEARS ENDED DECEMBER 31: 1997 1998 1999 2000 2001 2001 - ------------------------------------ --------- --------- --------- --------- --------- ----------- Revenues $ - $ - $ - $ - $ - $ 497 Operating expenses: Research and development 4,508 8,542 19,873 38,131 18,469 92,490 General and administrative 2,342 3,123 3,438 4,643 6,302 23,276 Settlement of litigation - - 2,458 - - 2,458 ---------- ---------- ---------- ---------- ---------- ------------ Loss from operations (6,850) (11,665) (25,769) (42,774) (24,771) (117,727) Other income (expense) 688 60 (9) (1,080) 152 (344) Minority interest in consolidated subsidiaries' net loss - - - (1,464) (48) (1,512) ---------- ---------- ---------- ---------- ---------- ------------ Net loss $ (6,162) $ (11,605) $ (25,778) $ (45,318) $ (24,667) $ (119,583) ========== ========== ========== ========== ========== ============
BALANCE SHEET DATA AT DECEMBER 31: 1997 1998 1999 2000 2001 - --------------------------------- --------- ---------- ------- --------- ------- Property and equipment, net $ 3,475 $ 3,252 $ 3,161 $ 3,416 $ 3,691 Total assets $ 13,198 $ 6,826 $13,172 $ 10,317 $ 9,676
FUNCTIONAL GENOMICS BUSINESS FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE INCEPTION TO YEARS ENDED DECEMBER 31: 1997 1998 1999 2000 2001 2001 - ------------------------------------ ---------- ---------- ---------- ---------- ---------- ----------- Revenues $ - $ - $ - $ - $ 41 $ 41 Operating expenses: Research and development - - 185 636 2,142 2,963 General and administrative - - 27 464 1,278 1,769 ---------- ---------- ---------- ---------- ---------- ----------- Loss from operations - - (212) (1,100) (3,379) (4,691) Other income (expense) - - - (10) 211 201 ---------- ---------- ---------- ---------- ---------- ----------- Net loss $ - $ - $ (212) $ (1,110) $ (3,168) $ (4,490) ========== ========== ========== ========== ========== ===========
BALANCE SHEET DATA AT DECEMBER 31: 1997 1998 1999 2000 2001 - --------------------------------- ------ ------ ------ ------ ------ Property and equipment, net $ - $ - $ - $ - $ 998 Total assets $ - $ - $ 2 $5,464 $3,149
29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of the financial condition and results of our operations in conjunction with the financial statements and the notes to those statements included elsewhere in this report. The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in "Risk Factors," as well as those discussed elsewhere. CRITICAL ACCOUNTING POLICES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of theses financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including cash requirements resulting from estimating: planned research & development activities and general and administrative requirements, the retention of key personnel, certain clinical trial results, maintained market need for our product candidates and other major business assumptions. 30 We believe that our most significant accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements are: Development Stage Enterprise, Liquidity, and Going Concern We have prepared the consolidated financial statements under the assumption that we are a going concern. We are in the development stage and, therefore, we devote substantially all of our efforts to research and development activities. Since our inception, we have incurred cumulative losses of approximately $124.1 million through December 31, 2001, and expect to incur substantial losses over the next several years. We spent cash in 2001 at an average rate in excess of approximately $2.3 million per month, and we expect this rate of spending to continue through the reporting of results from our current pivotal clinical trial for Neotrofin in Alzheimer's disease. Our burn-rate after that will be a function of the result of that trial and the timing of our phase 3 clinical study of satraplatin in prostate cancer. If the Alzheimer's trial is positive, we would expect our burn-rate to remain stable. If, based on the data, we decide not to initiate another pivotal study of Neotrofin in Alzheimer's disease, our burn-rate will decrease significantly. At the present time, our business does not generate cash from operations needed to finance our short-term operations. We will rely primarily on (a.) raising funds through the sale of our securities including under our Sales Agreement with Cantor Fitzgerald & Co., which is on a "best-efforts" basis, and/or (b.) out-licensing our technology, to meet all of our short-term cash needs. We have generated operating losses since our inception and our existing cash and investment securities, including net cash proceeds of $5.8 million raised in March 2002, are not sufficient to fund our current planned pharmaceutical and functional genomics operations for the next 12 months. Therefore, we will need to seek additional funding by the end of July 2002, or sooner, through public or private financings, including equity financings, and through other arrangements to continue operating our businesses. As has been stated by our independent public accountants in their opinion, our current financial position raises substantial doubt as to our ability to continue as a going concern. The results of a clinical trial on our lead drug candidate Neotrofin should be available during the second quarter of 2002. If the results of this trial are sufficiently positive, we expect to be able to raise the capital necessary to fund our currently planned pharmaceutical and functional genomics operations. Additionally, we anticipate that our long-term business plans require that we enter into collaborative partnership agreements and strategic alliance agreements with larger pharmaceutical companies to co-develop, manufacture and market our product candidates. If the results of this trial are negative (or not sufficiently positive), we may not be able to raise additional funds on favorable terms, if at all. Accordingly, we would be forced to significantly change our business plans and restructure our operations to conserve cash, which would likely involve some, combination, or all of the following: - Out-license or sell some or all of our intellectual, technological, and/or tangible property not presently contemplated and at terms that we believe would not be favorable to us; - Reduce the size of our workforce, including the number of our scientific personnel; - Reduce the scope and nature of our research and drug development activities including the possible termination of clinical trials; and - Terminate operating leases and other contractual arrangements. Although no assurance can be given, we believe that we can continue to operate as a going concern and, accordingly, our consolidated financial statements have been prepared assuming that we will continue as a going concern. Consequently, our consolidated financial statements do not include adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that would be required if we were not able to continue as a going concern. Principles of Consolidation Our consolidated financial statements include our accounts including those of our wholly owned and majority owned subsidiaries. We eliminated all significant intercompany accounts and transactions. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments of commercial paper and demand notes with original maturities of 90 days or less. Marketable Securities and Short-Term Investments We classify investments in debt and equity securities among three categories: held-to-maturity, trading, and available-for-sale. As of December 31, 2001, all of our debt and equity securities holdings were categorized as available-for-sale. We carry available-for-sale securities at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive income (loss) in stockholders' equity. We use quoted market prices to determine the fair value of these investments. Prepaid Expenses and Refundable Deposits Prepaid expenses are deferred and later recorded as an expense during the period benefited. Deposits are expected to become refundable at a later date. Property and Equipment Purchased or Leased We carry property and equipment at historical cost, less accumulated depreciation and amortization. When property and equipment are disposed of, the related cost and accumulated depreciation are removed from the accounts and 31 any resulting gain or loss is reflected in income. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: Equipment 5 to 7 years Leasehold Improvements The shorter of the estimated useful life or lease term Research and Development We expense all research and development activity costs in the period incurred. Stock-Based Compensation We account for all of our stock based compensation in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (or SFAS 123) that encourages companies to recognize stock based compensation using a fair market value methodology. Under SFAS 123, the fair value of a stock option (or its equivalent) granted by a public entity shall be estimated using an option-pricing model (for example, the Black-Scholes or binomial model) that takes into account certain assumptions. However, SFAS 123 permits continued use of accounting for employee stock based compensation using the intrinsic value methodology of accounting promulgated by Accounting Principles Board (or APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (or APB 25). Under the intrinsic method, stock based compensation is measured as the excess, if any, of the quoted market price of our common stock at the measurement date over the exercise price. We recognize non-employee stock based compensation or payments using a fair market value methodology promulgated by SFAS 123. We recognize employee stock based compensation using the intrinsic value methodology promulgated by APB 25. Basic and Diluted Net Loss Per Share We calculate basic and diluted net loss per share using: the weighted average number of common shares outstanding and the net loss, less preferred stock dividends, during each year, respectively. We exclude all antidilutive common stock equivalents from the basic and diluted net loss per share calculation. Use of Estimates We make certain estimates to prepare our financial statements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses reported during the reporting period. Actual results could differ from our estimates. We have estimated that our current working capital plus funds raised or to be raised subsequent to year end will be sufficient for us to continue as a going concern and therefore have prepared the financial statements on that basis. That basis includes estimating future cash requirements of planned research & development activities and general and administrative requirements, the retention of key personnel, certain clinical trial results, maintained market need for our product candidates, and other major business assumptions. If these estimates prove to be wrong, we may not be able to continue as a going concern. Revenue Recognition We recognize revenue from each sale contract over each sale contract's operative life and after all contingencies related to us being due receipt of such revenue are eliminated. Income Taxes We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement bases and tax bases of existing assets and liabilities. We recorded a valuation allowance equal to our net deferred tax asset. RESULTS OF OPERATIONS From our inception in June 1987 through December 31, 2001, we have devoted our resources primarily to fund research and development, and incurred a cumulative net loss of approximately $124.1 million. During this period, we had insignificant revenues from grants and licensing fees. Separate segment information is presented for our pharmaceutical business and functional genomics business. Pharmaceutical Business 32 We had no revenues during each year in the three-year period ended December 31, 2001. The decrease in research and development expense during 2001 was due primarily to us internally managing the majority of our clinical trials instead of using more expensive outside clinical research organizations. However, for that purpose, additional expenses from an increase in personnel, consultants and office space rent offset a portion of this decrease. The most significant clinical trials we conducted during 2001 were a pivotal phase 2 clinical trial for Neotrofin in Alzheimer's disease, other Neotrofin clinical trials for other neurology indications, and Neoquin, in the United Kingdom, for the treatment of bladder cancer. We also incurred additional research and development expenses to broaden our pharmaceutical platform base and further development of new drug candidates, including activities to secure drug supplies and to prepare clinical protocols for satraplatin, and the identification of compounds in our psychosis platform. Overall during 2001, research and development expenses increased in the category of salaries due to additional personnel, salary increases and related benefits, increases in pre-clinical expenses related to broadening our pharmaceutical platforms, and increases in consulting expenses primarily due to internally managing the majority of our clinical trials. Research and development expenses increased during 2000 and 1999 due primarily to accelerated clinical and pre-clinical trials to commercialize Neotrofin. These expenses were due primarily to the increased number and length of our clinical trials and manufacturing and formulation of drug compound, all of which were conducted by outside organizations. Internally, research and development expenses increased in the category of salaries due to additional personnel, salary increases and related benefits. In addition, during 1999, we began allocating a higher proportionate share of overall rent expense to research and development as a result of research and development utilizing a higher proportion of our primary Irvine facility. The increases in general and administrative expense in 2001, 2000 and 1999 were each due primarily to increases in personnel, salary increases and related benefits, recruiting, relocation, travel and depreciation and amortization. In addition, we paid a break-up penalty fee of approximately $405,000 in 2001 related to the cancellation of the first debenture tranche of $10 million under the April 17, 2001 financing and we incurred approximately $610,000 in investment banking consulting services expense in exchange for warrants to purchase shares of our common stock. In addition, 1999 expenses increased due to increases in investor relations expense, regulatory agency fees and licenses, and printing expense, offset by a lower proportionate share of overall rent expense to general and administrative as a result of general and administrative utilizing a lower proportion of our primary Irvine facility. We settled a single litigation matter in 1999 that resulted in a non-recurring, non-cash expense of approximately $2.5 million by issuing shares of NeoTherapeutics common stock. The decrease in interest income during 2001 was due to lower average balances in our investment accounts offset slightly by higher interest rates on our investments. The increase in interest income in 2000 was due primarily to a full year utilization of invested funds. The decrease in interest income in 1999 was due to lower average balances in our investment accounts. The decrease in interest expense during 2001 was due primarily to the non-recurrence of a non-cash charge incurred in 2000 of approximately $1.6 million of amortization of debt discount and issuance costs associated with convertible debt that was issued and converted into common stock during 2000, partially offset by an increase in interest expense associated with capital lease obligations due to higher interest rates and a higher average lease obligation balance. Interest expense in 1999 increased primarily due to interest expense associated with a higher average lease obligation balance. Functional Genomics Business Revenue was approximately $41,000 during 2001 primarily from recognizing deferred licensing fees earned during 2001 from Pfizer, Inc. and from a single product sale. We did not have any revenue during 2000 or 1999. The increase in research and development expense during 2001 was due primarily to a continued ramp up of operations in 2001 versus a year of beginning operational ramp-up, organizing and strategizing in 2000. The year 2001 included a significant increase in personnel that increased salary and related benefits and other expenses, offset slightly by a decrease in consulting expense. Additionally, we occupied new facilities under a sub-lease that commenced in June 2001. Under our new sub-lease agreement, we paid for approximately 85% of the expenses of the new facility (see "Properties" for the significant terms of this sub-lease agreement). Prior to 2001, we had no direct occupancy expense related to our functional genomics business. The increase in research and development during 2000 was due primarily to activities associated with beginning operating and continued organizing and strategizing the functional genomics business that included an increase in personnel that increased salary and related benefit and other expenses, an increase in consulting 33 expense, and an approximate $400,000 increase in research grants paid. In 1999, research and development expenses consisted primarily of salaries and related benefit and other expenses, research grants of approximately $150,000, and other costs associated with the start up of our functional genomics business. A significant portion of the general and administrative expense incurred by the functional genomics business is allocated from NeoTherapeutics to NeoGene. The increase in general and administrative during 2001 was due primarily to a continued ramp up of operations in 2001 versus a year of beginning operational ramp-up, organizing and strategizing in 2000. 2001 included a significant increase in the allocation of administrative personnel costs from NeoTherapeutics to NeoGene due to the hiring of executive and administrative personnel primarily at NeoTherapeutics that increased salary and related benefits and other expenses. Additionally, our new sub-lease agreement and the fact that we paid for approximately 85% of the expenses under the sub-lease during 2001 caused an increase in occupancy expense (see "Properties" for the significant terms of this sub-lease agreement). The increase in general and administrative expense during 2000 was due primarily a ramp up of organizational activity requiring an increase in the allocation of administrative personnel costs from NeoTherapeutics to NeoGene that increased salary and related benefits and other expenses. General and administrative expenses during 1999 were primarily allocated salary expenses associated with the start up of our functional genomics business. The increase in interest income during 2001 and 2000 was due to higher average investment balances. In the fourth quarter of 2000, we sold approximately $7 million in convertible preferred stock in our NeoGene subsidiary most of which we purchased back in the third quarter of 2001. We had no interest income during 1999. We had no interest expense during 2001, 2000 or 1999. FINANCIAL CONDITION General At the present time, our business does not generate cash from operations needed to finance our short-term operations. We will rely primarily on (a.) raising funds through the sale of our securities including under our Sales Agreement with Cantor Fitzgerald & Co., which is on a "best-efforts" basis, and/or (b.) out-licensing our technology, to meet all of our short-term cash needs. We have generated operating losses since our inception and our existing cash and investment securities, including net cash proceeds of $5.8 million raised in March 2002, are not sufficient to fund our current planned pharmaceutical and functional genomics operations for the next 12 months. Therefore, we will need to seek additional funding by the end of July 2002, or sooner, through public or private financings, including equity financings, and through other arrangements to continue operating our businesses. As has been stated by our independent public accountants in their opinion, our current financial position raises substantial doubt as to our ability to continue as a going concern. The results of a clinical trial on our lead drug candidate Neotrofin should be available during the second quarter of 2002. If the results of this trial are sufficiently positive, we expect to be able to raise the capital necessary to fund our currently planned pharmaceutical and functional genomics operations. Additionally, we anticipate that our long-term business plans require that we enter into collaborative partnership agreements and strategic alliance agreements with larger pharmaceutical companies to co-develop, manufacture and market our product candidates. If the results of this trial are negative (or not sufficiently positive), we may not be able to raise additional funds on favorable terms, if at all. Accordingly, we would be forced to significantly change our business plans and restructure our operations to conserve cash, which would likely involve some, combination, or all of the following: o Out-license or sell some or all of our intellectual, technological, and/or tangible property not presently contemplated and at terms that we believe would not be favorable to us; o Reduce the size of our workforce, including the number of our scientific personnel; o Reduce the scope and nature of our research and drug development activities including the possible termination of clinical trials; and o Terminate operating leases and other contractual arrangements. Although no assurance can be given, we believe that we can continue to operate as a going concern and, accordingly, our consolidated financial statements have been prepared assuming that we will continue as a going concern. Consequently, our consolidated financial statements do not include adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that would be required if we were not able to continue as a going concern. 2001 Cash Flow Activities At December 31, 2001, we had working capital of approximately $2.8 million that included cash and equivalents of approximately $0.7 million and short-term investments of approximately $6.4 million. In comparison, at December 31, 2000, we had working capital of approximately $7.2 million that included cash and cash equivalents of approximately $6.2 million and short-term investments of approximately $5.3 million. The $4.4 million decrease in net working capital during 34 the year ended December 31, 2001 is attributable primarily to the loss of $27.9 million, less non-cash compensation and other items of approximately $2.8 million, less changes in operating assets and liabilities of $0.2 million, plus the purchase of Series A Preferred Stock of NeoGene for $5.5 million and 7% Series C Preferred Stock of NeoTherapeutics for $0.3 million and equipment purchases of $1.4 million and payments on capital lease obligation of $0.7 million, partially offset by the sale of approximately $28.4 million of our common stock. Historical Funding We historically financed our operations primarily through sales of securities, borrowings, grants and deferred payment of salaries and other expenses from related parties. During 1993, we issued 40,000 shares of common stock at the fair market value on the date of issuance of $1.35 per share to a financial consultant in exchange for $54,000 of investment banking services. During 1994, we sold 13,000 shares of restricted common stock at $2.50 per share through a private placement for $32,500 in cash to three investors. During 1995, we sold 22,000 shares of restricted common stock at $2.50 per share through a private placement for $55,000 in cash to six investors. During 1996, we sold 266,800 shares of restricted common stock at $2.50 per share through a private placement for $633,650 in cash. In June 1996, we filed a registration statement with the Securities and Exchange Commission offering to the public 2,500,000 units (or the Units). Each Unit consisted of one share of our common stock and one warrant to purchase one share of our common stock. The registration statement became effective on September 26, 1996, and on October 1, 1996, we sold all of the Units in exchange for $17,363,003 in cash proceeds, net of public offering costs. On October 11, 1996, the principal underwriter of the offering exercised a portion of its overallotment option and purchased from us 200,000 Units in exchange for $1,389,280 in cash, net of transaction costs. The Units separated immediately following issuance and the common stock and warrants that made up the Units traded as separate securities. The warrants expired in September 2001. On March 27, 1998, we executed a $15 million Private Equity Line of Credit Agreement (the "Equity Line Agreement") with a private investor that provides for minimum and maximum puts ranging from $250,000 to $2.0 million, depending on our stock price and trading volume. At the time of each put, the investor receives a discount of 12% from the then current average market price, as determined under the Equity Line Agreement. Pursuant to the Equity Line Agreement, we also issued to the investor warrants to purchase 25,000 shares of our common stock at an exercise price of $11.62 per share. Under the Equity Line Agreement, we received proceeds of approximately $3.55 million from sales of 506,049 shares of our common stock in 1998, $1.95 million from sales of 211,393 shares of our common stock in 1999, and during January 2000, we received $2.0 million from the sale of 186,961 shares of our common stock. The agreement expired in February 2001. On August 31, 1998, certain of our officers and directors exercised non-qualified stock options and purchased 62,000 shares of our common stock. The exercise price of the stock options was at $4.50 per share for 50,000 shares and $5.13 per share for 12,000 shares for an aggregate purchase price of $286,560, represented by notes issued by the purchasers. The notes are full recourse promissory notes bearing interest at 7% per annum, and are collateralized by the stock issued upon the exercise of the stock options. Interest and principal are payable two years after the issue dates. The notes are included as a component of equity in the financial statements. On May 31, 1999, we sold to a group of private investors 400,000 shares of our common stock for $4.0 million in cash. The investors also received five-year warrants to purchase 80,000 shares of our common stock at an exercise price of $15 per share. On July 27, 1999, we completed a secondary public offering and sold 1,150,000 shares of our common stock, including the underwriters' overallotment, for $8.7 million in cash, net of offering costs. On November 30, 1999, we sold to two private investors, 845,594 shares of our common stock, for $9.4 million in cash, net of offering costs, and warrants to purchase 126,839 shares of our common stock at $14.24 per share. Based on a reset formula contained in the agreement, in March 2000 we issued to the investors 43,383 additional shares of our common stock for no additional consideration. The investors waived a second reset as partial consideration under a different financing transaction. On December 15, 1999, we entered into a settlement agreement for a previous litigation matter. Under the terms of the settlement, the shareholder forfeited 678,835 shares of common stock and warrants valued at $1,697,090 and we issued 332,630 shares of commons stock and warrants valued at $4,155,449. We charged the difference of $2,456,359 to operations. On February 25, 2000 we sold to two private investors 520,324 shares of our common stock for $8.0 million in 35 cash. The investors also received five-year warrants to purchase 104,000 shares of our common stock at the price of $21.00 per share. On April 6, 2000, we entered into a financing transaction with two private investor groups. The transaction consisted of (a) $10 million in 5% subordinated convertible debentures due April 6, 2005, (b) redeemable warrants to purchase up to 4 million shares of our common stock over a two year period and (c) five-year warrants to purchase from 115,000 shares up to 265,000 shares of our common stock at an exercise price of $19.67 per share. The redeemable warrants can be redeemed in part by us as frequently as several times per week, subject to average daily volume restrictions and if the market price of our common stock is above $5.00 per share and, when called for redemption, can be exercised by the investor at 97% of the per share closing market price (i.e., a discount of 3%) and are exercisable at the sole option of the investors at the price of $33.75 per share. During 2000, the investor converted the $10 million of debentures into 1,555,409 shares of our common stock plus 38,768 shares of our common stock in payment of accrued interest. Also in 2000, we called and the investors exercised 586,400 of our redeemable warrants for 586,400 shares of our common stock in exchange for $5,120,654 in cash. At both December 31, 2000 and 2001, there were 3,413,600 redeemable warrants outstanding. The warrants expire in June 2002. On May 1, 2000 we completed a private placement of 500,000 shares of our common stock for $7.0 million in cash. The investors also received five-year warrants to purchase 125,000 shares of our common stock at an exercise price of $17.50 per shares. On September 21, 2000, we sold 111,110 shares of Series A convertible preferred stock of our majority owned subsidiary, NeoGene, for $5 million and a five-year warrant to purchase up to (i) 80,000 shares of our common stock at an exercise price of $10.47 per share and (ii) 22,676 shares of NeoGene common stock at an exercise price of $45.00 per share. The fair market value of the warrant was estimated at $411,040 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0 percent; expected volatility of 74.97 percent; risk free interest rate of 6.01 percent; and an expected life of five years. The fair value of the warrant was estimated at $540,301 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0 percent; expected volatility of 74.97 percent; risk free interest rate of 5.93 percent; and an expected life of three years. On August 13, 2001, NeoTherapeutics purchased the Series A Preferred Stock of NeoGene for $5.5 million representing the $5.0 million face value of the preferred stock plus a $500,000 redemption fee. The difference of approximately $0.8 million between the book value of the preferred stock and the amount paid was recorded as a charge to accumulated deficit. We also paid accrued dividends of approximately $220,000 to the holders of the preferred stock. On September 29, 2000, we entered into an agreement to sell 968,524 shares of our common stock to two private investors for $8 million cash and a five-year warrant to purchase 193,706 shares of our common stock at $10.13 per share. The fair value of the warrant was estimated at $847,657 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0 percent; expected volatility of 74.97 percent; risk free interest rate of 5.88 percent; and an expected life of five years. The agreement contains a reset formula which provides for the investor to obtain at nominal cost, additional shares of our common stock based on the market price of our common stock determined thirty and sixty days after the effective date of the registration statement to be filed for this transaction. On January 30, 2001, the first vested period ended which resulted under the reset formula in the issuance of 1,070,336 shares of our common stock to the investors. As part of the April 17, 2001 transaction described below, we agreed to issue an additional 900,000 shares of our common stock to the investors under the second and final reset under the agreement. We received no proceeds upon the investors' exercise of the resets. On December 18, 2000, we entered into an agreement between our majority owned subsidiary, NeoGene, and an institutional investor for the issuance and sale of NeoGene Series B convertible preferred stock and warrants for aggregate consideration of $2.0 million. Under the provisions of the agreement, we issued and sold to the investor a total of 44,445 shares of NeoGene Series B Convertible Preferred Stock, at a purchase price of $45 per share, and issued a five-year warrant to purchase a total of 9,387 shares of NeoGene common stock, at an exercise price of $45 per share. The fair value of the warrant was estimated at $250,351 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0 percent; expected volatility of 88.96 percent; risk free interest rate of 5.14 percent; and an expected life of three years. The investor also received a five-year warrant to purchase an aggregate of 30,000 shares of our common stock, at an exercise price of $6.10 per share. The fair value of the warrant was estimated at $101,700 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0 percent; expected volatility of 88.96 percent; risk free interest rate of 5.10 percent; and an expected life of five years. We also granted an exchange right to the investor that will allow the investor to exchange its shares of NeoGene Series B Preferred for our preferred stock. The exchange right grants the investor the right, at its option, at any time and from time to time after June 18, 2001, to exchange all or a portion of the NeoGene Series B Preferred shares then held by the investor for a number of shares of our designated convertible preferred stock. In June 2001, the investor exercised its right to exchange all of the NeoGene Series B Preferred stock then held by the investor for 200 shares of our 7% Series C 36 convertible Preferred stock. Under the terms of the exchange right, the investor forfeited 4,693 or 50% of the previously granted five-year warrants to purchase shares of NeoGene common stock at an exercise price of $45 per share. The shares of our 7% Series C Preferred Stock were redeemable, under certain conditions at the option of the holder, and each share is convertible into a number of shares of our common stock equal to $10,000 divided by the lesser of (i) 100% of the average of the lowest seven closing bid prices of our common stock in the previous 30 trading days, or (ii) $5.97. In August 2001, the holder of our 7% Series C Preferred Stock converted 170 shares of our 7% Series C Preferred Stock into 485,591 shares of our common stock. In September 2001, we purchased the remaining 30 shares of our 7% Series C Preferred Stock for $300,000 plus accrued dividends and a settlement fee of approximately $72,000. The 30 shares of our 7% Series C Preferred Stock are recorded as an offset to Stockholders' Equity. 2001 Fundings and Other Related Events and Information We financed our 2001 business operations primarily through sales of securities. On January 2, 2001, we filed with the Securities and Exchange Commission a "shelf" registration statement permitting the sale of our securities with a maximum aggregate public offering price of $50 million. At March 22, 2002, approximately $10 million remained available for sale under the registration statement. On July 2, 2001, we filed with the Securities and Exchange Commission a registration statement permitting the sale by us, from time to time, of up to $8.4 million of our common stock directly into the public trading market for our common stock. The common stock sold pursuant to this registration statement will be offered through an underwriter engaged by us on a "best efforts" basis. At March 27, 2002, approximately $8 million remained available for sale under the registration statement. On April 6, 2001, in a special meeting, our stockholders approved an increase in authorized common stock from 25 million to 50 million shares. There were 26,876,951 issued and outstanding shares of our common stock as of March 22, 2002. In addition, security holders held options and warrants as of March 22, 2002 which, if exercised, would obligate us to issue up to an additional 11,068,822 shares of common stock, of which 3,913,693 shares are subject to options or warrants which are currently exercisable at the sole election of the holder. A substantial number of those shares, when issued upon exercise, will be available for immediate resale in the public market. During 2001, we raised $28.3 million and issued 9,979,340 shares of our common stock through the following transactions: o On January 25, 2001, we issued to a vendor in settlement of our obligation to them, 50,000 shares of our common stock and a five-year warrant to purchase 50,000 shares of our common stock at $3.50 per share. o On January 30, 2001, we issued to two investors 1,070,336 shares of our common stock under the first reset provision contained in the adjustable warrants issued in connection with the September 29, 2000 sale of 968,524 shares of our common stock for $8 million. On May 15, 2001 we also issued an additional 900,000 shares of our common stock to the two investors in respect of the second and final reset provision. We did not receive any consideration as a result of issuing shares of our common stock pursuant to the reset provisions of this financing transaction. The reset provisions were part of an earlier sale of our common stock and were previously accounted for as a partial allocation of the proceeds of that sale to common stock. As such, no further accounting was necessary on the date the reset provision was exercised. o On February 2, 2001, we sold 1,627,756 shares of our common stock under the shelf registration statement to a private investor for $3.5 million in cash. o On March 8, 2001, we sold 1,250,000 shares of our common stock under the shelf registration statement to a private investor for $5 million in cash. The investor also received five-year warrants to purchase up to 125,000 shares of our common stock at the exercise price of $5.00 per share. o On April 17, 2001, we entered into a financing transaction with two private investor groups which provide, among other things, for (a) the sale of 1,176,472 shares of our common stock under the shelf registration statement for $6.0 million cash, (b) an option to place with the investor groups two tranches of convertible debenture notes of $10 million and $8 million within approximately 30 days and seven months 37 of the initial closing, respectively, at our option, and (c) five-year warrants exercisable at 125% of the market price of the date of the respective closing of each of the aforementioned debenture issuances for a number of shares equal to 20% of the number of shares into which the debentures are initially convertible. We did not exercise the first option for the debenture tranche of $10 million and paid a break-up fee of $405,000 in July 2001, pursuant to the terms of the financing transaction of May 17, 2001. This fee was charged to general and administrative expense in the second quarter of 2001. On November 13, 2001, we decided not to exercise the second option for the debenture tranche of $8 million, pursuant to the April 17, 2001 financing transaction, as amended. o On May 17, 2001, we sold to the aforementioned two private investor groups 1,400,000 shares of our common stock under the shelf registration statement for $5.95 million in cash. The investors also received five-year warrants to purchase up to 280,000 shares of our common stock at an exercise price of $6.00 per share. o On June 22, 2001, we sold to our employees through our Employee Stock Purchase Plan (or ESPP), 40,390 shares of our common stock for approximately $90,100. Pursuant to the ESPP, the shares were sold at a 15% discount to market on the date of purchase. o On August 14, 2001, we sold 600,000 shares of our common stock under the shelf registration statement to an institutional investor for $2,010,000. o On June 12, 2001, we entered into two securities sales agreements with an investment banking firm acting as an underwriter to sell our common stock on a "best efforts" basis with the maximum aggregate public offering price under both agreements combined of $33.4 million. The securities were offered as part of a Controlled Equity Offering, or CEO(SM). Under one of the sales agreements, we may sell up to $8.4 million of our common stock "at the market" or directly into the established trading market for our common stock. Under the other sales agreement, we may sell up to $25 million of our common stock in any manner other than "at the market". Under each agreement, if we and the underwriter agree to sell our common stock on certain terms, the underwriter will use its commercially reasonable efforts to sell our securities up to the amount agreed upon, but will not be required to sell any specific number or dollar amount of our securities. The net proceeds from the sales will be the aggregate sales price at which our securities were sold after deduction for the underwriter's commission/discount of up to 4%. We will issue to the underwriter five-year warrants to purchase shares of our common stock in an amount equal to 10% of the number of shares of common stock sold by us pursuant to the offering at an exercise price per share equal to 130% of the volume weighted average price at which such shares were issued. On October 19, 2001, we and the investment banking firm executed amendments to the sales agreements previously entered into by the investment banking firm and us on June 12, 2001, and to the advisory agreement previously entered into on April 11, 2001 and amended on June 12, 2001. The amendments relate primarily to modifications of the compensation provisions of the sales agreements. Through placement notices under each sales agreement, during October and November of 2001, 949,710 shares of our common stock were sold pursuant to the $25 million sale agreement for aggregate cash proceeds of $3.8 million and approximately 124,800 shares of our common stock were sold pursuant to the $8.4 million sale agreement for aggregate cash proceeds of $0.4 million. o On December 10, 2001, we sold to certain institutional investors 519,480 shares of our common stock under the shelf registration statement for cash proceeds of approximately $2.0 million. o On December 13, 2001, under a second placement notice related to the aforementioned $25 million sales agreement, we sold 246,883 shares of our common stock for aggregate cash proceeds of approximately $1.0 million. o On December 21, 2001, we sold to our employees through our Employee Stock Purchase Plan (or ESPP), 23,513 shares of our common stock for $67,953. Pursuant to the ESPP, the shares were sold at a 15% discount to market on the date of purchase. We also entered into the following financing transactions in March 2002: o On March 12, 2002, we sold 2,575,000 shares of our common stock at $2.00 per share for $5.15 million 38 of gross cash proceeds off of our shelf registration statement. The investors also received warrants to purchase up to 643,750 shares of our common stock at an exercise price of $2.75 per share. Offering costs of this transaction were approximately $230,000. o On March 15, 2002, we sold 525,000 shares of our common stock at $2.00 per share for $1.05 million of gross cash proceeds off of our shelf registration statement. The investors also received warrants to purchase up to 131,250 shares of our common stock at an exercise price of $2.75 per share. Offering costs of this transaction were approximately $130,000. During 2001, we contracted two functional genomics' technology out-licensing agreements with Pfizer, Inc. and received initial cash payments aggregating $300,000. RELATED PARTY TRANSACTIONS During 1987 and 1988, Alvin J. Glasky, Ph.D., our Chief Executive Officer (or CEO) who is also a major stockholder of ours, loaned a total of $270,650 to us for working capital purposes, of which $250,000 plus $2,000 of accrued interest was canceled in December 1988 in exchange for the issuance of 28 Revenue Participation Units (or RPU's). The RPU's were converted into 112,000 shares of our common stock. From 1989 through 1993, we borrowed an additional $757,900 from Dr. Glasky, which, together with accrued interest of $300,404, aggregated $1,058,304 on December 31, 1993, at which time we issued 200,000 shares of common stock to Dr. Glasky in exchange for cancellation of $500,000 of loans made to us. The remaining $257,900 in principal and $300,404 of accrued interest were converted to a $558,304 promissory note which, as amended from time to time, is currently unsecured, and is payable upon demand. Interest is payable monthly at the annual rate of 9%. The note was partially repaid in 2000 when we advanced cash to Dr. Glasky to pay payroll taxes arising from his exercise of a warrant for 88,173 shares of common stock at $3.75 per share in August 2000. The note was partially repaid in 2001. The note balance at December 31, 2001 was $135,574. Assignment of Patents by Chief Executive Officer Dr. Glasky assigned to us all of his rights in nine patents. In connection with the assignment of these patents to us, we entered into royalty agreements with Dr. Glasky (or CEO Agreements), which expire concurrently with the expiration of the underlying patents and any additional patents derived from the underlying patents. Under each of the CEO Agreements, as amended, we are obligated to pay Dr. Glasky a royalty of two percent (2%) of all revenues derived by us from the use and sale by us of any products or methods included in the patents. Further, in the event that we terminate Dr. Glasky's employment without cause, the royalty rate under each CEO Agreement will increase from two percent (2%) to five percent (5%). Finally, in the event of Dr. Glasky's death, the family or estate is entitled to continue to receive under each CEO Agreement royalties at a rate of two percent (2%) for the duration of the respective CEO Agreement. McMaster University Agreement On July 10, 1996, we entered into a license agreement with McMaster University (or McMaster) that allows us the use of certain technologies developed by McMaster covered in the patents filed jointly by us and McMaster (US Patent Nos. 5,447,939, 5,801,184, 6,027,936, 6,338,963, and 6,350,752), all of which are also encumbered by CEO Agreements. Under the agreement, we paid a one time licensing fee of $15,000 and are obligated to pay to McMaster an annual royalty of five percent (5%) on net sales of products containing compounds developed by McMaster. In July 1997, we began, and have continued making, annual minimum royalty payments of $25,000. Director and Officer Notes for the Exercise of Equity Instruments We made loans to certain of our directors and officers for the exercise of stock options or the purchase of stock. We loaned $286,560 in 1998, and $435,649 in 2000. During 2000, one individual paid $61,560 back to us and during 2001, in connection with the settlement of a litigation matter, we forgave a $45,000 note to one individual. At December 31, 2001, $615,649 remained due to us from directors and officers for the purchase of shares of common stock or the exercise of stock options. These notes accrue interest at rates between 7% and 9% and are classified as an offset to stockholders' equity. CONTRACTUAL AND COMMERCIAL OBLIGATIONS Debt and Capital Leases In September 1998, we entered into a Master Note and Security Agreement (or the Note) with a finance company affiliated with our bank whereby we borrowed $1.5 million under the Note for equipment and computer software purchases. Borrowings are collateralized by substantially all of our assets, exclusive of our patents and other intellectual properties. The note requires monthly repayments of $41,277, bears interest at approximately 12% and is due March 2002, at which time a final principal installment of $150,000 is due. We have also granted to the finance company a warrant to purchase up to 13,459 shares of our common stock at $7.43 a share which was valued at $45,000 using the Black-Scholes option-pricing 39 model with the following assumptions: Risk-free interest rate of 5.02 percent; expected life of three years; expected volatility of 75.3 percent. The warrant was recorded as a prepaid expense and is being amortized using the effective interest method over the life of the note. In September 2000, we financed the premium amounting to $322,000 for a three-year insurance policy through a borrowing from the insurer. The loan was payable through August 2001 in monthly installments of $30,556 including principal and 8.57% annual interest. At December 31, 2000, approximately $210,000 related to this note was classified on the balance sheet as accrued expenses. On September 22, 2000 we signed an agreement to lease up to $2.5 million in equipment from a major equipment leasing and remarketing company (or lessor). Under the terms of the agreement, we can draw up to $2.5 million through September 2001 and are required to make quarterly payments over three years on cumulative advances drawn by us. We drew a total of $1,029,381 under the lease agreement. The lease is collateralized by the underlying equipment. At the conclusion of the lease term, the equipment may be purchased for fair value at that time, re-marketed by the lessor, or re-leased by us. In October 2000, we financed $151,249 of laboratory equipment through an equipment vendor under a capital lease agreement. Under the terms of the agreement, we are required to make monthly payments of $4,839 over three years, including effective interest at approximately 9% per annum. Future installments of debt principal on capital lease obligations are as follows:
Year Ending December 31: Amount ------------ ---------- 2002 $ 654,434 2003 315,355 2003 148,350 ---------- $1,118,139 ==========
Additionally, under our current capital lease obligations arrangements, we will be obligated to pay approximately $69,000 in interest. Facility, Property and Equipment Operating Leases We lease certain facilities for our research and development and administrative functions and its subsidiaries. Certain leases also require scheduled annual fixed rent increases, payments of property taxes, insurance and maintenance. Our functional genomics segment sub-leases a facility from its collaboration partner (see "Joint Venture" below) that requires us to pay 50% of the lease payments plus any shortfall by our collaboration partner. In 2001, we paid approximately 85% of the minimum lease requirements under this lease representing a contingent rental incurred in excess of our 50% commitment of approximately $102,000 in 2001. The minimum lease requirements below include 100% of the minimum lease requirements to be made under this lease. In addition, we lease certain office and telephone equipment under non-cancelable operating leases. 40 Minimum lease requirements for each of the next five years and thereafter under the property and equipment leases are as follows:
Year ending December 31: Amount ------------------------ ----------- 2002 $ 1,049,400 2003 944,200 2004 681,600 2005 405,800 2006 171,500 ----------- $ 3,252,500 ===========
Research and Fellowship Grants At December 31, 2001, we had committed to pay approximately $419,000 during 2002 and an aggregate of approximately $528,000 from 2003 through 2005, principally to the University of California, Irvine to conduct general scientific research programs. Joint Venture In September 1999, we entered into a three-year joint venture agreement with the University of California, Irvine (or UCI) to assist in the marketing and commercialization of discoveries made by certain members of its functional genomics science department. We are obligated under the agreement to fund the joint venture for three years with minimum payments of $2.0 million over the life of the agreement. As of December 31, 2001 no obligation remains under this minimum obligation. The agreement is cancelable by either UCI or us upon giving thirty days notice. We have the right of first refusal to acquire the licensing rights to any new discoveries and UCI retains ownership rights to all discoveries under the agreement. FINANCIAL MARKET RISKS We are exposed to certain market risks associated with interest rate fluctuations and credit risk on our marketable securities and borrowing arrangements. All investments in marketable securities and borrowing arrangements are entered into for purposes other than trading. Our primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. We do not utilize hedging contracts or similar instruments. Our investments during 2001 and as of December 31, 2001 are fixed rate, short-term corporate and government notes and bonds, which are available for sale. Because the interest rates are fixed, changes in interest rates affect the fair value of these investments but do not affect the interest earnings. Because these financial instruments are considered "available for sale," all changes in fair value is recorded in stockholders' equity as "Unrealized (losses) gains on available-for-sale securities" until the investment is either sold or matures, at which time the gain or loss, if any, is recognized as a realized gain or loss in the statement of operations. If a 10% change in interest rates were to have occurred on December 31, 2001, any decline in the fair value of our investments would not be material. In addition, we are exposed to certain market risks associated with corporations' credit ratings of which we have purchased corporate paper (or bonds). If these companies were to experience a significant detrimental change in their credit ratings, the fair market value of such corporate paper may significantly decrease. If these companies were to default on such corporate paper, we may lose part or all of our principal. We believe that we effectively manage this market risk by diversifying our corporate paper investments by purchasing a few bonds of many large, well known, companies in a variety of industries. Our primary exposures relate to (1) interest rate risk on borrowings, (2) our ability to pay or refinance our borrowings at maturity at market rates, (3) interest rate risk on our investment portfolio, and (4) credit risk of the companies' bonds in which we invest. We manage interest rate risk on our investment portfolio by matching scheduled investment maturities with our cash requirements. We manage interest rate risk on our outstanding borrowings by using fixed rate debt. While we cannot predict or manage our ability to refinance existing borrowings and investment portfolio, we evaluate our financial position on an ongoing basis. Our borrowings bear interest at fixed rates. Changes in interest rates affect the fair value of our borrowings, but do not have an impact on interest expense. Because of the relatively short-term nature of our borrowings, fluctuations in fair value are not deemed to be material. 41 BUSINESS OUTLOOK You should read the following discussion of our business outlook together with the financial statements and the notes to financial statements included elsewhere in this report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those anticipated in these forward-looking statements. Pharmaceutical Business We are near the end of a pivotal clinical trial for Neotrofin in Alzheimer's disease. This clinical trial should result in statistically significant data showing whether or not Neotrofin has efficacy in the treatment of Alzheimer's disease. It should also show whether or not Neotrofin has acute affect on certain sub-populations of patients that participated in the trial and, possibly provide insight into appropriate clinical study protocols for future clinical trials. The results of this trial should be known during the second quarter of 2002. We hope that the current pivotal trial will return positive results that will make the marketing of Neotrofin for the treatment of Alzheimer's disease come to fruition within two years. We believe that this drug candidate, with further development and study, will show efficacy for the treatment of Alzheimer's disease, however, our ability to do so may be limited or prevented if sufficient funds cannot be raised. However, if results from this clinical trial show that Neotrofin has no efficacy in the treatment of Alzheimer's disease, we will stop all trials of Neotrofin in Alzheimer's disease and focus all of our resources on other opportunities for this drug candidate and all of the other drug candidates that we have for the treatment of nervous system diseases and indications, and drug candidates for the treatment of certain cancer and related indications, all of which are discussed in "ITEM 1. BUSINESS" above. The capital markets have historically perceived us as a "one-drug" company. Therefore, if the results of our pivotal trial for Neotrofin in the treatment of Alzheimer's disease show that Neotrofin is unsuccessful, our ability to raise additional capital will be significantly harmed. If this were to occur, we would likely engage in immediate restructuring activities under a board-approved operational restructuring plan, which would include, but would not be limited to (a) layoffs of a substantial number of our personnel, (b) reduction in the scope and nature of our research and development activities, and (c) termination of operating leases and other contractual arrangements. Although these measures would reduce our ongoing burn-rate, there would be certain up-front non-recurring cash costs incurred, including severance and other termination-related costs. However, our hope is that, in the event that Neotrofin is unsuccessful, the capital markets recognize the value in developing all of our drug candidates for our targeted diseases and indications; therefore, our ability to raise additional capital may not be harmed. We intend to continue to expand the number of our drug candidates and indications. If we are able to raise sufficient funds to proceed with our proposed pre-clinical and clinical work on all of our drug candidates, we believe that our pipeline of drug candidates will eventually produce outstanding company growth. There is a risk, however, notwithstanding the results from the Neotrofin pivotal trial, that our ability to raise capital will be limited and that we will be forced to engage in restructuring activities as discussed previously. Our current pipeline consists of six drug candidates: Neotrofin(TM), AIT-034, NEO-339, Neoquin(TM), satraplatin, and elsamitrucin. We are currently developing these drug candidates for the treatment in Alzheimer's disease, spinal cord injury, Parkinson's disease, peripheral neuropathy, dementia and memory impairment associated with aging, mild cognitive impairment, cognition, stroke, schizophrenia, other neurodegenerative diseases, attention deficits, prostate cancer, ovarian carcinoma, bladder cancer, Non-Hodgkin's lymphoma, and radiation sensitization as it relates to radiation treatment for cancer. Currently, each of our drug candidates relates to life threatening diseases and is novel in its treatment or indication; therefore, we hope for expedited regulatory approval, if appropriate. We believe that all of our proposed drug candidates, with sufficient funding, will eventually be marketed by us or with the assistance and leadership of a co-development partner. We continue development of therapeutic technology that is novel in its treatment or indication. We are currently looking for additional cognitive enhancers both related to Neotrofin and AIT-034 and novel compounds. As previously noted, Neotrofin is in late stage development for the treatment of Alzheimer's disease and is being evaluated in spinal cord injury, Parkinson's disease and peripheral neuropathy in chemotherapy patients. Additionally, NEO-339 is our lead drug candidate for mild cognitive impairment and attention disorders. We also have additional compounds in evaluation for attention disorders. Similarly, we have a series of compounds for psychosis indications, including the NEO-356 series and other compounds, from which a lead candidate is in the process of being selected. In recent studies conducted by us, some of these compounds show favorable receptor affinity over psychosis drugs currently marketed. We hope that these compounds will eventually provide to people who suffer from schizophrenia, therapy that has improved efficacy and reduced side effects. We believe that we will market satraplatin initially for the treatment of prostate cancer and eventually other cancer types. We also believe that satraplatin will have better efficacy for the cancer indications contemplated than current platinum based drug therapy and that satraplatin will reduce the cost of treatment for certain cancer patients since it has proven oral bio-availability making it possibly a candidate for out-patient administration. We believe that Neoquin and elsamitrucin will both eventually be marketed for the treatment of bladder cancer and Non-Hodgkin's lymphoma, 42 respectively. In addition, Neoquin has the potential to become one of the first radiosensitizer drugs on the market and would improve the effectiveness of cancer related radiation treatment. We currently lack sufficient funds and strategic alliances to complete our current business plans. We believe that our existing capital resources, including net cash proceeds of $5.8 million raised from the sale of our common stock in March 2002, will not be adequate to fund our capital needs for the next 12 months of operations at our current level. We do not know whether or not we will be able to secure sufficient new funds to continue our businesses for the next twelve months and whether such funds can be obtained in time before we will have to take other actions that we otherwise would not take, like selling certain or all of our intellectual property rights and restructuring our operations or a combination of these activities. If we are able to secure sufficient new funds and are able to develop strategic alliances with other pharmaceutical businesses for co-development opportunities, we would expect that our operating expenses would increase over the next several years as we expand our research and development and commercialization activities and operations. We expect to incur significant additional operating losses for at least the next several years. We also expect that research and development expenses will increase as we expand our clinical trials on all of our drug candidates. Depending on the results of our ongoing and planned clinical trials for Neotrofin and other drug candidates and the outcome of the regulatory approval process, we will expand our marketing and manufacturing abilities as we approach commercializing each of our product candidates. Functional Genomics Business NeoGene believes and has proven during 2001 that it has the expertise to discover novel therapeutic targets. During 2001, we signed two contracts with Pfizer for out-licensing two of our G-protein-coupled receptor systems that we discovered. Over the next twelve months, we anticipate that our first agreement with Pfizer, Inc. will reach at least one milestone, thereby triggering payments from Pfizer to NeoGene. In addition, the scope of this agreement may be expanded. The second Pfizer agreement, may also reach the first milestone during 2002. We anticipate that we will enter into additional agreements with pharmaceutical or biotechnology companies during 2002 whereby they would obtain rights to certain of the proprietary receptor/ligand systems we have discovered. Additional types of agreements that we anticipate entering into this year are strategic alliances under collaborative research agreements whereby we will determine the natural ligands of a company's proprietary receptors. This type of agreement is anticipated to involve ongoing research funding for several years. We may also provide cell lines and clones to certain companies for compensation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", subheading "Financial market risks", above. ITEM 8. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants......................................................... 44 Consolidated Balance Sheets...................................................................... 45 Consolidated Statements of Operations............................................................ 46 Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income (Loss)........ 47 Consolidated Statements of Cash Flows............................................................ 53 Notes to Consolidated Financial Statements....................................................... 55
