<PAGE> 1
As filed with the Securities and Exchange Commission on August 22, 1996
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
TRANSCEND THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2836 04-3174575
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
640 MEMORIAL DRIVE, CAMBRIDGE, MASSACHUSETTS 02139 (617) 374-1200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
HECTOR J. GOMEZ, M.D., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TRANSCEND THERAPEUTICS, INC.
640 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139 (617) 374-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C>
STEVEN D. SINGER, ESQ. CHARLES W. MULANEY, JR., ESQ.
SUSAN W. MURLEY, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM
HALE AND DORR 333 W. Wacker Drive, Suite 2100
60 State Street Chicago, Illinois 60606
Boston, Massachusetts 02109 (312) 407-0700
(617) 526-6000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum
Title of each Class of Amount to be Offering Aggregate Amount of
Securities to be Registered Registered(1) Price Per Share(2) Offering Price(2) Registration Fee
<CAPTION>
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share.... 2,300,000 shares $14.00 $32,200,000 $11,104
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 300,000 shares which the Underwriters have the option to purchase
from the Company to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 22, 1996
PROSPECTUS
2,000,000 SHARES
LOGO
COMMON STOCK
All of the 2,000,000 shares of Common Stock offered hereby are being sold
by Transcend Therapeutics, Inc. ("Transcend" or the "Company"). Prior to the
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$12.00 and $14.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Company
has applied to list the Common Stock for quotation on the Nasdaq National Market
under the symbol "TSND."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
Per Share.................................... $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)..................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $600,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock on the same terms and conditions
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
---------------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made at the
offices of the agent of Vector Securities International, Inc., in New York, New
York, on or about , 1996.
---------------------------
Vector Securities International, Inc. Tucker Anthony
Incorporated
, 1996
<PAGE> 3
[GRAPHIC DESCRIPTION OF THE TEXT BELOW]
IN CONNECTION WITH THE ONSET OF ACUTE RESPIRATORY DISTRESS SYNDROME ("ARDS"),
NEUTROPHILS ACTIVATE AND ADHERE TO THE SURFACE OF PULMONARY CAPILLARIES. THESE
NEUTROPHILS THEN RELEASE REACTIVE OXYGEN SPECIES ("ROS") AND PROTEASE ENZYMES
WHICH CAUSE DAMAGE TO LUNG TISSUE. GLUTATHIONE, WHICH IS NORMALLY PRESENT IN
LUNG CELLS AND LUNG FLUID IN HIGH CONCENTRATIONS, NEUTRALIZES OR INACTIVATES
THESE ROS AND LIMITS OXIDATIVE DAMAGE. ANTI-PROTEASE ENZYMES ARE PRESENT IN THE
LUNG UNDER NORMAL CONDITIONS AND PROTECT THE LUNG AGAINST DAMAGE. THE PROTECTIVE
EFFECT OF ANTI-PROTEASES IS LOST IN THE PRESENCE OF EXCESSIVE ROS. GLUTATHIONE
CAN ALSO PREVENT FURTHER LUNG DAMAGE INDIRECTLY BY BLOCKING ROS INHIBITION OF
ANTI-PROTEASES.
[GRAPHIC DESCRIPTION OF THE TEXT BELOW]
PROCYSTEINE IS A SMALL MOLECULE THAT READILY ENTERS CELLS AND IS THEN CONVERTED
INTO CYSTEINE. CYSTEINE THEN COMBINES WITH GLUTAMATE AND GLYCINE TO FORM
GLUTATHIONE. PROCYSTEINE HAS NOT BEEN APPROVED BY THE UNITED STATES FOOD AND
DRUG ADMINISTRATION (THE "FDA") OR ANY FOREIGN REGULATORY AGENCY. THERE CAN BE
NO ASSURANCE THAT PROCYSTEINE WILL BE APPROVED BY THE FDA OR ANY FOREIGN
REGULATORY AGENCY ON A TIMELY BASIS, OR AT ALL. SEE "RISK FACTORS -- NO
ASSURANCE OF FDA APPROVAL; COMPREHENSIVE GOVERNMENT REGULATION."
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Transcend Therapeutics and Procysteine are trademarks of Transcend
Therapeutics, Inc. All other trademarks or trade names referred to in this
Prospectus are the property of their respective owners.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus, including information under "Risk Factors."
THE COMPANY
Transcend Therapeutics, Inc. ("Transcend" or the "Company") is developing
novel pharmaceuticals for the treatment of diseases caused by oxidative stress
and resultant tissue damage, with a particular therapeutic focus on critical
care. The Company's lead product candidate, Procysteine(R), has been evaluated
in two Phase II clinical trials involving patients with acute respiratory
distress syndrome ("ARDS"). In the first quarter of 1997, the Company plans to
begin a pivotal Phase III clinical trial of Procysteine to determine its safety
and efficacy in the treatment of ARDS. Transcend is also conducting pilot
clinical trials with Procysteine to determine its potential application for the
treatment of amyotrophic lateral sclerosis ("ALS") and atherosclerotic
cardiovascular disease ("ASCVD").
The Company's initial product candidates are small molecule,
glutathione-repleting agents designed to prevent or limit oxidative damage from
reactive oxygen species ("ROS"), highly reactive toxic molecules produced as
part of the body's immune response. Glutathione is one of the body's principal
mechanisms for neutralizing ROS. Animal and human studies have demonstrated that
in some conditions involving massive acute inflammation, including severe
infection, multiple trauma and extensive burns, large quantities of ROS may be
produced. Studies have also indicated decreased levels of glutathione in such
conditions. When the body's production of ROS increases and exceeds the capacity
of glutathione and other antioxidant systems to combat oxidative stress, damage
to the body's major organs can result.
ARDS, a disorder characterized by severe lung dysfunction, is a devastating
complication of conditions associated with massive acute inflammation. This
disorder affects an estimated 150,000 patients in the United States annually,
has a mortality rate of approximately 40 percent and is often associated with
dysfunction of other organs such as the kidneys, liver and heart. There are
currently no commercially available drug treatments for ARDS. Patients suffering
from ARDS are generally treated in a hospital intensive care unit with only
supportive care, consisting of highly invasive mechanical support with a
ventilator, until lung function returns. Mechanical ventilation involves forcing
air containing high concentrations of oxygen into the lungs through an
endotracheal tube inserted through a patient's nose or mouth. While on
mechanical ventilation, a patient is at an increased risk of serious
complications, including hospital-acquired infection with drug resistant
organisms.
Procysteine represents a novel pharmacological approach to the treatment of
diseases associated with oxidative damage. Procysteine is a system for
introducing into cells the amino acid cysteine, an essential building block of
glutathione. Preclinical studies have documented Procysteine's ability to
increase intracellular levels of glutathione and prevent ROS damage. The Company
has developed intravenous and oral formulations of Procysteine and has
characterized the safety profile and pharmacokinetics of these formulations in
clinical trials involving over 250 subjects in total.
Company-sponsored Phase II trials with intravenously administered
Procysteine have provided data to support its use in the treatment of patients
with ARDS. In the first Phase II trial, which involved 32 patients treated with
Procysteine or placebo, Procysteine-treated patients gained independence from
mechanical ventilation more rapidly than did placebo-treated patients.
Consistent with the first trial, the second Phase II trial, which involved a
total of 25 patients, indicated a trend toward a reduction in median days on
mechanical ventilation among Procysteine-treated patients as compared with
placebo-treated patients. Procysteine-treated patients also regained efficiency
in transporting oxygen to the blood stream to a greater degree than did
placebo-treated patients.
The Company's strategy is to exploit the potential of the
glutathione-repleting agents currently in its portfolio, with a particular
therapeutic focus on critical care, and to enhance its product pipeline through
collaborations with academic and research institutions. The Company plans to
commercialize its product candidates through strategic alliances and to retain
strategically important development, marketing or co-promotion rights in order
to enhance its product development opportunities.
Based on Procysteine's mechanism of action, the Company believes that the
drug has potential applications in a number of diseases. Transcend is conducting
pilot, clinical proof-of-principle studies with Procysteine in patients with ALS
and ASCVD. The Company plans to use the results of these studies, if successful,
to select at least one indication to advance into Phase II clinical trials
during 1997.
The Company was organized in Delaware in December 1992 under the name Free
Radical Sciences, Inc. and changed its name to Transcend Therapeutics, Inc. in
June 1995. The Company's executive office is located at 640 Memorial Drive,
Cambridge, Massachusetts 02139 and its telephone number is (617) 374-1200.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............................... 2,000,000 shares
Common Stock to be outstanding after the
Offering......................................... 5,749,126 shares(1)
Use of proceeds.................................... To fund clinical trials, research and development
programs and for other general corporate purposes.
Proposed Nasdaq National Market symbol............. TSND
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................................ $6,095 $ -- $ -- $ -- $ --
Total operating expenses....................................... 6,123 3,742 4,384 1,923 1,922
------ ------- ------- ------- -------
Loss from operations........................................... (28) (3,742) (4,384) (1,923) (1,922)
Other income (expense)......................................... -- 139 (66) 68 (312)
------ ------- ------- ------- -------
Net loss....................................................... $ (28) $(3,603) $(4,450) $(1,855) $(2,234)
====== ======= ======= ======= =======
Net loss to common stockholders................................ $ (28) $(4,714) $(5,931) $(2,596) $(2,975)
====== ======= ======= ======= =======
Pro forma net loss per common share (2)........................ $ (1.55) $ (.68) $ (.78)
======= ======= =======
Pro forma weighted average common shares outstanding (2)....... 3,833 3,831 3,833
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
-------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 546 $ 2,550 $ 26,130
Working capital (deficit)........................................... (2,944) 2,165 25,745
Total assets........................................................ 1,112 3,116 26,696
Redeemable preferred stock (5)...................................... 10,850 -- --
Deficit accumulated during the development stage.................... (10,316) (17,857) (17,857)
Stockholders' equity (deficit)...................................... (13,270) 2,689 26,269
</TABLE>
- ---------------
(1) Based on shares outstanding as of August 20, 1996. Includes the issuances
described in Footnote 3 below. Excludes (i) 379,721 shares of Common Stock
issuable upon exercise of outstanding options as of August 20, 1996 at a
weighted average exercise price of $1.17 per share; (ii) 471,639 shares of
Common Stock reserved for future grants of options or awards under the
Company's Amended and Restated 1994 Equity Incentive Plan; and (iii) 5,000
shares reserved for issuance upon exercise of a warrant at an exercise price
of $5.00 per share. See "Management -- Amended and Restated 1994 Equity
Incentive Plan" and "Description of Capital Stock."
(2) See Note 1 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per share.
(3) Presented on a pro forma basis to give effect to (i) the sale by the Company
of an aggregate of 851,064 shares of Series C Convertible Preferred Stock
(convertible into 170,213 shares of Common Stock upon the closing of the
Offering) and the receipt of approximately $2.0 million in proceeds
therefrom, which is expected to close on or about August 30, 1996; (ii) the
exchange of all of the Company's outstanding Nonconvertible Redeemable
Preferred Stock for an aggregate of 3,404,255 shares of Series C Convertible
Preferred Stock (convertible into 680,851 shares of Common Stock upon the
closing of the Offering), which is expected to close on or about August 30,
1996; (iii) the conversion of $3.1 million in aggregate principal amount of,
and interest on, the Company's senior secured convertible notes into an
aggregate of 2,098,631 shares of Series A Convertible Preferred Stock and
690,775 shares of Series B Convertible Preferred Stock (convertible into an
aggregate of 557,881 shares of Common Stock upon the closing of the
Offering), upon the closing of the sale of shares of Series C Convertible
Preferred Stock as described in (i) above; (iv) the issuance of 789,894
shares of Series A Convertible Preferred Stock (convertible into 157,979
shares of Common Stock upon the closing of the Offering) upon exercise of
Series A Preferred Stock warrants, which is expected to occur on or about
August 30, 1996; (v) the automatic conversion of all of the outstanding
shares of Series A, Series B and Series C Convertible Preferred Stock upon
the closing of the Offering; and (vi) the exercise of an option to purchase
8,000 shares of Common Stock.
