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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, 1996,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
COMMISSION FILE NUMBER: 0-27406
CONNECTIVE THERAPEUTICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3173928
(State or other (I.R.S.
jurisdiction of Employer
incorporation or Identification
organization) No.)
3400 WEST BAYSHORE ROAD, PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (415) 843-2800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
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 than 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. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $42,702,270 as of February 28, 1997, based
upon the closing sale price on the Nasdaq National Market reported for such
date. Shares of Common Stock held by each officer and director and by each
person who owns 5% of more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 9,084,896 shares of Registrant's Common Stock issued and
outstanding as of February 28, 1997.
The "C with interlocking hemisphere" logo (used alone and with the
Company's name), "Connective", "ConXn(TM)" and "Ridaura(R)" are trademarks of
the Company. All other tradenames and trademarks appearing in this Prospectus
are the property of their respective holders.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 14, 1997.
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PART I
ITEM 1. BUSINESS
Special Note: Except for the historical information contained therein,
the following discussion consists of forward-looking statements that involve
risks and uncertainties that could cause actual results or events to differ
materially from those in such forward-looking statements. Potential risks and
uncertainties include, without limitation, those factors below under the heading
"Additional Factors That May Affect Future Results."
Connective Therapeutics, Inc. ("Connective" or the "Company") acquires,
develops and markets products in the areas of rheumatology and dermatology. The
Company is specifically focused on commercialization of novel therapies and has
accumulated an extensive portfolio of late stage development products through
acquisition and in-licensing strategies. With the acquisition of Ridaura(R) in
December 1996, its first marketed product for rheumatoid arthritis, the Company
is developing market franchises in the United States using its own sales force
and plans to work with partners to commercialize its products in markets outside
the U.S.
In March 1997, the Company's Board of Directors approved a change of
the Company's name to "Connetics Corporation." This name change is subject to
the approval of the Company's stockholders at its annual meeting in May 1997.
Since its founding in 1993, Connective has rapidly built its product
pipeline through acquisition and in-licensing of currently marketed and late
stage development products. Focused exclusively on connective tissue and
autoimmune diseases, the Company has identified markets with high medical needs
and significant commercial potential, but which the Company believes are
presently underserved and lacking new products and technologies. The indications
or conditions addressed by the Company include atopic dermatitis, keloids,
scleroderma, multiple sclerosis, rheumatoid arthritis, and psoriasis. Patients
suffering from these conditions experience a variety of chronic problems
depending on the particular condition, including excessive uncontrollable
itching, extensive rashes and lesions, hardening of the skin and internal
organs, severe scarring and lack of mobility. The most severe of these diseases
cause painful disfigurement, disability and, in certain cases, death. The
Company estimates that over six million Americans suffer from its targeted
diseases in various forms, with over five billion dollars spent annually on
treatments that are mostly palliative in nature. Although individually these
diseases have been the subject of various independent research programs, no
concentrated effort has been aimed at developing this market segment as a whole.
Connective's mission is to meet the needs of patients suffering from connective
tissue and autoimmune diseases and to become a major force in providing
therapeutic alternatives for these diseases which are predominantly treated by
rheumatologists and dermatologists.
With the acquisition in December 1996 of U.S. and Canadian rights to
Ridaura(R), an established treatment for rheumatoid arthritis, from SmithKline
Beecham Corporation, Connective was able to immediately
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enter the rheumatology market. The Company is currently building a market
presence within its target markets and expects sales from Ridaura(R) to help
fund the establishment of its sales and marketing organization. The Company's
strategy is to further build its sales, marketing and distribution expertise
with the acquisition of additional marketed products, and future new product
introductions from its development pipeline. There are approximately 10,000
rheumatologists and dermatologists in the United States, a concentrated
physician base that the Company believes can be effectively targeted with a
focused sales force. The Company plans to strategically position field sales
representatives in large metropolitan areas with high concentrations of target
physicians, and the Company's marketing team will supplement sales efforts with
both national and regional promotion programs.
The Company's development portfolio consists of four products. Gamma
interferon 1(b) ("gamma interferon") is in Phase III testing for the treatment
of atopic dermatitis and Phase II testing for keloids. Betamethasone mousse will
be evaluated in a Phase III clinical trial expected to commence in 1997 for the
treatment of scalp psoriasis. ConXn(TM) (recombinant human relaxin H2)
("relaxin") is in Phase II testing for the treatment of scleroderma. T-cell
receptor peptide vaccines ("TCR vaccines") are being evaluated in a Phase I/II
trial for multiple sclerosis and preclinical studies for rheumatoid arthritis.
BACKGROUND
Connective tissue is composed of cells (such as fibroblasts) and the
extracellular matrix (such as collagen-containing fibers) produced by these
cells. Organs of the body such as lungs, kidneys and skin function normally in
part because of the precise three-dimensional arrangement of specialized cells
within a connective tissue framework. Alterations in this framework affect organ
function.
DISEASES INVOLVING CONNECTIVE TISSUE
Inflammation
Inflammation is a natural response to tissue injury and is necessary
for normal healing. During normal wound healing, tissue repair follows an
orderly progression of immune cell infiltration, new blood vessel formation and
connective tissue deposition and remodeling. Under abnormal conditions,
inappropriate regulation of the immune cells results in either local or
widespread tissue injury. Many disorders associated with inflammation occur in
response to an unknown stimulus that misdirects the inflammation process against
normal tissue. This lack of appropriate regulation generally results in chronic,
progressive disease conditions that may ultimately lead to dysfunction or
destruction of the affected organ system.
As an example, atopic dermatitis is a common inflammatory skin disease
resulting in incessant itching, extensive rashes and lesions and, in its severe
form, can cause physical disfigurement, occupational disability and
psychological trauma. Severe chronic atopic dermatitis may also result in
hospitalization and days lost from work and school. Although the primary cause
of atopic dermatitis is unknown, substantial evidence suggests that excessive
production of IgE (a type of antibody) directed to both food and inhalant
allergens contributes to the pathogenesis of the
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disease. Recent market studies have suggested that over 1,800,000 individuals in
the U.S. suffer from atopic dermatitis, generating approximately 1,000,000
office visits per year. It is estimated that approximately 200,000 patients
suffer from the severe form of the disease. Atopic dermatitis is treated
primarily by dermatologists. Current treatments, consisting largely of topical
corticosteroids, emollients and antihistamines to control itching, have been
less than satisfactory. Patients with severe disease receive some benefit from
systemic corticosteroids, but this therapy is associated with significant
long-term side effects. Should bacterial infection occur in these patients,
antibiotic therapy is typically initiated and requires the patient to be
hospitalized.
Abnormal Remodeling
Connective tissue undergoes constant turnover through a normal
remodeling process that links the breakdown of the collagen-based extracellular
matrix with the synthesis of new collagen. The body's ability to regulate this
process normally keeps the amount of connective tissue, which is 95% collagen,
in balance. When this balance is broken, as in the case of certain chronic
diseases, the result can lead to the increase in or breakdown of collagen. Both
excessive formation or destruction of connective tissue can result in serious
disease. There is currently no approved therapy that has been documented to have
significant beneficial effect on the clinical course of abnormal remodeling.
As an example, the overproduction of collagen can result in keloid
formation, hypertrophic scarring and severe systemic disorders, such as
scleroderma and pulmonary fibrosis. Keloids and hypertrophic scars are abnormal
healing responses that occur in the skin, resulting in large, painful, elevated
scars that are unattractive in appearance. There are approximately 300,000
patients treated by dermatologists and plastic surgeons for keloids every year.
Scleroderma is one of the most serious diseases involving the uncontrolled
formation of connective tissue. Approximately 300,000 individuals, primarily
women, suffer from various forms of this disease, with approximately 60,000
having severe, or diffuse scleroderma. In its most severe form, the disease has
a five year mortality rate in 50-70% of cases. Scleroderma is primarily treated
by rheumatologists. Currently there is no cure for this fatal disease and few
therapies ease the pain and suffering of scleroderma patients. Pulmonary
fibrosis represents a group of diseases associated with chronic inflammation and
increase in fibrotic tissue in the walls of the alveolar spaces in the lung.
Ultimately, these diseases result in scarring of lung tissue, impairment of lung
function, and in many cases, death. Approximately 144,000 individuals suffer
from pulmonary fibrosis. Pulmonary fibrosis is primarily treated by
pulmonologists, oncologists and rheumatologists.
Autoimmune Disorders
Connective tissue can also be attacked by various T cell-mediated
autoimmune diseases. Autoimmune diseases are generally believed to result from
an inappropriate response of the immune system. The immune system is the body's
major biological defense mechanism, first distinguishing antigens (foreign
substances) from the body's tissue and then eliminating a wide variety of
disease-causing antigens, such as bacteria and viruses. A major component of
this system are T cells. In many autoimmune diseases, these T cells go awry and
attack the body's healthy tissues. There is mounting evidence that these
disease-causing T cells are concentrated at the disease site, where they
initiate signals leading to tissue destruction. The mechanism
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responsible for causing these T cells to attack healthy tissue has, for the most
part, not been identified. Autoimmune diseases can attack virtually any tissue
or organ of the body, are often debilitating and can be fatal.
For example, rheumatoid arthritis is an autoimmune disease that
attacks the connective tissue in the joints. Rheumatoid arthritis is a chronic
disease in which the body's immune system leads to an attack on synovial tissue,
resulting in progressive, painful inflammation and destruction of the joints. In
advanced stages of the disease, symptoms include severe pain, body disfigurement
and loss of mobility. It is estimated that between one and two percent of the
adult U.S. population, or more than two million individuals, have rheumatoid
arthritis. Women are three times more susceptible than men. No current therapy
cures the disease and often its progression cannot be stopped. The efficacy of
currently used drugs tends to be directly correlated with systemic toxicity.
Rheumatoid arthritis is primarily treated by rheumatologists. Another example of
an autoimmune disease is multiple sclerosis, a chronic inflammatory disease of
the central nervous system in which the body's immune system attacks myelin, a
substance that encircles and insulates nerve fibers. Multiple sclerosis can
result in impaired mobility, visual impairment, slurred speech, poor bladder
control, sexual dysfunction and, ultimately, confinement to a wheelchair.
Approximately 250,000 persons suffer from multiple sclerosis in the United
States. Multiple sclerosis is primarily treated by neurologists. However, none
of the currently available treatments address the underlying cause of the
disease.
CONNECTIVE STRATEGY
The key elements of Connective's strategy include:
- Focus on the Treatment of Serious and Chronic Diseases Involving
Connective Tissue. The Company's products and technologies are focused on the
treatment of diseases involving connective tissues caused by inflammation,
abnormal remodeling and autoimmune disorders. These diseases include serious
skin and skin structure diseases, such as atopic dermatitis and keloids, as well
as scleroderma, organ fibroses, rheumatoid arthritis and multiple sclerosis.
Although individually these diseases have been the subject of various
independent research programs, no concentrated effort has been aimed at the
market segment as a whole, representing significant and currently underserved
therapeutic market opportunities. The Company believes that its focus on
diseases involving connective tissue, combined with its technological and
marketing expertise, maximizes the likelihood of success in rapidly developing
and effectively commercializing products.
- Develop Marketing Organization Targeting Rheumatologists and
Dermatologists. The Company is targeting its commercial activities at
rheumatologists and dermatologists, which can be served by a focused,
specialized marketing organization. Scalp psoriasis, betamethasone mousse's lead
indication, and atopic dermatitis and keloids, gamma interferon's lead
indications, are treated primarily by dermatologists. Scleroderma, ConXn(TM)'s
lead indication, is primarily treated by rheumatologists. With the acquisition
of rights to Ridaura(R), an established treatment for rheumatoid arthritis, the
company was able to enter the U.S. and Canadian rheumatology market in December
1996. As such, the Company's strategy is to target its marketing activities to
the approximately 3,000 rheumatologists and 7,000 dermatologists practicing in
the United States. In
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addition, because these rheumatologists and dermatologists are primarily
concentrated in major metropolitan areas, they can be effectively served by a
relatively small sales force.
- In-License Clinical-Stage and Currently Marketed Products. The
Company expects to continue to in-license and acquire rights to clinical-stage
products and currently marketed products for the treatment of diseases involving
connective tissue. To date, the Company has in-licensed both gamma interferon
and relaxin from Genentech, and has acquired rights to TCR Peptide technology
primarily from Genentech and XOMA Corporation, exclusive license rights to
betamethasone mousse from Soltec Research PTY Ltd., and exclusive U.S. and
Canadian rights to Ridaura(R) from SmithKline Beecham Corporation and related
entities ("SmithKline Beecham"). Increasing consolidation in the pharmaceutical
and biotechnology industries and continuing changes in the health care system
are changing the way therapeutic products are developed and marketed. As a
result, the Company believes there are significant opportunities to in-license
or acquire additional products from pharmaceutical companies that are not being
developed or optimally promoted by these companies or do not fit in the present
business strategy of such companies, or from research and academic institutions.
The Company believes it is well-positioned to expand its product portfolio by
licensing such products because of its market focus, complementary products in
development and relevant management experience in product development and
marketing. The Company believes that this strategy can result in accelerated
development and commercialization of novel products to treat serious diseases
involving connective tissue at significantly lower capital requirements than
most biotechnology companies while minimizing the Company's exposure to the
risks inherent in drug discovery and basic research.
- Leverage Platform Technology and Products for Additional Indications.
The Company is leveraging its product pipeline by developing its products for
multiple indications targeted at its strategic markets. In addition, the Company
believes ConXn(TM) and its TCR Peptide technology can be developed for uses
outside its strategic markets. Such uses include burn scarring and ophthalmic
fibrosis for ConXn(TM), and inflammatory bowel disease and Type 1 diabetes for
TCR Peptides. To target such uses, the Company plans to either retain such
products in-house or license them to third parties.
- Utilize Corporate Partnerships to Pursue Additional Markets. In its
strategic markets, the Company plans to retain commercial rights to its products
in North America and to enter into corporate partnerships with respect to
additional market segments in North America and international markets. This
strategy will allow the Company to pursue additional therapeutic markets, offset
near term development costs and enter international markets. The Company intends
to pursue collaborative relationships to provide funding and consulting support
for the Company's research and development programs and to assist in the
clinical and regulatory development and commercialization of specific products
outside of North America.
- Minimize Drug Discovery and Manufacturing Costs. The Company has
sought to minimize the costs of drug discovery and manufacturing by in-licensing
later-stage development and currently marketed products, outsourcing
manufacturing and utilizing research collaborators and consultants. To date, the
Company's clinical supplies have been manufactured by third parties
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on a contract basis. The Company also initially intends to use third parties for
the manufacture of its commercial products, including Ridaura(R), which is being
manufactured for the Company by SmithKline through December 2001. The Company
believes it will be able to minimize costly infrastructure by continuing to use
external resources where appropriate.
PRODUCT DEVELOPMENT
The Company has products in various stages of development as
illustrated in the table below:
<TABLE>
<CAPTION>
PRODUCT INDICATION DEVELOPMENT STATUS
------- ---------- ------------------
<S> <C> <C> <C>
Gamma Interferon Severe Atopic Dermatitis Phase III
Keloids Phase II
ConXn(TM) Scleroderma Phase II
TCR Peptide vaccine Multiple Sclerosis Phase I/II
TCR Peptide vaccine Rheumatoid Arthritis Preclinical
Betamethasone mousse Psoriasis Phase III scheduled in 1997
</TABLE>
Gamma Interferon Development Program
Gamma interferon is a member of a family of proteins involved in the
regulation of the immune system, and has been shown to be effective in the
treatment of certain immune-mediated diseases. Gamma interferon is an FDA
licensed product, manufactured and marketed by Genentech for an orphan disease,
chronic granulomatous disease (CGD). Gamma interferon also has been shown to
inhibit the production of IgE (a type of antibody) and collagen. Because of
these biological properties, the Company is developing gamma interferon for use
in the treatment of atopic dermatitis and keloids.
Atopic Dermatitis. Atopic dermatitis is a common inflammatory skin
disease. Although the primary cause of atopic dermatitis is unknown, evidence
suggests that excessive production of IgE contributes to the pathogenesis of the
disease. Severe atopic dermatitis, targeted by the Company, may result in
hospitalization for control of skin disease and infection, physical
disfigurement, occupational disability, work and school days lost and
psychological trauma. Recent market reviews have suggested that over 1,800,000
individuals suffer from atopic dermatitis, generating approximately 1,000,000
office visits per year. It is estimated that approximately 100,000 patients
suffer from the severe form of the disease. Current treatments provide only
modest benefits and are associated with significant long-term side effects.
In vitro studies have shown that gamma interferon can inhibit the
production of IgE. In addition, published reports indicate that patients with
atopic dermatitis produced decreased endogenous gamma interferon. Because of
these observations, several initial clinical studies were performed, including a
Phase I/II pilot study conducted by Genentech to assess the tolerance, safety,
and efficacy of gamma interferon in reducing clinical severity of skin disease
in 22 patients with atopic dermatitis. Overall, there was a progressive and
significant reduction in total clinical severity of atopic dermatitis observed
in these studies. Genentech also provided material for a placebo controlled
Phase II trial in 83 patients with severe atopic dermatitis. Patients receiving
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gamma interferon experienced a statistically significantly greater improvement
in atopic dermatitis, compared with those in the placebo group. Gamma interferon
treatment benefit was also demonstrated by a reduction in itching and in the
severity of associated atopic conditions. Treatment was well tolerated, without
evidence of significant toxicity. Several patients continued to receive gamma
interferon therapy for more than two years, with no evidence of significant
drug-related clinical or laboratory toxicity. Based on these studies, the
Company commenced a Phase III clinical trial in 1996 for the use of gamma
interferon in the treatment of severe atopic dermatitis.
Keloids. Keloids are abnormal healing responses caused by excess
collagen production, and typically occur in the skin of susceptible individuals
resulting in large, painful, elevated scars which are usually unattractive in
appearance. There are approximately 300,000 patients treated by dermatologists
and plastic surgeons for keloids every year. Although existing therapies are
potentially efficacious, recurrence after therapy is frequent.
In vitro studies have shown that gamma interferon can inhibit collagen
synthesis and production. Phase I/II trials conducted by independent
investigators in collaboration with Genentech have shown preliminary results
indicating that gamma interferon may be efficacious in the treatment of keloids
and hypertrophic scars. One study involved ten patients who received
intralesional therapy (injection directly into the keloid) for keloids or
hypertrophic scars. At 18 weeks, five of ten keloids or scars decreased by 50%
or more. Therapy was well tolerated and all patients completed the ten week
course of treatment. Another placebo-controlled study of intralesional therapy
was conducted in ten patients with keloids. Six of eight patients completing the
study showed clinically significant responses in reduction of the size of gamma
interferon-treated keloids, as compared to the placebo-treated keloids. In
addition, another patient had a keloid surgically excised and then the site of
excision was injected with gamma interferon; this patient also showed
significant improvement in the gamma interferon-treated keloid at one year of
follow-up. Therapy was well tolerated with no dosage reductions or patient
terminations due to adverse effects of treatment. Based on this in vitro and
clinical information, the Company initiated a Phase II clinical trial in 1996 to
demonstrate the efficacy of gamma interferon therapy in patients with keloids.
ConXn(TM) Development Program
ConXn(TM) is a naturally occurring peptide hormone that promotes
remodeling of connective tissues. Research by two of the Company's founders and
their colleagues has shown that ConXn(TM) can inhibit excessive connective
tissue formation and promote connective tissue remodeling through at least three
mechanisms: inhibiting the production of collagen by fibroblasts, increasing the
production of collagenase (the enzyme that breaks down collagen) and decreasing
the production of TIMP (a protein that blocks collagenase action). These results
have been confirmed by in vitro studies and in vivo animal models of human
disease. ConXn(TM) can now be produced in significant quantities by outside
contractors using the Company's recombinant manufacturing techniques. Connective
is currently developing the recombinant form of ConXn(TM) for use in the
treatment of scleroderma and other fibrotic conditions, including organ fibrosis
and fibromyalgia.
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Scleroderma. Scleroderma, sometimes referred to as systemic sclerosis,
is a generalized disorder of connective tissue characterized clinically by
thickening and fibrosis of the skin and internal organs, including the heart,
lungs, kidneys and gastrointestinal tract. Although the underlying cause of this
disease is unknown, the overproduction and accumulation of collagen and other
extracellular matrix proteins in skin and other organs often leads to severe and
painful disfigurement, quality of life impairment, dysfunction of vital organs
and death. There are in excess of 300,000 individuals suffering from
scleroderma, with a five-year mortality rate of 50-70% in the most severe cases
of the disease. There are no effective treatments for this disease; current
therapies are directed to alleviating the symptoms of the disease, not the
underlying cause.
The Company has completed a Phase I/II clinical trial for recombinant
human ConXn(TM) in patients with scleroderma. This study examined the safety and
pharmacokinetics of continuous subcutaneous infusion of ConXn(TM) for 28 days at
five different dose levels compared to placebo. Thirty patients with a history
of at least two years with systemic sclerosis were enrolled in a randomized,
double-blind, placebo-controlled trial. Administration of ConXn(TM) was well
tolerated through 28 days at all dose levels. In addition, during global
assessments performed at the end of the study, ten of 20 patients receiving
ConXn(TM) reported improvement versus two percent receiving placebo. No serious
adverse events were observed and no patients dropped out of the study. These
safety and pharmacokinetic observations support continued clinical evaluation of
ConXn(TM) for the treatment of scleroderma. The Company completed enrollment in
a Phase II clinical trial in patients with scleroderma in September 1996.
The Company has been granted Orphan Drug Status for ConXn(TM) for
treatment of progressive systemic sclerosis, a severe form of scleroderma. In
the United States, the Orphan Drug Act of 1983 provides incentives to drug
manufacturers to develop and manufacture products for the treatment of rare
diseases, currently defined as diseases that affect fewer than 200,000
individuals in the United States, or for a disease that affects more than
200,000 individuals in the United States where the sponsor does not
realistically anticipate its product becoming profitable. Under the Orphan Drug
Act, a manufacturer of a designated orphan product can seek certain tax
benefits, and the holder of the first FDA approval of a designated orphan
product will be granted a seven-year period of marketing exclusivity for that
product for the orphan indication. While the marketing exclusivity of an orphan
drug would prevent other sponsors from obtaining approval of the same product
for the same indication, it would not prevent other types of products from being
approved for the same use. The U.S. Congress has considered and may consider in
the future, legislation that would restrict the duration of the market
exclusivity of an orphan drug and, thus, there can be no assurance that the
benefits of the existing statute will remain in effect.
In addition to scleroderma, the Company believes ConXn(TM) may have
potential in treating fibromyalgia and organ fibroses, such as pulmonary
fibrosis. Fibromyalgia is a rheumatic disorder which is believed to affect
approximately two percent of the population in United States. The disease is
characterized by achy pain, tenderness and stiffness in muscles. The condition
occurs mainly in females and may be induced by physical or mental stress, poor
sleep, trauma or exposure to dampness or cold.
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Pulmonary Fibrosis. Pulmonary fibrosis, also known as interstitial lung
disease, represents a group of diseases associated with chronic inflammation and
excessive production of collagen in the walls of the alveolar spaces in the
lung. Approximately 144,000 individuals suffer from this disease. In the case of
idiopathic pulmonary fibrosis the underlying cause of the fibrosis is unknown,
while other cases may be associated with another disease process, such as
scleroderma, or due to exposure to toxic drugs or environmental agents. Current
therapy for pulmonary fibrosis consists of corticosteroids and cytotoxic drugs
such as cyclophosphamide, which, when utilized, are largely ineffective.
In vitro studies have shown that ConXn(TM) inhibits the production of
collagen by stimulated lung fibroblasts by up to 44%. In an animal model to test
the ability of ConXn(TM) to inhibit lung fibrosis in vivo, ConXn(TM)
substantially inhibited the onset of lung fibrosis.
T-Cell Receptor ("TCR") Peptide Development Program
The Company is also developing TCR Peptide vaccines to arrest the
autoimmune disease process by boosting the naturally occurring control arm of
the immune system that functions inefficiently in immune-mediated diseases.
Connective has two TCR vaccine programs in development, one for multiple
sclerosis and one for rheumatoid arthritis.
Multiple Sclerosis. Multiple sclerosis is an autoimmune disease of the
central nervous system that results from damage to myelin, a substance that
encircles and insulates nerve fibers. Multiple sclerosis can result in impaired
mobility, visual impairment, slurred speech, poor bladder control, sexual
dysfunction and, ultimately, confinement to a wheelchair. Approximately 270,000
persons suffer from multiple sclerosis in the United States. The cost of
treatment in the United States alone is estimated to be $270 million in 1995 and
is expected to grow to $1.7 billion worldwide by 1999. However, none of the
currently available treatments address the underlying cause of the disease.
A placebo-controlled, double-blind, randomized, physician sponsored TCR
vaccine Phase I trial involving 11 patients and a Phase I/II trial involving 23
patients with progressive multiple sclerosis were conducted by an independent
clinical investigator in association with the Company. Results from these trials
suggest that a number of patients achieved the desired immune response to the
vaccine, that the vaccine was well tolerated and that patients who had the
desired immune response experienced a stabilization of disease without side
effects during one year of therapy. Successful peptide vaccination boosted
protective T-cells and lowered pathogenic T-cells thought to cause the disease.
In December 1996, the Company initiated a 100 patient Phase I/II clinical trial
of TCR vaccines for the treatment of multiple sclerosis, and expects results
from this study to be available by the end of 1997.
Rheumatoid Arthritis. Rheumatoid arthritis is a chronic disease in
which the body's immune system attacks synovial tissue in joints, resulting in
progressive, systemic and painful inflammation. In advanced phases of the
disease, symptoms include severe pain, body disfigurement and loss of mobility.
The cause of rheumatoid arthritis is unknown, though
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environmental toxins, certain pathogens and genetic factors have been
implicated. It is estimated that between one and two percent of the worldwide
adult population, including approximately three million individuals in the
United States, suffer from rheumatoid arthritis and about one-half of these will
progress to severe disease. Women are three times more susceptible than men.
Current treatment for rheumatoid arthritis uses a combination of drugs and
physical and occupational therapy in an attempt to prevent further joint damage.
None of these therapies stops progression completely or reverses the damage.
At the tissue level, there is mounting evidence to suggest that T-cells
present at the sites of inflammation cause fibroblast dysfunction that leads to
destruction of the joint capsule. Company investigators have analyzed the
frequency of T-cells with certain types of receptors in patients with rheumatoid
arthritis. Through such studies the Company has identified peptides which mimic
these receptors and which may be useful as therapeutic vaccines. Company
investigators and their collaborators have performed parallel studies in animal
models of arthritis in which disease relevant T cells with specific receptor
configurations have been defined. Therapeutic vaccines based upon the relevant
protein sequences were produced and demonstrated to control the disease process.
Based on these studies the Company intends to initiate in 1997 a pilot clinical
trial of TCR vaccines for rheumatoid arthritis.
Betamethasone mousse program
In June 1996, the Company signed an agreement with Soltec Research PTY
Ltd. which granted Connective an exclusive license to develop and market
betamethasone mousse in North America. The product is being marketed in the
United Kingdom by Evans Medical Ltd., a division of Medera PLC. Betamethasone
mousse is a mousse formulation of betamethasone 17-alpha-valerate, a
corticosteroid currently marketed in the U.S. for the treatment of scalp
psoriasis. The foam formulation has been shown to liquify when applied to the
body, enabling rapid penetration of active dermatologic agent. This formulation
is designed to be easier to apply and less messy than currently marketed scalp
lotions and gels. In addition, the ease of use and patient acceptibility may
enhance patient compliance.
Psoriasis. Psoriasis, a chronic, recurrent dermatologic disease
characterized by inflammation and thickening of the skin, is estimated to affect
over 5 million people in the U.S. Scalp psoriasis, a distinct manifestation of
psoriasis, is a serious problem for more than 60 percent of psoriatics. Over 1.2
million patients are in treatment at any time in the United States. Patients
with scalp psoriasis suffer from various degrees of erythema, scaling and
itching associated with the disease, and the disease course typically involves
periods of remission followed by acute exacerbations. In a comparative clinical
trial of betamethasone mousse against placebo in scalp psoriasis patients in the
U.K., patients treated with betamethasone mousse showed statistically
significant improvement in erythema (redness), scaling and plaque. The product
was well tolerated and no adverse systemic effects were noted. The Company
expects to commence in 1997 a Phase III clinical trial for betamethasone mousse,
which if successful, could lead to the submission of a New Drug Application for
marketing the product in the United States.
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ADDITIONAL PRODUCTS AND RESEARCH PROGRAM
Connective has established a methodology for identifying and isolating
disease-causing T cells, which the Company may use to develop additional
products based on its TCR technology to treat diseases such as inflammatory
bowel disease, psoriasis and type I diabetes. The TCRs from relevant T cells are
analyzed and the resulting DNA sequence information is used to chemically
synthesize therapeutic vaccine peptides. The Company believes that these TCR
Peptides can be administered to the patient as a disease-specific immune booster
to halt the progress of the autoimmune disease. The Company further believes
that, because TCR Peptides selectively inhibit only certain T cells, side
effects resulting from general, non-specific immunosuppression can be avoided.
The Company is investigating the applicability of ConXn(TM) for other
indications, such as burn scarring, fibrotic adhesions and ophthalmic fibrosis.
Also ongoing are research efforts in the areas of formulation, routes of
administration and assays for research and clinical uses. The Company continues
to explore mechanisms of disease and autoimmune processes and to develop
analogs, derivatives and molecules related to its products and fields of
interest. In this manner, the Company intends to maintain its position as a
leader in the understanding of autoimmune and connective tissue diseases and
treatment of these diseases, as well as develop second generation products and
technology to enhance its product pipeline.
In addition to acquiring Betamethasone mousse, the Company also
received rights to the foam delivery technology which can be used to transform
steroids and other agents into more convenient, patient-friendly systems. The
Company plans to use this technology as a platform from which a pipeline of
innovative therapies could potentially be spawned.
MARKETED PRODUCT
Ridaura(R)
On December 31, 1996, the company acquired the exclusive U.S. and
Canadian rights to Ridaura(R) from SmithKline Beecham Corporation and related
entities ("SmithKline"). Ridaura(R) is an oral formulation of a gold salt
(auranofin). Also classified as a disease-modifying antirheumatic drug,
Ridaura(R) has been shown to slow the progression of rheumatoid arthritis and is
believed to slow joint destruction. The drug is currently indicated for adults
with active rheumatoid arthritis who are not responsive to, or are intolerant
of, treatment with non-steroidal anti-inflammatory drugs.
Rheumatoid arthritis. Rheumatoid arthritis is an autoimmune disease
that afflicts one to two percent of adult Americans (approximately 3 million
patients), with women three times more susceptible than men. It is characterized
by inflammation of synovial tissues with joint pain, swelling and stiffness.
Although autoimmune arthritis can afflict children and adolescents, the disease
usually strikes adults between the ages of 30 and 40, and the incidences of
clinical illness is greatest among those aged 40 to 60 years. Rheumatoid
arthritis is an extremely disabling disease that carries a high degree of
morbidity.
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Ridaura(R) is currently being distributed by SmithKline on behalf of
the Company. Connective expects to begin marketing Ridaura(R) through its own
sales force by mid-1997. Through agreements with SmithKline, customer orders and
distribution for the product will continue to be managed by SmithKline through
1997 and SmithKline will manufacture and supply Ridaura(R) (in final finished
package form) to the Company for an initial term through December 2001.
COLLABORATIVE RELATIONSHIPS
The Company's initial products were licensed from Genentech and XOMA.
As part of its business strategy, the Company has entered into and continues to
explore strategic collaborative relationships and consulting agreements with
leading researchers and institutions working in its fields of interest, to
complement its internal research efforts and provide access to technologies that
complement and expand its existing portfolio. The Company is seeking
collaborative agreements with pharmaceutical companies as sources of additional
products and as partners for the development and marketing of existing products.
See "-- Connective Strategy," "-- Marketing and Sales."
Genentech. In September 1993, Genentech and Connective entered into a
license agreement (the "September 1993 Agreement") pursuant to which Connective
obtained exclusive worldwide rights to relaxin (excluding reproductive
indications and the territories of Japan, Korea and the Republic of China),
including rights licensed to Genentech from the Howard Florey Institute of
Experimental Physiology and Medicine in Melbourne, Australia. Connective also
has rights to future developments regarding relaxin. The September 1993
Agreement also includes a worldwide exclusive license to certain TCR Peptide
technologies and a right of first negotiation for gamma interferon's connective
tissue disease indications, which, along with relaxin, had been the subject of
research by one of Connective's founders, Dr. Amento, during his tenure at
Genentech. The Company is obligated to pay royalties on licensed product sales.
In addition, Genentech received an equity position in the Company. The September
1993 Agreement also includes certain technology transfer, supply, and
intellectual property provisions. The Company is responsible for meeting certain
milestones and making payments for supplies provided under the September 1993
Agreement. Failure to timely achieve designated milestones may result in
termination of the agreement by Genentech and a license on a non-exclusive basis
to Genentech of relaxin technology developed by the Company.
In July 1994, Genentech and Connective amended the September 1993
Agreement to clarify the Company's right to sub-license the relaxin technology,
subject to a right of first offer held by Genentech. The Company's rights to
relaxin were expanded to include reproductive indications on a co-exclusive
basis with Genentech. In April 1996, the Company acquired rights to Japan,
Korea and the Republic of China from Genentech, thereby giving the Company
worldwide rights to the technology.
In December 1995, Genentech and Connective entered into an agreement
(the "December 1995 Agreement") with respect to gamma interferon pursuant to
which the Company has acquired exclusive development and marketing rights in the
United States for dermatologic indications. The
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<PAGE> 14
December 1995 Agreement includes supply provisions on the part of Genentech and
obligates the Company to pay for such supply, providing for a profit margin and
an allowance for the Company's expenses in developing and marketing the product.