43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of NeoTherapeutics, Inc.: We have audited the accompanying consolidated balance sheets of NeoTherapeutics, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2001 and for the period from inception (June 15, 1987) to December 31, 2001. These consolidated 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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of NeoTherapeutics, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of its consolidated operations and its cash flows for each of the three years in the period ended December 31, 2001 and for the period from inception (June 15, 1987) to December 31, 2001, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Orange County, California March 27, 2002 44 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------------------------- ASSETS 2000 2001 ------------------ ----------------- CURRENT ASSETS: Cash and cash equivalents............................ $ 6,158,375 $ 749,213 Marketable securities and short-term investments..... 5,311,215 6,407,388 Other receivables.................................... 334,059 474,007 Prepaid expenses and refundable deposits............. 418,010 386,229 ------------------ ----------------- Total current assets............................. 12,221,659 8,016,837 PROPERTY AND EQUIPMENT, at cost: Equipment............................................ 3,412,932 5,397,052 Leasehold improvements............................... 1,853,227 1,937,912 Accumulated depreciation and amortization............ (1,850,076) (2,646,103) ------------------ ------------------ Property and equipment, net...................... 3,416,083 4,688,861 OTHER ASSETS - Prepaid expenses and deposits.............. 53,242 119,164 ------------------ ----------------- Total assets..................................... $ 15,690,984 $ 12,824,862 ================== ================= LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses................ $ 3,965,506 $ 4,186,085 Accrued payroll and related taxes.................... 265,383 236,223 Note payable to related party........................ 285,574 135,574 Current portion of capital lease obligations ........ 593,609 654,434 ------------------ ----------------- Total current liabilities........................ 5,110,072 5,212,316 CAPITAL LEASE OBLIGATIONS, net of current portion......... 474,004 463,705 OTHER NON-CURRENT LIABILITIES............................. 86,532 361,831 ------------------ ----------------- Total liabilities................................ 5,670,608 6,037,852 COMMITMENTS AND CONTINGENCIES (NOTE 10) MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 7,280,111 - STOCKHOLDERS' EQUITY: Preferred Stock, par value $0.001 per share, 5,000,000 shares authorized: Issued and outstanding, none at December 31, 2000 and 2001.................... - - Common Stock, par value $0.001 per share, 25,000,000 shares authorized: Issued and outstanding, 13,307,227 and 23,777,158 shares, respectively............... 13,307 23,777 Additional paid in capital........................... 101,169,912 134,659,267 Deferred compensation expense........................ (959,850) (1,889,628) Notes receivable from officers and directors......... (660,649) (615,649) Accumulated other comprehensive income............... 763 87,065 Deficit accumulated during the development stage..... (96,823,218) (125,477,822) ------------------ ----------------- Total stockholders' equity....................... 2,740,265 6,787,010 ------------------ ---------------- Total liabilities, minority interest and stockholders' equity............................. $ 15,690,984 $ 12,824,862 ================== ================
The accompanying notes are an integral part of these consolidated balance sheets. 45 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM JUNE 15, 1987 (INCEPTION) YEARS ENDED DECEMBER 31, THROUGH ------------------------------------------------------ DECEMBER 31, 1999 2000 2001 2001 --------------- ---------------- --------------- --------------- REVENUES: Grants................................ $ - $ - $ - $ 497,128 Licensing and other................... - - 41,113 41,113 --------------- ---------------- --------------- --------------- - - 41,113 538,241 OPERATING EXPENSES: Research and development.............. 20,057,687 38,766,884 20,611,119 95,452,791 General and administrative............ 3,465,443 5,106,812 7,579,866 25,045,009 Settlement of litigation.............. 2,458,359 - - 2,458,359 --------------- ---------------- --------------- --------------- 25,981,489 43,873,696 28,190,985 122,956,159 --------------- ---------------- --------------- --------------- LOSS FROM OPERATIONS........................ (25,981,489) (43,873,696) (28,149,872) (122,417,918) OTHER INCOME (EXPENSE): Interest income ...................... 199,267 776,348 693,766 2,926,598 Interest expense...................... (243,410) (1,857,640) (129,567) (2,923,188) Other income (expense)................ 35,727 (8,702) (200,694) (146,234) --------------- ---------------- --------------- --------------- Total other income (expense)........ (8,416) (1,089,994) 363,505 (142,824) --------------- ---------------- --------------- --------------- NET LOSS BEFORE MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES............................. (25,989,905) (44,963,690) (27,786,367) (122,560,742) MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES' NET LOSS.................................. - (1,463,597) (48,453) (1,512,050) --------------- ---------------- --------------- --------------- NET LOSS............................ $ (25,989,905) $ (46,427,287) $ (27,834,820) $ (124,072,792) =============== ================ =============== =============== BASIC AND DILUTED LOSS PER SHARE................................. $ (3.68) $ (4.37) $ (1.46) =============== ================ =============== BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............................... 7,105,041 10,629,408 19,674,500 =============== ================ ===============
The accompanying notes are an integral part of these consolidated financial statements. 46 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
REVENUE ADDITIONAL PARTICIPATION PAID IN DEFERRED PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION --------------------- ---------------------- ------------- ----------- --------------- SHARES PAR SHARES PAR ---------- ---------- ---------- ----------- Balance at Inception (June 15, 1987) - - - - - - - Net loss - - - - - - - Common stock issued - - 465,902 2,100 - - - ---------- ---------- ---------- ----------- ------------- ----------- --------------- Balance at December 31, 1987 - - 465,902 2,100 - - - Net loss - - - - - - - Common Stock Issued - - 499,173 2,250 - - - Revenue participation units issuance - - - - 594,000 - - ---------- ---------- ---------- ----------- ------------- ----------- --------------- Balance at December 31, 1988 - - 965,075 4,350 594,000 - - Net loss - - - - - - - Revenue participation units issuance - - - - 82,000 - - Net effect of acquisition - - 145,000 354,316 - - - ---------- ---------- ---------- ----------- ------------- ----------- --------------- Balance at December 31, 1989 - - 1,110,075 358,666 676,000 - - Net loss - - - - - - - Exercise of warrants - - 31,108 136,402 - - - Common stock issued in exchange for accrued salaries - - 402,518 503,144 - - - ---------- ---------- ---------- ----------- ------------- ----------- --------------- Balance at December 31, 1990 - - 1,543,701 998,212 676,000 - - Net loss - - - - - - - ---------- ---------- ---------- ----------- ------------- ----------- --------------- Balance at December 31, 1991 - - 1,543,701 998,212 676,000 - - Net loss - - - - - - - ---------- ---------- ---------- ----------- ------------- ----------- ---------------
(continuation of table)
NOTES DEFICIT RECEIVABLE ACCUMULATED ACCUMULATED FROM OTHER DURING THE DIRECTORS AND COMPREHENSIVE DEVELOPMENT OFFICERS INCOME (LOSS) STAGE TOTAL ------------ --------------- -------------- ------------- Balance at Inception (June 15, 1987) - - - - Net loss - - (31,875) (31,875) Common stock issued - - - 2,100 ------------ --------------- -------------- ------------- Balance at December 31, 1987 - - (31,875) (29,775) Net loss - - (556,484) (556,484) Common Stock Issued - - - 2,250 Revenue participation units issuance - - - 594,000 ------------ --------------- -------------- ------------- Balance at December 31, 1988 - - (588,359) 9,991 Net loss - - (934,563) (934,563) Revenue participation units issuance - - - 82,000 Net effect of acquisition - - - 354,316 ------------ --------------- -------------- ------------- Balance at December 31, 1989 - - (1,522,922) (488,256) Net loss - - (859,172) (859,172) Exercise of warrants - - - 136,402 Common stock issued in exchange for accrued salaries - - - 503,144 ------------ --------------- -------------- ------------- Balance at December 31, 1990 - - (2,382,094) (707,882) Net loss - - (764,488) (764,488) ------------ --------------- -------------- ------------- Balance at December 31, 1991 - - (3,146,582) (1,472,370) Net loss - - (423,691) (423,691) ------------ --------------- -------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. 47 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)
REVENUE ADDITIONAL PARTICIPATION PAID IN DEFERRED PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION --------------------- ---------------------- ------------- ----------- --------------- SHARES PAR SHARES PAR ---------- ---------- ---------- ----------- Balance at December 31, 1992 - - 1,543,701 998,212 676,000 - - Net loss - - - - - - - Common stock issued in exchange for investment banking service - - 40,000 54,000 - - - Common stock issued in exchange for accrued salaries - - 255,476 638,694 - - - Common stock issued in exchange for note payable to President - - 200,000 500,000 - - - Common stock issued in exchange for accrued expenses - - 20,842 52,104 - - - Stock options issued in exchange for accrued professional services - - - 108,000 - - - Stock options issued in exchange for future services - - - 39,750 - - - Stock options issued for services - - - - (93,749) - - ---------- ---------- ---------- ----------- ------------- ----------- -------------- Balance at December 31, 1993 - - 2,060,019 2,390,760 582,251 - - Net loss - - - - - - - Common stock issued for cash - - 13,000 32,500 - - - Amortization of deferred compensation - - - - 93,749 - - ---------- ---------- ---------- ----------- ------------- ----------- -------------- Balance at December 31, 1994 - - 2,073,019 2,423,260 676,000 - - Net loss - - - - - - - Common stock issued for cash - - 22,000 55,000 - - - Common stock forfeiture - - (678,836) (1,193,943) - - - Common stock reissued - - 678,836 1,697,090 - - - Stock options issued for services - - - 105,000 - - - ---------- ---------- ---------- ----------- ------------- ----------- -------------- Balance at December 31, 1995 - - 2,095,019 3,086,407 676,000 - - Net loss - - - - - - - Common stock issued for cash - - 266,788 633,625 - - - Stock options issued for services - - - 103,950 - - - Conversion of revenue participation units into common stock - - 300,000 1,125,000 (676,000) - - Common stock and warrants issued for cash net of costs of public offering - - 2,700,000 18,176,781 - - - ---------- ---------- ---------- ----------- ------------- ----------- --------------
(continuation of table)
NOTES DEFICIT RECEIVABLE ACCUMULATED ACCUMULATED FROM OTHER DURING THE DIRECTORS AND COMPREHENSIVE DEVELOPMENT OFFICERS INCOME (LOSS) STAGE TOTAL ------------- --------------- -------------- ------------- Balance at December 31, 1992 - - (3,570,273) (1,896,061) Net loss - - (237,815) (237,815) Common stock issued in exchange for investment banking service - - - 54,000 Common stock issued in exchange for accrued salaries - - - 638,694 Common stock issued in exchange for note payable to President - - - 500,000 Common stock issued in exchange for accrued expenses - - - 52,104 Stock options issued in exchange for accrued professional services - - - 108,000 Stock options issued in exchange for future services - - - 39,750 Stock options issued for services - - - (93,749) ------------ --------------- -------------- ------------- Balance at December 31, 1993 - - (3,808,088) (835,077) Net loss - (312,342) (312,342) Common stock issued for cash - - - 32,500 Amortization of deferred compensation - - - 93,749 ------------ --------------- -------------- ------------- Balance at December 31, 1994 - - (4,120,430) (1,021,170) Net loss - - (895,378) (895,378) Common stock issued for cash - - - 55,000 Common stock forfeiture - - - (1,193,943) Common stock reissued - - - 1,697,090 Stock options issued for services - - - 105,000 ------------ --------------- -------------- ------------- Balance at December 31, 1995 - - (5,015,808) (1,253,401) Net loss - - (1,038,875) (1,038,875) Common stock issued for cash - - - 633,625 Stock options issued for services - - - 103,950 Conversion of revenue participation units into common stock - - (449,000) - Common stock and warrants issued for cash net of costs of public offering - - - 18,176,781 ------------ --------------- -------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. 48 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)
REVENUE ADDITIONAL PARTICIPATION PAID IN DEFERRED PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION --------------------- ---------------------- ------------- ----------- --------------- SHARES PAR SHARES PAR ---------- ---------- ---------- ----------- Balance at December 31, 1996 - - 5,361,807 23,125,763 - - - Net loss - - - - - - - Unrealized gains on available-for-sale securities - - - - - - - Comprehensive loss Stock options exercise - - 104,000 2,600 - - - Stock options issued for services - - - 60,000 - - - Reincorporation - - - (23,182,897) - 23,182,897 - ---------- ---------- ---------- ----------- ------------- ----------- --------------- Balance at December 31, 1997 - - 5,465,807 5,466 - 23,182,897 - Net loss - - - - - - - Unrealized gains on available-for-sale securities - - - - - - - Comprehensive loss Common stock and warrants issued for cash under Line of Equity agreement, net of issuance costs - - 506,047 506 - 3,451,276 - Stock options exercised by employees, directors and consultants - - 134,000 134 - 340,426 - Notes receivable from certain officers and directors to exercise stock options - - - - - - - Exercise of underwriters' warrant - - 41,000 41 - 373,879 - Stock options issued for services - - - - - 422,264 - Warrant to purchase common stock issued in connection with equipment financing - - - - - 45,000 - ---------- ---------- ---------- ----------- ------------- ----------- ---------------
(continuation of table)
NOTES DEFICIT RECEIVABLE ACCUMULATED ACCUMULATED FROM OTHER DURING THE DIRECTORS AND COMPREHENSIVE DEVELOPMENT OFFICERS INCOME (LOSS) STAGE TOTAL ------------- --------------- -------------- ------------- Balance at December 31, 1996 - - (6,503,683) 16,622,080 Net loss - - (6,161,541) (6,161,541) Unrealized gains on available-for-sale securities - 20,256 - 20,256 --------------- -------------- ------------- Comprehensive loss 20,256 (6,161,541) (6,141,285) Stock options exercise - - - 2,600 Stock options issued for services - - - 60,000 Reincorporation - - - - ------------ --------------- -------------- ------------- Balance at December 31, 1997 - 20,256 (12,665,224) 10,543,395 Net loss - - (11,604,556) (11,604,556) Unrealized gains on available-for-sale securities - 3,951 - 3,951 --------------- -------------- ------------- Comprehensive loss 3,951 (11,604,556) (11,600,605) Common stock and warrants issued for cash under Line of Equity agreement, net of issuance costs - - - 3,451,782 Stock options exercised by employees, directors and consultants - - - 340,560 Notes receivable from certain officers and directors to exercise stock options (286,560) - - (286,560) Exercise of underwriters' warrant - - - 373,920 Stock options issued for services - - - 422,264 Warrant to purchase common stock issued in connection with equipment financing - - - 45,000 ------------ --------------- -------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. 49 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)
REVENUE ADDITIONAL PARTICIPATION PAID IN DEFERRED PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION --------------------- ---------------------- ------------- ----------- --------------- SHARES PAR SHARES PAR ---------- ---------- ---------- ----------- Balance at December 31, 1998 - - 6,146,854 6,147 - 27,815,742 - Net loss - - - - - - - Unrealized gains on available-for-sale securities - - - - - - - Comprehensive loss Sale of common stock to Private Equity Line investor, net of issuance costs - - 211,393 211 - 1,917,941 - Sale of shares of 5% Series A Preferred stock, net of offering costs and allocated warrants 400 3,608,788 - - - - - Conversion of preferred stock into common stock (400) (3,608,788) 347,334 347 - 3,608,441 - Common stock and warrants issued for cash under an exempt private sale agreement, net of offering costs - - 400,000 400 - 3,982,316 - Sale of common stock pursuant to a secondary public offering, net of offering costs - - 1,150,000 1,150 - 8,705,510 - Common stock issued to legal counsel for services - - 12,500 13 - 69,987 - Fair value of warrants issued as compensation to investment advisor - - - - - 204,280 - Exercise of underwriters' warrants - - 9,000 9 - 82,071 - Stock options exercised by employees - - 1,900 2 - 12,487 - Stock options and warrants issued for legal consulting services - - - - - 119,471 - Sale of common stock to private investors - - 845,594 846 - 9,440,157 - Common stock forfeiture in settlement of litigation - - (678,835) (679) - (1,696,411) - Common stock and warrants issued in settlement of litigation - - 332,630 333 - 4,155,116 - Dividends paid on preferred stock - - - - - - - ------- ---------- ---------- ----------- ------------- ----------- --------------
(Continuation of table)
NOTES DEFICIT RECEIVABLE ACCUMULATED ACCUMULATED FROM OTHER DURING THE DIRECTORS AND COMPREHENSIVE DEVELOPMENT OFFICERS INCOME (LOSS) STAGE TOTAL ------------- --------------- -------------- ------------- Balance at December 31, 1998 (286,560) 24,207 (24,269,780) 3,289,756 Net loss - - (25,989,905) (25,989,905) Unrealized gains on available-for-sale securities - (62,779) - (62,779) ------------- ------------ ----------- Comprehensive loss (62,779) (25,989,905) (26,052,684) Sale of common stock to Private Equity Line investor, net of issuance costs - - - 1,918,152 Sale of shares of 5% Series A Preferred stock, net of offering costs and allocated warrants - - - 3,608,788 Conversion of preferred stock into common stock - - - - Common stock and warrants issued for cash under an exempt private sale agreement, net of offering costs - - - 3,982,716 Sale of common stock pursuant to a secondary public offering, net of offering costs - - - 8,706,660 Common stock issued to legal counsel for services - - - 70,000 Fair value of warrants issued as compensation to investment advisor - - - 204,280 Exercise of underwriters' warrants - - - 82,080 Stock options exercised by employees - - - 12,489 Stock options and warrants issued for legal consulting services - - - 119,471 Sale of common stock to private investors - - - 9,441,003 Common stock forfeiture in settlement of litigation - - - (1,697,090) Common stock and warrants issued in settlement of litigation - - - 4,155,449 Dividends paid on preferred stock - - (136,246) (136,246) ------------ --------------- -------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. 50 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)
REVENUE ADDITIONAL PARTICIPATION PAID IN DEFERRED PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION --------------------- ---------------------- ------------- ----------- --------------- SHARES PAR SHARES PAR ---------- ---------- ---------- ----------- Balance at December 31, 1999 - - 8,778,370 8,779 - 58,417,108 - Net loss - - - - - - - Unrealized gains on available-for-sale securities - - - - - - - Comprehensive loss Sale of common stock, net of issuance costs - - 2,805,592 2,806 - 28,755,541 - Fair value of warrants sold with 5% convertible debentures - - - - - 10,000,000 - Conversion of convertible debentures - - 1,594,177 1,594 - 1,673,869 - Fair value of warrants sold in subsidiary offerings - - - - - 512,740 - Common stock to be issued to vendor for services - - - 27 - 104,973 - Fair value of warrants to be issued to vendor for services - - - - - 131,250 - Common stock issued to consultants for service - - 2,000 2 - 23,498 - Public warrant exercise - - 4,490 5 - 51,181 - Stock options exercised by employees - - 92,598 93 - 539,153 - Stock options exercised by non-employees - - 30,000 1 - 749 - Deferred compensation from employee stock options - - - - - 959,850 (959,850) Notes receivable from certain officers and directors to purchase stock or exercise stock options - - - - - - - Repayment and forgiveness of notes to officers and directors upon exercise of stock options - - - - - - - ------ ---------- ---------- ----------- ------------- ----------- ---------------
(Continuation of table)
NOTES DEFICIT RECEIVABLE ACCUMULATED ACCUMULATED FROM OTHER DURING THE DIRECTORS AND COMPREHENSIVE DEVELOPMENT OFFICERS INCOME (LOSS) STAGE TOTAL ------------- --------------- -------------- ------------- Balance at December 31, 1999 (286,560) (38,572) (50,395,931) 7,704,824 Net loss - - (46,427,287) (46,427,287) Unrealized gains on available-for-sale securities - 39,335 - 39,335 --------------- -------------- ------------- Comprehensive loss 39,335 (46,427,287) (46,387,952) Sale of common stock, net of issuance costs - - - 28,758,347 Fair value of warrants sold with 5% convertible debentures - - - 10,000,000 Conversion of convertible debentures - - - 1,675,463 Fair value of warrants sold in subsidiary offerings - - - 512,740 Common stock to be issued to vendor for services - - - 105,000 Fair value of warrants to be issued to vendor for services - - - 131,250 Common stock issued to consultants for service - - - 23,500 Public warrant exercise - - - 51,186 Stock options exercised by employees - - - 539,246 Stock options exercised by non-employees - - - 750 Deferred compensation from employee stock options - - - - Notes receivable from certain officers and directors to purchase stock or exercise stock options (435,649) - - (435,649) Repayment and forgiveness of notes to officers and directors upon exercise of stock options 61,560 - - 61,560 ------------ --------------- -------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. 51 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)
REVENUE ADDITIONAL PARTICIPATION PAID IN DEFERRED PREFERRED STOCK COMMON STOCK UNITS CAPITAL COMPENSATION --------------------- ---------------------- ------------- ----------- --------------- SHARES PAR SHARES PAR ---------- ---------- ---------- ----------- Balance at December 31, 2000 - - 13,307,227 13,307 - 101,169,912 (959,850) Net loss - - - - - - - Unrealized gains on available-for-sale securities - - - - - - - Comprehensive loss Sale of common stock for cash net of issuance costs - - 9,979,340 9,979 - 28,316,993 - Fair value of stock options granted to consultant - - - - - 10,597 - Fair value of warrants issued for consulting services - - - - - 609,875 - Fair value of common stock issued for consulting services - - 5,000 5 - 22,742 - Conversion of Preferred Stock of Subsidiary into Series C Preferred Stock 200 1,973,488 - - - - - Conversion of Series C Preferred Stock into common stock (170) (1,677,465) 485,591 486 - 1,676,979 - Purchase and retirement of Series C Preferred Stock (30) (296,023) - - - - - Deferred compensation from employee stock options - - - - - 2,391,118 (2,391,118) Amortization of employee stock option compensation previously deferred - - - - - - 1,461,340 Sale of stock in subsidiary - - - - - 900 - Dividends paid on preferred stock - - - - - - - Reclassification of warrants fair value and other items previously included in minority interest - - - - - 460,151 - Litigation settlement - - - - - - - ---------- ---------- ---------- ----------- ------------- ----------- --------------- Balance at December 31, 2001 - - 23,777,158 23,777 - 134,659,267 (1,889,628) ========== ========== ========== =========== ============= =========== ===============
(Continuation of table)
NOTES DEFICIT RECEIVABLE ACCUMULATED ACCUMULATED FROM OTHER DURING THE DIRECTORS AND COMPREHENSIVE DEVELOPMENT OFFICERS INCOME (LOSS) STAGE TOTAL ------------- --------------- -------------- ------------- Balance at December 31, 2000 (660,649) 763 (96,823,218) 2,740,265 Net loss - - (27,834,820) (27,834,820) Unrealized gains on available-for-sale securities - 86,302 - 86,302 --------------- -------------- ------------- Comprehensive loss 86,302 (27,834,820) (27,748,518) Sale of common stock for cash net of issuance costs - - - 28,326,972 Fair value of stock options granted to consultant - - - 10,597 Fair value of warrants issued for consulting services - - - 609,875 Fair value of common stock issued for consulting services - - - 22,747 Conversion of Preferred Stock of Subsidiary into Series C Preferred Stock - - - 1,973,488 Conversion of Series C Preferred Stock into common stock - - - - Purchase and retirement of Series C Preferred Stock - - (3,977) (300,000) Deferred compensation from employee stock options - - - - Amortization of employee stock option compensation previously deferred - - - 1,461,340 Sale of stock in subsidiary - - - 900 Dividends paid on preferred stock - - (815,807) (815,807) Reclassification of warrants fair value and other items previously included in minority interest - - - 460,151 Litigation settlement 45,000 - - 45,000 ------------ --------------- -------------- ------------- Balance at December 31, 2001 (615,649) 87,065 (125,477,822) 6,787,010 ============ =============== ============== =============
The accompanying notes are an integral part of these consolidated financial statements. 52 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM JUNE 15, 1987 (INCEPTION) THROUGH DECEMBER 31, 1999 2000 2001 2001 ------------- ------------- -------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) (25,989,905) (46,427,287) (27,834,820) (124,072,792) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash items included in net loss: Minority interest in net loss - - (162,380) (162,380) Depreciation and amortization 519,875 588,856 796,027 2,770,660 Amortization of debt discount 13,102 13,102 13,102 39,306 Amortization of employee stock option compensation previously deferred 393,751 755,496 1,461,340 3,415,550 Issuance of common stock for services - - 33,344 56,844 Beneficial conversion feature related to preferred stock of consolidated subsidiary - 1,463,597 - 1,463,597 Amortization of discount on convertible debentures and beneficial conversion feature - 539,277 - 539,277 Fair value of warrants issued for consulting services - - 609,875 609,875 Issuance of common stock in settlement of litigation 2,458,359 - - 2,458,359 Forgiveness of notes to officers and directors - - 45,000 45,000 Compensation expense for extension of Debt Conversion Agreements, net - - - 503,147 Gain on sale of assets - - - (5,299) Changes in operating assets and liabilities: Increase in other receivables, prepaid expenses and refundable deposits (35,482) (186,025) (108,167) (441,980) Increase in accounts payable and accrued expenses 2,334,726 329,512 220,579 3,864,931 Increase (decrease) in accrued payroll and related taxes 30,452 153,562 (29,160) 874,917 Increase in other non-current liabilities 28,812 11,411 275,299 361,830 (Repayment of) proceeds from notes payable to related parties, net - (272,731) (150,000) 135,574 Decrease in employee expense reimbursement and accrued interest to related parties - - - 300,404 ------------ ------------- -------------- --------------- Net cash used in operating activities (20,246,310) (43,031,230) (24,829,961) (107,243,180) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (429,861) (368,911) (1,363,516) (6,709,978) Purchases of marketable securities and short-term investments, net (1,248,643) (2,316,668) (1,009,871) (6,320,323) (Increase) decrease in other assets 412,376 (300,910) (65,922) (441,639) Payment of organization costs - - - (66,093) Proceeds from sale of equipment - - - 29,665 Issuance of notes receivable - - - 100,000 ------------ ------------- -------------- --------------- Net cash used in investing activities (1,266,128) (2,986,489) (2,439,309) (13,408,368)
The accompanying notes are an integral part of these consolidated financial statements. 53 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
PERIOD FROM JUNE 15, 1987 (INCEPTION) THROUGH DECEMBER 31, 1999 2000 2001 2001 ------------ ------------- -------------- --------------- CASH FLOW FROM FINANCING ACTIVITIES:... Proceeds from issuance of common stock and warrants, net of related offering costs and expenses 24,048,532 29,912,724 28,326,972 105,957,813 Proceeds from issuance of common stock in consolidated subsidiary - - 1,000 1,000 Proceeds from preferred stock issuance, net of offering 3,608,788 - - 3,608,788 Proceeds from sale of preferred stock of consolidated subsidiary, net of issuance cost - 6,488,493 - 6,488,493 Proceeds from exercise of stock options and warrants 94,569 75,436 - 863,585 Proceeds from sale of convertible debentures, net of issuance cost - 9,387,321 - 9,387,321 Proceeds from long-term debt - - - 2,600,448 Payments made on capital lease and loan obligations (474,326) (475,660) (667,865) (1,832,614) Proceeds from notes receivables from officers and directors for purchase of common stock - 61,560 - 61,560 Purchase of preferred stock of consolidated subsidiary - - (4,684,192) (4,684,192) Payments of dividend on preferred stock of consolidated subsidiary - - (815,807) (815,807) Purchase of series C preferred stock - - (300,000) (300,000) Dividends paid to preferred stockholders (136,246) - - (136,246) Cash at acquisitions - - - 200,612 ------------ ------------- -------------- --------------- Net cash provided by financing activities 27,141,317 45,449,874 21,860,108 121,400,761 ------------ ------------- -------------- --------------- Net increase (decrease) in cash and cash equivalents 5,628,879 (567,845) (5,409,162) 749,213 Cash and cash equivalents, beginning of period 1,097,341 6,726,220 6,158,375 - ------------ ------------- -------------- --------------- Cash and cash equivalents, end of period 6,726,220 6,158,375 749,213 749,213 ============ ============= ============== =============== SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Fixed assets financed by capital lease $ - $ 475,340 $ 705,289 $ 2,916,144 ============ ============= ============== =============== Unrealized (gain) loss on marketable securities $ 62,779 $ (39,335) $ (86,302) $ (87,065) ============ ============= ============== =============== Stock and stock options granted to employees and non-employees below fair market value $ - $ 959,850 $ 2,391,118 $ 3,350,968 ============ ============= ============== =============== Conversion of subsidiary preferred stock into company series C preferred stock - - $1,973,488 $ 1,973,488 ============ ============= ============== =============== Conversion of preferred stock and convertible debentures into shares of common stock $ - $ 1,675,463 $ 1,677,465 $ 3,601,553 ============ ============= ============== =============== Retirement of preferred stock $ - $ - $ (3,977) $ (3,977) ============ ============= ============== =============== Reclassification of warrants and other $ - $ - $ 460,151 $ 460,151 ============ ============= ============== =============== Minority interest share of proceeds from issuance of common stock in consolidated subsidiary $ - $ - $ (100) $ (100) ============ ============= ============== =============== Financing of insurance policies and other assets $ - $ 379,000 $ - $ 407,260 ============ ============= ============== =============== Issuance of warrants in connection with equity and debt financing $ 344,610 $ 512,740 $ - $ 1,860,461 ============ ============= ============== =============== Dividends on preferred stock paid in shares of common stock $ 82,312 $ - $ - $ 82,312 ============ ============= ============== =============== Conversion of the accrued liabilities to shares of common stock $ - $ - $ - $ 1,442,567 ============ ============= ============== =============== Conversion of accrued interest into notes payable to related parties $ - $ - $ - $ 300,404 ============ ============= ============== =============== Conversion of revenue participation units into shares of common stock $ - $ - $ - $ 676,000 ============ ============= ============== ===============
The accompanying notes are an integral part of these consolidated financial statements. 54 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 1. ORGANIZATION AND BUSINESSES AND SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES Organization and Business We incorporated NeoTherapeutics, Inc. (or NeoTherapeutics) in Colorado as Americus Funding Corporation (or AFC) in December 1987. In August 1996, we changed AFC's name to NeoTherapeutics, Inc. and in June 1997, we reincorporated NeoTherapeutics in the state of Delaware. We had four subsidiaries as of December 31, 2001: NeoTherapeutics GmbH, wholly owned, incorporated in Switzerland in April 1997 (or NeoGmbH); NeoGene Technologies, Inc., 88.4% owned, incorporated in California in October 1999 (or NeoGene); NeoOncoRx, Inc., 90.5% owned, incorporated in California in November 2000 (or NeoOncoRx); and NeoTravel, Inc., wholly owned, incorporated in California in April 2001 (or NeoTravel). We merged a previously wholly owned subsidiary, Advanced ImmunoTherapeutics, Inc., into NeoTherapeutics, Inc. in 2001. The accompanying consolidated financial statements include the operating results of NeoTherapeutics, Inc. and its subsidiaries (or collectively, the Company, we, our, and similar references). We are a development-stage pharmaceutical company engaged in the pharmaceutical business and the functional genomics business. Our pharmaceutical business engages in discovering and developing novel technology platforms for the discovery and development, co-development and out-licensing of therapeutic drugs for nervous system disorders and in the in-licensing and development, co-development and out-licensing of late-stage cancer drugs. Our functional genomics business engages in discovering gene functions and validating novel molecular targets for innovative drug development. We conduct our pharmaceutical activities at NeoTherapeutics and NeoOncoRx, and our functional genomics activities at NeoGene. Summary of Critical Accounting Policies and Estimates Development Stage Enterprise and Liquidity We have prepared the consolidated financial statements under the assumption that we are a going concern. We are in the development stage and, therefore, we devote substantially all of our efforts to research and development activities. Since our inception, we have incurred cumulative losses of approximately $124.1 million through December 31, 2001, and expect to incur substantial losses over the next several years. We spent cash in 2001 at an average rate in excess of approximately $2.3 million per month, and we expect this rate of spending to continue through the reporting of results from our current pivotal clinical trial for Neotrofin in Alzheimer's disease. Our burn-rate after that will be a function of the result of that trial and the timing of our phase 3 clinical study of satraplatin in prostate cancer. If the Alzheimer's trial is positive, we would expect our burn-rate to remain stable. If, based on the data, we decide not to initiate another pivotal study of Neotrofin in Alzheimer's disease, our burn-rate will decrease significantly. At the present time, our business does not generate cash from operations needed to finance our short-term operations. We will rely primarily on (a.) raising funds through the sale of our securities including under our Sales Agreement with Cantor Fitzgerald & Co., which is on a "best-efforts" basis, and/or (b.) out-licensing our technology, to meet all of our short-term cash needs. We have generated operating losses since our inception and our existing cash and investment securities, including net cash proceeds of $5.8 million raised in March 2002, are not sufficient to fund our current planned pharmaceutical and functional genomics operations for the next 12 months. Therefore, we will need to seek additional funding by the end of July 2002, or sooner, through public or private financings, including equity financings, and through other arrangements to continue operating our businesses. As has been stated by our independent public accountants in their opinion, our current financial position raises substantial doubt as to our ability to continue as a going concern. The results of a clinical trial on our lead drug candidate Neotrofin should be available during the second quarter of 2002. If the results of this trial are sufficiently positive, we expect to be able to raise the capital necessary to fund our currently planned pharmaceutical and functional genomics operations. Additionally, we anticipate that our long-term business plans require that we enter into collaborative partnership agreements and strategic alliance agreements with larger pharmaceutical companies to co-develop, manufacture and market our product candidates. If the results of this trial are negative (or not sufficiently positive), we may not be able to raise additional funds on favorable terms, if at all. Accordingly, we would be forced to significantly change our business plans and restructure our operations to conserve cash, which would likely involve some, combination, or all of the following: - Out-license or sell some or all of our intellectual, technological, and/or tangible property not presently contemplated and at terms that we believe would not be favorable to us; - Reduce the size of our workforce, including the number of our scientific personnel; - Reduce the scope and nature of our research and drug development activities including the possible termination of clinical trials; and - Terminate operating leases and other contractual arrangements. Although no assurance can be given, we believe that we can continue to operate as a going concern and, accordingly, our consolidated financial statements have been prepared assuming that we will continue as a going concern. Consequently, our consolidated financial statements do not include adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that would be required if we were not able to continue as a going concern. 55 Principles of Consolidation Our consolidated financial statements include our accounts including those of our wholly owned and majority owned subsidiaries. We eliminated all significant intercompany accounts and transactions. Certain prior year amounts have been reclassified to conform to the current year presentation. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments of commercial paper and demand notes with original maturities of 90 days or less. Marketable Securities and Short-Term Investments We classify investments in debt and equity securities among three categories: held-to-maturity, trading, and available-for-sale. As of December 31, 2001, all of our debt and equity securities holdings were categorized as available-for-sale. We carry available-for-sale securities at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive income (loss) in stockholders' equity. We use quoted market prices to determine the fair value of these investments. Prepaid Expenses and Refundable Deposits Prepaid expenses are deferred and later recorded as an expense during the period benefited. Deposits are expected to become refundable at a later date. Property and Equipment Purchased or Leased We carry property and equipment at historical cost, less accumulated depreciation and amortization. When property and equipment are disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives: Equipment 5 to 7 years Leasehold Improvements The shorter of the estimated useful life or lease term Research and Development We expense all research and development activity costs in the period incurred. Stock-Based Compensation We account for all of our stock based compensation in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" (or SFAS 123) that encourages companies to recognize stock based compensation using a fair market value methodology. Under SFAS 123, the fair value of a stock option (or its equivalent) granted by a public entity shall be estimated using an option-pricing model (for example, the Black-Scholes or binomial model) that takes into account certain assumptions. However, SFAS 123 permits continued use of accounting for employee stock based compensation using the intrinsic value methodology of accounting promulgated by Accounting Principles Board (or APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (or APB 25). Under the intrinsic method, stock based compensation is measured as the excess, if any, of the quoted market price of our common stock at the measurement date over the exercise price. We recognize non-employee stock based compensation or payments using a fair market value methodology promulgated by SFAS 123. We recognize employee stock based compensation using the intrinsic value methodology promulgated by APB 25. Basic and Diluted Net Loss Per Share We calculate basic and diluted net loss per share using: the weighted average number of common shares outstanding and the net loss, less preferred stock dividends, during each year, respectively. We exclude all antidilutive common stock equivalents from the basic and diluted net loss per share calculation. 56 Use of Estimates We make certain estimates to prepare our financial statements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses reported during the reporting period. Actual results could differ from our estimates. We have estimated that our current working capital plus funds raised or to be raised subsequent to year end will be sufficient for us to continue as a going concern and therefore have prepared the financial statements on that basis. That basis includes estimating future cash requirements of planned research & development activities and general and administrative requirements, the retention of key personnel, certain clinical trial results, maintained market need for our product candidates, and other major business assumptions. If these estimates prove to be wrong, we may not be able to continue as a going concern. Revenue Recognition We recognize revenue from each sale contract over each sale contract's operative life and after all contingencies related to us being due receipt of such revenue are eliminated. Income Taxes We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement bases and tax bases of existing assets and liabilities. We recorded a valuation allowance equal to our net deferred tax asset. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (or FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations (or SFAS 141). SFAS 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16. Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises, SFAS 141 requires use of the purchase method of accounting for all business combinations initiated after June 30, 2001, the same date that we adopted SFAS 141. The adoption of SFAS 141 did not have a material impact on our financial condition or results of operations. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (or SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill shall no longer be amortized but shall be assessed at least annually for impairment using a fair value methodology. We adopted SFAS 142 for all goodwill and other intangible assets acquired after June 30, 2001 and for all existing goodwill and other intangible assets beginning January 1, 2002. We do not anticipate the adoption of SFAS 142 to have a material impact on our financial condition or results of operations. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (or SFAS 143). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002, with earlier application being encouraged. We do not anticipate the adoption of SFAS 143 to have a material impact on our financial condition or results of operations. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (or SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and 57 Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in APB Opinion No. 30). SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, with early application encouraged, and generally is to be applied prospectively. We do not anticipate the adoption of SFAS 144 to have a material impact on our financial condition and results of operations. 2. CONCENTRATIONS OF CREDIT RISK We invest our excess cash in marketable debt and equity securities and do not require collateral or other security in addition to collateral or other security contained in the investment contract. Investments are not insured against the possibility of a complete loss of earnings or principal and are subject to a degree of credit risk related to the credit worthiness of the underlying issuer. We widely diversify our investments in high-grade securities to avoid concentrations of credit risk and believe that such credit risk inherent in our investments at December 31, 2001 is minimal. 3. RELATED PARTY TRANSACTIONS During 1987 and 1988, our Chief Executive Officer (or CEO), who is also a major stockholder of ours, loaned a total of $270,650 to us for working capital purposes, of which $250,000 plus $2,000 of accrued interest was canceled in December 1988 in exchange for the issuance of 28 Revenue Participation Units (or RPU's). The RPU's were converted into 112,000 shares of our common stock. From 1989 through 1993, we borrowed an additional $757,900 from the CEO, which, together with accrued interest of $300,404, aggregated $1,058,304 on December 31, 1993, at which time we issued 200,000 shares of common stock to the CEO in exchange for cancellation of $500,000 of loans made to us. The remaining $257,900 in principal and $300,404 of accrued interest were converted to a $558,304 promissory note which, as amended from time to time, is currently unsecured, and is payable upon demand. Interest is payable monthly at the annual rate of 9%. The note was partially repaid in 2000 when we advanced cash to the CEO to pay payroll taxes arising from the CEO's exercise of a warrant for 88,173 shares of our common stock at $3.75 per share in August 2000. Additional repayments were made in 2001. The note balance at December 31, 2001 was $135,574. Assignment of Patents by Chief Executive Officer The CEO assigned to us all of his rights in nine patents. In connection with the assignment of these patents to us, we entered into royalty agreements with the CEO (or CEO Agreements), which expire concurrently with the expiration of the underlying patents and any patents derived therefrom. Under each of the CEO Agreements, as amended, we are obligated to pay the CEO a royalty of two percent (2%) of all revenues derived by us from the use and sale by us of any products or methods included in the patents. Further, in the event that we terminate the CEO's employment without cause, the royalty rate under each CEO Agreement will increase from two percent (2%) to five percent (5%). Finally, in the event of the CEO's death, the family or estate is entitled to continue to receive under each CEO Agreement royalties at a rate of two percent (2%) for the duration of the respective CEO Agreement. McMaster University Agreement On July 10, 1996, we entered into a license agreement with McMaster University (or McMaster) that allows us the use of certain technologies developed by McMaster covered in the patents filed jointly by us and McMaster (US Patent Nos. 5,447,939, 5,801,184, 6,027,936, 6,338,963, and 6,350,752), all of which are also encumbered by CEO Agreements. Under the agreement, we paid a one time licensing fee of $15,000 and are obligated to pay to McMaster an annual royalty of five percent (5%) on net sales of products containing compounds developed by McMaster. In July 1997, we began, and have continued making, annual minimum royalty payments of $25,000. Director and Officer Notes for the Exercise of Equity Instruments We made loans to certain of our directors and officers for the exercise of stock options or the purchase of stock. We loaned $286,560 in 1998, and $435,649 in 2000. During 2000, one individual paid $61,560 back to us and during 2001, in connection with the settlement of a litigation matter, we forgave a $45,000 note to one individual. At December 31, 2001, $615,649 remained due to us from directors and officers for the purchase of shares of common stock or the exercise of stock options. These notes accrue interest at rates between 7% and 9% and are classified as an offset to stockholders' equity. 58 4. NET LOSS PER SHARE Basic and diluted loss per share for the year ended December 31, 2001 was computed after increasing the net loss by dividend amounting to $815,807 paid to Series A Preferred Stock holders that resulted from our repurchase of the preferred stock. 5. MARKETABLE SECURITIES AND SHORT-TERM INVESTMENTS A summary of marketable securities and short-term investments at December 31, 2000 and 2001 is as follows:
Gross Gross Unrealized Unrealized Market Type of Investment Cost Gains (Losses) Value - --------------------------------- ------------- ---------- ---------- ---------- December 31, 2000: Available-for-Sale: U.S. Government Treasury Notes and Bonds $ 1,643,758 $ 2,421 $ - $ 1,646,179 U.S. Government guaranteed securities 246,493 4,185 - 250,678 Corporate Bonds 3,420,201 4,822 (10,665) 3,414,358 ------------- --------- ---------- ----------- Total Investments $ 5,310,452 $ 11,428 $ (10,665) $ 5,311,215 ============= ========= ========== =========== December 31, 2001: Available-for-Sale: U.S. Government Treasury Notes and Bonds $ 150,072 $ 2,279 $ - $ 152,351 U.S. Government guaranteed securities 212,491 6,709 - 219,200 Corporate Bonds 6,461,227 78,077 - 6,539,304 Margin Loans (503,467) - - (503,467) ------------- --------- ---------- ----------- Total Investments $ 6,320,323 $ 87,065 $ - $ 6,407,388 ============= ========= ========== ===========
For the years ended December 31, 2000 and 2001, sales of securities at fair market value aggregated $848,202 and $7,642,687, and the Company realized gains over original cost of $3,892 and of $131,150 and losses below original cost of $13,561 and of $101,171, respectively. All gains and losses reported in a year as other comprehensive income have been reclassified into net income in the subsequent year. From time to time, we use margin loans to purchase certain available-for-sale securities when cash is not available based on timing of other investment maturities. Our agreement with our bank secures the margin loans with our investments and grants the bank the right to collect money owed to them by us as a result of a margin loan prior to cash being distributed to the Company. Therefore, the margin loans are offset in the balance sheet against marketable securities and short-term investments. 6. CAPITAL LEASE OBLIGATIONS AND OTHER DEBT In September 1998, we entered into a Master Note and Security Agreement (or the Note) with a finance company affiliated with our bank whereby we borrowed $1.5 million under the Note for equipment and computer software purchases. Borrowings are collateralized by substantially all of our assets, exclusive of our patents and other intellectual properties. The note requires monthly repayments of $41,277, bears interest at approximately 12% and is due March 2002, at which time a final principal installment of $150,000 is due. We have also granted to the finance company a warrant to purchase up to 13,459 shares of our common stock at $7.43 a share which was valued at $45,000 using the Black-Scholes option-pricing model with the following assumptions: Risk-free interest rate of 5.02 percent; expected life of three years; expected volatility of 75.3 percent. The warrant was recorded as a prepaid expense and is being amortized using the effective interest method over the life of the note. In September 2000, we financed the premium amounting to $322,000 for a three-year insurance policy through a borrowing from the insurer. The loan was payable through August 2001 in monthly installments of $30,556 including principal and 8.57% annual interest. At December 31, 2000, approximately $210,000 related to this note was classified on the balance sheet as accrued expenses. 59 On September 22, 2000 we signed an agreement to lease up to $2.5 million in equipment from a major equipment leasing and remarketing company (or lessor). Under the terms of the agreement, we can draw up to $2.5 million through September 2001 and are required to make quarterly payments over three years on cumulative advances drawn by us. We drew a total of $1,029,381 under the lease agreement. The lease is collateralized by the underlying equipment. At the conclusion of the lease term, the equipment may be purchased for fair value at that time, re-marketed by the lessor, or re-leased by us. In October 2000, we financed $151,249 of laboratory equipment through an equipment vendor under a capital lease agreement. Under the terms of the agreement, we are required to make monthly payments of $4,839 over three years, including effective interest at approximately 9% per annum. Future installments of debt principal on capital lease obligations are as follows:
Year Ending December 31: Amount ----------- ------------ 2002 $ 654,434 2003 315,355 2004 148,350 ---------- $1,118,139 ==========
Additionally, under our current capital lease obligations arrangements, we will be obligated to pay approximately $69,000 in interest. 7. REVENUE FROM GRANTS From 1991 to 1995, we received funding in the form of two Small Business Innovative Research Grants (or SBIR) from the National Institutes of Health. A Phase 1 grant was initiated in September 1991 and a Phase 2 grant was initiated in August 1993. In July 1995, both grants were completed and no additional funds were due or collected. We have received an aggregate of $497,128 from the two SBIR grants. No additional grants have been received. 8. DEFERRED REVENUE We had deferred revenue of $258,887 classified as other non-current liabilities in our balance sheet at December 31, 2001. During 2001 we received initial payments of $300,000 from two licensing agreements that we have between our functional genomic business segment and Pfizer, Inc. Under these agreements, we out-licensed certain technology to Pfizer for investigating potential drug targets. We may receive additional payments from Pfizer if they achieve certain milestones as defined in the agreements. In accordance with our revenue recognition policy these initial payments will be recognized as revenue over a three-year period from the date of inception of the respective agreement. Accordingly, we recognized licensing revenue of $36,113 during 2001. 9. INCOME TAXES We did not provide any current of deferred federal or state income tax provision or benefit for the period presented because we have experienced operating losses since our inception. Significant components of the income tax benefit are as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1999 2000 2001 ------------ ------------- ------------- Current: Federal $ - $ - $ - State 800 800 1,600 Foreign - - - ------------ ------------- ------------- $ 800 $ 800 $ 1,600 ============ ============= ============= Deferred: Federal $ - $ - $ - State - - - Foreign - - - ------------ ------------- ------------- $ - $ - $ - ============ ============= =============
60 The following is a reconciliation from the statutory federal income tax rate to our effective tax rate for income taxes:
1999 2000 2001 ----------------- ----------------- ----------------- Federal statutory tax rate $ (6,075,765) $ (10,042,749) $ (6,595,893) Non-utilization of net operating losses 6,075,765 10,042,749 6,595,893 ----------------- ----------------- ----------------- Effective tax rate $ - $ - $ - ================= ================= =================
Significant components of our deferred tax assets and liabilities as of December 31, 2000 and 2001 are shown below. A valuation allowance has been recognized to fully offset the net deferred tax assets as of December 31, 2000 and 2001 as realization of such assets is uncertain.