(4) As adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered hereby, at an assumed initial public offering price of $13.00 per
share (after deducting estimated underwriting discounts and commissions and
estimated expenses of the Offering) and the receipt of the estimated net
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
(5) Includes all issued and outstanding shares of Series A, Series B and Series
C Convertible Preferred Stock and Nonconvertible Redeemable Preferred Stock.
See "Capitalization" and "Description of Capital Stock."
------------------------
Except as otherwise noted, all information in this Prospectus, including
financial information, share and per share data: (i) has been adjusted to
reflect the conversion of all outstanding shares of Series A, Series B and
Series C Convertible Preferred Stock into an aggregate of 2,972,485 shares of
Common Stock upon the closing of the Offering; (ii) has been adjusted to reflect
a one-for-five reverse split of the Common Stock to be effected prior to the
closing of the Offering; and (iii) assumes no exercise of the Underwriters'
over-allotment option. See "Certain Transactions," "Description of Capital
Stock" and "Underwriting."
4
<PAGE> 6
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMMON
STOCK OFFERED BY THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE THOSE DISCUSSED
BELOW.
EARLY STAGE OF PRODUCT DEVELOPMENT. The Company has not completed
development of any drugs and does not expect that any drugs resulting from its
development efforts will be available for several years, if at all. All of the
Company's potential products are in research, preclinical development or
clinical trials. Product development of new pharmaceuticals, including
Procysteine and the Company's other glutathione-repleting agents (the TR-500
compounds), is highly uncertain, and unanticipated developments, clinical or
regulatory delays, unexpected adverse side effects or inadequate therapeutic
efficacy could slow or prevent the product development efforts of the Company
and have a materially adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company's current potential products or any future potential products will
advance to clinical trials, prove safe and effective in clinical trials, meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable cost or be successfully marketed.
DEPENDENCE ON PROCYSTEINE. Since its inception, the Company has devoted
its efforts almost entirely to the development of its lead product, Procysteine,
which is the only potential product currently under development by the Company
that is in human clinical trials. Procysteine will require substantial
additional clinical testing and substantial further investment to determine
whether it will prove to be safe and effective. Clinical testing of safety and
efficacy can take several years. There can be no assurance that any such
testing, including the Company's Phase III acute respiratory distress syndrome
("ARDS") clinical trial, will confirm that Procysteine is safe or efficacious.
In addition, the successful commercialization of Procysteine is subject to the
risks of failure inherent in the development of drug and biological products and
products based on new technologies. These risks include the possibility that the
use of Procysteine as an approach to the treatment of ARDS or other indications
targeted by the Company will not be successful; that Procysteine will not be
safer, more effective or more economical than products currently on the market
or subsequently introduced; that third parties will market superior or
equivalent products for the treatment of ARDS or other indications targeted by
the Company; that Procysteine will not prove safe or effective or will fail to
receive necessary regulatory clearance; that Procysteine will be difficult or
uneconomical to manufacture on a large scale; or that proprietary rights of
third parties will preclude the Company from marketing Procysteine, any of which
would have a material adverse effect on the Company's business, financial
condition and results of operations and could result in the Company being forced
to discontinue operations. The Company does not currently conduct any internal
discovery or research. In addition, the Company's product development efforts
are based on its approach of repleting glutathione to treat or prevent diseases
associated with oxidative damage. As a result, in the event that the Company is
unsuccessful in completing the development and commercialization of Procysteine
as a treatment for ARDS or other indications targeted by the Company or if such
approach is otherwise unsuccessful, the Company will be required to identify and
license or acquire alternative technologies or compounds in order to develop
product candidates, of which there can be no assurance. In the event that
Procysteine does not prove to be safe, effective and commercially attractive, it
is unlikely that the Company would continue to pursue development of the use of
intracellular glutathione-repleting agents for the treatment of oxidative
stress, and the Company's business, financial condition and results of
operations would be materially and adversely affected.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. The Company is a
development stage company that commenced operations in January 1993. The Company
has incurred operating losses since its inception, and had a deficit accumulated
during the development stage of approximately $10.3 million as of June 30, 1996.
No revenues have been generated from product sales, and product sales
5
<PAGE> 7
revenues, if any, are not anticipated for a number of years, if at all. The
continued development of the Company's products will require the commitment of
substantial resources to conduct or contract with others to conduct research and
preclinical development and clinical testing, and to establish sales, marketing,
quality control, regulatory and administrative capabilities. Accordingly, the
Company expects to continue to incur substantial operating losses for at least
the next several years. The size of net losses and the time required by the
Company to reach and to sustain profitability are highly uncertain. To achieve
profitability, the Company must, alone or with others, successfully complete
development of Procysteine, obtain necessary regulatory approvals, establish
manufacturing, sales and marketing capabilities and successfully market such
product. As such, there can be no assurance that the Company will be able to
achieve or, if achieved, sustain, profitability.
UNCERTAINTY ASSOCIATED WITH CLINICAL TRIALS. Before obtaining regulatory
approvals for the commercial sale of any of the Company's potential products,
the products will be subjected to extensive preclinical and clinical testing to
demonstrate their safety and efficacy in humans. Preclinical studies of product
candidates may not predict and do not ensure safety or efficacy in humans and
are not necessarily indicative of the results that may be achieved in clinical
trials with humans. To date, the Company has tested its lead product,
Procysteine, in limited numbers of subjects in Phase I and Phase II clinical
trials. The results from these clinical trials are not necessarily predictive of
results that will be obtained from subsequent more extensive clinical testing,
including Phase III clinical trials. There can be no assurance that additional
clinical trials, including Phase III clinical trials, will demonstrate the
safety and efficacy of Procysteine to the extent necessary to obtain regulatory
approvals. Companies in the biotechnology industry have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. The dosage level of Procysteine expected to be administered in the Phase
III clinical trial is higher than that administered in the earlier human
clinical trials. There can be no assurance that administration of Procysteine at
the dosage level contemplated in the Phase III trial proposed by Transcend, or
at such other dosage level required for therapeutic efficacy, will result in a
safety profile comparable to or more favorable than earlier studies. The failure
to adequately demonstrate the safety and efficacy of Procysteine or any other
product candidate could delay or prevent regulatory approval and would have a
material adverse effect on the business, financial condition and results of
operations of the Company. See "Business -- Product Development Programs."
The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the trial to be performed and
the existence of competitive clinical trials. Delays in planned patient
enrollment in the Company's Phase III clinical testing of Procysteine or future
clinical trials of Procysteine or other potential products may result in
increased costs, program delays or both, which would have a material adverse
effect on the Company. In addition, the Company has a limited clinical staff
and, as a result, will rely on third parties to assist it in overseeing and
monitoring the Phase III clinical trials, which may result in delays in
completing, or failure to complete, clinical trials if such third parties fail
to perform under their agreements with the Company or fail to meet regulatory
standards in the performance of their obligations under such agreements. There
can be no assurance that, if Phase III clinical trials of Procysteine are
completed, the Company will be able to submit a new drug application ("NDA") or
its equivalent in countries outside the United States as scheduled or that any
such application will be reviewed and approved by the United States Food and
Drug Administration (the "FDA") or comparable agencies in foreign countries in a
timely manner, or at all. See "Business -- Government Regulation." Even if
cleared by the FDA or the regulatory authorities of other countries, Procysteine
may later be shown to be unsafe or to not have its purported effect, thereby
preventing its widespread use or requiring its withdrawal from the market.
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success, growth and
profitability will depend primarily on market acceptance of Procysteine, if
cleared for marketing by the FDA, for the treatment of ARDS and other
indications targeted by the Company. Physicians may be reluctant or
6
<PAGE> 8
unwilling to prescribe a product such as Procysteine unless they determine that
the clinical benefits to the patient and the cost savings achieved through the
use of Procysteine are significant. Such determination will depend, in part,
upon Procysteine's effectiveness, safety, ease of use and level of third-party
reimbursement. Even if the benefits of Procysteine are established as clinically
significant, physicians, pharmacists and other health care providers may elect
not to purchase, prescribe or administer Procysteine for any number of reasons.
As a result, there can be no assurance that demand for Procysteine will be
sufficient to allow for profitable operations. Because Procysteine represents
the Company's primary product focus, if Procysteine does not achieve a
significant level of market acceptance, the Company's business, financial
condition and results of operation would be materially and adversely affected.
NEED FOR SUBSTANTIAL ADDITIONAL FUNDS. The Company expects negative
cash-flows from operations to continue and to increase for the foreseeable
future. The Company will need substantial additional funds to fund its existing
and planned preclinical studies and clinical trials, and other operating
expenses. The Company anticipates that the net proceeds from the Offering,
including interest thereon, together with the Company's existing funds, will be
sufficient to fund its operating expenses and capital requirements as currently
planned for at least the next 18 months. However, there can be no assurance that
the Company's assumptions regarding future operating losses and operating
expenses will be accurate. The Company's actual working capital needs and
funding requirements will depend upon numerous factors, including the progress
of the external research and development programs being supported by the
Company, the magnitude and scope of these activities, the timing and results of
preclinical development and clinical testing, the timing and costs of obtaining
regulatory approvals, the level of resources that the Company commits to the
development of manufacturing, marketing and sales capabilities, if any, the
ability of the Company to establish collaborative arrangements with other
companies to provide funding to the Company, the technological advances and
activities of competitors, the cost involved in preparing, filing, prosecuting,
maintaining, enforcing and defending patent claims and other intellectual
property rights, developments related to regulatory and reimbursement matters
and other factors. The Company intends to seek additional funding through
corporate collaborations. There can be no assurance that the Company will be
able to negotiate such agreements on acceptable terms, or at all. The Company
will also seek additional funding through public or private financings. If
additional funds are raised by issuing equity securities, further dilution to
stockholders will result. Debt financing, if available, may involve restrictive
covenants. If adequate funds are not available, the Company may be required to
delay, scale back or eliminate certain of its product development programs,
license to others rights to commercialize products or technologies that the
Company would otherwise seek to develop and commercialize itself or cease
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
NO ASSURANCE OF FDA APPROVAL; COMPREHENSIVE GOVERNMENT REGULATION. The
research, development, clinical testing, manufacturing and marketing of
therapeutic products are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. All of the
Company's potential products will require governmental approvals for
commercialization, which approvals have not yet been obtained and are not
expected to be obtained for several years, if at all. Preclinical and clinical
trials and manufacturing of many of the Company's potential products, including
its lead product candidate, Procysteine, will be subject to the rigorous testing
and approval processes of the FDA and corresponding foreign regulatory
authorities. The regulatory process, which includes preclinical studies and
clinical testing of potential products to establish their safety and efficacy,
requires many years to complete and the expenditure of substantial resources.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
In addition, delays or rejection may be encountered based upon changes in, or
additions to, regulatory policies for drug approval during the period of product
development and regulatory review. The Company, an independent Institutional
Review Board ("IRB") or the FDA may suspend clinical trials at any time if the
participants in such trials are being exposed to unacceptable health risks.