XOMA. In June 1994, Connective entered into an agreement with XOMA
Corporation (the "XOMA Agreement") pursuant to which the Company acquired
additional TCR Peptide technology and patent rights. The XOMA Agreement
obligates the Company to make certain milestone payments and to pay certain
royalties on sales of TCR Peptide vaccine products. The Company's failure to
meet certain milestones may result in the acquisition by XOMA of a co-exclusive
royalty-free license to the TCR Peptide technology with the right to sublicense.
Pursuant to the agreement, the Company issued to XOMA a warrant to purchase
shares of preferred stock which expired upon the closing of the Company's
initial public offering in February 1996.
Arthur A. Vandenbark, Ph.D. (Veterans Administration Medical Center,
Portland, Oregon). In July 1994, the Company entered into a Research
Collaboration and Assignment Agreement with Dr. Vandenbark, the inventor of the
patent rights acquired from XOMA, to establish a framework for a three-year
scientific collaboration relating to the development of the TCR Peptide
vaccines. The agreement provides that the Company pays the Portland Veterans
Affairs Research Foundation in order to fund the collaborative research, gives
the Company access to future inventions and know-how, and obligates the Company
to make certain royalty payments on sales of products not already covered by the
XOMA Agreement. In addition, the Company granted to Dr. Vandenbark options to
purchase the Company's Common Stock, which vest upon the achievement of certain
milestones.
North Shore University Hospital (Peter Gregersen, Ph.D.). In January
1995, the Company entered into a Research and License Agreement with North Shore
University Hospital Research Corporation to establish a collaborative research
program expanding upon an existing consulting relationship with Dr. Peter
Gregersen in the area of T cell receptor analysis and use in the diagnosis and
treatment of disease. The agreement provides funding for collaborative research,
gives the Company access to inventions and know-how, and obligates the Company
to make certain royalty payments on sales of products covered by licensed
patents.
Medical University of South Carolina (Christian Schwabe, Ph.D.). In
April 1995, the Company entered into a Collaborative Research Agreement with the
Medical University of South Carolina to establish a collaborative research
program expanding upon an existing consulting relationship with Dr. Christian
Schwabe in the area of relaxin research, including the biology, receptors,
synthesis and activities of relaxin, the genes encoding relaxin, relaxin
peptides, analogs and related compounds. The agreement provides funding for
collaborative research, gives the Company access to future inventions and
know-how, and obligates the Company to make certain royalty payments on sales of
products covered by licensed patents.
Soltec. In June 1996, the Company entered into an exclusive License
Agreement with Soltec Research PTY Ltd. to develop and market betamethasone
mousse (a foam mousse
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<PAGE> 15
formulation of the dermatologic drug, betamethasone valerate) in North America.
Under the terms of the Agreement, the Company will pay a licensing fee to
Soltec, plus royalties on future sales of products, if any, arising from the
licensed technology. The Company also has an exclusive option on Soltec's foam
mousse system for the delivery of other compounds.
SmithKline Beecham. In December 1996, the Company entered into an
agreement with SmithKline Beecham under which the Company acquired exclusive
United States and Canadian rights to Ridaura(R), a disease modifying
antirheumatic drug. Ridaura(R) is currently being distributed by SmithKline on
behalf of the Company. Connective expects to begin marketing Ridaura(R) through
its own sales force by mid-1997. Through agreements with SmithKline, customer
orders and distribution for the product will continue to be managed by
SmithKline through 1997 and SmithKline will manufacture and supply Ridaura(R)
(in final finished package form) to the Company for an initial term through
December 2001.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on the ability of Connective
and its licensors to obtain patent protection for the Company's products and
processes, to preserve its trade secrets, and to operate without infringing the
proprietary rights of third parties. The Company owns, controls or has
exclusively licensed pending applications and/or issued patents worldwide
relating to the technology of all three of its major programs as well as
technology in the earlier stages of research.
The Company's gamma interferon patent portfolio includes issued
U.S. patents and other pending applications relating to the composition of
matter, formulations and methods of treatment, which do not begin to expire
until 2009. The Company's relaxin patent portfolio relates to the composition of
matter (proteins and DNA), analogs and closely related compositions,
formulations, methods of manufacture and methods of treatment, including issued
patents in the U.S. with various international equivalents in addition to other
applications that remain pending. The issued relaxin patents will expire at
various times between 2003 and 2012. The Company's TCR Peptide patent portfolio
includes pending applications in the U.S., and a corresponding international
patent and applications, relating to compositions of matter (peptides, peptide
analogs, peptide fragments, and antibodies), formulations, methods of treatment,
diagnostic methods, and methods of preparing/isolating protective T cells. Two
issued international patents (Australia and Israel) expire in 2010, and patents
issuing on the pending U.S. and international applications would expire at
various times beginning in 2010. Extensions may be available for certain key
patents in the U.S. and Europe (subject to statutory changes before product
approval). See "-- Collaborative Relationships."
There has been increasing litigation in the biomedical, biotechnology
and pharmaceutical industries with respect to the manufacture, use and sale of
new therapeutic products that are the subject of conflicting patent rights. The
validity and breadth of claims in biomedical/pharmaceutical/biotechnology
patents involve complex factual and legal issues for which no consistent policy
has emerged, and therefore, are highly uncertain. Moreover, the patent laws of
foreign countries differ from those of the U.S. and the degree of protection, if
any, afforded by foreign patents may, therefore, be different. In Europe, a
third party appeal is
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<PAGE> 16
pending from an opposition to a patent application concerning relaxin DNA; the
original opposition was successfully defended by the Company's licensor. No
assurance can be given that any of the Company's or its licensors' patent
applications will issue as patents or that any such issued patents will provide
competitive advantage to the Company or will not be successfully challenged or
circumvented by its competitors. In addition, others may hold or receive patents
or file patent applications that contain claims having a scope that covers
products or processes made, used or sold by the Company. In the event that any
claims of third-party patents are upheld as valid and enforceable with respect
to a product or process made, used or sold by the Company, the Company could be
prevented from practicing the subject matter claimed in such patents or could be
required to obtain licenses or redesign its products or processes to avoid
infringement and could be liable to pay damages. There can be no assurance that
such licenses would be available or, if available, would be on commercially
reasonable terms, or that the Company would be successful in any attempt to
redesign its products or processes to avoid infringement.
The Company has become aware that third parties have obtained patents
generally relating to TCR Vaccines technology, including a U.S. patent issued to
Immune Response Corporation on March 18, 1997. With regard to such patents as
are known to the Company and its patent counsel, the Company believes such
patents' claims would be found either invalid or not infringed if asserted
against the proposed TCR Vaccines. The Company is also aware of other pending
third party patent applications which, if issued, might be asserted against the
Company's TCR Vaccines and products or processes as planned to be made, used or
sold by the Company. If such patents were successfully asserted, the Company
could be required to obtain licenses or redesign its TCR Vaccines products or
processes to avoid infringement and could be liable to pay damages, or could be
prevented from commercializing TCR Vaccines. There can be no assurance that such
licenses would be available or, if available, would be on commercially
reasonable terms, or that the Company would be successful in any attempt to
redesign its products or processes to avoid infringement. Even if the Company's
patent counsel render advice that the Company's products and processes do not
infringe any valid claim under third party patents relating to the TCR Vaccines
technology, neither they nor the Company can assure that no third party will
commence litigation to enforce such patents, or that the Company will not incur
substantial expenses or that it will prevail in any patent litigation. Moreover,
patent applications in the U.S. are maintained in secrecy until issue, and
publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, so the Company cannot be certain that it is aware of
all potentially relevant pending applications and it is not possible to predict
with any certainty the scope of claims that could issue from such a third
party's pending application. The Company anticipates that an interference will
be declared between one or more of its TCR Peptide technology patent
applications and those of one or more of its competitors including the
above-references patent of Immune Response Corporation to determine priority of
invention, which could result in substantial cost to the Company even if the
eventual outcome is favorable. It is not possible to know in advance the
invention dates that such other parties may be able to prove, so the Company
cannot know whether its or its licensors' inventors are the first for inventions
covered by their pending patent applications or that it or its licensors were
the first to file patent applications for such inventions. A judgment adverse to
the Company in any such patent interference, litigation or other proceeding
could materially adversely affect the Company's business, financial condition
and
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<PAGE> 17
results of operation, and its expense may be substantial whether or not the
Company is successful.
Connective also relies on trade secrets and proprietary know-how. The
Company requires its employees, consultants and advisors to execute a
confidentiality agreement providing that all proprietary information developed
or made known to the individual during the course of the relationship will be
kept confidential and not used or disclosed to third parties except in specified
circumstances. The agreements also provide that all inventions conceived by an
employee (or consultant or advisor to the extent appropriate for the services
provided) during the course of the relationship shall be the exclusive property
of the Company, other than inventions unrelated to the Company and developed
entirely on the individual's own time. There can be no assurance, however, that
these agreements will provide meaningful protection or adequate remedies for
misappropriation of the Company's trade secrets in the event of unauthorized use
or disclosure of such information.
MARKETING AND SALES
The Company's business strategy is based upon the belief that
Connective should retain marketing rights for products in the areas of
rheumatology and dermatology in the United States and Canada. The Company
believes that a large, general sales and marketing infrastructure is not
required to effectively and successfully maximize the commercial potential of
products in the changing health care market, and in particular products directed
toward the treatment of connective tissue disorders. The Company is targeting
its commercial activities at rheumatologists and dermatologists, which can be
served by a focused and specialized marketing organization. The Company intends
to develop a highly trained, high quality, niche oriented commercial
organization to market the Company's in-licensed and internally developed
products.
Outside the United States, the Company's strategy is to establish
development, marketing and distribution agreements with pharmaceutical
companies. The Company is engaged in discussions with a number of pharmaceutical
companies regarding marketing and sales alliances for both ConXn(TM) and its TCR
Peptide products for the European and Asian markets.
MANUFACTURING
The Company contracts with independent sources to manufacture its
products, which enables the Company to focus on its product and clinical
development strengths, minimize fixed costs and capital expenditures, and gain
access to advanced manufacturing process capabilities. Gamma interferon is
manufactured by Genentech in an FDA-licensed manufacturing facility. ConXn(TM)
is manufactured for Connective under contract with four outside vendors: BASF
Bioresearch Corp. for fermentation, Scios Nova, Inc. for purification,
Chesapeake Biological Laboratory for filling and Tektagen, Inc. for testing. The
Company is in discussions with additional manufacturers who can supply ConXn(TM)
and TCR Peptides for clinical and commercial uses. Ridaura is manufactured by
SmithKline Beecham (in final finished package form) under an agreement with an
initial term through December 2001. Betamathasone mousse is manufactured for
Connective by CCL Pharmaceuticals.
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<PAGE> 18
The Company's strategy is to continue to use manufacturing agreements
for the production of its current and future products.
COMPETITION
The biopharmaceutical industry is highly competitive. The Company
believes that there are numerous pharmaceutical and biotechnology companies and
academic research groups throughout the world engaged in research and
development efforts with respect to therapeutic products targeted at diseases or
conditions addressed by the Company. There can be no assurance that such other
companies and research institutions will not complete the development and
regulatory approval process sooner and, therefore, market their products earlier
than the Company. Many of these institutions have substantially greater
financial, marketing and human resources and development capabilities than
Connective. Technological developments by competitors, earlier regulatory
approval for marketing competitive products or superior marketing capabilities
possessed by competitors could adversely affect the commercial potential of the
Company's products. In particular, with respect to the TCR Peptides, the Company
is aware that other companies and research institutions are engaged in research
and development efforts and are in various stages of clinical trials with
respect to rheumatoid arthritis and other autoimmune diseases.
Connective believes that competitive factors in its industry include
scientific and technological expertise, managerial competence in identifying and
pursuing product in-licensing and acquisition opportunities, operational
competence in developing, protecting, manufacturing and marketing products and
obtaining timely regulatory agency approvals, and financial resources. The
Company intends to compete on the basis of the quality and exclusivity of its
products, combined with the effectiveness of its marketing and sales efforts.
Competing successfully will depend on the Company's continued ability to attract
and retain skilled and experienced personnel, to develop and secure the rights
to pharmaceutical products and compounds and to exploit these products and
compounds commercially prior to the development of competitive products by
others. The Company expects that there will be continued competition for highly
qualified scientific, technical and managerial personnel.
GOVERNMENT REGULATION
FDA Regulation and Product Approval. Regulation by governmental
entities in the United States and other countries will be a significant factor
in the production and marketing of any pharmaceutical products which are or may
be developed by the Company. It is expected that all of the Company's
pharmaceutical products will require regulatory approval by governmental
agencies prior to commercialization. In particular, human pharmaceutical
therapeutic products are subject to rigorous preclinical and clinical testing
and other approval procedures by the FDA in the United States and similar health
authorities in foreign countries. Various federal and, in some cases, state
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping and marketing of such pharmaceutical products.
The process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations are time-consuming and
require the expenditure of substantial resources.
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Generally, in order to obtain FDA approval for a new therapeutic agent,
a company first must conduct preclinical studies in the laboratory and in animal
model systems to gain preliminary information on the agent's efficacy and to
identify any safety problems. "Preclinical" studies include toxicity,
pharmacokinetic and efficacy testing in vitro and in animals and chemical or
biological formulation work in preparation for submission of the necessary data
to comply with applicable regulations prior to the commencement of human
testing. The results of these studies are submitted as a part of an
investigational new drug application ("IND"), which the FDA must review before
human clinical trials of an investigational drug can start. The Company has
filed and will continue to be required to sponsor and file INDs and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety and efficacy that are necessary to obtain FDA approval of its
products. Clinical trials are normally done in three phases and generally take
two to five years, but may take longer, to complete. "Phase I trials" generally
involve administration of a product to a small number of persons to determine
safety, tolerance and pharmacokinetic characteristics. "Phase I/II trials"
generally involve administration of a product to a small number of persons who
have the targeted disease to determine safety, tolerance and pharmacokinetic
characteristics and/or to obtain preliminary evidence of efficacy. "Phase II
trials" generally involve administration of a product to a limited number of
patients with a particular disease to determine dosage, efficacy and safety.
"Phase III trials" generally examine the clinical efficacy and safety in an
expanded patient population at multiple clinical sites. At least one such trial
is required for FDA approval to market a drug.
After completion of clinical trials of a product, the Company will be
required to file a new drug application ("NDA"), if the product is classified as
a new drug, or a product license application ("PLA"), if the product is
classified as a biologic, and receive FDA approval before commercial marketing
of the drug. The testing and approval processes require substantial time and
effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. While the Company will endeavor to secure expedited
review and approval when possible, NDAs can take, on average, two to five years
to receive approval by the FDA. While recent legislative and regulatory
initiatives have focused on the need to reduce FDA review and approval times,
the ultimate impact of such initiatives on the Company's products cannot be
certain. If questions arise during the FDA review process, approval can take
more than five years. Even if FDA regulatory clearances are obtained, a marketed
product is subject to continual review, and later discovery of previously
unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on the marketing of a product or
withdrawal of the product from the market as well as possible civil or criminal
sanctions. For marketing outside the United States, the Company will also be
subject to foreign regulatory requirements governing human clinical trials and
marketing approval for pharmaceutical products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country.
Third Party Reimbursement and Health Care Reform. The commercial
success of the Company's products under development will be substantially
dependent upon the availability of government or private third-party
reimbursement for the use of such products. There can be no assurance that
Medicare, Medicaid, health maintenance organizations and other third-party
payers will authorize or otherwise budget such reimbursement. Such governmental
and third party payers are increasingly challenging the prices charged for
medical products and services. If the Company
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<PAGE> 20
succeeds in bringing one or more of its development products to market, there
can be no assurance that such products will be viewed as cost-effective or that
reimbursement will be available to consumers or will be sufficient to allow the
Company's products to be marketed on a competitive basis. Furthermore, federal
and state regulations govern or influence the reimbursement to health care
providers of fees and capital equipment costs in connection with medical
treatment of certain patients. In response to concerns about the rising costs of
advanced medical technologies, the current administration of the federal
government has publicly stated its desire to reform health care, including the
possibility of price controls and revised reimbursement policies. There can be
no assurance that actions taken by the administration, if any, with regard to
health care reform will not have a material adverse effect on the Company. If
any actions are taken by the administration, such actions could adversely affect
the prospects for future sales of the Company's products. Further, to the extent
that these or other proposals or reforms have a material adverse effect on the
Company's ability to secure funding for its development or on the business,
financial condition and profitability of other companies that are prospective
collaborators for certain of the Company's product candidates, the Company's
ability to develop or commercialize its product candidates may be adversely
affected.
Given recent government initiatives directed at lowering the total cost
of health care throughout the United States, it is likely that the United States
Congress and state legislatures will continue to focus on health care reform and
the cost of prescription pharmaceuticals as well as on the reform of the
Medicare and Medicaid systems. The Company cannot predict the likelihood of
passage of federal and state legislation related to health care reform or
lowering pharmaceutical costs. In certain foreign markets pricing of
prescription pharmaceuticals is already subject to government control. Continued
significant changes in the U.S. or foreign health care systems could have a
material adverse effect on the Company's business.
Environmental Regulation. The Company's research and development
activities involve the controlled use of hazardous materials, chemicals and
various radioactive materials. The Company is subject to federal, state and
local laws and regulations governing the use, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by state, federal, and local laws and regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any liability could exceed the
resources of the Company. There can be no assurance that the Company will not be
required to incur significant costs to comply with environmental laws and
regulations as its research activities are increased or that the operations,
business and future profitability of the Company will not be adversely affected
by current or future environmental laws and regulations.
SCIENTIFIC ADVISORY BOARD AND OTHER ADVISORS
Connective utilizes various advisors to provide expertise and critical
review of its programs. For advice on and review of its current and long-term
scientific planning, research and development, the Company has established a
Scientific Advisory Board ("SAB") consisting of distinguished scientists and
clinicians with expertise in biologic processes and diseases that involve
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<PAGE> 21
the connective tissues of the body. All of the individuals on the SAB are
recognized as leading authorities in their fields.
SAB members consult with and meet informally with management and key
scientific employees of the Company on a frequent basis. The members of the SAB
are as follows:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Edward P. Amento, M.D.............. Consultant, Molecular Medicine Research, Inc.
Eugene Bauer, M.D.................. Dean, Stanford University School of Medicine
Yueh-Hsiu Chien, Ph.D.............. Assistant Professor, Stanford University School of Medicine
Arthur Eisen, M.D.................. Professor, Washington University School of Medicine, Barnes Hospital
Philip Hanawalt, M.D............... Professor of Biological Sciences and Dermatology, Stanford University and
Stanford University School of Medicine
Gerald Nepom, M.D., Ph.D........... Director, Virginia Mason Research Center, Professor, University of
Washington School of Medicine, Seattle
Brian Seed, Ph.D................... Professor, Harvard Medical School (Massachusetts General Hospital)
</TABLE>
Each member of the SAB has entered into an agreement with the Company
covering the terms of his position as a member of the SAB. Each member provides
services on an as-needed basis. Four members of the SAB have entered into
separate agreements with the Company covering additional consultation above and
beyond their activities as SAB members. Certain SAB members hold options to
purchase or have purchased Common Stock of the Company. In addition, members of
the SAB receive a fee of $1,000 for attending each SAB meeting and are
reimbursed for out-of-pocket expenses incurred in attending each meeting. All
members of the SAB are employed by institutions other than the Company and may
have commitments to, or consulting or advisory agreements with, other entities
that may limit their availability to the Company.
For its preclinical and clinical development programs the Company has
established relationships with several contract research organizations and
practicing physicians.
EMPLOYEES
The Company had 42 full-time employees at December 31, 1996, of which
27 are engaged in, or directly support, the Company's research and development
activities. The Company also uses outside consultants. The Company considers
relations with its employees to be good. None of the Company's employees is
covered by a collective bargaining agreement.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert investors and other readers that the following important
factors, as well as other factors, could in the future affect, and in the past
have affected, the Company's actual results and could cause the Company's
results for future years or quarters to differ materially from those expressed
in any forward looking statements made by or on behalf of the Company.
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UNCERTAINTY OF PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE
Since its inception and through its acquisition of Ridaura(R) in
December 1996, Connective has been a development stage company. Except for
Ridaura(R), all of the Company's products are in clinical or preclinical
development, and no revenues had been generated from products until December
1996, when the Company recognized $428,000 in December product revenues from
Ridaura(R). To date, the Company's resources have been primarily dedicated to
the research and development of products that the Company has in-licensed from
Genentech and others. Although the Company believes it has the expertise to
develop and commercialize such products, any or all of the Company's products
may fail to be effective or prove to have undesirable and unintended side
effects or other characteristics that may prevent their development or
regulatory approval, or limit their commercial use. There can be no assurance
that the Company, or its collaborative partners, will be permitted to undertake
human clinical trials for any of their development products not currently in
clinical trials or, if permitted, that such products will be demonstrated to be
safe and effective. In addition, there can be no assurance that any of the
Company's products under development will obtain approval from the FDA or
equivalent foreign authorities for any indication or that an approved compound
will be capable of being produced in commercial quantities at reasonable costs
and successfully marketed. Products, if any, resulting from the Company's
research and development programs are not expected to be commercially available
for several years. Even if such products become commercially available, there
can be no assurance that the Company will be able to gain satisfactory market
acceptance for such products.
MANAGEMENT OF RIDAURA(R) ACQUISITION; UNCERTAINTY OF FUTURE RIDAURA(R) REVENUES
The Company's success will depend in part on its ability to manage its
recent acquisition of the exclusive U.S. and Canadian rights to Ridaura(R).
Although SmithKline is continuing to manage certain sales and distribution
operations through 1997, the Company will be required to recruit a substantial
number of qualified employees to market, sell and distribute Ridaura(R). If the
Company is unable to hire a sufficient number of employees with the appropriate
levels of experience to build these departments, or if the Company is unable to
effectively manage the integration of its rights to Ridaura(R) into the
Company's product line, the Company's business, financial condition and results
of operations could be materially and adversely affected. In addition, while the
Company believes in the potential of Ridaura(R), there can be no assurance that
the Company's Ridaura(R) revenues will equal or exceed those achieved by
SmithKline over the last several years. If the Company is not able to market and
sell Ridaura(R) successfully, the Company's business, financial condition and
results of operations could be materially and adversely affected.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
Due to its limited operating history, the Company is subject to the
uncertainties and risks associated with any new business. Having no
commercialized products until the recent Ridaura(R) acquisition, the Company has
experienced operating losses every year since its incorporation. Net losses for
the fiscal years ended December 31, 1996 and 1995 were $18.5 million and $10.4
million, respectively, and the Company had an accumulated deficit of $37.8
million at December 31, 1996. The Company expects to incur increasing operating
losses for at least the next several years. The amount of net losses and the
time required by the Company to reach profitability are
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<PAGE> 23
uncertain. There can be no assurance that the Company will ever be able to
generate revenue from its products now under development or achieve
profitability on a sustained basis.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company had no revenues from products from its inception until
December 1996, when it recognized $428,000 in December product revenues from
Ridaura(R). There can be no assurance that growth in Ridaura(R) revenues will be
achieved or that the Company will ever be profitable on a quarterly or annual
basis in the future. As noted above, the Company expects to incur quarterly and
annual operating losses for at least the next several years. The Company's
quarterly and annual operating results may fluctuate significantly in the future
depending on such factors as the timing and shipment of significant Ridaura(R)
orders, if any, changes in pricing policies by the Company and its competitors,
the timing and market acceptance of any new products introduced by the Company,
the mix of distribution channels through which Ridaura(R) and other products (if
any) are sold, and the Company's inability to obtain sufficient supplies for its
products. In response to competitive pressures or new product introductions, the
Company may take certain pricing or other actions that could materially and
adversely affect the Company's operating results.
FUTURE CAPITAL REQUIREMENTS AND UNCERTAINTY OF FUTURE FUNDING
The Company expects that its current cash and cash equivalents and
short-term investments, will be sufficient to fund the Company's operations
through 1997. In addition, the development of the Company's products will
require the commitment of substantial resources to conduct the time-consuming
research and development, clinical studies and regulatory activities necessary
to bring any potential medical product to market and to establish production,
marketing and sales capabilities. The Company may need to raise substantial
additional funds for these purposes. The Company may seek such additional
funding through collaborative arrangements and through public or private
financings, including equity financings. Any additional equity financing, if
available, may be dilutive to stockholders and any debt financing, if available,
may restrict the Company's ability to pay dividends on its capital stock or the
manner in which the Company conducts its business. The Company has secured an
equity line that allows the Company to raise up to $25 million from certain
institutional investors over a three-year period beginning on or before December
1, 1997. Other than this equity line, however, the Company currently has no
commitments for any additional financings and there can be no assurance that any
such financings will be available to the Company or that adequate funds for the
Company's operations, whether from financial markets, collaborative or other
arrangements with corporate partners or from other sources, will be available
when needed or on terms attractive to the Company. The inability to obtain
sufficient funds may require the Company to delay, scale back or eliminate some
or all of its research and product development programs, to limit the marketing
of its products or to license third parties the rights to commercialize products
or technologies that the Company would otherwise seek to develop and market
itself.
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<PAGE> 24
POSSIBLE FUTURE PRODUCT ACQUISITIONS
A significant part of the Company's overall strategy is to in-license
or acquire additional marketed or late stage development products in its
targeted therapeutic areas. The 1996 acquisitions of rights to Betamethasone
mousse and Ridaura(R) reflect this strategy. Future product acquisitions, if
any, may require substantial additional funds (i) for the initial acquisition of
rights to these products and (ii) for the steps necessary to obtain FDA approval
for the product and to market, sell and distribute the product successfully. A
portion of the funds needed to acquire, develop and market any new products may
come from the Company's existing cash and short-term investments; in such case,
fewer resources will be available to the Company's current products and clinical
programs, which could have a material adverse effect on the Company's business,
financial conditions and results of operations. Alternatively, the Company may
seek to raise substantial additional funds for new product acquisitions. As
discussed above under "Future Capital Requirements and Uncertainty of Future
Funding," the Company may seek such additional funding through collaborative
arrangements and through public or private financings, including equity
financings. Any additional equity financing, if available, may be dilutive to
stockholders and any debt financing, if available, may restrict the Company's
ability to pay dividends on its capital stock or the manner in which the Company
conducts its business. In addition, any acquisition of rights to additional
products that are not presently approved by the FDA will require the commitment
of substantial resources to conduct the research and development, clinical
studies and regulatory activities necessary to bring such potential product to
market. In addition, if the newly-acquired product is already approved for sale,
the Company will likely be assuming the marketing, sale and distribution of such
product, which may require the Company to recruit a substantial number of
qualified employees to perform these functions. If the Company is unable to hire
a sufficient number of employees with the appropriate levels of experience, or
if the Company is unable to effectively manage the integration of any
newly-acquired products into the Company's product line, the Company's business,
financial condition and results of operations could be materially and adversely
affected. Finally, any newly-acquired products may not achieve the marketing or
therapeutic success expected of it by the Company, industry analysts or others
at the time of acquisition.
UNPREDICTABILITY OF, AND LIMITED EXPERIENCE IN, CONDUCTING PRECLINICAL AND
CLINICAL TRIALS
Although the Company's officers and employees have significant prior
experience in conducting clinical trials, the Company itself has completed only
one clinical trial to date, a Phase I/II clinical trial of ConXn(TM) for
scleroderma. In 1996, the Company commenced a Phase III clinical trial of gamma
interferon for the treatment of atopic dermatitis, a Phase II clinical trial of
gamma interferon for the treatment of keloids, a Phase II clinical trial of
ConXn(TM) for the treatment of scleroderma, and a Phase I/II clinical trial of
TCR Vaccines for the treatment of multiple sclerosis. In addition, the Company
plans to initiate in 1997 a Phase III comparison trial of Betamethasone mousse
for the treatment of scalp psoriasis and a pilot study of TCR Vaccines for
rheumatoid arthritis. There can be no assurance that the Company will be able to
successfully complete its ongoing clinical trials or commence the trial or the
study currently planned for 1997. In addition, there can be no assurance that
the Company will meet its development schedule for any of its products in
development. If the Company were unable to commence clinical trials as
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<PAGE> 25
planned, complete the clinical trials or demonstrate the safety and efficacy of
its products, the Company's business, financial condition and results of
operations would be materially and adversely affected. There can be no assurance
that if a product from the Company's research and development programs or any
other therapeutic product is successfully developed according to plans, it will
be approved by the FDA on a timely basis or at all.
In addition, because the Company will, in a number of cases, rely on
its contractual rights to access data collected by others in phases of its
clinical trials, the Company is dependent on the continued satisfaction by such
parties' of their contractual obligations to provide such access and cooperate
with the Company in the execution of successful filings with the FDA. There can
be no assurance that the FDA will permit such reliance. If the Company were
unable to rely on clinical data collected by others, the Company may be required
to repeat clinical trials, which could significantly delay commercialization,
and require significantly greater capital.
Before obtaining regulatory approvals for the commercial sale of any of
its products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
the target indication for which approval is sought. The results from preclinical
studies and early clinical trials may not be predictive of results that will be
obtained in later-stage testing and there can be no assurance that the Company's
future clinical trials will demonstrate the safety and efficacy of any products
or will result in approval to market products. A number of companies in the
biotechnology industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials.
The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. Patient enrollment is
a function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs and delays, which could have a material adverse effect
on the Company.
UNCERTAINTIES OF REGULATORY APPROVAL; GOVERNMENT REGULATION
The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation by numerous
governmental authorities in the United States and other countries. Prior to
marketing, any drug developed by the Company must undertake rigorous preclinical
and clinical testing and an extensive regulatory approval process mandated by
the FDA and equivalent foreign authorities. These processes can take a number of
years and require the expenditure of substantial resources. The Company is also
subject to regulations under the food and drug statutes and regulations of the
State of California.
Obtaining such approvals and completing such testing is a costly and
time-consuming process and approval may not be ultimately obtained. The length
of the FDA review period varies considerably as does the amount of preclinical
and clinical data required to demonstrate the safety and efficacy of a specific
product. The Company may also decide to replace the compounds in testing with
modified or optimized compounds, thus extending the testing process. In
addition, delays or rejections may be encountered based upon changes in FDA
policy during the period of product development and FDA regulatory review of
each submitted new drug application or
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<PAGE> 26
product license application. Similar delays may also be encountered in other
countries. There can be no assurance that even after such time and expenditures,
regulatory approval will be obtained for any products developed by the Company.
If regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which the product may be marketed.
Further, even if such regulatory approval is obtained, the FDA will require
post-marketing reporting and may require surveillance programs to monitor the
usage or side effects of each drug product. A marketed product, its manufacturer
and its manufacturing facilities are subject to continual review and periodic
inspections, and later discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on such product or
manufacturer, potentially including withdrawal of the product from the market.
Government regulation in the United States or in foreign countries may
delay marketing of the Company's potential products for years, may impose costly
procedures upon the Company and may furnish a competitive advantage to larger
companies that may compete with the Company. There can be no assurance that FDA
or other regulatory approval for any products developed by the Company will be
granted on a timely basis or at all. A delay in obtaining or a failure to obtain
such approvals would adversely affect the marketing of any potential products
developed by the Company and the Company's liquidity and capital resources. The
FDA regulatory process is currently under substantial review by the current
presidential administration and the U.S. Congress, and as a result, government
regulation may become more or less restrictive in the future.
DEPENDENCE ON CONTRACT MANUFACTURERS AND SUPPLIERS
The Company currently has no manufacturing facilities for clinical or
commercial production of any of its products, nor does the Company intend to
develop such capabilities in the near future. The Company's products for
research and preclinical testing have been supplied by collaborators and
contract manufacturing companies. Gamma interferon is manufactured by Genentech
in an FDA-licensed manufacturing facility. ConXn(TM) is manufactured for
Connective under contract with four outside vendors: BASF Bioresearch Corp. for
fermentation, Scios, Inc. for purification, Chesapeake Biological Laboratory for
filling and Tektagen, Inc. for testing. The Company is in discussions with
manufacturers who can supply ConXn(TM) and TCR Vaccines for clinical and
commercial uses. Ridaura(R) is manufactured by SmithKline (in final finished
package form) under an agreement with an initial term through December 2001.
Betamethasone mousse is manufactured for Connective by CCL Pharmaceuticals. If
the Company is unable to contract for manufacturing capabilities on acceptable
terms, the Company's ability to conduct preclinical and human clinical testing
will be adversely affected, resulting in the delay of submission of products for
regulatory approval and initiation of new development programs, which in turn
could impair materially the Company's competitive position and the possibility
of the Company achieving profitability. In addition, some materials used in the
Company's products may be available only from sole suppliers. Although neither
the Company nor its contract manufacturers has experienced difficulty acquiring
materials for the manufacture of its products for clinical trials, no assurance
can be given that interruptions in supplies will not occur in the future, which
could have a material adverse effect on the Company's ability to manufacture its
products. There can also be no assurance that the Company will be able to
manufacture any of its products on a commercial scale or at a competitive cost
or in sufficient quantities. The Company currently is seeking additional
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<PAGE> 27
clinical and commercial suppliers. There is no assurance that such suppliers
will be located or that the current manufacturers of ConXn(TM) can supply
sufficient clinical quantities. Failure to obtain sufficient clinical or
commercial quantities of ConXn(TM) or other products at acceptable terms would
have a material adverse impact on the Company's attempts to complete its
clinical trials, and obtain approval for and commercialize its products.
COMPETITION AND TECHNOLOGICAL CHANGE
Other products and therapies currently exist on the market or are under
development that could compete directly with some of the products that the
Company is seeking to develop and market. There can be no assurance that the
Company's products, even if successfully tested and developed, will be adopted
by physicians over such other products, or that the Company's products will
offer an economically feasible alternative to existing modes of therapy where
they exist. In addition, a number of companies are currently seeking to develop
new products and therapies to address diseases involving connective tissue, the
number of the Company's competitors in these markets could increase. The Company
intends to compete on the basis of the effectiveness, quality and exclusivity of
its products, combined with the effectiveness of its marketing and sales
efforts. There can be no assurance that other products and therapies will not be
developed that will either render the Company's proposed products obsolete or
will have advantages outweighing those of the products and therapies that the
Company is seeking to develop.