DEFERRED TAX ASSETS: 2000 2001 ----------------- ---------------- Net operating loss and business credit carryforwards $ 29,380,902 $ 39,075,459 DEFERRED TAX LIABILITIES: Depreciation and amortization differences 681,587 735,712 ----------------- ---------------- NET DEFERRED TAX ASSETS $ 28,699,315 $ 38,339,747 VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS $ (28,699,315) $ (38,339,747) ----------------- ---------------- $ - $ - ================= ================
At December 31, 2001 we had federal and California income tax loss carryforwards of $66,904,774 and $34,734,529, respectively. The federal and California tax loss carryforwards will begin to expire in 2009 and 2001, respectively, unless previously utilized. The Tax Reform Act of 1986 limits the use of net operating loss carryforwards in the case of an "ownership change" of a corporation. Any ownership changes, as defined, may restrict utilization of our carryforwards. As of December 31, 2001, we had foreign loss carryforwards of $36,686,337. 10. COMMITMENTS AND CONTINGENCIES Facility and Equipment Leases We lease certain facilities for our research and development and administrative functions and its subsidiaries. Certain leases also require scheduled annual fixed rent increases, payments of property taxes, insurance and maintenance. Our functional genomics segment sub-leases a facility from its collaboration partner (see "Joint Venture" below) that requires us to pay 50% of the lease payments plus any shortfall by our collaboration partner. In 2001, we paid approximately 85% of the minimum lease requirements under this lease representing a contingent rental incurred in excess of our 50% commitment of approximately $102,000 in 2001. The minimum lease requirements below include 100% of the minimum lease requirements to be made under this lease. In addition, we lease certain office and telephone equipment under non-cancelable operating leases. Minimum lease requirements for each of the next five years and thereafter under the property and equipment leases are as follows:
Year ending December 31: Amount ------------------------ ----------- 2002 $ 1,049,400 2003 944,200 2004 681,600 2005 405,800 2006 171,500 ----------- $ 3,252,500 ===========
Rent expense for the years ended December 31, 1999, 2000 and 2001 aggregated approximately, $601,100, $637,000, and $808,000 respectively. 61 Research and Fellowship Grants At December 31, 2001, we had committed to pay approximately $419,000 during 2002 and an aggregate of approximately $528,000 from 2003 through 2005, principally to the University of California, Irvine to conduct general scientific research programs. Grant expense for 1999, 2000 and 2001 was approximately $617,000, $1,309,000, and $822,000 respectively, and is included in research and development on the consolidated statement of operations. Licensing agreements We purchased licenses to further develop certain therapeutic compounds. We are contingently liable for certain milestone payments to the licensor if we reach certain development milestones. We have not reached any milestones and cannot determine when or if ever a milestone will be reached. If we reach a milestone, it will likely occur prior to revenues being generated from the related compound. Joint Venture In September 1999, we entered into a three-year joint venture agreement with the University of California, Irvine (or UCI) to assist in the marketing and commercialization of discoveries made by certain members of its functional genomics science department. We are obligated under the agreement to fund the joint venture for three years with minimum payments of $2.0 million over the life of the agreement. As of December 31, 2001 no obligation remains under this minimum obligation. The agreement is cancelable by either UCI or us upon giving thirty days notice. We have the right of first refusal to acquire the licensing rights to any new discoveries and UCI retains ownership rights to all discoveries under the agreement. Employment Agreements We entered into employment agreements with certain of our key executive personnel. The agreements provide for, among other things, guaranteed severance payments equal to up to twice the officer's annual base salary upon the termination of employment without cause or upon a change in control under certain circumstances. Litigation We are involved in one matter of litigation considered normal to our business. It is our policy to accrue for amounts related to legal matters if it is probable that a liability has been incurred and an amount is reasonably determinable. We believe that the outcome of this matter will not materially impact our financial position. 11. MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES The Minority Interest in Consolidated Subsidiaries shown in the accompanying balance sheet represents the investments by outside parties in our consolidated subsidiaries. The minority interest in consolidated subsidiaries' net loss amounting to $1,463,597 and $48,453 in 2000 and 2001, respectively, in the accompanying consolidated statements of operations consists primarily of the amortization of beneficial conversion feature and dividends on convertible preferred stock issued by our NeoGene and net losses attributable to the minority interest holders. As of December 31, 2001, the minority holders had no net equity, therefore, we are currently recording 100% of our majority owned subsidiaries net losses. 12. STOCKHOLDERS' EQUITY Revenue Participation Units In 1988 and 1989, we raised $676,000 in private placement funds from the issuance of seventy-five Revenue Participation Units (or RPU's) at prices ranging from $9,000 to $10,000 per RPU. RPUs entitled holders to receive cash payments based on a stipulated percentage of revenues. RPU holders were entitled to convert to common stock at any time. We had the option to redeem the RPU's subject to certain conditions by paying cash or in exchange for common stock. In July 1996, the RPU holders and we agreed to convert all 75 RPUs into 300,000 shares of our common stock. Stock Split In June 1996, our Board of Directors authorized, with stockholder approval, a reverse split of our outstanding common stock on the basis of 1 share for each 2.5 shares of then outstanding common stock. Our 62 Board of Directors also authorized, with stockholder approval, an increase in the authorized common stock from 10 million to 25 million shares and the creation of a new class of preferred stock with the authorization to issue up to 5 million shares of such preferred stock. All references to common stock amounts and loss per share in the accompanying financial statements give effect to the reverse stock split. On April 6, 2001, in a special meeting, our stockholders approved an increase in the authorized common stock from 25 million to 50 million shares. Re-incorporation During June 1997, our stockholders approved our re-incorporation as a Delaware corporation. In connection therewith, a par value of $0.001 per share was assigned to our common stock. The total number of authorized and issued shares remained unchanged. Deferred compensation expense NeoTherapeutics We granted 1,352,000 stock options to employees in 2000 with exercise prices less than the fair value of our common stock at the measurement date. The intrinsic value of the option grants amounting to $959,850 was recorded as deferred compensation and is being amortized to expense over the vesting period, in accordance with APB Opinion No. 25. During 2001, we recorded compensation expense of $641,332 as a result of such amortization. NeoGene We issued 140,654 stock options of our majority owned subsidiary NeoGene to our employees in 2001 with exercise prices less than the fair market value of NeoGene's common stock at the measurement date. The intrinsic value of the option grants amounting to $2,391,118 was recorded as deferred compensation and is being amortized to expense over the vesting period, in accordance with APB Opinion No. 25. During 2001, we recorded compensation expense of $820,008 as a result of such amortization. Preferred, Common Stock, and Warrant transactions During 1993, we issued 40,000 shares of common stock at the fair market value on the date of issuance of $1.35 per share to a financial consultant in exchange for $54,000 of investment banking services. During 1994, we sold 13,000 shares of restricted common stock at $2.50 per share through a private placement for $32,500 in cash to three investors. During 1995, we sold 22,000 shares of restricted common stock at $2.50 per share through a private placement for $55,000 in cash to six investors. During 1996, we sold 266,800 shares of restricted common stock at $2.50 per share through a private placement for $633,650 in cash. In June 1996, we filed a registration statement with the Securities and Exchange Commission offering to the public 2,500,000 units (or the Units). Each Unit consisted of one share of our common stock and one warrant to purchase one share of our common stock. The registration statement became effective on September 26, 1996, and on October 1, 1996, we sold all of the Units in exchange for $17,363,003 in cash proceeds, net of public offering costs. On October 11, 1996, the principal underwriter of the offering exercised a portion of its overallotment option and purchased from us 200,000 Units in exchange for $1,389,280 in cash, net of transaction costs. The Units separated immediately following issuance and the common stock and warrants that made up the Units traded as separate securities. The warrants expired in September 2001. On March 27, 1998, we executed a $15 million Private Equity Line of Credit Agreement (the "Equity Line Agreement") with a private investor that provides for minimum and maximum puts ranging from $250,000 to $2.0 million, depending on our stock price and trading volume. At the time of each put, the investor receives a discount of 12% from the then current average market price, as determined under the Equity Line Agreement. Pursuant to the Equity Line Agreement, we also issued to the investor warrants to purchase 25,000 shares of our common stock at an exercise price of $11.62 per share. Under the Equity Line Agreement, we received proceeds of approximately $3.55 million from sales of 506,049 shares of our common stock in 1998, $1.95 million from sales of 211,393 shares of our common stock in 1999, and during January 2000, we received $2.0 million from the sale of 186,961 shares of our common stock. The agreement expired in February 2001. On August 31, 1998, certain of our officers and directors exercised non-qualified stock options and purchased 62,000 shares of our common stock. The exercise price of the stock options was at $4.50 per share for 50,000 shares and $5.13 per share for 12,000 shares for an aggregate purchase price of $286,560, represented by notes issued by the purchasers. The notes are full recourse promissory notes bearing interest at 7% per annum, and are collateralized by the stock issued upon the exercise of the stock options. Interest and principal are payable two years after the issue dates. The notes are included as a component of equity in the financial statements. 63 On May 31, 1999, we sold to a group of private investors 400,000 shares of our common stock for $4.0 million in cash. The investors also received five-year warrants to purchase 80,000 shares of our common stock at an exercise price of $15 per share. On July 27, 1999, we completed a secondary public offering and sold 1,150,000 shares of our common stock, including the underwriters' overallotment, for $8.7 million in cash, net of offering costs. On November 30, 1999, we sold to two private investors, 845,594 shares of our common stock, for $9.4 million in cash, net of offering costs, and warrants to purchase 126,839 shares of our common stock at $14.24 per share. Based on a reset formula contained in the agreement, in March 2000 we issued to the investors 43,383 additional shares of our common stock for no additional consideration. The investors waived a second reset as partial consideration under a different financing transaction. On December 15, 1999, we entered into a settlement agreement for a previous litigation matter. Under the terms of the settlement, the shareholder forfeited 678,835 shares of common stock and warrants valued at $1,697,090 and we issued 332,630 shares of common stock and warrants valued at $4,155,449. We charged the difference of $2,456,359 to operations. On February 25, 2000 we sold to two private investors 520,324 shares of our common stock for $8.0 million in cash. The investors also received five-year warrants to purchase 104,000 shares of our common stock at the price of $21.00 per share. On April 6, 2000, we entered into a financing transaction with two private investor groups. The transaction consisted of (a) $10 million in 5% subordinated convertible debentures due April 6, 2005, (b) redeemable warrants to purchase up to 4 million shares of our common stock over a two year period and (c) five-year warrants to purchase from 115,000 shares up to 265,000 shares of our common stock at an exercise price of $19.67 per share. The redeemable warrants can be redeemed in part by us as frequently as several times per week, subject to average daily volume restrictions and if the market price of our common stock is above $5.00 per share and, when called for redemption, can be exercised by the investor at 97% of the per share closing market price (i.e., a discount of 3%) and are exercisable at the sole option of the investors at the price of $33.75 per share. During 2000, the investor converted the $10 million of debentures into 1,555,409 shares of our common stock plus 38,768 shares of our common stock in payment of accrued interest. Also in 2000, we called and the investors exercised 586,400 of our redeemable warrants for 586,400 shares of our common stock in exchange for $5,120,654 in cash. At both December 31, 2000 and 2001, there were 3,413,600 redeemable warrants outstanding. The warrants expire in June 2002. On May 1, 2000 we completed a private placement of 500,000 shares of our common stock for $7.0 million in cash. The investors also received five-year warrants to purchase 125,000 shares of our common stock at an exercise price of $17.50 per shares. On September 21, 2000, we sold 111,110 shares of Series A convertible preferred stock of our majority owned subsidiary, NeoGene, for $5 million and a five-year warrant to purchase up to (i) 80,000 shares of our common stock at an exercise price of $10.47 per share and (ii) 22,676 shares of NeoGene common stock at an exercise price of $45.00 per share. The fair market value of the warrant was estimated at $411,040 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0 percent; expected volatility of 74.97 percent; risk free interest rate of 6.01 percent; and an expected life of five years. The fair value of the warrant was estimated at $540,301 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0 percent; expected volatility of 74.97 percent; risk free interest rate of 5.93 percent; and an expected life of three years. On August 13, 2001, NeoTherapeutics purchased the Series A Preferred Stock of NeoGene for $5.5 million representing the $5.0 million face value of the preferred stock plus a $500,000 redemption fee. The difference of approximately $0.8 million between the book value of the preferred stock and the amount paid was recorded as a charge to accumulated deficit. We also paid accrued dividends of approximately $220,000 to the holders of the preferred stock. On September 29, 2000, we entered into an agreement to sell 968,524 shares of our common stock to two private investors for $8 million cash and a five-year warrant to purchase 193,706 shares of our common stock at $10.13 per share. The fair value of the warrant was estimated at $847,657 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0 percent; expected volatility of 74.97 percent; risk free interest rate of 5.88 percent; and an expected life of five years. The agreement contains a reset formula which provides for the investor to obtain at nominal cost, additional shares of our common stock based on the market price of our common stock determined thirty and sixty days after the effective date of the 64 registration statement to be filed for this transaction. On January 30, 2001, the first vested period ended which resulted under the reset formula in the issuance of 1,070,336 shares of our common stock to the investors. As part of the April 17, 2001 transaction described below, we agreed to issue an additional 900,000 shares of our common stock to the investors under the second and final reset under the agreement. We received no proceeds upon the investors' exercise of the resets. On December 18, 2000, we entered into an agreement between our majority owned subsidiary, NeoGene, and an institutional investor for the issuance and sale of NeoGene Series B convertible preferred stock and warrants for aggregate consideration of $2.0 million. Under the provisions of the agreement, we issued and sold to the investor a total of 44,445 shares of NeoGene Series B Convertible Preferred Stock, at a purchase price of $45 per share, and issued a five-year warrant to purchase a total of 9,387 shares of NeoGene common stock, at an exercise price of $45 per share. The fair value of the warrant was estimated at $250,351 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0 percent; expected volatility of 88.96 percent; risk free interest rate of 5.14 percent; and an expected life of three years. The investor also received a five-year warrant to purchase an aggregate of 30,000 shares of our common stock, at an exercise price of $6.10 per share. The fair value of the warrant was estimated at $101,700 on the date of issuance using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0 percent; expected volatility of 88.96 percent; risk free interest rate of 5.10 percent; and an expected life of five years. We also granted an exchange right to the investor that will allow the investor to exchange its shares of NeoGene Series B Preferred for our preferred stock. The exchange right grants the investor the right, at its option, at any time and from time to time after June 18, 2001, to exchange all or a portion of the NeoGene Series B Preferred shares then held by the investor for a number of shares of our designated convertible preferred stock. In June 2001, the investor exercised its right to exchange all of the NeoGene Series B Preferred stock then held by the investor for 200 shares of our 7% Series C convertible Preferred stock. Under the terms of the exchange right, the investor forfeited 4,693 or 50% of the previously granted five-year warrants to purchase shares of NeoGene common stock at an exercise price of $45 per share. The shares of our 7% Series C Preferred Stock were redeemable, under certain conditions at the option of the holder, and each share is convertible into a number of shares of our common stock equal to $10,000 divided by the lesser of (i) 100% of the average of the lowest seven closing bid prices of our common stock in the previous 30 trading days, or (ii) $5.97. In August 2001, the holder of our 7% Series C Preferred Stock converted 170 shares of our 7% Series C Preferred Stock into 485,591 shares of our common stock. In September 2001, we purchased the remaining 30 shares of our 7% Series C Preferred Stock for $300,000 plus accrued dividends and a settlement fee of approximately $72,000. The 30 shares of our 7% Series C Preferred Stock are recorded as an offset to Stockholders' Equity. On January 25, 2001, we issued to a vendor in settlement of our obligation to them, 50,000 shares of our common stock and a five-year warrant to purchase 50,000 shares of our common stock at $3.50 per share. On January 30, 2001, we issued to two investors 1,070,336 shares of our common stock under the first reset provision contained in the adjustable warrants issued in connection with the September 29, 2000 sale of 968,524 shares of our common stock for $8 million. On May 15, 2001 we also issued an additional 900,000 shares of our common stock to the two investors in respect of the second and final reset provision. We did not receive any consideration as a result of issuing shares of our common stock pursuant to the reset provisions of this financing transaction. The reset provisions were part of an earlier sale of our common stock and were previously accounted for as a partial allocation of the proceeds of that sale to common stock. As such, no further accounting was necessary on the date the reset provision was exercised. On February 2, 2001, we sold 1,627,756 shares of our common stock under the shelf registration statement to a private investor for $3.5 million in cash. On March 8, 2001, we sold 1,250,000 shares of our common stock under the shelf registration statement to a private investor for $5 million in cash. The investor also received five-year warrants to purchase up to 125,000 shares of our common stock at the exercise price of $5.00 per share. On April 17, 2001, we entered into a financing transaction with two private investor groups which provide, among other things, for (a) the sale of approximately 1,176,472 shares of our common stock under the shelf registration statement for $6.0 million cash, (b) an option to place with the investor groups two tranches of convertible debenture notes of $10 million and $8 million within approximately 30 days and seven months of the initial closing, respectively, at our option, and (c) five-year warrants exercisable at 125% of the market price of the date of the respective closing of each of the aforementioned debenture issuances for a number of shares equal to 65 20% of the number of shares into which the debentures are initially convertible. We did not exercise the first option for the debenture tranche of $10 million and paid a break-up fee of $405,000 in July 2001, pursuant to the terms of the financing transaction of May 17, 2001. This fee was charged to general and administrative expense in the second quarter of 2001. On November 13, 2001, we decided not to exercise the second option for the debenture tranche of $8 million, pursuant to the April 17, 2001 financing transaction, as amended. On May 17, 2001, we sold to the aforementioned two private investor groups 1,400,000 shares of our common stock under the shelf registration statement for $5.95 million cash. The investors also received five-year warrants to purchase up to 280,000 shares of our common stock at an exercise price of $6.00 per share. On June 22, 2001, we sold to our employees through our Employee Stock Purchase Plan (or ESPP), 40,390 shares of our common stock for approximately $90,100. Pursuant to the ESPP, the shares were sold at a 15% discount to market on the date of purchase. On August 14, 2001, we sold 600,000 shares of our common stock under the shelf registration statement to an institutional investor for $2,010,000. On June 12, 2001, we entered into two securities sales agreements with an investment banking firm acting as an underwriter to sell our common stock on a "best efforts" basis with the maximum aggregate public offering price under both agreements combined of $33.4 million. The securities were offered as part of a Controlled Equity Offering, or CEO(SM). Under one of the sales agreements, we may sell up to $8.4 million of our common stock "at the market" or directly into the established trading market for our common stock. Under the other sales agreement, we may sell up to $25 million of our common stock in any manner other than "at the market". Under each agreement, if we and the underwriter agree to sell our common stock on certain terms, the underwriter will use its commercially reasonable efforts to sell our securities up to the amount agreed upon, but will not be required to sell any specific number or dollar amount of our securities. The net proceeds from the sales will be the aggregate sales price at which our securities were sold after deduction for the underwriter's commission/discount of up to 4%. We will issue to the underwriter five-year warrants to purchase shares of our common stock in an amount equal to 10% of the number of shares of common stock sold by us pursuant to the offering at an exercise price per share equal to 130% of the volume weighted average price at which such shares were issued. On October 19, 2001, we and the investment banking firm executed amendments to the sales agreements previously entered into by the investment banking firm and us on June 12, 2001, and to the advisory agreement previously entered into on April 11, 2001 and amended on June 12, 2001. The amendments relate primarily to modifications of the compensation provisions of the sales agreements. Through placement notices under each sales agreement, during October and November of 2001, 949,710 shares of our common stock were sold pursuant to the $25 million sale agreement for aggregate cash proceeds of $3.8 million and approximately 124,800 shares of our common stock were sold pursuant to the $8.4 million sale agreement for aggregate cash proceeds of $0.4. On December 10, 2001, we sold to certain institutional investors 519,480 shares of our common stock under the shelf registration statement for cash proceeds of approximately $2.0 million. On December 13, 2001, under a second placement notice related to the aforementioned $25 million sales agreement, we sold 246,883 shares of our common stock for aggregate cash proceeds of approximately $1.0 million. On December 21, 2001, we sold to our employees through our Employee Stock Purchase Plan (or ESPP), 23,513 shares of our common stock for $67,953. Pursuant to the ESPP, the shares were sold at a 15% discount to market on the date of purchase. 13. STOCK BASED COMPENSATION We have three stock option plans: the 1991 Stock Incentive Plan (or the 1991 Plan), the 1997 Stock Incentive Plan (of the 1997 Plan) and the 2000 NeoGene Stock Incentive Plan (or the 2000 NeoGene Plan) (collectively, the Plans). The Plans were adopted by stockholders and Board of Directors in May 1991, June 1997, and August 2000, respectively, and provide for the granting of incentive and nonqualified stock options as well as other stock-based compensation. The Plans provide for issuance of incentive stock options having exercise prices equal to the fair market values of the stock on the date of grant of the options or, in certain circumstances, at option 66 prices at least equal to 110% of the fair market value of the stock on the date the options are granted. Options granted under the Plans are exercisable in such a manner and within such period, not to exceed ten years from the date of the grant, as shall be set forth in a stock option agreement between the director, officer or employee and us. Under the Plans, shares of common stock may be granted to directors, officers and employees, except that incentive stock options may not be granted to non-employee directors. The 1991 Plan, as amended, authorizes for issuance up to 401,430 shares of our common stock. The 1997 Plan, as amended, authorizes for issuance up to 3,000,000 shares of our common stock of which all had been granted at December 31, 2001. The 2000 NeoGene Plan authorizes for issuance up to 250,000 shares of NeoGene common stock. A summary of our stock option activities for the 1991 Plan and 1997 Plan are as follows:
1999 2000 2001 ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE SHARES EXERCISE PRICE SHARES PRICE SHARES PRICE ------ -------------- ------ -------- ------ -------- Outstanding at beginning of year 853,873 $5.78 1,389,373 $6.77 2,490,175 $8.34 Granted 543,500 $10.76 1,358,000 $7.04 721,500 $3.86 Exercised (1,900) $6.57 (122,598) $2.85 - - Forfeited (6,100) $8.08 (134,600) $8.78 (294,700) $4.92 ----------- ------------- ----------- ------------- ------------ ---------- Outstanding, at end of year 1,389,373 $6.77 2,490,175 $8.34 2,916,975 $6.40 ----------- ------------- ----------- ------------- ----------- ---------- Exercisable, at end of year 662,823 $3.23 745,758 $3.80 1,610,067 $4.72 =========== ============= =========== ============= =========== ==========
The following table summarizes information about stock options outstanding under the 1991 Plan and 1997 Plan at December 31, 2001:
OPTIONS WEIGHTED OPTIONS WEIGHTED RANGE OF EXERCISE OUTSTANDING AT WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE PRICE 12/31/01 REMAINING LIFE EXERCISE PRICE 12/31/01 EXERCISE PRICE ----- -------- -------------- -------------- ----------- -------------- $2.14 - $3.64 161,500 9.77 $2.95 4,500 $9.81 $3.650 - $5.625 1,344,600 8.78 $4.10 733,150 $8.54 $5.626 - $8.874 492,075 7.37 $6.83 332,900 $6.78 $8.875 - $13.00 918,800 7.84 $11.09 539,517 $7.68 ---------- --------- 2,916,975 1,610,067 ========== =========
A summary of our stock option activities for the 2000 NeoGene Plan is as follows:
2001 ------------------------ WEIGHTED AVERAGE EXERCISE SHARES PRICE ------ ----- Outstanding at beginning of year - - Granted 140,654 $1.16 Exercised - - Forfeited (3,000) $1.00 ------------- Outstanding, at end of year 137,654 $1.16 ------------ Exercisable, at end of year - - ============
The following table summarizes information about stock options outstanding under the 2000 NeoGene Plan at December 31, 2001: 67
OPTIONS WEIGHTED OPTIONS WEIGHTED OUTSTANDING AT WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE EXERCISE PRICE 12/31/01 REMAINING LIFE EXERCISE PRICE 12/31/01 EXERCISE PRICE -------------- -------- -------------- -------------- -------- -------------- $1.00 135,654 9.00 $1.00 - - $18.00 2,000 9.33 $18.00 - - ----------- --------------- 137,654 - =========== ===============
We apply APB Opinion No. 25 and related interpretations in accounting for stock options granted to employees, and do not recognize compensation expense when the exercise price of the options equals the fair market value of the underlying shares at the date of grant. Directors' stock options are treated in the same manner as employee stock options for accounting purposes. Under SFAS No. 123, the Company is required to present certain pro forma earnings information determined as if employee stock options were accounted for under the fair value method of that statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999, 2000 and 2001, respectively: risk-free interest rates of 5.80 percent (1999); 5.90 percent (2000); and 4.22 percent (2001), zero expected dividend yields; expected lives of 5 years; expected volatility of 75.44 percent in 1999; 90.72 percent in 2000; and 87.58 percent in 2001. For purposes of the following required pro forma information, the weighted average fair value of stock options granted in 1999, 2000 and 2001 was $7.57, $5.31, and $2.65, respectively. The total estimated fair value is amortized to expense over the vesting period.
1999 2000 2001 -------------- -------------- ------------- Pro forma net loss $ (27,414,976) $ (49,050,557) $(32,142,737) Pro forma basic and diluted loss per share $ (3.82) $ (4.61) $ (1.63)
Warrants are typically issued by the Company to investors as part of a financing transaction, or in connection with services rendered by outside consultants and expire at varying dates ranging from September 2001 through November 2004. A summary of warrant activity follows:
1999 2000 2001 ----------------------------- ------------------------ ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE COMMON AVERAGE COMMON AVERAGE COMMON SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------------- -------------- ------ -------------- ------ -------------- Outstanding, at beginning of year 2,697,459 $11.38 3,217,123 $11.95 4,140,189 $13.57 Granted 528,664 $13.41 927,556 $16.76 1,192,569 $9.05 Exercised (9,000) $11.40 (4,490) $11.40 - - Forfeited (1) - - - - (2,735,510) $11.37 ------------- ---------- ----------- Outstanding, at end of year 3,217,123 $11.95 4,140,189 $13.57 2,597,248 $12.91 ============= ========== ===========
(1) Expiration of public warrants that were issued at time of initial public offering. 68 The following table summarizes information about warrants outstanding at December 31, 2001:
WARRANTS WEIGHTED WARRANTS WEIGHTED OUTSTANDING AT WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE EXERCISE PRICE 12/31/01 REMAINING LIFE EXERCISE PRICE 12/31/01 EXERCISE PRICE - -------------- -------------- ---------------- -------------- ----------- -------------- $3.50 - $5.50 682,139 4.67 $4.34 557,139 $4.40 $5.51 - $7.43 333,459 4.19 $6.07 53,459 $6.45 $7.44 - $10.47 273,706 3.74 $10.23 - - $10.48 - $13.00 132,632 1.98 $12.68 56,631 $12.29 $13.01 - $15.00 462,312 3.20 $14.79 335,473 $15.00 $15.01 - $17.50 260,000 3.04 $16.72 260,000 $16.72 $17.51 - $19.67 314,000 3.26 $19.67 - - $19.68 - $21.00 139,000 3.08 $20.91 35,000 $20.63 ---------- --------- 2,597,248 1,297,702 ========== =========
The preceding table excludes the Class B warrants that are callable at our option and subject to certain terms described in Note 12. Stockholders' Equity,under the subtitle, "Preferred, Common Stock, and Warrant transactions". On September 1, 2000, we granted and our Board of Director approved 250,000 stock options to purchase shares of our common stock at an exercise price of $6.0625 per share to one of our officers. This agreement was amended on February 12, 2001, which revised certain of the vesting milestones noted below. 100,000 of these options vest ratably over two years. 100,000 of these stock options vest in two tranches of 50,000 on a day when the market closing price of our common stock is equal to or greater than $6.00 and $9.00 per share, respectively. The remaining tranche of 50,000 stock options vests on the earlier of certain milestones being reached, one of which is a day when the market closing price of our common stock is equal to or greater than $12.00. An additional 1,316,000 options with an exercise price of $3.00 per share were granted, subject to shareholder approval, to employees, officers, and directors on October 9, 2001. We issued to various consultants stock options that are not associated with any of the aforementioned Plans (Non-Plan Options). During the period from December 1993 through December 1996, we issued to two scientific consultants and a financial consultant in exchange for past and future services a total of 194,000 Non-Plan Options to purchase common stock at an exercise price of $0.025 per share. As the exercise price was lower than the fair market value of the stock on the date the options were granted, compensation expense was recorded for the difference between the option exercise price and the estimated fair market value of the stock as determined by our Board of Directors on the grant date. All of these Non-Plan Options were vested and exercisable upon issuance. We issued to a consultant 180,000 Non-Plan Options in 1997 at an exercise price of $3.875 per share, of which 30,000 vested immediately. In 1998, we issued to the same consultant an additional 25,000 Non-Plan Options at an exercise price of $8.5625 per share, all of which vested immediately. Compensation expense related to these options grants that vested immediately was recorded in the respective year of grant. The remaining 150,000 stock options granted in 1997 did not vest and no compensation expense was recorded. In September 1990, we issued to our Chief Executive Officer a warrant to purchase 88,173 shares of our common stock at $3.75 per share. The Chief Executive Officer exercised the warrant in August 2000 by delivery of a promissory note payable to us (See footnote 3, Related Party Transactions). 14. DEFINED CONTRIBUTION PENSION PLAN We established a 401(k) Salary Deferral Plan on January 1, 1990. This plan allows eligible employees to defer part of their income on a tax-free basis. Contributions by us to this plan are discretionary upon approval by our Board of Directors. As of December 31, 2001, we have not made any contributions into this plan. 69 15. EMPLOYEE STOCK PURCHASE PLAN In January 2001, we adopted the NeoTherapeutics Employee Stock Purchase Plan (or the ESPP). The ESPP is subject to the provisions of Section 423 of the Internal Revenue Code offers to our eligible employees, on a tax-advantaged basis, the opportunity to purchase shares of our common stock, at a discount, through payroll deductions. The ESPP allows the participant to deduct up to a specified maximum percentage of their gross income each pay period. Under the ESPP, our common stock will be offered during the six month offering periods commencing on each June and December. Under the ESPP, shares of our common stock are purchased, for those employees who chose to participate, automatically, at a purchase price equal to 85% of the lesser of (i) the fair market value of our common stock on the first trading day of an offering period and (ii) the fair market value of our common stock on the last trading day of an offering period. 16. SEGMENT INFORMATION We are organized in two business segments: pharmaceutical and functional genomics. Our pharmaceutical business segment engages in the discovery and development of novel drugs to treat significant medical diseases or indications associated with nervous system disorders and cancer. Our functional genomics business segment is involved in determining the function and purpose of human genes for the purpose of discovering drugs that combat diseases associated with these genes. The information shown below for our pharmaceutical business segment represents the accounts of NeoTherapeutics, NeoOncoRx and all of our wholly owned subsidiaries. The information shown below for our functional genomics business segment represents the accounts of our majority owned subsidiary NeoGene. Summary intercompany transactions and balances are not shown. Intercompany transactions include primarily cash loaned and general and administrative services rendered by our pharmaceutical segment to our functional genomics segment. The allocation of general and administrative services is carved out from our pharmaceutical business based on our best estimates but may not be indicative of the cost of these services if they had been rendered by an independent third party. The information below represents amounts that are included in the measure of segment operating results that are reviewed by our management. PHARMACEUTICAL BUSINESS FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED INCEPTION TO DECEMBER 31: 1999 2000 2001 2001 ----------- ---------- ---------- ------------ Revenues $ - $ - $ - $ 497 Operating expenses: Research and development 19,873 38,131 18,469 92,490 General and administrative 3,438 4,643 6,302 23,276 Settlement of litigation 2,458 - - 2,458 ------------ ----------- ---------- ------------ Loss from operations (25,769) (42,774) (24,771) (117,727) Other income (expense) (9) (1,080) 152 (344) Minority interest in consolidated subsidiaries' net loss - (1,464) (48) (1,512) ------------ ----------- ---------- ------------ Net loss $ (25,778) $ (45,318) $ (24,667) $ (119,583) ============ =========== ========== ============
BALANCE SHEET DATA AT DECEMBER 31: 1999 2000 2001 -------- -------- ------- Capital expenditures $ 430 $ 844 $ 1,045 Property and equipment, net 3,161 3,416 3,691 Total assets $ 13,172 $ 10,317 $ 9,676
70 FUNCTIONAL GENOMICS BUSINESS FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED INCEPTION TO DECEMBER 31: 1999 2000 2001 2001 ----------- --------- ---------- ------------ Revenues $ - $ - $ 41 $ 41 Operating expenses: Research and development 185 636 2,142 2,963 General and administrative 27 464 1,278 1,769 ------------ ----------- ------------ -------------- Loss from operations (212) (1,100) (3,379) (4,691) Other income (expense) - (10) 211 201 ------------ ----------- ------------ -------------- Net loss $ (212) $ (1,110) $ (3,168) $ (4,490) ============ =========== ============ ==============
BALANCE SHEET DATA AT DECEMBER 31: 1999 2000 2001 ----- ------ ------ Capital expenditures $ - $ - $1,024 Property and equipment, net - - 998 Total assets $ 2 $5,464 $3,149
CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS):
STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED INCEPTION TO DECEMBER 31: 1999 2000 2001 2001 ----------- ---------- ----------- -------------- Revenues $ - $ - $ 41 $ 538 Operating expenses: Research and development 20,058 38,767 20,611 95,453 General and administrative 3,465 5,107 7,580 25,045 Settlement of litigation 2,458 - - 2,458 ------------ ----------- ------------ -------------- Loss from operations (25,981) (43,874) (28,150) (122,418) Other income (expense) (9) (2,553) 315 (1,655) ------------ ----------- ------------ -------------- Net loss $ (25,990) $ (46,427) $ (27,835) $ (124,073) ============ =========== ============ ==============
BALANCE SHEET DATA AT DECEMBER 31: 1999 2000 2001 ------- ------- ------- Capital expenditures $ 430 $ 844 $ 2,069 Property and equipment, net 3,161 3,416 4,689 Total assets $13,174 $15,781 $12,825
All revenue is domestic licensing except $5,000 that was from a single non-recurring product sale made to a company in Spain. All of our long-lived assets reside in the United States. 71 17. UNAUDITED QUARTERLY FINANCIAL INFORMATION The following is a summary of the unaudited quarterly results of operations for each of the calendar quarters ended in the two-year period ended December 31, 2001 (in thousands, except per share data):
Fiscal 2000 March 31 June 30 September 30 December 31 ------------ ------------- ------------ ----------- Revenues $ - $ - $ - $ - Total operating expenses $ 9,455 $ 11,387 $ 11,778 $ 11,253 Net loss $ (9,332) $ (12,346) $ (13,223) $ (11,526) Basic and diluted loss per share $ (1.02) $ (1.29) $ (1.27) $ (0.88) Shares used in calculation 9,135 9,536 10,383 13,077
Fiscal 2001 March 31 June 30 September 30 December 31 ------------ ------------- ------------ ----------- Revenues $ - $ 8 $ 8 $ 25 Total operating expenses $ 5,608 $ 6,745 $ 6,217 $ 9,620 Net loss $ (5,478) $ (6,643) $ (5,979) $ (9,735) Basic and diluted loss per share $ (0.36) $ (0.36) $ (0.39) $ (0.48) Shares used in calculation 15,336 18,510 17,582 20,316
18. SUBSEQUENT EVENTS On March 12, 2002, we sold 2,575,000 shares of our common stock at $2.00 per share for gross cash proceeds of $5.15 million off of our shelf registration statement. The investors also received warrants to purchase up to 643,750 shares of our common stock at an exercise price of $2.75 per share. Offering costs of this transaction were approximately $230,000. On March 15, 2002, we sold 525,000 shares of our common stock at $2.00 per share for gross cash proceeds of $1.05 million off of our shelf registration statement. The investors also received warrants to purchase up to 131,250 shares of our common stock at an exercise price of $2.75 per share. Offering costs of this transaction were approximately $130,000. 72 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning our directors and executive officers required under this item is incorporated herein by reference from our definitive proxy statement, to be filed pursuant to Regulation 14A, related to our 2002 Annual Meeting of Stockholders to be held on June 17, 2002 (or the 2002 Proxy Statement). ITEM 11. EXECUTIVE COMPENSATION The information required under this item is incorporated herein by reference from our 2002 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this item is incorporated herein by reference from our 2002 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this item is incorporated herein by reference from our 2002 Proxy Statement. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1. CONSOLIDATED FINANCIAL STATEMENTS: The following are included herein under Item 8: Report of Independent Public Accountants. Consolidated Balance Sheet as of December 31, 2000 and 2001. Consolidated Statement of Operations for the years ended December 31, 1999, 2000 and 2001 and the period from inception through December 31, 2001. Consolidated Statement of Stockholders' Equity for the period from inception through December 31, 2001. Consolidated Statement of Cash Flow for the years ended December 31, 1999, 2000 and 2001 and the period from inception through December 31, 2001. Notes to Consolidated Financial Statements. (a)2. FINANCIAL STATEMENT SCHEDULES: None. All financial statement schedules are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto. 73 (A) 3. EXHIBITS.
EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 Certificate of Incorporation of the Registrant, as filed on May 7, 1997. (Filed as Exhibit B to the Definitive Proxy Statement dated May 8, 1997, for the Annual Meeting of Shareholders of NeoTherapeutics Colorado, the predecessor to Registrant, held on June 17, 1997, as filed with the Securities and Exchange Commission on May 9, 1997, and incorporated herein by reference.) 3.1.1+ Certificate of Amendment to the Certificate of Incorporation of the Registrant. 3.1.2 Certificate of Designation of 5% Series A Preferred Stock with Conversion Features. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on February 9, 1999, and incorporated herein by reference.) 3.1.3 Certificate of Designation of Rights, Preferences and Privileges of Series B Junior Participating Preferred Stock of the Registrant. (Filed as Exhibit 3.1 to Form 8-A12G, as filed with the Securities and Exchange Commission on December 26, 2000, and incorporated herein by reference.) 3.1.4 Certificate of Designations of the Series C Preferred Stock of the Registrant. (Filed as Exhibit 4.7 to the Registration Statement on Form S-3, as amended (No. 333-64432), as filed with the Securities and Exchange Commission on July 2, 2001, and incorporated herein by reference.) 3.2+ Bylaws of the Registrant, as amended. 4.1+ Form of Warrant issued by the Registrant to Sanford Glasky, dated as of December 15, 1997, to purchase up to 16,631 shares of our common stock. 4.2+ Warrant issued by the Registrant to Leasing Technologies, Inc., dated as of September 9, 1998. 4.3 Registration Rights Agreement dated as of January 29, 1999, by and among the Registrant, Westover Investments L.P. and Montrose Investments Ltd. (Filed as Exhibit 4.3 to Form 8-K, as filed with the Securities and Exchange Commission on February 9, 1999, and incorporated herein by reference.) 4.4 Form of Warrant issued by the Registrant to Westover Investments L.P. and Montrose Investments Ltd., dated as of January 29, 1999. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on February 9, 1999, and incorporated herein by reference.) 4.5 Warrant issued by the Registrant to Brighton Capital, Ltd., dated as of January 29, 1999. (Filed as Exhibit 4.13 to the Registration Statement on Form S-3 (No. 333-37180), as filed with the Securities and Exchange Commission on May 16, 2000, and incorporated herein by reference.) 4.6+ Form of Warrant issued by the Registrant to certain investors, dated as of May 11, 1999, to purchase up to an aggregate of 80,000 shares of our common stock. 4.7+ Warrant issued by the Registrant to Stradling Yocca Carlson & Rauth, dated as of May 17, 1999. 4.8 Form of Representative's Warrant issued to Joseph Charles & Associates, Inc., dated as of July 26, 1999, to purchase up to 100,000 shares of our common stock. (Filed as Exhibit 4.12 to the Registration Statement on Form S-1, as amended (No. 333-79935), as filed with the Securities and Exchange Commission on July 21, 1999, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION ----------- ----------- 4.9 Registration Rights Agreement dated as of November 19, 1999, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on December 7, 1999, and incorporated herein by reference.) 4.10 Closing Warrant issued by the Registrant to Montrose Investments Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on December 7, 1999, and incorporated herein by reference.) 4.11 Closing Warrant issued by the Registrant to Strong River Investments, Inc., dated as of November 19, 1999. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on December 7, 1999, and incorporated herein by reference.) 4.12 Warrant issued by the Registrant to Brighton Capital, Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.14 to the Registration Statement on Form S-3 (No. 333-37180), as filed with the Securities and Exchange Commission on May 16, 2000, and incorporated herein by reference.) 4.13 Registration Rights Agreement dated as of February 25, 2000, by and among the Registrant, Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 4.2 to Form 8-K, as filed with the Securities and Exchange Commission on April 3, 2000, and incorporated herein by reference.) 4.14 Closing Warrant issued by the Registrant to Montrose Investments Ltd., dated as of February 25, 2000. (Filed as Exhibit 4.3 to Form 8-K, as filed with the Securities and Exchange Commission on April 3, 2000, and incorporated herein by reference.) 4.15 Closing Warrant issued by the Registrant to Strong River Investments, Inc., dated as of February 25, 2000. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on April 3, 2000, and incorporated herein by reference.) 4.16 Warrant issued by the Registrant to Brighton Capital, Ltd., dated as of February 25, 2000. (Filed as Exhibit 4.15 to the Registration Statement on Form S-3 (No. 333-37180), as filed with the Securities and Exchange Commission on May 16, 2000, and incorporated herein by reference.) 4.17 Registration Rights Agreement dated as of April 6, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.2 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.) 4.18 Class A Warrant issued by the Registrant to Montrose Investments Ltd., dated as of April 6, 2000. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.) 4.19 Class A Warrant issued by the Registrant to Strong River Investments, Inc., dated as of April 6, 2000. (Filed as Exhibit 4.5 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.) 4.20 Class B Warrant issued by the Registrant to Montrose Investments Ltd., dated as of April 6, 2000. (Filed as Exhibit 4.6 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION ----------- ----------- 4.21 Class B Warrant issued by the Registrant to Strong River Investments, Inc., dated as of April 6, 2000. (Filed as Exhibit 4.7 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.) 4.22 Warrant issued by the Registrant to Brighton Capital, Ltd., dated as of April 6, 2000. (Filed as Exhibit 4.16 to the Registration Statement on Form S-3 (No. 333-37180), as filed with the Securities and Exchange Commission on May 16, 2000, and incorporated herein by reference.) 4.23 Registration Rights Agreement dated as of April 28, 2000, by and among the Registrant, Royal Canadian Growth Fund and Dlouhy Investments Inc. (Filed as Exhibit 4.2 to Form 8-K, as filed with the Securities and Exchange Commission on May 25, 2000, and incorporated herein by reference.) 4.24 Warrant issued by the Registrant to Royal Canadian Growth Fund, dated as of May 1, 2000. (Filed as Exhibit 4.3 to Form 8-K, as filed with the Securities and Exchange Commission on May 25, 2000, and incorporated herein by reference.) 4.25 Warrant issued by the Registrant to Dlouhy Investments Inc., dated as of May 1, 2000. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on May 25, 2000, and incorporated herein by reference.) 4.26 Registration Rights Agreement dated as of September 21, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.27 Warrant issued by the Registrant to Montrose Investments Ltd., dated as of September 21, 2000. (Filed as Exhibit 4.7 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.28 Warrant issued by the Registrant to Strong River Investments, Inc., dated as of September 21, 2000. (Filed as Exhibit 4.8 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.29 Registration Rights Agreement dated as of September 29, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.12 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.30 Closing Warrant issued by the Registrant to Montrose Investments, Ltd., dated as of September 29, 2000. (Filed as Exhibit 4.13 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.31 Closing Warrant issued by the Registrant to Strong River Investments, Inc., dated as of September 29, 2000. (Filed as Exhibit 4.14 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.32+ Form of Warrants issued by the Registrant to Brighton Capital, Ltd., dated between September 18, 2000 and May 18, 2001, to purchase up to an aggregate of 130,473 shares of our common stock.