Delays in obtaining such approvals could adversely affect the
7
<PAGE> 9
marketing of products developed by the Company and the Company's ability to
generate commercial product revenues. There can be no assurance that requisite
regulatory approvals will be obtained within a reasonable period of time, if at
all. Moreover, if regulatory approval of a product is granted, such approval may
impose limitations on the indicated uses for which such product may be marketed.
Further, even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections. Among the conditions for product approval and
continued marketing approval is that the quality control and manufacturing
procedures of the Company or its collaborative partners or contract
manufacturers conform to the FDA's current good manufacturing practice ("cGMP")
regulations which must be followed at all times. In complying with cGMP
requirements, manufacturers must expend time, money and effort on a continuing
basis in production, record keeping and quality control. Manufacturing
establishments, both domestic and foreign, are subject to inspection by or under
the authority of the FDA and by other federal, state and local agencies. Failure
to pass such inspections may subject the manufacturer to possible FDA actions
such as the suspension of manufacturing, seizure of the product, withdrawal of
approval or other regulatory sanctions. The FDA also may require the
manufacturer to recall a product from the market. The failure by the Company,
its corporate collaborators or contract manufacturers to comply with cGMP could
have a material adverse effect on the business, financial condition and results
of operations of the Company.
Discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market. Failure to comply with the applicable
regulatory requirements can, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution. The Company is also subject to numerous environmental, health and
workplace safety laws and regulations, including those governing laboratory
procedures and the handling of biohazardous materials. Any violation of, and the
cost of compliance with, such laws and regulations could adversely affect the
Company's operations. See "Business -- Government Regulation."
DEPENDENCE ON RESEARCH COLLABORATORS AND SCIENTIFIC ADVISORS. The Company
does not have any research and development facilities and does not intend to
conduct internal discovery activities. The Company's strategy for development
and commercialization of products depends upon the formation of collaborations
with academic and other institutions to perform research and development
functions for the Company and to access technology. The Company is dependent
upon creating and maintaining relationships with collaborators at academic and
other institutions who conduct a substantial portion of the Company's research.
Such collaborators are not employees of the Company. All of the Company's
consultants are employed by employers other than the Company and may have
commitments to, or consulting or advisory contracts with, other entities that
may limit their availability to the Company. As a result, the Company has
limited control over their activities and, except as otherwise required by its
collaboration and consulting agreements, can expect only limited amounts of
their time to be spent on the Company's activities. The Company also seeks to
protect its proprietary technology, including technology which may not be
patented or patentable, in part by confidentiality agreements and, if
applicable, inventor's rights agreements with its collaborators, advisors,
employees and consultants. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not be otherwise disclosed to, or
discovered by, competitors. Any unauthorized dissemination of the Company's
confidential information could have an adverse effect on the Company's business.
The Company's implementation of the proposed Phase III clinical trial for
Procysteine and the research and development of and access to other potential
products or technologies will depend on continued collaborations with
researchers at academic and other institutions. There can be no assurance that
the Company will be able to negotiate additional acceptable collaborations with
collaborators at academic and other institutions or that its existing research
collaborations will be successful.
RAPID TECHNOLOGICAL CHANGE; INTENSE COMPETITION. The biotechnology and
pharmaceutical industries are subject to rapid and significant technological
change. The Company competes with all
8
<PAGE> 10
entities developing and producing pharmaceuticals for critical care or other
diseases which may be the subject of future product development efforts of the
Company. Competitors of the Company in the United States and abroad are numerous
and include, among others, pharmaceutical and biotechnology companies,
universities and other research institutions. The Company's competitors may
succeed in identifying and developing products that are more effective than
those of the Company or in obtaining regulatory approvals of their drugs more
rapidly than the Company and such success could render the Company's products
obsolete or non-competitive and have a material adverse effect on the Company's
business, financial condition and results of operations. As a result, the
Company's success depends upon developing and maintaining a competitive position
in the development of products and technologies in its area of focus.
Competition in the pharmaceutical and biotechnology industry is intense and
is expected to continue to increase. Many of the Company's competitors are
actively engaged in the research and development of products in the Company's
targeted areas. Many of these competitors have substantially greater financial
and technical resources and product and marketing capabilities than the Company,
as well as considerable experience in preclinical testing, human clinical trials
and other regulatory approval procedures, and certain of these competitors may
compete with the Company in establishing development and marketing agreements
with pharmaceutical companies. There is currently no commercially available drug
to treat ARDS. However, The Liposome Company, Inc. ("Liposome") initiated in
September 1995 a Phase III study for a drug designed to treat ARDS through a
mechanism different from that of Procysteine. There can be no assurance that
research and development by Liposome or others will not render any of the
Company's planned products obsolete or uneconomical, or result in therapies
superior to any developed by the Company, or that any products developed by the
Company will be preferred to any existing or newly developed technologies.
LIMITED SOURCE OF SUPPLY; DEPENDENCE ON THIRD-PARTY MANUFACTURERS. To be
successful, the Company's products, including Procysteine, if successfully
developed, must be manufactured in commercial quantities in accordance with
regulations prescribed by the FDA, at acceptable costs and on a timely basis.
The Company does not have the capability to manufacture products under cGMP
regulations prescribed by the FDA and does not intend to develop such a
capability in the near future. Accordingly, the Company anticipates that, for
the foreseeable future, it will pursue a strategy of seeking production
capability from outside vendors or corporate collaborators. The Company does not
have a long term, fixed price supply agreement for Procysteine, but rather
obtains Procysteine by issuing purchase orders to its supplier on an as needed
basis. There can be no assurance that the Company's existing or future outside
vendors or prospective corporate collaborators will be able to manufacture
Procysteine or any other product which is successfully developed by the Company
on a commercial scale or that any collaborator or vendor will be able to
manufacture such products on a timely basis or in quantities of a quality or at
prices which will be commercially viable or beneficial for the Company. If the
Company encounters difficulty in obtaining third-party manufacturing on
commercially acceptable terms and on a timely basis, its ability to
commercialize products may be delayed or foreclosed, in which case its business,
financial condition and results of operations would be materially and adversely
affected.
LACK OF COMMERCIAL SALES AND MARKETING EXPERIENCE; DEPENDENCE ON STRATEGIC
ALLIANCES. The Company does not have experience in marketing, sales,
distribution or support of commercial products. To succeed in marketing any of
its products, the Company must develop and maintain a sales force with
sufficient marketing and technical expertise to commercialize and provide
support for its products. Alternatively, the Company must obtain such
capabilities through third parties. Toward this end, the Company is seeking a
strategic partner with the necessary sales, distribution and support
capabilities to assist in the commercialization of Procysteine and future
products of the Company. To date, the Company has not entered into any
distribution arrangements or strategic alliances for its products. There can be
no assurance that the Company will be able to establish in-house sales and
distribution capabilities or gain market acceptance for its products or enter
into a strategic relationship without
9
<PAGE> 11
undue delays or expenditures. Any such delay or expenditure could have a
material adverse effect on the Company's business, financial condition and
results of operations. If the Company enters into any such strategic
relationship, there can be no assurance that any such collaborative partner
would commit sufficient marketing and other resources towards developing,
promoting and commercializing its products. Further, competitive conflicts may
arise among these third parties that could prevent them from working
cooperatively with the Company. The amount and timing of resources devoted to
these activities by such parties generally would be controlled by such partners.
In addition, its strategic relationships generally provide the collaborator with
the right to terminate an agreement in part or in full under certain
circumstances. Any termination of a strategic relationship for any reason could
substantially reduce the likelihood that the collaborative product candidate
would be developed, would obtain regulatory approvals and be successfully
commercialized on a timely basis, if at all, and any such termination could,
therefore, have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's royalties from sales of
products licensed to collaborators, if any, may be less than the revenues the
Company could have generated had it commercialized and marketed products itself.
There can be no assurance that the Company would be successful in establishing
or maintaining future collaborative arrangements, that any collaborative
partners would be successful in developing and commercializing products or that
the Company would generate revenues from royalties sufficient to offset the
Company's significant investment in research and development and other costs.
PATENTS AND PROPRIETARY RIGHTS; THIRD-PARTY RIGHTS. The Company's
commercial success will depend, to a significant extent, on the Company's and
its licensor's ability to obtain patent protection for its products and methods,
including methods for treating or preventing human disease. The Company is
conducting research and expects to seek additional patents in the future. The
Company's success will depend to a significant extent on its ability to obtain
and enforce patents, maintain trade secret protection and operate without
infringing the patents and proprietary rights of third parties. The patent
positions of pharmaceutical and biotechnology firms, including the Company, are
uncertain and involve complex legal and factual questions for which important
legal principles are largely unresolved, particularly in regard to methods for
treating or preventing human diseases, and most particularly for diseases such
as ARDS and multiple organ dysfunction ("MOD") for which there is currently no
commercially available drug for prevention or treatment. Substantial periods of
time pass before the United States Patent & Trademark Office ("USPTO") responds
on the merits to patent applications and submissions on behalf of the inventors.
In addition, the coverage originally claimed in a patent application can be
significantly reduced or modified before and after a patent is issued.
Consequently, there can be no assurance that any of the Company's or any
licensor's pending or future patent applications will result in the issuance of
patents or, if any patents are issued, whether the patents will be subjected to
further proceedings limiting their scope, and whether they will provide
significant proprietary protection or competitive advantage, or will be
circumvented or invalidated. Because patent applications in the United States
are maintained in secrecy until patents issue and patent applications in certain
other countries generally are not published until more than 18 months after they
are filed, and since publication of inventions in scientific or patent
literature often lags behind actual dates of invention, the Company cannot be
certain that it or any licensor was the first inventor of inventions covered by
pending patent applications or that it or such licensor was the first to file
patent applications on such inventions.
There can be no assurance that the Company's or licensor's patents, if
issued, would not be found invalid or unenforceable by a court or that such
patents would cover products or technologies of the Company's competitors.
Competitors or potential competitors may have filed applications for or received
patents, and may obtain additional patents and proprietary rights relating to
products or methods for treating or preventing human disease that are
competitive with those of the Company. To protect its proprietary rights, the
Company may be required to participate in interference proceedings declared by
the USPTO to determine priority of invention, which could result in substantial
cost to the Company. Moreover, even if the Company's patents issue, there can be
no assurance that they will provide sufficient proprietary protection or will
not be later limited, circumvented or invalidated.
10
<PAGE> 12
There is substantial uncertainty concerning whether human clinical data
will be required for the issuance of patents for methods of treating or
preventing human disease, particularly for diseases such as ARDS and MOD, for
which there is currently no commercially available drug for prevention or
treatment. If such data is required, the Company's ability to obtain patent
protection could be delayed or otherwise adversely affected. Although the USPTO
issued new utility guidelines in July 1995 that address the requirements for
demonstrating utility for biotechnology inventions, including inventions
relating to methods for treating or preventing human diseases, there can be no
assurance that USPTO patent examiners will follow such guidelines or that the
USPTO's position will not change with respect to what is required to establish
utility for methods of using Procysteine or future potential products of the
Company in the treatment of human diseases. Nor can it be assured that
compliance with such guidelines will result in patents that are valid and
enforceable. Furthermore, the enactment of legislation implementing the General
Agreement on Trade and Tariffs has resulted in certain changes to United States
Patent laws that became effective on June 8, 1995. Most notably, the term of
patents that issue from patent applications filed on or after June 8, 1995 is no
longer a period of 17 years from the date of grant. The new term of United
States patents will commence on the date of issuance and terminate 20 years from
the earliest claimed filing date of the application. Because the time from
filing to issuance of biotechnology patent applications is often more than three
years, a 20-year term from the claimed date of filing may result in a
substantially shortened term of patent protection, which may adversely impact
the Company's patent position. In addition, if this change results in a shorter
period of patent coverage, and if the Company negotiates royalties based on the
existence of a valid patent, the Company's business could be adversely affected.