Many of the Company's existing or potential competitors, particularly
large pharmaceutical companies, have substantially greater financial, technical
and human resources than the Company. In addition, many of these competitors
have more collective experience than the Company in undertaking preclinical
testing and human clinical trials of new pharmaceutical products and obtaining
regulatory approvals for therapeutic products. Accordingly, the Company's
competitors may succeed in obtaining FDA approval for products more rapidly than
the Company.
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its technology or potential
products is alleged to have resulted in adverse effects. Such claims, even if
successfully defended by the Company, could injure the Company's reputation.
While the Company has taken, and intends to continue to take, what it believes
are appropriate precautions to minimize exposure to product liability claims,
there can be no assurance that it will avoid liability. The Company believes
that it possesses product liability and general liability and certain other
types of insurance customarily obtained by business organizations of its type.
The Company intends to maintain insurance against product liability risks
associated with the testing, manufacturing and marketing of its products.
However, there can be no assurance that it will be able to obtain such insurance
in the future, or that if obtained, such insurance will be sufficient.
Consequently, a product liability claim or other claims with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on the business or financial condition of the Company.
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<PAGE> 28
ABSENCE OF SALES AND MARKETING EXPERIENCE
Although the Company's officers and employees have significant previous
experience in the industry, the Company itself has no history or experience in
sales, marketing or distribution. As the Company begins to sell Ridaura(R) and
if it obtains government approval to commence commercial sales of any other
products, the Company will be competing with established pharmaceutical and
biotechnology companies with respect to marketing capabilities, an area in which
the Company has no history. To market its products directly (in particular,
Ridaura(R)), the Company must either establish a marketing and sales force with
technical expertise and distribution capability or obtain the assistance of a
pharmaceutical company with a large distribution system and sales force. There
can be no assurance that the Company will be able to establish sales and
distribution capabilities or be successful in gaining market acceptance for its
products. If the Company enters into co-promotion or other licensing
arrangements, the Company's revenues will be subject to the payment provisions
of such arrangements and dependent on the efforts of third parties, and there
can be no assurance that such efforts will be successful.
DEPENDENCE ON AND NEED FOR ADDITIONAL KEY PERSONNEL
The Company is dependent on the principal members of its scientific and
management staffs (including Thomas G. Wiggans, its President and Chief
Executive Officer), the loss of whose services might impede the achievement of
development objectives. The Company does not maintain "key person" insurance on
any of these individuals. In addition, the Company's potentially rapid growth
and expansion into areas and activities requiring additional expertise, such as
clinical trials, governmental approvals, manufacturing, sales and marketing,
will increase burdens on the Company's management, operational and financial
resources. These demands are expected to require an increase in management and
scientific personnel and the development of additional expertise by existing
management personnel. Recruiting and retaining management, operational personnel
and qualified scientific personnel to perform research and development work in
the future will be critical to the Company's success. Although the Company
believes it will continue to be successful in attracting and retaining skilled
and experienced management and operational and scientific personnel, there can
be no assurance that the Company will be able to attract and retain such
personnel on acceptable terms given the competition for such personnel among
numerous pharmaceutical and biotechnology companies, universities and other
institutions.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT; HEALTH CARE REFORM AND
RELATED MATTERS
The levels of revenues and profitability of pharmaceutical companies
may be affected by the continuing efforts of governmental and third party payers
to contain or reduce the costs of health care through various means. In both the
United States and elsewhere, sales of prescription pharmaceuticals are dependent
in part on the availability of reimbursement to the consumer from third party
payers, such as government, employers and private insurance plans. Third party
payers are increasingly seeking to reduce the costs of medical products and
services and looking for improved cost/benefit relationships from the products
and services they buy. If the Company or one of its potential marketing or
strategic alliance partners succeeds in bringing one or more products based upon
the Company's technology to the market, there can be no assurance of market
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<PAGE> 29
acceptance of the Company's products or that these products will be considered
cost-effective and that reimbursement to the consumer will be available or will
be sufficient to allow the Company or its partner to sell such products on a
competitive basis. Any inability of the Company or its potential partners to
sell products developed using the Company's technology or in-licensed by the
Company on a competitive basis would have a material adverse effect on the
Company's business.
ENVIRONMENT AND CONTROLLED USE OF HAZARDOUS MATERIALS
The Company is subject to federal, state and local laws and regulations
governing the use, generation, manufacture, storage, discharge, handling and
disposal of certain materials and wastes used in its operations, some of which
are classified as "hazardous." There can be no assurance that the Company will
not be required to incur significant costs to comply with environmental laws and
regulations as its research activities are increased or that the operations,
business and future profitability of the Company will not be adversely affected
by current or future environmental laws and regulations. Although the Company
believes that its safety procedures for handling and disposing materials comply
with such laws and regulations, the risk of accidental contamination or injury
from these materials cannot be eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company.
SIGNIFICANT CONTROL BY EXISTING STOCKHOLDERS
Officers and directors of the Company, together with entities
affiliated with them, beneficially own approximately 37% of the Common Stock of
the Company. These stockholders currently are able to exercise significant
influence over the election of members of the Company's Board of Directors and
therefore to influence all corporate actions.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of undesignated Preferred Stock, of which 200 shares have been
designated as Series A redeemable convertible preferred stock, and to determine
the rights, preferences, privileges and restrictions of such shares without
further vote or action by the Company's stockholders. The rights of the holders
of Common Stock will be subject to, and may be adversely effected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock could have the effect of making it more difficult
for third parties to acquire a majority of the outstanding voting stock of the
Company. In addition, certain provisions of the Company's charter documents,
including a provision eliminating the ability of stockholders to take actions by
written consent, and of Delaware law could delay or make difficult a merger,
tender offer or proxy contest involving the Company. Further, the Company's
stock option and purchase plans generally provide for the assumption of such
plans or substitution of an equivalent option of a successor corporation or,
alternatively, at the discretion of the Board of Directors, exercise of some or
all of the option stock, including non-vested shares, or acceleration of vesting
of shares issued pursuant to stock grants, upon a change of control or similar
event. The Company has entered into agreements with its directors and executive
officers to accelerate the vesting of stock options upon a change of control or
similar event.
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<PAGE> 30
POSSIBLE VOLATILITY OF STOCK PRICE; LACK OF DIVIDENDS
Prior to February 1996 there was no public market for the Common Stock
of the Company. There can be no assurance that an active trading market will
continue to be sustained or that the market price of the Common Stock will not
decline below the its present market price. The market prices for securities of
biotechnology companies have been highly volatile. Announcements regarding the
results of regulatory approval filings, clinical studies or other testing,
technological innovations or new commercial products by the Company or its
competitors, government regulations, developments concerning proprietary rights
or public concern as to safety of technology have historically had, and are
expected to continue to have, a significant impact on the market prices of the
stocks of biotechnology companies. The trading price of the Common Stock could
also be subject to significant fluctuations in response to variations in
operating results. In addition, the Company has never paid cash dividends on its
capital stock and does not anticipate paying cash dividends in the foreseeable
future, but instead intends to retain future earnings, if any, for reinvestment
in its business. The Company's credit agreement requires the approval of the
Company's bank to declare or pay cash dividends.
ITEM 2. PROPERTIES
Connective currently leases approximately 23,500 square feet of
laboratory and office space at 3400 West Bayshore Road in Palo Alto, California.
The Company leases this space under a master lease agreement that expires in
July 1999 with a renewal option that, if exercised, would extend the term of the
lease to the year 2001. The Company currently pays base monthly rent of $45,825
for this space and has the right to use this space for laboratory research and
development, storage and distribution, offices, marketing and other related
uses. The Company expects to outgrow its existing facilities requirements in the
near term and is in the process of searching for additional space on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
Connective knows of no material litigation or proceeding pending or
threatened to which the Company is, or may become, a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their ages as of December
31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas G. Wiggans........................... 45 President, Chief Executive Officer and Director
</TABLE>
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<PAGE> 31
<TABLE>
<S> <C> <C>
W. Scott Harkonen, M.D...................... 45 Sr. Vice President, Product Development and Operations
Cynthia M. Butitta.......................... 42 Vice President, Finance and Administration and Chief
Financial Officer
Richard J. Hammel, Ph.D..................... 53 Vice President, Commercial Development
David A. Lowin, Esq......................... 42 Vice President, Intellectual Property, Chief Patent
Counsel and Assistant Secretary
Ernst H. Rinderknecht, Ph.D................. 49 Vice President, Process Science and Manufacturing
</TABLE>
Thomas G. Wiggans has served as President, Chief Executive Officer and
as a director of the Company since July 1994. From February 1992 to April 1994,
Mr. Wiggans served as President and Chief Operating Officer of CytoTherapeutics,
a biotechnology company. From 1980 to February 1992, Mr. Wiggans served at
various positions at Ares-Serono Group, a pharmaceutical company, including
President of its U.S. pharmaceutical operations and Managing Director of its
U.K. pharmaceutical operations. From 1976 to 1980 he held various sales and
marketing positions with Eli Lilly & Co., a pharmaceutical company. He is
currently a director of the Biotechnology Industry Organization, and a member of
the governing body of its emerging company section. He was also President of the
Board of Directors of the Association of Biotechnology Companies. Mr. Wiggans
received his B.S. from the University of Kansas and M.B.A. from Southern
Methodist University.
W. Scott Harkonen has served as Senior Vice President, Product
Development and Operations of the Company since September 1995. From March 1991
to August 1995, Dr. Harkonen served as Vice President of medical and regulatory
affairs at Univax Biologics, Inc., a biotechnology company. From May 1989 to
February 1991, he served as Vice President, medical and regulatory affairs at
Scios Nova, Inc., a biotechnology company. He is currently a director of Planet
Biotechnology, a privately-owned biopharmaceutical company. He received his B.A.
and M.D. from the University of Minnesota and M.B.A. from the University of
California, Berkeley.
Cynthia M. Butitta has served as Vice President, Finance and
Administration and Chief Financial Officer since December 1995. From June 1994
to December 1995 she served as Vice President and Chief Financial Officer of
InSite Vision, Inc., a pharmaceutical company. From June 1993 until joining
InSite Vision, Ms. Butitta was director of finance for the worldwide sales and
support group of Tandem Computers Incorporated. From 1988 to 1992, she held a
variety of positions with MIPS Computer Systems, Inc., including vice president
of finance, corporate controller and director of sales operations. Ms. Butitta
holds a B.S. in business and accounting from Edgewood College and M.B.A. from
the University of Wisconsin.
Richard J. Hammel has served as Vice President, Commercial Development
of the Company since September 1995. From September 1993 to September 1995, he
served at Matrix Pharmaceutical, Inc., a biotechnology company, as Vice
President of Business Development, Sales and Marketing. From March 1992 to
September 1995, he served as a Senior Consultant to Marketing Corporation of
America, a marketing company. From 1986 to March 1992, he served at
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<PAGE> 32
Glaxo, Inc., a pharmaceutical company, most recently as Director of Business
Development. He received a B.S., M.S. and Ph.D. from the University of
Minnesota.
David A. Lowin has served as Vice President, Intellectual Property and
Chief Patent Counsel of the Company since January 1995 and Assistant Secretary
of the Company since July 1995. From 1982 to January 1995, Mr. Lowin served at
Syntex Corporation, a pharmaceutical company, as Assistant Director of the
Patent Law Department. From 1979 to 1982, he served as an associate at Owen,
Wickersham & Erickson. He received a B.A. from Hobart College and a J.D. from
the Franklin Pierce Law Center.
Ernst H. Rinderknecht has served as Vice President, Process Sciences of
the Company since September 1994. From 1980 to September 1994, Dr. Rinderknecht
worked at Genentech in various positions, since 1987 as Staff Scientist. He
received his M.S. from the Swiss Federal Institute of Technology (ETH) and Ph.D.
in Biochemistry from the University of Zurich, Switzerland.
Each executive officer serves at the sole discretion of the Board of
Directors.
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<PAGE> 33
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock has been traded on the Nasdaq National
Market under the symbol CNCT since the effective date of the Company's initial
public offering on January 31, 1996. Prior to the initial public offering, no
public market existed for the Common Stock. The price per share reflected in the
table below represents the range of low and high closing sale prices for the
Company's Common Stock as reported in the Nasdaq National Market for the
quarters indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW
----------------------------------- ---- ---
<S> <C> <C> <C>
First Quarter........................................................... $11.25 $8.00
Second Quarter.......................................................... $11.00 $7.75
Third Quarter........................................................... $10.25 $5.75
Fourth Quarter.......................................................... $ 8.75 $6.50
</TABLE>
The Company had approximately 237 stockholders of record as of February
28, 1997, including several holders who are nominees for an undetermined number
of beneficial owners.
The Company has never paid cash dividends on its capital stock. The
Company currently anticipates that it will retain all available funds for use in
the operation and expansion of its business, and does not anticipate paying any
cash dividends in the foreseeable future. However, the Board of Directors of the
Company will review the dividend policy periodically to determine whether the
declaration of dividends is appropriate. The Company must obtain the approval of
its bank before declaring or paying dividends.
RECENT SALES OF UNREGISTERED SECURITIES
On December 4, 1996, the Company sold 972,224 shares of common stock to
four institutional accredited investors at a price of $6.1714 per share for an
aggregate purchase price of $599,983.20. No underwriter was involved in this
private placement. The shares were sold under an exemption from registration
pursuant to Rule 506 under Regulation D of the Securities Act of 1933, as
amended (the "Securities Act"). No general solicitation or advertisement was
made in connection with the private placement.
On December 31, 1996, as partial consideration for the Company's
acquisition of the U.S. and Canadian rights to Ridaura(R) from SmithKline
Beecham, the Company issued 637,733 shares of the Company's common stock to
SmithKline Beecham Properties, Inc. ("SKP"). No underwriter was involved in
such issuance. The Company relied on the exemption from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof. The
Company determined that such exemption was available based upon SKP's access to
information about the Company (the Company provided SKP with copies of all of
its material reports and registration statements filed with the Commission),
SKP's sophistication as an affiliate of a large publicly-held company, and a
number of representations and warranties made by SKP regarding its investment
intent and understanding that the shares are "restricted securities." The total
value of the shares issued to SKP is required to be $9.0 million on December
31, 1997; to achieve such value, the Company may be obligated to issue
additional shares to SKP on such date, or may repurchase a portion of the
originally-issued shares to reduce the market value of the remaining shares to
$9.0 million. In connection with this issuance, the Company agreed to file in
December 1997 a registration statement on Form S-3 covering resale of the
shares and to maintain the registration statement in effect for up to two years.
In January 1996, prior to the Company's initial public offering, the
Company issued options to two consultants, Christian Schwabe and Bogart
Delafiel, to purchase 1,124 and 5,000 shares of common stock at $0.45 and
$4.50, respectively. Such issuances were deemed to be exempt from registration
under the Securities Act in reliance upon Rule 701.
In March 1996, the Company issued options to purchase 13,488 shares of
common stock at $0.45 per share to three members of the Company's Scientific
Advisory Board. These options were granted outside of the 1994 Stock Plan but
are subject to the same terms as those options granted under the Plan. the
Company relied on the exemption from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof. The optionees represented
their intentions to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof. All optionees
had adequate access, through their relationships with the Company as members of
the Scientific Advisory board, to information about the Company.
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<PAGE> 34
ITEM 6: SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
The following table presents selected financial data of the Company.
This historical data should be read in conjunction with the attached
consolidated Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in Item 7 of this Form 10-K.
<TABLE>
<CAPTION>
Period from
inception
(February 8,
Years Ended December 31, 1993) to
----------------------------------------------- December 31,
1996 1995 1994 1993
----------- ----------- ----------- -----------
Statement of Operations Data:
<S> <C> <C> <C> <C>
Product revenues $ 428 $ -- $ -- $ --
Operating costs and expenses:
License amortization 594 -- -- --
Research and development 13,161 8,271 6,436 836
General and administrative 5,434 2,113 1,317 240
----------- ----------- ----------- -----------
Total operating costs and expenses 19,189 10,384 7,753 1,076
Loss from operations (18,761) (10,384) (7,753) (1,076)
Interest income (expense), net 247 12 (97) (2)
----------- ----------- ----------- -----------
Net loss $ (18,514) $ (10,372) $ (7,850) $ (1,078)
=========== =========== =========== ===========
Net loss per share $ (2.71) $ (2.34) $ (1.84) $ (0.29)
=========== =========== =========== ===========
Shares used to calculate net loss per share 6,824,668 4,435,112 4,276,185 3,676,683
=========== =========== =========== ===========
Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 24,554 $ 9,023 $ 1,287 $ 729
Working capital 14,820 5,844 (979) (147)
Total assets 47,922 11,796 2,901 930
Notes payable -- 2,205 1,350 --
Non-current portion of capital lease obligations,
capital loans and long-term debt 2,978 4,933 829 13
Other long-term liabilities (1) 10,858 1,262 1,293 --
Redeemable convertible preferred stock 2,000 -- -- --
Total stockholders' equity (net capital deficiency) 21,800 63 (2,919) (60)
</TABLE>
(1) See Note 5 of Notes to Financial statements for a description of the
Company's other long-term liabilities.
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<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information,
certain forward looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from the results anticipated in
these forward looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below as well as
those discussed above under the heading "Additional Factors That May Affect
Future Results".
The following discussion should be read in conjunction with the Financial
Statements and Notes contained in Item 8.
OVERVIEW
Connective Therapeutics, Inc. acquires, develops and markets
products in the areas of rheumatology and dermatology. In February 1996, the
company completed an initial public offering of its common stock and became a
public company.
The Company's products under development include gamma interferon for
the treatment of atopic dermatitis and keloids; betamethasone mousse for the
treatment of scalp psoriasis and other scalp dermatoses; ConXn(TM) (relaxin) for
the treatment of scleroderma and other fibrotic disorders and T-cell Receptor
(TCR) peptide vaccines for the treatment of multiple sclerosis and rheumatoid
arthritis. At present, these products are all under development and no revenues
have been derived from the sale of these products. There can be no assurance
that any of these potential products will be successfully developed, receive the
necessary regulatory approvals or be successfully commercialized.
In December 1996, the Company acquired exclusive U.S. and Canadian
rights to Ridaura(R) (auranofin), a disease modifying antirheumatic drug, from
SmithKline Beecham Corporation and related entities ("SmithKline"). In return,
the Company agreed to provide SmithKline a $3 million upfront cash payment,
which was paid in January 1997, a non-interest bearing $11 million promissory
note, 637,733 shares of common stock (guaranteed to be worth $9 million on
December 31, 1997) and up to a maximum of $6 million in royalty payments based
on future sales, for a potential aggregate consideration of up to $29 million.
Ridaura(R) is an established therapy for rheumatoid arthritis, an autoimmune
disease that afflicts one to two percent of adult Americans (approximately three
million patients), mostly women.
RESULTS OF OPERATIONS
The Company recorded its first revenues in December 1996, for a total
of $428,000, due to the initial product sales of Ridaura(R). In addition, the
Company also recorded amortization cost of $594,000 in December 1996 associated
with the acquisition of product rights to Ridaura(R) from SmithKline. The
Company has determined the useful life of the asset to be three years based on
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<PAGE> 36
information regarding products currently in the Company's development pipeline,
competitive products, the off-patent position of Ridaura(R) and expected future
revenues from Ridaura(R) sales.
Research and development expenses were $13.2 million, $8.3 million and
$6.4 million for the years ended December 31, 1996, 1995 and 1994, respectively.
The increase in research and development expenses in fiscal 1996 over fiscal
1995 was primarily attributable to significant increases in personnel staffing
particularly related to clinical development, commencement of a Phase III
clinical trial of gamma interferon for the treatment of atopic dermatitis, a
Phase II clinical trial of gamma interferon for the treatment of keloids, a
Phase II clinical trial of ConXn(TM) for the treatment of scleroderma and a
Phase I/II clinical trial of TCR Peptides for the treatment of multiple
sclerosis, and increased outside services required to support operations. The
research and development spending increase in fiscal 1995 over fiscal 1994 was
primarily due to devoting additional resources to commence the initiation of a
Phase I/II clinical trial of ConXn(TM) for scleroderma, the production of
clinical supplies and increased outside services required to support operations.
The factors contributing to increases in spending were partially offset by
decreases in technology acquisition costs from $1.9 million in fiscal 1994, to
$0.9 million and $35,000 for fiscal 1995 and 1996, respectively. Research and
development expenses are expected to continue to increase due to continued
expansion of development activities, including progression in advanced-stage
clinical trials, and possible acquisition of new technologies and products.
General and administrative expenses increased to $5.4 million for the
year ended December 31, 1996, and from $2.1 million for the same period in 1995,
primarily due to increased support costs associated with operating as a public
company (including costs related to strengthening the senior management team),
professional fees and expenses associated with the acquisition of Ridaura(R),
and other business development expenses. The increase in general and
administrative expenses to $2.1 million for the year ended December 31, 1995,
from $1.3 million for the same period in 1994 was primarily due to increases in
staffing and business development expenses. General and administrative expenses
are expected to continue to increase primarily due to expanded business
development efforts and the creation of a marketing and sales organization.
Interest income was $1.2 million, $0.4 million and $38,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. The increase in
interest income in fiscal 1996 over fiscal 1995 was due to higher invested cash
balances from proceeds of the Company's initial public offering and two private
placements of equity securities. The increase in fiscal 1995 from 1994 was due
to higher balances in cash and cash equivalents. Interest earned in the future
will depend on Company funding cycles and prevailing interest rates. Interest
expense increased to $0.9 million for the year ended December 31, 1996, from
$0.4 million and $0.1 million for the same periods in 1995 and 1994,
respectively, in each year due to increased balances outstanding for obligations
under capital leases and loans, and notes payable.
The Company incurred net losses of $18.5 million, $10.4 million and
$7.9 million for the years ended December 31, 1996, 1995 and 1994, respectively,
primarily due to its development stage activities. The Company expects to incur
substantial additional losses over the next few years and losses are expected to
fluctuate from period to period based on timing of product
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<PAGE> 37
revenues, clinical material purchases, possible acquisitions of new products and
technologies, scale-up activities and clinical activities.
For income tax purposes, the Company had a federal net operating loss
carryforward as of December 31, 1996, of approximately $32.4 million available
to offset future taxable income, if any. The net operating loss carryforward
will expire at various dates beginning from 2008 through 2011, if not utilized.
Utilization of the net operating losses and credits may be subject to
substantial annual limitation due to the "change in ownership" provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilizations. (See Note 14 of Notes to Financial Statements)
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through
December 31, 1996 primarily through private sales of equity securities, proceeds
from its initial public offering in February 1996 and two self-managed
financings in December 1996 (the sale of its common stock to several
institutional investors and the sale of Series A convertible preferred stock to
an offshore investor).
Working capital increased to $14.9 million at December 31, 1996,
compared to working capital of $5.8 million at December 31, 1995, due to the
receipt of approximately $24.5 million in net proceeds from the initial public
offering and approximately $7.9 million in net proceeds through the two private
placements of equity securities, offset by cash used in operations of
approximately $10.4 million for the year ended December 31, 1996 and the
repayment of $2.2 million in notes outstanding pursuant to certain technology
licensing agreements. At December 31, 1996, the Company had cash, cash
equivalents and short-term investments totaling $24.6 million, compared to $9.0
million at December 31, 1995. It is generally the Company's policy to invest
these funds in highly liquid securities, such as interest-bearing money market
funds, corporate debt, commercial paper and federal agency notes.
For the year ended December 31, 1996, additions of equipment and
leasehold improvements totaled $0.7 million, of which approximately $0.6 million
was financed through capital lease and loan arrangements. Total additions for
equipment and leasehold improvements from inception to December 31, 1995 were
$1.9 million, which included $0.8 million of additional equipment financed
through capital lease arrangements, and $0.8 million financed through capital
loans. As of December 31, 1996, the Company had invested approximately $2.5
million in property and equipment, and had approximately $1.0 million available
for borrowing under its capital loan arrangement.
On December 2, 1996, the Company entered into a Structured Equity Line
Flexible Financing Agreement (the "Equity Line Agreement") with Kepler Capital
LLC ("Kepler") that allows the Company to access up to $25 million through sales
of its Common Stock. The equity line will be available for a three-year period
beginning on or before December 1, 1997. The Equity Line Agreement provides that
the Company can, at its option, obtain from $500,000 to $2,000,000 at any one
time through a sale of its Common Stock to Kepler, subject to the satisfaction
of certain conditions, including registration of shares for resale, minimum
volume requirements, and a
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<PAGE> 38
minimum trading price of $7.00 per share over a specified period. In addition,
the Company must sell $500,000 of its Common Stock from time to time if the
price per share exceeds $10.00 and minimum volume requirements are met. (See
Note 6 of Notes to Financial Statements)
The Company believes that its existing cash and cash equivalents,
short-term investments, and funds available under the capital loan and the
structured equity line, will be sufficient to meet the Company's operating
expenses and capital requirements through 1997. The Company's future capital
uses and requirements are expected to increase in future periods and will depend
on numerous factors, including the progress of its research and development
programs, the progress of clinical and advanced-stage clinical testing, the time
and costs involved in obtaining regulatory approvals, the cost of filing,
prosecuting, and enforcing patent claims and other intellectual property rights,
competing technological and market developments, the ability of the Company to
establish collaborative arrangements, the possible acquisition of new products
and technologies, and the development of commercialization activities. As a
result, the Company will require substantial additional funds prior to reaching
profitability and may attempt to raise additional funds through equity or debt
financings, collaborative arrangements with corporate partners or from other
sources. There can be no assurance that additional funding will be available for
the Company to finance its ongoing operations on acceptable terms, if at all.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements
and supplementary financial information that are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report
because the Company will file a definitive proxy statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement")
for its annual meeting of shareholders to be held May 14, 1997 and the
information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company and the Chairman
of the Company's Board of Directors is incorporated by reference from the
information under the caption "Election of Directors--Nominees" in the Company's
Proxy Statement.
Information as to the Company's executive officers appears at the end
of Part I of this report.
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<PAGE> 39
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption
"Common Stock Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement.
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<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements and Report of Ernst & Young LLP, Independent
Auditors
Report of Ernst & Young LLP, Independent Auditors.
Consolidated Balance Sheet at December 31, 1996 and 1995.
Consolidated Statements of Operations - Years ended December
31, 1996, 1995 and 1994.
Consolidated Statement of Shareholders' Equity - Three years
ended December 31, 1996.
Consolidated Statements of Cash Flows - Years ended December
31, 1996, 1995, and 1994.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Financial statement schedules are omitted because they are not
applicable or are not required as the information required to
be set forth therein is included in the financial statements
or notes thereto.
3. Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
EXHIBITS
<S> <C> <C>
3.4(1) Form of Amended and Restated Certificate of Incorporation.
3.5(1) Form of Bylaws.
3.6(5) Certificate of Designation of 7% Redeemable Convertible Preferred Stock, Series A of Connective
Therapeutics, Inc., as filed with the Delaware Secretary of State on December 4, 1996.
4.1(1) Form of Common Stock Certificate.
10.1(1) Form of Indemnification Agreement.
10.2(1)* 1994 Stock Plan and form of Option Agreement.
10.3(1)* 1995 Employee Stock Purchase Plan and form of Subscription Agreement.
10.4(1)* 1995 Directors' Stock Option Plan and form of Option Agreement.
10.5(1) Third Amended and Restated Registration Rights Agreement dated February 14, 1995 among the
Registrant and certain security holders of the Registrant and Amendments Nos. 1 and 2 thereto
dated May 31, 1995 and September 28, 1995.
10.6(1)(2) License Agreement dated September 27, 1993, between Genentech, Inc. and the Company, Amendment
dated July 14, 1994, and side letter agreement dated November 17, 1994.
10.8(1) Assignment and Assumption Agreement, dated June 3, 1994, by and between the Company and XOMA
Corporation.
</TABLE>
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<PAGE> 41
<TABLE>
<S> <C> <C>
10.9(1)(2) Technical Collaboration and Manufacturing Agreement, dated May 24, 1994, by and between the
Company and Scios Nova Inc.
10.10(1)(2) Technology Acquisition Agreement dated June 3, 1994 by and between the Company and XOMA
Corporation, and License Agreement dated February 27, 1990 by and between Arthur A. Vandenbark,
Ph.D. and XOMA Corporation.
10.11(1)(2) Agreement on Interferon Gamma-1B dated December 8, 1995 by and between the Company and
Genentech, Inc.
10.12(1) Equipment Lease Line, dated May 31, 1994 with Lease Management Services, Inc.
10.13(1) Business Loan Agreement, dated July 18, 1995, between the Company, Silicon Valley Bank and
MMC/GATX Partnership No. 1.
10.14(1)(2) Research Collaboration and Assignment Agreement, dated July 1, 1994, between the Company and
Dr. Arthur A. Vandenbark.
10.15(1) Employment and Bonus Agreement between the Company and Edward Amento, dated November 17, 1993.
10.16(1) Secured Loan Agreements between the Company and Edward Amento dated November 1, 1993 and
July 11, 1994, respectively.
10.17(1) Consulting Agreement dated November 17, 1993 between the Company and Brian Seed.
10.18(1) Consulting Agreement dated November 17, 1993 between the Company and Eugene Bauer.
10.19(1) Employment Agreement dated June 9, 1994 between the Company and Thomas Wiggans.
10.20(1) Loan Agreements between the Company and Thomas Wiggans dated July 15, 1994 and August 1, 1994.
10.21(1) Letter Agreement with G. Kirk Raab dated October 1, 1995.
10.23(1) Facility Master Lease between the Company and Renault & Handley dated February 9, 1994.
10.26(1) Loan and Security Agreement dated December 21, 1995 by and among the Company, Silicon Valley
Bank and MMC/GATX Partnership No. 1.
10.27(3)(2) Agreement on Relaxin Rights in Asia dated April 1, 1996 between the Company and Mitsubishi
Chemical Corporation (Exhibits A and B to Exhibit 10.27 have been previously filed as Exhibit 10.6
above. Confidential treatment has been granted as to certain portions of Exhibit 10.6 by the SEC).
10.28(3)(2) Soltec License Agreement dated June 14, 1996.
10.29(4) Laboratory Services Agreement dated October 24, 1996.
10.30(4) Agreement with Dr. Edward Amento dated October 24, 1996.
10.31(4) Form of Directors and Officers Change in Control Agreement
10.32(5) Common Stock Purchase Agreement, dated December 4, 1996 by and among the Company and certain
investors.
10.33(5) Registration Rights Agreement, dated December 4, 1996 by and among the Company and certain
investors.
10.34(5) Securities Purchase Agreement, dated December 4, 1996 by and among the Company and a certain
purchaser.
10.35(5) Warrant, dated December 4, 1996 between the Company and a certain purchaser.
10.36(6)+ Asset Purchase Agreement dated December 2, 1996 between the Company, SmithKline Beecham
Corporation, SmithKline Beecham Pharma Inc., SmithKline Beecham Properties, Inc. and SmithKline
Beecham Inter-American Corporation.
10.37(6) Stock Issuance Agreement dated December 31, 1996 between the Company and SmithKline Beecham
Properties, Inc.
10.38(6) Secured Promissory Note dated December 31, 1996 issued to SmithKline Beecham Corporation.
10.39(6) Security Agreement dated December 31, 1996 between the Company and SmithKline Beecham
Corporation.
10.40(6)+ Supply Agreement dated December 31, 1996 between the Company and SmithKline Beecham Corporation.
10.41(6) Transitional Services Agreement dated December 31, 1996 between the Company and SmithKline
Beecham Corporation.
10.42 Structured Equity Line Flexible Financing Agreement dated January 2, 1997 between the Company
and Kepler Capital LLC.
</TABLE>
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<PAGE> 42
<TABLE>
<S> <C> <C>
10.43 Registration Rights Agreement dated January 2, 1997 between the Company and Kepler Capital LLC.
11.1 Statement of Computation of Net Loss Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 44 of this Report)
27.1 Financial Data Schedule (EDGAR - filed version only)
</TABLE>
================================================================================
+ Certain portions of this Exhibit have been omitted for which
confidential treatment has been requested and filed separately by the Securities
and Exchange Commission.
* This item is a compensatory plan required to be listed as an exhibit to
this form pursuant to Item 601(a)(10)(iii) of Regulation S-K.
1. Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 33-80261) declared
effective by the Securities and Exchange Commission (the "SEC") on
January 31, 1996.
2. Certain portions of this Exhibit were granted confidential treatment
pursuant to an order from the SEC.
3. Incorporated by reference from an exhibit to the Company's
Quarterly Report on Form 10-Q (File No. 0-27406) filed with the SEC for
the fiscal quarter ended June 30, 1996.
4. Incorporated by reference from an exhibit to the Company's
Quarterly Report on Form 10-Q (File No. 0-27406) filed with the SEC for
the fiscal quarter ended September 30, 1996.
5. Incorporated by reference from an exhibit to the Company's Report on
Form 8-K (File No. 0-27406) dated December 4, 1996.
6. Incorporated by reference from an exhibit to the Company's Report on
Form 8-K (File No. 0-27406) dated January 15, 1997.
(B) REPORTS ON FORM 8-K
The following Reports on Form 8-K were filed during the three months
ended December 31, 1996:
The Company filed a current report on 8-K dated December 4, 1996
reporting the private sale of 972,224 shares of Common Stock to certain
institutional investors and the private sale of 200 shares of 7% Redeemable
Convertible Preferred Stock, Series A, to an offshore investor. Such disclosures
were provided under Item 5 (Other Events) and Item 9 (Sale of Equity Securities
Pursuant to Regulation S) of Form 8-K. No financial statements were filed with
this report.
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<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Palo
Alto, California on this 17th day of March 1997.