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EXHIBIT NO. DESCRIPTION ----------- ----------- 4.33 Rights Agreement, dated as of December 13, 2000, between the Registrant and U.S. Stock Transfer Corporation, as Rights Agent, which includes as Exhibit A thereto the form of Certificate of Designation for the Series B Junior Participating Preferred Stock, as Exhibit B thereto the Form of Rights Certificate and as Exhibit C thereto a Summary of Terms of Stockholder Rights Plan. (Filed as Exhibit 4.1 to Form 8-A12G, as filed with the Securities and Exchange Commission on December 26, 2000, and incorporated herein by reference.) 4.34 Registration Rights Agreement dated as of December 18, 2000, by and between the Registrant and Societe Generale. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on December 28, 2000, and incorporated herein by reference.) 4.35 Warrant issued by the Registrant to Societe Generale, dated as of December 18, 2000. (Filed as Exhibit 4.6 to Form 8-K, as filed with the Securities and Exchange Commission on December 28, 2000, and incorporated herein by reference.) 4.36+ Warrant issued by the Registrant to Brighton Capital, Ltd., dated as of December 18, 2000. 4.37+ Warrant issued by the Registrant to CroMedica Global, Inc., dated as of January 25, 2001. 4.38 Warrant issued by the Registrant to IAT ReInsurance Syndicate Ltd., dated as of March 8, 2001. (Filed as Exhibit 10.2 to Form 8-K, as filed with the Securities and Exchange Commission on March 14, 2001, and incorporated herein by reference.) 4.39 Advisory Agreement dated as of April 11, 2001, by and between the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 4.1 to the Registration Statement on Form S-3, as amended (No. 333-64444), as filed with the Securities and Exchange Commission on July 2, 2001, and incorporated herein by reference.) 4.40 Amendment to the Advisory Agreement dated as of June 12, 2001, by and between the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 4.2 to the Registration Statement on Form S-3, as amended (No. 333-64444), as filed with the Securities and Exchange Commission on July 2, 2001, and incorporated herein by reference.) 4.41 Amendment to the Advisory Agreement, dated as of October 19, 2001, by and between the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on October 24, 2001, and incorporated herein by reference.) 4.42 Warrant issued by the Registrant to Montrose Investments Ltd., dated as of May 18, 2001. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on May 21, 2001, and incorporated herein by reference.) 4.43 Warrant issued by the Registrant to Strong River Investments, Inc., dated as of May 18, 2001. (Filed as Exhibit 4.2 to Form 8-K, as filed with the Securities and Exchange Commission on May 21, 2001, and incorporated herein by reference.) 4.44+ Form of Warrant issued by the Registrant to Gruntal & Co., L.L.C., dated as of August 10, 2001, to purchase up to 125,000 shares of our common stock.
77
EXHIBIT NO. DESCRIPTION ----------- ----------- 4.45 Form of Warrants issued by the Registrant to Cantor Fitzgerald & Co, dated as of December 6, 2001 and December 13, 2001, to purchase up to an aggregate of 132,139 shares of our common stock. (Filed as Exhibit A to Schedule 1 to Exhibit 1.1 to Form 8-K, as filed with the Securities and Exchange Commission on October 24, 2001, and incorporated herein by reference.) 4.46+ Warrant issued by the Registrant to Jefferies & Company, Inc., dated as of December 13, 2001. 4.47+ Form of Warrant issued by the Registrant to certain purchasers, dated as of March 13, 2002 and March 15, 2002, to purchase up to an aggregate of 795,000 shares of our common stock. 10.1* 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the Registration Statement on Form SB-2, as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.2* Note dated as of June 21, 1996, between the Registrant and Alvin J. Glasky and related Security Agreement dated August 31, 1990. (Filed as Exhibit 10.4 to the Registration Statement on Form SB-2, as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.3* Addendum to Note dated as of June 21, 1996, between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.12 to the Form 10-KSB for fiscal year ended December 31, 1996, as filed with the Securities and Exchange Commission on March 31, 1997, and incorporated herein by reference.) 10.4* Agreement dated as of June 6, 1991, as amended on July 26, 1996, by and between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.7 to the Registration Statement on Form SB-2, as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.5* Agreement dated as of June 30, 1991, as amended on July 26, 1996, by and between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.8 to the Registration Statement on Form SB-2, as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.6* Form of Indemnification Agreement between the Registrant and each of its officers and directors. (Filed as Exhibit 10.10 to the Registration Statement on Form SB-2, as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.7 Industrial Lease Agreement dated as of January 16, 1997, between the Registrant and the Irvine Company. (Filed as Exhibit 10.11 to the Form 10-KSB for the fiscal year ended December 31, 1996, as filed with the Securities and Exchange Commission on March 31, 1997, and incorporated herein by reference.) 10.8*+ Amended and Restated 1997 Stock Incentive Plan. 10.9 Master Note and Security Agreement between the Registrant and Leasing Technologies, Inc. dated as of July 10, 1998. (Filed as Exhibit 4 to Form 10-QSB for the quarter ended September 30, 1998, as filed with the Securities and Exchange Commission on November 9, 1998, and incorporated herein by reference.) 10.10 Securities Purchase Agreement dated as of February 25, 2000, by and among the Registrant, Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on April 3, 2000, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION ----------- ----------- 10.11 Convertible Debenture Purchase Agreement dated as of April 6, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.) 10.12 Securities Purchase Agreement dated as of April 28, 2000, by and between the Registrant and Royal Canadian Growth Fund. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on May 25, 2000, and incorporated herein by reference.) 10.13 Letter Agreement dated as of May 1, 2000, by and between the Registrant and Royal Canadian Growth Fund. (Filed as Exhibit 4.5 to Form 8-K, as filed with the Securities and Exchange Commission on May 25, 2000, and incorporated herein by reference.) 10.14 Securities Purchase Agreement dated as of September 21, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 10.15 Registration Rights Agreement dated as of September 21, 2000, by and among NeoGene Technologies, Inc., Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.3 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 10.16 Warrant issued by NeoGene Technologies, Inc., to Montrose Investments Ltd., dated as of September 21, 2000. (Filed as Exhibit 4.5 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 10.17 Warrant issued by NeoGene Technologies, Inc., to Strong River Investments, Inc., dated as of September 21, 2000. (Filed as Exhibit 4.6 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 10.18+ Warrant issued by NeoGene Technologies, Inc., to Brighton Capital, Ltd., dated as of September 21, 2000. 10.19 Master Lease Agreement dated as of September 22, 2000, by and between the Registrant and Comdisco Laboratory and Scientific Group. (Filed as Exhibit 10.16 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.20 Amendment No. 1 to Master Lease Agreement dated as of September 22, 2000, by and between the Registrant and Comdisco Laboratory and Scientific Group. (Filed as Exhibit 10.17 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.21 Equipment Schedule No. S-01 dated as of September 22, 2000, by and between the Registrant and Comdisco Laboratory and Scientific Group. (Filed as Exhibit 10.18 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION ----------- ----------- 10.22 Addendum to Equipment Schedule No. SG-01 dated as of September 22, 2000, by and between the Registrant and Comdisco Laboratory and Scientific Group. (Filed as Exhibit 10.19 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.23 Securities Purchase Agreement dated as of September 29, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.11 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 10.24 Securities Purchase Agreement dated as of December 18, 2000, by and among the Registrant, NeoGene Technologies, Inc. and Societe Generale. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on December 28, 2000, and incorporated herein by reference.) 10.25 Registration Rights Agreement dated as of December 18, 2000, by and between NeoGene Technologies, Inc. and Societe Generale. (Filed as Exhibit 4.3 to Form 8-K, as filed with the Securities and Exchange Commission on December 28, 2000, and incorporated herein by reference.) 10.26 Warrant issued by NeoGene Technologies, Inc., to Societe Generale, dated as of December 18, 2000. (Filed as Exhibit 4.5 to Form 8-K, as filed with the Securities and Exchange Commission on December 28, 2000, and incorporated herein by reference.) 10.27 Stock Purchase Agreement dated as of January 31, 2001, by and between the Registrant and Amro International S.A. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on February 16, 2001, and incorporated herein by reference.) 10.28 Securities Purchase Agreement dated as of March 8, 2001, by and between the Registrant and IAT ReInsurance Syndicate Ltd. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on March 14, 2001, and incorporated herein by reference.) 10.29 Letter Agreement dated as of April 17, 2001, by and between the Registrant, Montrose Investments Ltd., Strong River Investments, Inc. and HBK Master Fund L.P. (Filed as Exhibit 10.20 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.30 Securities Purchase Agreement dated as of April 20, 2001, by and between the Registrant, Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 4.63 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.31* Employee Stock Purchase Plan. (Filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (No. 333-54246), and incorporated herein by reference.) 10.32* Amendment 2001-1 to the Employee Stock Purchase Plan effective as of June 21, 2001. (Filed as Exhibit 10.22 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.33* Executive Employment Agreement for Alvin J. Glasky, Ph.D., dated as of December 1, 2000. (Filed as Exhibit 10.23 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.34* Executive Employment Agreement for Sam Gulko, dated as of December 1, 2000. (Filed as Exhibit 10.24 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.35*+ Executive Employment Agreement for Rajesh C. Shrotriya, M.D., dated as of December 1, 2000. 10.36 Securities Purchase Agreement dated as of May 17, 2001, by and among the Registrant, Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on May 21, 2001, and incorporated herein by reference.) 10.37 Letter Agreement dated as of May 17, 2001, by and among the Registrant, Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 10.2 to Form 8-K, as filed with the Securities and Exchange Commission on May 21, 2001, and incorporated herein by reference.) 10.38 License Agreement dated as of June 29, 2001, by and between the Registrant and NDDO Research Foundation. (Filed as Exhibit 10.4 to Form 10-Q, as filed with the Securities and Exchange Commission on November 14, 2001, and incorporated herein by reference.) 10.39+ Letter Agreement dated as of August 10, 2001, by and between the Registrant and Gruntal & Co., L.L.C. 10.40 Stock Purchase Agreement dated as of August 13, 2001, by and among the Registrant, NeoGene Technologies, Inc., Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on August 27, 2001, and incorporated herein by reference.) 10.41 Stock Purchase Agreement dated as of August 14, 2001, by and between the Registrant and Summit Capital Management L.L.C. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on August 15, 2001, and incorporated herein by reference.) 10.42 License Agreement dated as of August 28, 2001, by and between the Registrant and Johnson Matthey plc. (Filed as Exhibit 10.5 to Form 10-Q, as filed with the Securities and Exchange Commission on November 14, 2001, and incorporated herein by reference.) 10.43 Stock Purchase and Settlement Agreement and Release dated as of September 19, 2001, by and among the Registrant, NeoGene Technologies, Inc. and Societe Generale. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on September 24, 2001, and incorporated herein by reference.) 10.44 License Agreement dated as of October 24, 2001, by and between the Registrant and Bristol-Myers Squibb Company. (Filed as Exhibit 10.6 to Form 10-Q, as filed with the Securities and Exchange Commission on November 14, 2001, and incorporated herein by reference.) 10.45 Letter Agreement dated as of November 19, 2001, by and between the Registrant and Ladenburg Thalmann & Co., Inc. (Filed as Exhibit 1.1 to Form 8-K, as filed with the Securities and Exchange Commission on December 11, 2001, and incorporated herein by reference.) 10.46+ Form of Securities Purchase Agreement, by and between the Registrant and certain investors, dated as of December 10, 2001, for the purchase of an aggregate of 519,480 shares of our common stock.
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EXHIBIT NO. DESCRIPTION ----------- ----------- 10.47+ Letter Agreement dated as of March 11, 2002, by and between the Registrant and Brighton Capital, Ltd. 10.48+ Form of Securities Purchase Agreement, by and between the Registrant and certain investors, dated as of March 12, 2002 and March 15, 2002, for the purchase of an aggregate of 3,100,000 shares of our common stock. 21+ Subsidiaries of Registrant. 23+ Consent of Arthur Andersen LLP. 99.1+ Letter dated April 1, 2002 from the Registrant to the Commission.
* Indicates a management contract or compensatory plan or arrangement. + Filed herewith 82 (b) Reports on Form 8-K. 1. We filed a Report on Form 8-K on October 24, 2001 to report that on October 19, 2001, we executed amendments to the Sales Agreements dated June 12, 2001 as well as the Advisory Agreement dated April 11, 2001 and amended on June 12, 2001 that we had previously entered into with Cantor Fitzgerald & Co. 2. We filed a Report on Form 8-K on October 30, 2001 and on December 20, 2001 to report press releases issued on October 30, 2001 and December 20, 2001, respectively. 3. We filed a Report on Form 8-K on December 11, 2001 to report that we entered into a letter agreement with Ladenburg Thalmann & Co. pursuant to which Landenburg Thalmann & Co. would act as a non-exclusive placement agent in connection with proposed public offerings of common stock and/or warrants to purchase common stock of NeoTherapeutics pursuant to NeoTherapeutics' existing effective shelf registration statement on Form S-3, file number 333-53108. 83 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. NEOTHERAPEUTICS, INC. Date: April 2, 2002 By: /s/ Alvin J. Glasky ------------------------------------ Alvin J. Glasky, Ph.D. Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ Alvin J. Glasky Chairman of the Board, April 2, 2002 - ------------------------------------ Chief Executive Officer Alvin J. Glasky, Ph.D. and Director (Principal Executive Officer) /s/ Rajesh C. Shrotriya, M.D. President, Chief April 2, 2002 - -------------------------------------- Operating Officer and Rajesh C. Shrotriya, M.D. Director /s/ Samuel Gulko Senior Vice President Finance, April 2, 2002 - ------------------------------------ Chief Financial Officer, Secretary, Samuel Gulko Treasurer and Director (Principal Accounting and Financial Officer) /s/ Mark J. Glasky Director April 2, 2002 - ------------------------------------ Mark J. Glasky /s/ Ann C. Kessler Director April 2, 2002 - ------------------------------------ Ann C. Kessler, Ph.D. /s/Armin M. Kessler Director April 2, 2002 - ------------------------------------ Armin M. Kessler /s/ Eric L. Nelson Director April 2, 2002 - ------------------------------------ Eric L. Nelson, Ph.D. /s/ Carol O'Cleireacain Director April 2, 2002 - ------------------------------------ Carol O'Cleireacain, Ph.D. /s/ Paul H. Silverman Director April 2, 2002 - ------------------------------------ Paul H. Silverman Ph.D., D.Sc.
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 Certificate of Incorporation of the Registrant, as filed on May 7, 1997. (Filed as Exhibit B to the Definitive Proxy Statement dated May 8, 1997, for the Annual Meeting of Shareholders of NeoTherapeutics Colorado, the predecessor to Registrant, held on June 17, 1997, as filed with the Securities and Exchange Commission on May 9, 1997, and incorporated herein by reference.) 3.1.1+ Certificate of Amendment to the Certificate of Incorporation of the Registrant. 3.1.2 Certificate of Designation of 5% Series A Preferred Stock with Conversion Features. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on February 9, 1999, and incorporated herein by reference.) 3.1.3 Certificate of Designation of Rights, Preferences and Privileges of Series B Junior Participating Preferred Stock of the Registrant. (Filed as Exhibit 3.1 to Form 8-A12G, as filed with the Securities and Exchange Commission on December 26, 2000, and incorporated herein by reference.) 3.1.4 Certificate of Designations of the Series C Preferred Stock of the Registrant. (Filed as Exhibit 4.7 to the Registration Statement on Form S-3, as amended (No. 333-64432), as filed with the Securities and Exchange Commission on July 2, 2001, and incorporated herein by reference.) 3.2+ Bylaws of the Registrant, as amended. 4.1+ Form of Warrant issued by the Registrant to Sanford Glasky, dated as of December 15, 1997, to purchase up to 16,631 shares of our common stock. 4.2+ Warrant issued by the Registrant to Leasing Technologies, Inc., dated as of September 9, 1998. 4.3 Registration Rights Agreement dated as of January 29, 1999, by and among the Registrant, Westover Investments L.P. and Montrose Investments Ltd. (Filed as Exhibit 4.3 to Form 8-K, as filed with the Securities and Exchange Commission on February 9, 1999, and incorporated herein by reference.) 4.4 Form of Warrant issued by the Registrant to Westover Investments L.P. and Montrose Investments Ltd., dated as of January 29, 1999. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on February 9, 1999, and incorporated herein by reference.) 4.5 Warrant issued by the Registrant to Brighton Capital, Ltd., dated as of January 29, 1999. (Filed as Exhibit 4.13 to the Registration Statement on Form S-3 (No. 333-37180), as filed with the Securities and Exchange Commission on May 16, 2000, and incorporated herein by reference.) 4.6+ Form of Warrant issued by the Registrant to certain investors, dated as of May 11, 1999, to purchase up to an aggregate of 80,000 shares of our common stock. 4.7+ Warrant issued by the Registrant to Stradling Yocca Carlson & Rauth, dated as of May 17, 1999. 4.8 Form of Representative's Warrant issued to Joseph Charles & Associates, Inc., dated as of July 26, 1999, to purchase up to 100,000 shares of our common stock. (Filed as Exhibit 4.12 to the Registration Statement on Form S-1, as amended (No. 333-79935), as filed with the Securities and Exchange Commission on July 21, 1999, and incorporated herein by reference.)
EXHIBIT NO. DESCRIPTION ----------- ----------- 4.9 Registration Rights Agreement dated as of November 19, 1999, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on December 7, 1999, and incorporated herein by reference.) 4.10 Closing Warrant issued by the Registrant to Montrose Investments Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on December 7, 1999, and incorporated herein by reference.) 4.11 Closing Warrant issued by the Registrant to Strong River Investments, Inc., dated as of November 19, 1999. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on December 7, 1999, and incorporated herein by reference.) 4.12 Warrant issued by the Registrant to Brighton Capital, Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.14 to the Registration Statement on Form S-3 (No. 333-37180), as filed with the Securities and Exchange Commission on May 16, 2000, and incorporated herein by reference.) 4.13 Registration Rights Agreement dated as of February 25, 2000, by and among the Registrant, Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 4.2 to Form 8-K, as filed with the Securities and Exchange Commission on April 3, 2000, and incorporated herein by reference.) 4.14 Closing Warrant issued by the Registrant to Montrose Investments Ltd., dated as of February 25, 2000. (Filed as Exhibit 4.3 to Form 8-K, as filed with the Securities and Exchange Commission on April 3, 2000, and incorporated herein by reference.) 4.15 Closing Warrant issued by the Registrant to Strong River Investments, Inc., dated as of February 25, 2000. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on April 3, 2000, and incorporated herein by reference.) 4.16 Warrant issued by the Registrant to Brighton Capital, Ltd., dated as of February 25, 2000. (Filed as Exhibit 4.15 to the Registration Statement on Form S-3 (No. 333-37180), as filed with the Securities and Exchange Commission on May 16, 2000, and incorporated herein by reference.) 4.17 Registration Rights Agreement dated as of April 6, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.2 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.) 4.18 Class A Warrant issued by the Registrant to Montrose Investments Ltd., dated as of April 6, 2000. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.) 4.19 Class A Warrant issued by the Registrant to Strong River Investments, Inc., dated as of April 6, 2000. (Filed as Exhibit 4.5 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.) 4.20 Class B Warrant issued by the Registrant to Montrose Investments Ltd., dated as of April 6, 2000. (Filed as Exhibit 4.6 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.)
EXHIBIT NO. DESCRIPTION ----------- ----------- 4.21 Class B Warrant issued by the Registrant to Strong River Investments, Inc., dated as of April 6, 2000. (Filed as Exhibit 4.7 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.) 4.22 Warrant issued by the Registrant to Brighton Capital, Ltd., dated as of April 6, 2000. (Filed as Exhibit 4.16 to the Registration Statement on Form S-3 (No. 333-37180), as filed with the Securities and Exchange Commission on May 16, 2000, and incorporated herein by reference.) 4.23 Registration Rights Agreement dated as of April 28, 2000, by and among the Registrant, Royal Canadian Growth Fund and Dlouhy Investments Inc. (Filed as Exhibit 4.2 to Form 8-K, as filed with the Securities and Exchange Commission on May 25, 2000, and incorporated herein by reference.) 4.24 Warrant issued by the Registrant to Royal Canadian Growth Fund, dated as of May 1, 2000. (Filed as Exhibit 4.3 to Form 8-K, as filed with the Securities and Exchange Commission on May 25, 2000, and incorporated herein by reference.) 4.25 Warrant issued by the Registrant to Dlouhy Investments Inc., dated as of May 1, 2000. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on May 25, 2000, and incorporated herein by reference.) 4.26 Registration Rights Agreement dated as of September 21, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.27 Warrant issued by the Registrant to Montrose Investments Ltd., dated as of September 21, 2000. (Filed as Exhibit 4.7 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.28 Warrant issued by the Registrant to Strong River Investments, Inc., dated as of September 21, 2000. (Filed as Exhibit 4.8 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.29 Registration Rights Agreement dated as of September 29, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.12 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.30 Closing Warrant issued by the Registrant to Montrose Investments, Ltd., dated as of September 29, 2000. (Filed as Exhibit 4.13 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.31 Closing Warrant issued by the Registrant to Strong River Investments, Inc., dated as of September 29, 2000. (Filed as Exhibit 4.14 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 4.32+ Form of Warrants issued by the Registrant to Brighton Capital, Ltd., dated between September 18, 2000 and May 18, 2001, to purchase up to an aggregate of 130,473 shares of our common stock.
EXHIBIT NO. DESCRIPTION ----------- ----------- 4.33 Rights Agreement, dated as of December 13, 2000, between the Registrant and U.S. Stock Transfer Corporation, as Rights Agent, which includes as Exhibit A thereto the form of Certificate of Designation for the Series B Junior Participating Preferred Stock, as Exhibit B thereto the Form of Rights Certificate and as Exhibit C thereto a Summary of Terms of Stockholder Rights Plan. (Filed as Exhibit 4.1 to Form 8-A12G, as filed with the Securities and Exchange Commission on December 26, 2000, and incorporated herein by reference.) 4.34 Registration Rights Agreement dated as of December 18, 2000, by and between the Registrant and Societe Generale. (Filed as Exhibit 4.4 to Form 8-K, as filed with the Securities and Exchange Commission on December 28, 2000, and incorporated herein by reference.) 4.35 Warrant issued by the Registrant to Societe Generale, dated as of December 18, 2000. (Filed as Exhibit 4.6 to Form 8-K, as filed with the Securities and Exchange Commission on December 28, 2000, and incorporated herein by reference.) 4.36+ Warrant issued by the Registrant to Brighton Capital, Ltd., dated as of December 18, 2000. 4.37+ Warrant issued by the Registrant to CroMedica Global, Inc., dated as of January 25, 2001. 4.38 Warrant issued by the Registrant to IAT ReInsurance Syndicate Ltd., dated as of March 8, 2001. (Filed as Exhibit 10.2 to Form 8-K, as filed with the Securities and Exchange Commission on March 14, 2001, and incorporated herein by reference.) 4.39 Advisory Agreement dated as of April 11, 2001, by and between the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 4.1 to the Registration Statement on Form S-3, as amended (No. 333-64444), as filed with the Securities and Exchange Commission on July 2, 2001, and incorporated herein by reference.) 4.40 Amendment to the Advisory Agreement dated as of June 12, 2001, by and between the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 4.2 to the Registration Statement on Form S-3, as amended (No. 333-64444), as filed with the Securities and Exchange Commission on July 2, 2001, and incorporated herein by reference.) 4.41 Amendment to the Advisory Agreement, dated as of October 19, 2001, by and between the Registrant and Cantor Fitzgerald & Co. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on October 24, 2001, and incorporated herein by reference.) 4.42 Warrant issued by the Registrant to Montrose Investments Ltd., dated as of May 18, 2001. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on May 21, 2001, and incorporated herein by reference.) 4.43 Warrant issued by the Registrant to Strong River Investments, Inc., dated as of May 18, 2001. (Filed as Exhibit 4.2 to Form 8-K, as filed with the Securities and Exchange Commission on May 21, 2001, and incorporated herein by reference.) 4.44+ Form of Warrant issued by the Registrant to Gruntal & Co., L.L.C., dated as of August 10, 2001, to purchase up to 125,000 shares of our common stock.
EXHIBIT NO. DESCRIPTION ----------- ----------- 4.45 Form of Warrants issued by the Registrant to Cantor Fitzgerald & Co, dated as of December 6, 2001 and December 13, 2001, to purchase up to an aggregate of 132,139 shares of our common stock. (Filed as Exhibit A to Schedule 1 to Exhibit 1.1 to Form 8-K, as filed with the Securities and Exchange Commission on October 24, 2001, and incorporated herein by reference.) 4.46+ Warrant issued by the Registrant to Jefferies & Company, Inc., dated as of December 13, 2001. 4.47+ Form of Warrant issued by the Registrant to certain purchasers, dated as of March 13, 2002 and March 15, 2002, to purchase up to an aggregate of 795,000 shares of our common stock. 10.1* 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the Registration Statement on Form SB-2, as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.2* Note dated as of June 21, 1996, between the Registrant and Alvin J. Glasky and related Security Agreement dated August 31, 1990. (Filed as Exhibit 10.4 to the Registration Statement on Form SB-2, as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.3* Addendum to Note dated as of June 21, 1996, between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.12 to the Form 10-KSB for fiscal year ended December 31, 1996, as filed with the Securities and Exchange Commission on March 31, 1997, and incorporated herein by reference.) 10.4* Agreement dated as of June 6, 1991, as amended on July 26, 1996, by and between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.7 to the Registration Statement on Form SB-2, as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.5* Agreement dated as of June 30, 1991, as amended on July 26, 1996, by and between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.8 to the Registration Statement on Form SB-2, as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.6* Form of Indemnification Agreement between the Registrant and each of its officers and directors. (Filed as Exhibit 10.10 to the Registration Statement on Form SB-2, as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.7 Industrial Lease Agreement dated as of January 16, 1997, between the Registrant and the Irvine Company. (Filed as Exhibit 10.11 to the Form 10-KSB for the fiscal year ended December 31, 1996, as filed with the Securities and Exchange Commission on March 31, 1997, and incorporated herein by reference.) 10.8*+ Amended and Restated 1997 Stock Incentive Plan. 10.9 Master Note and Security Agreement between the Registrant and Leasing Technologies, Inc. dated as of July 10, 1998. (Filed as Exhibit 4 to Form 10-QSB for the quarter ended September 30, 1998, as filed with the Securities and Exchange Commission on November 9, 1998, and incorporated herein by reference.) 10.10 Securities Purchase Agreement dated as of February 25, 2000, by and among the Registrant, Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on April 3, 2000, and incorporated herein by reference.)
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.11 Convertible Debenture Purchase Agreement dated as of April 6, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on April 21, 2000, and incorporated herein by reference.) 10.12 Securities Purchase Agreement dated as of April 28, 2000, by and between the Registrant and Royal Canadian Growth Fund. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on May 25, 2000, and incorporated herein by reference.) 10.13 Letter Agreement dated as of May 1, 2000, by and between the Registrant and Royal Canadian Growth Fund. (Filed as Exhibit 4.5 to Form 8-K, as filed with the Securities and Exchange Commission on May 25, 2000, and incorporated herein by reference.) 10.14 Securities Purchase Agreement dated as of September 21, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 10.15 Registration Rights Agreement dated as of September 21, 2000, by and among NeoGene Technologies, Inc., Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.3 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 10.16 Warrant issued by NeoGene Technologies, Inc., to Montrose Investments Ltd., dated as of September 21, 2000. (Filed as Exhibit 4.5 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 10.17 Warrant issued by NeoGene Technologies, Inc., to Strong River Investments, Inc., dated as of September 21, 2000. (Filed as Exhibit 4.6 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 10.18+ Warrant issued by NeoGene Technologies, Inc., to Brighton Capital, Ltd., dated as of September 21, 2000. 10.19 Master Lease Agreement dated as of September 22, 2000, by and between the Registrant and Comdisco Laboratory and Scientific Group. (Filed as Exhibit 10.16 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.20 Amendment No. 1 to Master Lease Agreement dated as of September 22, 2000, by and between the Registrant and Comdisco Laboratory and Scientific Group. (Filed as Exhibit 10.17 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.21 Equipment Schedule No. S-01 dated as of September 22, 2000, by and between the Registrant and Comdisco Laboratory and Scientific Group. (Filed as Exhibit 10.18 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.)
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.22 Addendum to Equipment Schedule No. SG-01 dated as of September 22, 2000, by and between the Registrant and Comdisco Laboratory and Scientific Group. (Filed as Exhibit 10.19 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.23 Securities Purchase Agreement dated as of September 29, 2000, by and among the Registrant, Strong River Investments, Inc. and Montrose Investments Ltd. (Filed as Exhibit 4.11 to Form 8-K, as filed with the Securities and Exchange Commission on November 13, 2000, and incorporated herein by reference.) 10.24 Securities Purchase Agreement dated as of December 18, 2000, by and among the Registrant, NeoGene Technologies, Inc. and Societe Generale. (Filed as Exhibit 4.1 to Form 8-K, as filed with the Securities and Exchange Commission on December 28, 2000, and incorporated herein by reference.) 10.25 Registration Rights Agreement dated as of December 18, 2000, by and between NeoGene Technologies, Inc. and Societe Generale. (Filed as Exhibit 4.3 to Form 8-K, as filed with the Securities and Exchange Commission on December 28, 2000, and incorporated herein by reference.) 10.26 Warrant issued by NeoGene Technologies, Inc., to Societe Generale, dated as of December 18, 2000. (Filed as Exhibit 4.5 to Form 8-K, as filed with the Securities and Exchange Commission on December 28, 2000, and incorporated herein by reference.) 10.27 Stock Purchase Agreement dated as of January 31, 2001, by and between the Registrant and Amro International S.A. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on February 16, 2001, and incorporated herein by reference.) 10.28 Securities Purchase Agreement dated as of March 8, 2001, by and between the Registrant and IAT ReInsurance Syndicate Ltd. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on March 14, 2001, and incorporated herein by reference.) 10.29 Letter Agreement dated as of April 17, 2001, by and between the Registrant, Montrose Investments Ltd., Strong River Investments, Inc. and HBK Master Fund L.P. (Filed as Exhibit 10.20 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.30 Securities Purchase Agreement dated as of April 20, 2001, by and between the Registrant, Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 4.63 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.31* Employee Stock Purchase Plan. (Filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (No. 333-54246), and incorporated herein by reference.) 10.32* Amendment 2001-1 to the Employee Stock Purchase Plan effective as of June 21, 2001. (Filed as Exhibit 10.22 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.33* Executive Employment Agreement for Alvin J. Glasky, Ph.D., dated as of December 1, 2000. (Filed as Exhibit 10.23 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.)
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.34* Executive Employment Agreement for Sam Gulko, dated as of December 1, 2000. (Filed as Exhibit 10.24 to the Annual Report on Form 10-K, as amended, as filed with the Securities and Exchange Commission on April 25, 2001, and incorporated herein by reference.) 10.35*+ Executive Employment Agreement for Rajesh C. Shrotriya, M.D., dated as of December 1, 2000. 10.36 Securities Purchase Agreement dated as of May 17, 2001, by and among the Registrant, Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on May 21, 2001, and incorporated herein by reference.) 10.37 Letter Agreement dated as of May 17, 2001, by and among the Registrant, Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 10.2 to Form 8-K, as filed with the Securities and Exchange Commission on May 21, 2001, and incorporated herein by reference.) 10.38 License Agreement dated as of June 29, 2001, by and between the Registrant and NDDO Research Foundation. (Filed as Exhibit 10.4 to Form 10-Q, as filed with the Securities and Exchange Commission on November 14, 2001, and incorporated herein by reference.) 10.39+ Letter Agreement dated as of August 10, 2001, by and between the Registrant and Gruntal & Co., L.L.C. 10.40 Stock Purchase Agreement dated as of August 13, 2001, by and among the Registrant, NeoGene Technologies, Inc., Montrose Investments Ltd. and Strong River Investments, Inc. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on August 27, 2001, and incorporated herein by reference.) 10.41 Stock Purchase Agreement dated as of August 14, 2001, by and between the Registrant and Summit Capital Management L.L.C. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on August 15, 2001, and incorporated herein by reference.) 10.42 License Agreement dated as of August 28, 2001, by and between the Registrant and Johnson Matthey plc. (Filed as Exhibit 10.5 to Form 10-Q, as filed with the Securities and Exchange Commission on November 14, 2001, and incorporated herein by reference.) 10.43 Stock Purchase and Settlement Agreement and Release dated as of September 19, 2001, by and among the Registrant, NeoGene Technologies, Inc. and Societe Generale. (Filed as Exhibit 10.1 to Form 8-K, as filed with the Securities and Exchange Commission on September 24, 2001, and incorporated herein by reference.) 10.44 License Agreement dated as of October 24, 2001, by and between the Registrant and Bristol-Myers Squibb Company. (Filed as Exhibit 10.6 to Form 10-Q, as filed with the Securities and Exchange Commission on November 14, 2001, and incorporated herein by reference.) 10.45 Letter Agreement dated as of November 19, 2001, by and between the Registrant and Ladenburg Thalmann & Co., Inc. (Filed as Exhibit 1.1 to Form 8-K, as filed with the Securities and Exchange Commission on December 11, 2001, and incorporated herein by reference.) 10.46+ Form of Securities Purchase Agreement, by and between the Registrant and certain investors, dated as of December 10, 2001, for the purchase of an aggregate of 519,480 shares of our common stock.
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.47+ Letter Agreement dated as of March 11, 2002, by and between the Registrant and Brighton Capital, Ltd. 10.48+ Form of Securities Purchase Agreement, by and between the Registrant and certain investors, dated as of March 12, 2002 and March 15, 2002, for the purchase of an aggregate of 3,100,000 shares of our common stock. 21+ Subsidiaries of Registrant. 23+ Consent of Arthur Andersen LLP. 99.1+ Letter dated April 1, 2002 from the Registrant to the Commission.
* Indicates a management contract or compensatory plan or arrangement. + Filed herewith EX-3.1.1 3 a80481ex3-1_1.txt EXHIBIT 3.1.1 EXHIBIT 3.1.1 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF NEOTHERAPEUTICS, INC. A DELAWARE CORPORATION NeoTherapeutics, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (this "Corporation"), DOES HEREBY CERTIFY: 1. That the Board of Directors of this Corporation adopted a resolution setting forth a proposed amendment of the Certificate of Incorporation of this Corporation at a meeting held on February 12, 2001. The resolution setting forth the proposed amendment is as follows: "FURTHER, that subject to the approval of the stockholders of the Company, the first sentence of Article 4 of the Certificate of Incorporation of the Company, be and hereby is amended to read in its entirety as follows: The aggregate number of shares of all classes of stock which the Corporation shall have the authority to issue is 55,000,000 shares, consisting of (a) 50,000,000 shares of common stock, $.001 par value per share (the "Common Stock"), and (b) 5,000,000 shares of preferred stock, $.001 par value per share (the "Preferred Stock")." 2. That said amendment was duly adopted and approved by the stockholders of this Corporation at a meeting called for that purpose held on April 6, 2001, in accordance with the provisions of Section 242 of the Delaware General Corporation Law. IN WITNESS WHEREOF the undersigned has caused this Certificate of Amendment of Certificate of Incorporation to be duly executed as of the 6th day of April, 2001 and hereby affirm and acknowledge under penalty of perjury that the filing of this Certificate of Amendment of Certificate of Incorporation of NeoTherapeutics, Inc. is the act and deed of NeoTherapeutics, Inc. NEOTHERAPEUTICS, INC., A DELAWARE CORPORATION By: /s/ Samuel Gulko -------------------------- Samuel Gulko Senior Vice President, Finance. Chief Financial Officer, Secretary and Treasurer EX-3.2 4 a80481ex3-2.txt EXHIBIT 3.2 EXHIBIT 3.2 BYLAWS OF NEOTHERAPEUTICS, INC. A DELAWARE CORPORATION ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the Corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. SECTION 2. OTHER OFFICES. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. SECTION 3. BOOKS. The books of the Corporation may be kept within or without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. All meetings of stockholders shall be held at such place either within or without the State of Delaware as may be designated from time to time by the Board of Directors. SECTION 2. ANNUAL MEETINGS. Annual meetings of stockholders shall be held at a time and date designated by the Board of Directors for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. SECTION 3. SPECIAL MEETINGS. Special meetings of stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Board of Directors, the Chairman of the Board, or by the Chief Executive Officer. SECTION 4. NOTIFICATION OF BUSINESS TO BE TRANSACTED AT MEETING. At any meeting of the stockholders, only such business shall be conducted as shall have been properly brought before such meeting. To be brought properly before an annual meeting of stockholders, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or the chairman of the meeting, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be received no less than sixty days nor more than ninety days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that in the event that the 1 date of the annual meeting is advanced by more than thirty days or delayed by more than sixty days from such anniversary, notice by the stockholder, to be timely, must be received not earlier than the ninetieth day prior to such annual meeting of stockholders and not later than the close of business on the later of (a) the sixtieth day prior to such annual meeting or (b) the tenth day following the date on which notice of the date of the annual meeting was mailed or public disclosure thereof was made, whichever first occurs. Each such notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting of stockholders: (a) a brief description of the business desired to be brought before the annual meeting of stockholders and the reasons for conducting such business at such meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class, series, and number of shares of the Corporation that are beneficially owned by the stockholder, and (d) any material interest of the stockholder or any Affiliate of the stockholder in such business. The stockholder also shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 4. To be properly brought before a special meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or the chairman of the meeting. No other business may be brought before a special meeting by stockholders. No business shall be conducted at any meeting of the stockholders except in accordance with the procedures set forth in this Section 4. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 4, and if he or she should so determine, any such business not properly brought before the meeting shall not be transacted. Nothing herein shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or any successor provision. SECTION 5. NOTICE; WAIVER OF NOTICE. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by law, such notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 6. QUORUM; ADJOURNMENT. Except as otherwise required by law, or provided by the Certificate of Incorporation or these Bylaws, the holders of a majority of the capital stock 2 issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of enough votes to leave less than a quorum, if any action taken is approved by at least a majority of the required quorum to conduct that meeting. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the majority of the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. SECTION 7. VOTING; PROXIES. At all meetings of stockholders at which a quorum is present for the election of directors a plurality of the votes cast shall be sufficient to elect. All other questions brought before a meeting of stockholders at which a quorum is present shall, unless otherwise provided by law, the Certificate of Incorporation or these Bylaws, be decided by the vote of the holders of the majority of stock represented and entitled to vote thereat. Unless otherwise provided in the Certificate of Incorporation, each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary of the Corporation. Elections of directors need not be by ballot unless the Chairman of the meeting so directs or unless a stockholder demands election by ballot at the meeting and before the voting begins. SECTION 8. STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Except as otherwise provided in the Certificate of Incorporation, any action which may be taken at any annual or special meeting of stockholders, may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of all of the outstanding shares entitled to vote thereon. All such consents shall be filed with the Secretary of the Corporation and shall be maintained in the corporate records. SECTION 9. RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such 3 meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Stockholders on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date, except as otherwise provided by agreement or by applicable law. SECTION 10. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. SECTION 11. STOCK LEDGER. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 10 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION 12. INSPECTORS OF ELECTION. In advance of any meeting of stockholders, the Board of Directors may appoint one or more persons (who shall not be candidates for office) as inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not so appointed, or if an appointed inspector fails to appear or fails or refuses to act at a meeting, the Chairman of any meeting of stockholders may, and on the request of any stockholder or his proxy shall, appoint an inspector or inspectors of election at the meeting. The duties of such inspector(s) shall include: determining the number of shares outstanding and the voting power of each; the shares represented at the meeting; the existence of a quorum; the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all stockholders. In the event of any dispute between or among the inspectors, the determination of the majority of the inspectors shall be binding. SECTION 13. ORGANIZATION. At each meeting of stockholders the Chairman of the Board of Directors, if one shall have been elected, (or in his absence or if one shall not have been elected, the Chief Executive Officer) shall act as Chairman of the meeting. The Secretary (or in his or her absence or inability to act, the person whom the Chairman of the meeting shall appoint Secretary of the meeting) shall act as Secretary of the meeting and keep the minutes thereof. 4 SECTION 14. ORDER OF BUSINESS. The order and manner of transacting business at all meetings of stockholders shall be determined by the Chairman of the meeting. SECTION 15. NOMINATION AND ELECTION OF DIRECTORS. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, dissolution or winding up of the Corporation, nominations for the election of directors shall be made by a nominating committee of the Board of Directors if then constituted pursuant to these Bylaws, or if no nominating committee has been constituted, by the Board of Directors. In addition, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at an annual meeting of stockholders, but only if written notice of such stockholder's intent to make such nomination or nominations has been received by the Secretary of the Corporation not less than sixty nor more than ninety days prior to the first anniversary of the preceding year's annual meeting of stockholders. In the event that the date of the annual meeting of stockholders is advanced by more than thirty days or delayed by more than sixty days from such anniversary, notice by the stockholder to be timely must be received by the Secretary of the Corporation not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of (a) the sixtieth day prior to such annual meeting or (b) the tenth day following the day on which notice of the date of the annual meeting was mailed or public disclosure thereof was made by the Corporation, whichever first occurs. Each such notice by a stockholder shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at a meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder or any person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such stockholder (an "Affiliate" of such stockholder) and each nominee and any other person or persons (naming such person or persons) relating to the nomination or nominations; (d) the class and number of shares of the Corporation that are beneficially owned by such stockholder and the person to be nominated as of the date of such stockholder's notice and by any other stockholders known by such stockholder to be supporting such nominees as of the date of such stockholder's notice; (e) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (f) the written consent of each nominee to serve as a director of the Corporation if so elected. The stockholder also shall comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder, with respect to the matters set forth in this Section 15. In addition, in the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a special meeting only if written notice of such stockholder's intent to make such nomination or nominations, setting forth the information and complying with the form described in the immediately preceding paragraph, has been received by the Secretary of the Corporation not earlier than the ninetieth day prior to such special meeting and not later than the close of business on the later of (i) the sixtieth day prior to such special meeting or (ii) the tenth day following the 5 day on which notice of the date of the special meeting was mailed or public disclosure thereof was made by the Corporation, whichever comes first. The stockholder also shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 15. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 15. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 15, and if he or she should so determine, the defective nomination shall be disregarded. ARTICLE III DIRECTORS SECTION 1. POWERS. Except as otherwise required by law or provided by the Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. SECTION 2. NUMBER AND ELECTION OF DIRECTORS. Subject to any limitations in the Certificate of Incorporation, the authorized number of directors of the Corporation shall be fixed from time to time by the Board of Directors pursuant to a resolution duly adopted by a majority of the entire Board of Directors, but no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Until changed in the foregoing manner, the number of directors shall be nine (9). Directors shall be elected at each annual meeting of the stockholders to replace directors whose terms then expire, and, subject to the provisions of Section 3 of this Article III, each director elected shall hold office for a term of three (3) years or until his or her successor is duly elected and qualified, or until his or her earlier death, resignation or removal. Any director may resign at any time effective upon giving written notice to the Board of Directors, unless the notice specifies a later time for such resignation to become effective. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor prior to such effective time to take office when such resignation becomes effective. Directors need not be stockholders. SECTION 3. CLASSIFIED BOARD OF DIRECTORS. The Board of Directors shall be divided into three (3) classes, as nearly equal in number as possible, designated Class I, Class II and Class III. The number of directors constituting each Class shall be fixed from time to time by a resolution duly adopted by a majority of the entire Board of Directors. Class I directors shall hold office for a full term expiring at the 2003 annual meeting of stockholders. Class II directors shall hold office for a continuing term expiring at the 2001 annual meeting of stockholders. Class III directors shall hold office for an initial term expiring at the 2002 annual meeting of stockholders. At each annual meeting of stockholders held thereafter, directors shall be elected for a full term of office to succeed the directors of the Class whose terms then expire. SECTION 4. VACANCIES. Subject to the limitations in the Certificate of Incorporation, vacancies in the Board of Directors resulting from death, resignation, removal or otherwise and newly created directorships resulting from any increase in the authorized number of directors 6 may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Each director so selected shall hold office for the remainder of the full term of office of the former director which such director replaces and until his successor is duly elected and qualified, or until his earlier death, resignation or removal. No decrease in the authorized number of directors constituting the Board of Directors shall shorten the term of any incumbent directors. SECTION 5. TIME AND PLACE OF MEETINGS. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors. SECTION 6. ANNUAL MEETING. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place, either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 8 of this Article III or in a waiver of notice thereof. SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware at such date and time as the Board of Directors may from time to time determine and, if so determined by the Board of Directors, notices thereof need not be given. SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer, or by any two (2) directors. Notice of the date, time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at the director's address as it is shown on the records of the Corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. The notice need not specify the purpose of the meeting. A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 9. QUORUM; VOTE REQUIRED FOR ACTION; ADJOURNMENT. Except as otherwise required by law, or provided in the Certificate of Incorporation or these Bylaws, a majority of the directors shall constitute a quorum for the transaction of business at all meetings of the Board of Directors and the affirmative vote of not less than a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a 7 quorum shall be present. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum to conduct that meeting. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. SECTION 10. ACTION BY ELECTRONIC MAIL AND/OR WRITTEN CONSENT. Unless otherwise restricted by the certificate of incorporation or bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the board, or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. SECTION 11. TELEPHONE MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee, as the case may be, by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section 11 shall constitute presence in person at such meeting. SECTION 12. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the entire Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any such committee, who may replace any absent or disqualified member at any meeting of the committee. In the event of absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the committee member or members present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Any committee, to the extent allowed by law and as provided in the resolution establishing such committee, shall have and may exercise all the power and authority of the Board of Directors in the management of the business and affairs of the Corporation, but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the Bylaws of the Corporation; and, unless the resolution or the Certificate of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Each committee shall keep regular minutes of its meetings and report to the Board of Directors when required. 8 SECTION 13. COMPENSATION. The directors may be paid such compensation for their services as the Board of Directors shall from time to time determine. SECTION 14. INTERESTED DIRECTORS. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or the committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if: (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV OFFICERS SECTION 1. OFFICERS. The officers of the Corporation shall be a President, a Secretary and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, a Vice Chairman of the Board, a Chief Executive Officer, one or more Vice Presidents, one or more Assistant Financial Officers and Treasurers, one or more Assistant Secretaries and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article IV. SECTION 2. APPOINTMENT OF OFFICERS. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article IV, shall be appointed by the Board of Directors, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. SECTION 3. SUBORDINATE OFFICERS. The Board of Directors may appoint, and may empower the Chief Executive Officer or President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. SECTION 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights of an officer under any contract, any officer may be removed at any time, with or without cause, by the Board of Directors or, except in case of an officer chosen by the Board of Directors, by any officer 9 upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights of the Corporation under any contract to which the officer is a party. SECTION 5. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to that office. SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an officer is elected, shall, if present, preside at meetings of the stockholders and of the Board of Directors. He shall, in addition, perform such other functions (if any) as may be prescribed by the Bylaws or the Board of Directors. SECTION 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Corporation shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the Corporation. He shall exercise the duties usually vested in the chief executive officer of a corporation and perform such other powers and duties as may be assigned to him from time to time by the Board of Directors or prescribed by the Bylaws. In the absence of the Chairman of the Board and any Vice Chairman of the Board, the Chief Executive Officer shall preside at all meetings of the stockholders and of the Board of Directors. SECTION 8. PRESIDENT. The President of the Corporation shall, subject to the control of the Board of Directors and the Chief Executive Officer of the Corporation, if there be such an officer, have general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws or the Chief Executive Officer of the Corporation. In the absence of the Chairman of the Board, Vice Chairman of the Board and Chief Executive Officer, the President shall preside at all meetings of the Board of Directors and stockholders. SECTION 9. VICE PRESIDENT. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws, and the President, or the Chairman of the Board. SECTION 10. SECRETARY. The Secretary shall keep or cause to be kept, at the principal executive office or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of Directors, committees of Directors, and stockholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at Directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and a summary of the proceedings. 10 The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required by the Bylaws or by law to be given, and he shall keep or cause to be kept the seal of the Corporation if one be adopted, in safe custody, and shall have such powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws. SECTION 11. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation. The Chief Financial Officer shall also have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. ARTICLE V STOCK SECTION 1. FORM OF CERTIFICATES. Every holder of stock in the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President and by the Treasurer or an Assistant Treasurer, or by the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. SECTION 2. SIGNATURES. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 3. LOST CERTIFICATES. The Corporation may issue a new certificate to be issued in place of any certificate theretofore issued by the Corporation, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. The Board of Directors may in its discretion require a bond in such form and amount and with such surety as it may determine, before issuing a new certificate. 11 SECTION 4. TRANSFERS. Stock of the Corporation shall be transferable in the manner prescribed by law and in these Bylaws or in any agreement with the stockholder making the transfer. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. SECTION 5. RECORD HOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the record holder of shares to receive dividends, and to vote as such record holder, and to hold liable for calls and assessments a person registered on its books as the record holder of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise required by law. SECTION 6. TRANSFER AGENT. The Board of Directors may at its discretion appoint one or more transfer agents, registrars and agents for making payment upon any class of stock, bond, debenture or other security of the Corporation. Such agents shall be located either within or outside of Delaware. They shall be entitled to such compensation as may be agreed. ARTICLE VI INDEMNIFICATION SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee's heirs, executors and administrators; provided, however, that, except as provided in Section 2 of this Article VI with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, 12 that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Article VI or otherwise (hereinafter an "undertaking"). SECTION 2. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section 1 of this Article VI is not paid in full by the Corporation within forty-five (45) days after a written claim has been received by the Corporation, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or part in any such suit or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified or to such advancement of expenses under this Article VI or otherwise shall be on the Corporation. SECTION 3. NON-EXCLUSIVITY OF RIGHTS. The rights of indemnification and to the advancement of expenses conferred in this Article VI shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. SECTION 4. INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. SECTION 5. INDEMNIFICATION OF EMPLOYEES OR AGENTS OF THE CORPORATION. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant 13 rights to indemnification and to the advancement of expenses, to any employee or agent of the Corporation to the fullest extent of the provisions of this Article VI with respect to the indemnification and advancement of expenses of directors or officers of the Corporation. SECTION 6. INDEMNIFICATION CONTRACTS. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article VI. SECTION 7. EFFECT OF TERMINATION OF ACTION. The termination of any action, suit or proceeding by judgment, order, settlement, or conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the person seeking indemnification did not act in good faith and in the best interests of the Corporation and, with respect to any criminal action or proceeding, had a reasonable cause to believe that his conduct was unlawful. Entry of a judgment by a consent as part of a settlement shall not be deemed a final adjudication of liability for negligence or misconduct in the performance of duty, nor of any other issue or matter. SECTION 8. EFFECT OF AMENDMENT. Any amendment, repeal or modification of any provision of this Article VI by the stockholders or the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. ARTICLE VII GENERAL PROVISIONS SECTION 1. DIVIDENDS. Subject to limitations contained in the General Corporation Law of the State of Delaware and the Certificate of Incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, securities of the Corporation or other property. SECTION 2. DISBURSEMENTS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. SECTION 3. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. SECTION 4. CORPORATE SEAL. The Corporation shall have a corporate seal in such form as shall be prescribed by the Board of Directors. SECTION 5. VOTING OF STOCK OWNED BY THE CORPORATION. The Chairman of the Board, the Chief Executive Officer, the President and any other officer of the Corporation authorized by the Board of Directors shall have power, on behalf of the Corporation, to attend, vote and grant 14 proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock. SECTION 6. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction and definitions in the General Corporation Law of the State of Delaware shall govern the construction of these Bylaws. SECTION 7. AMENDMENTS. Subject to the General Corporation Law of the State of Delaware, the Certificate of Incorporation and these Bylaws, the Board of Directors may by the affirmative vote of a majority of the entire Board of Directors amend or repeal these Bylaws, or adopt other Bylaws as in their judgment may be advisable for the regulation of the conduct of the affairs of the Corporation. Unless otherwise restricted by the Certificate of Incorporation, these Bylaws may be altered, amended or repealed, and new Bylaws may be adopted, at any annual meeting of the stockholders (or at any special meeting thereof duly called for that purpose) by a majority of the combined voting power of the then outstanding shares of capital stock of all classes and series of the Corporation entitled to vote generally in the election of directors, voting as a single class, provided that, in the notice of any such special meeting, notice of such purpose shall be given. 