Legislation currently is pending in Congress that, if enacted, would amend
the Patent Laws regarding the patentability of certain medical procedures and
limitations on damages and other remedies for infringement of patents on such
medical procedures. The Company cannot predict whether this or similar
legislation concerning patent protection for medical procedures will be enacted.
There can be no assurance that any such legislation will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
The Company has obtained an exclusive license from the Cornell Research
Foundation (the "Cornell Agreement") under certain patents covering methods of
using Procysteine, the Company's lead product candidate, to increase
intracellular levels of glutathione and/or cysteine. The last of these United
States patents licensed from Cornell expires in 2004. The Company has also
licensed corresponding patents in Canada, United Kingdom, Germany, France,
Austria and Sweden. The Company's rights under the Cornell Agreement further
include an exclusive license under a United States patent to a composition of
matter for the TR-500 series of glutathione-repleting agents. In addition, the
Company owns a United States patent application for the use of Procysteine in
treating pulmonary disease, including ARDS, with corresponding applications in
Canada, Australia, Japan and in the European Patent Office (designating
countries including Austria, Denmark, France, Germany, Italy, Spain, Sweden,
Switzerland and the United Kingdom). The Company may be required to obtain
licenses to patents or other proprietary rights of third parties in addition to
its license from Cornell. No assurance can be given that any licenses required
under any such patents or proprietary rights would be made available on terms
acceptable to the Company, if at all. If the Company does not obtain such
licenses, it could encounter delays in product market introductions while it
attempts to design around such patents or other rights, or it may be unable to
develop, manufacture or sell products.
The Company was independently approached by two individuals, each claiming
to be the first and sole inventor of the use of Procysteine in the treatment of
ALS patients. One of those individuals is employed by Massachusetts General
Hospital, where the Company has sponsored a clinical trial for the
administration of Procysteine to ALS patients. Two identical patent
applications, each naming one of the individuals as sole inventor, have been
filed at the Company's expense and with full disclosure of the two patent
applications to each individual and Massachusetts General Hospital. There can be
no assurance that the subject matter of these patent applications is patentable
over prior art, or that either of these pending patent applications will be
licensed to the Company, if at all, on terms acceptable to
11
<PAGE> 13
the Company. With assent of the individuals and Massachusetts General Hospital,
the Company intends to investigate fully the issue of priority of invention and,
if agreement can be reached, only the patent application of the first inventor
will be pursued. However, in the event that agreement as to priority cannot be
reached and the claims are found allowable in each application, it is expected
that an interference will be declared between the two patent applications and
the USPTO will determine priority of invention.
The Company also seeks to protect its proprietary technology, including
technology which may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventor's rights agreements with its
collaborators, advisors, employees and consultants. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not be
otherwise disclosed to, or discovered by, competitors. Moreover, the Company
conducts a significant amount of research through academic advisors and
collaborators who are prohibited from entering into confidentiality or
inventor's rights agreements by their academic institutions. Any unauthorized
dissemination of the Company's confidential information could have an adverse
effect on the Company's business.
POTENTIAL FOR CONFLICT WITH CLINTEC. In connection with the formation of
the Company and the contribution of certain assets and technology to the Company
by Clintec Nutrition Company ("Clintec"), the Company became the exclusive
licensee of certain patents covering methods of using Procysteine to increase
intracellular levels of glutathione and/or cysteine. The Company has granted to
Clintec an exclusive, royalty-free right to the use of this technology for
certain nutritional applications while retaining exclusive rights to all
pharmaceutical applications. Although no disputes have arisen to date regarding
the exclusive rights of the Company and Clintec in their respective fields, such
a dispute could have a material adverse effect on the Company's ability to enter
into corporate alliances and license arrangements, and if resolved in a manner
adverse to the Company would have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Technology and License Agreements."
PRODUCT LIABILITY. The testing, marketing and sale of human therapeutic
products entail an inherent risk of exposure to product liability claims by
consumers, health care providers, pharmaceutical and biotechnology companies or
other sellers of the Company's products. There can be no assurance that
substantial product liability claims will not be asserted against the Company.
While the Company has liability insurance with respect to clinical trials, there
can be no assurance that the Company will be able to maintain clinical trial
liability insurance on acceptable terms or that such insurance will provide
adequate coverage against potential liabilities. The Company does not have
product liability insurance coverage for the commercial sale of Procysteine, the
Company's lead product candidate. The Company will seek to obtain product
liability insurance coverage for commercial sales if and when its products are
commercialized. However, there can be no assurance that adequate insurance
coverage will be available in sufficient amounts and at acceptable costs, if at
all. In addition, pursuant to the terms of the licensing agreements entered into
by the Company, including the agreement licensing methods of using Procysteine
in the treatment of human diseases, the Company has agreed to indemnify certain
third parties with respect to losses incurred as a result of the manufacture,
supply or sale of potential product candidates. Any indemnification or product
liability claim or product recall could inhibit or prevent commercialization of
products being developed by the Company, and otherwise have a material adverse
effect on the Company's business, financial condition and results of operations.
UNCERTAINTY OF PHARMACEUTICAL PRICING, REIMBURSEMENT AND RELATED
MATTERS. The Company's business, financial condition and results of operations
may be materially adversely affected by the continuing efforts of government and
third-party payors to contain or reduce the costs of health care through various
means. For example, in certain foreign markets, pricing and profitability of
prescription pharmaceuticals are subject to government control. In the United
States, the Company expects that there will continue to be a number of federal
and state proposals to implement similar government control. While the Company
cannot predict whether any such regulatory proposals will be adopted or
12
<PAGE> 14
the effect such proposals may have on its business, the pendency of such
proposals could have a material adverse effect on the Company's ability to raise
capital, and the adoption of such proposals could have a material adverse effect
on the Company in general. In addition, increasing emphasis on managed care in
the United States will continue to put pressure on the pricing of pharmaceutical
products. Cost control initiatives could decrease the price that the Company or
its strategic partners, if any, receive for any products in the future and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The ability of the Company to commercialize pharmaceutical products may
depend in part on the extent to which reimbursement for the products will be
available from government and health administration authorities, private health
insurers and other third-party payors. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. Third-party payors,
including Medicare, increasingly are challenging the price and cost
effectiveness of medical products and services. Government and other third-party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products and by
refusing in some cases to provide coverage for uses of approved products for
disease indications for which the FDA has not granted labeling approval. There
can be no assurance that any third-party insurance will cover use by patients of
Procysteine or products developed by the Company or its strategic partners, if
any, or that adequate third-party reimbursement will be available to enable the
Company to maintain price levels sufficient to realize an appropriate return on
its investment in product development. Failure to achieve sufficient price
levels for its drugs could adversely affect the Company's business, financial
condition and results of operations. In addition, if adequate coverage and
reimbursement levels are not provided by government and other third-party payors
for the Company's products, the market acceptance of these products may be
reduced, which may have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent on the
members of its management and scientific staff, the loss of one or more of whom
could have a material adverse effect on the Company. The Company's employment
agreements with each of its executive officers may be terminated by the employee
upon short notice. The Company also depends on its collaborators and scientific
advisors, all of whom have commitments that may limit their availability to the
Company. In addition, the Company believes that its future success will depend
in large part upon its ability to attract and retain highly skilled scientific,
managerial and marketing personnel, particularly as the Company expands its
activities in clinical trials, the regulatory approval process and sales and
marketing. The Company faces significant competition for such personnel from
other companies, research and academic institutions, government entities and
other organizations. There can be no assurance that the Company will be
successful in hiring or retaining the personnel it requires for continued
growth. The failure to hire and retain such personnel could materially and
adversely affect the Company's prospects.
MANAGEMENT DISCRETION AS TO USE OF PROCEEDS. The Company anticipates using
the net proceeds of the Offering primarily to fund research and development
activities, the expansion of facilities, working capital and general corporate
purposes. The Company also may use the net proceeds of the Offering for other
purposes, including the acquisition of technology rights, products or
businesses. Accordingly, management will retain broad discretion over the use of
the net proceeds of the Offering. There can be no assurance as to the timing or
application of such proceeds. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of substantial
amounts of Common Stock in the public market after the Offering, or the
possibility of such sales occurring, could adversely affect prevailing market
prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities. Of the 5,749,126 shares to be
outstanding after the Offering, the 2,000,000 shares of Common Stock offered
hereby will be freely tradeable without restriction in the public market unless
such shares are held by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act").
The remaining 3,749,126 shares of Common Stock are restricted securities under
the Securities Act, and may
13
<PAGE> 15
be sold in the public market only if they are registered or if they qualify for
exemption from registration under Rule 144 or Rule 701 under the Securities Act.
Pursuant to "lock-up" agreements, certain of the Company's stockholders and
employees and all of its executive officers and directors, who collectively hold
3,652,486 of such restricted securities have agreed not to offer, sell or
otherwise dispose of (i) any of their restricted securities for a period of 180
days from the date of this Prospectus (the "Initial Lock-Up Period") and (ii) in
excess of 50 percent of such restricted securities for a period of 90 days
following the Initial Lock-Up Period (the "Secondary Lock-Up Period"), without
the prior written consent of Vector Securities International, Inc. The Company
has also agreed that it will not offer, sell or otherwise dispose of Common
Stock for a period of 180 days from the date of this Prospectus without the
prior written consent of Vector Securities International, Inc., other than
pursuant to existing stock option plans or upon exercise of outstanding
warrants. Upon termination of each of the Initial Lock-Up Period and the
Secondary Lock-Up Period, approximately 1,409,415 of the restricted securities
will be available for immediate sale in the public market, subject to certain
volume, manner of sale, and other limitations under Rule 144. In addition, of
the restricted securities not subject to lock-up agreements, approximately
44,109 shares will be eligible for sale without limitation under Rule 144(k) and
52,531 shares will be eligible for sale beginning 90 days after the date of this
Prospectus, subject to certain volume, manner of sale and other limitations
under Rule 144 and Rule 701. Vector Securities International, Inc. may, in its
sole discretion and at any time without notice, release all or any portion of
the shares subject to such lock-up agreements. The Securities and Exchange
Commission has proposed revisions to Rule 144, the effect of which would be to
shorten the holding periods under Rule 144. If enacted, these proposed revisions
would increase, potentially substantially, the number of shares that would be
available for sale in the public market following the expiration of the lock-up
agreements. See "Description of Capital Stock" and "Shares Eligible for Future
Sale."
After the Offering, holders of an aggregate of 3,652,486 shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares for resale under the Securities Act. In addition, the Company
intends to file a Registration Statement on Form S-8 after the date of this
Prospectus to register an aggregate of 379,721 shares of Common Stock reserved
for issuance upon exercise of outstanding options and an aggregate of 471,639
shares of Common Stock reserved for issuance pursuant to future option grants
under the Company's 1994 Equity Incentive Plan. If such registrations cause a
large number of shares to be registered and sold in the public market, such
sales could have an adverse effect on the market price for the Company's Common
Stock. See "Description of Capital Stock -- Registration Rights" and "Shares
Eligible for Future Sale."