CONNECTIVE THERAPEUTICS, INC.
By: /s/ CYNTHIA M. BUTITTA
Cynthia M. Butitta
Vice President, Finance and Administration and
Chief Financial Officer
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<PAGE> 44
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Thomas G. Wiggans and Cynthia M. Butitta,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ THOMAS G. WIGGANS President, Chief Executive Officer
---------------------------------- and Director
Thomas G. Wiggans (Principal Executive Officer)
March 13, 1997
/s/ CYNTHIA M. BUTITTA Vice President of Finance and
---------------------------------- Administration and Chief
Cynthia M. Butitta Financial Officer (Principal
Financial and Accounting
Officer) March 13, 1997
/s/ G. KIRK RAAB Chairman of the Board of
---------------------------------- Directors
G. Kirk Raab March 13, 1997
/s/ EDWARD P. AMENTO Director
----------------------------------
Edward P. Amento March 12, 1997
/s/ ALEXANDER E. BARKAS Director
----------------------------------
Alexander E. Barkas March 14, 1997
/s/ EUGENE A. BAUER Director
----------------------------------
Eugene A. Bauer March 17, 1997
/s/ ROBERT E. CURRY Director
----------------------------------
Robert E. Curry March 17, 1997
/s/ BRIAN H. DOVEY Director
----------------------------------
Brian H. Dovey March 14, 1997
/s/ THOMAS D. KILEY Director
----------------------------------
Thomas D. Kiley March 19, 1997
/s/ KENNETH B. PLUMLEE Director
----------------------------------
Kenneth B. Plumlee March 13, 1997
/s/ JOSEPH J. RUVANE, JR. Director
----------------------------------
Joseph J. Ruvane, Jr. March 17, 1997
/s/ PETRI T. VAINIO Director
----------------------------------
Petri T. Vainio March 12, 1997
</TABLE>
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<PAGE> 45
CONNECTIVE THERAPEUTICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................... F-2
Balance Sheets........................................................ F-3
Statements of Operations.............................................. F-4
Statements of Stockholders' Equity (Net Capital Deficiency)........... F-5
Statements of Cash Flows.............................................. F-6
Notes to Financial Statements......................................... F-7
</TABLE>
F-1
<PAGE> 46
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of Connective Therapeutics, Inc.
(also known as Connetics Corporation)
We have audited the accompanying balance sheets of Connective
Therapeutics, Inc. (also known as Connetics Corporation) as of December 31, 1996
and 1995, and the related statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material aspects, the financial position of Connective
Therapeutics, Inc. at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 13, 1997
F-2
<PAGE> 47
CONNECTIVE THERAPEUTICS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995
------- -------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $14,555 $ 9,023
Short-term investments 9,999 --
Accounts receivable 428 --
Prepaid expenses and other current assets 124 154
------- -------
Total current assets 25,106 9,177
Property and equipment, net 1,484 1,367
Notes receivable from related parties 301 414
Deposits and other assets 250 838
Licensed assets and product rights 20,781 --
------- -------
$47,922 $11,796
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,179 $ 441
Accrued liabilities 2,023 808
Accrued process development expenses 1,198 668
Accrued payroll and related expenses 394 157
Current portion of capital lease obligations, capital loans and long-term debt 2,408 1,259
-------- --------
Total current liabilities 10,202 3,333
Notes payable -- 2,205
Non-current portion of capital lease obligations, capital loans and long-term debt 3,062 4,933
Other long-term liabilities 10,858 1,262
Redeemable convertible preferred stock, Series A 2,000 --
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value: 5,000,000 shares authorized;
redeemable convertible preferred stock, Series A, 200 shares issued and
outstanding at December 31, 1996; no shares issued and outstanding
at December 31, 1995; and preferred stock, no shares issued and
outstanding at December 31, 1996 and 3,965,137 shares issued and
outstanding at December 31, 1995 -- 4
Common stock, $0.001 par value: 50,000,000 shares authorized;
9,057,393 shares issued and outstanding at December 31, 1996 and
908, 511 issued and outstanding at December 31, 1995 9 1
Additional paid in capital 60,998 21,425
Notes receivable from stockholders (75) (134)
Deferred compensation, net (1,315) (1,933)
Other (3) --
Accumulated deficit (37,814) (19,300)
-------- --------
Total stockholders' equity 21,800 63
-------- --------
$ 47,922 $ 11,796
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 48
CONNECTIVE THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Product revenues $ 428 $ -- $ --
Operating costs and expenses:
License amortization 594 -- --
Research and development 13,161 8,271 6,436
General and administrative 5,434 2,113 1,317
----------- ----------- -----------
Total operating expenses 19,189 10,384 7,753
Interest income 1,190 405 38
Interest expense (943) (393) (135)
----------- ----------- -----------
Net loss $ (18,514) $ (10,372) $ (7,850)
=========== =========== ===========
Net loss per share $ (2.71) $ (2.34) $ (1.84)
=========== =========== ===========
Shares used to calculate net loss per share 6,824,668 4,435,112 4,276,185
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 49
CONNECTIVE THERAPEUTICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID IN NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
------ ------ ------ ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 227,081 $ -- 604,802 $ 1 $ 1,037 $ (20)
Issuance of series A preferred stock 1,116,180 1 -- -- 4,950 --
Issuance of common stock under stock option plans -- -- 261,138 -- 117 (77)
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1994 1,343,261 1 865,940 1 6,104 (97)
Issuance of series B preferred stock, net
of issuance costs 2,621,876 3 -- -- 12,787 (28)
Issuance of common stock under stock option plans -- -- 42,571 -- 19 (9)
Deferred compensation related to certain options
and stock purchase rights granted to employees
and consultants -- -- -- -- 2,265 --
Amortization of deferred compensation -- -- -- -- -- --
Issuance of warrants -- -- -- -- 250 --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1995 3,965,137 4 908,511 1 21,425 (134)
---------- ---------- ---------- ---------- ---------- ----------
Issuance of common stock in initial public offering
("IPO"), net of issuance costs of $2,981 -- -- 2,500,000 2 24,519 --
Conversion of preferred stock into common stock
in conjunction with IPO in February (3,965,137) (4) 3,965,137 4 -- --
Issuance of common stock under stock option plans,
net of repurchases -- -- 51,586 -- 22 --
Issuance of common stock warrants -- -- 10,328 -- -- --
Issuance of common stock under employee stock
purchase plan -- -- 11,874 -- 96 --
Issuance of common stock pursuant to private
placement, net of issuance costs -- -- 972,224 1 5,929 --
Issuance of common stock upon asset purchase
from SmithKline Beecham -- -- 637,733 1 8,999 --
Payment of notes receivable -- -- -- -- -- 59
Deferred compensation related to certain options
and stock purchase rights granted to consultants -- -- -- -- 145 --
Amortization and reversal of deferred compensation -- -- -- -- (137) --
Unrealized loss on investments -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1996 -- $ -- 9,057,393 $ 9 $ 60,998 $ (75)
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
DEFERRED GAINS/LOSS ACCUMULATED
COMPENSATION ON INVESTMENTS DEFICIT TOTAL
------------ ---------- ---------- -----
<S> <C> <C> <C> <C>
Balances at December 31, 1993 $ -- $ -- $ (1,078) $ (60)
Issuance of series A preferred stock -- -- -- 4,951
Issuance of common stock under stock option plans -- -- -- 40
Net loss -- -- (7,850) (7,850)
---------- ---------- ---------- ----------
Balances at December 31, 1994 -- -- (8,928) (2,919)
Issuance of series B preferred stock, net
of issuance costs -- -- -- 12,762
Issuance of common stock under stock option plans -- -- -- 10
Deferred compensation related to certain options
and stock purchase rights granted to employees
and consultants (2,265) -- -- --
Amortization of deferred compensation 332 -- -- 332
Issuance of warrants -- -- -- 250
Net loss -- -- (10,372) (10,372)
---------- ---------- ---------- ----------
Balances at December 31, 1995 (1,933) -- (19,300) 63
---------- ---------- ---------- ----------
Issuance of common stock in initial public offering
("IPO"), net of issuance costs of $2,981 -- -- -- 24,521
Conversion of preferred stock into common stock
in conjunction with IPO in February -- -- -- --
Issuance of common stock under stock option plans,
net of repurchases -- -- -- 22
Issuance of common stock warrants -- -- -- --
Issuance of common stock under employee stock
purchase plan -- -- -- 96
Issuance of common stock pursuant to private
placement, net of issuance costs -- -- -- 5,930
Issuance of common stock upon asset purchase
from SmithKline Beecham -- -- -- 9,000
Payment of notes receivable -- -- -- 59
Deferred compensation related to certain options
and stock purchase rights granted to consultants (145) -- -- --
Amortization and reversal of deferred compensation 763 -- -- 626
Unrealized loss on investments -- (3) -- (3)
Net loss -- -- (18,514) (18,514)
---------- ---------- ---------- ----------
Balances at December 31, 1996 $ (1,315) $ (3) $ (37,814) $ 21,800
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 50
CONNECTIVE THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(18,514) $(10,372) $ (7,850)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 1,237 393 120
Technology acquired in exchange for note payable and other
long-term liability -- 855 1,850
Amortization of deferred compensation 626 332 --
Changes in assets and liabilities:
Accounts receivable (428) -- --
Prepaid expenses and other current assets 30 (72) 18
Notes receivable from related parties 173 (116) (298)
Deposits and other assets 487 (543) 8
Accounts payable 3,738 (117) 409
Accrued liabilities 1,215 587 65
Accrued process development 530 209 459
Accrued payroll and related expenses 237 78 26
Other long-term liabilities 221 (31) 793
-------- -------- --------
Net cash used by operating activities (10,448) (8,797) (4,400)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (21,650) (7,560) --
Sales and maturities of short-term investments 11,648 7,560 --
Capital expenditures (461) (400) (650)
Licensed assets and product rights (3,000) -- --
-------- -------- --------
Net cash used in investing activities (13,463) (400) (650)
-------- -------- --------
Cash flows from financing activities:
Proceeds (payments) from bank loans -- (750) 750
Payment of notes payable (2,205) -- --
Proceeds from capital loans and long-term debt 323 5,230 540
Payments on obligations under capital leases and capital loans (1,244) (319) (111)
Proceeds from issuance of redeemable preferred stock 2,000 -- --
Proceeds from issuance of preferred and common stock, net of issuance costs 30,569 12,772 4,429
-------- -------- --------
Net cash provided by financing activities 29,443 16,933 5,608
-------- -------- --------
Net change in cash and cash equivalents 5,532 7,736 558
Cash and cash equivalents at beginning of period 9,023 1,287 729
-------- -------- --------
Cash and cash equivalents at end of period $ 14,555 $ 9,023 $ 1,287
======== ======== ========
Supplementary information:
Interest paid $ 1,062 $ 274 $ 71
Investing and financing activities:
Assets acquired under capital leases $ 199 $ 171 $ 611
Issuance of preferred stock in exchange for cancellation of accrued
liability related to technology license $ -- $ -- $ 563
Issuance of warrants $ -- $ 250 $ --
Issuance of preferred and common stock in exchange for notes receivable $ -- $ 37 $ 77
Deferred compensation related to stock options and purchase rights $ 145 $ 2,265 $ --
Issuance of common stock for licensed assets and product rights purchased
from SmithKline Beecham $ 9,000 $ -- $ --
Issuance of note payable for licensed assets and product rights purchased
from SmithKline Beecham $ 9,375 $ -- $ --
</TABLE>
See accompanying notes to financial statements.
<PAGE> 51
CONNECTIVE THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Connective Therapeutics, Inc. (the "Company") was incorporated in the
State of Delaware on February 8, 1993. In March 1997, the Company's board of
directors approved a change of the Company's name from "Connective Therapeutics,
Inc." to "Connetics Corporation", subject to approval by the Company's
stockholders at its annual meeting in May 1997. References in this section to
historical results include the Company's results when it was known as
"Connective Therapeutics, Inc." From its inception until December 1996, the
Company was in the development stage, principally involved in research and
development of therapeutics for diseases that involve connective tissues of the
body, obtaining financing, recruiting personnel, securing operating facilities,
and pursuing business development opportunities. On December 31, 1996, the
Company acquired exclusive U.S. and Canadian rights to Ridaura(R), a disease
modifying antirheumatic drug, from SmithKline Beecham Corporation and related
entities. Ridaura(R) is the first product the Company markets and it signifies
the beginning of the Company's transition from purely product development to a
revenue based sales and marketing company. The Company has no products from its
current development programs available for sale and does not expect to have any
for several years. Accordingly, the Company's ability to continue its research
and development activities is dependent upon the ability of management to obtain
substantial additional financing.
Liquidity and financial viability
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to increase over at least
the next several years. The Company plans to continue to finance its operating
activities with a combination of stock sales, such as the initial public
offering completed in February 1996 and the self-managed private financings in
December 1996, payments from corporate partnering arrangements, acquisition of
revenue generating products such as Ridaura(R) and/or debt financing.
Ultimately, the Company's ability to continue as a going concern is dependent
upon obtaining substantial additional financings and upon achieving profitable
operations through the successful commercialization of products.
Cash, cash equivalents and short-term investments
Cash and cash equivalents consist of cash on deposit with banks and
money market instruments with original maturity of 90 days or less. Investments
with maturities beyond three months at the date of acquisition and that mature
within one year from the balance sheet date are considered to be short-term
investments. Cash equivalents and short-term investments are carried at fair
value, with unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. The cost of securities sold is based on the
specific identification method.
<PAGE> 52
Management of the Company believes it has established guidelines for
investment of its excess cash relative to diversification and maturities that
maintain safety and liquidity.
Property and equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over the useful lives of the assets, generally three to
five years. Assets acquired under capital lease arrangements are amortized over
the shorter of the estimated useful lives or the lease term.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that fair values be disclosed for
most of the Company's financial instruments. The carrying amount of cash, cash
equivalents and short-term investments, accounts receivable, current
liabilities, notes payable, and long-term lease obligations, loans and debt are
considered to be representative of their respective fair values.
Research and development
Research and development costs are charged to expense as incurred.
Revenue recognition
Revenues from product sales are recognized upon shipment.
Income taxes
Income taxes are accounted for under the asset and liability method
where deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
Net loss per share
Net loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock options
and convertible preferred stock are excluded from the computation as their
effect is antidilutive, except that, pursuant to Securities and Exchange
Commission Staff Accounting Bulletins, common equivalent shares issued during
the twelve-month period prior to the initial public offering in February 1996
are presumed to have been issued in contemplation of the public offering and
have been included in the calculation as if they were outstanding for all
periods through December 31, 1995 (using the treasury stock method for stock
options and the anticipated offering price).
<PAGE> 53
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New accounting standards
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which requires the Company to adopt disclosure
provisions for stock-based compensation effective January 1, 1996. The standard
defines a fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation is measured at the grant
date based on the fair value of the award and is recognized over the service
period, which is usually the vesting period. This standard encourages rather
than requires companies to adopt the fair value method of accounting for
employee stock-based transactions. Companies are permitted to continue to
account for such transactions under Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," but will be required to make
pro forma disclosures as if the fair value method had been applied. The Company
has elected to continue to apply APB Opinion No. 25 in its financial statements
and has provided pro forma disclosures in the accompanying notes to financial
statements.
Effective January 1, 1996, the Company adopted Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("Statement No. 121").
Statement No. 121 requires losses from impairment to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. The adoption of Statement No. 121 did not have a
material effect on the Company's financial statements for the twelve months
ended December 31, 1996.
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The following is a summary of available-for-sale investments ( tables in
thousands):
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------
Amortized Gross Gross
Costs Unrealized Unrealized Estimated
Gains Loss Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate bonds $ 9,802 $ 2 $ (5) $ 9,799
Commercial paper 8,269 -- -- 8,269
Certificate of deposits 5,021 -- -- 5,021
Money market funds 14 -- -- 14
-------- -------- -------- --------
Total 23,106 2 (5) 23,103
Less amount classified as cash equivalents (13,104) -- -- (13,104)
-------- -------- -------- --------
Total short-term investments $ 10,002 $ 2 $ (5) $ 9,999
======== ======== ======== ========
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Costs Gains Loss Fair Value
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Money market funds $ 1,686 $ - $ - $ 1,686
Less amounts classified as cash equivalents (1,686) - - (1,686)
-------- ---------- ---------- ---------
Total short-term investments $ - $ - $ - $ -
======== ========== ========== =========
</TABLE>
The net unrealized holding gain (loss) on available-for-sale
investments included as a separate component of stockholders' equity at December
31, 1996 totaled $(3,000). The gross realized gains on sales of available-for-
sale investments for the year ended December 31, 1996 totaled $543,000, and the
gross realized losses for the years ended December 31, 1996 and 1995 totaled
$289,000 and $21,000, respectively. Realized gains and losses were calculated
based on the specific identification method.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
------ -------
<S> <C> <C>
Laboratory equipment................................ $1,357 $ 928
Computer equipment.................................. 288 217
Furniture and fixtures.............................. 224 169
Leasehold improvements.............................. 672 567
------ ------
2,541 1,881
Less accumulated depreciation and amortization...... (1,057) (514)
------ ------
Property and equipment, net......................... $1,484 $1,367
====== ======
</TABLE>
Property and equipment includes assets under capitalized leases at
December 31, 1996 and 1995 of approximately $1,005,000 and $805,000,
respectively. Accumulated amortization related to leased assets was
approximately $559,000 and $280,000 at December 31, 1996 and 1995, respectively.
4. NOTES RECEIVABLE FROM RELATED PARTIES
At December 31, 1996 and 1995, the Company held notes receivable from
officers of the Company totaling $301,000 and $414,000, respectively. These
notes, which bear interest at rates ranging from 6% to 8% annually, are
collateralized by certain personal assets of the officers and are generally due
and payable within three to five years.
5. RESEARCH AND LICENSE AGREEMENTS:
Licensed Assets and Product Rights
In December 1996, the Company entered into an agreement with SmithKline
Beecham Corporation and affiliated entities ("SmithKline") under which the
Company acquired exclusive United States and Canadian rights to Ridaura(R), a
disease modifying antirheumatic drug. Under
<PAGE> 55
the Asset Purchase Agreement, the Company provided a $3.0 million upfront cash
payment, which was paid in January 1997, a non-interest bearing $11.0 million
promissory note payable in two installments, in January 1998 and January 1999 of
$6.0 million and $5.0 million, respectively, 637,733 shares of common stock with
a guaranteed value of $9.0 million at December 31, 1997, and up to $6.0 million
in royalty payments based on future product sales, for a potential aggregate
consideration of up to $29.0 million. The $11.0 million promissory note was
discounted at inception using an imputed interest rate of 11% and future imputed
interest expense attributable to these payments is $1.6 million. The amount of
the discounted note, $9.4 million, has been included in other long-term
liabilities, and the total purchase price of $21.4 million has been capitalized.
The Company has determined the useful life of this asset to be three years based
on information regarding products currently in the Company's development
pipeline, competitive products, the off-patent position of Ridaura(R) and
expected future revenues from Ridaura(R), and has recorded amortization of $0.6
million in December 1996.
Under a related Transitional Services Agreement, customer orders and
distribution for the product will continue to be managed by SmithKline through
1997 only with no additional consideration for performing such services. The
parties also entered into a Supply Agreement, under which SmithKline will
manufacture and supply Riduara(R) in final package form to the Company for an
initial term through December 2001.
License agreements
In September 1993, the Company entered into a Letter Agreement and a
License Agreement with a corporation (the "Licensor"), which was subsequently
amended in July 1994, for an exclusive right to make, use and sell certain
products arising from licensed technology in a defined field and territory in
exchange for Series A preferred stock which was issued in September 1994. The
Company charged the value of the preferred stock to research and development
expense in 1993. In addition, the Company charged $684,000 to expense in 1994
for the purchase of research materials and payment of technology transfer costs
under the agreement. This amount is due in September 1998 and has been included
in other long-term liabilities. The Company will also pay to the Licensor
royalties on sales of products arising from the licensed technology, if any. In
April 1996, the Company acquired worldwide rights to such technology from the
Licensor.
In June 1996, the Company entered into an exclusive License Agreement
with Soltec Research PTY Ltd. (the "Licensor"), to develop and market
betamethasone mousse (a foam mousse formulation of the dermatologic drug,
betamethasone valerate) in North America. Under the terms of the Agreement, the
Company will pay $75,000, of which $35,000 was paid in 1996, in licensing fee to
the Licensor (based on certain milestones) plus royalties on future sales of
products, if any, arising from the licensed technology. The Company also has an
exclusive option on the Licensor's foam mousse system for the delivery of other
compounds.
Technology acquisition agreement
In June 1994, the Company entered into a Technology Acquisition
Agreement (the "Agreement") with a corporation to purchase all rights to certain
technology and for the exclusive right to make, use and sell certain products
pursuant to a sublicense agreement in exchange for the
<PAGE> 56
issuance of a $1,350,000 subordinated promissory note. The note, including
interest, was paid in full in February 1996 after the closing of the Company's
initial public offering of common stock. In addition to this note, the Company
has accrued additional consideration of $500,000, which is payable by the
Company upon the earlier of the achievement of commencement of phase III
clinical trials for a product involving the licensed technology, or six years
from the date of the agreement. This amount has been included in other long-term
liabilities.
The Agreement also provided for certain contingent payments based on
future financings. As a result of the Series B financing which was completed in
1995, the Company issued an additional note in the amount of $855,000 under this
Agreement. The note, including interest, was paid in full in February 1996 after
the closing of the Company's initial public offering of common stock. An
additional $1,000,000 will be payable by the Company upon FDA approval of a
product involving the licensed technology.
Under the terms of the Agreement, the Company is also committed to pay
royalties on applicable sales.
Technology license agreement
In December 1995, the Company entered into a Technology License
Agreement (the "License") to acquire exclusive rights to develop and market
products arising from certain licensed technology, other than for its currently
marketed indications, for dermatological diseases in the United States as part
of a collaborative marketing and profit sharing agreement. Such agreement is
contingent upon the Company using its best efforts to achieve commencement of a
Phase III clinical trial within 30 months of the agreement effective date. In
September 1996, the Company achieved this milestone with the initiation of a
Phase III clinical trial.
The Company will fund all costs to develop a product using the licensed
technology and has the option to defer payments for the purchase of commercial
materials from the licensor, if any, in exchange for certain debt instruments.
If the Company is successful in commercialization of a product using the
licensed technology, and if certain defined annual sales levels are met, the
licensor has the right to co-promote the product upon terms mutually agreeable
to the parties.
Expenses
Expenses under all of the Company's research and license agreements
totaled $35,000, $855,000 and $3,089,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
6. FINANCING ARRANGEMENTS
Long-Term Debt
On December 21, 1995, the Company entered into a term Loan and Security
Agreement (the "Term Loan") with a bank consortium (the "Lenders") under which
the Company borrowed $5,000,000. The Term Loan bears interest at 13%, with
interest only payments for the first six
<PAGE> 57
months, and interest and principal payments for the following 30 months. In
connection with the Term Loan, the Company issued a warrant to purchase 73,071
shares of Common Stock at a price of $5.78 per share. The warrant is exercisable
at any time through December 2002. In conjunction with the Term Loan, the
Company granted the lender a first security interest in its corporate assets.
Under the terms of the loan, the Company is required to maintain a minimum cash
balance of the greater of $6,000,000 or six times the Company's average monthly
cash usage. If the Company violates the covenants during the loan period, the
Company would be required to pledge restricted cash of 65% of the outstanding
loan, or $2,681,000 as of December 31, 1996, to cure the violation.
Future minimum principal payments under the Term Loan include
$1,929,000 and $2,196,000 for the years ending December 31, 1997 and 1998,
respectively.
Convertible Subordinated Note Financing
On December 7, 1995, the Company entered into a Master Bridge Loan
Agreement (the "Bridge Loan") with certain shareholders to provide for
borrowings up to $5 million. The Company did not draw down any portion of this
Bridge Loan and the right to draw down funds expired upon the successful
completion of the Company's initial public offering in February 1996. In
connection with the Bridge Loan, the Company issued five-year warrants to
purchase a total of 22,727 shares of common stock at the exercise price equal to
$11.00, the price per share of securities issued in the Company's initial public
offering.
Structured Equity Line Flexible Financing
On December 2, 1996, the Company entered into a Structured Equity Line
Flexible Financing Agreement (the "Agreement") with Kepler Capital LLC
("Kepler") that allows the Company to access up to $25 million through sales of
its Common Stock. The equity line will be available for a three-year period
beginning on or before December 1, 1997. The Agreement provides that the Company
can obtain from $500,000 to $2,000,000 at any one time through a sale of its
Common Stock to Kepler, subject to the satisfaction of certain conditions,
including registration of the shares for resale, minimum volume requirements,
and a minimum trading price of $7.00 per share over a specified period. In
addition, the Company must sell $500,000 of its Common Stock from time to time
if the price per share exceeds $10.00 and certain volume conditions are met.
Such sales will occur no more frequently than every 60 trading days. Any shares
sold under the equity line will be priced at 93% of the lesser of (i) the
average of the daily low trading price of the Common Stock for the 5 days
preceding the sale and (ii) the weighted average of daily low trading price of
the Common Stock during a valuation period. The purchase price will be subject
to further adjustment, up to a maximum discount of 15% depending on the length
of the valuation period - the period following the purchase date and ending on
the day, not to exceed 80 trading days, on which the aggregate value of open
market trading during the period equals or exceeds the aggregate value of open
market trading during the 20 days preceding the purchase date. As a commitment
fee to Kepler for keeping the equity line available, the Company has issued a
warrant to purchase 250,000 shares of Common Stock (see Note 11).
<PAGE> 58
7. CAPITAL LEASE OBLIGATIONS AND CAPITAL LOANS
The Company has capital lease and capital loan credit lines available
totaling $3,245,000 at December 31, 1996, of which $975,000 was unused and
available at December 31, 1996. Under the terms of the master lease agreement,
ownership of the leased equipment reverts to the Company at the end of the lease
term.
As of December 31, 1996, future minimum lease payments under capital
leases and principal payments on capital loans are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES CAPITAL LOANS
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Year ending December 31:
1997...................................................... $ 428 $ 96
1998...................................................... 411 110
1999...................................................... 79 131
2000...................................................... 54 67
Thereafter................................................ 43 -
----- ----
Total minimum lease and principal payments, respectively.... 1015 $404
====
Less amount representing interest........................... 167
-----
Present value of future payments............................ 848
Less current portion of capital lease obligations........... 329
-----
Non-current portion of capital lease obligations............ $ 519
=====
</TABLE>
The obligations under the capital leases and loans are secured by the
leasehold improvements and equipment financed, bear interest at fixed rates of
approximately 8% to 14% and are payable in monthly installments through January
2002.
8. OPERATING LEASES
The Company subleases its facility under a noncancelable operating
lease which expires in July 1999, with an option to extend the term of the lease
for one additional period of two years. The future minimum rental payments under
the leases are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Years ending December 31:
1997................................................ $ 561
1998................................................ 589
1999................................................ 352
------
$1,502
</TABLE>
The Company recognizes rent expenses on a straight-line basis over
the term of each lease. Rent expense under operating leases was approximately
$425,000, $416,000 and $325,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
9. NOTES RECEIVABLE FROM STOCKHOLDERS
At December 31, 1996, the Company held $75,000 in notes receivable from
certain stockholders for the purchase of the Company's common stock. These notes
bear interest at rates ranging from 6% to 7% annually and are secured by the
shares of common stock held by the
<PAGE> 59
borrowers. The notes are due and payable, together with any unpaid interest, no
later than either the fourth or fifth anniversary of the note, or, for certain
of these notes, within 30 days of termination of employment with the Company.
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In December 1996, the Company issued 200 shares of 7% Series A
Redeemable Convertible Preferred Stock ("Series A Redeemable Preferred Stock"),
par value $.001 per share, in a Regulation S offering at a per share price of
$10,000 with a mandatory redemption date of December 4, 1999. Dividends and
principal on the Series A Redeemable Preferred Stock are convertible into common
stock at a conversion price equal to 85% of the average closing bid price for
the ten trading days immediately preceding the conversion date. Each holder is
entitled to convert all or a portion of its Series A Redeemable Preferred Stock
into common stock at any time. Any Series A Redeemable Preferred Stock that upon
conversion would result in the cumulative issuance of common stock in excess of
20% of the outstanding common stock, will be automatically redeemed by the
Company for cash at a redemption price equal to 120% of the $10,000 original
purchase price plus accrued dividends at the rate of 7%.
11. STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of shares, common stock
(Common Stock) and preferred stock (Preferred Stock), each with par value of
$.001 per share. Prior to the Company's initial public offering, two series of
Preferred Stock, Series A and B were issued. In connection with the initial
public offering of the Company's common stock in February 1996, each previously
outstanding share of preferred stock (an aggregate of 3,965,137 shares) was
converted into one share of common stock and all previously authorized preferred
stock was eliminated. The Company's Articles of Incorporation was restated to
delete all references to Series A and B of Preferred Stock, and to authorize a
new class of 5,000,000 shares of Preferred Stock.
Warrants
In July 1995, the Company issued warrants to purchase 18,395 shares of
Series B Preferred Stock at an exercise price of $4.89 per share pursuant to a
capital lease and capital loan agreement. Each warrant for the purchase of
preferred stock was converted into a warrant for the purchase of one share of
common stock and such warrants are exercisable any time through the later of
seven years from grant date or five years from the Company's initial public
offering of common stock in February 1996.
In connection with a Master Bridge Loan Agreement with certain
stockholders of the company in December 1995, the Company issued warrants which
expire in December 2000 to purchase a total of 22,727 shares of Common Stock at
a price of $11.00 per share.
Also in December 1995, in connection with a loan and security
agreement with a bank consortium, the Company issued warrants which expire in
December 2002 to purchase 73,071 shares of Common Stock at a price of $5.78 per
share.
<PAGE> 60
In conjunction with the Company's issuance of 200 shares of Series A
Redeemable Preferred Stock in December 1996 (see Note 10), warrants were issued
that allow the holders to purchase up to 20,000 shares of the Company's common
stock at an exercise price equal to 110% of the closing bid price on December 4,
1996, or $7.425 per share, with an expiration date of December 4, 2001.
In conjunction with the Structured Equity Line Flexible Financing
Agreement in December 1996 (See Note 6), the Company issued a warrant on January
2, 1997 to purchase 250,000 shares of common stock at an exercise price of $8.25
per share. The warrant is exercisable over a period of 5 years from date of
issuance. On each of the first, second and third anniversaries of the beginning
of the commitment period, the Company will issue the Investor an additional
five-year warrant exercisable for a number of shares based on the amount of
equity line still available to the Company.
Common stock
The Company has the right to repurchase, at the original issue price
per share, certain shares of common stock issued to employees, consultants,
investors and founders. This right generally expires ratably over a period of
time not greater than five years, in accordance with terms determined by the
Board of Directors.
At December 31, 1996 and 1995, outstanding shares of 154,786 and
392,102, respectively, were subject to repurchase at original issue prices
ranging from $0.04 to $0.45 per share, including shares issued pursuant to stock
purchase rights under the 1994 Stock Plan (see Note 12).
Dividend restrictions
The Company's loan agreement with a bank lender prohibits the Company
from declaring or paying a dividend without the banks' prior written consent.
Common shares reserved for future issuance
The Company has reserved shares of common stock as of December 31, 1996
as follows:
<TABLE>
<S> <C>
1994 Stock Plan............................................... 1,353,347
1995 Employee Stock Purchase Plan............................. 88,126
1995 Directors Stock Option Plan.............................. 150,000
Common stock warrants......................................... 384,193
-----------
1,975,666
</TABLE>
In addition, the Company is required to reserve shares of common stock
for issuance upon the conversion of the Series A Redeemable Convertible
Preferred Stock based on the conversion formula. The amount was approximately
344,000 shares at December 31, 1996.
<PAGE> 61
12. STOCK PLANS
1994 Stock Plan
In August 1994, the Company's Board of Directors (the "Board") adopted
the 1994 Stock Plan (the "Plan") which authorizes the Board to grant incentive
stock options, nonstatutory stock options, and stock purchase rights for up to
1,349,011 shares of common stock. The Plan was amended in January 1996 to
increase the number of shares by 150,989, bringing the total up to 1,500,000
shares of common stock.
The options under this Plan expire no later than ten years from the
date of grant. The exercise price of the incentive stock options, nonstatutory
stock options and options granted to 10% shareholders shall be at least 100%,
85%, and 110%, respectively, of the fair value of the stock subject to the
option on the grant date. The price for shares purchased pursuant to stock
purchase rights by 10% shareholders shall be at least 100% of the fair market
value of the stock on the date of grant.
The options generally become exercisable at such times as determined by
the Company's Board of Directors, but in no event at a rate of less than 20% per
year for a period of five (5) years from date of grant. Shares granted under the
Plan pursuant to stock purchase rights are generally subject to repurchase by
the Company at the original issue price per share. The Company's right to
repurchase these shares generally expires ratably over a period of time not
greater than five years.
The Company has elected to adopt Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," issued in
October 1995. In accordance with the provisions of SFAS No. 123, the Company
applies APB Opinion No. 25 and related interpretations in accounting for its
stock option plans and, accordingly, does not recognize compensation cost. If
the Company had elected to recognize compensation cost based on the fair value
of the options granted at grant date and including stock purchases under the
1995 Employee Stock Purchase Plan as prescribed by SFAS No. 123, net loss and
net loss per share would have been increased to the pro forma amounts indicated
in the table below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss - as reported............................ $(18,514) $(10,372)
Net loss - pro forma.............................. $(19,339) $(10,586)
Net loss per share - as reported.................. $ (2.71) $ (2.34)
Net loss per share - pro forma.................... $ (2.83) $ (2.39)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected until
1997.
<PAGE> 62
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<S> <C>
Expected stock price volatility .......................... 60.0%
Risk-free interest rate range ........................... 4.24% - 6.32%
Expected life of options ................................. 1.125 to 2.0 years
Option approach .......................................... multiple
</TABLE>
The weighted average fair value of options granted during 1996 and 1995
was $4.846 and $2.550 per share, respectively.