15 EX-4.1 5 a80481ex4-1.txt EXHIBIT 4.1 EXHIBIT 4.1 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. NEOTHERAPEUTICS, INC. WARRANT Dated: December 15, 1999 NeoTherapeutics, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, ________________, or his/her registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of __________ shares of Common Stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $13.00 per share (as adjusted from time to time as provided in Section 8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including the earlier of (i) December 15, 2002 or (ii) the business day preceding a Redemption Date, as defined in Section 4 hereof (as applicable, the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) This Warrant or the Warrant Shares issued upon any exercise hereof may only be transferred pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to the registration requirements of the Securities Act. In connection with any transfer of this Warrant or any Warrant Shares other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act. Holder agrees to the imprinting, so long as is required by this Section 2(a), of a legend substantially similar to that first above written on any New Warrant (as defined in Section 2(b) below) or a legend of similar import on any Warrant Shares issued upon an exercise hereof. Any such transferee shall agree in writing to be bound by the terms of this Warrant and shall have the rights of Holder under this Warrant. (b) The Company shall register the transfer of any portion of this Warrant in conformance with Section 2(a) in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 11. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (c) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. 3. Duration and Exercise of Warrant. (a) This Warrant shall be exercisable by the then registered Holder on any business day before 5:00 P.M., California time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., California time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Subject to Sections 2(c), and 5, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 11 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except (i) either in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective or the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) if this Warrant shall have been issued pursuant to a written agreement between the original Holder and the Company, as required by such agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. -2- (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. (d) Prior to the exercise of this Warrant, the Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings (except as otherwise set forth in Section 8(f) herein). 4. Redemption. (a) The remaining unexercised portion of this Warrant may be completely redeemed at the option of the Company at any time prior to exercise if, at the time notice of such redemption is given by the Company as provided in Section 4(b) below, the Daily Price has exceeded $26.00 per share for any 10 consecutive trading days immediately preceding the date of such notice, at a price equal to $0.25 per Warrant Share then subject to the unexercised portion of this Warrant (the "Redemption Price"). For the purpose of the foregoing sentence, the term "Daily Price" shall mean, for any relevant day, the closing bid price or closing price of the Common Stock, as the case may be, on that day as reported by the principal exchange, national market or quotation system on which prices for the Common Stock are reported. On the date set for redemption in the redemption notice (the "Redemption Date") the Holder of record of this Warrant shall be entitled to payment of the Redemption Price upon surrender of such redeemed Warrant to the Company at the principal office of the Company. (b) Notice of redemption of Warrant shall be given at least 30 days prior to the Redemption Date by mailing, by registered or certified mail, return receipt requested, a copy of such notice to the Holder of this Warrant at the address appearing on the Warrant Register or such other address designated in writing by the holder of record to the Company not less than 40 days prior to the Redemption Date. (c) From and after the Redemption Date, all rights of the Holder (except the right to receive the Redemption Price) with respect to this Warrant shall terminate. (d) The Company shall pay to the Holder of this Warrant all monies to which the Holder of this Warrant is entitled, provided such Holder shall have surrendered this Warrant to the Company. The Holder shall have no right to interest following the Redemption Date unless the Company shall have defaulted in its obligation to deliver the Redemption Price. 5. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation -3- hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock and not the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, -4- sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), and (b)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (e) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (f) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or -5- (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 9. Payment of Exercise Price. The Holder shall pay the Exercise Price in immediately available funds by certified check or bank draft payable to the order of the Company or by wire transfer to an account designated by the Company. 10. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (California time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: -6- (i) if to the Company, to 157 Technology Drive, Irvine, CA 92618, Attention: Chief Financial Officer, or to facsimile no. (949) 788-6706, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 12. Warrant Agent. The Company shall serve as warrant agent under this Warrant. The Company may appoint a new warrant agent upon notice to the Holder in accordance with Section 11. Any corporation into which the Company may be merged or any corporation resulting from any consolidation to which the Company shall be a party or any corporation to which the Company transfers substantially all of its corporate assets shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of California without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in Orange County, California, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. -7- IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. NEOTHERAPEUTICS, INC. By: /s/Samuel Gulko ----------------------------------------------- Name: Samuel Gulko ----------------------------------------------- Title: Chief Financial Officer, Secretary & Treasurer -8- FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To NeoTherapeutics, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase __________ shares of Common Stock ("Common Stock"), $.001 par value per share, of NeoTherapeutics, Inc. encloses herewith $__________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER ---------------------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: __________, ____ Name of Holder: (Print) -------------------------------- (By:) -------------------------------- (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________ the right represented by the Warrant enclosed with this Form of Assignment to purchase __________ shares of Common Stock of NeoTherapeutics, Inc. to which the Warrant relates and appoints ____________________ attorney to transfer said right on the books of NeoTherapeutics, Inc. with full power of substitution in the premises. Dated: __________, ____ --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) --------------------------------------- Address of Transferee --------------------------------------- --------------------------------------- In the presence of: - -------------------------- EX-4.2 6 a80481ex4-2.txt EXHIBIT 4.2 EXHIBIT 4.2 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. WARRANT TO PURCHASE A MAXIMUM OF SHARES OF COMMON STOCK OF NEOTHERAPEUTICS, INC. (VOID AFTER SEPTEMBER 9, 2003) This certifies that Leasing Technologies International, Inc., its permitted, successors or assigns (the "Holder"), for value received, is entitled to purchase from NEOTHERAPEUTICS, INC., a Delaware corporation (the "Company"), a maximum of 13,459.00 fully paid and nonassessable shares of the Company's Common Stock ("Common Stock") for cash at a price of $7.43 per share (the "Stock Purchase Price") at any time or from time to time up to and including 5:00 p.m. (Pacific time) on September 9, 2003, (the "Expiration Date"), upon surrender to the Company at its principal office at 157 Technology Drive, Irvine, CA 92618 (or at such other location as the Company may advise Holder in writing) of this Warrant properly endorsed with the Form of Subscription attached hereto duly filled in and signed and upon payment in cash or by check of the aggregate Stock Purchase Price for the number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Stock Purchase Price and the number of shares purchasable hereunder are subject to adjustment as provided in Section 3 of this Warrant. This Warrant is subject to the following terms and conditions: 1. Exercise; Issuance of Certificates; Payment of Shares. (a) Unless an election is made pursuant to clause (b) of this Section 1, this Warrant is exercisable at the option of the Holder of record hereof, at any time or from time to time, up to the Expiration Date for all and any part of the shares of Common Stock (but not for a fraction of a share) which may be purchased hereunder, for the Stock Purchase Price multiplied by the number of shares to be purchased. The Company agrees that the shares of Common Stock purchased under this Warrant shall be and are deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares. Certificates for the shares of Common Stock so purchased, together with any other securities or property to which the Holder hereof is entitled upon such exercise, shall be delivered to the Holder hereof by the Company at the Company's expense within a reasonable time after the rights represented by this Warrant have been so exercised. Except as provided in clause (b) of this Section 1, in case of a purchase of less than all the shares which may be purchased under this Warrant, the Company shall cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the shares purchasable under the Warrant surrendered upon such purchase to the Holder hereof within a reasonable time. Each stock certificate so delivered shall be in such denominations of Common Stock as may be requested by the Holder hereof and shall be registered in the name of such Holder or, subject to the provisions of Section 8 hereof, such other name as shall be designated by such Holder. (b) The Holder, in lieu of exercising this Warrant by the payment of the Stock Purchase Price pursuant to clause (a) of this Section 1, may elect, at any time on or before the Expiration Date, to receive that number of shares of Common Stock equal to the quotient of: (i) the difference between (A) the Per Share Price (as hereinafter defined) of the Common Stock, less (B) the Stock Purchase Price then in effect, multiplied by the number of shares of Common Stock the Holder would otherwise have been entitled to purchase hereunder pursuant to clause (a) of this Section 1 (or such lesser number of shares as the Holder may designate in the case of a partial exercise of this Warrant) over (ii) the Per Share Price. (c) For purposes of clause (b) of this Section 1, "Per Share Price" means the greater of (A) the average of the closing sale prices of the Company's Common Stock as quoted by NASDAQ or listed on any exchange, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the ten (10) trading days prior to the date of the Holder's election hereunder or if applicable, (B) the gross sales price of one share of the Company's Common Stock pursuant to a registered public offering or that amount which shareholders of the Company will receive for each share of Common Stock pursuant to a registered public offering or that amount which shareholders of the Company will receive for each share of Common Stock pursuant to a merger, reorganization or sale of assets. If the Company's Common Stock is not quoted by NASDAQ or listed on an exchange, the Per Share Price of the Common Stock shall be determined in good faith by the Company's Board of Directors. 2. Shares to be Fully Paid; Reservation of Shares. The Company covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any shareholder and free of all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of authorized but unissued Common Stock, or other securities and property, when and as required to provide for the exercise of the rights represented by this Warrant. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which the Common Stock may be listed. The Company will not take any action which would result in any adjustment (pursuant to Section 3 hereof) of the Stock Purchase Price if the total number of shares of Common Stock issuable after such action, together with all shares of Common Stock then outstanding and then issuable upon exercise of all options and upon the conversion of all convertible securities then outstanding, would exceed the total number of shares of Common Stock then authorized by the Company's Articles of Incorporation. 3. Adjustment of Stock Purchase Price and Number of Shares. The Stock Purchase Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time upon the occurrence of certain events described in this Section 3. Upon each adjustment of the Stock Purchase Price, the Holder of this Warrant shall thereafter be entitled to purchase, at the Stock Purchase Price resulting from such adjustment, the number of shares obtained by multiplying the Stock Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Stock Purchase Price resulting from such adjustment. 3.1 Subdivision or Combination of Stock. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Stock Purchase Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Stock Purchase Price in effect immediately prior to such combination shall be proportionately increased. 3.2 Dividends in Common Stock, Other Stock, Property, Reclassification. If at any time or from time to time the holders of Common Stock (or any shares of Stock or other securities at the time receivable upon the exercise of this Warrant) shall have received or become entitled to receive, without payment therefor, (a) Common Stock or any shares of stock or other securities which are at any time directly or indirectly convertible into or exchangeable for Common Stock, or any rights or options to subscribe for, purchase or otherwise acquire any of the foregoing by way of dividend or other distribution, (b) any cash paid or payable otherwise than as a cash dividend at a rate which is substantially consistent with past practice (or in the case of an initial dividend, at a rate which is substantially consistent with industry practice), or (c) Common Stock or other or additional stock or other securities or property (including cash) by way of spinoff, split-up, reclassification, combination of shares or similar corporate rearrangement, (other than shares of Common Stock issued as a stock split, adjustments in respect of which shall be covered by the terms of Section 3.1 above), then and in each such case, the Holder hereof shall, upon the exercise of this Warrant, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of stock and other securities and property (including cash in the cases referred to in clauses (b) and (c) above) which such Holder would hold on the date of such exercise had he been the holder of record of such Common Stock as of the date on which holders of Common Stock received or became entitled to receive such shares and/or all other additional stock and other securities and property. 3.3 Reorganization, Reclassification, Consolidation, or Merger. If any capital reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger of sale, lawful and adequate provisions shall be made whereby the Holder hereof shall thereafter have the right to purchase and receive (in lieu of the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby) such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby. In any such case, appropriate provision shall be made with resect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Stock Purchase Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company will not effect any such consolidation, merger or sale unless, prior to the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or the corporation purchasing such assets shall assume by written instrument, executed and mailed or delivered to the registered Holder hereof at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. 3.4 Intentionally Omitted 3.5 Notice of Adjustment. Upon any adjustment of the Stock Purchase Price, and/or any increase or decrease in the number of shares purchasable upon the exercise of this Warrant, the Company shall give written notice thereof, by first class mail, postage prepaid, addressed to the registered Holder of this Warrant at the address of such Holder as shown on the books of the Company. The notice shall be signed by the Company's chief financial officer and shall state the Stock Purchase Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 3.6 Other Notices. If at any time: (a) the Company shall declare any cash dividend upon its Common Stock; (b) the Company shall declare any dividend upon its Common Stock payable in stock or make any special dividend or other distribution to the holders of its Common Stock; (c) the Company shall offer for subscription pro-rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (d) there shall be any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation; or (e) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company; or (f) the Company shall take or propose to take any other action, notice of which is actually provided to (or is required to be provided, pursuant to any written agreement,) to holders of Common Stock; then, in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to the Holder of this Warrant at the address of such Holder as shown of the books of the Company, (i) at least 10 days prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividends, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, at least 20 days written notice of the date when the same shall take place. Any notice given in accordance with the foregoing clause (i) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto. Any notice given in accordance with the foregoing clause (ii) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. 3.7 Certain Events. If any change in the outstanding Common Stock of the Company or any other event occurs as to which the other provisions of this Section 3 are not strictly applicable or if strictly applicable would not fairly protect the purchase rights of the Holder of the Warrant in accordance with the essential intent and principles of such provisions, then the Board of Directors of the Company shall make an adjustment in the number and class of shares available under the Warrant, the Stock Purchase Price and/or the application of such provisions, in accordance with such essential intent and principles, so as to protect such purchase rights as aforesaid. The adjustment shall be such as will give the Holder of the Warrant upon exercise for the same aggregate Stock Purchase Price the total number, class and kind of shares as he would have owned had the Warrant been exercised prior to the event and had he continued to hold such shares until after the event requiring adjustment. 4. Issue Tax. The issuance of certificates for shares of Common Stock upon the exercise of the Warrant shall be made without charge of the Holder of the Warrant for any issue tax in respect thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the Holder of the Warrant being exercised. 5. Closing of Books. The Company will at no time close its transfer books against the transfer of any Warrant or of any shares of Common Stock issued or issuable upon the exercise of any Warrant in any manner which interferes with the timely exercise of this Warrant. 6. No Voting or Dividend Rights; Limitation of Liability. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a shareholder in respect of meetings of shareholders for the election of directors of the Company or any other matters or any rights whatsoever as a shareholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. No provisions hereof, in the absence of affirmative action by the holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the Stock Purchase Price or as a shareholder of the Company, whether such liability is asserted by the Company or by its creditors. 7. Registration Rights 7.1 Certain Definitions. As used in this Section 7, the following terms shall have the following meanings: "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Holder" shall mean any of the Warrant or of Registrable Securities as hereinafter defined. The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. "Registrable Securities" shall mean (i) shares of Common Stock issued or issuable upon exercise of the Warrant and (ii) any Common Stock issued in respect of such securities upon any stock split, stock dividend, recapitalization or similar event. "Registration Expenses" shall mean all expenses incurred by the Company in compliance with Section 7.2 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursement of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company and expenses of regular annual and periodic audits, which shall be paid in any event by the Company) and the expenses associated with the Company's obligations under Section 7.4 hereof. "Restricted Securities" shall refer collectively to the securities of the Company required to bear the legend set forth in Section 8.2 hereof. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursement of counsel for any Holder. 7.2 Piggyback Registration Rights. (a) If the Company shall determine to register any of its securities for its own account, other than a registration relating solely to employee benefit plans or a transaction subject to Rule 145 under the Securities Act, the Company will: (i) Promptly give to each Holder written notice thereof; and (ii) Except as set forth in Section 7.2 (b), include in such registration (and any related qualification under state blue sky laws and other compliance filings, and in any underwriting involved therein), all the Registrable Securities specified in a written request or requests, given by any Holder within 15 days after the written notice from the Company is given. (b) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the written notice given pursuant to Section 7.2 (a) (i). In such event the right of any Holder to registration pursuant to Section 8.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other persons distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected or approved for underwriting by the Company. Notwithstanding any other provision of this Section 7.2, if the underwriter determines that marketing factors require a limitation on the number of shares to be underwritten, the underwriter exclude from such registration and underwriting some or all of the Registrable Securities which would otherwise be underwritten pursuant hereto. If any Holder of Registrable Securities or any officer, director or other security holder requesting registration disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 7.3 Expenses of Registration. All Registration Expenses incurred on behalf of Holders in connection with any registration, qualification or compliance pursuant to this Section 7 shall be borne by the Company, and all Selling Expenses shall be borne by the Holders of the securities so registered pro rata on the basis of the number of their shares so registered. 7.4 Registration Procedures. In the case of each registration effected by the Company pursuant to this Section 7, the Company will advise each Holder in writing as to the initiation of each registration and as to the completion thereof. The Company will: (a) Keep such registration effective for a period of 120 days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; and (b) Furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request. 7.5 Indemnification. (a) The Company will indemnify each Holder, each of its officers, directors, and partners, and each person controlling such Holder, with respect to which registration, qualification or compliance has been effected pursuant to this Section 7, and each underwriter, if any, and each person who controls any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance. The Company will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on (i) any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein, or (ii) any failure by any such Holder or underwriter or comply with the prospectus delivery requirements of the Securities Act. (b) Each Holder and other security holder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of the Securities Act and the rules and regulations thereunder, each other such Holder and other security holder and each of their officers, directors and partners, and each person controlling such Holder or other security holder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact necessary to make the statements made therein not misleading. Each Holder and other security holder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification or compliance is being affected, reimburse the Company and such Holders, other security holders, directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action. The obligation to indemnify and reimburse assumed under this Section 7.5 (b) shall be limited to an untrue statement (or alleged untrue statement) or omission (or alleged omission) made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder or other security holder (as the case may be) and stated to be specifically for use therein; provided, however, that the obligations of such Holders and other security holders hereunder shall be limited to an amount equal to the proceeds to each such Holder or other security holder (as the case may be) of securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section 7.5 (the "Indemnified party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnifying Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 7.5 No Indemnified Party, in the defense of any such claim of litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 7.6 Information by Holder. Each Holder of Registrable Securities, and each person holding securities included in any registration, shall furnish to the Company such information regarding such Holder or other person as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 7. 7.7 Intentionally Omitted. 7.8 Rule 144 Reporting. With a view of making available the benefits of certain rules and regulations of the Commission which may permit the sale of the Restricted Securities to the public without registration, the Company agrees to: (a) Use its best efforts to make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act, at all time from and after 90 days following the effective date of the first registration under the Securities Act file by the Company for an offering of its securities of the general public; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") at any time during which it is subject to such reporting requirements; and (c) So long as a Holder owns any Restricted Securities, furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after 90 days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time during which it is subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. 7.9 Transfer of Registration Rights. The rights to cause the Company to register securities granted by the Company under Section 7.2 may be assigned by any Holder to transferees or assignees of Restricted Securities, who after such assignment or transfer hold at least 50% of such Holder's Restricted Securities; provided, however, that the Company is given written notice at the time of or within a reasonable time after said transfer, stating the name and address of said transferees or assignees and identifying the securities with respect to which such registration rights are being assigned; and, provided, further, that the transferees or assignees of such rights assume the obligations of such Holder under this Section 7. The foregoing requirement as to the minimum percentage of shares to be transferred or assigned in connection with any assignment of registration rights shall not apply to an assignment by a Holder to any person or entity which is affiliated with such Holder. 7.10 "Market Stand-Off" Agreement. Each Holder agrees, if requested by the Company and the underwriter of Common Stock (or other securities) of the Company, not to sell or otherwise transfer or dispose of any Common Stock on the effective date of any registration statement of the Company filed under the Securities Act with respect to any underwritten public offering of securities by the Company, provided that: (a) such agreement shall only apply to the first such registration statement of the Company; and (b) all Holders, other security holders whose securities are included in such registration statement and officers and directors of the Company shall also enter into similar agreements. Such agreement shall be in writing in a form satisfactory to the Company and such underwriter. The Company may impose stop-transfer instructions with respect to the securities subject to the foregoing restrictions until the end of said 120 day period. 7.11 Termination of Registration Rights. The right to cause the Company to register securities granted by the Company under Section 7.2 shall terminate with respect to any Holder at such time as all of the Registrable Securities of such Holder can be sold (in a single transaction) in accordance with Rule 144 of the Commission. 8. Restrictions on Transferability of Securities; Compliance with Securities Act. 8.1 Restrictions on Transferability. The Warrant and the Common Stock shall not be transferable except upon the conditions specified in this Section 8, which conditions are intended to insure compliance with the provisions of the Securities Act or, to assist in an orderly distribution. Each Holder of this Warrant or the Common Stock issuable hereunder will cause any proposed transferees of the Warrant or Common Stock to agree to take and hold such securities subject to provisions and upon the conditions specified in this Section 8. 8.2 Restrictive Legend. Each certificate representing (i) this Warrant, (ii) the Common Stock, (iii) any other securities issued in respect of the Common Stock or Common Stock issued upon conversion of the Common Stock upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted by the provisions of Section 8.3 below or unless such securities have been registered under the Securities Act or sold under Rule 144) be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. 8.3 Restrictions on Transfer. The Holder of this Warrant and each person to whom this Warrant is subsequently transferred represents and warrants to the Company (by acceptance of such transfer) that it will not transfer the Warrant (or securities issuable upon exercise hereof) unless a registration statement under the Securities Act was in effect with respect to such securities at the time of issuance thereof except pursuant to (i)an effective registration statement under the Securities Act, (ii) Rule 144 under the Securities Act (or any other rule under the Securities Act relating to the disposition of securities), or (iii) an opinion of counsel, reasonably satisfactory to counsel for the Company, that an exemption from such registration is available. 9. Warrants Transferable. Subject to the provisions of Section 8, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Holder hereof (except for transfer taxes), upon surrender of this Warrant properly endorsed. Each taker and Holder of this Warrant, when endorsed in blank, shall be deemed negotiable, and that the Holder hereof, when this Warrant shall have been so endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the right represented by this Warrant, or to the transfer hereof on the books of the Company any notice to the contrary notwithstanding; but until such transfer on such books, the Company may treat the registered owner hereof as the owner for all purposes. 10. Rights and Obligations Survive Exercise of Warrant. The rights and obligations of the Company, of the Holder of this Warrant and of the holder of shares of Common Stock issued upon exercise of this Warrant, contained in Sections 7, 8, and 9 shall survive the exercise of this Warrant. 11. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder hereof or the Company shall be delivered or shall be sent by certified or registered mail, postage prepaid, to each such Holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant. 13. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. All of the obligations of the Company relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise and termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and permitted assigns of the Holder hereof. The Company will, at the time of the exercise of this Warrant, in whole or in part, upon request of the Holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the Holder hereof in respect of any rights (including, without limitation, any right to registration of the shares of Common Stock) to which the Holder hereof shall continue to be entitled after such exercise in accordance with this Warrant; provided, that the failure of the Holder hereof to make any such request shall not affect the continuing obligation of the Company to the Holder hereof in respect of such rights. 14. Descriptive Headings and Governing Law. The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware. 15. Lost Warrants or Stock Certificates. The Company represents and warrants to LTI that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant (or stock certificate issued upon exercise thereof), and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such Warrant or stock certificate, the Company, at its expense, will issue and deliver a new Warrant or stock certificate issued upon exercise thereof of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 16. Fractional Shares. No fractional shares shall be issued upon exercise of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the Holder entitled to such fraction a sum in cash equal to such fraction multiplied by the then effective Stock Purchase Price. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its officers, thereunto daily authorized this 9th day of September, 1998. NEOTHERAPEUTICS, INC. By: /s/ Samuel Gulko -------------------------------- Name: Samuel Gulko ------------------------------ Title: CFO, Secretary & Treasurer FORM OF SUBSCRIPTION (To be signed only upon exercise of Warrant) To:_________________________________ The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ____________(1)______ ( ) shares of Common Stock of __________ and herewith makes payment of _______________________________ Dollars ($______________) therefore, and requests that the certificates for such shares be issued in the name of, and delivered to, ______________________________, whose address is - ----------------------------------------------. The undersigned represent that it is acquiring such Common Stock for its own account for investment and not with a view to or sale in connection with any distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times be within its control). DATED:___________________ ------------------------------ (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) ------------------------------ ------------------------------ (Address) - ------------------- (1) Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other Stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise. ASSIGNMENT FOR VALUE RECEIVED, the undersigned, the Holder of the within Warrant, hereby sells, assigns and transfers all of the rights of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered thereby set forth herein below unto: Name of Assignee Address No. of Shares - ---------------- ------- ------------- DATED:_____________________ ------------------------------ (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) EX-4.6 7 a80481ex4-6.txt EXHIBIT 4.6 EXHIBIT 4.6 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. NEOTHERAPEUTICS, INC. WARRANT - NO. NEOT005 DATED: MAY 11, 1999 NeoTherapeutics, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, _____________________, or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of _____________________ shares of Common Stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $15.00 per share (as adjusted from time to time as provided in Section 8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including the earlier of (i) May 10, 2004 or (ii) the business day preceding a Redemption Date, as defined in Section 4 hereof (as applicable, the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) This Warrant or the Warrant Shares issued upon any exercise hereof may only be transferred pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to the registration requirements of the Securities Act. In connection with any transfer of this Warrant or any Warrant Shares other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act. Holder agrees to the imprinting, so long as is required by this Section 2(a), of a legend substantially similar to that first above written on any New Warrant (as defined in Section 2(b) below) or a legend of similar import on any Warrant Shares issued upon an -1- exercise hereof. Any such transferee shall agree in writing to be bound by the terms of this Warrant and shall have the rights of Holder under this Warrant. (b) The Company shall register the transfer of any portion of this Warrant in conformance with Section 2(a) in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 11. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (c) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. 3. Duration and Exercise of Warrant. (a) This Warrant shall be exercisable by the then registered Holder on any business day before 5:00 P.M., California time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., California time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Subject to Sections 2(c), and 5, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 11 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except (i) either in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective or the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) if this Warrant shall have been issued pursuant to a written agreement between the original Holder and the Company, as required by such agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. (d) Prior to the exercise of this Warrant, the Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings, except as otherwise set forth in Section 8(f) herein. 4. Redemption. (a) The remaining unexercised portion of this Warrant may be completely redeemed at the option of the Company at any time prior to exercise if, at the time notice of such redemption is given by the Company as provided in Section 4(b) below, the Daily Price has exceeded 200% of the Exercise Price then in effect for any 20 out of the 30 consecutive trading days immediately preceding the date of such notice, at a price equal to $0.25 per Warrant Share then subject to the unexercised portion of this Warrant (the "Redemption Price"). For the purpose of the foregoing sentence, the term "Daily Price" shall mean, for any relevant day, the closing bid price or closing price, as the case may be, on that day as reported by the principal exchange, national market or quotation system on which prices for the Common Stock are reported. On the date set for redemption in the redemption notice (the "Redemption Date") the Holder of record of this Warrant shall be entitled to payment of the Redemption Price upon surrender of such redeemed Warrant to the Company at the principal office of the Company. (b) Notice of redemption of Warrant shall be given at least 30 days prior to the Redemption Date by mailing, by registered or certified mail, return receipt requested, a copy of such notice to the Holder of this Warrant at the address appearing on the Warrant Register or such other address designated in writing by the holder of record to the Company not less than 40 days prior to the Redemption Date. (c) From and after the Redemption Date, all rights of the Holder (except the right to receive the Redemption Price) with respect to this Warrant shall terminate. (d) The Company shall pay to the Holder of this Warrant all monies to which the Holder of this Warrant is entitled, provided such Holder shall have surrendered this Warrant to the Company. The Holder shall have no right to interest following the Redemption Date unless the Company shall have defaulted in its obligation to deliver the Redemption Price. 5. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock and not the Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), and (b)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date, fixed for determination of stockholders entitled to receive such distribution, by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (e) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (f) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 9. Payment of Exercise Price. The Holder shall pay the Exercise Price in immediately available funds by certified check or bank draft payable to the order of the Company or by wire transfer to an account designated by the Company. 10. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (California time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 157 Technology Drive, Irvine, CA 92618, Attention: Chief Financial Officer, or to facsimile no. (949) 788-6706, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 12. Warrant Agent. The Company shall serve as warrant agent under this Warrant. The Company may appoint a new warrant agent upon notice to the Holder in accordance with Section 11. Any corporation into which the Company may be merged or any corporation resulting from any consolidation to which the Company shall be a party or any corporation to which the Company transfers substantially all of its corporate assets shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of California without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in Orange County, California, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. NEOTHERAPEUTICS, INC. By: /s/Samuel Gulko ------------------------------------------------------ Name: Samuel Gulko ------------------------------------------------------ Title: Senior Vice President Finance, Chief Financial ------------------------------------------------------ Officer, Secretary and Treasurer ------------------------------------------------------ FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To NeoTherapeutics, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase __________ shares of Common Stock ("Common Stock"), $.001 par value per share, of NeoTherapeutics, Inc. and encloses herewith $__________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER ------------------------------------------------ - ------------------------------------------------------------------------------- (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - ------------------------------------------------------------------------------- (Please print name and address) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Dated: __________, ____ Name of Holder: (Print) ----------------------------------- (By:) ------------------------------------- (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________ the right represented by the Warrant enclosed with this Form of Assignment to purchase __________ shares of Common Stock of NeoTherapeutics, Inc. to which the Warrant relates and appoints ____________________ attorney to transfer said right on the books of NeoTherapeutics, Inc. with full power of substitution in the premises. Dated: __________, ____ --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) --------------------------------------- Address of Transferee --------------------------------------- --------------------------------------- In the presence of: - -------------------------- EX-4.7 8 a80481ex4-7.txt EXHIBIT 4.7 EXHIBIT 4.7 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. NEOTHERAPEUTICS, INC. WARRANT Dated: May 17, 1999 NeoTherapeutics, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, STRADLING YOCCA CARLSON & RAUTH INVESTMENT PARTNERSHIP OF 1982, or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of 25,000 shares of Common Stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $11.40 per share (as adjusted from time to time as provided in Section 8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including the earlier of (i) May 17, 2004 or (ii) the business day preceding a Redemption Date, as defined in Section 4 hereof (as applicable, the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) This Warrant or the Warrant Shares issued upon any exercise hereof may only be transferred pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to the registration requirements of the Securities Act. In connection with any transfer of this Warrant or any Warrant Shares other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act. Holder agrees to the imprinting, so long as is required by this Section 2(a), of a legend substantially similar to that first above written on any New Warrant (as defined in Section 2(b) below) or a legend of similar import on any Warrant Shares issued upon an exercise hereof. Any such transferee shall agree in writing to be bound by the terms of this Warrant and shall have the rights of Holder under this Warrant. (b) The Company shall register the transfer of any portion of this Warrant in conformance with Section 2(a) in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 11. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (c) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 3. Duration and Exercise of Warrant. (a) This Warrant shall be exercisable by the then registered Holder on any business day before 5:00 P.M., California time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., California time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Subject to Sections 2(c), 5 and 9, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 11 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except (i) either in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective or the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) if this Warrant shall have been issued pursuant to a written agreement between the original Holder and the Company, as required by such agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. -2- (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. 4. Redemption. (a) The remaining unexercised portion of this Warrant may be completely redeemed at the option of the Company at any time prior to exercise if, at the time notice of such redemption is given by the Company as provided in Section 4(b) below, the Daily Price has exceeded 200% of the Exercise Price then in effect for the 10 consecutive trading days immediately preceding the date of such notice, at a price equal to $0.25 per Warrant Share then subject to the unexercised portion of this Warrant (the "Redemption Price"). For the purpose of the foregoing sentence, the term "Daily Price" shall mean, for any relevant day, the closing bid price or closing price, as the case may be, on that day as reported by the principal exchange, national market or quotation system on which prices for the Common Stock are reported. On the date set for redemption in the redemption notice (the "Redemption Date") the Holder of record of this Warrant shall be entitled to payment of the Redemption Price upon surrender of such redeemed Warrant to the Company at the principal office of the Company. (b) Notice of redemption of Warrant shall be given at least 30 days prior to the Redemption Date by mailing, by registered or certified mail, return receipt requested, a copy of such notice to the Holder of this Warrant at the address appearing on the Warrant Register or such other address designated in writing by the holder of record to the Company not less than 40 days prior to the Redemption Date. (c) From and after the Redemption Date, all rights of the Holder (except the right to receive the Redemption Price) with respect to this Warrant shall terminate. (d) The Company shall pay to the Holder of this Warrant all monies to which the Holder of this Warrant is entitled, provided such Holder shall have surrendered this Warrant to the Company. The Holder shall have no right to interest following the Redemption Date unless the Company shall have defaulted in its obligation to deliver the Redemption Price. 5. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. -3- 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock and not the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or -4- assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a) and (b)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (e) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (f) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the -5- Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 9. Payment of Exercise Price. The Holder may pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder shall deliver immediately available funds; or (b) Cashless Exercise. The Holder shall surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y (A-B)/A where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. -6- 10. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (California time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 157 Technology Drive, Irvine, CA 92618, Attention: Chief Financial Officer, or to facsimile no. (949) 788-6706, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 12. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company may be merged or any corporation resulting from any consolidation to which the Company shall be a party or any corporation to which the Company transfers substantially all of its corporate assets shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of California without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in Orange County California, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or -7- proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. NEOTHERAPEUTICS, INC. By: /s/ Samuel Gulko ---------------- Name: Samuel Gulko ------------ Title: Chief Financial Officer ----------------------- -8- FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To NeoTherapeutics, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase __________ shares of Common Stock ("Common Stock"), $.001 par value per share, of NeoTherapeutics, Inc. and , if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, encloses herewith $__________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER -------------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: __________, ____ Name of Holder: (Print) ------------------------------------ (By:) ------------------------------------ (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________ the right represented by the within Warrant to purchase __________ shares of Common Stock of NeoTherapeutics, Inc. to which the within Warrant relates and appoints ____________________ attorney to transfer said right on the books of NeoTherapeutics, Inc. with full power of substitution in the premises. Dated: __________, ____ ---------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ---------------------------------------- Address of Transferee ---------------------------------------- ---------------------------------------- In the presence of: - ------------------------------- EX-4.32 9 a80481ex4-32.txt EXHIBIT 4.32 EXHIBIT 4.32 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. WARRANT NO: NEOT_____ NEOTHERAPEUTICS, INC. WARRANT DATED: _____________________ NeoTherapeutics, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, BRIGHTON CAPITAL, LTD., or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of __________ shares of Common Stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $15.00 per share (as adjusted from time to time as provided in Section 8, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including the earlier of (i) ____________________ or (ii) the business day preceding a Redemption Date, as defined in Section 4 hereof (as applicable, the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) This Warrant or the Warrant Shares issued upon any exercise hereof may only be transferred pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to the registration requirements of the Securities Act. In connection with any transfer of this Warrant or any Warrant Shares other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act. Holder agrees to the imprinting, so long as is required by this Section 2(a), of a legend substantially similar to that first above written on any New Warrant (as defined in Section 2(b) below) or a legend of similar import on any Warrant Shares issued upon an exercise hereof. Any such transferee shall agree in writing to be bound by the terms of this Warrant and shall have the rights of Holder under this Warrant. (b) The Company shall register the transfer of any portion of this Warrant in conformance with Section 2(a) in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 11. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (c) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. 3. Duration and Exercise of Warrant. (a) This Warrant shall be exercisable by the then registered Holder on any business day before 5:00 P.M., California time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., California time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Subject to Sections 2(c), and 5, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 11 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except (i) either in the event that a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective or the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) if this Warrant shall have been issued pursuant to a written agreement between the original Holder and the Company, as required by such agreement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. -2- (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. (d) Prior to the exercise of this Warrant, the Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings (except as otherwise set forth in Section 8(f) herein). 4. Redemption. (a) The remaining unexercised portion of this Warrant may be completely redeemed at the option of the Company at any time prior to exercise if, at the time notice of such redemption is given by the Company as provided in Section 4(b) below, the Daily Price has exceeded $30.00 per share for any 10 consecutive trading days immediately preceding the date of such notice, at a price equal to $0.25 per Warrant Share then subject to the unexercised portion of this Warrant (the "Redemption Price"). For the purpose of the foregoing sentence, the term "Daily Price" shall mean, for any relevant day, the closing bid price or closing price of the Common Stock, as the case may be, on that day as reported by the principal exchange, national market or quotation system on which prices for the Common Stock are reported. On the date set for redemption in the redemption notice (the "Redemption Date") the Holder of record of this Warrant shall be entitled to payment of the Redemption Price upon surrender of such redeemed Warrant to the Company at the principal office of the Company. (b) Notice of redemption of Warrant shall be given at least 30 days prior to the Redemption Date by mailing, by registered or certified mail, return receipt requested, a copy of such notice to the Holder of this Warrant at the address appearing on the Warrant Register or such other address designated in writing by the holder of record to the Company not less than 40 days prior to the Redemption Date. (c) From and after the Redemption Date, all rights of the Holder (except the right to receive the Redemption Price) with respect to this Warrant shall terminate. (d) The Company shall pay to the Holder of this Warrant all monies to which the Holder of this Warrant is entitled, provided such Holder shall have surrendered this Warrant to the Company. The Holder shall have no right to interest following the Redemption Date unless the Company shall have defaulted in its obligation to deliver the Redemption Price. 5. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 6. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation -3- hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 7. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 8). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 8. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 8. Upon each such adjustment of the Exercise Price pursuant to this Section 8, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock and not the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, -4- sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 8(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 8(a), and (b)), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) For the purposes of this Section 8, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (e) All calculations under this Section 8 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (f) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or -5- (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 9. Payment of Exercise Price. The Holder shall pay the Exercise Price in immediately available funds by certified check or bank draft payable to the order of the Company or by wire transfer to an account designated by the Company. 10. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (California time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: -6- (i) if to the Company, to 157 Technology Drive, Irvine, CA 92618, Attention: Chief Financial Officer, or to facsimile no. (949) 788-6706, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 12. Warrant Agent. The Company shall serve as warrant agent under this Warrant. The Company may appoint a new warrant agent upon notice to the Holder in accordance with Section 11. Any corporation into which the Company may be merged or any corporation resulting from any consolidation to which the Company shall be a party or any corporation to which the Company transfers substantially all of its corporate assets shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of California without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in Orange County, California, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. -7- IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. NEOTHERAPEUTICS, INC. By: -------------------------------------------- Name: Samuel Gulko ----------------------------------------- Title: Senior Vice President Finance, ---------------------------------------- Chief Financial Officer, ---------------------------------------- Secretary and Treasurer ---------------------------------------- -8- FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To NeoTherapeutics, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase __________ shares of Common Stock ("Common Stock"), $.001 par value per share, of NeoTherapeutics, Inc. encloses herewith $__________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER ------------------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: __________, ____ Name of Holder: (Print) ---------------------------------- (By:) ------------------------------------ (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________ the right represented by the Warrant enclosed with this Form of Assignment to purchase __________ shares of Common Stock of NeoTherapeutics, Inc. to which the Warrant relates and appoints ____________________ attorney to transfer said right on the books of NeoTherapeutics, Inc. with full power of substitution in the premises. Dated: __________, ____ --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) --------------------------------------- Address of Transferee --------------------------------------- --------------------------------------- In the presence of: - -------------------------- EX-4.36 10 a80481ex4-36.txt EXHIBIT 4.36 EXHIBIT 4.36 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. WARRANT NO.: NEOT031 NEOTHERAPEUTICS, INC. WARRANT DATED: DECEMBER 18, 2000 NeoTherapeutics, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, BRIGHTON CAPITAL, LTD., or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of TEN THOUSAND (10,000) shares of Common Stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $6.17 per share (as adjusted from time to time as provided in Section 7, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including DECEMBER 18, 2005 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) This Warrant or the Warrant Shares issued upon any exercise hereof may only be transferred (i) pursuant to an effective registration statement under the Securities Act, (ii) to the Company or (iii) pursuant to an available exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. In connection with any transfer of this Warrant or any Warrant Shares other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel to the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer may be made without registration under the Securities Act. Holder agrees to the imprinting, so long as is required by applicable securities laws, of a legend substantially similar to that first above written on any New Warrant (as defined in Section 2(b) below). Any such transferee shall agree by virtue of having a New Warrant registered in its name in accordance with Section 2(b) below to be bound by the terms of this Warrant and shall have the rights of Holder under this Warrant. (b) The Company shall register the transfer of any portion of this Warrant in conformance with Section 2(a) on the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 12. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (c) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 3(b), for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. 3. Duration and Exercise of Warrant. (a) This Warrant shall be exercisable by the then registered Holder on any business day before 5:00 P.M., California time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., California time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Subject to Sections 2(c), and 4, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 12 and upon payment, if applicable, of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly, but in no event later than 3 business days after the applicable Date of Exercise (as defined below), issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except as are required under applicable securities laws. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become the holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. Notwithstanding the foregoing, subject to applicable law, in the event the Holder may resell shares of Common Stock acquired upon exercise of this Warrant without restriction pursuant to an effective registration statement or otherwise, the Company shall cause the transfer agent with respect to its Common Stock, if such transfer agent is then participating in the Depositary Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, to electronically transmit the shares of Common Stock issuable to the Holder upon exercise of this Warrant by crediting the account of the Holder's prime broker with DTC through DTC's Deposit Withdrawal Agent Commission ("DWAC") system, within 3 business days after exercise of this Warrant by the Holder. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment, if applicable, of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be 2 purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. (d) Prior to the exercise of this Warrant, the Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings (except as otherwise set forth in Section 7(g) herein). 4. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, reasonably satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 6. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 7). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized and issued, fully paid and nonassessable. 7. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 7. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock and not the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately before such event by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. The number of Warrant Shares issuable upon exercise of this Warrant shall be adjusted upon such adjustment of the Exercise Price by multiplying the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment by a fraction of which the denominator shall be 3 the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section 7(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holder shall be entitled upon such exercise to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification or share exchange. The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 7(b) upon any exercise following any such reclassification or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 7(a), (b) and (d) and other than with respect to rights granted pursuant to a stockholders rights plan adopted by the Company), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the average of the closing prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the record date mentioned above (the "Record Date Value"), and of which the numerator shall be the Record Date Value less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examine the financial statements of the Company (the "Appraiser"). The number of Warrant Shares issuable upon exercise of this Warrant shall be adjusted upon such adjustment of the Exercise Price by multiplying the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment by a fraction of which the numerator shall be the Record Date Value and the denominator shall be the Record Date Value less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding shares of Common Stock as determined by the Appraiser. (d) In case of the closing of any (1) merger or consolidation of the Company with or into another Person, or (2) sale by the Company of more than one-half of the assets of the Company (on a book value basis) in one or a series of related transactions, or (3) tender or other offer or exchange (whether by the Company or another Person) pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, stock, cash or property of the Company or another Person; then the Holder shall have the right thereafter to (A) exercise this Warrant for the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and the Holder shall be entitled upon exercise of this Warrant to receive such amount of securities, cash and property as the Common Stock for which this Warrant could have been exercised immediately prior to such merger, consolidation or sale would have been entitled, or (B) in the event of an exchange or tender offer or other transaction contemplated by clause (3) of this Section 7(d), tender or exchange this 4 Warrant for such securities, stock, cash and other property receivable upon or deemed to be held by holders of Common Stock that have tendered or exchanged their shares of Common Stock following such tender or exchange, and the Holder shall be entitled upon such exchange or tender to receive such amount of securities, cash and property as the shares of Common Stock for which this Warrant could have been exercised immediately prior to such tender or exchange would have been entitled as would have been issued. The terms of any such merger, sale, consolidation, tender or exchange shall include such terms so as continue to give the Holder the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (e) For the purposes of this Section 7, the number of shares of Common Stock outstanding at any time shall be deemed to include the aggregate maximum number of shares of Common Stock deliverable upon exercise, conversion or exchange, as applicable (assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability, as applicable, including, without limitation, the passage of time), of any options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities then outstanding. (f) All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (g) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at such Holder's last address as it shall appear upon the Warrant Register, at least 15 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become 5 effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 8. Payment of Exercise Price. The Holder shall pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available funds by certified check or bank draft payable to the order of the Company or by wire transfer to an account designated by the Company; or (b) Cashless Exercise. The Holder may surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: Y (A-B) X = ------- A where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have been commenced, on the issue date. 9. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 9, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 10. Certain Exercise Restrictions. Notwithstanding any other provision of this Warrant, as of any date prior to the Expiration Date, the aggregate number of shares of Common Stock with respect to which this Warrant may be exercised, together with any other shares of Common Stock then beneficially owned (as defined in the Securities Exchange Act of 1934, as amended) by the Holder and its affiliates, shall not exceed 4.9% of the total outstanding shares of Common Stock as of such date. The Company shall have no obligation to monitor compliance with the foregoing limitation 6 11. Representations and Warranties of Holder. By accepting this Warrant, the Holder hereby represents and warrants as follows: (a) Purchase for Own Account. Holder represents and warrants that it is acquiring the Warrant and the Warrant Shares (collectively, the "Securities") solely for its own account for investment and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act. Holder further represents that it does not have any present intention of selling, offering to sell or otherwise disposing of or distributing the Securities or any portion thereof and that the entire legal and beneficial interest of the Securities it is acquiring is being acquired for, and will be held for the account of, Holder only and neither in whole nor in part for any other person. (b) Accredited Investor; Informed and Knowledgeable Decision. Holder is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. Holder hereby agrees, represents and warrants that it is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Holder further represents and warrants that it has discussed the Company and its plans, operations and financial condition with its officers, has received all such information as he deems necessary and appropriate to enable it to evaluate the financial risk inherent in making an investment in the Securities. (c) Company Disclosure. Holder hereby agrees, represents and warrants that the Company has disclosed to Holder that the Securities have not been registered under the Securities Act or under any state securities laws and must be held indefinitely unless a transfer of it is subsequently registered under the Securities Act or an exemption from such registration is available. (d) Rule 144. The Holder hereby agrees, represents and warrants that the Holder is aware of the provisions of Rule 144, promulgated under the Securities Act. 12. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (California time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 157 Technology Drive, Irvine, CA 92618, Attention: Chief Financial Officer, or to facsimile no. (949) 788-6706, with a copy to Latham & Watkins, 650 Town Center Drive, Suite 2000, Costa Mesa, California 92626, attention Alan W. Pettis, Esq., or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 11. 13. Warrant Agent. The Company shall serve as warrant agent under this Warrant. The Company may appoint a new warrant agent upon notice to the Holder in accordance with Section 11. Any corporation into which the Company may be merged or any corporation resulting from any consolidation to which the Company shall be a party or any corporation to which the Company transfers substantially all of its corporate assets shall be a successor warrant agent under this Warrant 7 without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 14. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the County of Orange, State of California, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waive, and agree not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. 8 NEOTHERAPEUTICS, INC. By: /s/ Samuel Gulko ------------------------------ Samuel Gulko Senior Vice President Finance, Chief Financial Officer, Secretary and Treasurer 9 FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To NeoTherapeutics, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase __________ shares of the common stock ("Common Stock"), no par value per share, of NeoGene Technologies, Inc. and such Holder (i) ___ is utilizing the Cashless Exercise provisions set forth in the Warrant, or (ii) ___ encloses herewith $__________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned hereby acknowledges that it has reviewed the representations and warranties contained in Section 11 of the Warrant and by its signature below hereby makes such representations and warranties to the Company as of the date hereof. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER - -------------------------------------------------------------------------------- (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: __________, ____ Name of Holder: (Print) ---------------------------------- (By:) ------------------------------------ (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________ the right represented by the Warrant enclosed with this Form of Assignment to purchase __________ shares of Common Stock of NeoTherapeutics, Inc. to which the Warrant relates and appoints ____________________ attorney to transfer said right on the books of NeoTherapeutics, Inc. with full power of substitution in the premises. Dated: __________, ____ --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) --------------------------------------- Address of Transferee --------------------------------------- --------------------------------------- In the presence of: - -------------------------- EX-4.37 11 a80481ex4-37.txt EXHIBIT 4.37 EXHIBIT 4.37 NEITHER THESE SECURITIES NOR THE SECURITIES FOR WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. NEOTHERAPEUTICS, INC. WARRANT No. NEOT010 Dated: January 25, 2001 NeoTherapeutics, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, CroMedica Global, Inc. or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of 50,000 shares of Common Stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $3.50 per share (as adjusted from time to time as provided in Section 7, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including January 24, 2006 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) This Warrant or the Warrant Shares issued upon any exercise hereof may only be transferred (i) pursuant to an effective registration statement under the Securities Act, (ii) to the Company or (iii) pursuant to an available exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. In connection with any transfer of this Warrant or any Warrant Shares other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel to the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer may be made without registration under the Securities Act. Holder agrees to the imprinting, so long as is required by applicable securities laws, of a legend substantially similar to that first above written on any New Warrant (as defined in Section 2(b) below) or certificates representing Warrant Shares. Any such transferee shall agree by virtue of having a New Warrant registered in its name in accordance with Section 2(b) below to be bound by the terms of this Warrant and shall have the rights of Holder under this Warrant. (b) The Company shall register the transfer of any portion of this Warrant in conformance with Section 2(a) on the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 11. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. (c) This Warrant is exchangeable, upon the surrender hereof by the Holder to the Company at its address for notice specified in or pursuant to Section 11, for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. 3. Duration and Exercise of Warrant. (a) This Warrant shall be exercisable by the then registered Holder on any business day before 5:00 P.M., California time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., California time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Subject to Sections 2(c), and 4, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice specified in or pursuant to Section 11 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly, but in no event later than 5 business days after the applicable Date of Exercise (as defined below), issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except as are required under applicable securities laws. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become the holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the business day on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment, if applicable, of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased; provided that any documents or payments received after 5:00 p.m. California time on any day shall be deemed to have been received on the next following business day. 2 (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. (d) Prior to the exercise of this Warrant, the Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings (except as otherwise set forth in Section 7(g) herein). 4. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, reasonably satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 6. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder. The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized and issued, fully paid and nonassessable. 7. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 7. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock and not the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller 3 number of shares, the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately before such event by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. The number of Warrant Shares issuable upon exercise of this Warrant shall be adjusted upon such adjustment of the Exercise Price by multiplying the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment by a fraction of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section 7(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holder shall be entitled upon such exercise to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification or share exchange. The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 7(b) upon any exercise following any such reclassification or share exchange. (c) In case of the closing of any merger or consolidation of the Company with or into another individual, corporation, partnership, limited liability company, trust, business, association or government or political subdivision thereof, governmental agency or other entity ("Person"), the Holder shall have the right thereafter to exercise this Warrant for the shares of stock and other securities, cash and property receivable by holders of Common Stock upon such merger or consolidation, and the Holder shall be entitled upon exercise of this Warrant to receive such amount of securities, cash and property as the Common Stock for which this Warrant could have been exercised immediately prior to such merger or consolidation would have been entitled. The terms of any such merger or consolidation shall include such terms so as continue to give the Holder the right to receive the securities, cash and property set forth in this Section 7(c) upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (d) For the purposes of this Section 7, the number of shares of Common Stock outstanding at any time shall be deemed to include the aggregate maximum number of shares of Common Stock then deliverable upon exercise, conversion or exchange, as applicable (assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability, as applicable, including, without limitation, the passage of time), of all options, warrants or rights to purchase Common Stock, securities by their terms convertible into or exchangeable for Common 4 Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities then outstanding. (e) All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (f) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to the Holder at the Holder's last address as it shall appear upon the Warrant Register, at least 15 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 8. Payment of Exercise Price. The Holder shall pay the Exercise Price in immediately available funds by certified check or bank draft payable to the order of the Company or by wire transfer to an account designated by the Company. 9. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant 5 Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 9, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 10. Representations and Warranties of Holder. (a) Purchase for Own Account. Holder represents and warrants that it is acquiring the Warrant and the Warrant Shares (collectively, the "Securities") solely for its own account for investment and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act. Holder further represents that it does not have any present intention of selling, offering to sell or otherwise disposing of or distributing the Securities or any portion thereof and that the entire legal and beneficial interest of the Securities it is acquiring is being acquired for, and will be held for the account of, Holder only and neither in whole nor in part for any other person. (b) Accredited Investor; Informed and Knowledgeable Decision. Holder is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. Holder hereby agrees, represents and warrants that it is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Holder further represents and warrants that it has discussed the Company and its plans, operations and financial condition with its officers, has received all such information as he deems necessary and appropriate to enable it to evaluate the financial risk inherent in making an investment in the Securities. (c) Company Disclosure. Holder hereby agrees, represents and warrants that the Company has disclosed to Holder that the Securities have not been registered under the Securities Act or under any state securities laws and must be held indefinitely unless a transfer of it is subsequently registered under the Securities Act or an exemption from such registration is available. (d) Rule 144. The Holder hereby agrees, represents and warrants that the Holder is aware of the provisions of Rule 144, promulgated under the Securities Act. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (California time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 157 Technology Drive, Irvine, CA 92618, Attention: Chief Financial Officer, or to facsimile no. (949) 788-6706, with a 6 copy to Latham & Watkins, 650 Town Center Drive, Suite 2000, Costa Mesa, California 92626, attention Alan W. Pettis, Esq., or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register, or such other address or facsimile number as any party may provide to the other party in accordance with this Section 11. 12. Warrant Agent. The Company shall serve as warrant agent under this Warrant. The Company may appoint a new warrant agent upon notice to the Holder in accordance with Section 11. Any corporation into which the Company may be merged or any corporation resulting from any consolidation to which the Company shall be a party or any corporation to which the Company transfers substantially all of its corporate assets shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. Subject to Section 2(a) above, this Warrant may be assigned by the Holder to any affiliate of the Holder, including, but not limited to, officers, directors and employees of the Holder. (b) Subject to Section 13(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in Orange County, California, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waive, and agree not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties 7 will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, the parties hereto have executed this Warrant effective as of the date first indicated above. THE COMPANY: NEOTHERAPEUTICS, INC. By: /s/Samuel Gulko ----------------------------------------- Samuel Gulko Senior Vice President, Finance, Chief Financial Officer, Secretary and Treasurer HOLDER: CROMEDICA GLOBAL, INC. By: --------------------------------------- Name: --------------------------------------- Title: --------------------------------------- 8 FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To NeoTherapeutics, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _________ shares of common stock ("Common Stock"), $.001 par value per share, of NeoTherapeutics, Inc. and encloses herewith either (i) $_______ in cash, certified or official bank check or checks, or (ii) a Fedwire Funds Transfer reference number for the wire transfer of $_______ in immediately available funds to: Chase Manhattan Bank, N.Y.C. Routing No.: 021 000 021 FBO: Salomon Smith Barney, Inc. Account No. 066-198 038 FCC: NeoTherapeutics, Inc. Account No. 561-04051-19 103 which sum represents in either case the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned hereby acknowledges that it has reviewed the representations and warranties contained in Section 10 of the Warrant and by its signature below hereby makes such representations and warranties to the Company as of the date hereof. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER -------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: __________, ____ Name of Holder: (Print) ------------------------------------ (By:) ------------------------------------ (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________ the right represented by the Warrant enclosed with this Form of Assignment to purchase __________ shares of Common Stock of NeoTherapeutics, Inc. to which the Warrant relates and appoints ____________________ attorney to transfer said right on the books of NeoTherapeutics, Inc. with full power of substitution in the premises. Dated: __________, ____ ------------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ------------------------------------------- Address of Transferee ------------------------------------------- ------------------------------------------- In the presence of: - ------------------------------------- EX-4.44 12 a80481ex4-44.txt EXHIBIT 4.44 EXHIBIT 4.44 NEITHER THESE SECURITIES NOR THE SECURITIES FOR WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. NEOTHERAPEUTICS, INC. WARRANT NO. NEOT_____ DATED: AUGUST 10, 2001 NeoTherapeutics, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, Gruntal & Co., L.L.C., or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of ________ shares of Common Stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $3.80 per share (as adjusted from time to time as provided in Section 7, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including August 9, 2006 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) This Warrant or the Warrant Shares issued upon any exercise hereof may only be transferred (i) pursuant to an effective registration statement under the Securities Act, (ii) to the Company or (iii) pursuant to an available exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. In connection with any transfer of this Warrant or any Warrant Shares other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel to the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer may be made without registration under the Securities Act. Holder agrees to the imprinting, so long as is required by applicable securities laws, of a legend substantially similar to that first above written on any New Warrant (as defined in Section 2(b) below) or certificates representing Warrant Shares. Any such transferee shall agree by virtue of having a New Warrant registered in its name in accordance with Section 2(b) below to be bound by the terms of this Warrant and shall have the rights of Holder under this Warrant. (b) The Company shall register the transfer of any portion of this Warrant in conformance with Section 2(a) on the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 12. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. (c) This Warrant is exchangeable, upon the surrender hereof by the Holder to the Company at its address for notice specified in or pursuant to Section 12, for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. 3. Duration and Exercise of Warrant. (a) This Warrant shall be exercisable by the then registered Holder on any business day before 5:00 P.M., California time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., California time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Subject to Sections 2(c), and 4, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice specified in or pursuant to Section 12 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly, but in no event later than 5 business days after the applicable Date of Exercise (as defined below), issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends except as are required under applicable securities laws. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become the holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the business day on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment, if applicable, of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased; provided that any documents or payments received after 5:00 p.m. California time on any day shall be deemed to have been received on the next following business day. 2 (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. (d) Prior to the exercise of this Warrant, the Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings (except as otherwise set forth in Section 7(g) herein). 4. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, reasonably satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 6. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder. The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized and issued, fully paid and nonassessable. 7. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 7. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock or on any other class of capital stock and not the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller 3 number of shares, the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately before such event by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. The number of Warrant Shares issuable upon exercise of this Warrant shall be adjusted upon such adjustment of the Exercise Price by multiplying the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment by a fraction of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section 7(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holder shall be entitled upon such exercise to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification or share exchange. The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 7(b) upon any exercise following any such reclassification or share exchange. (c) In case of the closing of any merger or consolidation of the Company with or into another individual, corporation, partnership, limited liability company, trust, business, association or government or political subdivision thereof, governmental agency or other entity ("Person"), the Holder shall have the right thereafter to exercise this Warrant for the shares of stock and other securities, cash and property receivable by holders of Common Stock upon such merger or consolidation, and the Holder shall be entitled upon exercise of this Warrant to receive such amount of securities, cash and property as the Common Stock for which this Warrant could have been exercised immediately prior to such merger or consolidation would have been entitled. The terms of any such merger or consolidation shall include such terms so as continue to give the Holder the right to receive the securities, cash and property set forth in this Section 7(c) upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. (d) For the purposes of this Section 7, the number of shares of Common Stock outstanding at any time shall be deemed to include the aggregate maximum number of shares of Common Stock then deliverable upon exercise, conversion or exchange, as applicable (assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability, as applicable, including, without limitation, the passage of time), of all options, warrants or rights to purchase Common Stock, securities by their terms convertible into or exchangeable for Common 4 Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities then outstanding. (e) All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (f) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to the Holder at the Holder's last address as it shall appear upon the Warrant Register, at least 15 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 8. Payment of Exercise Price. The Holder shall pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available funds by certified check or bank draft payable to the order of the Company or by wire transfer to an account designated by the Company; or 5 (b) Cashless Exercise. If the Date of Exercise is more than one year after the date of this Warrant, the Holder may surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: Y(A-B) X = ------ A where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the fair market value of a share of Common Stock on the Date of Exercise. B = the Exercise Price. For purposes of this Section 8(b), the "fair market value" of one share of Common Stock on the Date of Exercise shall mean: (i) if the Company's Common Stock is traded on a securities exchange or The Nasdaq Stock Market, the fair market value shall be deemed to be the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise; or (ii) if the Company's Common Stock is actively traded over-the-counter, the fair market value shall be deemed to be average of the closing bid or, if the closing bid is not reported, the closing sales price for the five (5) trading days immediately prior to (but not including) the Date of Exercise; or (iii) if neither (i) nor (ii) is applicable, the fair market value shall be at the highest price per share which the Company could obtain on the date of calculation from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board of Directors, unless the Company is at such time subject to an acquisition including the sale, conveyance or disposal of all or substantially all of the Company's property or business or the Company's merger into or consolidation with any other corporation (other than a wholly-owned subsidiary corporation) or any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, other than a merger effected exclusively for the purpose of changing the domicile of the Company, in which case the fair market value of one Warrant Share shall be deemed to be 6 the value received by the holders of Common Stock pursuant to such acquisition. 9. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 9, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 10. Registration Rights. (a) Form S-3 Registration. At any time on or after August 10, 2002, if the Company shall receive from the Holder a written request that the Company effect a resale registration statement on Form S-3 and any related qualification or compliance with respect to the Warrant Shares held by the Holder, the Company will: (i) As soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of the all or such portion of Holder's Warrant Shares as are specified in such request; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this subsection: (x) if Form S-3 is not available for such offering by the Holder; (y) if the Company shall furnish to the Holder a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 registration statement to be filed or declared effective at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than 60 days after receipt of the request of the Holder under this subsection. (ii) Subject to the foregoing, the Company shall file a registration statement covering the Warrant Shares and other securities so requested to be registered as soon as practicable after, and in any event within 30 days after (the "Filing Deadline") receipt of any request of the Holder and use its commercially reasonable efforts to cause such filed registration statement to become effective by the Effectiveness Date. "Effectiveness Date" means the 60th day following receipt by the Company of any request of the Holder. 7 (b) Company Registration. (i) Private Placement. If the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock in connection with the public offering of such securities solely for cash for which the Holder acted as placement agent for the original sale and issuance of the securities to be registered, the Company shall, at such time, promptly give the Holder notice of such proposed registration. Upon the written request of the Holder given within 15 days after receipt by the Holder of the Company's notice, the Company shall, subject to the provisions of the remainder of this Section 10(b), cause to be included in such registration statement all of the Warrant Shares that the Holder has requested to be registered. (ii) Underwritten Offering. In connection with any offering involving an underwriting of shares of the Company's capital stock for which the Holder has acted as lead underwriter, the Company shall, subject to the provisions of the remainder of this Section 10(b), cause to be included in such underwriting all of the Warrant Shares that the Holder has requested to be registered. (iii) Demand Registration. If the registration referred to in Section 10(b)(i) is being made by the Company to satisfy demand registration rights (a "Demand Registration") held by any person or entity (a "Demanding Holder"), the Company shall not be required under Section 10(b)(i) to include any of the Holders' securities in such registration, except in such quantity as the Demanding Holder shall determine in its sole discretion, subject to the provisions of Section 10(b)(iv) below. (iv) Cutbacks. If the total amount of securities, including Warrant Shares, requested by stockholders to be included in an underwritten offering or a Demand Registration exceeds the amount of securities sold other than by the Company or the Demanding Holder, respectively, that the underwriters or Demanding Holder, respectively, determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Warrant Shares, which the underwriters or Demanding Holder, respectively, determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata (to the nearest 100 shares) among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually 8 be agreed to by such selling stockholders). For purposes of the preceding apportionment, if the Holder is a partnership, limited liability company or corporation, the partners, retired partners, members, retired members and stockholders of the Holder, or the estates and family members of any such partners, members, retired partners or members and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "selling stockholder," and any pro-rata reduction with respect to such "selling stockholder" shall be based upon the aggregate amount of shares carrying registration rights owned by all Persons included in such "selling stockholder," as defined in this sentence. (v) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 10(b)(v) prior to the effectiveness of such registration whether or not the Holder has elected to include Warrant Shares in such registration. (c) Obligations of the Company. Whenever required under this Section 10 to effect the registration of any Warrant Shares, the Company shall, as expeditiously as reasonably possible: (i) Prepare and file with the SEC a registration statement with respect to such Warrant Shares and use its best efforts to cause such registration statement to become effective. (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act. (iii) Furnish to the Holder such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of such Warrant Shares. (iv) Use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holder, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement with the 9 managing underwriter of such offering in usual and customary form and consistent with the other provisions of this Warrant. The Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (vi) Promptly notify the Holder covered by the registration statement at any time when the Company becomes aware of the happening of any event as a result of which the registration statement or the prospectus included in such registration statement or any supplement to the prospectus (as then in effect) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein (in the case of the prospectus, in light of the circumstances under which they were made) not misleading or, if for any other reason it shall be necessary during such time period to amend or supplement the registration statement or the prospectus in order to comply with the Securities Act, whereupon, in either case, the Holder shall immediately cease to use such registration statement or prospectus for any purpose and, as promptly as practicable thereafter, the Company shall prepare and file with the SEC, and furnish without charge to the Holder and managing underwriters, if any, a supplement or amendment to such registration statement or prospectus which will correct such statement or omission or effect such compliance and such copies thereof as the Holder and any underwriters may reasonably request. (vii) Cause all such Warrant Shares registered pursuant hereunder to be listed on each securities exchange or market on which similar securities issued by the Company are then listed or traded, if applicable. (viii) Provide a transfer agent and registrar for such Warrant Shares not later than the effective date of such registration. (ix) Use its reasonable best efforts to furnish, at the request of the Holder requesting registration of Warrant Shares pursuant to this Section 10, on the date that such Warrant Shares are delivered to the underwriters for sale in connection with a registration pursuant to this Section 10, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holder requesting registration of Warrant Shares and (ii) a letter dated 10 such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holder requesting registration of Warrant Shares (to the extent the then applicable standards of professional conduct permit said letter to be addressed to the Holder). (d) Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 10 with respect to the Warrant Shares of the Holder that the Holder shall furnish to the Company such information regarding itself, the Warrant Shares held by it, and the intended method of disposition of such securities as shall be required to effect the registration of the Holder's Warrant Shares. (e) Expenses of Registration. All expenses incurred in connection with a registration requested pursuant to this Section 10, including (without limitation) all registration, filing, qualification, printers' and accounting fees and the reasonable fees and disbursements of counsel for the Holder, such fees and disbursements not to exceed $5,000 for each requested registration, and counsel for the Company shall be borne by the Company, and any underwriters' discounts or commissions associated with Warrant Shares shall be borne by the Holder participating in the Form S-3 Registration. (f) Indemnification. In the event any Warrant Shares are included in a registration statement under this Section 10: (i) The Company agrees to indemnify and hold harmless the Holder and each person, if any, who (i) controls such Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or (ii) is controlled by or is under common control with the Holder from and against any and all losses, claims, liabilities, expenses and damages (including, but not limited to, any and all investigative, legal and other expenses reasonably incurred in connection with, and any and all amounts paid in settlement of, any action, suit or proceeding between any of the indemnified parties and any indemnifying parties or between any indemnified party and any third party, or otherwise, or any claim asserted), as and when incurred, to which the Holder, or any such person, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based, directly or indirectly, on (x) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, registration statement or final prospectus filed with the SEC pursuant to this Section 10, or any amendment or supplement to any such registration statement or prospectus, or in any application or other document executed by 11 or on behalf of the Company or based on written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Warrant Shares under the securities laws thereof or filed with the SEC, or (y) the omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading; provided that this indemnity agreement shall not apply to the extent that such loss, claim, liability, expense or damage is caused directly by an untrue statement or omission made in reliance on and in conformity with information relating to the Holder and furnished in writing to the Company by the Holder for inclusion in any document described in clause (i)(x) above. Any reference in this Section 10(f) to a registration statement, prospectus or any amendment or supplement thereto shall be deemed to refer to and include any documents incorporated or deemed to be incorporated by reference therein, and any reference to the terms "amend," "amendment" or "supplement" with respect to such registration statement or prospectus shall be deemed to refer to and include filing with the SEC of any document incorporated or deemed to be incorporated by reference therein. This indemnity agreement will be in addition to any liability that the Company might otherwise have. (ii) The Holder agrees to indemnify and hold harmless the Company and its directors and each officer of the Company who signed a registration statement in which Warrant Shares are included, and each person, if any, who (x) controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act or (y) is controlled by or is under common control with Company, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (i) of this subsection, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in such registration statement (or any amendments thereto) or any preliminary or final prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information and relating to the Holder furnished to the Company by the Holder for use in such registration statement (or any amendment thereto) or such preliminary or final prospectus (or any amendment or supplement thereto). (iii) Any party that proposes to assert the right to be indemnified under this Section 10(f) will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 10(f), notify each such indemnifying party of the commencement of such action, enclosing a copy of all 12 papers served, but the omission so to notify such indemnifying party will not relieve the indemnifying party from (x) any liability that it might have to any indemnified party otherwise than under this Section 10(f) and (y) any liability that it may have to any indemnified party under the foregoing provision of this Section 10(f) unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel reasonably satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (w) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (x) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (y) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (z) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party 13 promptly as they are incurred. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent. No indemnifying party shall, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated by this Section 10(f) (whether or not any indemnified party is a party thereto), unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising or that may arise out of such claim, action or proceeding. Notwithstanding any other provision of this Section 10(f), if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel for which it is entitled to reimbursement pursuant to this Section 10(f), such indemnifying party agrees that it shall be liable for any settlement effected without its written consent if (x) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (y) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into, and (z) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement; provided that an indemnifying party shall not be liable for any such settlement effected without its consent if such indemnifying party, at least five days prior to the date of such settlement, (x) reimburses such indemnified party in accordance with such request for the amount of such fees and expenses of counsel as the indemnifying party believes in good faith to be reasonable and (y) provides written notice to the indemnified party that the indemnifying party disputes in good faith the reasonableness of the unpaid balance of such fees and expenses. (iv) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section 10(f) is applicable in accordance with its terms but for any reason is held to be unavailable from the Company or the Holder, the Company and the Holder will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company from persons other than the Holder, such as persons who control the Company within the meaning of the Securities Act, officers of the Company who signed the applicable registration statement and directors of the Company, who also may be liable 14 for contribution) to which the Company and the Holder may be subject in such proportion as shall be appropriate to reflect the relative fault of the Company, on the one hand, and the Holder, on the other, with respect to the statements or omission which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Holder, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holder agree that it would not be just and equitable if contributions pursuant to this Section 10(f)(iv) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense, or damage, or action in respect thereof, referred to above in this Section 10(f)(iv) shall be deemed to include, for the purpose of this Section 10(f)(iv), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim to the extent consistent with Section 10(f)(iii) hereof. Notwithstanding the foregoing provisions of this Section 10(f)(iv), the Holder shall not be required to contribute any amount in excess of the net proceeds received by it from the offering and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 10(f)(iv), any person who controls a party to this Warrant within the meaning of the Securities Act, and any officers, directors, partners, employees or agents of the Holder, will have the same rights to contribution as that party, and each officer of the Company who signed the applicable registration statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 10(f)(iv), will notify any such party or parties from whom contribution may be sought, but the omission to so notify will not relieve that party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 10(f)(iv). Except for a settlement entered into pursuant to the last 15 sentence of Section 10(f)(iii) hereof, no party will be liable for contribution with respect to any action or claim settled without its written consent if such consent is required pursuant to Section 10(f)(iii) hereof. 11. Representations and Warranties of Holder. (a) Purchase for Own Account. Holder represents and warrants that it is acquiring the Warrant and the Warrant Shares (collectively, the "Securities") solely for its own account for investment and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act. Holder further represents that it does not have any present intention of selling, offering to sell or otherwise disposing of or distributing the Securities or any portion thereof and that the entire legal and beneficial interest of the Securities it is acquiring is being acquired for, and will be held for the account of, Holder only and neither in whole nor in part for any other person. (b) Accredited Investor; Informed and Knowledgeable Decision. Holder is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. Holder hereby agrees, represents and warrants that it is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Holder further represents and warrants that it has discussed the Company and its plans, operations and financial condition with its officers, has received all such information as he deems necessary and appropriate to enable it to evaluate the financial risk inherent in making an investment in the Securities. (c) Company Disclosure. Holder hereby agrees, represents and warrants that the Company has disclosed to Holder that the Securities have not been registered under the Securities Act or under any state securities laws and must be held indefinitely unless a transfer of it is subsequently registered under the Securities Act or an exemption from such registration is available. (d) Rule 144. The Holder hereby agrees, represents and warrants that the Holder is aware of the provisions of Rule 144, promulgated under the Securities Act. 12. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (California time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 157 Technology Drive, Irvine, CA 92618, Attention: Chief Financial Officer, or to facsimile no. (949) 788-6706, with a copy to Latham & Watkins, 650 Town Center Drive, Suite 2000, Costa Mesa, California 92626, 16 attention Alan W. Pettis, Esq., or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register, or such other address or facsimile number as any party may provide to the other party in accordance with this Section 12. 13. Warrant Agent. The Company shall serve as warrant agent under this Warrant. The Company may appoint a new warrant agent upon notice to the Holder in accordance with Section 12. Any corporation into which the Company may be merged or any corporation resulting from any consolidation to which the Company shall be a party or any corporation to which the Company transfers substantially all of its corporate assets shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 14. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. Subject to Section 2(a) above, this Warrant may be assigned by the Holder to any affiliate of the Holder, including, but not limited to, officers, directors and employees of the Holder. (b) Subject to Section 14(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in Orange County, California, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waive, and agree not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a 17 commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, the parties hereto have executed this Warrant effective as of the date first indicated above. THE COMPANY: NEOTHERAPEUTICS, INC. By: /s/Samuel Gulko --------------------------------------- Samuel Gulko Senior Vice President, Finance, Chief Financial Officer, Secretary and Treasurer HOLDER: GRUNTAL & CO., L.L.C. By: ------------------------------------ Name: ------------------------------------ Title: ------------------------------------ 18 FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To NeoTherapeutics, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _________ shares of common stock ("Common Stock"), $.001 par value per share, of NeoTherapeutics, Inc. by ____ cash ____ Cashless Exercise (check one). If such Holder is not utilizing the Cashless Exercise provisions set forth in the Warrant, such Holder encloses herewith either (i) $_______ in cash, certified or official bank check or checks, or (ii) a Fedwire Funds Transfer reference number for the wire transfer of $_______ in immediately available funds to: Chase Manhattan Bank, N.Y.C. Routing No.: 021 000 021 FBO: Salomon Smith Barney, Inc. Account No. 066-198 038 FCC: NeoTherapeutics, Inc. Account No. 561-04051-19 103 which sum represents in either case the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned hereby acknowledges that it has reviewed the representations and warranties contained in Section 11 of the Warrant and by its signature below hereby makes such representations and warranties to the Company as of the date hereof. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER ------------------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: __________, ____ Name of Holder: (Print) ----------------------------------- (By:) ----------------------------------- (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________ the right represented by the Warrant enclosed with this Form of Assignment to purchase __________ shares of Common Stock of NeoTherapeutics, Inc. to which the Warrant relates and appoints ____________________ attorney to transfer said right on the books of NeoTherapeutics, Inc. with full power of substitution in the premises. Dated: __________, ____ ------------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ------------------------------------------- Address of Transferee ------------------------------------------- ------------------------------------------- In the presence of: - ------------------------------------ EX-4.46 13 a80481ex4-46.txt EXHIBIT 4.46 EXHIBIT 4.46 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE WARRANT UNDER SUCH ACT AND APPLICABLE LAWS OR SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. No. NEOT 017 Warrant to Purchase 250,000 Shares of Common Stock (subject to adjustment) NEOTHERAPEUTICS, INC. WARRANT TO PURCHASE 250,000 SHARES OF COMMON STOCK NeoTherapeutics, Inc., a Delaware corporation (the "COMPANY"), hereby certifies that, for value received, Jefferies & Company, Inc., a Delaware corporation, or its registered transferees, successors or assigns (each, a "HOLDER"), is entitled to subscribe for and purchase up to Two Hundred Fifty Thousand (250,000) shares of the fully paid and nonassessable Common Stock (as adjusted pursuant to Section 4 hereof, the "WARRANT SHARES") of the Company, at a purchase price per share determined as set forth in Section 1 below (such price, as adjusted pursuant to Section 4 hereof, the "WARRANT PRICE"), subject to the provisions and upon the terms and conditions hereinafter set forth in this warrant (the "WARRANT"). As used herein, (a) the term "COMMON STOCK" shall mean the Company's presently authorized Common Stock, par value $.001 per share, and any stock into or for which such Common Stock may hereafter be converted or exchanged, and (b) the term "DATE OF GRANT" shall mean December 13, 2001. The term "WARRANT" shall include any warrant issued upon transfer or partial exercise of this Warrant, unless the context clearly requires otherwise. This Warrant is being issued pursuant to that certain engagement letter of even date herewith between the Company and Jefferies & Company, Inc. (the "ENGAGEMENT LETTER"). 1. Term, Vesting, Exercise Price. (a) Term. The purchase right represented by this Warrant is exercisable, in whole or in part, for up to the number of Warrant Shares then vested pursuant to Section 1(b) below, at any time and from time to time from the Date of Grant through and including the close of business on the fifth anniversary of the date of vesting hereunder of the Warrant Shares with respect to which exercise is sought (each an "EXPIRATION DATE"). (b) Vesting. This Warrant shall vest and become exercisable with respect to the number of Warrant Shares and at the Warrant Price(s) per share determined as follows: (i) 125,000 Warrant Shares shall be vested as of the Date of Grant, with the Warrant Price applicable to such Warrant Shares at an exercise price per share equal to the average of the closing sale prices of the Common Stock, as reported in the Wall Street Journal, for the ten (10) consecutive trading days immediately preceding (but not including) the Date of Grant. (ii) Until an aggregate of 125,000 Warrant Shares have vested under this Section 1(b)(ii) and Section 1(b)(iii), upon each closing of an Equity Offering (as defined in the Engagement Letter) with respect to which Jefferies & Company, Inc., acts as financial advisor to the Company pursuant to the Engagement Letter, this Warrant shall vest with respect to a number of Warrant Shares equal to the product of 125,000 multiplied by a fraction, the numerator of which shall be the gross proceeds received by the Company upon such closing, and the denominator of which shall be $15,000,000; provided that in no event shall more than 125,000 Warrant Shares in aggregate vest pursuant to this Section 1(b)(ii) and Section 1(b)(iii). The Warrant Price applicable to Warrant Shares vesting under this Section 1(b)(ii) shall be equal to the purchase price per share of Common Stock established in the applicable Equity Offering. (iii) Upon the closing of a Debt Financing or a Combination (each as defined in the Engagement Letter) with respect to which Jefferies & Company, Inc., acts as financial advisor to the Company pursuant to the Engagement Letter, this Warrant shall vest with respect to all then unvested Warrant Shares, at a Warrant Price applicable to such Warrant Shares equal to that determined in Section 1(b)(i) above. (iv) Upon any adjustment to the number of Warrant Shares purchasable hereunder pursuant to Section 4(g) below, the number of Warrant Shares vesting under this Section 1 shall be correspondingly adjusted. 2. Exercise. (a) Method of Exercise; Payment; Issuance of New Warrant. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, from and after the Date of Grant by the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company, and, except as otherwise provided for herein, by the payment to the Company of an amount in cash or by check equal to the then applicable Warrant Price multiplied by the number of Warrant Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing shares of Common Stock shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised if exercised prior to the close of business on such date; otherwise, the date of record shall be the next business day. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of Common Stock so 2 purchased shall be delivered to the holder hereof as soon as possible and in any event within fifteen (15) days after such exercise and, unless this Warrant has been fully exercised, a new Warrant representing the portion of the Warrant Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such fifteen (15)-day period. (b) Net Issue Exercise. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being cancelled) by surrender of this Warrant at the principal office of the Company (with the notice of exercise form and notice of such election attached hereto as Exhibit A duly executed) in which event the Company shall issue to the holder a number of Warrant Shares computed using the following formula: X = Y (A - B) ---------- A Where: X = the number of shares of Common Stock to be issued to the holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being cancelled A = the fair market value of one (1) share of Common Stock B = the Warrant Price For purposes of this Section 2(b), "fair market value" of a share of Common Stock shall have the meaning set forth in Section 4(g) below. 3. Stock Fully Paid; Reservation of Shares. All Warrant Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all taxes, liens, charges, and pre-emptive rights with respect to the issue thereof. The Company shall pay all transfer taxes, if any, attributable to the issuance of the Warrant Shares upon the exercise of this Warrant. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) Adjustments for Dividends in Stock. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired declares any dividend, 3 or authorizes any other distribution, upon any stock of the Company of any class, payable in Additional Shares of Common Stock (as defined below) (except for any distribution specifically provided for in Section 4(b), Section 4(c), Section 4(d) or Section 4(e)), then the Warrant Price shall be adjusted, from and after the date of determination of stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (1) the numerator of which shall be the number of shares of Common Stock issued and outstanding immediately prior to such dividend or distribution, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately after such dividend or distribution. The term "ADDITIONAL SHARES OF COMMON STOCK" as used in this Warrant shall mean any shares of Common Stock issued or issuable by the Company after the date of this Warrant, except for the Warrant Shares. (b) Subdivision or Combination of Shares. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired shall split, subdivide or combine its outstanding shares of Common Stock, into a different number of shares of Common Stock, the Warrant Price shall be adjusted, from and after the date of such split, subdivision or combination, to that price determined by multiplying the Warrant Price in effect immediately prior to such date by a fraction (1) the numerator of which shall be the number of shares of Common Stock issued and outstanding immediately prior to such split, subdivision or combination, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately after such split, subdivision or combination. (c) Certain Distributions. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired shall declare a dividend or otherwise make a distribution to the holders of its Common Stock and not to the holder of this Warrant (other than dividends, distributions or issuances referred to in Section 4(a), Section 4(b), Section 4(d), and Section 4(e)), in the form of: (1) cash or other property; (2) any evidence of indebtedness, any shares of its capital stock or any other securities or property of any nature whatsoever (including securities of a subsidiary), or (3) any warrants or other rights to subscribe for or purchase any evidences of indebtedness, any shares of its capital stock, or any other securities or property of any nature whatsoever (including securities of a subsidiary), then the Warrant Price shall be adjusted by multiplying the Warrant Price in effect immediately prior to the record date for such event by a fraction (A) the numerator of which shall be the fair market value per share of Common Stock on such record date (determined in accordance with Section 4(g) below), less the amount allocated to one share of Common Stock of any such cash so distributed and the fair value (determined in accordance with Section 4(g) below), of any evidences of indebtedness, shares of capital stock, other securities or property, or warrants or other subscriptions or purchase rights so distributed, and (B) the denominator of which shall be such fair market value per share of Common Stock (determined in accordance with Section 4(g) below). Such adjustment shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Warrant Price shall again be adjusted to be the Warrant Price which would then be in effect if such record date had not been fixed, but such subsequent adjustment shall not affect the number of Warrant Shares issued upon any exercise of this Warrant prior to the date such subsequent adjustment was made. 4 (d) Merger ; Sale of Assets; Reclassification. If at any time while this Warrant, or any portion thereof, remains outstanding and unexpired there shall be (1) a reorganization or reclassification (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (2) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, or (3) a sale or transfer of the Company's properties and assets as, or substantially as, an entirety to any other person, then, as a part of such reorganization, reclassification, merger, consolidation, sale or transfer, lawful provision shall be made so that the holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Warrant Price then in effect, the number of shares of stock or other securities or property of the successor corporation (or the Company, as applicable) resulting from such reorganization, reclassification, merger, consolidation, sale or transfer that a holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization, reclassification, merger, consolidation, sale or transfer if this Warrant had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this Section 4. The foregoing provisions of this Section 4(d) shall similarly apply to successive reorganizations, reclassification, mergers, consolidations, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in the manner set forth under Section 4(g). At the time of such event, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by the Board of Directors of the Company) in order to provide for adjustments of shares of Common Stock for which this Warrant is exercisable. These adjustments shall be as nearly equivalent as practicable to the adjustments provided in this Section 4. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. (e) Dissolution, Liquidation and Wind-Up. In case the Company shall, at any time prior to the expiration of this Warrant, dissolve, liquidate or wind up its affairs in a transaction not otherwise covered by Section 4(c) or Section 4(d), the holder of this Warrant shall be entitled, upon the exercise of this Warrant, to receive in lieu of the shares of Common Stock of the Company which such holder would have been entitled to receive, the same kind and amount of assets as would have been issued, distributed or paid to such holder upon any such dissolution, liquidation or winding up with respect to such shares of Common Stock of the Company, had such holder been the holder of record of the Warrant Shares receivable upon the 5 exercise of this Warrant on the record date for the determination of those persons entitled to receive any such liquidating distribution. After such dissolution, liquidation or winding up which shall result in any cash distribution in excess of the Warrant Price provided for by this Warrant, the holder of this Warrant may, at such holder's option, exercise the same without making payment of the Warrant Price, and in such case the Company shall, upon the distribution to the holder, consider that said Warrant Price has been paid in full to it and in making settlement to the holder, shall deduct from the amount payable to the holder of this Warrant an amount equal to such Warrant Price. (f) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, other than an adjustment made pursuant to Section 4(c) above, the number of Warrant Shares purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by (1) multiplying the number of Warrant Shares purchasable immediately prior to such adjustment in the Warrant Price, by (2) a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter. (g) Determination of Fair Market Value. For purposes of this Warrant "FAIR MARKET VALUE" as of a particular date (the "DETERMINATION DATE") shall mean (1) for any security if such security is traded on a national securities exchange (an "EXCHANGE"), the weighted average (based on daily trading volume) of the mid-point between the daily high and low trading prices of the security on each of the last five (5) consecutive trading days prior to the Determination Date reported on such Exchange, (2) for any security that is not traded on an Exchange but which is quoted on the Nasdaq Stock Market ("NASDAQ"), the weighted average (based on daily trading volume) of the mid-point between the daily high and low trading prices reported on NASDAQ on each of the last five (5) consecutive trading days (or if the relevant price or quotation did not exist on any of such days, the relevant price or quotation on the next preceding business day on which there was such a price or quotation, for a total of five trading days) prior to the Determination Date, or (3) for any security or any other asset, if no price can be determined on the basis of the above methods of valuation, then the judgment of valuation shall be determined in good faith by the Board of Directors of the Company, which determination shall be described in a duly adopted board resolution certified by the Company's Secretary or Assistant Secretary. If the Board of Directors of the Company is unable to determine any Valuation (as defined below), or if the holders of at least fifty-one percent (51%) of all of the Warrant Shares issuable under outstanding Warrants (collectively, the "REQUESTING HOLDERS") disagree with the Board's determination of any Valuation by written notice delivered to the Company within five (5) business days after the determination thereof by the Board of Directors of the Company is communicated to holders of the Warrants affected thereby, which notice specifies a majority-in-interest of the Requesting Holders' determination of such Valuation, then, unless the Company accepts the Valuation so proposed and the Company and a majority-in-interest of the Requesting Holders agree upon a valuation within five (5) business days thereafter, the Company and (in the event of a disagreement by the Requesting Holders) a majority-in-interest of the Requesting Holders shall select a mutually acceptable investment banking firm of national reputation which has not had a material relationship with the Company or any officer of the Company within the preceding two (2) years, which shall determine such Valuation. Such investment banking firm's determination of such Valuation shall be final, 6 binding and conclusive on the Company and the holders of all of the Warrants issued hereunder and then outstanding, to the extent of the issuance or distribution to which such Valuation applies. If the Board of Directors of the Company was unable to determine such Valuation, all costs and fees of such investment banking firm shall be borne by the Company. If the Requesting Holders disagreed with the Board's determination of such Valuation, the party whose determination of such Valuation differed from the Valuation determined by such investment banking firm by the greatest amount shall bear all costs and fees of such investment banking firm. For purposes of this Section 4(g), the term "VALUATION" shall mean the determination, to be made initially by the Board of Directors of the Company, of the fair market value of any asset pursuant to clause (3) above in this paragraph. 