CONTROL BY EXISTING STOCKHOLDERS. Following the Offering, the Company's
directors, executive officers and principal stockholders and certain of their
affiliates will beneficially own approximately 58.2 percent of the outstanding
shares of Common Stock (55.4 percent if the Underwriter over-allotment option is
exercised in full). Accordingly, they will have the ability to control the
election of the Company's directors and other actions requiring stockholder
approval. This concentration of ownership may have the effect of delaying or
preventing a change of control of the Company.
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK
PRICE. Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the Offering. The initial public
offering price will be determined by negotiations between the Company and
representatives of the Underwriters. The trading price of the Common Stock could
be subject to wide fluctuations in response to quarterly variations in the
Company's operating results, shortfalls in such operating results from levels
forecast by securities analysts, announcements of technological innovations or
new commercial products by the Company or its competitors, progress with
clinical trials, government regulations, changes in third-party reimbursement,
changes in the Company's relationships with future collaborative partners,
public concern as to the safety and efficacy of drugs developed by the Company
and its competitors and other events or factors. In addition, the stock market
has, from time to time, experienced extreme price and volume fluctuations that
have particularly affected the market prices for companies in the biotechnology
and pharmaceutical industries and that have often been unrelated to
14
<PAGE> 16
the operating performance of the affected companies. Announcements of changes in
reimbursement policies of third-party payors, regulatory developments, economic
news and other external factors may have a significant impact on the market
price of biotechnology and pharmaceutical stocks. Broad market fluctuations of
this type may adversely affect the future market price of the Common Stock. See
"Underwriting."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Restated
Certificate of Incorporation and By-laws, as in effect upon the closing of the
Offering, and Section 203 of the Delaware General Corporate Law may have the
effect of deterring hostile takeovers or delaying or preventing changes in
control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests.. The Restated Certificate of Incorporation provides, among other
things, for a classified Board of Directors, and members of the Board of
Directors may be removed only for cause upon the affirmative vote of holders of
at least two-thirds of the shares of capital stock of the Company entitled to
vote. The Company's Board of Directors is also authorized to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those 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 affected by, the rights of the holders of any
such shares of Preferred Stock that may be issued in the future. Any such
Preferred Stock may have other rights, including economic rights senior to the
Common Stock, and, as a result, the issuance thereof could have a material
adverse effect on the market value of the Common Stock. Furthermore, the Company
is subject to anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder," unless the business combination
is approved in a prescribed manner. See "Description of Capital Stock --
Delaware Law and Certain Charter and By-Law Provisions."
SUBSTANTIAL DILUTION TO NEW INVESTORS. The initial public offering price
per share of the Company's Common Stock will be substantially higher than the
book value per share of Common Stock. Investors purchasing shares of Common
Stock in the Offering will experience immediate and substantial dilution of
$8.50 per share. To the extent outstanding options and warrants to purchase
Common Stock are exercised, there will be further dilution to new investors. See
"Dilution."
ABSENCE OF DIVIDENDS. The Company has never declared or paid cash
dividends on the Common Stock. The Company currently anticipates that it will
retain all future earnings for use in the operation and growth of its business
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. See "Dividend Policy."
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds from the sale of the 2,000,000 shares of Common Stock
offered hereby at an assumed public offering price of $13.00 per share are
estimated to be $23.6 million ($27.2 million if the Underwriters' over-allotment
option is exercised in full), after deducting estimated underwriting discounts
and commissions and estimated expenses of the Offering.
The Company intends to use approximately $12.0 million of the net proceeds
to fund costs associated with the clinical development of Procysteine, and the
balance of the net proceeds for research and development, preclinical and
clinical programs, working capital and general corporate purposes. The Company
may also use a portion of the net proceeds to acquire or license products or
technologies complementary to the Company's business, although the Company has
no agreements or commitments for any such acquisition. See "Risk Factors -- Need
for Substantial Additional Funds."
The Company anticipates that the net proceeds from the Offering, including
interest thereon together with the Company's existing funds, will be sufficient
to fund its operating expenses and capital requirements as currently planned for
at least the next 18 months. However, there can be no assurance that the
Company's assumptions regarding future operating losses and operating expenses
will be accurate. The Company's actual working capital needs and funding
requirements will depend upon numerous factors, including the progress of the
external research and development programs being supported by the Company, the
magnitude and scope of these activities, the timing and results of preclinical
and clinical testing, the timing and costs of obtaining regulatory approvals,
the level of resources that the Company commits to the development of
manufacturing, marketing and sales capabilities, if any, the ability of the
Company to establish new collaborative arrangements with other companies to
provide funding to the Company, the technological advances and activities of
competitors, the costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent claims and other intellectual property rights,
developments related to regulatory and reimbursement matters and other factors.
If adequate funds are not available, the Company may be required to delay, scale
back or eliminate certain of its product development programs, license to others
rights to commercialize products or technologies that the Company would
otherwise seek to develop and commercialize itself, or cease operations. See
"Risk Factors -- Need for Substantial Additional Funds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings for
use in the operation and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth as of June 30, 1996 (i) the actual
capitalization of the Company as if the one-for-five reverse split of the Common
Stock had been effected prior to June 30, 1996; (ii) the pro forma
capitalization of the Company as described in Note 1 below; and (iii) the pro
forma capitalization of the Company as adjusted to reflect the issuance and sale
of the 2,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $13.00 per share, after deducting estimated
underwriting discounts and commissions and estimated expenses of the Offering.
See "Use of Proceeds" and "Description of Capital Stock." This table should be
read in conjunction with the Company's Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
-------- ------------ -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Short-term debt(2).................................................... $ 3,105 $ -- $ --
======== ============== ============
Redeemable preferred stock:
Series A Redeemable Convertible Preferred Stock, $.01 par value;
12,991,000 shares authorized (actual and pro forma); 7,027,806
shares issued and outstanding (actual); no shares issued and
outstanding (pro forma); no shares authorized, issued and
outstanding (pro forma as adjusted)............................... $ 7,028 $ -- $ --
Series B Redeemable Convertible Preferred Stock, $.01 par value;
3,000,000 shares authorized (actual and pro forma); no shares
issued and outstanding (actual and pro forma); no shares
authorized, issued and outstanding (pro forma as adjusted)........ -- -- --
Nonconvertible Redeemable Preferred Stock, $.01 par value; 9,000
shares authorized (actual and pro forma); 9,000 shares issued and
outstanding (actual); no shares issued and outstanding (pro
forma); no shares authorized, issued and outstanding (pro forma as
adjusted)......................................................... 3,822 -- --
Stockholders' equity (deficit):
Common Stock, $.01 par value; 5,000,000 shares authorized (actual
and pro forma); 3,749,126 shares issued and outstanding (pro
forma); 25,000,000 authorized, 5,749,126 shares issued and
outstanding (pro forma as adjusted)(3)............................ 8 37 57
Preferred Stock, $.01 par value; no shares authorized (actual and
pro forma); 5,000,000 shares authorized, no shares issued and
outstanding (pro forma as adjusted)............................... -- -- --
Additional paid-in capital........................................ 371 20,509 44,069
Accretion of dividend on Nonconvertible Redeemable Preferred
Stock............................................................... (1,418) -- --
Accretion of liquidation preference on Nonconvertible Redeemable
Preferred Stock................................................... (1,915) -- --
Deficit accumulated during the development stage.................... (10,316) (17,857) (17,857)
Total stockholders' equity (deficit).............................. (13,270) 2,689 26,269
-------- ------------ -----------
Total short-term debt and capitalization........................ $ 685 $ 2,689 $ 26,269
======== ============== ============
</TABLE>
- ---------------
(1) Presented on a pro forma basis to give effect to (i) the sale by the Company
of an aggregate of 851,064 shares of Series C Convertible Preferred Stock
(convertible into 170,213 shares of Common Stock upon the closing of the
Offering) and the receipt of approximately $2.0 million in proceeds
therefrom, which is expected to close on or about August 30, 1996; (ii) the
exchange of all of the Company's outstanding Nonconvertible Redeemable
Preferred Stock for an aggregate of 3,404,255 shares of Series C Convertible
Preferred Stock (convertible into 680,851 shares of Common Stock upon the
closing of the Offering), which is expected to close on or about August 30,
1996; (iii) the conversion of $3.1 million in aggregate principal amount of,
and interest on, the Company's senior secured convertible notes into an
aggregate of 2,098,631 shares of Series A Convertible Preferred Stock and
690,775 shares of Series B Convertible Preferred Stock (convertible into an
aggregate of 557,881 shares of Common Stock upon the closing of the
Offering), upon the closing of the sale of shares of Series C Convertible
Preferred Stock as described in (i) above; (iv) the issuance of 789,894
shares of Series A Convertible Preferred Stock (convertible into 157,979
shares of Common Stock upon the closing of the Offering) upon exercise of
Series A Convertible Preferred Stock warrants, which is expected to occur on
or about August 30, 1996; (v) the conversion of all outstanding shares of
Series A, Series B and Series C Redeemable Convertible Preferred Stock; and
(vi) the exercise of an option to purchase 8,000 shares of Common Stock.
(2) Consists of $3.0 million in senior secured convertible notes and $105,000 in
interest payable thereon at June 30, 1996.
(3) Excludes (i) 257,521 shares of Common Stock issuable upon exercise of stock
options outstanding as of June 30, 1996, at an exercise price of $0.50 per
share; (ii) 1,839 additional shares of Common Stock reserved for future
grants of options under the Company's 1994 Equity Incentive Plan as of June
30, 1996; and (iii) 5,000 shares of Common Stock reserved for issuance upon
exercise of a warrant outstanding as of June 30, 1996 at an exercise price
of $5.00 per share. See "Description of Capital Stock" and "Management --
Amended and Restated 1994 Equity Incentive Plan."
17
<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996
was $2,272,000 or $.61 per share. Pro forma net tangible book value per share is
equal to the Company's pro forma net tangible assets (pro forma tangible assets
less pro forma total liabilities), divided by the pro forma number of shares of
Common Stock outstanding on June 30, 1996 (as if the one-for-five reverse stock
split of the Company's Common Stock had occurred prior to June 30, 1996),
assuming (i) the sale by the Company of an aggregate of 851,064 shares of Series
C Convertible Preferred Stock (convertible into 170,213 shares of Common Stock
upon the closing of the Offering) and the receipt of approximately $2.0 million
in proceeds therefrom, which is expected to close on or about August 30, 1996;
(ii) the exchange of all of the Company's outstanding Nonconvertible Redeemable
Preferred Stock for an aggregate of 3,404,255 shares of Series C Convertible
Preferred Stock (convertible into 680,851 shares of Common Stock upon the
closing of the Offering) which is expected to close on or about August 30, 1996;
(iii) the conversion of $3.1 million in aggregate principal amount of, and
interest on, the Company's senior secured convertible notes into an aggregate of
2,098,631 shares of Series A Convertible Preferred Stock and 690,775 shares of
Series B Convertible Preferred Stock (convertible into 557,881 shares of Common
Stock upon the closing of the Offering), upon the closing of the sale of shares
of Series C Convertible Preferred Stock as described in (i) above; (iv) the
issuance of 789,894 shares of Series A Convertible Preferred Stock (convertible
into 157,979 shares of Common Stock upon the closing of the Offering) upon
exercise of Series A Preferred Stock warrants, which is expected to occur on or
about August 30, 1996; (v) the automatic conversion of all of the outstanding
shares of Series A, Series B and Series C Convertible Preferred Stock upon the
closing of the Offering; and (vi) the exercise of an option to purchase 8,000
shares of Common Stock. Without taking into account any other changes in pro
forma net tangible book value other than to give effect to the sale of the
2,000,000 shares of Common Stock in the Offering (at an assumed initial public
offering price of $13.00 per share) and the receipt of the estimated net
proceeds therefrom, the pro forma net tangible book value of the Company as of
June 30, 1996 would have been approximately $25.9 million or $4.50 per share.