In July 1994, in conjunction with a research collaboration agreement,
the Company issued an option to purchase 22,483 shares of common stock at $0.45
per share to a consultant under the Plan. The option becomes exercisable based
on the achievement of certain technical milestones, except as to 6,745 shares
which become exercisable on the earlier of the achievement of milestones or over
a period of five years from the date of grant. Compensation expense will be
recorded for the options to purchase 15,738 common shares, for which vesting is
not fixed, based on the difference between the fair value on the date the
milestones are met and the exercise price of the options. The Company may
terminate the agreement and cancel all unvested shares at 30 days' written
notice. At December 31, 1996, none of the shares were exercisable. No
compensation expense has been incurred as of December 31, 1996 as none of the
milestones have been met.
Activity under the plan is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------------
SHARES RANGE WEIGHTED
AVAILABLE FOR NUMBER OF OF EXERCISE AVG. PRICE
GRANT SHARES PRICES PER SHARE
----- ------ ------ ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 337,253
Stock purchase rights grants (55,678) -- $0.45 $0.45
Options granted (57,772) 57,772 $0.45 $0.45
-------- ------
Balance, December 31, 1994 223,803 57,772 $0.45 $0.45
Additional shares authorized 1,011,758 -- -- --
Stock purchase rights granted (37,320) -- $0.45 $0.45
Options granted (910,178) 910,178 $0.45-2.22 $0.71
Options exercised -- (3,193) $0.45 $0.45
Options and stock purchase rights canceled 9,778 (8,655) $0.45 $0.45
--------- ----------
Balance, December 31, 1995 297,841 956,102 $0.45-2.22 $0.71
Additional shares authorized 150,989 -- -- --
Options granted (196,540) 196,540 $6.75-11.00 $8.76
Options exercised -- (62,302) $0.45 $0.45
Shares repurchased 10,717 -- $0.45 $0.45
Options canceled 57,154 (57,154) $0.45 $0.45
-------- -----------
Balance, December 31, 1996 320,161 1,033,186 $0.45-11.00 $2.04
</TABLE>
At December 31, 1996 and 1995, options to purchase 284,764 and 99,943
shares were exercisable, respectively. For the year ended December 31, 1995,
39,378 shares were issued under the Plan pursuant to stock purchase rights (none
at December 31, 1996).
For the years ended December 31, 1995 and 1996, the Company recorded
deferred compensation expense for the difference between the exercise price and
the deemed fair value of
<PAGE> 63
the Company's common stock, related to shares issued pursuant to stock purchase
rights and options granted in 1995 and 1996. These options were granted to
provide additional incentives to retain management and key employees. This
deferred compensation expense is being amortized over the related vesting
period, generally a 48-month period.
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors in December 1995. A total of 100,000
shares of Common Stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan is administered by the Compensation Committee of the Board of
Directors. Employees (including officers and employee directors) of the Company,
or of any majority owned subsidiary designated by the Board of Directors, are
eligible to participate if they are employed by the Company or any such
subsidiary for at least 20 hours per week and more than 5 months per year. The
Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 15% of an employee's compensation, at a
price equal to the lower of 85% of the fair market value of the Company's Common
Stock at the beginning or end of the offering period. As of December 31, 1996,
11,874 shares had been issued under the plan and 88,126 shares were reserved for
future issuance.
1995 Director Stock Option Plan
The 1995 Director Stock Option Plan (the "Directors' Plan") was adopted
by the Board of Directors in December 1995. A total of 150,000 shares of Common
Stock has been reserved for issuance under the Directors' Plan. The Directors'
Plan provides for the grant of nonstatutory stock options to nonemployee
directors of the Company.
The Directors' Plan provides that each person who first becomes a
nonemployee director of the Company after the date of the Company's initial
public offering shall be granted a nonstatutory stock option to purchase 30,000
shares of Common Stock (the "First Option") on the date on which the optionee
first becomes a nonemployee director of the Company. The First Option was not
granted to any nonemployee director who was a director as of the date of the
offering. Thereafter, on the date of each annual meeting of the Company's
stockholders, each nonemployee director (including directors who were not
eligible for a First Option) shall be granted an additional option to purchase
7,500 shares of Common Stock (a "Subsequent Option") if, on such date, he or she
shall have served on the Company's Board of Directors for at least six months.
The Directors' Plan provides that the First Option shall become
exercisable in installments as to 25% of the total number of shares subject to
the First Option on each of the first, second, third and fourth anniversaries of
the date of grant of the First Option; each Subsequent Option shall become
exercisable in full on the first anniversary of the date of grant of that
Subsequent Option. The exercise price of all stock options granted under the
Directors' Plan shall be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the option. Options granted under
the Directors' Plan have a term of ten years. No options were granted or
outstanding under the Directors' Plan at December 31, 1996.
<PAGE> 64
13. INCOME TAXES
As of December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $32,400,000. The net operating loss carryforward
will expire at various dates beginning from 2008 through 2011, if not utilized.
Significant components of the Company's deferred tax assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforward.......... $ 11,300 $ 5,500
Capitalized research and development..... 1,200 1,400
Research credits (expires 2008-2011)..... 800 400
Other.................................... 1,200 --
-------- -------
Net deferred tax assets.................. 14,500 7,300
Valuation allowance...................... (14,500) (7,300)
-------- -------
Total.......................... $ -- $ --
======== =======
</TABLE>
Because of the Company's lack of earnings history, the net deferred tax
asset has been fully offset by a valuation allowance.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "ownership change" provisions of the
Internal Revenue Code of 1986.
<PAGE> 1
Exhibit 10.42
STRUCTURED EQUITY LINE FLEXIBLE FINANCING(SM) AGREEMENT
Between
KEPLER CAPITAL LLC
And
CONNECTIVE THERAPEUTICS, INC.
Dated as of January 2, 1997
<PAGE> 2
STRUCTURED EQUITY LINE FLEXIBLE FINANCING(SM) AGREEMENT dated as of
January 2, 1997 (the "Agreement"), between Kepler Capital LLC (the "Investor"),
a limited liability company organized and existing under the laws of the State
of Delaware, and Connective Therapeutics, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue to the Investor, and the
Investor shall purchase from the Company, from time to time as provided herein,
the Company's Common Stock, par value $.001 per share (the "Common Stock"), for
an aggregate Purchase Price (as defined herein) of up to $25,000,000; and
WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) promulgated by the Securities and Exchange Commission ("SEC")
under the United States Securities Act of 1933, as amended (the "Securities
Act"), and/or upon such other exemption from the registration requirements of
the Securities Act as may be available with respect to any or all of the
investments in Common Stock to be made hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
Certain Definitions
Section 1.1 "Additional Warrant". See Section 2.8.
Section 1.2 "Additional Warrant Registration Statement". See Section
3.2(a).
Section 1.3 "Closing" shall mean the consummation of each purchase and
sale of Common Stock pursuant to Section 2.1.
Section 1.4 "Closing Date" shall mean, with respect to each purchase
and sale of Common Stock pursuant to this Agreement, the fifth Trading Day
following an Optional Purchase Date or a Mandatory Purchase Date, as the case
may be, provided all conditions to the Closing have been satisfied; provided,
however, that if the Investor shall notify the Company by the third Trading Day
that it does not expect to be able to complete its due diligence by such fifth
Trading Day, the Closing Date shall be the seventh Trading Day following such
Optional Purchase Date or Mandatory Purchase Date, as the case may be.
<PAGE> 3
Section 1.5 "Commitment Period" shall mean the period commencing on the
earlier to occur of (i) December 1, 1997 or (ii) such earlier date as the
Company and the Investor may mutually agree, and expiring on the earlier to
occur of (x) the date on which the Investor shall have purchased Common Stock
pursuant to this Agreement for an aggregate Purchase Price of $25,000,000, (y)
the date this Agreement is terminated pursuant to Section 2.6, or (z) the date
occurring three years (subject to extension as provided by Section 8.1) from the
date of commencement of such period.
Section 1.6 "Commitment Fee". See Section 2.8.
Section 1.7 "Equity Offerings" shall mean the issuance or sale by the
Company in a transaction exempt from or not subject to the registration
requirements of the Securities Act of any shares of Common Stock or securities
which are convertible into or exchangeable for its Common Stock or any warrants,
options or other rights to subscribe for or purchase its Common Stock or any
such convertible or exchangeable securities (other than shares of Common Stock
which may be issued upon exercise of options under the Company's employee or
director stock option plans, upon the conversion or exchange of convertible or
exchangeable securities or upon the exercise of warrants (including the Warrant
and the Additional Warrants), or other rights, which options, convertible or
exchangeable securities, warrants or other rights are outstanding on the date of
execution and delivery of the Agreement (other than the Additional Warrants) and
are listed in the SEC Documents on file with the Commission as of the date of
this Agreement (other than the Warrants and the Additional Warrants) and other
than (x) shares of Common Stock which may be issued upon exercise of options
granted under such plans, (y) shares of Common Stock which may be issued upon
exercise of the Warrant and the Additional Warrants, and (z) shares of Common
Stock or securities which are convertible into or exchangeable for Common Stock
or any warrants, options or other rights to subscribe for or purchase Common
Stock or any such convertible or exchangeable securities issued in strategic
corporate partnering transactions.
Section 1.8 The "Exchange Act". See Section 4.8.
Section 1.9 "Investment Amount" shall mean the amount invested by the
Investor with respect to any Optional Purchase Date or Mandatory Purchase Date,
as the case may be, as notified by the Company to the Investor in accordance
with Section 2.5 hereof.
Section 1.10 "Mandatory Purchase Date". See Section 2.1(b)(ii).
2
<PAGE> 4
Section 1.11 "Material Adverse Effect". See Section 5.5.
Section 1.12 "Optional Purchase Date". See Section 2.1(b)(i).
Section 1.13 "Principal Market" shall mean the Nasdaq National Market,
the Nasdaq Small-Cap Market, the American Stock Exchange or the New York Stock
Exchange, whichever is at the time the principal trading exchange or market for
the Common Stock.
Section 1.14 "Purchase Price". See Section 2.2.
Section 1.15 "Registration Rights Agreement". See Section 2.8.
Section 1.16 "Registration Statement". See Section 3.2(a).
Section 1.17 "Securities Act". See the introductory paragraphs hereof.
Section 1.18 "SEC Documents". See Section 5.2.
Section 1.19 "Trading Day" shall mean any day during which the New York
Stock Exchange shall be open for business.
Section 1.20 "Valuation Period" shall mean the period commencing on the
Trading Day following but excluding an Optional Purchase Date or a Mandatory
Purchase Date and ending on and including the Trading Day on which the aggregate
Value of Open Market Trading for all Trading Days within such period is equal to
or greater than the aggregate Value of Open Market Trading for the twenty (20)
Trading Days preceding but excluding the Optional Purchase Date or the Mandatory
Purchase Date, as the case may be; provided, however, that such period shall not
exceed eighty (80) Trading Days.
Section 1.21 "Value of Open Market Trading" with respect to any Trading
Day shall mean the product of the reported trading volume of the Common Stock on
the Principal Market on any such day , multiplied by the low trading price of
the Common Stock on such day (each as determined in accordance with Section 12.4
hereof).
Section 1.22 "Warrants". See Section 2.8.
Section 1.23 "Warrant Registration Statement". See Section 3.2(a).
Section 1.24 "Warrant Shares". See Section 3.2(l).
3
<PAGE> 5
ARTICLE II
Purchase and Sale of Common Stock
Section 2.1 Investments. (a) Upon the terms and conditions set forth
herein (including, without limitation, the provisions of Article III hereof),
during the Commitment Period the Company may, on any Optional Purchase Date, and
shall, on any Mandatory Purchase Date, issue and sell to the Investor, and the
Investor shall purchase from the Company, the number of shares of Common Stock
to be sold pursuant to the provisions hereof at the Purchase Price per share
determined pursuant to Section 2.2 below.
(b) (i) An "Optional Purchase Date" is any
Trading Day that the Company in its sole discretion elects by delivery of an
Optional Purchase Notice pursuant to Section 2.5 to sell Common Stock to the
Investor, provided that on the preceding Trading Day (x) the closing bid price
of the Common Stock on the Principal Market is (i) greater than $7.00 per share,
and (ii) at least 105% of the average of the daily low trade prices of the
Common Stock for the five (5) Trading Days preceding, but excluding, such date,
(y) all conditions provided in this Agreement for the delivery of an Optional
Put Notice are satisfied, and (z) such exercise shall be in accordance with the
provisions of clause (c) below.
(ii) A "Mandatory Purchase Date" is any
Trading Day that the Company shall be required by delivery of a Mandatory
Purchase Notice pursuant to Section 2.5 to sell Common Stock to the Investor,
which requirement shall occur provided that on the preceding Trading Day (x) the
closing bid price of the Common Stock on the Principal Market is (i) greater
than $10.00 per share, and (ii) at least 110% of the average of the daily low
trade prices of the Common Stock for the five (5) Trading Days preceding, but
excluding, such date, (y) all conditions provided in this Agreement for the
delivery of a Mandatory Put Notice are satisfied, and (z) such exercise shall be
in accordance with the provisions of clause (c) below.
(c) The Company may in its sole discretion on
any Optional Purchase Date, and must on any Mandatory Purchase Date, sell to the
Investor the number of shares of Common Stock determined by dividing the
Investment Amount by the Purchase Price. In the case of an Optional Purchase
Date or a Mandatory Purchase Date, the Investment Amount shall be as determined
by the Company and shall be in the minimum amount of $500,000 and may be in
increments of $10,000 in excess thereof and shall not exceed $2,000,000;
provided that, the Investment Amount shall not exceed 5% of the aggregate Value
of Open Market Trading during the twenty (20) Trading Days preceding and
4
<PAGE> 6
excluding such Optional Purchase Date. The Company may not deliver an Optional
Purchase Notice or a Mandatory Purchase Notice prior to completion of the
Valuation Period relating to the previous issuance of Common Stock to the
Investor, whether pursuant an Optional Purchase Notice or Mandatory Purchase
Notice. In addition, the Company shall not deliver a Mandatory Purchase Notice
until the expiration of sixty (60) Trading Days following the Closing Date with
respect to the most recent previous issuance of Common Stock to the Investor
pursuant to a Mandatory Purchase Notice.
(d) The obligation of the Investor to purchase
and pay for shares of Common Stock hereunder shall be guaranteed by The Palladin
Group, L.P.
Section 2.2 Determination of Purchase Price. The purchase price per
share of the Company's Common Stock (the "Purchase Price"), shall be 93% (the
"Purchase Price Percentage") of the lesser of (i) the average of the daily low
trading price of the Common Stock on the Principal Market for the five (5) days
prior to but excluding an Optional Purchase Date or a Mandatory Purchase Date
(the "Initial Share Price") and (ii) the weighted average (by trading volume) of
the daily low trading prices of the Common Stock on the Principal Market during
the Valuation Period (the "Valuation Period Price"). The Purchase Price shall be
subject to change by adjustments to the Purchase Price Percentage, as provided
in Section 2.3 below.
Section 2.3 Adjustments of Purchase Price Percentage. The Purchase
Price Percentage shall be adjusted as follows:
(a) if the Valuation Period exceeds twenty (20) Trading Days but is
less than forty (40) Trading Days, the Purchase Price Percentage shall be 91%;
or
(b) if the Valuation Period exceeds forty (40) Trading Days but is less
than sixty (60) Trading Days, the Purchase Price Percentage shall be 89%; or
(c) if the Valuation Period exceeds sixty (60) Trading Days but is less
than eighty (80) Trading Days, the Purchase Price Percentage shall be 87%; or
(d) if the Valuation Period is eighty (80) Trading Days, the Purchase
Price Percentage shall be 85%.
Section 2.4 (a) Closings. On each Closing Date (i) the Company shall
deliver to the Investor one or more certificates representing the number of
shares of Common Stock to be purchased by the Investor pursuant to Section 2.1
herein, registered in the name of the Investor or, at the Investor's option,
deposit such
5
<PAGE> 7
certificate(s) into such account or accounts previously designated by the
Investor and (ii) the Investor shall deliver to the Company such amount of the
aggregate Purchase Price as determined pursuant to Section 2.4 (b) by wire
transfer of immediately available funds to an account designated by the Company
on or before the Closing Date. In addition, on or prior to the Closing Date,
each of the Company and the Investor shall deliver all documents, instruments
and writings required to be delivered or reasonably requested by either of them
pursuant to this Agreement in order to implement and effect the transactions
contemplated herein.
(b) Payment for the Common Stock Purchased by the Investor. On
the Closing Date, the Investor shall pay to the Company the Investment Amount
(less any amounts withheld pursuant to Section 11.2) and shall receive from the
Company the number of shares of Common Stock determined by dividing the
Investment Amount by the Initial Share Price (rounded to the next highest
number). If upon completion of the Valuation Period with respect to the shares
of Common Stock purchased on such Closing Date, it is determined that the
Valuation Period Price is less than the Initial Share Price, the Company shall
issue and deliver to the Investor an additional number of shares of Common Stock
(the "Additional Common Stock") such that the aggregate number of shares of
Common Stock issued to the Investor on the Closing Date together with the
Additional Common Stock multiplied by the Purchase Price shall equal the
Investment Amount. The Additional Common Stock shall be delivered to the
Investor within two (2) Trading Days following the end of the Valuation Period
and the Investor shall be deemed to have paid for the shares of Common Stock
purchased on the Closing Date as well as the Additional Common Stock in full. If
the Company fails to deliver to the Investor the Additional Common Stock within
such period, the Company shall pay to the Investor in cash liquidated damages in
an amount equal to (i) one percent (1%) of the total value of the Additional
Common Stock not delivered (as determined based on the closing bid price of the
Common Stock on the date by which delivery was required or any subsequent
Trading Days prior to delivery of such Additional Common Stock, whichever is
higher) for each of the first 7 days which the Company fails to deliver to the
Investor such Additional Common Stock, and (ii) three percent (3%) of the total
value of the Additional Common Stock (determined as aforesaid) not delivered
thereafter. In the event the Investor incurs actual damages in excess of such
liquidated damages amount as a result of the Company's failure to timely deliver
such Additional Common Stock, the Company shall be liable for any such excess
amount.
Section 2.5 Mechanics of Exercise.
(a) Delivery of Optional Purchase Notice. At any time during the
Commitment Period, the Company may deliver written notices to the Investor
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(each such notice hereinafter referred to as an "Optional Purchase Notice")
setting forth the Investment Amount, subject to the limitations imposed by
Sections 2.1 and 3.2(l) herein, which the Company intends to sell to the
Investor. The Company may not deliver an Optional Purchase Notice to the
Investor if the conditions set forth in Section 2.1(b)(i) are not satisfied or
if the events described in Section 2.6 occur, or if the conditions set forth in
Article III are not satisfied. If such Optional Purchase Notice does not comply
with Section 2.1(b)(i), any of the events described in Section 2.6 occur on or
after the date on which an Optional Purchase Notice is given, but prior to the
closing of the transaction on the Closing Date associated with such Optional
Purchase Notice, or if the conditions set forth in Article III are not
satisfied, such Optional Purchase Notice shall be null, void and of no further
force or effect.
(b) Delivery of Mandatory Purchase Notice. At any time during the
Commitment Period, the Company shall, on a Mandatory Purchase Date, deliver a
written notice to the Investor (each such notice hereinafter referred to as an
"Mandatory Purchase Notice") setting forth the Investment Amount, subject to the
limitations imposed by Sections 2.1 and 3.2(l) herein, which the Company is
required to sell to the Investor; provided, however, that in the event the
Company fails to deliver a Mandatory Purchase Notice, such notice shall be
deemed delivered as of the Mandatory Purchase Date and the Investment Amount
shall be deemed to be $500,000. The Company may not deliver a Mandatory Purchase
Notice to the Investor if the conditions set forth in Section 2.1(b)(ii) are not
satisfied or if the events described in Section 2.6 occur, or if the conditions
set forth in Article III are not satisfied. If the conditions set forth in
Section 2.1(b)(ii) are not satisfied, any of the events described in Section 2.6
occur on or after the date on which an Mandatory Purchase Notice is given, but
prior to the closing of the transaction on the Closing Date associated with such
Mandatory Purchase Notice, or if the conditions set forth in Article III are not
satisfied, such Mandatory Purchase Notice shall be null, void and of no further
force or effect.
(c) Date of Delivery of Optional Purchase Notice or Mandatory Purchase
Notice. An Optional Purchase Notice shall be deemed delivered on (i) the Trading
Day it is received by facsimile or otherwise by the Investor if such notice is
received prior to 5:00 P. M. New York time, or (ii) the immediately succeeding
Trading Day if it is received by facsimile or otherwise after 5:00 P. M. New
York time (in which case the provisions of Section 2.1(b)(i) must be satisfied
as of such immediately succeeding Trading Day. A Mandatory Purchase Notice shall
be deemed delivered (regardless of whether it is actually delivered) on the
Trading Day on which a Mandatory Purchase Date occurs. No Optional Purchase
Notice or Mandatory Purchase Notice may be delivered or deemed delivered, on a
day which is not a Trading Day.
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Section 2.6 Termination or Suspension of Investment Obligation. The
Investor shall not be required to purchase any shares of Common Stock from the
Company on any Closing Date nor may an Optional Purchase Notice be delivered nor
shall a Mandatory Purchase Notice be delivered at any time during the Commitment
Period that there shall exist any one or more of the following: (i) the
withdrawal of the effectiveness of the Registration Statement, (ii) the
withdrawal of the effectiveness of the Warrant Registration Statement or the
Additional Warrant Registration Statement or any other suspension of the use of
the Warrant Registration Statement or related prospectus or the Additional
Warrant Registration Statement or related prospectus pursuant to Paragraph
3.1(e) of the Registration Rights Agreement, (iii) the Company's failure to
satisfy the requirements in Section 3.2, or (iv) any failure or interruption in
the full compliance with the Company's covenants provided in Article 6;
provided, however that the obligation of the Investor to purchase shares of
Common Stock shall be terminated (including with respect to a Closing Date which
has not yet occurred) in the event that (x) there shall occur any stop order or
suspension of the effectiveness of the Registration Statement, the Warrant
Registration Statement or the Additional Registration Statement or any
withdrawal of the effectiveness of the Registration Statement, the Warrant
Registration Statement or the Additional Registration Statement for any reason
other than as a result of subsequent corporate developments which would require
such Registration Statement, the Warrant Registration Statement or the
Additional Registration Statement to be amended to reflect such event in order
to maintain its compliance with the disclosure requirements of the Securities
Act, or (y) the Company shall at any time fail to comply with the requirements
of Section 6.3, 6.4, 6.5 or 6.6.
Section 2.7 Repurchase of Common Stock by the Company. If the daily low
trade price for the Common Stock on the Principal Market for five (5)
consecutive Trading Days within the Valuation Period relating to an Optional
Purchase Date or a Mandatory Purchase Date, as the case may be, is less than 80%
of the applicable Initial Share Price, the Company shall be required to
repurchase from the Investor such number of shares of Common Stock held by the
Investor up to the total number of shares of Common Stock sold to the Investor
on the applicable Closing Date at a purchase price per share equal to the
applicable Initial Share Price. On the fifth Trading Day from the Trading Day
the Company is required to repurchase Common Stock from the Investor, the
Investor shall deliver to the Company the total number of shares of Common Stock
it owns on such date against delivery by the Company of the purchase price
therefor.
Section 2.8 Commitment Fee. On the date of execution and delivery of
this Agreement, the Company will issue to the Investor a warrant exercisable
from time to time within five (5) years from the date of issuance (the
"Warrant") to purchase
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an aggregate of 250,000 shares of Common Stock at a price equal to 110% of the
closing bid price on the Principal Market of the Company's Common Stock on the
date of this Agreement. The Warrant shall be delivered by the Company to the
Investor upon execution of this Agreement by the parties hereto. The shares of
Common Stock to be issued upon exercise of the Warrant shall be registered for
resale on the Registration Statement referenced in Section 3.2(a) herein. On
each of the first, second and third anniversary of the commencement of the
Commitment Period, the Company shall issue to the Investor an additional warrant
exercisable from time to time within five (5) years from the date of issuance
(each an "Additional Warrant") to purchase an aggregate number of shares of
Common Stock equal to the product of (A) $8,333,000 minus the Aggregate
Investment Amount with respect to Common Stock sold by the Company to the
Investor during the preceding twelve-month period divided by $8,333,000 times
(B) 25,000, at a purchase price equal to 110% of the closing bid price on the
Principal Market of the Company's Common Stock on the applicable anniversary
date, subject to adjustment as provided below. The resale by the Investor of
Common Stock issuable upon exercise of the Warrant as well as each Additional
Warrant shall be subject to a registration rights agreement (the "Registration
Rights Agreement") entered into between the Company and the Investor on the date
of execution of this Agreement. The number of shares of Common Stock issuable
upon exercise of an Additional Warrant shall be increased as provided by the
following sentence, if during the twelve-month period preceding the issuance of
such Additional Warrant, the Company completes an Equity Offering and (x) on the
date of closing of such Equity Offering or on any of the thirty (30) preceding
Trading Days, conditions for the delivery of an Optional Purchase Notice
provided by Section 2.1(b)(i) relating to the closing bid price of the Common
Stock on the Principal Market and the trading volume of the Common Stock on the
Principal Market are met, and (y) at any time during such period the Company
shall have not been prohibited by the penultimate sentence of Section 2.1(c)
from delivering an Optional Purchase Notice to the Investor. The number of
shares of Common Stock otherwise issuable upon exercise of each Additional
Warrant shall be increased by an amount equal to the product of (i) the average
daily Value of Open Market Trading for the period set forth in clause (x) above,
times (ii).003333. Each of the Warrant and each Additional Warrant shall be
substantially in the form of Exhibit A hereto.
ARTICLE III
Conditions to Delivery of Optional Purchase Notices
and Mandatory Purchase Notices and Conditions to Closing
Section 3.1 Conditions Precedent to the Obligation of the Company to
Issue and Sell Common Stock. The obligation hereunder of the Company to issue
and
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sell Common Stock to the Investor incident to each Closing is subject to the
satisfaction, at or before each such Closing, of each of the conditions set
forth below.
(a) Accuracy of the Investor's Representation and Warranties.
The representations and warranties of the Investor shall be true and correct in
all material respects as of the date of this Agreement and as of the date of
each such Closing as though made at each such time.
(b) Performance by the Investor. The Investor shall have
performed, satisfied and complied in all respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Investor at or prior to such Closing.
(c) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which, in the reasonable opinion of the Company and its legal
counsel, prohibits or adversely affects any of the transactions contemplated by
this Agreement, and no proceeding shall have been commenced which may have the
effect of prohibiting or adversely affecting any of the transactions
contemplated by this Agreement.
Section 3.2 Conditions Precedent to the Right of the Company to Deliver
an Optional Purchase Notice, the Obligation of the Company to Deliver a
Mandatory Purchase Notice and the Obligation of the Investor to Purchase Common
Stock. The right of the Company to deliver an Optional Purchase Notice, the
obligation of the Company to deliver a Mandatory Purchase Notice and the
obligation of the Investor hereunder to acquire and pay for Common Stock
incident to the Closing is subject to the satisfaction, on the date of delivery
of such Optional Purchase Notice or Mandatory Purchase Notice, as applicable,
and on the applicable Closing Date (each a "Condition Satisfaction Date") of
each of the following conditions.
(a) Registration of the Common Stock with the SEC. The Company
shall have filed with the SEC (i) a registration statement on Form S-3 (the
"Registration Statement") for the registration of the resale by the Investor of
Common Stock to be acquired pursuant to this Agreement (not including Common
Stock to be issued upon exercise of the Warrants) under the Securities Act,
which Registration Statement shall have been declared effective by the SEC prior
to the first Optional Purchase Date or Mandatory Purchase Date, as the case may
be, but in no event later than December 1, 1997, (ii) by March 15, 1997, in
accordance with the Registration Rights Agreement a registration statement on
Form S-3 for the registration of the resale by the Investor of Common Stock to
be issued upon exercise of the Warrant (the "Warrant Registration Statement"),
and (iii) within
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thirty (30) days of the issuance of any Additional Warrants, in accordance with
the Registration Rights Agreement, a registration statement on Form S-3 for the
registration of the resale by the Investor of Common Stock to be issued upon
exercise of such Additional Warrants (each an "Additional Warrant Registration
Statement"); and no stop order or suspension or withdrawal of the effectiveness
of or with respect to any such registration statement or any other suspension of
the use of any such registration statement or related prospectus shall have been
issued by the SEC or any states securities commission during the Commitment
Period; and the Company shall be in compliance with the terms of the
Registration Rights Agreement.
(b) Effective Registration Statement. The Registration
Statement shall have previously become effective and shall remain effective on
each Condition Satisfaction Date and (i) neither the Company nor the Investor
shall have received notice that the SEC has issued or intends to issue a stop
order with respect to the Registration Statement or that the SEC otherwise has
suspended or withdrawn the effectiveness of the Registration Statement, either
temporarily or permanently, or intends or has threatened to do so, and (ii) no
other suspension of the use of the Registration Statement or prospectus shall
exist pursuant to Paragraph 3.1(e) of the Registration Rights Agreement.
(c) Accuracy of the Company's Representations and Warranties.
The representations and warranties of the Company shall be true and correct as
of each Condition Satisfaction Date as though made at each such time (except for
representations and warranties specifically made as of a particular date) with
respect to all periods, and as to all events and circumstances occurring or
existing to and including each Condition Satisfaction Date.
(d) Performance by the Company. The Company shall have
performed, satisfied and complied in all respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to each Condition Satisfaction Date.
(e) No Injunction. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits or adversely affects any of the transactions
contemplated by this Agreement, and no proceeding shall have been commenced
which may have the effect of prohibiting or adversely affecting any of the
transactions contemplated by this Agreement.
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(f) Adverse Changes. Since the date of filing of the Company's
most recent SEC Document, no event which had or is reasonably likely to have a
Material Adverse Effect (as that term is defined in Section 5.5 hereof) has
occurred.
(g) No Suspension of Trading In or Delisting of Common Stock.
The trading of the Common Stock shall not have been suspended by the SEC, the
Principal Market or the National Association of Securities Dealers, Inc. (the
"NASD") and the Common Stock shall have been approved for listing or quotation
on and shall not have been delisted from the Principal Market. The issuance of
shares of Common Stock with respect to the applicable Closing, if any, shall not
violate the shareholder approval requirements of the Principal Market.
(h) Legal Opinions. The Company shall have caused to be
delivered to the Investor, (i) within five (5) Trading Days of the effective
date of the Registration Statement, (ii) as of a date subsequent to the date of
the Company's filing of its most recent quarterly report on Form 10-Q (or the
date by which such report is required to be filed), (iii) as of a date
subsequent to the date on which the Company announces, whether on a preliminary
or definitive basis, its fourth quarter or full-year financial results and (iv)
to the extent provided by Section 3.3, an opinion of the Company's independent
counsel containing the opinions and statements set forth in Exhibit B hereto,
addressed to the Investor stating, inter alia, that in such counsel's belief the
Registration Statement (if applicable, as so amended by such SEC Document) does
not contain an untrue statement of material fact or omits a material fact
required to make the statements contained therein, not misleading or that the
underlying prospectus (if applicable, as so amended or supplemented) does not
contain an untrue statement of material fact or omits a material fact required
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading; provided, however, that in the event that such
an opinion cannot be delivered by the Company's independent counsel to the
Investor, the Company shall promptly revise the Registration Statement and shall
not deliver an Optional Purchase Notice or a Mandatory Purchase Notice or, if an
Optional Purchase Notice or Mandatory Purchase Notice shall have been delivered
in good faith without knowledge by the Company that an opinion of independent
counsel can not be delivered as required, postpone such Closing Date for a
period of up to five (5) Trading Days until such an opinion is delivered to the
Investor (or such Closing shall otherwise be cancelled). In the event of such a
postponement, the Purchase Price of the Common Stock to be issued at such
Closing as determined pursuant of Section 2.2 shall be the lower of the such
Purchase Price as calculated as of the originally scheduled Closing Date and as
of the actual Closing Date. The Company's independent counsel shall also deliver
to the Investor upon execution of this agreement an opinion in form and
substance satisfactory to the Investor addressing, among other things, corporate
matters and
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the exemption from registration under the Securities Act of the issuance of the
Common Stock by the Company to the Investor under this Agreement.
(i) Accountant's Letter. (a) The Company shall engage the
Company's independent auditors to perform certain agreed upon procedures and
report thereon in accordance with the provisions of Statement on Auditing
Standards No. 71 with respect to the Company's quarterly financial information
and, upon issuance of such reports, the Company will provide copies thereof to
the Investor (each, a "Quarterly Review Report"). A copy of each Quarterly
Review Report shall be delivered to the Investor within five (5) Trading Days of
the filing with the SEC of each of the Company's Quarterly Reports on Form 10-Q.
(b) The Company shall engage its independent auditors to perform certain agreed
upon procedures and report thereon as shall have been reasonably requested by
the Investor with respect to certain financial information contained in the
Registration Statement and shall have delivered to the Investor, within five (5)
Trading Days of the effective date of the Registration Statement, a copy of such
report addressed to the Company. (c) In the event that no Quarterly Review
Report shall have been delivered by the Company's independent auditors to the
Company for more than ninety (90) days since the reporting date to which the
previously delivered report relates or (y) the Investor shall have requested
delivery of such a report to the Company pursuant to Section 3.3, the Company
shall engage its independent auditors to perform certain agreed upon procedures
and report thereon as shall have been reasonably requested by the Investor with
respect to certain financial information of the Company and the Company shall
deliver to the Investor a copy of such report. In the event that the report
required by this Section 3.2(i) cannot be delivered by the Company's independent
auditors, the Company shall, if necessary, promptly revise the Registration
Statement and shall not deliver an Optional Purchase Notice or a Mandatory
Purchase Notice or, if an Optional Purchase Notice or Mandatory Purchase Notice
shall have been delivered in good faith without knowledge by the Company that a
report of its independent auditors can not be delivered as required, postpone
such Closing Date for a period of up to five (5) Trading Days until such a
report is delivered (or such Closing shall otherwise be canceled). In the event
of such a postponement, the Purchase Price of the Common Stock to be issued at
such Closing as determined pursuant to Section 2.2 shall be the lower of such
Purchase Price as calculated as of the originally scheduled Closing Date and as
of the actual Closing Date.