5. Notice of Adjustments. Whenever the Warrant Price or the number of Warrant Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Warrant Shares purchasable hereunder after giving effect to such adjustment, which shall be mailed, by first class mail, postage prepaid, to the holder of this Warrant. 6. Fractional Shares. No fractional shares of Common Stock will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value (as determined in accordance with Section 4(g) above) of a share of Common Stock on the date of exercise. 7. Transfer of Warrant. (a) Warrant Register. The Company will maintain a register (the "WARRANT REGISTER") containing the names and addresses of the holder or holders of the Warrants. Any holder of this Warrant, or any portion thereof may change his or her address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the holder may be delivered or given by mail to such holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. (b) Warrant Agent. The Company may, by written notice to the holder, appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 7(a) above, issuing the Common Stock or other securities then issuable upon the exercise of this Warrant, exchanging this Warrant, replacing this Warrant, or any or all of the foregoing. Thereafter, any such registration, issuance, exchange, or replacement, as the case may be, shall be made at the office of such agent. (c) Transferability and Nonnegotiability of Warrant. This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment 7 representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company). Subject to the provisions of this Warrant with respect to compliance with the Securities Act of 1933, as amended (the "SECURITIES ACT"), title to this Warrant may be transferred by endorsement (by the holder executing the Assignment Form attached hereto as Exhibit B) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery. (d) Exchange of Warrant Upon a Transfer. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions of this Warrant with respect to compliance with the Securities Act and with the limitations on assignments and transfers contained in this Section 7, the Company at its expense shall issue to or on the order of the holder a new warrant or warrants of like tenor, in the name of the holder or as the holder may direct, for the number of shares issuable upon exercise hereof. (e) Compliance with Securities Laws. (i) The holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Common Stock to be issued upon exercise hereof or conversion thereof are being acquired solely for the holder's own account and not as a nominee for any other party, and for investment, and that the holder will not offer, sell or otherwise dispose of this Warrant or any shares of Common Stock to be issued upon exercise hereof or conversion thereof except under circumstances that will not result in a violation of the Securities Act or any state securities laws. Upon exercise of this Warrant, the holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of Common Stock so purchased are being acquired solely for the holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale that would violate the Securities Act. (ii) The Warrant Shares and any other securities issued upon exercise hereof or conversion thereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES AND ANY SECURITIES ISSUED HEREUNDER OR THEREUNDER MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND APPLICABLE LAWS. 8. Replacement of Warrants or Stock Certificates. The Company covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any loss, theft or destruction, upon receipt of an executed lost securities bond or indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new 8 Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 9. Rights as Stockholders; Information. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a stockholder of the Company or any right to vote for the election of the directors or upon any matter submitted to stockholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise, until this Warrant shall have been exercised and the Warrant Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 10. Registration. (a) Definitions. For purposes of this Section 10 the following terms have the following definitions: "REGISTRABLE STOCK" means (i) all Warrant Shares which are issuable pursuant to the Warrants, whether or not the Warrants have in fact been exercised and whether or not such Warrant Shares have in fact been issued, (ii) all Warrant Shares acquired by holders pursuant to the Warrants, and (iii) any shares of Common Stock, whether or not such shares of Common Stock have in fact been issued, and stock or other securities of the Company issued upon conversion of, in a stock split or reclassification of, or a stock dividend or other distribution on, or in substitution or exchange for, or otherwise in connection with, such Warrant Shares. Notwithstanding the foregoing, securities shall only be treated as Registrable Stock if and so long as they have not been (A) sold pursuant to an effective registration statement or to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale. "COMMISSION" means the U.S. Securities and Exchange Commission. "EXCHANGE ACT" means the Securities and Exchange Act of 1934, as amended. "PARTICIPATING HOLDERS" means holders of Registrable Stock included in a registration statement filed with the Commission pursuant to this Section 10. (b) Required Registration. (1) Demand Registration. After twelve (12) months following the Date of Grant, if the Company shall receive a written request therefor from any holder or holders of at least 25% of the Registrable Stock, the Company shall promptly prepare and file a 9 registration statement under the Securities Act covering the Registrable Stock which is the subject of such request and not then covered by an effective registration statement and shall use its commercially reasonable efforts to cause such registration statement to become effective as expeditiously as possible. Upon the receipt of such request, the Company shall promptly give written notice to all holders of Registrable Stock that such registration is to be effected. The Company shall include in such registration statement such Registrable Stock for which it has received written requests to register such shares by the holders thereof within thirty (30) days after the effectiveness of the Company's written notice to such other holders. Notwithstanding the above, the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 10(b)(1): (i) if the holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Stock and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than two hundred fifty thousand dollars ($250,000); or (ii) if the Company shall furnish to the holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration to be effected at such time, in which event the Company shall have the right to defer the filing of the registration statement for a period of not more than 180 days after receipt of the request of the holder or holders under this Section 10(b)(1). The Company is obligated to effect only one registration pursuant to this Section 10(b)(1). (2) Underwritten Offering. In the event of a firm commitment underwritten offering pursuant to Section 10(b)(1), if the managing underwriter of such offering shall advise the holders in writing that, in its good faith opinion, the distribution of a specified portion of the securities requested to be included in the registration would materially adversely affect the distribution of such securities by increasing the aggregate amount of the offering in excess of the maximum amount of securities which such managing underwriter believes can reasonably be sold in the contemplated distribution, then the securities to be included in the registration shall be included in the following order: (A) first, the Registrable Stock requested to be included in such registration by the holders of Registrable Stock, and if two or more holders of Registrable Stock are included in the registration, pro rata among the holders on the basis of the number of Registrable Stock owned by each such holder, (B) second, the Registrable Stock requested to be included in such registration by any holders other than the holders who made the request for the registration, pro rata among such holders on the basis of the number of Registrable Stock owned by each such holder and (C) securities proposed to be included by the Company or other Company security holders in such proportion as they shall agree. (c) Incidental Registration (Piggy-Back Registration Rights). Each time the Company shall determine to file a registration statement under the Securities Act (other than on Form S-8 or Form S-4) in connection with the proposed offer and sale for money of any of its securities by it or by any of its security holders, the Company will give written notice of its determination to all holders of Registrable Stock. Upon the written request of a holder of any Registrable Stock, the Company will cause all such Registrable Stock, the holders of which have so requested registration thereof, to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Registrable Stock to be so registered in accordance with the terms of the proposed offering. If 10 the registration statement is to cover an underwritten distribution, the Company shall use its commercially reasonable efforts to cause the Registrable Stock requested for inclusion pursuant to this Section 10(c) to be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. In the event of a firm commitment underwriting, if the managing underwriter of such offering shall advise holders in writing that, in its good faith opinion, distribution of a specified portion of the securities requested to be included in the registration statement would materially adversely affect the distribution of such securities by increasing the aggregate amount of the offering in excess of the maximum amount of securities which such managing underwriter believes can reasonably be sold in the contemplated distribution, then the securities to be included in the registration shall be included in the following order: (1) first, the securities the Company and, if the registration statement is being filed pursuant to the exercise by any Company security holder of demand registration rights, such Company security holders propose to include in the underwritten offering, (2) second, Registrable Stock requested to be included in such registration by holders of Registrable Stock, and if two or more holders of Registrable Stock are included in the registration pro rata among the holders are the basis of the number of shares or Registrable Stock owned by each such holder, and (3) third, all other shares of securities requested to be included by any other security holder of the Company. Notwithstanding anything to the contrary contained herein, the Company shall have the right to terminate or withdraw any registration initiated by it to which this Section 10(c) applies prior to the effectiveness of such registration. (d) Registration Procedures. If and whenever the Company is required by the provisions of Section 10(b) or Section 10(c) to effect the registration of Registrable Stock under the Securities Act, the Company will, at its expense, as expeditiously as possible: (1) In accordance with the Securities Act and the rules and regulations of the Commission, prepare and file with the Commission a registration statement on the form of registration statement appropriate with respect to such securities and use its commercially reasonable efforts to cause such registration statement to become and remain effective until the earlier of (A) the date on which the securities covered by such registration statement have been sold, or (B) one hundred eighty (180) days after the effective date thereof, and prepare and file with the Commission such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective and such registration statement and prospectus accurate and complete until the securities covered by such registration statement have been sold; (2) If the offering is to be underwritten, in whole or in part, enter into a written underwriting agreement with participating holders in such offering and the underwriter in customary form and substance, reasonably satisfactory to the Company, the managing underwriter of the public offering and the holders of the Registrable Stock participating in such offering; (3) Furnish to participating holders and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters and holders may reasonably request in order to facilitate the public offering of such securities; 11 (4) Use its commercially reasonable efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such participating holders and underwriters may reasonably request, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or file a general consent to service of process in such states or jurisdictions; (5) Notify participating holders, promptly after it shall receive notice thereof, of the date and time when such registration statement and each post-effective amendment thereto has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (6) Notify participating holders promptly of any request by the Commission for the amending or supplementing of such registration statement or prospectus or for additional information; (7) Prepare and file with the Commission, promptly upon the request of any participating holders, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such holders, is required under the Securities Act or the rules and regulations thereunder in connection with the distribution of the Registrable Stock by such holders; (8) Prepare and promptly file with the Commission, and promptly notify participating holders of the filing of, such amendments or supplements to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event has occurred as the result of which any such prospectus or any other prospectus as then in effect may include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (9) In case any of participating holders or any underwriter for any such holders is required to deliver a prospectus at a time when the prospectus then in circulation is not in compliance with the Securities Act or the rules and regulations of the Commission, prepare promptly upon request such amendments or supplements to such registration statement and such prospectus as may be necessary in order for such prospectus to comply with the requirements of the Securities Act and such rules and regulations; (10) Advise participating holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Commission suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; (11) If requested by the managing underwriter or underwriters or a participating holder in connection with an underwritten offering, immediately incorporate in a prospectus supplement or post-effective amendment such information as the managing 12 underwriters and the participating holders of a majority of the Registrable Stock being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Stock, including information with respect to the Registrable Stock being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Stock to be sold in such offering; and make all required filings of such prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; (12) Cooperate with the participating holders and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Stock to be sold and not bearing any restrictive legends; and enable such Registrable Stock to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Stock to the underwriters; (13) Make available for inspection by a representative of participating holders of a majority of the Registrable Stock, any underwriter participating in any disposition pursuant to a registration statement, and any attorney or accountant retained by the participating holders or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with the preparation of the registration statement; provided, that any records, information or documents that are designated by the Company in writing as confidential shall be kept confidential by such persons unless disclosure of such records, information or documents is required by court or administrative order; (14) Not file any amendment or supplement to such registration statement or prospectus to which participating holders of a majority of the Registrable Stock has objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or the rules and regulations thereunder, after having been furnished with a copy thereof at least five (5) business days prior to the filing thereof; provided, however, that the failure of such holders or their counsel to review or object to any amendment or supplement to such registration statement or prospectus shall not affect the rights of such holders or any controlling person or persons thereof or any underwriter or underwriters therefor under Section 10(g) hereof; and (15) At the request of any participating holder (A) furnish to such holder on the effective date of the registration statement or, if such registration includes an underwritten public offering, at the closing provided for in the underwriting agreement, an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the holder or holders making such request, covering such matters with respect to the registration statement, the prospectus and each amendment or supplement thereto, proceedings under state and federal securities laws, other matters relating to the Company, the securities being registered and the offer and sale of such securities as are customarily the subject of opinions of issuer's counsel provided to underwriters in underwritten public offerings, and (B) use its commercially reasonable efforts to furnish to 13 such holder letters dated each such effective date and such closing date, from the independent certified public accountants of the Company, addressed to the underwriters, if any, and to the holder or holders making such request (to the extent the then applicable standards of professional conduct permit such letters to be addressed to the holder) in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering. (e) Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 10 with respect to the Registrable Stock of any holder that such holder shall furnish to the Company such information regarding itself, the Registrable Stock held by it, and the intended method of disposition of such securities as shall be required to effect the registration of the holder's Registrable Stock. (f) Expenses of Registration. All expenses incident to the Company's performance of or compliance with this Warrant, including, without limitation, the following shall be borne by the Company, regardless of whether the registration statement becomes effective: (1) All registration and filing fees (including those with respect to filings required to be made with the National Association of Securities Dealers, Inc.); (2) Fees and expenses of compliance with all securities or blue sky laws (including fees and disbursements of counsel for the underwriters or participating holders in connection with blue sky qualifications of the Registrable Stock and in determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or participating holders of a majority of the Registrable Stock being sold may designate); (3) Printing, messenger, telephone, facsimile and delivery expenses; (4) Fees and disbursements of counsel for the Company, the underwriters and for participating holders as hereinafter provided; (5) Fees and disbursements of all independent certified public accountants of the Company (including the expenses of any special audit and "comfort" letters required by or incident to such performance); (6) Fees and disbursements of underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Stock or legal expenses of any person other than the Company and the selling holders); and (7) Fees and expenses of other persons retained by the Company. The Company will, in any event, pay its internal expenses (including without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which 14 similar securities issued by the Company are then listed, rating agency fees and the fees and expenses of any person, including special experts, retained by the Company. In connection with the registration statement required hereunder, the Company will reimburse the participating holders of Registrable Stock being registered pursuant to the registration statement for the reasonable fees and disbursements, not to exceed $5,000 for each registration, of not more than one counsel chosen by the holders of a majority of such Registrable Stock. (g) Indemnification. (1) The Company hereby agrees to indemnify each of the participating holders of Registrable Stock included on an registration statement and their officers and directors and each person, if any, who controls any thereof within the meaning of Section 15 of the Securities Act and their respective successors against all claims, losses, damages and liabilities (or actions in respect thereof), joint or several, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, preliminary or final prospectus, or other document incident to any such registration, qualification or compliance (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and to reimburse the holders of Registrable Stock (including officers and directors of the same and controlling persons) for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by holders of Registrable Stock in an instrument duly executed by them and stated to be specifically for use therein. (2) Participating holders of Registrable Stock whose shares are included in a registration statement, severally and not jointly, agree to indemnify the Company and its officers and directors and each person, if any, who controls any thereof within the meaning of Section 15 of the Securities Act and their respective successors against all claims, losses, damages and liabilities (or actions in respect thereof), joint or several, arising out of or based on any untrue statement of a material fact contained in any registration statement, preliminary or final prospectus or other document incident to any such registration, qualification or compliance relating to the Warrants or the securities purchased pursuant to the Warrants (or in any related registration statement, notification or the like) or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and to reimburse the Company and each other person indemnified pursuant to this Section 10(g) for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action provided, however, that this Section 10(g) shall apply only if (and only to the extent that) such statement or omission was made in reliance upon information (including, without limitation, 15 written negative responses to inquiries) furnished to the Company by an instrument duly executed by participating holders of Registrable Stock and stated to be specifically for use in such prospectus, or other document (or related registration statement, notification or the like) or any amendment or supplement thereto; provided further, that in no case shall any participating holder of Registrable Stock be responsible for any amount in excess of the amount of net proceeds received by such participating holders from the offering of the securities. (3) Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in this Section 10(g), such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 10(g), except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. If, in the indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnified party may assume the defense of such claim, jointly with any other indemnified party that reasonably determines such conflict of interest to exist, and the indemnifying party shall be liable to such indemnified parties for the reasonable legal fees and expenses of one counsel for all such indemnified parties and for other expenses reasonably incurred in connection with the defense thereof incurred by the indemnified party. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability, or a covenant not to sue, in respect of such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. (4) Indemnification and contribution similar to that specified in this Section 10(g) (with appropriate modifications) shall be given by the Company and each participating holder of Registrable Stock included in a registration statement with respect to any required registration or other qualification of Registrable Stock under any Federal or state law or regulation of any governmental authority, other than the Securities Act. (5) The indemnification required by this Section 10(g) shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 16 (6) If the indemnification provided for in this Section 10(g) from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities, or expenses referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of losses, claims, damages, liabilities, or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such losses, claims, damages, liabilities, or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities, and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. In no event shall the liability of any person or entity hereunder be greater in amount than the dollar amount of the proceeds received by such person or entity upon the sale of the Registrable Stock giving rise to such contribution obligation. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 10(g)(6) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in this Section 10(g)(6). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (h) Assignment of Rights; Termination. The rights granted under this Section 10 may be assigned to the transferee of any of the Warrant or Registrable Stock. No holder shall be entitled to exercise any registration right provided for in this Section 10 at such time as Rule 144 or another similar exemption under the Securities Act is available for the sale during a three-month period without registration of all of the Registrable Stock otherwise proposed to be registered by such Holder pursuant to this Section 10. 11. Special Agreements of the Company. (a) Avoidance of Certain Actions. The Company will not, by amendment of its articles of incorporation, certificate of incorporation or any other charter document through any reorganization, transfer of assets, consolidation, merger, issue or sale of securities or otherwise, avoid or take any action which would have the effect of avoiding the observance or performance of any of the terms to be observed or performed hereunder by the Company. (b) Securing Governmental Approvals. If any shares of Common Stock required to be reserved for the purposes of exercise of this Warrant require registration with or approval of any governmental authority under any federal law (other than the Securities Act) or under any state law before such shares may be issued upon exercise of this Warrant, the Company will, at its expense, as expeditiously as possible, cause such shares to be duly registered or approved, as the case may be. 17 (c) Listing on Securities Exchanges. If, and so long as, any class of the Company's Common Stock shall be listed on any national securities exchange (as defined in the Exchange Act) or NASDAQ, the Company will, at its expense, obtain and maintain the approval for listing upon official notice of issuance of all Warrant Shares and maintain the listing of Warrant Shares after their issuance; and the Company will so list on such national securities exchange or NASDAQ, will register under the Exchange Act (or any similar statute then in effect), and will maintain such listing of, any other securities that at any time are issuable upon exercise of this Warrant if and at the time any securities of the same class shall be listed on such national securities exchange or NASDAQ by the Company. (d) Notices of Stock Dividends, Subscriptions, Reclassifications, Consolidations, Mergers, etc. If at any time: (1) the Company shall declare a cash dividend (or an increase in the then existing dividend rate), or declare a dividend on Common Stock payable otherwise than in cash out of its net earnings after taxes for the prior fiscal year; or (2) the Company shall authorize the granting to the holders of Common Stock of rights to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (3) there shall be any capital reorganization, or reclassification, or redemption of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation or firm; or (4) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company, then the Company shall give to the holders at the addresses of such holders as shown on the books of the Company, at least fifteen (15) days prior to the applicable record date hereinafter specified, a written notice summarizing such action or event and stating the record date for any such dividend or rights (or, if a record date is not to be selected, the date as of which the holders of Common Stock of record entitled to such dividend or rights are to be determined), the date on which any such reorganization, reclassification, consolidation, merger, sale of assets, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected the holders of Common Stock of record shall be entitled to effect any exchange of their shares of Common Stock for cash (or cash equivalent), securities or other property deliverable upon any such reorganization, reclassification, consolidation, merger, sale of assets, dissolution, liquidation or winding up. (e) Reporting Requirements Under Exchange Act. The Company shall timely file such information, documents and reports as the Commission may require or prescribe under Section 13 or Section 15(d) (whichever is applicable) of the Exchange Act. The Company shall upon request furnish any holder of Registrable Stock (1) a written statement by the Company that it has complied with such reporting requirements, (2) a copy of the most recent annual or quarterly report of the Company, and (3) such other reports and documents filed by the Company with the Commission as such holder may reasonably request in availing itself of an exemption for the sale of Registrable Stock without registration under the Securities Act. The Company acknowledges and agrees that the purpose of the requirements contained in this Section 11(e) is to enable any such holder to comply with the current public information requirement contained in Rule 144 under the Securities Act should such holder ever wish to dispose of any of the securities of the Company acquired by it without registration under the Securities Act in reliance upon Rule 144 (or any other similar exemptive provision). In addition, the Company shall take such other measures and file such other information, documents and reports as shall hereafter be 18 required by the Commission as a condition to the availability of Rule 144 and Rule 144A under the Securities Act (or any similar exemptive provision hereafter in effect). (f) Preemptive Rights. If at any time prior to the exercise or expiration of all of the Warrants, the Company offers any shares of its Common Stock to the holders of its Common Stock as a class for subscription in accordance with preemptive or other rights of those stockholders, the holder shall be entitled to subscribe for the same number of shares of Common Stock as the holder would have been entitled to purchase, upon exercising the Warrants and becoming a stockholder of the Company, immediately prior to the record or effective date with respect to the preemptive or other rights. Notwithstanding the foregoing, in no event shall the holder be entitled to exercise preemptive rights to the extent that complying with such preemptive rights would cause the Company to violate any law, regulation or rule applicable to the Company or such offering, including without limitation federal or state securities laws and the rules and regulations thereunder. 12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 13. Notices. Unless otherwise specifically provided herein, all communications under this Warrant shall be in writing and shall be deemed to have been duly given (a) on the date of service if served personally on the party to whom notice is to be given, (b) on the day of transmission if sent by facsimile transmission to a number provided to a party specifically for such purposes, and telephonic confirmation of receipt is obtained promptly after completion of transmission, (c) on the day after delivery to Federal Express or similar overnight courier, or (d) on the fifth day after mailing, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid, and properly addressed, return receipt requested, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant. Any party hereto may change its address for purposes of this Section 13 by giving the other party written notice of the new address in the manner set forth herein. 14. Binding Effect on Successors. This Warrant shall be binding upon any person or entity succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Common Stock issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise or conversion of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights to which the holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 19 15. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 16. Governing Law. The validity, interpretation and performance of this Warrant shall be governed by, and construed in accordance with, the laws of the State of California applicable to contracts made and to be performed entirely within such State, regardless of the law that might be applied under principles of conflicts of law. 17. Survival of Representations, Warranties and Agreements. Each of the respective agreements of each of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative. Without limiting the generality of the foregoing sentence, the provisions contained in Section 10 above shall survive the exercise or conversion of this Warrant (or any part hereof) and the termination or expiration of any other rights hereunder. 18. Remedies. In case any covenant or agreement contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by the Company), or the Company (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant. 19. Acceptance. Receipt of this Warrant by the holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. [Signature page follows.] 20 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed on its behalf by one of its officers thereunto duly authorized. NEOTHERAPEUTICS, INC. By: /s/ Samuel Gulko ------------------------------------- Name: Samuel Gulko ------------------------------------- Title: Senior Vice President, Finance, Chief ------------------------------------- Financial Officer, Secretary and Treasurer Address: 157 Technology Drive Irvine, California 92618 Fax: (949) 788-6706 Dated: as of December 13, 2001 21 EXHIBIT A NOTICE OF EXERCISE To: NEOTHERAPEUTICS, INC. 1. The undersigned hereby: [ ] Elects to purchase _____ shares of Common Stock of ______________________, pursuant to the terms of Section 2(a) of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. [ ] Elects to exercise this Warrant for the purchase of ___ shares of Common Stock, pursuant to the terms of Section 2(b) of the attached Warrant. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: - ------------------------------------- ------------------------------------ (Name) ------------------------------------ (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. In support thereof, the undersigned has executed an Investment Representation Statement attached hereto as Schedule 1. (Signature) (Date) - ---------------------------------- ----------------------------- 4. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: -------------------------------------- Date: By: (Warrantholder) ----------------------- -------------------------------------- Name: (Print) ------------------------- Its: --------------------------------- A-1 EXHIBIT B FORM OF ASSIGNMENT FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock set forth below: NAME OF ASSIGNEE ADDRESS NO. OF SHARES and does hereby irrevocably constitute and appoint ___________ Attorney to make such transfer on the books of NeoTherapeutics, Inc., maintained for the purpose, with full power of substitution in the premises. Dated: ------------------------------ ------------------------------------ Signature of holder ------------------------------------ Name ------------------------------------ Title By signing below, the Assignee acknowledges that this Warrant and the shares of stock to be issued upon exercise hereof or conversion thereof are being acquired for investment and that the Assignee will not offer, sell or otherwise dispose of this Warrant or any shares of stock to be issued upon exercise hereof or conversion thereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Further, the Assignee acknowledges that upon exercise of this Warrant, the Assignee shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or resale. Dated: ------------------------------ ------------------------------------ Signature of Assignee ------------------------------------ Name ------------------------------------ Title B-1 EX-4.47 14 a80481ex4-47.txt EXHIBIT 4.47 EXHIBIT 4.47 NEOTHERAPEUTICS, INC. WARRANT DATED: MARCH __, 2002 NUMBER ________ NeoTherapeutics, Inc., a Delaware corporation (the "Company"), hereby certifies that, for value received, [________________] or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of [_______] shares of Common Stock, $.001 par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $2.75 per share (as adjusted from time to time as provided in Section 7, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including March __, 2007 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) This Warrant may not be sold, transferred, assigned pledged, hypothecated or otherwise disposed, directly or indirectly, in whole or in part, without the prior written consent of the Company. Any attempted sale, transfer, assignment, pledge, hypothecation or other disposition of this Warrant, or any portion thereof, shall be void and without any force or effect; provided, however, that, subject to compliance with any applicable securities laws, the Holder may transfer this Warrant, or any portion thereof, without the prior written consent of the Company, if such transfer is to (i) a spouse, child, grandchild, parent, sibling or custodian or trustee for the benefit of any such relatives, or (ii) any shareholder or affiliate entity. (b) The Company shall register the transfer of any portion of this Warrant in conformance with Section 2(a) in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 10. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of this Warrant. (c) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company specified in or pursuant to Section 10 for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. 3. Duration and Exercise of Warrant. (a) This Warrant shall be exercisable by the then registered Holder on any business day before 5:00 P.M., California time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., California time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 10 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (and in any event, within four business days) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. (d) Prior to the exercise of this Warrant, the Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings (except as otherwise set forth in Section 7(f) herein). (e) If by the tenth business day after a Date of Exercise the Company fails to deliver the required number of Warrant Shares in the manner required pursuant to Section 3(b), then the Holder will have the right to rescind such exercise. (f) The Company's obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof. 4. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 6. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder. The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly authorized, validly issued and fully paid and nonassessable. 7. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 7. Upon each such adjustment of the Exercise Price pursuant to this Section 7, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (b) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 7(b) upon any exercise following any such reclassification, consolidation, merger, sale, transfer or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 7(a), and (b)), other than as part of its dissolution or liquidation or the winding up of its affairs, then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the fair market value of a share of Common Stock determined as of the record date mentioned above, and of which the numerator shall be the fair market value of a share of Common Stock determined as of such record date less the fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examines the financial statements of the Company (an "Appraiser"). (d) For the purposes of this Section 7, the following clauses shall also be applicable: (i) Record Date. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in securities convertible or exchangeable into shares of Common Stock, or (B) to subscribe for or purchase Common Stock or securities convertible or exchangeable into shares of Common Stock, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (ii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (e) All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (f) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 8. Payment of Exercise Price. The Holder shall pay the Exercise Price in immediately available funds by certified check or bank draft payable to the order of the Company or by wire transfer to an account designated by the Company. 9. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 9, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 10. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (California time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 157 Technology Drive, Irvine, CA 92618, Attention: Chief Financial Officer, or to facsimile no. (949) 788-6706, or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 10. 11. Warrant Agent. The Company shall serve as warrant agent under this Warrant. The Company may appoint a new warrant agent upon notice to the Holder in accordance with Section 10. Any corporation into which the Company may be merged or any corporation resulting from any consolidation to which the Company shall be a party or any corporation to which the Company transfers substantially all of its corporate assets shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 12. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 12(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of California without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in Orange County, California, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to it at the address in effect for notices to it under this instrument and in the manner set forth in Section 10 above, and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. NEOTHERAPEUTICS, INC. By: ----------------------------------- Name: ----------------------------------- Title: ----------------------------------- FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To NeoTherapeutics, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase __________ shares of Common Stock ("Common Stock"), $.001 par value per share, of NeoTherapeutics, Inc. encloses herewith $__________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER ----------------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: __________, ____ Name of Holder: (Print) -------------------------------- (By:) -------------------------------- (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________ the right represented by the Warrant enclosed with this Form of Assignment to purchase __________ shares of Common Stock of NeoTherapeutics, Inc. to which the Warrant relates and appoints ____________________ attorney to transfer said right on the books of NeoTherapeutics, Inc. with full power of substitution in the premises. Dated: __________, ____ ----------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) ----------------------------------------- Address of Transferee ----------------------------------------- ----------------------------------------- In the presence of: - -------------------------- EX-10.8 15 a80481ex10-8.txt EXHIBIT 10.8 EXHIBIT 10.8 NEOTHERAPEUTICS, INC. AMENDED AND RESTATED 1997 STOCK INCENTIVE PLAN This 1997 STOCK INCENTIVE PLAN (the "Plan") is hereby established by NeoTherapeutics, Inc. (the "Company"), and first adopted by its Board of Directors as of the 2nd day of May, 1997 (the "Effective Date"), as amended on March 19, 1999, May 6, 1999, December 15, 1999, March 24, 2000, November 2, 2000, March 19, 2001, October 9, 2001, February 11, 2002 and March 23, 2002. ARTICLE 1. PURPOSES OF THE PLAN 1.1 PURPOSES. The purposes of the Plan are (a) to enhance the Company's ability to attract and retain the services of qualified employees, officers and directors (including non-employee officers and directors), and consultants and other service providers upon whose judgment, initiative and efforts the successful conduct and development of the Company's business largely depends, and (b) to provide additional incentives to such persons or entities to devote their utmost effort and skill to the advancement and betterment of the Company, by providing them an opportunity to participate in the ownership of the Company and thereby have an interest in the success and increased value of the Company. ARTICLE 2. DEFINITIONS For purposes of this Plan, the following terms shall have the meanings indicated: 2.1 ADMINISTRATOR. "Administrator" means the Board or, if the Board delegates responsibility for any matter to the Committee, the term Administrator shall mean the Committee. 2.2 AFFILIATED COMPANY. "Affiliated Company" means any "parent corporation" or "subsidiary corporation" of the Company, whether now existing or hereafter created or acquired, as those terms are defined in Sections 424(e) and 424(f) of the Code, respectively. 2.3 BOARD. "Board" means the Board of Directors of the Company. 2.4 CHANGE IN CONTROL. "Change in Control" shall mean (i) the acquisition, directly or indirectly, by any person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of the beneficial ownership of securities of the Company possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company; (ii) a merger or consolidation in which the Company is not the surviving entity, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such merger or consolidation hold, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the surviving entity immediately after such merger or consolidation; (iii) a reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company are transferred to or acquired by a person or persons different from the persons holding those securities immediately prior to such merger; (iv) the sale, transfer or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (v) the approval by the shareholders of a plan or proposal for the liquidation or dissolution of the Company. 2.5 CODE. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.6 COMMITTEE. "Committee" means a committee of two or more members of the Board appointed to administer and/or amend the Plan, as set forth in Sections 7.1 and 9.1, respectively, hereof. 2.7 COMMON STOCK. "Common Stock" means the Common Stock, no par value, of the Company, subject to adjustment pursuant to Section 4.2 hereof. 2.8 DISABILITY. "Disability" means permanent and total disability as defined in Section 22(e)(3) of the Code. The Administrator's determination of a Disability or the absence thereof shall be conclusive and binding on all interested parties. 2.9 EFFECTIVE DATE. "Effective Date" means the date on which the Plan is adopted by the Board, as set forth on the first page hereof. 2.10 EXERCISE PRICE. "Exercise Price" means the purchase price per share of Common Stock payable upon exercise of an Option. 2.11 FAIR MARKET VALUE. "Fair Market Value" on any given date means the value of one share of Common Stock, determined as follows: (a) If the Common Stock is then listed or admitted to trading on a NASDAQ market system or a stock exchange which reports closing sale prices, the Fair Market Value shall be the closing sale price on the date of valuation on such NASDAQ market system or principal stock exchange on which the Common Stock is then listed or admitted to trading, or, if no closing sale price is quoted on such day, then the Fair Market Value shall be the closing sale price of the Common Stock on such NASDAQ market system or such exchange on the next preceding day for which a closing sale price is reported. (b) If the Common Stock is not then listed or admitted to trading on a NASDAQ market system or a stock exchange which reports closing sale prices, the Fair Market Value shall be the average of the closing bid and asked prices of the Common Stock in the over-the-counter market on the date of valuation. (c) If neither (a) nor (b) is applicable as of the date of valuation, then the Fair Market Value shall be determined by the Administrator in good faith using any reasonable method of evaluation, which determination shall be conclusive and binding on all interested parties. 2 2.12 INCENTIVE OPTION. "Incentive Option" means any Option designated and qualified as an "incentive stock option" as defined in Section 422 of the Code. 2.13 INCENTIVE OPTION AGREEMENT. "Incentive Option Agreement" means an Option Agreement with respect to an Incentive Option. 2.14 NASD DEALER. "NASD Dealer" means a broker-dealer that is a member of the National Association of Securities Dealers, Inc. 2.15 NONQUALIFIED OPTION. "Nonqualified Option" means any Option that is not an Incentive Option. To the extent that any Option designated as an Incentive Option fails in whole or in part to qualify as an Incentive Option, including, without limitation, for failure to meet the limitations applicable to a 10% Shareholder or because it exceeds the annual limit provided for in Section 5.6 below, it shall to that extent constitute a Nonqualified Option. 2.16 NONQUALIFIED OPTION AGREEMENT. "Nonqualified Option Agreement" means an Option Agreement with respect to a Nonqualified Option. 2.17 OFFEREE. "Offeree" means a Participant to whom a Right to Purchase has been offered or who has acquired Restricted Stock under the Plan. 2.18 OPTION. "Option" means any option to purchase Common Stock granted pursuant to the Plan. 2.19 OPTION AGREEMENT. "Option Agreement" means the written agreement entered into between the Company and the Optionee with respect to an Option granted under the Plan. 2.20 OPTIONEE. "Optionee" means a Participant who holds an Option. 2.21 PARTICIPANT. "Participant" means an individual or entity who holds an Option, a Right to Purchase or Restricted Stock under the Plan. 2.22 PURCHASE PRICE. "Purchase Price" means the purchase price per share of Restricted Stock payable upon acceptance of a Right to Purchase. 2.23 RESTRICTED STOCK. "Restricted Stock" means shares of Common Stock issued pursuant to Article 6 hereof, subject to any restrictions and conditions as are established pursuant to such Article 6. 2.24 RIGHT TO PURCHASE. "Right to Purchase" means a right to purchase Restricted Stock granted to an Offeree pursuant to Article 6 hereof. 2.25 SERVICE PROVIDER. "Service Provider" means a consultant or other person or entity who provides services to the Company or an Affiliated Company and who the Administrator authorizes to become a Participant in the Plan. 2.26 STOCK PURCHASE AGREEMENT. "Stock Purchase Agreement" means the written agreement entered into between the Company and the Offeree with respect to a Right to Purchase offered under the Plan. 3 2.27 10% SHAREHOLDER. "10% Shareholder" means a person who, as of a relevant date, owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of an Affiliated Company. ARTICLE 3. ELIGIBILITY 3.1 INCENTIVE OPTIONS. Officers and other key employees of the Company or of an Affiliated Company (including members of the Board if they are employees of the Company or of an Affiliated Company) are eligible to receive Incentive Options under the Plan. 3.2 NONQUALIFIED OPTIONS AND RIGHTS TO PURCHASE. Officers and other key employees of the Company or of an Affiliated Company, members of the Board (whether or not employed by the Company or an Affiliated Company), and Service Providers are eligible to receive Nonqualified Options or Rights to Purchase under the Plan. 3.3 LIMITATION ON SHARES. In no event shall any Participant be granted Options or Rights to Purchase in any one calendar year pursuant to which the aggregate number of shares of Common Stock that may be acquired thereunder exceeds 740,000 shares. ARTICLE 4. PLAN SHARES 4.1 SHARES SUBJECT TO THE PLAN. A total of 6,000,000 shares of Common Stock may be issued under the Plan, subject to adjustment as to the number and kind of shares pursuant to Section 4.2 hereof. For purposes of this limitation, in the event that (a) all or any portion of any Option or Right to Purchase granted or offered under the Plan can no longer under any circumstances be exercised, or (b) any shares of Common Stock are reacquired by the Company pursuant to an Incentive Option Agreement, Nonqualified Option Agreement or Stock Purchase Agreement, the shares of Common Stock allocable to the unexercised portion of such Option or such Right to Purchase, or the shares so reacquired, shall again be available for grant or issuance under the Plan. 4.2 CHANGES IN CAPITAL STRUCTURE. In the event that the outstanding shares of Common Stock are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, stock split, combination of shares, reclassification, stock dividend, or other change in the capital structure of the Company, then appropriate adjustments shall be made by the Administrator to the aggregate number and kind of shares subject to this Plan, and the number and kind of shares and the price per share subject to outstanding Option Agreements, Rights to Purchase and Stock Purchase Agreements in order to preserve, as nearly as practical, but not to increase, the benefits to Participants. ARTICLE 5. OPTIONS 4 5.1 OPTION AGREEMENT. Each Option granted pursuant to this Plan shall be evidenced by an Option Agreement which shall specify the number of shares subject thereto, the Exercise Price per share, and whether the Option is an Incentive Option or Nonqualified Option. As soon as is practical following the grant of an Option, an Option Agreement shall be duly executed and delivered by or on behalf of the Company to the Optionee to whom such Option was granted. Each Option Agreement shall be in such form and contain such additional terms and conditions, not inconsistent with the provisions of this Plan, as the Administrator shall, from time to time, deem desirable, including, without limitation, the imposition of any rights of first refusal and resale obligations upon any shares of Common Stock acquired pursuant to an Option Agreement. Each Option Agreement may be different from each other Option Agreement. 5.2 EXERCISE PRICE. The Exercise Price per share of Common Stock covered by each Option shall be determined by the Administrator, subject to the following: (a) the Exercise Price of an Incentive Option shall not be less than 100% of Fair Market Value on the date the Incentive Option is granted, (b) the Exercise Price of a Nonqualified Option shall not be less than 85% of Fair Market Value on the date the Nonqualified Option is granted, and (c) if the person to whom an Incentive Option is granted is a 10% Shareholder on the date of grant, the Exercise Price shall not be less than 110% of Fair Market Value on the date the Option is granted. 5.3 PAYMENT OF EXERCISE PRICE. Payment of the Exercise Price shall be made upon exercise of an Option and may be made, in the discretion of the Administrator, subject to any legal restrictions, by: (a) cash; (b) check; (c) the surrender of shares of Common Stock owned by the Optionee that have been held by the Optionee for at least six (6) months, which surrendered shares shall be valued at Fair Market Value as of the date of such exercise; (d) the Optionee's promissory note in a form and on terms acceptable to the Administrator; (e) the cancellation of indebtedness of the Company to the Optionee; (f) the waiver of compensation due or accrued to the Optionee for services rendered; (g) provided that a public market for the Common Stock exists, a "same day sale" commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the Exercise Price directly to the Company; (h) provided that a public market for the Common Stock exists, a "margin" commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the Exercise Price directly to the Company; or (i) any combination of the foregoing methods of payment or any other consideration or method of payment as shall be permitted by applicable corporate law. 5.4 TERM AND TERMINATION OF OPTIONS. The term and provisions for termination of each Option shall be as fixed by the Administrator, but no Option may be exercisable more than ten (10) years after the date it is granted. An Incentive Option granted to a person who is a 10% Shareholder on the date of grant shall not be exercisable more than five (5) years after the date it is granted. 5.5 VESTING AND EXERCISE OF OPTIONS. Each Option shall vest and become exercisable in one or more installments at such time or times and subject to such conditions, including without limitation the achievement of specified performance goals or objectives, as shall be determined by the Administrator. 5 5.6 ANNUAL LIMIT ON INCENTIVE OPTIONS. To the extent required for "incentive stock option" treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the Common Stock shall not, with respect to which Incentive Options granted under this Plan and any other plan of the Company or any Affiliated Company become exercisable for the first time by an Optionee during any calendar year, exceed $100,000. 5.7 NONTRANSFERABILITY OF OPTIONS. No Option shall be assignable or transferable except by will or the laws of descent and distribution, and during the life of the Optionee shall be exercisable only by such Optionee; provided, however, that, in the discretion of the Administrator, any Option may be assigned or transferred in any manner which an "incentive stock option" is permitted to be assigned or transferred under the Code. 5.8 RIGHTS AS SHAREHOLDER. An Optionee or permitted transferee of an Option shall have no rights or privileges as a shareholder with respect to any shares covered by an Option until such Option has been duly exercised and certificates representing shares purchased upon such exercise have been issued to such person. ARTICLE 6. RIGHTS TO PURCHASE 6.1 NATURE OF RIGHT TO PURCHASE. A Right to Purchase granted to an Offeree entitles the Offeree to purchase, for a Purchase Price determined by the Administrator, shares of Common Stock subject to such terms, restrictions and conditions as the Administrator may determine at the time of grant ("Restricted Stock"). Such conditions may include, but are not limited to, continued employment or the achievement of specified performance goals or objectives. 6.2 ACCEPTANCE OF RIGHT TO PURCHASE. An Offeree shall have no rights with respect to the Restricted Stock subject to a Right to Purchase unless the Offeree shall have accepted the Right to Purchase within ten (10) days (or such longer or shorter period as the Administrator may specify) following the grant of the Right to Purchase by making payment of the full Purchase Price to the Company in the manner set forth in Section 6.3 hereof and by executing and delivering to the Company a Stock Purchase Agreement. Each Stock Purchase Agreement shall be in such form, and shall set forth the Purchase Price and such other terms, conditions and restrictions of the Restricted Stock, not inconsistent with the provisions of this Plan, as the Administrator shall, from time to time, deem desirable. Each Stock Purchase Agreement may be different from each other Stock Purchase Agreement. 6.3 PAYMENT OF PURCHASE PRICE. Subject to any legal restrictions, payment of the Purchase Price upon acceptance of a Right to Purchase Restricted Stock may be made, in the discretion of the Administrator, by: (a) cash; (b) check; (c) the surrender of shares of Common Stock owned by the Offeree that have been held by the Offeree for at least six (6) months, which surrendered shares shall be valued at Fair Market Value as of the date of such exercise; (d) the Offeree's promissory note in a form and on terms acceptable to the Administrator; (e) the cancellation of indebtedness of the Company to the Offeree; (f) the waiver of compensation due or accrued to the Offeree for services rendered; or (g) any combination of the foregoing methods of payment or any other consideration or method of payment as shall be permitted by applicable corporate law. 6 6.4 RIGHTS AS A SHAREHOLDER. Upon complying with the provisions of Section 6.2 hereof, an Offeree shall have the rights of a shareholder with respect to the Restricted Stock purchased pursuant to the Right to Purchase, including voting and dividend rights, subject to the terms, restrictions and conditions as are set forth in the Stock Purchase Agreement. Unless the Administrator shall determine otherwise, certificates evidencing shares of Restricted Stock shall remain in the possession of the Company until such shares have vested in accordance with the terms of the Stock Purchase Agreement. 6.5 RESTRICTIONS. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided in the Stock Purchase Agreement. In the event of termination of a Participant's employment, service as a director of the Company or Service Provider status for any reason whatsoever (including death or disability), the Stock Purchase Agreement may provide, in the discretion of the Administrator, that the Company shall have the right, exercisable at the discretion of the Administrator, to repurchase (i) at the original Purchase Price, any shares of Restricted Stock which have not vested as of the date of termination, and (ii) at Fair Market Value, any shares of Restricted Stock which have vested as of such date, on such terms as may be provided in the Stock Purchase Agreement. 6.6 VESTING OF RESTRICTED STOCK. The Stock Purchase Agreement shall specify the date or dates, the performance goals or objectives which must be achieved, and any other conditions on which the Restricted Stock may vest. 6.7 DIVIDENDS. If payment for shares of Restricted Stock is made by promissory note, any cash dividends paid with respect to the Restricted Stock may be applied, in the discretion of the Administrator, to repayment of such note. 6.8 NONASSIGNABILITY OF RIGHTS. No Right to Purchase shall be assignable or transferable except by will or the laws of descent and distribution or as otherwise provided by the Administrator. ARTICLE 7. ADMINISTRATION OF THE PLAN 7.1 ADMINISTRATOR. Authority to control and manage the operation and administration of the Plan shall be vested in the Board, which may delegate such responsibilities in whole or in part to a committee consisting of two (2) or more members of the Board (the "Committee"). Members of the Committee may be appointed from time to time by, and shall serve at the pleasure of, the Board. As used herein, the term "Administrator" means the Board or, with respect to any matter as to which responsibility has been delegated to the Committee, the term Administrator shall mean the Committee. 7.2 POWERS OF THE ADMINISTRATOR. In addition to any other powers or authority conferred upon the Administrator elsewhere in the Plan or by law, the Administrator shall have full power and authority: (a) to determine the persons to whom, and the time or times at which, Incentive Options or Nonqualified Options shall be granted and Rights to Purchase shall be offered, the number of shares to be represented by each Option and Right to Purchase and the consideration to be received by the Company upon the exercise thereof; (b) to interpret the Plan; (c) to create, amend or rescind rules and regulations relating to the Plan; (d) to determine the terms, conditions and restrictions contained in, and the form of, Option Agreements and Stock Purchase Agreements; (e) to 7 determine the identity or capacity of any persons who may be entitled to exercise a Participant's rights under any Option or Right to Purchase under the Plan; (f) to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option Agreement or Stock Purchase Agreement; (g) to accelerate the vesting of any Option or release or waive any repurchase rights of the Company with respect to Restricted Stock; (h) to extend the exercise date of any Option or acceptance date of any Right to Purchase; (i) to provide for rights of first refusal and/or repurchase rights; (j) to amend outstanding Option Agreements and Stock Purchase Agreements to provide for, among other things, any change or modification which the Administrator could have provided for upon the grant of an Option or Right to Purchase or in furtherance of the powers provided for herein; and (k) to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. Any action, decision, interpretation or determination made in good faith by the Administrator in the exercise of its authority conferred upon it under the Plan shall be final and binding on the Company and all Participants. 