This represents an immediate increase in pro forma net tangible book value of
$3.89 per share to existing stockholders and an immediate dilution in pro forma
net tangible book value of $8.50 per share to new investors. The following table
sets forth the per share dilution to new investors in the Offering:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $13.00
Pro forma net tangible book value per share as of June 30,
1996......................................................... $ .61
Increase per share attributable to new investors................ 3.89
-----
Pro forma net tangible book value per share after the Offering.... 4.50
------
Dilution per share to new investors............................... $ 8.50
======
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1996,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price paid per share (at an assumed initial
public offering price of $13.00 per share and before deducting estimated
underwriting discounts and commissions and estimated expenses of the Offering):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 3,749,126 65% $13,029,000 33% $ 3.48
New investors............................ 2,000,000 35 26,000,000 67 13.00
--------- ------- ----------- -------
Total............................... 5,749,126 100% $39,029,000 100%
========= ======= ============ =======
</TABLE>
The foregoing tables assumes no exercise of any outstanding stock options
or warrants subsequent to June 30, 1996, except as described above. As of August
20, 1996, there were (i) 379,721 shares of Common Stock issuable upon exercise
of outstanding stock options, with a weighted average exercise price of $1.17
per share; and (ii) 5,000 shares of Common Stock issuable upon the exercise of a
warrant at an exercise price of $5.00 per share. To the extent that these
options or this warrant are exercised, there will be further dilution to new
investors. See "Management -- Executive Compensation."
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company since
its inception. The selected financial data for the years ended December 31,
1993, 1994 and 1995 are derived from the Financial Statements of the Company and
have been audited by Ernst & Young LLP, independent auditors. Ernst & Young
LLP's report on the Financial Statements for the three years ended December 31,
1995, which appears elsewhere herein, includes a description of uncertainties
regarding the Company's ability to continue as a going concern described in Note
1 to the Financial Statements. The statements of operations for the six-month
periods ended June 30, 1995 and 1996 and the balance sheet data as of June 30,
1996 have been derived from unaudited financial statements included elsewhere
herein. The unaudited financial statements include all adjustments, consisting
of normal recurring accruals, which the Company's management considers necessary
for a fair presentation of the financial position and results of operations for
these periods. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related Notes thereto, and other
financial information included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- ----------------------
1993 1994 1995 1995 1996
------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................................... $ 6,095 $ -- $ -- $ -- $ --
Operating expenses:
Research and development................................ 4,498 2,627 2,739 1,116 941
General administration.................................. 1,625 1,115 1,645 807 981
------ ------- ------- -------
Total operating expenses.............................. 6,123 3,742 4,384 1,923 1,922
------ ------- ------- -------
Loss from operations...................................... (28) (3,742) (4,384) (1,923) (1,922)
Other income (expense).................................... -- 139 (66) 68 (312)
------ ------- ------- -------
Net loss.................................................. (28) (3,603) (4,450) (1,855) (2,234)
Accretion of dividends and liquidation preference on
Redeemable Nonconvertible Preferred Stock............... -- (1,111) (1,481) (741) (741)
------ ------- ------- -------
Net loss to common stockholders........................... $ (28) $ 4,714 $ (5,931) $(2,596) $ (2,975)
====== ======= ======= =======
Pro forma net loss per common share(1).................... $ (1.55) $ (.68) $ (.78)
======= =======
Pro forma weighted average common shares outstanding(1)... 3,833 3,831 3,833
======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- JUNE 30,
1993 1994 1995 1996
------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 66 $ 3,461 $ 1,276 $ 546
Working capital (deficit)................................. (63) 3,136 732 (2,944)
Total assets.............................................. 107 4,257 1,866 1,112
Senior secured convertible notes.......................... -- -- 2,000 3,000
Redeemable preferred stock(2)............................. -- 8,100 9,581 10,850
Deficit accumulated during the development stage.......... (28) (3,631) (8,081) (10,316)
Total stockholders' deficit............................... (28) (4,368) (10,297) (13,270)
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per share.
(2) Includes all issued and outstanding shares of Series A, Series B and Series
C Convertible Preferred Stock and Nonconvertible Preferred Stock. See
"Capitalization" and "Description of Capital Stock."
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company is developing novel pharmaceuticals for the treatment of
diseases involving oxidative stress and resulting tissue damage, with a
particular therapeutic focus on critical care. Since inception, the Company has
devoted substantially all of its resources to the development of Procysteine and
related compounds. Transcend has generated no revenue from product sales and has
been dependent upon funding from external financing, contract research and
interest income. The Company has not been profitable since inception and has
incurred accumulated net losses of $10.3 million through June 30, 1996. Losses
have resulted principally from costs incurred for clinical and product
development and from general and administrative expenses. The Company expects to
incur additional operating losses over at least the next several years, and
expects such losses to increase as the Company advances its clinical development
programs. The Company's ability to achieve profitability is dependent on its
ability to successfully complete development of, and obtain regulatory approval
for, its planned products, obtain regulatory approvals for planned products, to
enter into agreements for commercialization of such products and successfully
market such products, as to which there can be no assurance. See "Risk Factors
- -- History of Losses; Uncertainty of Future Profitability."
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
The Company earned no revenue during the six-month periods ended June 30,
1996 and June 30, 1995. The Company's total operating expenses for the six-month
periods ended June 30, 1996 and June 30, 1995 were $1.9 million for both
periods. Research and development expenses for the six month periods ended June
30, 1996 and June 30, 1995 were $941,000 and $1.1 million, respectively. The
decrease in research and development expenses for the first six months of 1996
compared to 1995 were due to reduced expenditures on the Company's AIDS clinical
program, which was terminated in September 30, 1995, and reduced assay,
formulation development, and clinical material costs. General and administrative
expenses for the six months periods ended June 30, 1996 and June 30, 1995 were
$981,000 and $807,000, respectively. This increase was due primarily to
increased business development expenses.
Other income (expense) for the six-month periods ended June 30, 1996 and
June 30, 1995 comprises interest income and interest expense. Interest income
for the six month periods ended June 30, 1996 and June 30, 1995 was $13,000 and
$68,000, respectively. This decrease was due primarily to decreases in cash
balances available for investment. The Company incurred interest expense,
payable in shares of Series A and Series B Convertible Preferred Stock, in the
six-month period ended June 30, 1996, of $325,000 related to the senior secured
convertible notes. There were no senior secured convertible notes outstanding in
the six-month period ended June 30, 1995.
Net loss for the six-month periods ended June 30, 1996 and June 30, 1995
was $2.2 million and $1.9 million, respectively.
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The Company earned no revenue in 1995 and 1994. Revenue in 1993 of $6.1
million consisted of a one-time contract research fee from Clintec Nutrition
Company, a joint venture formed by Baxter Healthcare Corporation and Nestle SA.
The Company's total operating expenses for the years ended December 31,
1995, 1994 and 1993 were $4.4 million, $3.7 million and $6.1 million,
respectively. Research and development expenses for
20
<PAGE> 22
the years ended December 31, 1995, 1994 and 1993 were $2.7 million, $2.6 million
and $4.5 million, respectively. Research and development expenses increased in
1995 from 1994 due to higher clinical development expenditures for the ARDS and
MOD programs. Research and development expenses decreased in 1994 from 1993 due
primarily to reduced clinical material costs and lower expenditures related to
the Company's AIDS clinical development program. General and administrative
expenses for the years ended December 31, 1995, 1994 and 1993 were $1.6 million,
$1.1 million and $1.6 million, respectively. General and administrative expenses
increased in 1995 from 1994 due primarily to increased administrative personnel
and recruitment costs and higher rent and office expenses. General and
administrative expenses decreased in 1994 from 1993 due primarily to lower
office and employee relocation and severance costs.
Other income (expense) for the years ended December 31, 1995, 1994 and 1993
comprises interest income and interest expense. Interest income for the years
ended December 31, 1995, 1994 and 1993 were $111,000, $138,000 and $0,
respectively. Interest income decreased in 1995 as compared to 1994 primarily
due to reduced cash balances available for investment. Interest income increased
in 1994 compared to 1993 due to increases in cash balances available for
investment. The Company incurred interest expense, payable in shares of Series A
Convertible Preferred Stock, for the year ended December 31, 1995, of $178,000
related to the Company's senior secured convertible notes. There were no senior
secured convertible notes outstanding in the years ended December 31, 1994 and
1993.
Net loss for the years ended December 31, 1995, 1994 and 1993 were $4.5
million, $3.6 million and $28,000, respectively.
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of December 31,
1995, the Company had deferred tax assets of $3.2 million. Because of
uncertainties surrounding the realization of these favorable tax attributes in
future tax periods, all of the net deferred tax assets have been fully offset by
a valuation allowance. As of December 31, 1995, the Company had total net
operating loss carryforwards of $7.8 million and tax credits of approximately
$125,000, both of which expire on dates beginning in 2008. The Company's ability
to utilize the net operating loss carryforwards in future years may be limited
in some circumstances, including significant changes in ownership interests, due
to certain provisions of the Internal Revenue Code of 1986, as amended. See Note
5 to Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily with
$9.5 million from the private sale of equity securities and convertible notes,
$6.0 million in contract research payments, and $263,000 in interest income. In
April 1994, the Company sold an aggregate of 6,500,000 shares of Series A
Convertible Preferred Stock resulting in proceeds to the Company of $6.0
million. In September 1995, the Company sold $2.0 million in aggregate principal
amount of senior secured convertible notes due 1997 (the "Series A Notes"). The
Series A Notes are convertible into, and interest on the Series A Notes is
payable in, shares of the Company's Series A Convertible Preferred Stock. In
January 1996, the Company sold an aggregate of 130,000 shares of Series A
Convertible Preferred Stock resulting in proceeds of $130,000 to the Company. In
May 1996, the Company issued an aggregate of $1.0 million in aggregate principal
amount of senior secured convertible notes due 1997 (the "Series B Notes"). The
Series B Notes are convertible into, and interest on the Series B Notes is
payable in, shares of the Company's Series B Convertible Preferred Stock.
The Company acquired rights to certain patents relating to methods of using
Procysteine to treat human diseases and related technologies from Clintec
Nutrition Company in exchange for 715,026 shares of Common Stock and 9,000
shares of Nonconvertible Redeemable Preferred Stock in April 1994. Concurrently,
the Company entered into a license agreement with Cornell Research Foundation in
return for 35,028 shares of Common Stock (of which 7,026 shares of Common Stock
were subsequently returned to the Company). See "Certain Transactions."
21
<PAGE> 23
In August 1996, the Company entered into an agreement to issue and sell an
aggregate of 851,604 shares of Series C Convertible Preferred Stock to certain
investors of the Company (at a price of $11.75 per share on a Common Stock
equivalent basis) (the "August 1996 Financing"). In addition, in August 1996,
the Company entered into an agreement to issue 3,404,255 shares of Series C
Convertible Preferred Stock in exchange for all of the outstanding shares of
Nonconvertible Redeemable Preferred Stock (the "Nonconvertible Preferred Stock
Exchange"). The August 1996 Financing and the Nonconvertible Preferred Stock
Exchange are expected to close on or about August 30, 1996. See "Certain
Transactions."