(j) Officer's Certificate. The Company shall have delivered to
the Investor, on each Closing Date, a certificate in substantially the form and
substance of Exhibit C hereto, executed in either case by an executive officer
of the Company and to the effect that all the conditions to such Closing shall
have been satisfied as at the date of each such certificate.
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(k) Due Diligence. No dispute between the Company and the
Investor shall exist pursuant to Section 3.3 as to the adequacy of the
disclosure contained in the Registration Statement.
(l) Other. On each Closing Date (i) the additional shares of
Common Stock then to be purchased by the Investor shall not exceed the number of
such shares which, when aggregated with all other shares of Common Stock then
owned by the Investor pursuant to this Agreement and with the shares of Common
Stock ("Warrant Shares") beneficially or deemed beneficially owned by the
Investor pursuant to the Warrant and each Additional Warrant (if then issued and
outstanding) theretofore issued to the Investor pursuant to Section 2.8 hereof,
would result in the Investor owning more than 4.9% of all of such Common Stock
as would be outstanding on such Closing Date, as determined in accordance with
Section 13(d) of the Exchange Act and the regulations promulgated thereunder and
(ii) the Investor shall have received and been reasonably satisfied with such
other certificates and documents as shall have been reasonably requested by the
Investor in order for the Investor to confirm the Company's satisfaction of the
conditions set forth in Section 3.2. For purposes of clause (i) of this Section
3.2(l), in the event that the amount of Common Stock outstanding as determined
in accordance with Section 13(d) of the Exchange Act and the regulations
promulgated thereunder is greater on a Closing Date than on the date upon which
the Optional Purchase Notice or Mandatory Purchase Notice associated with such
Closing Date is given, the amount of Common Stock outstanding on such Closing
Date shall govern for purposes of determining whether the Investor, when
aggregating all purchases of Common Stock made pursuant to this Agreement and,
if any, Warrant Shares, would own more than 4.9% of the Common Stock following
such Closing Date.
Section 3.3 Due Diligence Review. The Company shall make available for
inspection and review by the Investor, advisors to and representatives of the
Investor (who may or may not be affiliated with the Investor and who are
reasonably acceptable to the Company), any underwriter participating in any
disposition of Common Stock on behalf of the Investor pursuant to the
Registration Statement, any such registration statement or amendment or
supplement thereto or any blue sky, NASD or other filing, all financial and
other records, all SEC Documents and other filings with the SEC, and all other
corporate documents and properties of the Company as may be reasonably necessary
for the purpose of such review, and cause the Company's officers, directors and
employees to supply all such information reasonably requested by the Investor or
any such representative, advisor or underwriter in connection with such
Registration Statement (including, without limitation, in response to all
questions and other inquiries reasonably made or submitted by any of them),
prior to and from time to time after the filing and effectiveness of the
Registration Statement for the sole purpose of enabling the
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Investor and such representatives, advisors and underwriters and their
respective accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the Registration
Statement.
The Company shall not disclose non-public information to the Investor,
advisors to or representatives of the Investor unless prior to disclosure of
such information the Company identifies such information as being non-public
information and provides the Investor, such advisors and representatives with
the opportunity to accept or refuse to accept such non-public information for
review. The Company may, as a condition to disclosing any non-public information
hereunder, require the Investor's advisors and representatives to enter into a
confidentiality agreement in form reasonably satisfactory to the Company and the
Investor.
Nothing herein shall require the Company to disclose non-public
information to the Investor, his advisors or representatives, and the Company
represents that it does not disseminate non-public information to any investors
who purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
non-public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration Statement
would cause such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the statements,
therein, in light of the circumstances in which they were made, not misleading.
Nothing contained in this Section 3.3 shall be construed to mean that such
persons or entities other than the Investor (without the written
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consent of the Investor prior to disclosure of such information) may not obtain
non-public information in the course of conducting due diligence in accordance
with the terms of this Agreement and nothing herein shall prevent any such
persons or entities from notifying the Company of their opinion that based on
such due diligence by such persons or entities, that the Registration Statement
contains an untrue statement of a material fact or omits a material fact
required to be stated in the Registration Statement or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading; provided, however, that in no event shall the Investor's
advisors or representatives disclose to the Investor the nature of the specific
event or circumstances constituting any non-public information discovered by
such advisors or representatives in the course of their due diligence (without
the written consent of the Investor prior to disclosure of such information).
The Investor's advisers or representatives shall make complete disclosure to the
Investor's independent counsel of all events or circumstances constituting
non-public information discovered by such advisors or representatives in the
course of their due diligence upon which such advisors or representatives form
the opinion that the Registration Statement contains an untrue statement of a
material fact or omits a material fact required to be stated in the Registration
Statement or necessary to make the statements contained therein, in the light of
the circumstances in which they were made, not misleading. Upon receipt of such
disclosure, the Investor's independent counsel shall consult with the Company's
independent counsel in order to address the concern raised as to the existence
of a material misstatement or omission and to discuss appropriate disclosure
with respect thereto. In the event after such consultation the Investor's
independent counsel believes that the Registration Statement contains an untrue
statement or a material fact or omits a material fact required to be stated in
the Registration Statement or necessary to make the statements contained
therein, in light of the circumstances in which they were made, not misleading,
(x) the Company shall file with the SEC an amendment to the Registration
Statement responsive to such alleged untrue statement or omission and provide
the Investor, as promptly as practicable with copies of the Registration
Statement and related prospectus, as so amended, (y) if the Company disputes the
existence of any such material misstatement or omission, (i) the Company's
independent counsel shall provide the Investor's independent counsel with an
opinion stating that nothing has come to their attention that would lead them to
believe that the Registration Statement or the related prospectus, as of the
date of such opinion contains an untrue statement of a material fact or omits a
material fact required to be stated in the Registration Statement or the related
prospectus or necessary to make the statements contained therein, in light of
the circumstances in which they were made, not misleading and (ii) in the event
the dispute relates to the adequacy of financial disclosure and the Investor
shall reasonably request, the Company's independent auditors shall provide to
the Company a letter outlining the performance of such "agreed upon procedures"
as shall be reasonably requested by the Investor and the Company shall provide
the Investor with a copy of such letter, or (z) if the Company disputes the
existence of any such material misstatement or omission, and the dispute relates
to the timing of disclosure of a material event and the Company's independent
counsel is unable to provide the opinion referenced in clause (y) above to the
Investor, then this Agreement shall be suspended for a period of up to thirty
(30) days, at the end of which, if the dispute still exists between the
Company's independent counsel and the Investor's independent counsel, the
Company shall either (i) amend the Registration Statement as provided above,
(ii) provide to the Investor the Company's independent counsel opinion and a
copy of the letter of the Company's independent auditors referenced above, or
(iii) this Agreement shall be suspended for an
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additional period of up to thirty (30) days; provided, however, that at the end
of such sixty (60) day period, if the dispute still exists between the Company's
independent counsel and the Investor's independent counsel, the Company shall
either (i) amend the Registration Statement as provided above, (ii) provide the
Company's independent counsel opinion referenced above, or (iii) the obligation
of the Investor to purchase shares of Common Stock pursuant to this Agreement
shall terminate.
ARTICLE IV
Representations and Warranties of Investor
The Investor represents and warrants to the Company that:
Section 4.1 Intent. The Investor is entering into this Agreement for
its own account and the Investor has no present arrangement (whether or not
legally binding) at any time to sell the Common Stock to or through any person
or entity; provided, however, that by making the representations herein, the
Investor does not agree to hold the Common Stock for any minimum or other
specific term and reserves the right to dispose of the Common Stock at any time
in accordance with federal and state securities laws applicable to such
disposition.
Section 4.2 Sophisticated Investor. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
experience in business and financial matters that it is capable of evaluating
the merits and risks of an investment in Common Stock. The Investor acknowledges
that an investment in the Common Stock is speculative and involves a high degree
of risk.
Section 4.3 Authority. This Agreement has been duly authorized and
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
Section 4.4 No Brokers. The Investor has taken no action which would
give rise to any claim by any person for brokerage commission, finder's fees or
similar payments by the Company relating to this Agreement or the transactions
contemplated hereby, except for dealings with AFO Capital Advisors LLC, whose
fees will be paid for by the Investor.
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Section 4.5 Not an Affiliate. The Investor is not an officer, director
or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company.
Section 4.6 Organization and Standing. Investor is a limited liability
company duly organized, validly existing, and in good standing under the laws of
Delaware.
Section 4.7 Absence of Conflicts. The execution and delivery of this
Agreement and any other document or instrument executed in connection herewith,
and the consummation of the transactions contemplated thereby, and compliance
with the requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on Investor, or the
provision of any indenture, instrument or agreement to which Investor is a party
or is subject, or by which Investor or any of its assets is bound, or conflict
with or constitute a material default thereunder, or result in the creation or
imposition of any lien pursuant to the terms of any such indenture, instrument
or agreement, or constitute a breach of any fiduciary duty owed by Investor to
any third party, or require the approval of any third-party (which has not been
obtained) pursuant to any material contract, agreement, instrument, relationship
or legal obligation to which Investor is subject or to which any of its assets,
operations or management may be subject.
Section 4.8 Disclosure; Access to Information. Investor has received
all documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by Investor. Investor further
acknowledges that it understands that the Company is subject to the periodic
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Investor has reviewed or received copies of any such
reports that have been requested by it.
Section 4.9 Manner of Sale. At no time was Investor presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
ARTICLE V
Representations and Warranties of the Company
The Company represents and warrants to the Investor that:
Section 5.1 Company Status. The Company has registered its Common Stock
pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company has
maintained
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all requirements for the continued listing or quotation of its Common Stock, and
such Common Stock is currently listed or quoted on the Principal Market. As of
the date hereof, the Principal Market is the Nasdaq National Market.
Section 5.2 Current Public Information. The Company has furnished the
Investor with true and correct copies of all registration statements, reports
and documents, including proxy statements (other than preliminary proxy
statements), filed with the SEC by or with respect to the Company since February
1, 1996, pursuant to the Securities Act or Exchange Act. All such registration
statements, reports and documents, together with those registration statements,
reports and documents filed pursuant to the Securities Act or Exchange Act
subsequent to the date of this Agreement are collectively referred to herein as
the "SEC Documents").
Section 5.3 No General Solicitation in Regard to this Transaction.
Neither the Company nor any of its affiliates nor any distributor or any person
acting on its or their behalf has conducted any general solicitation (as that
term is used in Rule 502(c) of Regulation D) with respect to any of the Common
Stock, nor have they made any offers or sales of any security or solicited any
offers to buy any security under any circumstances that would require
registration of the Common Stock under the Securities Act.
Section 5.4 Valid Issuance of Common Stock. As of the date of this
Agreement, the Company has authorized capitalization consisting of 50,000,000
shares of Common Stock, par value $.001 and 5,000,000 shares of Preferred Stock,
par value $.001, 200 shares of which have been designated 7% Convertible
Preferred Stock, Series A (the "Series A Stock") and outstanding stock options
granted or reserved for issuance to employees, consultants and directors as
described in the SEC Documents on file with the Commission as of the date of
this Agreement. As of December 27, 1996, there were issued and outstanding
8,420,550 shares of Common Stock and 200 shares of Series A Stock and no other
series of preferred stock was outstanding as of such date. As of the date of
this Agreement, the Company has no other outstanding securities convertible into
Common Stock other than as described in the SEC Documents on file with the
Commission as of the date of this Agreement. Since December 27, 1996, the
Company has issued 637,733 shares of Common Stock to SmithKline Beecham
Corporation in connection with the sale of a product. All of the outstanding
shares of Common Stock of the Company have been duly and validly authorized and
issued and are fully paid and nonassessable, upon issuance of the Common Stock,
the Common Stock will be duly and validly issued, fully paid and nonassessable,
and the holders of outstanding Common Stock of the Company are not and shall not
be entitled to preemptive or other rights afforded by the Company or other
rights afforded by the Company to subscribe for
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the capital stock or other securities of the Company as a result of the sale of
the Common Stock to the Investor hereunder.
Section 5.5 Organization and Qualification. The Company is a
corporation duly incorporated and existing in good standing under the laws of
the State of Delaware and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company does
not have any subsidiaries. The Company and each subsidiary, if any, is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, other than those in which the
failure so to qualify would not have a Material Adverse Effect. "Material
Adverse Effect" means any effect on the business, operations, properties,
prospects, or financial condition of the Company and which is material and
adverse to the Company or to the Company and such other entities controlling or
controlled by the Company, taken as a whole and/or any condition or situation
which would prohibit or otherwise interfere with the ability of the Company to
enter into and perform its obligations under this Agreement.
Section 5.6 Authorization; Enforcement. (i) The Company has the
requisite corporate power and authority to enter into and perform this Agreement
and to issue the Common Stock, the Warrants and each Additional Warrant in
accordance with the terms hereof and thereof, (ii) the execution, issuance and
delivery of this Agreement by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no further consent or authorization of the Company or its
Board of Directors or stockholders is required (other than such stockholder
approval as may be required by the standards imposed on companies listed on the
Nasdaq Stock Market with respect to issuances by such companies of greater than
20% of such companies' outstanding voting stock), (iii) this Agreement has been
duly executed and delivered by the Company and constitutes valid and binding
obligations of the Company enforceable against the Company in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable principles
of general application and (iv) the Common Stock issuable in accordance with the
terms of this Agreement or upon exercise of the Warrants and each Additional
Warrant will be duly validly issued, fully paid and nonassessable.
Section 5.7 Corporate Documents. The Company has furnished or made
available to the Investor true and correct copies of the Company's Certificate
of Incorporation, as amended and in effect on the date hereof (the
"Certificate"), and
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the Company's By-Laws, as amended and in effect on the date hereof (the
"By-Laws").
Section 5.8 No Conflicts. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby, including without limitation the issuance of
Common Stock, the Warrant and each Additional Warrant do not and will not (i)
result in a violation of the Company's Certificate of Incorporation or By-Laws
or (ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any material
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or (iii) result in a violation of any federal, state,
local or foreign law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations) applicable to the Company or
any of its subsidiaries or by which any property or asset of the Company or any
of its subsidiaries is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect) nor is
the Company otherwise in violation of, conflict with or in default under any of
the foregoing; provided that, for purposes of the Company's representations and
warranties as to violations of foreign law, rule or regulation referenced in
clause (iii), such representations and warranties are made only to the best of
the Company's knowledge insofar as the execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby are or may be affected by the status of the
Investor under or pursuant to any such foreign law, rule or regulation). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations which either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Common Stock or the Warrant and the Additional
Warrants in accordance with the terms hereof (other than any SEC, NASD or state
securities filings which may be required to be made by the Company subsequent to
any Closing, and any registration statement which may be filed pursuant hereto
and other than any shareholder approval required by the rules applicable to
companies whose common stock trades on the Nasdaq National Market referenced in
Section 5.6); provided that, for purposes of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investor herein.
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Section 5.9 SEC Documents. The Company has delivered or made available
to the Investor true and complete copies of the SEC Documents (including,
without limitation, proxy information and solicitation materials). The Company
has not provided to the Investor any information which, according to applicable
law, rule or regulation, should have been disclosed publicly prior to the date
hereof by the Company but which has not been so disclosed. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
rules and regulations of the SEC promulgated thereunder and other federal, state
and local laws, rules and regulations applicable to such SEC Documents, and none
of the SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
Section 5.10 No Material Adverse Change. Since February 1, 1996, no
Material Adverse Effect has occurred or exists with respect to the Company or
its subsidiaries, except as disclosed in the SEC Documents.
Section 5.11 No Undisclosed Liabilities. The Company and its
subsidiaries have no liabilities or obligations which are material, individually
or in the aggregate, and are not disclosed in the SEC Documents or otherwise
publicly announced, other than those incurred in the ordinary course of the
Company's or its subsidiaries' respective businesses since February 1, 1996, and
which, individually or in the aggregate, do not or would not have a Material
Adverse Effect on the Company and upon any of its subsidiaries.
Section 5.12 No Undisclosed Events or Circumstances. Since February 1,
1996, no event or circumstance has occurred or exists with respect to the
Company or its subsidiaries or their respective businesses, properties,
prospects, operations or financial condition, which, under applicable law, rule
or regulation, requires public
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disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed in the SEC Documents.
Section 5.13 No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, other than pursuant to this Agreement, under circumstances
that would require registration of the Common Stock under the Securities Act.
Section 5.14 No Brokers. The Company has taken no action which would
give rise to any claim by any person for brokerage commissions, finder's fees or
similar payments by the Investor relating to this Agreement for the transactions
contemplated hereby, except for dealings with AFO Capital Advisors LLC, whose
fees will be paid for by the Investor.
Section 5.15 Litigation and Other Proceedings. Except as may be set
forth in the SEC Documents, there are no lawsuits or proceedings pending or to
the best knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which might have a Material Adverse Effect on the Company or
which might materially adversely affect the transactions contemplated by this
Agreement. Except as set forth in the SEC Documents no judgment, order, writ,
injunction or decree or award has been issued by or, so far as is known by the
Company, requested of any court, arbitrator or governmental agency which might
result in a Material Adverse Effect on the Company or which might materially
adversely affect the transactions contemplated by this Agreement.
ARTICLE VI
Covenants of the Company
Section 6.1 Registration Rights. The Registration Rights Agreement
shall remain in full force and effect and the Company shall comply in all
respects with the terms thereof.
Section 6.2 Reservation of Common Stock. As of the date hereof, the
Company has reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue shares of
its Common Stock incident to the Closings and incident to the exercise of the
Warrant and each Additional Warrant issued hereunder; such amount of shares of
Common Stock to be reserved to be calculated based upon the minimum Purchase
Price
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therefore under the terms of this Agreement, and assuming the full exercise of
the Warrant and each Additional Warrant. The number of shares so reserved from
time to time, as theretofore increased or reduced as hereinafter provided, may
be reduced by the number of shares actually delivered hereunder and the number
of shares so reserved shall be increased to reflect (a) potential increases in
the Common Stock which the Company may thereafter be so obligated to issue by
reason of adjustments to the Purchase Price therefore and the issuance of the
Warrant and each Additional Warrant and (b) stock splits and stock dividends and
distributions.
Section 6.3 Listing of Common Stock. The Company hereby agrees to
maintain the listing of the Common Stock on a Principal Market, and as soon as
practicable but in any event prior to the commencement of the Commitment Period
to list the additional shares of Common Stock issuable under this Agreement
(including Common Stock issuable upon exercise of the Warrant and the Additional
Warrants). The Company further agrees, if the Company applies to have the Common
Stock traded on any other Principal Market, it will include in such application
the Common Stock issuable under this Agreement (including Common Stock issuable
upon exercise of the Warrant and the Additional Warrants), and will take such
other action as is necessary or desirable to cause the Common Stock to be listed
on such other Principal Market as promptly as possible. The Company shall
maintain sufficient net tangible assets to satisfy the requirements of the NASD
for the listing of the Common Stock on the Nasdaq National Market. The Company
shall undertake its best efforts to obtain the shareholder approval referenced
in Section 5.6 required for the issuance of Common Stock under this Agreement
within such time period as shall not at any time preclude the Company from
providing an Optional Purchase Notice or Mandatory Purchase Notice for the
maximum Investment Amount provided by Section 2.1 (c).
Section 6.4 Exchange Act Registration. The Company will cause its
Common Stock to continue to be registered under Section 12(g) or 12(b) of the
Exchange Act, will comply in all respects with its reporting and filing
obligations under said Act, and will not take any action or file any document
(whether or not permitted by said Act or the rules thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under said Act. The Company will take all action to continue the
listing and trading of its Common Stock on the Principal Market and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the NASD and the Principal Market.
Section 6.5 Legends. The certificates evidencing the Common Stock to be
issued to the Investor at each Closing and upon the exercise of the Warrant and
each Additional Warrant, subject to the continued effectiveness of the
appropriate
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registration statement, shall be free of legends, so-called "stop transfer," or
"stock transfer restrictions," or other restrictions upon transfer by the
Investor to a bona fide third party which is not an affiliate of the Company.
Section 6.6 Corporate Existence. The Company will take all steps
necessary to preserve and continue the corporate existence of the Company.
Section 6.7 Additional SEC Documents. The Company will furnish to the
Investor, as and when the originals thereof are submitted to the SEC for filing,
copies of all SEC Documents so furnished or submitted to the SEC.
Section 6.8 "Blackout Period". (a) The Company shall not deliver to the
Investor an Optional Purchase Notice at any time during the five (5) Trading Day
period prior to filing with the SEC of an SEC Document nor shall it deliver a
Mandatory Purchase Notice during such period to the extent the Company can
reasonably be expected to anticipate the filing of an SEC Document.
(b) The Company will immediately notify the Investor upon the
occurrence of any of the following events in respect of a registration statement
or related prospectus in respect of an offering of Registrable Securities; (i)
receipt of any request for additional information by the SEC or any other
federal or state governmental authority during the period of effectiveness of
the registration statement for amendments or supplements to the registration
statement or related prospectus; (ii) the issuance by the SEC or any other
federal or state governmental authority of any stop order suspending the
effectiveness of the registration statement or the initiation of any proceedings
for that purpose; (iii) receipt of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of any event
which makes any statement made in the registration statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or which requires the making of any
changes in the registration statement, related prospectus or documents so that,
in the case of the registration statement, it will not contain any 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, and
that in the case of the related prospectus, it will not contain any 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, in the light of the
circumstances under which they were made, not misleading; and (vi) the Company's
reasonable determination that a post-effective amendment to the registration
statement would be appropriate; and the Company will promptly make available to
the Investor any such supplement or amendment to the related
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prospectus. The Company shall not deliver to the Investor any Optional Purchase
Notice or Mandatory Purchase Notice during the continuation of any of the
foregoing events.
Section 6.9 Expectations Regarding Optional Purchase Notices and
Mandatory Purchase Notices. Within 10 days after the commencement of each
calendar quarter occurring subsequent to the commencement of the Commitment
Period, the Company undertakes to notify the Investor as to its reasonable
expectations as to the dollar amount it intends to raise during such calendar
quarter, if any, through the issuance of Optional Purchase Notices and Mandatory
Purchase Notices. Such notification shall constitute only the Company's good
faith estimate and shall in no way obligate the Company to raise such amount, or
any amount, or otherwise limit its ability to deliver Optional Purchase Notices
or Mandatory Purchase Notices. The failure by the Company to comply with this
provision can be cured by the Company's notifying the Investor at any time as to
its reasonable expectations with respect to the current calendar quarter.
ARTICLE VII
Legends
Section 7.1 Legends. Each of the Warrant and each Additional Warrant
and, unless otherwise provided below, the Common Stock will bear the following
legend (the "Legend"):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS.
THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN
APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Common Stock (and to any substitute or replacement
transfer agent for its Common Stock coterminous with the Company's appointment
of any such substitute or replacement transfer agent) irrevocable instructions
in substantially the form of Exhibit D hereto. Such instructions shall be
irrevocable by the Company from and after the date hereof or from and after the
issuance thereof to any such substitute or replacement transfer agent, as the
case may be, except as otherwise expressly provided in the Registration Rights
Agreement. It is the intent and purpose of such instructions, as provided
therein, to require the transfer agent
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for the Common Stock from time to time upon transfer of Common Stock by the
Investor to issue certificates evidencing Common Stock free of the Legend during
the following periods and under the following circumstances and without
consultation by the transfer agent with the Company or its counsel and without
the need for any further advice or instruction or documentation to the transfer
agent by or from the Company or its counsel or the Investor:
(a) At any time after the effective date of the applicable
registration statement (provided that such registration statement shall then be
effective): (i) incident to any Closing or other issuance of shares of Common
Stock; (ii) incident to the exercise of the Warrant or either Additional
Warrant; or (iii) upon any surrender of one or more certificates evidencing
Common Stock which bear the Legend, to the extent accompanied by a notice
requesting the issuance of new certificates free of the Legend to replace those
surrendered; provided that in connection with such event the Investor confirms
to the transfer agent that it has sold, pledged or otherwise transferred or
agreed to sell, pledge or otherwise transfer such Common Stock in a bona fide
transaction to a third party which is not an affiliate of the Company; and
(b) At any time upon any surrender of one or more certificates
evidencing Common Stock which bear the Legend, to the extent accompanied by a
notice requesting the issuance of new certificates free of the Legend to replace
those surrendered and containing representations that (i) the Investor has a
bona fide intention to dispose of such Common Stock pursuant to Rule 144 under
the Securities Act or is otherwise permitted to dispose thereof without
limitation as to amount or manner of sale pursuant to Rule 144(k) under the
Securities Act; or (ii) the Investor has sold, pledged or otherwise transferred
or agreed to sell, pledge or otherwise transfer such Common Stock in a manner
other than pursuant to an effective registration statement, to a transferee who
will upon such transfer be entitled to freely tradeable securities; provided
that in connection with the event described in clause (i), the transfer agent
shall be entitled to receive an opinion of counsel to the Investor that in such
circumstances the Legend may be removed and that the transferee (provided that
such transferree is not an affiliate of the Company) shall be entitled to hold
freely tradeable securities.
Section 7.2 No Other Legend or Stock Transfer Restrictions. No Legend
has been or shall be placed on the share certificates representing the Common
Stock and no instructions or "stop transfers," so called, "stock transfer
restrictions," or other restrictions have been or shall be given to the
Company's transfer agent with respect thereto other than as expressly set forth
in this Article VII.
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Section 7.3 Investor's Compliance. Nothing in this Article VII shall
affect in any way the Investor' s obligations under any agreement to comply with
all applicable securities laws upon resale of the Common Stock.
Section 7.4 Covenants of the Investor. During the term of this
Agreement (i) the Investor's trading activities with respect to shares of the
Company's Common Stock will be in compliance with all applicable state and
federal securities laws, rules and regulations and rules and regulations of the
Principal Market on which the Company's Common Stock is listed, and (ii) the
Investor will not engage in short sales of the Company's Common Stock for the
purpose of depressing the trading price of such Common Stock.
ARTICLE VIII
Other Issuances of Common Stock
Section 8.1 Underwritten Public Offerings. In the event the Company at
any time during the Commitment Period undertakes an underwritten public offering
of its Common Stock, the Company shall promptly notify the Investor in writing
of such transaction, and this Agreement shall be suspended for a period of time
prior to the filing with the SEC of a registration statement relating to the
public offer and sale of Common Stock as reasonably specified in such
notification, and for such subsequent period of time following the filing of the
registration statement as required by any underwriter (provided that the
Company, its officers and directors and its significant shareholders shall be
suspended from engaging in transactions involving the Common Stock for at least
the same period) or as required by any applicable securities law; provided,
however, that clause (z) of the definition of "Commitment Period" shall be
extended for a period of time equal to one and one-half times the number of
days, if any, that this Agreement is suspended as provided by this Section 8.1.
Section 8.2 Antidilution Adjustment to Purchase Price. (a) In the event
that the Company shall, at any time within the time period commencing five days
prior to an Optional Purchase Date or a Mandatory Purchase Date and ending on
the last day of the Valuation Period, (x) issue shares of Common Stock without
consideration (other than in the form of a dividend) at a price per share less
than the daily low trading price on the date of issue, (y) issue options, rights
or warrants to subscribe for or purchase Common Stock (or securities convertible
into Common Stock) without consideration or at a price per share (or having a
conversion price per share, if a security convertible into Common Stock) less
than the daily low trading price of the Common Stock on the date of issue, or
(z) in the case of
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securities convertible into Common Stock having a conversion price less than the
daily low trading price of the Common Stock on the date of conversion, then for
purposes of determining the Purchase Price, the daily low trading price shall be
adjusted, if at all, as follows: for purposes of determining the Purchase Price
of the Common Stock pursuant to Section 2.2, the daily low trading price of the
Common Stock on the day on which such issuance occurs and on all days prior
thereto shall be adjusted by multiplying such daily low trading price by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding on the date of such issuance plus the number of shares of Common
Stock which the aggregate offering price of the total number of shares of Common
Stock so to be issued (or the aggregate initial conversion price of the
convertible securities so to be issued) would purchase at the Purchase Price on
the date of such issue and of which the denominator shall be the number of
shares of Common Stock outstanding on the date of such issuance plus the number
of additional shares of Common Stock to be issued (or into which the convertible
securities so to be issued are initially convertible).
(b) The $7.00 amount and the $10.00 amount referenced in Section
2.1(b), as well as the daily low trading price of the Common Stock for any
Trading Day used to calculate the Purchase Price shall be adjusted
proportionally to reflect any stock splits, stock dividends, reclassifications,
combinations and similar transactions involving the Company's Common Stock.
ARTICLE IX
Choice of Law and Venue, Waiver of Jury Trial
Section 9.1 Choice of Law; Submission to Jurisdiction. THIS AGREEMENT
SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW. The parties hereby agree that
all actions or proceedings arising directly or indirectly from or in connection
with this Agreement shall, at the option of either party, be litigated only in
the United States District Court for the Southern District of New York located
in New York County, New York. The parties consent to the jurisdiction and venue
of the foregoing court and consent that any process or notice of motion or other
application to said court or a judge thereof may be served inside or outside the
State of New York or the Southern District of New York by registered mail,
return receipt requested, directed to the party for which it is intended at its
address set forth in this Agreement (and service so made shall be deemed
complete five (5) days after the same has been posted as aforesaid) or by
personal service or in such other manner as may be permissible under the rules
of said court.
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ARTICLE X
Assignment; Entire Agreement, Amendment; Termination
Section 10.1 Assignment. Neither this Agreement nor any rights of the
Investor or the Company hereunder may be assigned by either party to any other
person. Notwithstanding the foregoing, (a) the provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any transferee of any of
the Common Stock purchased or acquired by the Investor hereunder with respect to
the Common Stock held by such person, and (b) the Investor's interest in this
Agreement may be assigned at any time, in whole or in part, to any other person
or entity (including any affiliate of the Investor) upon the prior written
consent of the Company, which consent shall not to be unreasonably withheld.
Section 10.2 Entire Agreement, Amendment. This Agreement, the
Registration Rights Agreement, and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof, and no party shall be liable or
bound to any other party in any manner by any warranties, representations or
covenants except as specifically set forth in this Agreement or therein. Except
as expressly provided in this Agreement, neither this Agreement nor any term
hereof may be amended, waived, discharged or terminated other than by a written
instrument signed by the party against whom enforcement of any such amendment,
waiver, discharge or termination is sought.
Section 10.3 Publicity. The Company agrees that it will not disclose,
and will not include in any public announcement, the name of the Investor
without its consent, unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.
ARTICLE XI
Notices, Etc.; Cost and Expenses; Indemnification
Section 11.1 Notices, Etc. All notices, demands, requests, consents,
approvals or other communications required or permitted to be given hereunder or
which are given with respect to this Agreement shall be in writing and shall be
personally served or deposited in the mail, registered or certified, return
receipt requested, postage prepaid, or delivered by reputable air courier
service with charges prepaid, or transmitted by hand delivery, telegram, telex
or facsimile, addressed as set forth below, or to such other address as such
party shall have specified most recently by written notice: (i) if to the
Company, to: Connective Therapeutics, Inc., 3400 West
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Bayshore Road, Palo Alto, CA 94303; Attention: Ms. Cynthia Butitta, Facsimile
No.: (415) 843-2899, with copies (which shall not constitute notice) to: Venture
Law Group, 2800 Sand Hill Road, Menlo Park, CA 94025 Attention: Joshua Greene,
Esq., Facsimile No.: (415) 233-8386; and (ii) if to the Investor, to Kepler
Capital LLC, 40 West 57th Street, New York, NY 10019; Attention: Robert L.
Chender, Facsimile No.: (212) 698-0554. Notice shall be deemed given on the date
of service or transmission if personally served or transmitted by telegram,
telex or facsimile. Notice otherwise sent as provided herein shall be deemed
given on the third business day following the date mailed or on the second
business day following delivery of such notice by a reputable air courier
service.
Section 11.2 Cost and Expenses. The Company shall be responsible for
the Investor's costs and expenses (including legal fees) incurred in entering
into this Agreement which amounts shall be paid upon execution and delivery
thereof as well as the Investor's costs and expenses (including legal fees)
incurred in connection with the performance of its initial due diligence
activities relating to the effectiveness of the Registration Statement in an
amount up to $20,000 (provided that the Investor provides the Company a proposed
budget relating to its due diligence activities prior to the commencement
thereof and the Company reasonably agrees thereto). The Company shall also be
responsible for any reasonable subsequent costs and expenses incurred by the
Investor in connection with matters set forth in Section 3.3 (including without
limitation legal fees and fees of advisors and representatives of the Investor)
in an amount not exceeding $5,000 with respect to any Closing, which amounts may
be netted by the Investor against the amount of any payment relating to the
issuance of shares of Common Stock to the Investor in connection with any
Closing. In the event that with respect to the conduct by the Investor of its
due diligence activities in connection with the effectiveness of the
Registration Statement or any Closing, it incurs costs and expenses in excess of
the amount for which the Company is responsible to reimburse it, up to $5,000 of
such excess costs and expenses may be carried forward to be reimbursed by the
Company (within the limitation set forth above) at the immediately succeeding
Closing.
Section 11.3 Indemnification.