7.3 LIMITATION ON LIABILITY. No employee of the Company or member of the Board or Committee shall be subject to any liability with respect to duties under the Plan unless the person acts fraudulently or in bad faith. To the extent permitted by law, the Company shall indemnify each member of the Board or Committee, and any employee of the Company with duties under the Plan, who was or is a party, or is threatened to be made a party, to any threatened, pending or completed proceeding, whether civil, criminal, administrative or investigative, by reason of such person's conduct in the performance of duties under the Plan. ARTICLE 8. CHANGE IN CONTROL 8.1 CHANGE IN CONTROL. In order to preserve a Participant's rights in the event of a Change in Control of the Company, (i) the time period relating to the exercise or realization of all outstanding Options, Rights to Purchase and Restricted Stock shall automatically accelerate immediately prior to the consummation of such Change in Control, and (ii) with respect to Options and Rights to Purchase, the Administrator in its discretion may, at any time an Option or Right to Purchase is granted, or at any time thereafter, take one or more of the following actions: (A) provide for the purchase or exchange of each Option or Right to Purchase for an amount of cash or other property having a value equal to the difference, or spread, between (x) the value of the cash or other property that the Participant would have received pursuant to such Change in Control transaction in exchange for the shares issuable upon exercise of the Option or Right to Purchase had the Option or Right to Purchase been exercised immediately prior to such Change in Control transaction and (y) the Exercise Price of such Option or the Purchase Price under such Right to Purchase, (B) adjust the terms of the Options and Rights to Purchase in a manner determined by the Administrator to reflect the Change in Control, (C) cause the Options and Rights to Purchase to be assumed, or new rights substituted therefor, by another entity, through the continuance of the Plan and the assumption of outstanding Options and Rights to Purchase, or the substitution for such Options and Rights to Purchase of new options and new rights to purchase of comparable value covering shares of a successor corporation, with appropriate adjustments as to the number and kind of shares and Exercise Prices, in which event the Plan and such Options and Rights to Purchase, or the new options and rights to purchase substituted therefor, shall continue in the manner and under the terms so provided, or (D) make such other provision as the Administrator may consider equitable. If the Administrator 8 does not take any of the forgoing actions, all Options and Rights to Purchase shall terminate upon the consummation of the Change in Control and the Administrator shall cause written notice of the proposed transaction to be given to all Participants not less than fifteen (15) days prior to the anticipated effective date of the proposed transaction. ARTICLE 9. AMENDMENT AND TERMINATION OF THE PLAN 9.1 AMENDMENTS. The Board may from time to time alter, amend, suspend or terminate the Plan in such respects as the Board may deem advisable. In addition, the Board may delegate such power in whole or in part to the Committee. No such alteration, amendment, suspension or termination shall be made which shall substantially affect or impair the rights of any Participant under an outstanding Option Agreement or Stock Purchase Agreement without such Participant's consent. The Board and/or Committee may alter or amend the Plan to comply with requirements under the Code relating to Incentive Options or other types of options which give Optionees more favorable tax treatment than that applicable to Options granted under this Plan as of the date of its adoption. Upon any such alteration or amendment, any outstanding Option granted hereunder may, if the Administrator so determines and if permitted by applicable law, be subject to the more favorable tax treatment afforded to an Optionee pursuant to such terms and conditions. 9.2 PLAN TERMINATION. Unless the Plan shall theretofore have been terminated, the Plan shall terminate on the tenth (10th) anniversary of the Effective Date and no Options or Rights to Purchase may be granted under the Plan thereafter, but Option Agreements, Stock Purchase Agreements and Rights to Purchase then outstanding shall continue in effect in accordance with their respective terms. ARTICLE 10. TAX WITHHOLDING 10.1 WITHHOLDING. The Company shall have the power to withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy any applicable Federal, state, and local tax withholding requirements with respect to any Options exercised or Restricted Stock issued under the Plan. To the extent permissible under applicable tax, securities and other laws, the Administrator may, in its sole discretion and upon such terms and conditions as it may deem appropriate, permit a Participant to satisfy his or her obligation to pay any such tax, in whole or in part, up to an amount determined on the basis of the highest marginal tax rate applicable to such Participant, by (a) directing the Company to apply shares of Common Stock to which the Participant is entitled as a result of the exercise of an Option or as a result of the purchase of or lapse of restrictions on Restricted Stock or (b) delivering to the Company shares of Common Stock owned by the Participant. The shares of Common Stock so applied or delivered in satisfaction of the Participant's tax withholding obligation shall be valued at their Fair Market Value as of the date of measurement of the amount of income subject to withholding. 9 ARTICLE 11. MISCELLANEOUS 11.1 BENEFITS NOT ALIENABLE. Other than as provided above, benefits under the Plan may not be assigned or alienated, whether voluntarily or involuntarily. Any unauthorized attempt at assignment, transfer, pledge or other disposition shall be without effect. 11.2 NO ENLARGEMENT OF EMPLOYEE RIGHTS. This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Participant to be consideration for, or an inducement to, or a condition of, the employment of any Participant. Nothing contained in the Plan shall be deemed to give the right to any Participant to be retained as an employee of the Company or any Affiliated Company or to limit the right of the Company or any Affiliated Company to discharge any Participant at any time. 11.3 APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock pursuant to Option Agreements and Stock Purchase Agreements, except as otherwise provided herein, will be used for general corporate purposes. 10 EX-10.18 16 a80481ex10-18.txt EXHIBIT 10.18 EXHIBIT 10.18 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. WARRANT NO. NEOG001 NEOGENE TECHNOLOGIES, INC. WARRANT Dated: September 21, 2000 NeoGene Technologies, Inc., a California corporation (the "Company"), hereby certifies that, for value received, BRIGHTON CAPITAL, LTD., or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to a total of Five Thousand Five Hundred Fifty-five (5,555) shares of the common stock, no par value per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $45.00 per share (as adjusted from time to time as provided in Section 7, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including September 21, 2003 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Registration of Transfers and Exchanges. (a) This Warrant or the Warrant Shares issued upon any exercise hereof may only be transferred pursuant to an effective registration statement under the Securities Act, to the Company or pursuant to an available exemption from or in a transaction not subject to the registration requirements of the Securities Act. In connection with any transfer of this Warrant or any Warrant Shares, other than pursuant to an effective registration statement or to the Company, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act. Holder agrees to the imprinting, so long as is required by this Section 2(a), of a legend substantially similar to that first above written on any New Warrant (as defined in Section 2(b) below). Any such transferee shall agree in writing to be bound by the terms of this Warrant and shall have the rights of Holder under this Warrant. (b) The Company shall register the transfer of any portion of this Warrant in conformance with Section 2(a) in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 11. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a holder of a Warrant. (c) This Warrant is exchangeable, upon the surrender hereof by the Holder to the office of the Company pursuant to Section 3(b), for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. 3. Duration and Exercise of Warrant. (a) This Warrant shall be exercisable by the then registered Holder on any business day before 5:00 P.M., California time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., California time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. (b) Subject to Sections 2(c) and 4, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its address for notice set forth in Section 11 and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in the manner provided hereunder, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become the holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. (c) This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. (d) Prior to the exercise of this Warrant, the Holder shall not be entitled to any rights as a stockholder of the Company with respect to the Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings (except as otherwise set forth in Section 7(g) herein). 2 4. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 5. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable charges as the Company may prescribe. 6. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 7). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 7. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 7. (a) If the Company, at any time while this Warrant is outstanding, (i) shall pay a stock dividend (except scheduled dividends paid on outstanding preferred stock as of the date hereof which contain a stated dividend rate) or otherwise make a distribution or distributions on shares of its Common Stock (or on any other class of capital stock and not the Common Stock) payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately before such event by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. The number of Warrant shares issuable upon exercise of this Warrant shall be adjusted upon such adjustment of the Exercise Price by multiplying the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment by a fraction of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. 3 (b) In case of any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification or share exchange, and the Holder shall be entitled upon such exercise to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification or share exchange. The terms of any such reclassification or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this Section 7(b) upon any exercise following any such reclassification or share exchange. (c) If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 7(a), (b) and (d)) and other than with respect to rights granted pursuant to a stockholders rights plan adopted by the Company, then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the fair market value of a Warrant Share determined in accordance with Section 8(b), below, as of the record date mentioned above, and of which the numerator shall be such fair market value of a Warrant Share less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Company's independent certified public accountants that regularly examine the financial statements of the Company (the "Appraiser"). (d) In case of the closing of any (1) merger or consolidation of the Company with or into another Person, or (2) sale by the Company of more than one-half of the assets of the Company (on a book value basis) in one or a series of related transactions, or (3) tender or other offer or exchange (whether by the Company or another Person) pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, stock, cash or property of the Company or another Person; then the Holder shall have the right thereafter to (A) exercise this Warrant for the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and the Holder shall be entitled upon exercise of this Warrant to receive such amount of securities, cash and property as the Common Stock for which this Warrant could have been exercised immediately prior to such merger, consolidation or sale would have been entitled, or (B) in the event of an exchange or tender offer or other transaction contemplated by clause (3) of this Section, tender or exchange this Warrant for such securities, stock, cash and other property receivable upon or deemed to be held by holders of Common Stock that have tendered or exchanged their shares of Common Stock following such tender or exchange, and the Holder shall be entitled upon such exchange or tender to receive such amount of securities, cash and property as the shares of Common Stock for which this Warrant could have been exercised immediately prior to such tender or exchange would have been entitled as would have been issued. The terms of any such merger, sale, consolidation, tender or exchange shall include such terms so as continue to give the Holder the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. 4 (e) For the purposes of this Section 7, the number of shares of Common Stock outstanding at any time shall be deemed to include the aggregate maximum number of shares of Common Stock deliverable upon exercise, conversion or exchange, as applicable (assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability, as applicable, including, without limitation, the passage of time), of any options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities then outstanding. (f) All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (g) If: (i) the Company shall declare a dividend (or any other distribution) on its Common Stock; or (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall cause to be mailed to each Holder at such Holder's last address as it shall appear upon the Warrant Register, at least 15 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 5 8. Payment of Exercise Price. The Holder shall pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available funds by certified check or bank draft payable to the order of the Company or by wire transfer to an account designated by the Company; or (b) Cashless Exercise. The Holder may surrender this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: Y (A - B) X = --------- A Where X = The number of Warrant Shares to be issued to the Holder. Y = The number of Warrant Shares with respect to which this Warrant is being exercised. A = The fair market value of one Warrant Share on the Date of Exercise. B = The Exercise Price. For purposes of this Section 8(b), the fair market value of a Warrant Share on the Date of Exercise shall mean: (i) if the exercise is in connection with an initial public offering of the Company's Common Stock, and if the Company's registration statement relating to such public offering has been declared effective by the Securities and Exchange Commission, then the fair market value per share shall be the initial "Price to Public" specified in the final prospectus with respect to the offering; (ii) if this Warrant is exercised after, and not in connection with, the Company's initial public offering, and if the Company's Common Stock is traded on a securities exchange or The Nasdaq Stock Market or actively traded over-the-counter: (A) if the Company's Common Stock is traded on a securities exchange or The Nasdaq Stock Market, the fair market value shall be deemed to be the average of the closing sale prices of the Common Stock for the five (5) trading days immediately prior to (but not including) the Date of Exercise; or (B) if the Company's Common Stock is actively traded over-the-counter, the fair market value shall be deemed to be average of the closing bid or sales price (whichever is applicable) for the five (5) trading days immediately prior to (but not including) the Date of Exercise; or (iii) if neither (i) nor (ii) is applicable, the fair market value of a Warrant Share shall be at the highest price per share which the Company could obtain on the date of calculation from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board 6 of Directors, unless the Company is at such time subject to an acquisition including the sale, conveyance or disposal of all or substantially all of the Company's property or business or the Company's merger into or consolidation with any other corporation (other than a wholly-owned subsidiary corporation) or any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, other than a merger effected exclusively for the purpose of changing the domicile of the Company, in which case the fair market value of a Warrant Share shall be deemed to be the value received by the holders of Common Stock pursuant to such acquisition. 9. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 9, be issuable on the exercise of this Warrant, the Company shall pay an amount in cash equal to the Exercise Price multiplied by such fraction. 10. Representations and Warranties of Holder. By accepting this Warrant, the Holder hereby represents and warrants as follows: (a) Purchase for Own Account. Holder represents and warrants that it is acquiring the Warrant and the Warrant Shares (collectively, the "Securities") solely for its own account for investment and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act. Holder further represents that it does not have any present intention of selling, offering to sell or otherwise disposing of or distributing the Securities or any portion thereof and that the entire legal and beneficial interest of the Securities it is acquiring is being acquired for, and will be held for the account of, Holder only and neither in whole nor in part for any other person. (b) Accredited Investor; Informed and Knowledgeable Decision. Holder is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. Holder hereby agrees, represents and warrants that it is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. Holder further represents and warrants that it has discussed the Company and its plans, operations and financial condition with its officers, has received all such information as he deems necessary and appropriate to enable it to evaluate the financial risk inherent in making an investment in the Securities. (c) Company Disclosure. Holder hereby agrees, represents and warrants that the Company has disclosed to Holder that the Securities have not been registered under the Securities Act or under any state securities laws and must be held indefinitely unless a transfer of it is subsequently registered under the Securities Act or an exemption from such registration is available. (d) Rule 144. The Holder hereby agrees, represents and warrants that the Holder is aware of the provisions of Rule 144, promulgated under the Securities Act. 11. Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified 7 in this Section prior to 5:00 p.m. (California time) on a business day, (ii) the business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (California time) on any date and earlier than 11:59 p.m. (California time) on such date, (iii) the business day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to 157 Technology Drive, Irvine, CA 92618, Attention: Chief Financial Officer, or to facsimile no. (949) 788-6706, with a copy to Latham & Watkins, 650 Town Center Drive, Suite 2000, Costa Mesa, California 92626, attention Alan W. Pettis, Esq., or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 10. 12. Warrant Agent. The Company shall serve as warrant agent under this Warrant. The Company may appoint a new warrant agent upon notice to the Holder in accordance with Section 10. Any corporation into which the Company may be merged or any corporation resulting from any consolidation to which the Company shall be a party or any corporation to which the Company transfers substantially all of its corporate assets shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 13. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) Subject to Section 12(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Holder any legal or equitable right, remedy or cause under this Warrant. This Warrant shall inure to the sole and exclusive benefit of the Company and the Holder. (c) All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. The Company and the Holder hereby irrevocably submit to the exclusive jurisdiction of the state and federal courts sitting in the County of Orange, State of California, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waive, and agree not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. 8 (d) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (e) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. NEOGENE TECHNOLOGIES, INC. By: /s/ Sam Gulko --------------------------- Samuel Gulko Chief Financial Officer 9 FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To NeoGene Technologies, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase __________ shares of the common stock ("Common Stock"), no par value per share, of NeoGene Technologies, Inc. and such Holder (i) ___ is utilizing the Cashless Exercise provisions set forth in the Warrant, or (ii) ___ encloses herewith $__________ in cash, certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned hereby acknowledges that it has reviewed the representations and warranties contained in Section 10 of the Warrant and by its signature below hereby makes such representations and warranties to the Company as of the date hereof. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER ---------------------------------------- - -------------------------------------------------------------------------------- (Please print name and address) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: __________, ____ Name of Holder: (Print) ------------------------------------- (By:) ------------------------------------- (Name:) (Title:) (Signature must conform in all respects to name of holder as specified on the face of the Warrant) FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ____________________ the right represented by the Warrant enclosed with this Form of Assignment to purchase __________ shares of the common stock of NeoGene Technologies, Inc. to which the Warrant relates and appoints ____________________ attorney to transfer said right on the books of NeoGene Technologies, Inc. with full power of substitution in the premises. Dated: __________, ____ -------------------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) -------------------------------------------------- Address of Transferee -------------------------------------------------- -------------------------------------------------- In the presence of: - -------------------------- EX-10.35 17 a80481ex10-35.txt EXHIBIT 10.35 EXHIBIT 10.35 EXECUTIVE EMPLOYMENT AGREEMENT THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of December 1, 2000 by and between, Dr. Rajesh C. Shrotriya, currently residing at 24571 Santa Clara Avenue, Dana Point, California 92629 (hereinafter referred to as "Executive"), and NeoTherapeutics, Inc. (hereinafter referred to as "Corporation"). WHEREAS: A. The Corporation is a corporation organized under the laws of the State of Delaware, and is engaged in the business of developing and manufacturing pharmaceutical products and services; and B. Executive is a person whose skills, experience and training are required by the Corporation; and C. Executive wishes to accept the employment offered by the Corporation on the terms and conditions hereinafter set forth. NOW THEREFORE, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. EMPLOYMENT 1.1 Position and Duties The Corporation does hereby employ Executive and Executive hereby accepts such employment as President of Corporation upon the terms and provisions set forth in this Agreement. Executive shall report to the Chief Executive Officer of the Corporation subject to the directions of the Chief Executive Officer. Executive shall devote his full working time and effort to the business and affairs of the Corporation as necessary to faithfully discharge the duties and responsibilities of his office. Executive may participate in other business and act as a director of any profit or nonprofit corporation, so long as such activity is not competitive with the business of the Corporation in any material respect and does not materially detract from the performance of his duties as a full time executive of the Corporation. 2. TERM This Agreement shall continue in full force and effective for a period (the "Term") which shall commence as of December 1, 2000 (the "effective date") and shall continue until December 31, 2003 unless sooner terminated as hereafter provided. Thereafter, this Agreement will automatically renew for one (1) year periods, unless 1 either party gives to the other written notice at least ninety (90) days prior to the commencement of the next year, of such party's intent not to renew this Agreement. 3. COMPENSATION 3.1 Base Salary As compensation for the services to be performed by Executive during the continuance of this Agreement, the Corporation shall pay Executive a base salary of not less than $260,000 per year for each year of his employment hereunder, payable in accordance with Corporation practices in effect from time to time, but not less often than monthly (the "Base Salary"). Base Salary shall be payable in substantially equal installments and reduced on a pro rata basis for any fraction of a year or month during which Executive is not so employed. 3.2 Bonus The Board of Directors of the Corporation may, at its sole discretion, award bonuses of cash or stock from time to time. Any such Bonus earned by Executive shall be paid at least annually within ninety (90) days after the conclusion of the Corporation's fiscal year or, upon mutual agreement of the parties, in another fashion. 3.3 Additional Benefits Executive shall be entitled to all rights and benefits for which Executive is otherwise entitled under any pension plan, profit sharing plan, life, medical, dental, or benefit the Corporation may provide for senior executives generally and for employees of the Corporation generally from time to time in effect during the term of this Agreement (collectively, "Additional Benefits"). Executive shall receive participation in the Executive Medical Plan and shall commence such participation immediately. 3.4 Stock Options As an additional element of compensation to Executive in consideration of the services to be rendered hereunder, Employer shall grant to Executive options to acquire shares of Corporation's common stock at the sole discretion of the Board of Directors as follows: (A) The specific terms of stock options awarded to Executives shall be as set forth in the separate option agreements. To the extent that Corporation does not have available options in its option plans to grant to Executive as contractually committed herein above, Corporation agrees to amend its plans and/or adopt new plans as promptly as possible to provide sufficient options for such option grants. Corporation shall use its best 2 efforts to prepare and submit for approval by its directors and its stockholders at the 2001 Annual Meeting of Stockholders a new option plan which would provide sufficient options to allow Corporation to meet its contractual obligations to Executive herein and to provide for potential grants of stock options to other key employees. (B) Executive shall be considered for additional grants of options, SAR's, phantom stock rights and any similar option or securities compensation when and as such grants are considered for other executives or employees of the Corporation, but any grant is wholly at the discretion of the Board. (C) For all purposes of this Agreement, a "change of control" shall mean and shall be deemed to have occurred if: (1) There shall be consummated (x) any consolidation or merger of the Corporation with another corporation or entity and as a result of such consolidation or merger, a majority of the outstanding voting securities of the surviving or resulting corporation or entity shall be owned in the aggregate by persons who were not stockholders of the Corporation prior to the merger or consolidation (excluding the affiliates of the acquiror who acquired their shares within one hundred eighty (180) days prior to such merger or transfer (or in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Corporation, or (2) The stockholders of the Corporation shall have approved any plan or proposal for the liquidation or dissolution of the Corporation; or (3) Any "person" (as such term is used in the Sections 13(d) and 14 (d) (2) of the Securities Exchange Act of 1934), shall have become the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of forty percent (40%) or more of the Corporation's outstanding common stock, without the prior approval of the Board, or (4) During any period of two (2) consecutive years, individuals who at the beginning of such period constituted the entire Board of Directors shall have ceased for any reason to constitute a majority thereof unless the election, or the nomination for election by the Corporation's stockholders, of each new Director was approved by vote of the Directors then still in office who were Directors at the beginning of the period. 3 (D) Retirement of Executive Any options held by Executive will become fully vested at the time that Executive terminates employment due to his retirement. Retirement is defined as the voluntary termination of employment by the Executive as a result of the Executive having reached the retirement age as established by the Corporation or age 65, whichever occurs first or, subsequent to thereto, voluntarily terminates his employment. 3.5 Periodic Review The Corporation shall review Executive's Base Salary bonus, Stock Options, and Additional Benefits then being provided to Executive not less frequently than every twelve (12) months. Following such review, the Corporation may, in its discretion, increase the Base Salary, award a Bonus, grant Stock Options and Additional Benefits. 3.6 Reimbursements 3.6.1 General. Subject to approval of his/her superior, Executives shall be promptly reimbursed by the Corporation for amounts actually expended by Executive in the course of performing duties for the Corporation where Executive tenders receipts or other documentation reasonably substantiating the amounts as required by the Corporation. As a condition of employment hereunder, Executive shall entertain business prospects, provide and maintain an appropriate automobile, maintain and improve Executive's professional skills by participating in continuing education courses and seminars, and maintain memberships in civic groups and professional societies and Corporation agrees to reimburse Executive therefore consistent with criteria under the Internal Revenue Code, subject to approval by their superior. 3.6.2 Business Expenses. During the term of this Agreement to the extent that such expenditures satisfy the criteria under the Internal Revenue Code for deductibility by the Corporation (whether or not fully deductible by the Corporation) for federal income tax purposes as ordinary and necessary business expenses, Corporation agrees to and shall reimburse Executive promptly for all reasonable business expenditures including travel, entertainment, parking, business meetings, professional dues and the costs of and dues associated with maintaining club memberships and expenses of education, made or substantiated in accordance with policies, practices and procedures established from time to time by the Corporation generally with respect to other senior executives/managers and other employees of the Corporation and incurred in the pursuit and furtherance of the Corporation's business and good will. 4 3.6.3 Travel. In connection with any travel by Executive in the performance of his duties hereunder, Corporation shall advance to Executive an amount equivalent to the reasonable and necessary expenses of such travel and appropriate to Executive's position in Corporation pursuant to the policies and procedures established for this purpose by this Corporation. 3.6.4 Automobile Expenses. During the term of this Agreement, Corporation shall provide Executive with a monthly vehicle allowance. In addition, Corporation shall pay or reimburse Executive for reasonable and necessary costs of all automobile insurance (liability or otherwise), fuel, lubricants and automobile maintenance and repair incurred by Executive hereunder. 3.6.5 Entertainment. Executive shall be expected to entertain those with whom the Corporation conducts business both at Executives' home and at public restaurants, theatres, etc. The Corporation shall pay Executive for or promptly reimburse Executive for the reasonable and necessary costs of such entertainment. 3.6.6 Credit Cards. To Assist Executive in the performance of his duties, Corporation shall provide Executive with a Corporation credit card or cards for use in paying for any and all reimbursable expenses. 3.7 Deductions There shall be deducted from Executive's gross compensation appropriate amounts for standard employee deductions (e.g., income tax withholding, social security and state disability insurance) and any other amounts authorized for deduction by Executive. 4. VACATION Executive shall be entitled to not less than four weeks per year of paid vacation for each twelve (12) month period of employment which shall accrue on a pro rata basis from the date employment commences under this Agreement. Subject to the foregoing minimum vacation, Executive shall be entitled to paid vacation, holidays and leave time in accordance with the plans, policies, programs and practices in effect generally with respect to other senior employees of the Corporation. Executive shall not forfeit or cease to accrue any paid vacation, if he is unable to or does not use it, in any year or period of years during the term hereof, or any extensions thereof. 5. INDEMNIFICATION 5 The Corporation shall, to the maximum extent permitted by law, indemnify and hold Executive harmless from and against any expenses, including reasonable attorney's fees, judgements, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising out of, or related to, Executive's employment by the Corporation. The Corporation shall advance to Executive any expenses, including reasonable attorneys' fees and costs of settlement, reasonably incurred in defending any such proceeding to the maximum extent permitted by law. The Corporation will include Executive under all directors' and officers' liability insurance policies and will use its best efforts to maintain existing coverage levels, assuming continuation of insurance availability at commercially reasonable rates. 6. TERMINATION OF EMPLOYMENT Employment shall terminate upon the occurrence of any of the following events: 6.1 Expiration of Term Upon at least ninety (90) days prior written notice by Corporation to Executive terminating this Agreement prior to the expiration of the original term or an extended term as specified in Section 2; upon such termination, Executive shall be entitled to the compensation provided in paragraph 6.4 payable as provided therein. 6.2 Mutual Agreement Whenever the Corporation and Executive mutually agree in writing to termination; 6.3 Termination for Cause At any time for cause. For purposes of this Agreement,"cause" shall be defined as any of the following, provided however, that the board of directors of the Corporation by a duly adopted resolution has determined the presence of such cause in good faith: (i) Executive's material breach of any of his duties and responsibilities under this Agreement (other than as a result of incapacity due to disability); (ii) Executive's conviction by, or entry of a plea of guilty in, a court of competent jurisdiction for a felony; or, (iii) Executive's commission of an act of fraud or willful misconduct or gross negligence in the performance of his duties Notwithstanding the foregoing, Executive shall not be terminated for "cause pursuant to the clauses above, unless and until Executive has received notice of the proposed termination for cause including details on the bases for such termination and has had an opportunity to be heard before at least a majority of members of the board of directors of the Corporation. Executive shall be deemed to have had such an opportunity if written or telephonic notice is given at least ten (10) days in advance of a meeting. 6 6.4 Termination Without Cause Without cause. Notwithstanding any other provision of this section, the Corporation shall have the right to terminate Executive's employment with the Corporation without cause at any time, but any such termination shall be without prejudice to Executive's rights to receive Base Salary and Additional Benefits provided; under this Agreement for the greater of two (2) years or the remaining term, as set forth in paragraph 2 above, of this Agreement and, except as provided in the proviso below, Executive shall be vested in all options granted to him, and shall have one (1) month for each month of Executive's tenure, with a minimum of six (6) months and a maximum of one (1) year, to exercise all vested options; provided, further, if the Board determines that Executive's employment is being terminated for the reason that the shared expectations of Executive and the Board are not being met; in the Board's judgement, then Executive's vesting as shall occur during a period following the date of termination of Executive's employment equal to the number of months of Executive's tenure with the Corporation, with a minimum of six (6) months and a maximum of one (1) year, with the right to exercise for the same period plus thirty (30) days. The continued vesting and exercise rights relative to all options granted to Executive shall be subject to the same limitations as set forth in the immediately preceding sentence. If Executive is terminated without cause, Executive may elect to receive a lump sum payment representing the aggregate cash compensation (including salary, bonus, auto allowance and any other cash or equivalent compensation, other than continued vacation accrual). Such lump sum payment shall be made not later than ten (10) days after Executive makes such election. In the event of such lump sum election, all insurance and other noncash benefits shall cease. 6.5 Death/Disability The death or disability of Executive. For the purposes of this Agreement, disability shall mean the absence of Executive performing Executive's duties with the Corporation on a full time basis for a period of six (6) consecutive months, as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Corporation or its insurers and reasonably acceptable to Executive or Executive's legal representative. If Executive shall become disabled, Executive's employment may be terminated; by written notice to Executive. In the event of the death of Executive, all compensation hereunder shall be paid based on value at time of death. 6.6 By Executive Without Cause By Executive at any time upon ninety (90) days' notice to Corporation. Executive shall not be entitled to any severance in the event of such a termination. 7. CHANGE OF CONTROL 7 If there should occur a "change of control" of the Corporation (or any successor), as defined in paragraph 3.4 (C) hereof, and Executive's employment is terminated (other than by Executive) or Executive is adversely affected in terms of overall compensation, benefits, title, authority, reports reporting relationships, location of employment or similar matters, then Executive, without limitation on any other rights hereunder, may, within six (6) months after receiving notice of such event, elect to resign from full time service to the Corporation. In the event of such election by Executive, Executive shall be provided with senior executive outplacement services at an outplacement or executive search firm of Executive's selection (and reasonably acceptable to Corporation), and the cash compensation and all benefits to which Executive is entitled hereunder shall be discontinued twenty-four (24) months after the date of election (or earlier, if a lump sum payment of cash compensation is specified). Executive, at his election, shall have the right to request and, if requested, shall be paid the full cash value of all amounts of cash compensation due for the 24-month period (including salary, approved bonus, auto allowance, and any other cash or equivalent compensation) in a lump sum, such lump sum payment shall be made not later than ten (10) days after Executive gives notice to the Corporation of his lump sum election. In the event of such election, all insurance and noncash benefits shall cease. All options granted to Executive shall vest to the extent provided in paragraph 6.4 above. In addition, if an acquirer of 100% of the Corporation stock is itself a publicly held company, the Corporation shall make reasonable efforts to negotiate that Executive shall have the right, but not the obligation, to convert all his Corporation vested options into options on the acquirer's stock and shall have two (2) years to exercise those options, but Corporation shall have no obligation to Executive if it fails to secure such rights or concludes that pursuing such rights would materially prejudice the interest of the stockholders of the Corporation. 8. BREAKUP AND DISPOSITION OF CORPORATION ASSETS If within the first year of Executive's employment, the Board determines to maximize stockholder value through disposition of a significant amount of assets or business units of the Corporation, Executive shall assist Corporation through such disposition and shall thereafter be entitled to terminate this Agreement within six (6) months of such event (completion of such disposition) and receive all benefits provided under section 6.4 hereof. As used herein, the term "significant amount of assets or business units of the Corporation" shall mean either fifty percent (50%) or more of the gross revenues of Corporation or, in the absence of gross revenues, 50% of the gross assets of the Corporation including intellectual properties, as determined by an independent appraisal, or fifty percent (50%) or more of the operating income by excluding losses from business units of the Corporation which are operating at a loss.) 9. BUSINESS DISCLOSURES AND SOLICITATION OF EMPLOYEES Executive agrees during the term of his employment by the Corporation and thereafter that he will not disclose, other than to an authorized employee, officer, director or agent of the Corporation, any information relating to the Corporation's business, trade, 8 practices, trade secrets or know-how or proprietary information without the Corporation's prior express written consent. Following termination of Executive's employment, Executive shall be permitted to continue in his usual occupation and shall not be prohibited from competing with the Corporation except during the two (2) year severance period and in the specific industry market segments in which the Corporation competes and which represent twenty percent (20%) or more of its revenues. Executive agrees that for a period of one (1) year following the termination of Executive's employment with the Corporation for any reason, Executive shall not directly or indirectly solicit, induce, recruit or encourage any of the Corporation's employees to leave their employment or take away such employees to leave their employment or take away such employees or attempts to solicit, induce, recruit, encourage or take away employees of the Corporation. 10. MISCELLANEOUS 10.1 Arbitration Any dispute, controversy or claim arising out of or in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall, at the request of either party, be settled by binding arbitration in Orange County, California in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgement upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The parties shall have rights to discovery as provided in section 1283.05 of the California Code of Civil Procedure. The prevailing party in any such matter shall recover all of its costs and expenses, including reasonable attorney's fees. 10.2 No Third-Party Beneficiaries This Agreement shall not confer any rights or remedies upon any person other than the parties and their respective successors and permitted assigns. 10.3 Entire Agreement This Agreement (including the documents referred to herein) constitutes the entire agreement between the parties and supersedes any prior understandings, agreements, or representations between the parties, written or oral, to the extent they have related in any way to the subject matter hereof. 10.4 Succession and Assignment This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns. No party may assign either the Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the Corporation and Executive; provided, however, that the Corporation may (i) assign any or all of its 9 rights and interests hereunder to one or more of its affiliates and (ii) designate one or more of its affiliates to perform its obligations hereunder (in any or all of which cases the Corporation nonetheless shall remain responsible for the performance of all of its obligations hereunder). 10.5 Counterparts This Agreement may be executed in one or more Counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 10.6 Headings The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this agreement. 10 10.7 Notices All notices, requests, demands, claims, and other communications required or permitted hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to Corporation: NEOTHERAPEUTICS, INC. 157 TECHNOLOGY DRIVE IRVINE, CA 92618 If to Executive: RAJESH SHORTRIYA, M.D. 24571 SANTA CLARA AVENUE DANA POINT, CA 92629 Any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving notice in the manner herein set forth. 10.8 Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California without giving effect to any choice or conflict of law provision or rule (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. 10.9 Amendments and Waivers No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Corporation and the Executive. No waiver by any party of any default, misrepresentation, or breach of warranty or convenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or convenant 11 hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 10.10 Severability Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the date first above written. "CORPORATION" By: /s/ Alvin J. Glasky -------------------------------------- Alvin J. Glasky Its: CEO -------------------------------------- "EXECUTIVE" By: /s/ Rajesh Shrotriya -------------------------------------- Rajesh Shrotriya, M.D. Title: President ----------------------------------- 12 EX-10.39 18 a80481ex10-39.txt EXHIBIT 10.39 EXHIBIT 10.39 August 10, 2001 Alvin J. Glasky, PhD Chairman, Chief Executive Officer & Chief Scientific Officer NeoTherapeutics, Inc. 157 Technology Drive Irvine, CA 92618 Dear Dr. Glasky: This letter acknowledges and confirms the terms of the corporate finance agreement ("Agreement") between NeoTherapeutics, Inc. and its subsidiaries (collectively, the "Company") and Gruntal & Co., L.L.C. ("Gruntal"). 1. Gruntal shall act as investment banker and financial advisor for the Company in connection with corporate finance and mergers and acquisition matters. As such, Gruntal will provide the Company with advice on the most appropriate time to access the capital markets and on the nature of the security to be sold, as well as the appropriate investor base to approach. 2. The Company will furnish Gruntal with such information as Gruntal believes appropriate to its assignment (the "Information"). The Company recognizes and confirms that Gruntal (a) will use and rely primarily on the Information and on information available from generally recognized public sources in performing the duties contemplated by this Agreement without having independently verified the same, (b) does not assume responsibility for the accuracy or completeness of the Information and such other information and (c) will not make an appraisal of any of the assets of the Company. 3. Either party shall have the right to terminate, in writing, this Agreement after twenty-four (24) months from the signing hereof. Any termination of this Agreement shall not affect the Company's obligation to pay Gruntal's fees and expenses as set forth in paragraphs 4 and 6 below, and to indemnify Gruntal and certain related entities as provided in paragraph 8. 4. The Company agrees to pay Gruntal, for its services, a monthly retainer of five thousand dollars ($5,000) per month, payable upon the signing of this agreement and thereafter on the first day of each month beginning September 1, 2001 through July 1, 2002 and seven thousand five hundred dollars ($7,500) per month payable each month beginning August 1, 2002 through July 1, 2003. Additionally, the Company agrees to issue to Gruntal warrants to acquire 125,000 shares of the Company's Common Stock at an exercise price of $3.80 per share. The warrants will be exercisable at any time before the fifth anniversary of the date of execution of this Agreement. The warrants shall, among other things: (i) be transferable to officers, directors and employees of Gruntal, (ii) permit exercise on a cashless basis, and (iii) contain such other terms as are customarily included in warrants of this type. The Company shall register the shares underlying the Warrants upon the earlier of the first anniversary of the signing of this Agreement or the closing of a financing for which Gruntal has acted as underwriter or placement agent. Alvin J. Glasky, PhD August 10, 2001 Page 2 5. During the term of this Agreement, Gruntal shall have the right to participate as a managing underwriter or placement agent with respect to any offering or placement, by the Company or any of its subsidiaries, of equity or equity-related securities for which the services of an investment banker are required, for customary investment banking fees to be mutually negotiated. 6. The Company agrees to reimburse Gruntal for its reasonable out-of-pocket expenses related to this engagement, including, without limitation, items such as transportation, lodging, meals, postage, telephone expenses and legal fees incurred in connection with Gruntal's services described herein. The Company's responsibility to reimburse Gruntal for such fees shall be limited to $50,000. The aforementioned expenses shall be billed and will be payable by the Company as and when incurred. 7. Any financial advice or opinion rendered by Gruntal pursuant to this Agreement may not be disclosed publicly in any manner without the prior written approval of Gruntal. 8. The Company hereby agrees to indemnify and hold harmless Gruntal and its affiliates, and the respective directors, officers, partners, controlling persons (within the meaning of Section 15 of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934), agents, counsel and employees of Gruntal or any of its affiliates (Gruntal and each such other person or entity being referred to individually as an "Indemnified Person" and, collectively, as "Indemnified Persons"), to the full extent lawful, from and against any and all claims, liabilities, losses, damages, penalties, judgments, awards and expenses incurred by any Indemnified Person (including fees and disbursements of counsel) which (a) relate to or arise out of (i) actions taken or omitted to be taken (including any untrue statements made or alleged to have been made or any statements omitted or alleged to have been omitted or any other oral or written statements) by the Company, its affiliates, directors, employees or agents, or (ii) actions taken or omitted to be taken by an Indemnified Person with the Company's consent or in conformity with its instructions or its actions or omissions, or (b) otherwise relate to or arise out of Gruntal's activities on the Company's behalf in connection with the engagement. In addition, the Company will reimburse Gruntal and any other Indemnified Person for all costs and expenses, including counsel fees and disbursements, as they are incurred, in connection with investigating, preparing and defending any action, formal or informal claim, investigation, inquiry or other proceeding, whether or not in connection with pending or threatened litigation, caused by or arising out of or in connection with Gruntal Acting pursuant to the letter of intent whether or not Gruntal or any Indemnified Person is named as a party thereto and whether or not any liability results therefrom. The Company will not, however, be responsible for any claim, liabilities, losses, damages or expenses pursuant to clause (b) of the preceding sentence which are finally judicially determined by a court of competent jurisdiction (not subject to further review) to have resulted primarily from Gruntal's willful misconduct or gross negligence. The Company also agrees that neither Gruntal nor any other Indemnified Person shall have any liability to the Company for or in connection with such engagement except for any such liability for claims, liabilities, losses, damages, or expenses incurred by the Company which is finally judicially determined to have resulted primarily from Gruntal's willful misconduct or gross negligence. Alvin J. Glasky, PhD August 10, 2001 Page 3 In order to provide for just and equitable contribution, if a claim for indemnification is made pursuant to these provisions but it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification is not available for any reason even though the express provisions hereof provide for indemnification in such case, then the Company, on the one hand, and Gruntal on the other hand, shall contribute to such claim, liability, loss, damage or expense for which such indemnification or reimbursement is held unavailable in such proportion as is appropriate to reflect the relative benefits to the Company, on the one hand, and Gruntal on the other hand, in connection with the actions contemplated by the engagement, subject to the limitation that in any event the aggregate contribution of Gruntal and all Indemnified Persons to all losses, claims, damages, liabilities and expenses to which contribution is available hereunder shall not exceed the amount of fees actually received by Gruntal pursuant to the Engagement Letter. The foregoing right to indemnity and contribution shall be in addition to any rights that Gruntal or any other Indemnified Person may have at common law or otherwise and shall remain in full force and effect following the completion or any termination of Gruntal's engagement and shall be binding on and inure to the benefit of the successors, assigns, heirs and personal representatives of the Company and Gruntal and any other Indemnified Party. The Company hereby consents to personal jurisdiction and to service and venue in any court in which any claim which is subject to this is brought against Gruntal or any other Indemnified Person and in any court in which Gruntal or another Indemnified Person brings such a claim against the Company. Neither termination nor completion of the engagement of Gruntal referred to above shall affect these provisions, which shall remain operative and in full force and effect. 9. The Company and Gruntal acknowledge and agree that no brokers, representatives or other persons have an interest in any of the fees to be paid to Gruntal by the Company in connection with any Transaction or any other matter contemplated herein. 10. This Agreement sets forth the entire understanding of the parties relating to the subject matter hereof, and supersedes and cancels any prior communications, understandings and agreements between the parties relating to the subject matter hereof. This Agreement cannot be modified, or changed, nor can any of its provisions be waived, except by written agreement signed by all parties. 11. The benefits of this Agreement shall inure to the parties hereto and their respective successors and assigns, and the obligations and liabilities assumed in this Agreement shall be binding upon the parties hereto and their respective successors and assigns. 12. Any dispute between the parties to this Agreement shall be settled by arbitration before the facilities of the New York Stock Exchange, Inc. or the National Association of Securities Dealers, Inc. in the City of New York and will be conducted pursuant to applicable federal laws, the laws of the State of New York, without regard to conflicts of laws, and the rules of the selected arbitral facility. The parties understand that Alvin J. Glasky, PhD August 10, 2001 Page 4 the award of the arbitrators, or of a majority of them, will be final and that a judgment upon any award rendered may be entered in any court having jurisdiction. 13. Each of the Company and Gruntal represents and warrants to the other that it is authorized to execute the Agreement on its behalf. Please confirm that the foregoing correctly sets forth our understanding by signing the enclosed copy of this letter where provided and returning it to us. Very truly yours, GRUNTAL & CO., L.L.C. /s/ Andrew M. Sadosky - ------------------------------------ Andrew M. Sadosky Managing Director Agreed and accepted on the 13 day of August 2001 NEOTHERAPEUTICS, INC. By: /s/ Alvin J. Glasky --------------------------------------- Alvin J. Glasky, Ph.D. Chairman, Chief Executive Officer & Chief Scientific Officer EX-10.46 19 a80481ex10-46.txt EXHIBIT 10.46 EXHIBIT 10.46 STOCK PURCHASE AGREEMENT This agreement is dated December 10, 2001 between ____________ ("Purchaser"), and NeoTherapeutics, Inc. ("Company"), whereby the parties agree as follows: The Purchaser shall buy and the Company agrees to sell _______ shares ("Shares") of the Company's Common Stock at a price of $3.85 per share for a total amount of $___________. The Shares have been registered on a Form S-3, File No. 333-53108, which registration statement has been declared effective by the Securities and Exchange Commission. The Shares are free of restrictive legends and are free of any resale restrictions. The Company is delivering herewith a prospectus supplement on Form 424 (b)(2) regarding the sale of the Shares prior to funding. The Purchaser shall wire the purchase amount to the Company to the account set forth below. Company Wire Transfer Instructions: Chase Manhattan Bank 1 Chase Plaza New York, NY 10004 ABA # 021 000 021 FBO Salomon Smith Barney A/C # 066-198038 For Further Credit to: Neotherapeutics, Inc. A/C # 561-04051-19-103 The Company shall cause its transfer agent to transmit the Shares electronically to the Purchaser by crediting the account set forth below through the Deposit Withdrawal Agent Commission system. Purchaser DWAC Instructions: -------------- DTC #____ -------------- 2 AGREED AND ACCEPTED: NeoTherapeutics, Inc. By: ----------------------------------------- Name: Title: PURCHASER: [Purchaser Name] By: ----------------------------------------- Name: Title: EX-10.47 20 a80481ex10-47.txt EXHIBIT 10.47 EXHIBIT 10.47 BRIGHTON CAPITAL, LTD. 1888 CENTURY PARK EAST SUITE 1900 LOS ANGELES, CA 90211 (310) 277-6095; FAX: (310) 277-6097 March 11, 2002 Mr. Sam Gulko, Chief Financial Officer NeoTherapeutics, Inc. 157 Technology Drive Irvine, CA 92618 Re: NeoTherapeutics, Inc. --------------------- Dear Mr. Gulko: This letter shall confirm the non-exclusive finder's arrangement between Brighton Capital, Ltd. ("Brighton") and NeoTherapeutics, Inc. ("NEOT") in the event that NEOT proceeds with a debt and/or equity transaction ("Transaction(s)") with a party introduced or procured by Brighton, even though NEOT may have been previously introduced to that party by another. There is no obligation to consummate any Transaction and NEOT can choose to accept or reject any Transaction in its sole and absolute discretion. NEOT acknowledges that there is no guaranty or assurance that any Transaction will take place and that the final legal documentation may contain terms that vary with those set forth on any term sheets. In the event that a Transaction(s) occurs, NEOT agrees to pay Brighton the following at each close (or at Brighton's request, NEOT shall direct the investor to pay the fees directly to Brighton) in cash (a) 6% (six) of all cash amounts received and (b) 10,000 warrants per $1,000,000 funded. The terms and conditions of the warrants including the exercise price and registration rights shall be identical to those of the investor. NEOT agrees to pay one-half of the fees each to Brighton and Atwood Capital, Ltd. NEOT agrees to indemnify and hold harmless Brighton and its affiliates, directors, officers, shareholders, employees and agents (the "Indemnified Parties") against any and all losses, claims, damages or liabilities, joint or several, including attorney's fees, to which the Indemnified Parties may become subject, arising out of or related to actions taken or omitted to be taken by an Indemnified Parties in connection with any service rendered, or any Transaction or proposed Transaction contemplated, or any Indemnified Party's role in connection therewith. In this regard, and without limitation, NEOT acknowledges that Brighton is not responsible for the actions of the investor or its agents. NEOT acknowledges that none of the Indemnified Parties is acting as attorney, accountant, or financial advisor to NEOT and that NEOT will seek its own professional advice with respect to the Transaction. Brighton and NEOT agree that the obligations of each of the parties are solely corporate obligations, and that no officer, director, employee, agent or shareholder of either party shall be subjected to any personal liability whatsoever to any person, nor will any claim for liability or suit be asserted by, or on behalf of, either Brighton or NEOT. In the event of any dispute between the parties hereto, the parties Mr. Sam Gulko March 11, 2002 Page 2 of 2 agree to resolve all matters in binding arbitration before the American Arbitration Association in Los Angeles, CA with the prevailing party entitled to reasonable attorney's fees and costs. Mr. Sam Gulko March 11, 2002 Page 2 of 2 This agreement supercedes all other prior agreements between the parties named herein. NEOT agrees not to mention the name of Brighton or its agents in any press release or new announcement without the written consent of Brighton. Please acknowledge your agreement to the terms of this letter by executing a copy of this letter where indicated below and returning it to us by fax at 310-277-6097. Please call me on my private line at 310-277-6092 if you have any questions. By: Brighton Capital, Ltd. By: NeoTherapeutics, Inc. /s/Jeffrey Wolin /s/Sam Gulko - --------------------------- -------------------------------------- Jeffrey B. Wolin, President Sam Gulko, Chief Financial Officer EX-10.48 21 a80481ex10-48.txt EXHIBIT 10.48 EXHIBIT 10.48 SECURITIES PURCHASE AGREEMENT This Securities Purchaser Agreement (the "Agreement") is made as of March __, 2002 by and between _________________ ("Purchaser"), and NeoTherapeutics, Inc. ("Company"), whereby the parties agree as follows: The Purchaser shall buy from the Company and the Company agrees to sell to the Purchaser: (i) _______ shares (the "Shares") of the Company's common stock, par value $.001 per share (the "Common Stock"), at a price of $2.00 per share for an aggregate purchase price of $_________ (the "Purchase Price"), and (ii) a five-year warrant to purchase up to __________ shares of Common Stock (the "Warrant"), at an exercise price of $2.75 per share, in the form attached hereto as Exhibit A. The Shares and the Warrant are being issued and sold pursuant to a registration statement on Form S-3, File No. 333-53108, which registration statement has been declared effective by the Securities and Exchange Commission. The Company is delivering herewith a prospectus supplement on Form 424(b)(5) regarding the issuance and sale of the Shares and the Warrant prior to funding, a copy of which is attached hereto as Exhibit B. The Shares and Warrant are free of restrictive legends and the Shares and the shares of Common Stock issuable upon exercise of the Warrant, when issued upon exercise of the Warrant in accordance with its terms and as described in the prospectus supplement, will be free of any resale restrictions. Prior to the close of business on the date hereof: 1. The Purchaser shall wire the Purchase Price to the Company to the account set forth below. Company Wire Transfer Instructions: Chase Manhattan Bank 1 Chase Plaza New York, NY 10004 ABA # 021 000 021 FBO Salomon Smith Barney A/C # 066-198038 For Further Credit to: Neotherapeutics, Inc. A/C # 561-04051-19-103 2. The Company shall (A) deliver a facsimile copy of the Warrant to the Purchaser at the address for notices set forth below, with the original Warrant to be delivered to such address on the next following business day, and (B) cause its transfer agent to transmit the Shares electronically to the Purchaser by crediting the account set forth below through the Deposit Withdrawal Agent Commission system. Purchaser DWAC Instructions: DTC No.: ------------------------------------ Account No.: -------------------------------- Reference: ---------------------------------- Notices to the Company shall be delivered to: NeoTherapeutics, Inc. Attention: Samuel Gulko Senior Vice President Finance, Chief Financial Officer, Secretary and Treasurer 157 Technology Drive, Irvine, California 92618 Facsimile: (949) 788-6706 Notices to Purchaser shall be delivered to: Purchaser Name: -------------------------------------- Attn: ------------------------------------------- Address: ------------------------------------------- ------------------------------------------- Facsimile: ------------------------------------------- Delivery of an executed copy of a signature page to this Agreement by facsimile transmission shall be effective as delivery of a manually executed copy of this Agreement and shall be effective and enforceable as the original. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed and construed in accordance with the internal laws of the State of California without giving effect to the conflicts of law principles thereunder. AGREED AND ACCEPTED, as of the date indicated above: NeoTherapeutics, Inc. By: -------------------------------------------------- Name: -------------------------------------------------- Title: -------------------------------------------------- Purchaser Name: ----------------------------------------- By: -------------------------------------------------- Name: -------------------------------------------------- Title: -------------------------------------------------- EX-21 22 a80481ex21.txt EXHIBIT 21 EXHIBIT 21 SCHEDULE 21 SUBSIDIARIES OF REGISTRANT -------------------------------------- SUBSIDIARY NAME INCORPORATION DATE - ---------------- ------------- ---- NeoTherapeutics GmbH Switzerland 04-26-97 NeoGene Technologies, Inc. California 10-01-99 NeoOncoRx, Inc. California 11-16-00 NeoTravel, Inc. California 04-05-01 EX-23 23 a80481ex23.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference into the Company's previously filed Registration Statements of Forms S-1 (Nos. 333-89153, 333-79935), Forms S-3 (Nos. 333-64444, 333-64432, 333-60966, 333-53108, 333-51388, 333-42852, 333-38710, 333-37180, 333-92855, 333-73009, 333-52331, 333-37585) and Forms S-8 (Nos. 333-54246, 333-30345, 333-30321), of our report dated March 27, 2002, included in NeoTherapeutics, Inc.'s Form 10-K for the year ended December 31, 2001. Orange County, California April 1, 2002 EX-99.1 24 a80481ex99-1.txt EXHIBIT 99.1 Exhibit 99.1 Letter of Arthur Andersen Representation Exhibit 99.1 Letter of Arthur Andersen Representation To the Securities and Exchange Commission: We received a letter from Arthur Andersen, dated April 1, 2002, representing that the audit was subject to their quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Andersen personnel working on the audit and availability of national office consultation, and availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the audit. Very truly yours, /s/ Samuel Gulko Samuel Gulko Chief Financial Officer Irvine, California April 1, 2002 -----END PRIVACY-ENHANCED MESSAGE-----