Upon the closing of these transactions, (i) the Series A Notes, including
interest thereon, will convert into an aggregate of 2,098,631 shares of Series A
Convertible Preferred Stock and the Series B Notes, including interest thereon,
will convert into an aggregate of 690,775 shares of Series B Convertible
Preferred Stock; and (ii) Series A Convertible Preferred Stock warrants (the
"Series A Warrants") will be exercised pursuant to a net exercise provision
resulting in the issuance of an aggregate of 789,894 shares of Series A
Convertible Preferred Stock. See "Certain Transactions."
The Company expects negative cash flows from operations to continue and to
increase for the foreseeable future. The Company anticipates that the net
proceeds from the Offering, including interest thereon, together with the
Company's existing funds, will be sufficient to fund its operating expenses and
capital requirements as currently planned for at least the next 18 months.
However, there can be no assurance that the Company's assumptions regarding
future operating losses and operating expenses will be accurate. The Company's
actual working capital needs and funding requirements will depend upon numerous
factors, including the progress of the external research and development
programs being supported by the Company, the magnitude and scope of these
activities, the timing and results of preclinical and clinical testing, the
timing and costs of obtaining regulatory approvals, the level of resources that
the Company commits to the development of manufacturing, marketing and sales
capabilities, if any, the ability of the Company to establish new collaborative
arrangements with other companies to provide funding to the Company, the
technological advances and activities of competitors, the costs involved in
preparing, filing, prosecuting, maintaining, enforcing and defending patent
claims and other intellectual property rights, developments related to
regulatory and reimbursement matters and other factors. The Company intends to
seek additional funding through corporate collaborations. There can be no
assurance that the Company will be able to negotiate such agreements on
acceptable terms, or at all. The Company will also seek additional funding
through public or private financings. If additional funds are raised by issuing
equity securities, further dilution to stockholders will result. Debt financing,
if available, may involve restrictive covenants. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate certain
of its product development programs, to license to others rights to
commercialize products or technologies that the Company would otherwise seek to
develop and commercialize itself or cease operations. See "Risk Factors -- Need
for Substantial Additional Funds" and "Use of Proceeds."
EXCHANGE OF NONCONVERTIBLE REDEEMABLE PREFERRED STOCK
In August 1996, the Company entered into an agreement to exchange all of
its Nonconvertible Redeemable Preferred Stock for 3,404,255 shares of Series C
Redeemable Convertible Preferred Stock which have been valued by the Company at
$8.0 million. The difference between the carrying value of the Nonconvertible
Redeemable Preferred Stock and the value of the Series C Redeemable Convertible
Preferred Stock of $4.2 million will be an addition to the net loss to common
stockholders in the calculation of net loss per share.
22
<PAGE> 24
BUSINESS
The Company is developing novel pharmaceuticals for the treatment of
diseases involving oxidative stress and resultant tissue damage, with a
particular therapeutic focus on critical care. The Company's lead product
candidate, Procysteine, an intracellular glutathione-repleting agent, has been
evaluated in two Phase II clinical trials involving patients with ARDS. In the
first quarter of 1997, the Company plans to begin a pivotal Phase III clinical
trial of Procysteine to determine its safety and efficacy for the treatment of
ARDS. The Company is also conducting pilot clinical trials with Procysteine to
determine its potential application for the treatment of ALS and atherosclerotic
cardiovascular disease ("ASCVD").
BACKGROUND ON OXIDATIVE DAMAGE
While oxygen is vital to life, it can also be extremely toxic. As a
by-product of normal metabolism, the body produces small amounts of highly
reactive, toxic molecules called reactive oxygen species ("ROS"). In addition,
larger quantities of ROS are produced by activation of neutrophils, a type of
white blood cell, as part of the body's immune response against infection.
Although ROS help kill infectious organisms, the excessive production of ROS, as
part of the inflammatory response to infection, can also cause tissue damage,
known as oxidative damage. In some conditions associated with massive acute
inflammation, such as severe infection, multiple trauma and extensive burns,
activation of neutrophils may produce such large quantities of ROS that severe
tissue damage in organs occurs, leading to organ dysfunction and in many cases
death. In addition, oxidative damage is believed to play a causative role in a
number of chronic conditions, such as ALS, ASCVD and hemolytic anemias.
The body employs a number of systems to neutralize or inactivate ROS by
converting them into water and other harmless substances. One of the body's
principal means for protecting cells from oxidative damage is the molecule
glutathione, a small peptide found in abundance throughout the body. Glutathione
is produced inside cells from three amino acids, L-cysteine, L-glutamic acid and
glycine, and functions as one of the primary non-enzymatic, ROS-neutralizing
compounds made in the body. Other means for neutralizing ROS include enzymes,
such as superoxide dismutase and catalase, which are produced in the body and
are supplemented by ingested vitamins. Most enzymatic systems can neutralize
only certain types of ROS and cannot be restored rapidly within cells after
depletion. The Company believes that intracellular glutathione repletion may be
a more effective method for neutralizing ROS than other systems because
glutathione can be rapidly constituted and can neutralize all types of ROS.
A number of published studies have indicated decreased levels of
glutathione in conditions where excessive production of ROS has caused severe
tissue damage. In severe inflammatory conditions, the body's production of ROS
increases and exceeds the capacity of glutathione and other antioxidant systems
to combat oxidative stress, resulting in tissue damage.
Ideally, direct replacement of glutathione within cells would reduce or
eliminate additional oxidative damage. However, direct administration of
glutathione does not offer intracellular protection against oxidative damage,
because the physicochemical properties of glutathione inhibit its passage
through cell membranes. Of the three amino acids which comprise glutathione, it
is the lack of availability of cysteine that limits glutathione synthesis.
Increasing available intracellular levels of cysteine to facilitate the
production of glutathione may, therefore, be a viable therapeutic approach.
However, direct administration of cysteine is not practical because it may be
toxic when present outside of cells at the concentrations required to achieve a
therapeutic effect.
PRODUCT DEVELOPMENT PROGRAMS
Transcend is developing small molecule, intracellular glutathione-repleting
agents to limit or prevent oxidative damage. Procysteine, the Company's first
product candidate, is a delivery system for
23
<PAGE> 25
the introduction of the amino acid cysteine into cells. Procysteine readily
enters cells, where it is converted into cysteine that is then available for
glutathione synthesis.
The Company has developed intravenous ("i.v.") and oral formulations of
Procysteine. The ability of Procysteine to replenish glutathione when given
orally or intravenously has been documented in published animal and human
studies. In its clinical trials, Transcend is evaluating the use of this
approach to treat or prevent conditions where oxidative stress results in tissue
damage. To date, the safety profile and pharmacokinetics of Procysteine
administered intravenously or orally have been characterized in over 250
subjects in clinical trials sponsored by Transcend. The observed serious adverse
events in these trials were consistent with the underlying diseases and the
Company believes that none of these adverse events were drug related. See
"Business -- Procysteine- I.V. Formulation -- Acute Respiratory Distress
Syndrome -- Clinical Program." The Company also intends to develop one or more
of the TR-500 compounds, a group of glutathione derivatives, as additional
glutathione-repleting agents.
The Company's product development programs are described in the table
below.
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
INDICATION PRODUCT CANDIDATE STATUS(1)
- -----------------------------------------------------------------------------------------------
Acute Respiratory Distress Syndrome Procysteine (intravenous) Phase II completed
Multiple Organ Dysfunction Procysteine (intravenous) Phase II(2)
Amyotrophic Lateral Sclerosis Procysteine (oral) Phase I/II
Atherosclerotic Cardiovascular Disease Procysteine (oral) Phase I/II
Hemolytic Anemias TR-500 compounds Preclinical research
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) "Preclinical research" includes in vitro studies of product candidates and
evaluation in animals. "Phase I/II" refers to clinical trials in which the
compound is tested in a limited patient population for safety,
pharmacokinetics and preliminary indications of biological activity in
patients with the targeted disease. "Phase II" refers to clinical trials in
which the compound is tested in a limited patient population to assess the
efficacy of the drug for a specific indication and to gather additional
evidence relating to safety and potential adverse effects.
(2) Phase II trial data regarding the application of Procysteine for the
prevention of MOD was obtained from the Company's latest Phase II ARDS
trial. Additional trials will be required in order to complete a Phase II
program for MOD. See "Business -- Procysteine - I.V. Formulation -- Multiple
Organ Dysfunction."
PROCYSTEINE - I.V. FORMULATION
Acute Respiratory Distress Syndrome
ARDS, a disorder characterized by severe lung dysfunction, is a devastating
complication of conditions associated with massive acute inflammation, such as
severe infection, multiple traumatic injury and extensive burns. The disorder
affects an estimated 150,000 patients in the United States annually, with a
mortality rate of approximately 40 percent. ARDS is often associated with
dysfunction of other organs such as the kidneys, liver and heart.
There are currently no commercially available drug treatments for ARDS.
Patients suffering from ARDS are generally treated in a hospital intensive care
unit with only supportive care, consisting of highly invasive mechanical support
with a ventilator until lung function returns. Mechanical ventilation involves
forcing air containing high concentrations of oxygen into the lungs through an
endotracheal tube inserted through a patient's nose or mouth. Patients must be
sedated because this process usually causes extreme discomfort. Patients
requiring mechanical ventilation for more than two weeks generally require
surgical insertion of a tracheostomy tube to avoid complications of prolonged
nasotracheal or orotracheal intubation. As long as the patient is on mechanical
ventilation, there is an increased risk of serious complications, including
hospital-acquired infection with drug resistant organisms.
24
<PAGE> 26
ROS play a central role in ARDS. In connection with the onset of ARDS,
neutrophils activate and adhere to the surface of pulmonary capillaries. These
neutrophils then release ROS and protease enzymes which cause the damage to lung
tissue. Glutathione, which is normally present in lung cells and in lung fluid
in high concentrations, neutralizes or inactivates these ROS and limits
oxidative damage. Anti-protease enzymes are present in the lung under normal
conditions and protect the lung against damage. The protective effect of
anti-proteases is lost in the presence of excessive ROS. Glutathione can prevent
further lung damage indirectly, by blocking ROS inhibition. The clinical result
of excess ROS in the lungs is a swelling of the normally thin walls lining the
air spaces that impedes the movement of oxygen from the air spaces into the
bloodstream. Patients with ARDS require supplemental oxygen and mechanical
ventilation in order to maintain sufficient oxygen for the body's tissues, but
the oxygen rich air provided by the ventilator has the potential to exacerbate
oxidative damage.
The Company believes that increasing glutathione levels by administering
Procysteine may prevent additional ROS damage and speed recovery of lung
function, thereby reducing the need for mechanical ventilation. Because of
multiple complications associated with prolonged mechanical ventilation, the
Company also believes that reduced time on the ventilator is a clinically
important goal in the treatment of ARDS patients and will also likely reduce the
cost of treating these patients.