(a) Indemnification of Investor. The Company agrees to indemnify and
hold harmless the Investor and each person, if any, who controls the Investor
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement of a
material fact
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<PAGE> 33
contained in the Registration Statement (or any amendment thereto), including
any prospectus, or in any offering circular or other document, as applicable, or
the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statement therein not misleading or
arising out of any untrue statement or alleged untrue statement of a material
fact contained in any prospectus (or any amendment or supplement thereto), or in
any offering circular or other document, as applicable, or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, statement or omission, or any such alleged untrue
statement or omission; provided that (subject to Section 11.3(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred
(including the fees and disbursements of counsel chosen by the Investor),
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or omission,
to the extent that any such expense is not paid under (i ) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by the
Investor expressly for use in the Registration Statement (or any amendment
thereto), including any prospectus (or any amendment or supplement thereto), or
in any offering circular or other document, as applicable.
(b) Indemnification of Company. The Investor agrees to indemnify and
hold harmless the Company its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act against any and all loss, liability, claim, damage and expense described in
the indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including any prospectus (or any amendment or supplement thereto), or in any
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<PAGE> 34
offering circular or other document, as applicable, in reliance upon and in
conformity with written information furnished to the Company by the Investor
expressly for use in the Registration Statement (or any amendment or supplement
thereto) or in any offering circular or other document, as applicable.
(c) Action against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of his indemnity
agreement. In the case of parties indemnified pursuant to Section 11.3(a) above,
counsel to the indemnified parties shall be selected by the Investor, and in the
case of parties indemnified pursuant to Section 11.3(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with he
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnifies parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry or any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section or Section
11.4 hereof (whether or not the indemnified parties are actual or potential
parties thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnifies part form all liability arising out of
such litigation , investigation proceeding or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act by or
on behalf of an any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for the fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 11.3(a)(ii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) 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 (iii) such
33
<PAGE> 35
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
Section 11.4 Contribution. If the indemnification provided for in
Section 11.3 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to herein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Investor on the other hand from the offering of
the Common Stock pursuant to this Agreement or (ii) if the allocation provided
by clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Investor on the other hand in connection with the statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses. as well as
any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Investor on the other hand in connection with the offering of the Common Stock
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Common Stock
pursuant to this Agreement (before deducting expenses) received by the Company
and the total net proceeds received by the Investor (before deducting expenses)
bear to the aggregate public offering price.
The relative fault of the Company on the one hand and the Investor on
the other hand shall be determined by reference to, among other things, whether
any such 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 by the Investor and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Investor agree that it would not be just and
equitable if contribution pursuant to this Section 11.4 were determined on a
pro-rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 11.4.
The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 11.4
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim
34
<PAGE> 36
whatsoever based upon any such untrue or alleged untrue statement or omission or
alleged omission.
Notwithstanding the provisions of this Section 11.4, the Investor shall
not be required to contribute any amount in excess of the amount by which the
total price at which the Common Stock purchased by it and resold to the public
exceeds the amount of any damages which the Investor has otherwise been required
to pay by reason of any such untrue or alleged untrue statement or omission or
alleged omission.
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 who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 11.4, each person, if any, who controls
the Investor within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act shall have the same rights to contribution as such
Investor, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act shall have the same rights to contribution as the Company.
ARTICLE XII
Miscellaneous
Section 12.1 Counterparts. This Agreement may be executed in any number
of counterparts, all of which together shall constitute one instrument.
Section 12.2 Survival; Severability. The representations, warranties,
covenants and agreements of the parties hereto shall survive each Closing
hereunder. The indemnity and contribution agreements contained in Sections 11.3
and 11.4 hereof shall remain operative and in full force and effect regardless
of (i) any termination of this Agreement or of the Commitment Period, (ii) any
investigation made by or on behalf of any indemnified party or by or on behalf
of the Company, and (iii) the consummation of the sale or successive resales of
the Common Stock. In the event that any provision of this Agreement becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
35
<PAGE> 37
Section 12.3 Title and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 12.4 Reporting Entity for the Common Stock. The reporting
entity relied upon for the determination of the trading price or trading volume
of the Common Stock on any given Trading Day for the purposes of this Agreement
shall be Bloomberg or any other reputable pricing service chosen by the Investor
and reasonably acceptable to the Company.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized offices as of the date hereof.
KEPLER CAPITAL LLC CONNECTIVE THERAPEUTICS, INC.
By:________________________ By:________________________
Its_____________________ Its_____________________
36
<PAGE> 38
EXHIBIT A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH SECURITIES
LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF, IN THE ABSENCE OF REGISTRATION UNDER THE SECURITIES ACT OR UNLESS
SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
[Date]
Warrant to Purchase up to
_______ Shares of Common Stock
of Connective Therapeutics, Inc.
Connective Therapeutics, Inc., a Delaware corporation (the "Company"),
hereby acknowledges that Kepler Capital LLC (the "Purchaser") or any other
Warrant Holder is entitled, on the terms and conditions set forth below, to
purchase from the Company at any time after the date hereof and ending on
___________________ (sixty (60) months after the original issuance of this
Warrant) up to _____________ fully paid and nonassessable shares of Common
Stock, par value $.001 per share, of the Company (the "Common Stock"), as the
same my be adjusted pursuant to Section 5 herein, at the Purchase Price
(hereinafter defined), as the same may be adjusted pursuant to Section 5 herein.
The resale of the shares of Common Stock or other securities issuable upon
exercise or exchange of this Warrant is subject to the provisions of the
Registration Rights Agreement dated January 2, 1997 (the "Registration Rights
Agreement"), by and between the Company and the Investor.
1. Definitions.
(a) the term "Warrant Holder" shall mean the Purchaser or
any assignee of all or any portion of this Warrant.
(b) the term "Warrant Shares" shall mean the shares of
Common Stock or other securities issuable upon exercise of this Warrant.
(c) the term "Purchase Price" shall initially be $8.25,
which represents 110% of the closing bid price for the Common Stock on January
2, 1997, as may be adjusted pursuant to Section 5 herein.
(d) the term "Agreement" shall mean the Structured Equity Line
Flexible Financing SM Agreement, dated as of January 2, 1997, between the
Company and the Investor.
(e) other capitalized terms used herein which are defined
in the Agreement shall have the same meanings herein as therein.
2. Exercise or Exchange of Warrant.
(a) This Warrant may be exercised by the Warrant Holder,
in whole or in part, at any time and from time to time by surrender of this
Warrant, together with the form of subscription at the end hereof duly executed
by Warrant Holder, together with the full Purchase Price (as defined in Section
1) for each share of Common Stock as to which this Warrant is exercised to the
Company at the
Warrant Exhibit
<PAGE> 39
address set forth in Section 13 hereof. In the event that the Warrant is not
exercised in full, the number of Warrant Shares shall be reduced by the number
of such Warrant Shares for which this Warrant is exercised, and the Company, at
its expense, shall forthwith issue and deliver to or upon the order of the
Warrant Holder a new Warrant of like tenor in the name of the Warrant Holder or
as the Warrant Holder may request, reflecting such adjusted Warrant Shares.
The Warrants are exchangeable for their value in Common Stock based
upon the closing bid price of such Common Stock as quoted on the Principal
Market (as herein defined) on the date prior to the date of exchange or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange or quoted on the Nasdaq National Market or Small-Cap Market, the
closing bid price on the over-the-counter market as furnished by any New York
Stock Exchange member firm which makes a market in the Common Stock reasonably
selected from time to time by the Company for that purpose, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted on the Nasdaq National Market or Small-Cap Market or traded
over-the-counter and the average price cannot be determined as contemplated
above, the fair market value of the Common Stock shall be as reasonably
determined in good faith by the Company's Board of Directors. In the event
Warrants are exchanged for shares, the value of the Warrants so exchanged shall
equal the Closing Price on the date of delivery of notice of exercise minus the
Purchase Price.
(b) The "Date of Exercise" of the Warrant shall be the date
that the advance copy of the form of exercise attached hereto as Exhibit A (the
"Exercise Form"), is sent by facsimile to the Company, provided that the
original Warrant and Exercise Form are received by the Company within reasonable
time thereafter. If the Warrant Holder has not sent advance notice by facsimile,
the Date of Exercise shall be the date the original Exercise Form is received by
the Company.
(c) Notwithstanding any other provision of this Section 2, as
of any date prior to the Date of Exercise, the aggregate number of shares of
Common Stock into which this Warrant, all other Warrants and all other
securities convertible into Common Stock held by the Warrant Holder and its
affiliates shall be convertible, together with the shares of Common Stock then
beneficially owned (as such term is defined in the Exchange Act) by such Warrant
Holder and its affiliates, shall not exceed 4.9% of the total outstanding shares
of Common Stock as of such Date of Exercise.
3. Delivery of Stock Certificates.
(a) Subject to the terms and conditions of this Warrant, as
soon as practicable after the exercise of this Warrant in full or in part, and
in any event within two (2) days thereafter, the Company at its expense
(including, without limitation, the payment by it of any applicable issue taxes)
will cause to be issued in the name of and delivered to the Warrant Holder, or
as the Warrant Holder may lawfully direct, a certificate or certificates for the
number of fully paid and non-assessable shares of Common Stock to which the
Warrant Holder shall be entitled on such exercise, together with any other stock
or other securities or property (including cash, where applicable) to which the
Warrant Holder is entitled upon such exercise in accordance with the provisions
hereof.
(b) This Warrant may not be exercised as to fractional shares
of Common Stock. In the event that the exercise of this Warrant, in full or in
part, would result in the issuance of any fractional share of Common Stock, then
in such event the Warrant Holder shall be entitled to cash equal to the fair
market value of such fractional share. For purposes of this Warrant, "fair
market value" shall equal the closing bid price of the Common Stock on the
Nasdaq National Market or Small-Cap Market, the American Stock Exchange or the
New York Stock Exchange, whichever is the principal trading exchange or market
for the Common Stock (the "Principal Market") on the date of determination or,
if the Common Stock is not listed or admitted to trading on any national
securities exchange or quoted on the Nasdaq National Market or Small-Cap Market,
the closing bid price on the over-the-counter market as furnished by any New
York Stock Exchange member firm that makes a market in the Common Stock
reasonably selected from time to time by the Company for that purpose, or, if
the Common Stock is not listed or
2
Warrant Exhibit
<PAGE> 40
admitted to trading on any national securities exchange or quoted on the Nasdaq
National Market or Small-Cap Market or traded over-the-counter and the average
price cannot be determined as contemplated above, the fair market value of the
Common Stock shall be as reasonably determined in good faith by the Company's
Board of Directors.
4. Covenants of the Company.
(a) The Company shall use its reasonable best efforts to
insure that a registration statement under the Securities Act covering the
resale or other disposition thereof of the Warrant Shares by the Warrant Holder
is effective to the extent provided by the Registration Rights Agreement or, to
the extent applicable, in Section 3.2(a) of the Agreement.
(b) The Company shall take all necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, including, without limitation the notification of the Nasdaq
National Market, for the legal and valid issuance of this Warrant and the
Warrant Shares to the Warrant Holder.
(c) From the date hereof through the last date on which this
Warrant is exercisable, the Company shall take all steps reasonably necessary
and within its control to insure that the Common Stock remains listed or quoted
on the Principal Market and shall not amend its Certificate of Incorporation or
Bylaws so as to adversely affect any rights of the Warrant Holder under this
Warrant.
(d) The Company shall at all times reserve and keep available,
solely for issuance and delivery as Warrant Shares hereunder, such shares of
Common Stock as shall from time to time be issuable as Warrant Shares.
(e) The Warrant Shares, when issued in accordance with the
terms hereof; will be duly authorized and, when paid for or issued in accordance
with the terms hereof, shall be validly issued, fully paid and non-assessable.
The Company has authorized and reserved for issuance to the Warrant Holder the
requisite number of shares of Common Stock to be issued pursuant to this
Warrant.
(f) With a view to making available to the Warrant Holder the
benefits of Rule 144 promulgated under the Securities Act ("Rule 144") and any
other rule or regulation of the Securities and Exchange Commission (the "SEC"),
that may at any time permit Warrant Holder to sell securities of the Company to
the public without registration, the Company agrees to use its reasonable best
efforts to(i) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times; and (ii) file with the SEC in
a timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act.
5. Adjustment of Purchase Price and Number of Shares. The
number of and kind of securities purchasable upon exercise of this Warrant and
the Purchase Price shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and Other Issuances. If the
Company shall at any time after the date hereof but prior to the expiration of
this Warrant subdivide its outstanding securities as to which purchase rights
under this Warrant exist, by split-up, spin-off, or otherwise, or combine its
outstanding securities as to which purchase rights under this Warrant exist, the
number of Warrant Shares as to which this Warrant is exercisable as of the date
of such subdivision, split-up, spin-off or combination shall forthwith be
proportionately increased in the case of a subdivision, or proportionately
decreased in the case of a combination. Appropriate adjustments shall also be
made to the Purchase Price, but the aggregate purchase price payable for the
total number of Warrant Shares purchasable under this Warrant as of such date
shall remain the same.
3
Warrant Exhibit
<PAGE> 41
(b) Stock Dividend. If at any time after the date hereof the
Company declares a dividend or other distribution on Common Stock payable in
Common Stock or other securities or rights convertible into or exchangeable for
Common Stock ("Common Stock Equivalents"), without payment of any consideration
by holders of Common Stock for the additional shares of Common Stock or the
Common Stock Equivalents (including the additional shares of Common Stock
issuable upon exercise or conversion thereof), then the number of shares of
Common Stock for which this Warrant may be exercised shall be increased as of
the record date (or the date of such dividend distribution if no record date is
set) for determining which holders of Common Stock shall be entitled to receive
such dividends, in proportion to the increase in the number of outstanding
shares (and shares of Common Stock issuable upon conversion of all such
securities convertible into Common Stock) of Common Stock as a result of such
dividend, and the Purchase Price shall be adjusted so that the aggregate amount
payable for the purchase of all the Warrant Shares issuable hereunder
immediately after the record date (or on the date of such distribution, if
applicable), for such dividend shall equal the aggregate amount so payable
immediately before such record date (or on the date of such distribution, if
applicable).
(c) Other Distributions. If at any time after the date hereof
the Company distributes to holders of its Common Stock, other than as part of a
dissolution or liquidation or the winding up of its affairs, any shares of its
capital stock, any evidence of indebtedness or any of its assets (other than
cash, Common Stock or securities convertible into or exchangeable for Common
Stock), then, in any such case, the Warrant Holder shall be entitled to receive,
upon exercise of this Warrant, with respect to each share of Common Stock
issuable upon such exercise, the amount of cash or evidences of indebtedness or
other securities or assets which such Warrant Holder would have been entitled to
receive with respect to each such share of Common Stock as a result of the
happening of such event had this Warrant been exercised immediately prior to the
record date or other date determining the shareholders entitled to participate
in such distribution (the "Determination Date") or, in lieu thereof, if the
Board of Directors of the Company should so determine at the time of such
distribution, a reduced Purchase Price determined by multiplying the Purchase
Price on the Determination Date by a fraction, the numerator of which is the
result of such Purchase Price reduced by the value of such distribution
applicable to one share of Common Stock (such value to be determined in good
faith by the Company's Board of Directors) and the denominator of which is such
Purchase Price.
(d) Merger, Consolidation, etc. If at any time after the date
hereof there shall be a merger or consolidation of the Company with or into, or
a transfer of all or substantially all of the assets of the Company to, another
entity (a "Consolidation Event"), then the Warrant Holder shall be entitled to
receive upon such transfer, merger or consolidation becoming effective, and upon
payment of the aggregate Purchase Price then in effect, the number of shares or
other securities or property of the Company or of the successor corporation
resulting from such merger or consolidation, which would have been received by
Warrant Holder for the shares of stock subject to this Warrant had this Warrant
been exercised immediately prior to such transfer, merger or consolidation
becoming effective or to the applicable record date thereof, as the case may be.
The Company shall not effect any Consolidation Event unless the resulting
successor or acquiring entity (if not the Company) assumes by written instrument
the obligation to deliver to the Warrant Holder such shares of stock and/or
securities as the Warrant Holder is entitled to receive had this Warrant been
exercised in accordance with the foregoing; provided, however, that if as of the
third business day prior to the consummation of the Consolidation Event the
closing bid price of the Common Stock shall be equal to at least 200% of the
Purchase Price, then the Warrant shall be automatically exchanged on the date of
consummation of the Consolidation Event, as provided in Section 2 hereof.
(e) Reclassification, Etc. If at any time after the date
hereof there shall be a reclassification of any securities as to which purchase
rights under this Warrant exist, into the same or a different number of
securities of any other class or classes, then the Warrant Holder shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the Purchase Price then in effect,
the number of shares or other securities or property
4
Warrant Exhibit
<PAGE> 42
resulting from such reorganization or reclassification, which would have been
received by the Warrant Holder for the shares of stock subject to this Warrant
had this Warrant at such time been exercised.
(f) Purchase Price Adjustment. In the event that the Company
issues or sells any Common Stock or securities which are convertible into or
exchangeable for its Common Stock or any convertible securities, or any warrants
or other rights to subscribe for or to purchase or any options for the purchase
of its Common Stock or any such convertible securities (other than issuance of
Preferred Stock or of shares of Common Stock upon conversion thereof, shares or
options issued or which may be issued to employees, directors or consultants
pursuant to the Company's stock option or stock purchase plans listed in the SEC
Reports or shares issued upon exercise of options, warrants or rights
outstanding on the date of the Agreement and listed in the SEC Reports) at an
effective purchase price per share which is less than the Purchase Price then in
effect and less than the fair market value (as hereinabove defined) of the
Common Stock on the trading day next preceding such issue or sale, then in each
such case, the Purchase Price in effect immediately prior to such issue or sale
shall be reduced effective concurrently with such issue or sale to an amount
determined by multiplying the Purchase Price then in effect by a fraction, (x)
the numerator of which shall be the sum of (1) the number of shares of Common
Stock outstanding immediately prior to such issue or sale, including, without
duplication, those deemed to have been issued under any provision of the
Preferred Stock and the Warrants plus (2) the number of shares of Common Stock
which the aggregate consideration received by the Company for such additional
shares would purchase at such fair market value then in effect and (y) the
denominator of which shall be the number of shares of Common Stock of the
Company outstanding immediately after such issue or sale including, without
duplication, those deemed to have been issued under any provision of the
Preferred Stock and Warrants; provided, however, there shall be no reduction of
the Purchase Price for such issuances or sales at any time from January 2, 1997
through the term of this Warrant in an aggregate (i.e., not per transaction)
amount of up to $5,000,000 provided that such issuance or sale is completed at
an effective purchase price per share of at least 85% of the fair market value
of the Common Stock on the trading day next preceding such issue or sale. For
purposes of the foregoing fraction, Common Stock outstanding shall include,
without limitation, any equity offerings then outstanding, whether or not they
are exercisable or convertible when such fraction is to be determined.
The number of shares which may be purchunder shall be
increased proportionately to any reduction in Purchase Price pursuant to this
pased herearagraph 5(f), so that after such adjustments the aggregate Purchase
Price payable hereunder for the increased number of shares of Common Stock shall
be the same as the aggregate Purchase Price in effect immediately prior to such
adjustments.
Notwithstanding anything else contained in this Warrant to the
contrary, there shall be no adjustment of the Purchase Price or the number of
shares of Common Stock issuable pursuant to the exercise of this Warrant in the
event that during the term of this Warrant, the Company issues shares of Common
Stock, or securities convertible into Common Stock to the Purchaser.
(g) Adjustments: Additional Shares, Securities or Assets. In
the event that at any time, as a result of an adjustment made pursuant to this
Section 5, the Warrant Holder shall, upon exercise of this Warrant, become
entitled to receive shares and/or other securities or assets (other than Common
Stock) then, wherever appropriate, all references herein to shares of Common
Stock shall be deemed to refer to and include such shares and/or other
securities or assets; and thereafter the number of such shares and/or other
securities or assets shall be subject to adjustment from time to time in a
manner and upon terms as nearly equivalent as practicable to the provisions of
this Section 5.
6. No Impairment. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the
5
Warrant Exhibit
<PAGE> 43
rights of the Warrant Holder against impairment. Without limiting the generality
of the foregoing, the Company (a) will not increase the par value of any Warrant
Shares above the amount payable therefor on such exercise, and (b) will take all
such action as may be reasonably necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable Warrant
Shares on the exercise of this Warrant.
7. Notice of Adjustments; Notices. Whenever the Purchase Price
or number of Warrant Shares purchasable hereunder shall be adjusted pursuant to
Section 5 hereof, the Company shall execute and deliver to the Warrant Holder a
certificate 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 Purchase Price and number of shares purchasable hereunder
after giving effect to such adjustment, and shall cause a copy of such
certificate to be mailed (by first class mail, postage prepaid) to the Warrant
Holder.
8. Rights As Stockholder. Prior to exercise of this Warrant,
the Warrant 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. However, in the event of any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Company shall mail to
each Warrant Holder, at least 10 days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right.
9. Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Warrant and, in the case of any such loss, theft or destruction of the Warrant,
upon delivery of an indemnity agreement or security reasonably satisfactory in
form and amount to the Company or, in the case of any such mutilation, on
surrender and cancellation of such Warrant, the Company at its expense will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
10. Consent to Jurisdiction. Each of the Company and the
Warrant Holder (i) hereby irrevocably submits to the non-exclusive jurisdiction
of the United States District Court for the Southern District of New York for
the purposes of any suit, action or proceeding arising out of or relating to
this Warrant and (ii) hereby waives, and agrees not to assert in any such suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of such court, that the suit, action or proceeding is brought in an
inconvenient forum or that the venue of the suit, action or proceeding is
improper. Each of the Company and the Warrant Holder consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address in effect for notices to it under this Warrant and agrees
that such service shall constitute good and sufficient service of process and
notice thereof. Nothing in this paragraph shall affect or limit any right to
serve process in any other manner permitted by law.
11. Entire Agreement; Amendments. This Warrant and the
Agreement contain the entire understanding of the parties with respect to the
matters covered hereby and thereby. No provision of this Warrant may be waived
or amended other than by a written instrument signed by the party against whom
enforcement of any such amendment or waiver is sought.
12. Restricted Securities.
(a) Registration or Exemption Required. This Warrant has
been issued in a transaction exempt from the registration requirements of the
Act in reliance upon the provisions of
6
Warrant Exhibit
<PAGE> 44
Section 4(2) promulgated by the SEC under the Act. This Warrant and the Warrant
Shares issuable upon exercise of this Warrant may not be resold except pursuant
to an effective registration statement or an exemption to the registration
requirements of the Act and applicable state laws.
(b) Legend. The Warrant and any Warrant Shares issued upon
exercise thereof (until a registration statement has been declared effective by
the SEC with respect to the Warrant Shares, at which time, such legend shall be
removed, and the Warrant Shares shall be freely tradeable), shall bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE
BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH SECURITIES LAWS. NEITHER
THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF, IN THE ABSENCE OF REGISTRATION UNDER THE
SECURITIES ACT OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, SUCH REGISTRATION."
(c) Assignment. Assuming the conditions of (a) above regarding
registration or exemption have been satisfied, the Warrant Holder may sell,
transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in
part. The Warrant Holder shall deliver a written notice to Company,
substantially in the form of the Assignment attached hereto as Exhibit B,
indicating the person or persons to whom the Warrant shall be assigned and the
respective number of warrants to be assigned to each assignee. The Company shall
effect the assignment within ten (10) days, and shall deliver to the assignee(s)
designated by the Warrant Holder a Warrant or Warrants of like tenor and terms
for the appropriate number of shares.
13. Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a)
upon hand delivery or delivery by facsimile at the address or number designated
below (if delivered on a business day during normal business hours where such
notice is to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the second business day following the date
of mailing by express courier service, fully prepaid, addressed to such address,
or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:
to the Company:
Connective Therapeutics, Inc.
3400 West Bayshore Road
Palo Alto, California 94303
Attn: Ms. Cynthia Butitta
Fax: (415) 843-2899
to the Warrant Holder:
Attn:
Fax:
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 13 by giving at least 10 days prior written
notice of such changed address or facsimile number to the other party hereto.
7
Warrant Exhibit
<PAGE> 45
14. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the laws of the State of Delaware. The headings
in this Warrant are for purposes of reference only, and shall not limit or
otherwise affect any of the terms hereof. The invalidity or unenforceability of
any provision hereof shall in no way affect the validity or enforceability of
any other provision.
CONNECTIVE THERAPEUTICS, INC.
By ______________________________
Title:
[CORPORATE SEAL]
Attest:
By ________________________________
Its:
8
Warrant Exhibit
<PAGE> 46
EXHIBIT A
EXERCISE FORM
CONNECTIVE THERAPEUTICS, INC.
The undersigned hereby irrevocably exercises the right to
purchase __________________ shares of Common Stock of CONNECTIVE THERAPEUTICS,
INC., a Delaware corporation, evidenced by the attached Warrant, and herewith
makes payment of the Purchase Price with respect to such shares in full in the
form of [cash or check in the amount of $___], [_____ Warrant Shares which
represent the amount of Warrant Shares as provided in the attached Warrant to be
cancelled in connection with such exercise], all in accordance with the
conditions and provisions of said Warrant.
The undersigned requests that stock certificates for such
Warrant Shares be issued, and a Warrant representing any unexercised portion
hereof be issued, pursuant to this Warrant in the name of the registered Holder
and delivered to the undersigned at the address set forth below.
Dated:____________________
_____________________________________________
Signature of Registered Holder
Name of Registered Holder (Print)
_____________________________________________
Address
9
Warrant Exhibit
<PAGE> 47
EXHIBIT B
ASSIGNMENT
(To be executed by the registered Warrant Holder
desiring to transfer the Warrant)
FOR VALUED RECEIVED, the undersigned Warrant Holder of the attached Warrant
hereby sells, assigns and transfers unto the persons below named the right to
purchase ______________ shares of the Common Stock of CONNECTIVE THERAPEUTICS,
INC. evidenced by the attached Warrant and does hereby irrevocably constitute
and appoint ______________________ attorney to transfer the said Warrant on the
books of the Company, with full power of substitution in the premises.
Dated:
______________________________
Signature
Fill in for new Registration of Warrant:
_________________________________________
Name
_________________________________________
Address
_________________________________________
Please print name and address of assignee
(including zip code number)
NOTICE
The signature to the foregoing Exercise Form or Assignment must correspond to
the name as written upon the face of the attached Warrant in every particular,
without alteration or enlargement or any change whatsoever.
10
Warrant Exhibit
<PAGE> 48
EXHIBIT B
(a) The Company is a corporation duly organized, validly existing and
in good standing under the law of the State of Delaware and has all requisite
power and authority (corporate and other) to carry on its business and to own,
lease and operate its properties and assets as described in the Company's SEC
Reports.
(b) To our knowledge, except as disclosed in the SEC Reports, there are
no actions or proceedings that are pending or threatened against the Company or
against any officer or director of the Company in their capacity as such.
(c) Although we have not undertaken to determine independently, and do
not assume any responsibility for, the accuracy or completeness of the
statements in the Registration Statement, we have participated in the
preparation of the Registration Statement and the Prospectus, including review
and discussion of the contents thereof, and nothing has come to our attention
that has caused us to believe that the Registration Statement at the time the
Registration Statement became effective and as of the date of the filing with
the Commission of the Company's most recent Quarterly Report on Form 10-Q
incorporated by reference into such Registration Statement, or the Prospectus as
of its date of the filing of such Quarterly Report, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; however, we express no
opinion with respect to the financial statements and the notes thereto and the
schedules and other financial and statistical data derived therefrom included in
the Registration Statement or the Prospectus.
<PAGE> 49
EXHIBIT C
CONNECTIVE THERAPEUTICS, INC.
COMPLIANCE CERTIFICATE
The undersigned, Thomas G. Wiggans, hereby certifies as follows:
1. The undersigned is the duly elected President and Chief Executive
Officer of Connective Therapeutics, Inc., a Delaware corporation (the
"Company").
2. The representations and warranties of the Company set forth in
Article V of the Structured Equity Line Flexible Financing Agreement (the
"Agreement") dated as of January 2, 1997 are true and correct in all material
respects as though made on and as of the date hereof.
3. The Company has performed and complied with all covenants,
agreements, obligations and conditions contained in Article III of the Agreement
to be performed by the Company on or prior to the Closing Date.
The undersigned has executed this Certificate this ____ day of
________, 199_.
____________________________________
Thomas G. Wiggans, President and
Chief Executive Officer
<PAGE> 50
Exhibit D
CONNECTIVE THERAPEUTICS, INC.
IRREVOCABLE INSTRUCTIONS TO TRANSFER AGENT
January 2, 1997
[Name and address of Transfer Agent]
Dear Sirs:
Reference is made to the Structured Equity Line Flexible Financing
Agreement (the "Agreement") dated as of January 2, 1997 between Kepler Capital
LLC (the "Investor") and Connective Therapeutics, Inc. (the "Company"). Pursuant
to the Agreement, subject to the terms and conditions set forth in the Agreement
(i) the Investor has agreed to purchase from the Company and the Company has
agreed to sell to the Investor from time to time during the term of the
Agreement shares of Common Stock of the Company, par value $.001 per share (the
"Common Stock") and (ii) the Company has issued to the Investor a warrant to
purchase Common Stock and, subject to the terms and conditions set forth in the
Agreement, the Company has agreed to issue to the Investor additional warrants
to purchase Common Stock (together, the "Warrants"). As a condition to the
effectiveness of the Agreement the Company has agreed to issue to you, as the
transfer agent for the Common Stock (the "Transfer Agent"), these irrevocable
instructions relating to the Common Stock to be issued to the Investor (or a
permitted assignee) pursuant to the Agreement or upon exercise of the Warrants.
All terms used herein and not otherwise defined shall have the meaning set forth
in the Agreement.
1. ISSUANCE OF COMMON STOCK WITHOUT THE LEGEND
Pursuant to the Agreement, the Company is required to prepare and file
with the Commission, and maintain the effectiveness of, a registration statement
or registration statements registering the resale of the Common Stock to be
acquired by the Investor (i) under the Agreement and (ii) upon exercise of the
Warrants. The Company will advise the Transfer Agent in writing of the
effectiveness of any such registration statement promptly upon its being
declared effective. The Transfer Agent shall be entitled to rely on such advice
and shall assume that the effectiveness of such registration statement remains
in effect unless the Transfer Agent is otherwise advised in writing by the
Company and shall not be required to independently confirm the continued
effectiveness of such registration statement. In the circumstances set forth in
the following two paragraphs, the Transfer Agent shall deliver to the Investor
certificates representing Common Stock not bearing the Legend without requiring
further advice or instruction or additional documentation from the Company or
its counsel or the Investor or its counsel or any other party (other than as
described in such paragraphs).
<PAGE> 51
At any time after the effective date of the applicable registration
statement (provided that the Company has not informed the Transfer Agent in
writing that such registration statement is not effective) (i) incident to any
Closing (whether on the Closing Date or thereafter as a result of an increase in
the number of shares of Common Stock issuable in respect of such Closing in
accordance with the Agreement) or other issuance of shares of Common Stock; (ii)
incident to the exercise of any Warrant; or (iii) upon any surrender of one or
more certificates evidencing Common Stock which bear the Legend, to the extent
accompanied by a notice requesting the issuance of new certificates free of the
Legend to replace those surrendered, the Transfer Agent shall deliver to the
Investor the certificates representing the Common Stock not bearing the Legend,
in such names and denominations as the Investor shall request, provided that in
connection with any such event, the Investor shall confirm in writing to the
Transfer Agent that it has sold, pledged or otherwise transferred or agreed to
sell, pledge or otherwise transfer such Common Stock in a bona fide transaction
to a third party.
In addition to the obligation of the Transfer Agent set forth in the
preceding paragraph to issue certificates representing the Common Stock not
bearing the Legend, at any time upon surrender of one or more certificates
evidencing Common Stock which bear the Legend which certificates are accompanied
by a request to issuance new certificates not bearing the Legend to replace
those surrendered, the Transfer Agent shall deliver certificates evidencing
Common Stock not bearing the Legend, in such names and denominations as the
Investor shall request, provided that in connection with such request the
Investor (or permitted assignee) shall represent that (i) it has a bona fide
intention to dispose of such Common Stock pursuant to Rule 144 under the
Securities Act or is otherwise permitted to dispose thereof with limitation as
to amount of manner of sale pursuant to Rule 144(k) under the Securities Act; or
(ii) it has sold, pledged or otherwise transferred or agreed to sell, pledge or
otherwise transfer such Common Stock in a manner other than pursuant to an
effective registration statement to a transferee who will upon such transfer be
entitled to freely tradeable securities; provided that in connection with the
event described in clause (i), the transfer agent shall be entitled to receive
an opinion of counsel to the Investor that in such circumstances the Legend may
be removed and that the transferee (provided that it is not an affiliate of the
Company) shall be entitled to receive freely tradeable securities.
2. MECHANICS OF DELIVERY OF CERTIFICATES REPRESENTING COMMON STOCK
In connection with any Closing pursuant to which the Investor acquires
Common Stock under the Agreement, the Transfer Agent shall deliver certificates
representing Common Stock (with or without the Legend, as appropriate) on the
Closing Date by overnight courier as instructed by the Investor.
2
<PAGE> 52
In connection with the issuance of Common Stock upon the exercise of
Warrants, you (i) shall deliver certificates representing Common Stock (with or
without the Legend, as appropriate) on the date the Transfer Agent shall have
received the original certificate representing the Warrant to be exercised (in
whole or in part) by overnight courier as instructed by the Investor and (ii)
unless the Company assumes responsibility therefor, shall also on such date
deliver to the Investor a new Warrant representing any portion of the Warrant
not being exercised.
In connection with any delivery by the Investor to the Transfer Agent
of certificates representing Common Stock which bear the Legend accompanied by
appropriate documentation as specifically set forth in Section 1, the Transfer
Agent shall deliver certificates representing Common Stock (with or without the
Legend, as appropriate) by overnight courier as instructed by the Investor on
the date the Transfer Agent shall have received the original certificate or
certificates representing the Common Stock (provided that you shall also have
received the appropriate documentation by facsimile or otherwise).
3. NUMBER OF SHARES OF COMMON STOCK TO BE ISSUED AT CLOSING, AS ADJUSTED
SUBSEQUENT TO A CLOSING OR UPON EXERCISE OF WARRANTS
The number of shares of Common Stock to be issued upon at any Closing
under the Agreement shall be determined based upon a formula as set forth in the
Agreement. In addition, the number of shares of Common Stock issuable with
respect to any Closing may be subject increase subsequent to such Closing as
provided in the Agreement. Furthermore, the number of shares of Common Stock
issuable upon the exercise of Warrants may be subject to adjustment as provided
by the Warrants. With respect to each of the instances referenced in the
previous sentence, the Investor shall advise the Transfer Agent as to the number
of shares of Common Stock to be issued and shall also so advise the Company. In
the event the Company disagrees with the Investor's calculation and so notifies
the Transfer Agent in writing, the Transfer Agent shall issue shares of Common
Stock to the Investor in accordance with the Agreement and these Irrevocable
Instructions in the lesser amount and the Investor shall present the disputed
issue to an independent financial institution (chosen by the Investor and
reasonably acceptable to the Company) for resolution and the determination of
that financial institution shall be controlling. The written concurrence of the
Company as to the Investor's calculation shall not be required and in the event
the Transfer Agent does not receive written notice of the Company's disagreement
with the Investor's calculation prior to the date by which the Transfer Agent is
required to deliver certificates representing Common Stock to the Investor, the
Transfer Agent shall deliver the number of shares of Common Stock to the
Investor as so requested. The fees of such financial institution shall be borne
by the party which, based upon such
3
<PAGE> 53
financial institution's determination, incorrectly calculated the number of
shares of Common Stock issuable.
4. FEES OF TRANSFER AGENT; INDEMNIFICATION
The Company agrees to pay the Transfer Agent for all fees incurred in
connection with these Irrevocable Instructions. The Company agrees to indemnify
the Transfer Agent and its officers, employees and agents, against any losses,
claims, damages or liabilities, joint or several, to which it or they become
subject based upon the performance by the Transfer Agent of its duties in
accordance with the Irrevocable Instructions.
5. IRREVOCABLE INSTRUCTIONS
These Irrevocable Instructions delivered by the Company to the Transfer
Agent are irrevocable and the Transfer Agent is hereby directed not to follow
any subsequent direction of the Company, written or oral, delivered subsequent
to the date hereof relating to the matters contained herein which are
inconsistent with these Irrevocable Instructions.
6. THIRD PARTY BENEFICIARY
The Company and the Transfer Agent acknowledge and agree that the
Investor is an express third party beneficiary of these Irrevocable Instructions
and shall be entitled to rely upon, and enforce, the provisions thereof.
CONNECTIVE THERAPEUTICS, INC.
By:__________________________
Name:
Title:
AGREED:
[NAME OF TRANSFER AGENT]
By:__________________________
Name:
Title:
4
<PAGE> 1
EXHIBIT 10.43
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of
January 2, 1997 is made and entered into between CONNECTIVE THERAPEUTICS, INC.,
a Delaware corporation (the "Company"), and Kepler Capital LLC (the "Investor").
WHEREAS, the Company and the Investor have entered into that certain
Structured Equity Line Flexible FinancingSM Agreement, dated as of the date
hereof (the "Investment Agreement"), pursuant to which the Company will issue,
from time to time, to the Investor shares of Common Stock, par value $.001 per
share (the "Common Stock");
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Investor's agreement to enter into the Investment Agreement, the Company has
issued to the Investor a warrant dated January 2, 1997, exercisable from time to
time within five (5) years from the date of issuance (the "Warrant") for the
purchase of an aggregate of 250,000 shares of Common Stock at a price specified
in such Warrant, and the Company has agreed to issue to the Investor on each of
the first, second and third anniversary of the Commitment Period (as defined in
the Investment Agreement), certain additional warrants (the "Additional
Warrants") to purchase shares of Common Stock in an amount and at a price
determined pursuant to the Investment Agreement (the Warrant and the Additional
Warrants are herein collectively referred to as the "Warrants");
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Investor's agreement to enter into the Investment Agreement, the Company has
agreed to provide the Investor with certain registration rights with respect to
the Conversion Shares (as defined below);
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein and in the Investment
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. Capitalized terms defined in the Investment
Agreement or the Warrant shall have the same meanings herein as are ascribed to
<PAGE> 2
them therein. In addition, the following terms shall have the meanings ascribed
below:
"Registrable Securities" means all of the Common Stock and any other
securities issued or issuable upon exercise of the Warrants as provided therein
(together, the "Conversion Shares") until (i) a registration statement under the
Act covering the offering of such Conversion Shares has been declared effective
by the SEC and such Conversion Shares have been disposed of pursuant to such
effective registration statement, (ii) such Conversion Shares are sold under
circumstances in which all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Act ("Rule 144") are met, (iii) such
Conversion Shares have been otherwise transferred and the Company has delivered
a new certificate or other evidence of ownership for such securities not bearing
a restrictive legend or (iv) such time as, in the opinion of counsel to the
Company, which counsel shall be acceptable to the Investor in its sole
discretion, such Conversion Shares may be sold without any time, volume or
manner limitation pursuant to Rule 144(k) (or any similar provision then in
effect) under the Act.
"Registration Statement," "Warrant Registration Statement" and
"Additional Warrant Registration Statement." See Section 2.1(a).
ARTICLE II
REGISTRATION RIGHTS
SECTION 2.1. FORM S-3 REGISTRATION STATEMENTS.
(a) Filing of Form S-3 Registration Statements. Subject to the terms
and conditions of this Agreement, the Company shall file with the SEC (i) by
March 15, 1997 a registration statement on Form S-3 under the Securities Act
(the "Warrant Registration Statement") for the registration of the resale by the
Investor of Common Stock to be issued upon exercise of the Warrant and (ii)
within thirty (30) days of the issuance of any Additional Warrants, a
registration statement on Form S-3 under the Securities Act (each, an
"Additional Warrant Registration Statement") for the registration of the resale
by the Investor of Common Stock to be issued upon exercise of each Additional
Warrant. The Warrant Registration Statement and each Additional Warrant
Registration Statement are each referred to herein as a "Registration Statement.
(b) Effectiveness of Registration Statements. The Warrant Registration
Statement shall be declared effective by the SEC by no later than June 15, 1997
and each Additional Registration Statement shall be declared effective by the
SEC by no later than ninety (90) days following the date by which such
Additional Registration Statement is filed (or is required to be filed) with the
SEC
2
<PAGE> 3
and each Registration Statement shall remain in effect until such time as the
Conversion Shares issuable upon exercise of the Warrants or Additional Warrants,
as the case may be, shall no longer constitute Registrable Securities.
(c) Penalties for Failure to Obtain or Maintain Effectiveness of
Registration Statements. In the event the Company fails to obtain the
effectiveness of a Registration Statement within the time period set forth in
Section 2.1 (b), the Company shall pay to the Investor at the end of each thirty
(30) day period following the date by which such Registration Statement was
required to have been declared effective, in cash liquidated damages in an
amount equal to (i) $500 per day in the case of the Warrant Registration
Statement and $200 per day in the case of any Additional Warrant Registration
Statement. In addition, in the event the Company fails to maintain the
effectiveness of a Registration Statement (or the use of the underlying
prospectus) throughout the period set forth in Section 2.1(b), other than
temporary suspensions not exceeding thirty (30) days in any one twelve (12)
month period, the Company shall pay to the Investor at the end of any calendar
month in which such a suspension has occurred, in cash liquidated damages in an
amount equal to (i) $250 per day in the case of the Warrant Registration
Statement and $100 per day in the case of any Additional Warrant Registration
Statement. Such liquidated damages amount shall not be payable with respect to
deferrals of filing of a Registration Statement or suspensions of the
effectiveness of a Registration Statement (or use of the underlying prospectus)
in accordance with Section 2.1(d) although any such deferrals or suspensions
shall be counted towards the thirty (30) days allowed by the preceeding
sentence.
(d) Deferral. Notwithstanding the foregoing, if the Company shall
furnish to the Investor fifteen (15) days prior to the date by which a
Registration Statement (or if the Company shall furnish to the Investor
subsequent to the effectiveness of a Registration Statement) is required to be
filed (or remain in effect), a certificate signed by the Chairman, President and
Chief Executive Officer of the Company stating that the Board of Directors of
the Company has, by duly authorized resolution, determined in good faith that it
would be seriously detrimental to the Company and its shareholders for such
Registration Statement to be filed (or remain in effect) and it is therefore
essential to defer the filing of such Registration Statement (or temporarily
suspend the effectiveness of such Registration Statement or use of the related
prospectus), the Company shall have the right to defer such filing (or suspend
such effectiveness or use) for a period of not more than ninety (90) days beyond
the date by which such Registration Statement was otherwise required to be filed
(or required to remain in effect). The Investor acknowledges that it would be
seriously detrimental to the Company and its shareholders for such Registration
Statement to be filed (or remain in effect) and therefore essential to defer
such filing (or suspend such effectiveness or use) if, among other things, such
filing (or use) would impose an undue burden upon the ability of the Company to
proceed with any reorganization, merger, consolidation or acquisition of the
3
<PAGE> 4
securities or assets of another firm or corporation or disposition of the
securities or assets of the Company or a public offering by the Company of
Common Stock or other securities of the Company registered under the Securities
Act which, in each case, is material to the Company (a "Material Transaction").
If the Company shall have delivered the certificate referred to above and
thereafter shall have entered into a definitive agreement or filed a
registration statement or a proxy statement in connection with a Material
Transaction, the Company shall, upon written notice to the Investor, have the
right to defer the filing of the Registration Statement (or suspend its
effectiveness or the use of the underlying prospectus) for whatever additional
time period (but in no event longer than forty-five (45) days) from the
expiration of the initial ninety (90)-day extension period referred to above as
is reasonably necessary to enable the Company to satisfy its disclosure
obligations under the Securities Act in such Registration Statement with respect
to the Material Transaction. The Company may not utilize this right to defer the
filing of a Registration Statement (or suspend its effectiveness or the use of
the underlying prospectus) more than once in any twelve (12) month period.
ARTICLE III
REGISTRATION PROCEDURES
SECTION 3.1. FILINGS; INFORMATION. Whenever the Company is required to
effect or cause the registration of Registrable Securities pursuant to Section
2.1, the Company will use its reasonable best efforts to effect the registration
of such Registrable Securities in accordance with the intended method of
disposition thereof as quickly as practicable, and in connection with any such
request:
(a) The Company will as expeditiously as possible but in no event later
than the time period prescribed by Section 2.1(a), prepare and file with the SEC
a registration statement on Form S-3 (if use of such form is then available to
the Company pursuant to the rules of the SEC and, if not, on such other form
promulgated by the SEC for which the Company then qualifies and which counsel
for the Company shall deem appropriate and which form shall be available for the
sale of the Registrable Securities to be registered thereunder in accordance
with the provisions of this Agreement and in accordance with the intended method
of such Registrable Securities), and use commercially reasonable efforts to
cause such filed Registration Statement to become and remain effective (pursuant
to Rule 415 under the Act or otherwise), and the Company will as expeditiously
as possible prepare and file with the SEC such amendments and supplements to
such Registration Statement and the prospectus used in connection therewith as
may be necessary to keep such Registration Statement effective for the time
periods prescribed by Section 2.1(b) and comply with the provisions of the Act
with respect to the disposition of all securities covered by such Registration
Statement during such period in accordance with the intended methods of
disposition by the Investor set forth in such Registration Statement.
4
<PAGE> 5
(b) The Company will, prior to filing a Registration Statement or
prospectus or any amendment or supplement thereto (excluding amendments deemed
to result from the filing of documents incorporated by reference therein),
furnish to the Investor and one firm of counsel representing the Investor,
copies of such Registration Statement as proposed to be filed, together with
exhibits thereto, which documents will be subject to review and approval by such
parties, and thereafter furnish to the Investor and its counsel for their review
and comment such number of copies of such Registration Statement, each amendment
and supplement thereto (in each case including all exhibits thereto), the
prospectus included in such Registration Statement (including each preliminary
prospectus) and such other documents or information as the Investor or counsel
may reasonably request in order to facilitate the disposition of the Registrable
Securities.
(c) After the filing of the Registration Statement, the Company will
promptly notify the Investor of any stop order issued or threatened by the SEC
in connection therewith and take all reasonable actions required to prevent the
entry of such stop order or to remove it if entered.
(d) The Company will use its reasonable efforts to (i) register or
qualify such Registrable Securities under such other securities or blue sky laws
of such jurisdictions in the United States as the Investor may reasonably (in
light of its intended plan of distribution) request, and (ii) cause such
Registrable Securities to be registered with or approved by such other
governmental agencies or authorities in the United States as may be necessary by
virtue of the business and operations of the Company and do any and all other
acts and things that may be reasonably necessary or advisable to enable the
Investor to consummate the disposition of the Registrable Securities; provided
that the Company will not be required to (A) qualify generally to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this paragraph (d), (B) subject itself to taxation in any such jurisdiction or
(C) consent or subject itself to general service of process in any such
jurisdiction.
(e) The Company will immediately notify the Investor upon the
occurrence of any of the following events in respect of a Registration Statement
or related prospectus in respect of an offering of Registrable Securities; (i)
receipt of any request for additional information by the SEC or any other
federal or state governmental authority during the period of effectiveness of
the Registration Statement for amendments or supplements to the Registration
Statement or related prospectus; (ii) the issuance by the SEC or any other
federal or state governmental authority of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose; (iii) receipt of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) the happening of
5
<PAGE> 6
any event which makes any statement made in the Registration Statement or
related prospectus or any document incorporated or deemed to be incorporated
therein by reference untrue in any material respect or which requires the making
of any changes in the Registration Statement, related prospectus or documents so
that, in the case of the Registration Statement, it will not contain any 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, and
that in the case of the related prospectus, it will not contain any 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, in the light of the
circumstances under which they were made, not misleading; and (vi) the Company's
reasonable determination that a post-effective amendment to the Registration
Statement would be appropriate; and the Company will promptly make available to
the Investor any such supplement or amendment to the related prospectus.
(f) The Company will enter into customary agreements and take such
other actions as are reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities (the Investor may, at its option,
require that any or all of the representations, warranties and covenants of the
Company also be made to and for the benefit of the Investor).
(g) The Company will make available to the Investor (and will deliver
to Investors's counsel), subject to restrictions imposed by the United States
federal government or any agency or instrumentality thereof, copies of all
correspondence between the SEC and the Company, its counsel or auditors and will
also make available for inspection by the Investor and any attorney, accountant
or other professional retained by the Investor (collectively, the "Inspectors"),
all financial and other records, pertinent corporate documents and properties of
the Company (collectively, the "Records") as shall be reasonably necessary to
enable them to exercise their due diligence responsibility, and cause the
Company's officers and employees to supply all information reasonably requested
by any Inspectors in connection with such Registration Statement. Records which
the Company determines, in good faith, to be confidential and which it notifies
the Inspectors are confidential shall not be disclosed by the Inspectors unless
(i) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in such Registration Statement or (ii) the disclosure
or release of such Records is requested or required pursuant to oral questions,
interrogatories, requests for information or documents or a subpoena or other
order from a court of competent jurisdiction or other process; provided that
prior to any disclosure or release pursuant to clause (ii), the Inspectors shall
provide the Company with prompt notice of any such request or requirement so
that the Company may seek an appropriate protective order or waive such
Inspectors' obligation not to disclose such Records; and, provided further, that
if failing the entry of a protective order or the waiver by the Company
permitting the disclosure or release of such Records, the Inspectors, upon
advice of
6
<PAGE> 7
counsel, are compelled to disclose such Records, the Inspectors may disclose
that portion of the Records which counsel has advised the Inspectors that the
Inspectors are compelled to disclose. The Investor agrees that information
obtained by it solely as a result of such inspections (not including any
information obtained from a third party who, insofar as is known to the Investor
after reasonable inquiry, is not prohibited from providing such information by a
contractual, legal or fiduciary obligation to the Company) shall be deemed
confidential and shall not be used by it as the basis for any market
transactions in the securities of the Company or its Affiliates unless and until
such information is made generally available to the public. The Investor further
agrees that it will, upon learning that disclosure of such Records is sought in
a court of competent jurisdiction, give notice to the Company and allow the
Company, at its expense, to undertake appropriate action to prevent disclosure
of the Records deemed confidential.
(h) The Company will furnish to the Investor a signed counterpart,
addressed to the Investor, of (1) an opinion or opinions of counsel to the
Company, and (2) a comfort letter or comfort letters from the Company's
independent public accountants, each in customary form and covering such matters
of the type customarily covered by opinions or comfort letters, as the case may
be, as the Investor therefor reasonably requests.
(i) The Company will otherwise comply with all applicable rules and
regulations of the SEC, including, without limitation, compliance with
applicable reporting requirements under the Exchange Act, and will make
available to its securityholders, as soon as reasonably practicable, an earning
statement covering a period of twelve (12) months, beginning within three (3)
months after the effective date of the Registration Statement, which earning
statement shall satisfy the provisions of Section 11(a) of the Act.
(j) The Company will use commercially reasonable efforts to secure
designation of all such Registrable Securities covered by such Registration
Statement as a NASDAQ "national market system security" within the meaning of
Rule 11Aa2-1 of the SEC and to arrange for at least two market makers to
register as such with respect to such Registrable Securities with the National
Association of Securities Dealers, Inc. (the "NASD").
(k) The Company will appoint a transfer agent and registrar for all
such Registrable Securities covered by such Registration Statement not later
than the effective date of such Registration Statement.
The Company may require the Investor to promptly furnish in writing to
the Company such information regarding the distribution of the Registrable
Securities as the Company may from time to time reasonably request and such
other information as may be legally required in connection with such
registration
7
<PAGE> 8
including, without limitation, all such information as may be requested by the
SEC or the NASD. The Investor agrees to provide such information requested in
connection with such registration within ten (10) business days after receiving
such written request and the Company shall not be responsible for any delays in
obtaining or maintaining the effectiveness of the Registration Statement caused
by the Investor's failure to timely provide such information.
The Investor agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3.1(e) hereof,
the Investor will forthwith discontinue disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until the Investor's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3.1(e) hereof, and, if so directed by the
Company, the Investor will deliver to the Company all copies, other than
permanent file copies then in the Investor's possession, of the most recent
prospectus covering such Registrable Securities at the time of receipt of such
notice. In the event the Company shall give such notice, the Company shall
extend the period during which such Registration Statement shall be maintained
effective (including the period referred to in Section 3.1(a) hereof) by the
number of days during the period from and including the date of the giving of
notice pursuant to Section 3.1(e) hereof to the date when the Company shall make
available to the Investor a prospectus supplemented or amended to conform with
the requirements of Section 3.1(e) hereof.
SECTION 3.2. REGISTRATION EXPENSES. In connection with each Registration
Statement, the Company shall pay the following registration expenses incurred in
connection with the registration thereunder (the "Registration Expenses"): (i)
all registration and filing fees, (ii) fees and expenses of compliance with
securities or blue sky laws (including reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable
Securities), (iii) printing expenses, (iv) the Company's internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), (v) the fees and expenses
incurred in connection with the listing of the Registrable Securities, (vi)
reasonable fees and disbursements of counsel for the Company and customary fees
and expenses for independent certified public accountants retained by the
Company (including the expenses of any comfort letters or costs associated with
the delivery by independent certified public accountants of a comfort letter or
comfort letters requested pursuant to Section 3.1(h) hereof), (vii) the fees and
expenses of any special experts retained by the Company in connection with such
registration and (viii) reasonable fees and expenses of one firm of counsel for
the Investor retained as the Investor's counsel with respect to such
Registration Statement (an estimate of such fees and expenses of such firm of
counsel to be provided to the Company prior to the undertaking of such counsel's
review). The Company shall have no obligation to pay any underwriting fees,
discounts or
8
<PAGE> 9
commissions attributable to the sale of Registrable Securities, or the cost of
any special audit required by the Investor, such costs to be borne by the
Investor.
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
SECTION 4.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to
indemnify and hold harmless the Investor, its partners, Affiliates, officers,
directors, employees and duly authorized agents, and each Person or entity, if
any, who controls the Investor within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, together with the partners, Affiliates,
officers, directors, employees and duly authorized agents of such controlling
Person or entity (collectively, the "Controlling Persons"), from and against any
loss, claim, damage, liability, reasonable attorneys' fees, costs or expenses
and costs and expenses of investigating and defending any such claim
(collectively, "Damages"), joint or several, and any action in respect thereof
to which the Investor, its partners, Affiliates, officers, directors, employees
and duly authorized agents, and any such Controlling Person may become subject
under the Act or otherwise, insofar as such Damages (or proceedings in respect
thereof) arise out of, or are based upon, any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or
prospectus relating to the Registrable Securities or any preliminary prospectus,
or arises out of, or are based upon, 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, except insofar as the same are based upon
information furnished in writing to the Company by the Investor expressly for
use therein, and shall reimburse the Investor, its partners, Affiliates,
officers, directors, employees and duly authorized agents, and each such
Controlling Person for any legal and other expenses reasonably incurred by the
Investor, its partners, Affiliates, officers, directors, employees and duly
authorized agents, or any such Controlling Person in investigating or defending
or preparing to defend against any such Damages or proceedings; provided,
however, that the Company shall not be liable to the Investor to the extent that
any such Damages arise out of or are based upon an untrue statement or omission
made in any preliminary prospectus if (i) the Investor failed to send or deliver
a copy of the final prospectus with or prior to the delivery of written
confirmation of the sale by the Investor to the Person asserting the claim from
which such Damages arise, and (ii) the final prospectus would have corrected
such untrue statement or alleged untrue statement or such omission or alleged
omission.
SECTION 4.2. INDEMNIFICATION BY THE INVESTOR. The Investor agrees to
indemnify and hold harmless the Company, its partners, Affiliates, officers,
directors, employees and duly authorized agents and each Person or entity, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, together with the partners, Affiliates,
officers, directors,
9
<PAGE> 10
employees and duly authorized agents of such controlling Person, to the same
extent as the foregoing indemnity from the Company to the Investor, but only
with reference to information related to the Investor or its plan of
distribution, furnished in writing by the Investor or on the Investor's behalf
expressly for use in any Registration Statement or prospectus relating to the
Registrable Securities, or any amendment or supplement thereto, or any
preliminary prospectus. In case any action or proceeding shall be brought
against the Company or its partners, Affiliates, officers, directors, employees
or duly authorized agents or any such controlling Person or its partners,
Affiliates, officers, directors, employees or duly authorized agents, in respect
of which indemnity may be sought against the Investor, the Investor shall have
the rights and duties given to the Company, and the Company or its partners,
Affiliates, officers, directors, employees or duly authorized agents, or such
controlling Person, or its partners, Affiliates, officers, directors, employees
or duly authorized agents, shall have the comparable rights and duties given to
the Investors by Section 4.1. The Investor also agrees to indemnify and hold
harmless any Underwriters of the Registrable Securities with reference to the
same information as to which it agrees to indemnify the Company referenced
above, their officers and directors and each Person who controls such
Underwriters on customary terms. The Company shall be entitled to receive
indemnities on customary terms from Underwriters, selling brokers, dealer
managers and similar securities industry professionals participating in the
distribution, to the same extent as provided above, with respect to information
so furnished in writing by such persons specifically for inclusion in any
prospectus or Registration Statement.
SECTION 4.3. CONDUCT OF INDEMNIFICATION PROCEEDINGS. Promptly after receipt
by any person or entity in respect of which indemnity may be sought pursuant to
Section 4.1 or 4.2 (an "Indemnified Party") of notice of any claim or the
commencement of any action, the Indemnified Party shall, if a claim in respect
thereof is to be made against the person or entity against whom such indemnity
may be sought (an "Indemnifying Party"), notify the Indemnifying Party in
writing of the claim or the commencement of such action; in the event an
Indemnified Party shall fail to give such notice as provided in this Section 4.3
and the Indemnifying Party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially prejudiced
by the failure to give such notice, the indemnification provided for in Section
4.1 or 4.2 shall be reduced to the extent of any actual prejudice resulting from
such failure to so notify the Indemnifying Party; provided, that the failure to
notify the Indemnifying Party shall not relieve it from any liability which it
may have to an Indemnified Party otherwise than under Section 4.1 or 4.2. If any
such claim or action shall be brought against an Indemnified Party, and it shall
notify the Indemnifying Party thereof, the Indemnifying Party shall be entitled
to participate therein, and, to the extent that it wishes, jointly with any
other similarly notified Indemnifying Party, to assume the defense thereof with
counsel reasonably satisfactory to the Indemnified Party. After notice from the
Indemnifying Party to
10
<PAGE> 11
the Indemnified Party of its election to assume the defense of such claim or
action, the Indemnifying Party shall not be liable to the Indemnified Party for
any legal or other expenses subsequently incurred by the Indemnified Party in
connection with the defense thereof other than reasonable costs of
investigation; provided that the Indemnified Party shall have the right to
employ separate counsel to represent the Indemnified Party and its controlling
persons who may be subject to liability arising out of any claim in respect of
which indemnity may be sought by the Indemnified Party against the Indemnifying
Party, but the fees and expenses of such counsel shall be for the account of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) in the
reasonable judgment of the Company and such Indemnified Party, representation of
both parties by the same counsel would be inappropriate due to actual or
potential conflicts of interest between them, it being understood, however, that
the Indemnifying Party shall not, in connection with any one such claim or
action or separate but substantially similar or related claims or actions in the
same jurisdiction arising out of the same general allegations or circumstances,
be liable for the fees and expenses of more than one separate firm of attorneys
(together with appropriate local counsel) at any time for all Indemnified
Parties, or for fees and expenses that are not reasonable. No Indemnifying Party
shall, without the prior written consent of the Indemnified Party, effect any
settlement of any claim or pending or threatened proceeding in respect of which
the Indemnified Party is or could have been a party and indemnity could have
been sought hereunder by such Indemnified Party, unless such settlement includes
an unconditional release of such Indemnified Party from all liability arising
out of such claim or proceeding. Whether or not the defense of any claim or
action is assumed by the Indemnifying Party, such Indemnifying Party will not be
subject to any liability for any settlement made without its consent, which
consent will not be unreasonably withheld.
SECTION 4.4. CONTRIBUTION. If the indemnification provided for in this
Article IV is unavailable to the Indemnified Parties in respect of any Damages
referred to herein, then each 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 such Damages as between the Company on the one
hand and the Investor on the other, in such proportion as is appropriate to
reflect the relative fault of the Company and of the Investor in connection with
such statements or omissions, as well as other equitable considerations. The
relative fault of the Company on the one hand and of the Investor on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by such party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
11
<PAGE> 12
The Company and the Investor agree that it would not be just and
equitable if contribution pursuant to this Section 4.4 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of the
Damages referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such Indemnified Party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 4.4, the Investor shall in no event be required to contribute any amount
in excess of the amount by which the total price at which the Registrable
Securities of the Investor were sold to the public (less underwriting discounts
and commissions) exceeds the amount of any damages which the Investor has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any Person who was not guilty of such fraudulent
misrepresentation.
ARTICLE V
MISCELLANEOUS
SECTION 5.1. TERM. The registration rights provided to the holders of
Registrable Securities hereunder shall terminate at such time as no Registrable
Securities are outstanding or may be issuable in the future upon the issuance of
Additional Warrants; provided, however, that the provisions of Article IV hereof
shall survive any termination of this Agreement.
SECTION 5.2. RULE 144. The Company covenants that it will file all
reports required to be filed by it under the Act and the Exchange Act and that
it will take such further action as holders of Registrable Securities may
reasonably request, all to the extent required from time to time to enable the
Investor to sell Registrable Securities without registration under the Act
within the limitation of the exemptions provided by (a) Rule 144, as such Rule
may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the SEC. If at any time the Company is not required to file
such reports, it will, upon the request of any holder of Registrable Securities,
make publicly available other information so long as necessary to permit sales
pursuant to Rule 144. Upon the request of the Investor, the Company will deliver
to the Investor a written statement as to whether it has complied with such
requirements.
SECTION 5.3. AMENDMENT AND MODIFICATION. Any provision of this Agreement
may be waived, provided that such waiver is set forth in a writing executed by
the party against whom the enforcement of such waiver is sought. The provisions
of this Agreement, including the provisions of this sentence, may not be
12
<PAGE> 13
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, unless the Company has obtained the
written consent of the holders of a majority of the then outstanding Registrable
Securities. Notwithstanding the foregoing, the waiver of any provision hereof
with respect to a matter that relates exclusively to the rights of holders of
Registrable Securities whose securities are being sold pursuant to a
Registration Statement and does not directly or indirectly affect the rights of
other holders of Registrable Securities may be given by holders of at least a
majority of the Registrable Securities being sold by such holders; provided that
the provisions of this sentence may not be amended, modified or supplemented
except in accordance with the provisions of the immediately preceding sentence.
No course of dealing between or among any Person having any interest in this
Agreement will be deemed effective to modify, amend or discharge any part of
this Agreement or any rights or obligations of any person under or by reason of
this Agreement.
SECTION 5.4. SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This Agreement and
all of the provisions hereof shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. The Investor may
assign its rights under this Agreement to any subsequent holder of Warrants or
Conversion Shares, provided that the Company shall have the right to require any
holder of Registrable Securities to execute a counterpart of this Agreement as a
condition to such holder's claim to any rights hereunder. This Agreement,
together with the Investment Agreement and the Warrants sets forth the entire
agreement and understanding between the parties as to the subject matter hereof
and merges and supersedes all prior discussions, agreements and understandings
of any and every nature among them.
SECTION 5.5. SEPARABILITY. In the event that any provision of this
Agreement or the application of any provision hereof is declared to be illegal,
invalid or otherwise unenforceable by a court of competent jurisdiction, the
remainder of this Agreement shall not be affected except to the extent necessary
to delete such illegal, invalid or unenforceable provision unless that provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
SECTION 5.6. NOTICES. All notices, demands, requests, consents, approvals
or other communications required or permitted to be given hereunder or which are
given with respect to this Agreement shall be in writing and shall be personally
served or deposited in the mail, registered or certified, return receipt
requested, postage prepaid, or delivered by reputable air courier service with
charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile,
addressed as set forth below, or to such other address as such party shall have
specified most recently by written notice: (i) if to the Company, to: Connective
Therapeutics, Inc., 3400 West Bayshore Road, Palo Alto, CA 94303; Attention: Ms.
Cynthia Butitta, Facsimile No.: (415) 843-2899, with copies (which shall not
constitute notice) to: Venture Law
13
<PAGE> 14
Group, 2800 Sand Hill Road, Menlo Park, CA 94025 Attention: Joshua Greene, Esq.,
Facsimile No.: (415) 233-8386; and (ii) if to the Investor, to Kepler Capital
LLC, 40 West 57th Street, New York, NY 10019; Attention: Robert L. Chender,
Facsimile No.: (212) 698-0554. Notice shall be deemed given on the date of
service or transmission if personally served or transmitted by telegram, telex
or facsimile. Notice otherwise sent as provided herein shall be deemed given on
the third business day following the date mailed or on the second business day
following delivery of such notice by a reputable air courier service.
SECTION 5.7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF DELAWARE, WITHOUT
GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
SECTION 5.8. HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not constitute a part of this Agreement,
nor shall they affect their meaning, construction or effect.
SECTION 5.9. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute one and the same instrument.
SECTION 5.10. FURTHER ASSURANCES. Each party shall cooperate and take
such action as may be reasonably requested by another party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
SECTION 5.11. REMEDIES. In the event of a breach or a threatened breach
by any party to this Agreement of its obligations under this Agreement, any
party injured or to be injured by such breach will be entitled to specific
performance of its rights under this Agreement or to injunctive relief, in
addition to being entitled to exercise all rights provided in this Agreement and
granted by law. The parties agree that the provisions of this Agreement shall be
specifically enforceable, it being agreed by the parties that the remedy at law,
including monetary damages, for breach of any such provision will be inadequate
compensation for any loss and that any defense or objection in any action for
specific performance or injunctive relief that a remedy at law would be adequate
is waived.
14
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by the undersigned, thereunto duly authorized, as of the date first set
forth above.
CONNECTIVE THERAPEUTICS, INC.
By:_________________________
Name:
Title:
KEPLER CAPITAL LLC
By:_________________________
Name:
Title:
15
<PAGE> 1
EXHIBIT 11.1
CONNECTIVE THERAPEUTICS, INC.
STATEMENTS RE: COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
HISTORICAL
Weighted average shares of common stock outstanding 6,825 877 711
Shares related to Staff Accounting Bulletin topic 4D:
Common stock, stock options and warrants -- 936 943
Preferred stock -- 2,622 2,622
----- ----- -----
Total shares used in computing net loss per share 6,825 4,435 4,276
===== ===== =====
Net loss $(18,514) $(10,372) $(7,850)
HISTORICAL NET LOSS PER SHARE $(2.71) $(2.34) $(1.84)
====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated January 13, 1997 in this
Annual Report (Form 10-K) of Connective Therapeutics, Inc. (also known as
Connetics Corporation) for the year ended December 31, 1996.
We also consent to the incorporation by reference to the Registration
Statement (Form S-8 No. 333-04985) pertaining to the 1995 Employee Stock
Purchase Plan, 1994 Stock Plan and 1995 Director Stock Option Plan of
Connective Therapeutics, Inc. (also known as Connetics Corporation), of our
report dated January 13, 1997, with respect to the consolidated financial
statements of Connective Therapeutics, Inc. (also known as Connectics
Corporation) included in this Annual Report (Form 10-K) for the year ended
December 31, 1996.
ERNST & YOUNG, LLP
Palo Alto, California
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 14,555
<SECURITIES> 9,999
<RECEIVABLES> 428
<ALLOWANCES> 0
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2,000
0
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