Clinical Program. Transcend has sponsored two randomized, double-blind
placebo-controlled Phase II trials of Procysteine which have provided data that
support its use in the treatment of patients with ARDS. An objective of the
first Phase II trial was to assess the effect of Procysteine on patients with
ARDS. Of the ARDS patients studied, 17 received 189 mg/kg/day (milligrams of
drug/kilogram of body weight/day) of Procysteine for up to ten days, and 15
received a placebo. The study results provided evidence that Procysteine-treated
patients regained independence from the ventilator more rapidly than did
placebo-treated patients. There was a statistically significant difference in
the duration on mechanical ventilation between patients treated with Procysteine
and placebo-treated patients.
The objective of the second Phase II trial was to assess the effect of
Procysteine on blood glutathione levels. This study was conducted in 25 patients
with sepsis syndrome and organ dysfunction, 23 of whom suffered from pulmonary
dysfunction (either acute lung injury or ARDS). Of the 25 patients, 19 received
200 mg/kg/day of Procysteine for up to 21 days and six patients received a
placebo. Prior to administration of Procysteine or the placebo, the patients in
the study had lower blood glutathione concentrations than a healthy control
population. Following administration, average glutathione concentration
increased 13 percent in the patients receiving Procysteine and decreased one
percent in placebo-treated patients.
Consistent with the first Phase II trial, the results of the second Phase
II trial indicated a trend toward a reduction in median days on mechanical
ventilation among Procysteine-treated patients compared with placebo patients.
However, the study was not designed to provide statistical evidence of efficacy
and this trend did not reach statistical significance. The results of the study
also indicated that, as measured by PaO(2)/FiO(2) (an established measure of
lung function), Procysteine-treated patients regained efficiency of the lungs in
transporting oxygen to the bloodstream to a greater degree than placebo-treated
patients.
Based on the results of the Phase II trials and on discussions with the
FDA, Transcend plans to begin a pivotal Phase III trial in patients with ARDS by
the end of the first quarter of 1997. The trial will be a randomized,
double-blind, placebo-controlled trial of approximately 350 newly-diagnosed ARDS
patients. Patients will receive either 210 mg/kg/day of Procysteine or a placebo
for up to 14 days. The trial will involve approximately 40 centers and the
Company expects to complete enrollment in the trial, once initiated, in
approximately 18 months. The trial's primary endpoint is expected to be the
number of days patients are alive and off-ventilator over a 30-day trial period.
This endpoint is designed to provide an accurate and quantifiable measure of the
clinical benefit as measured by reduction in ventilator days, while accounting
for the high mortality rate in these patients. Secondary endpoints in the trial
are expected to include the effect of Procysteine treatment on mortality, lung
function and other organ function. The Company believes that the use of
non-mortality endpoints has
25
<PAGE> 27
become generally accepted as a measure of clinical benefit in ARDS treatment
studies. In anticipation of its Phase III trial, the Company has analyzed its
initial Phase II trial results using the proposed Phase III trial primary
endpoint and confirmed a trend, although not statistically significant, in favor
of Procysteine-treated patients. The Company intends to rely on third parties to
assist it in monitoring the Phase III trial and managing data generated in the
trial. See "Risk Factors -- Uncertainty Associated with Clinical Trials."
There can be no assurance that the Company's Phase III trial will be
completed on a timely basis or at all, that the trial will demonstrate the
safety and efficacy of Procysteine to the extent necessary to obtain regulatory
approvals, that, even if the Phase III trial is successful, the FDA will approve
Procysteine for the treatment of ARDS based on the Phase III trial or that the
FDA will not require additional studies to support regulatory approval. In
addition, in earlier trials sponsored by Transcend involving approximately 250
subjects, Procysteine was administered intravenously at doses of up to 300
mg/kg/day for one day and doses of up to 200 mg/kg/day for 21 days. There can be
no assurance that administration of Procysteine at the dosage level contemplated
in the Phase III trial proposed by Transcend, or at any other dosage level
required for therapeutic efficacy, will result in a safety profile comparable to
or more favorable than earlier studies. See "Risk Factors -- Uncertainty
Associated with Clinical Trials."
The Company has been granted orphan-drug designation by the FDA for
Procysteine for the treatment of ARDS. See "Business -- Government Regulation."
Multiple Organ Dysfunction
The failure of one organ, such as the lungs, places other organs at risk of
failure. The progressive failure of additional organs, known as multiple organ
dysfunction or MOD, generally has catastrophic consequences for the patient.
Other organ systems that are frequently involved in MOD include the kidneys
(acute renal failure), the liver (acute hepatic failure) and the heart
(cardiovascular collapse). While mortality due to the failure of a single organ
is 30 to 40 percent, mortality rises to more than 60 percent with the failure of
two organs and exceeds 90 percent with failure of a third organ. In addition,
MOD exacts a significant cost on the healthcare system. MOD patients are treated
in intensive care units, where costs average $100,000 per patient. The Company
estimates that annually there are over 750,000 patients in the United States at
risk of MOD. These patients include those patients with ARDS as well as those
who suffer from acute conditions such as severe infection, multiple trauma and
extensive burns. Because of the difficulty of determining which patients will
develop MOD and due to the higher rate of mortality that occurs when a single
organ dysfunction progresses to MOD, the Company believes it would be more
effective to administer treatment prophylactically.
Currently, there are no commercially available drugs to prevent MOD. As in
ARDS, mechanical support for other failed organs (e.g., dialysis to support
kidney function), and pharmacological treatments for complications arising from
MOD, are the sole available therapies. Because most methods of mechanical
intervention, such as dialysis, are invasive, they also carry additional risks
to patients.
Published clinical studies have indicated that the same process of
oxidative damage that results in ARDS also contributes to the development of
MOD. The Company believes, based on published and Company-sponsored preclinical
studies, that Procysteine may be effective in the prevention of organ
dysfunction in patients with acute conditions such as severe infection, multiple
trauma and extensive burns. In the Company's first ARDS Phase II trial, there
was a statistically significantly lower percentage of patients with new organ
dysfunction (other than lung) in the group receiving Procysteine compared to the
placebo group. In the second trial sponsored by the Company involving patients
with ARDS (and who are at risk of MOD) a reduced level of glutathione, and a
corresponding increase in the level of glutathione following the administration
of Procysteine, was shown. Additional Phase II work will be required to complete
a Phase II program for the use of Procysteine for the prevention of MOD. The
Company's planned Phase III ARDS trial is also expected to provide data on the
potential of Procysteine to prevent MOD.
26
<PAGE> 28
The Company currently does not intend to pursue separate clinical trials
for MOD unless it receives additional data supporting the potential use of
Procysteine for prevention of MOD from the Company's planned Phase III clinical
trial for ARDS and until the Company has sufficient funds available to undertake
such trials. The Company believes that, unlike in ARDS trials, non-mortality
endpoints have not become generally accepted as measures of clinical benefit in
MOD trials, and as a result, additional research will be necessary to define an
appropriate endpoint. Further, since not all patients in a prevention trial
develop MOD, a trial for the prevention of MOD would require a considerably
larger number of patients than a trial for the treatment of ARDS. The Company
will be required to raise substantial additional funds to pursue further
research and development of the use of Procysteine for the prevention of MOD. If
the Company undertakes such studies, there can be no assurance that the results
of earlier studies on the use of Procysteine for the prevention of MOD will be
predictive of results that will be obtained from more extensive clinical
testing. See "Risk Factors -- Uncertainty Associated with Clinical Trials" and
"Risk Factors -- Need for Substantial Additional Funds."
PROCYSTEINE - ORAL FORMULATION
Transcend is conducting pilot, proof-of-principle trials with Procysteine
in two indications with an oral formulation of the product. If successful, the
Company plans to select at least one indication to advance into Phase II
clinical trials during 1997.
Amyotrophic Lateral Sclerosis
The inherited form of ALS, a fatal degenerative disorder, is widely
believed to be the result of a malfunctioning enzyme that results in increased
ROS. Tissue damage from ROS may also play a role in the progression of the
non-inherited form of ALS. The Company believes, based on published preclinical
studies, that increasing glutathione levels in nerve cells may reduce or prevent
further oxidative damage. The Company is sponsoring a Phase I/II clinical trial
to assess the pharmacokinetics of Procysteine in blood and cerebrospinal fluid
in ALS patients. This study is designed to evaluate the effect of Procysteine on
glutathione levels in cerebrospinal fluid. Such levels are believed to be an
indication of intracellular glutathione levels within the brain. If the results
of this study are positive, the study may provide a basis for Phase II trials in
patients with ALS. There can be no assurance, however, that the results of this
study will be positive. See "Risk Factors -- Uncertainty Associated with
Clinical Trials."
The Company has been granted orphan drug designation by the FDA for
Procysteine for the treatment of ALS. See "Business -- Government Regulation."
Atherosclerotic Cardiovascular Disease
Atherosclerotic cardiovascular disease, a major risk factor for heart
attack and stroke, is characterized by a narrowing of the arteries by lipid
deposits and the loss of blood vessel elasticity. There is growing evidence in
the medical literature that increased vascular oxidative stress is a primary
mechanism of impaired blood vessel elasticity in patients with atherosclerosis.
The Company believes, based on preclinical studies, that Procysteine
administration may improve blood vessel elasticity. As a result, it may enhance
blood flow, and reduce the risk and severity of heart attack in patients with
coronary artery disease. The Company is sponsoring a Phase I/II clinical trial
to assess the potential of Procysteine to rapidly restore blood vessel
elasticity in patients in whom atherosclerotic cardiovascular disease has begun.
There can be no assurance that the results of this study, if completed, will be
successful.
TR-500 COMPOUNDS (GLUTATHIONE-REPLETING AGENTS)
The TR-500 compounds are a group of glutathione derivatives that enable the
direct delivery of glutathione into cells. The Company believes that in clinical
conditions, where glutathione cannot be repleted efficiently through the use of
Procysteine, the TR-500 compounds may serve as second
27
<PAGE> 29
generation glutathione-repleting agents. The Company believes, based on
preclinical studies, that the TR-500 compounds have potential therapeutic
application in hemolytic anemias where ROS may play a role in blood cell damage.
These anemias include inherited disorders such as sickle cell disease and
thalassemia, and acquired anemias such as the hemolytic anemia associated with
dialysis. During 1997, the Company plans to select one or more of these
compounds for further preclinical development.
BUSINESS STRATEGY
Transcend's strategy is to develop and commercialize novel pharmaceuticals
to treat or prevent disorders involving oxidative stress and resulting tissue
damage, with a particular therapeutic focus on products for the critical care
market. The Company's strategy involves the following key elements:
Exploit Glutathione Repletion Methodologies. The Company is currently
concentrating on the preclinical and clinical development of the
glutathione-repleting compounds in its portfolio. Transcend's priority is
advancing the clinical program for Procysteine for the treatment of ARDS.
Leverage Development Expertise. Transcend's management and scientific
personnel have considerable experience in the development of novel
pharmaceutical products. The Company uses this expertise to manage the
development of its products through external resources, such as contract
research organizations and contract manufacturers. The Company believes that the
continued focus on development expertise will allow it to benefit from the
commercialization of products without requiring a substantial investment in
costly infrastructure.
Commercialize Products through Collaborations. The Company intends to
enter into strategic alliances and licensing arrangements with corporate
partners in order to accelerate the development and commercialization of its
product candidates. Specifically, the Company plans to establish alliances with
pharmaceutical companies to complete clinical trials, prepare regulatory
submissions and market and sell the Company's products. The Company expects to
retain strategically important development, manufacturing, marketing or
co-promotion rights in order to enhance its product development opportunities.
Enhance Product Pipeline. The Company plans to build a product pipeline,
with a particular therapeutic focus on critical care, through the licensing or
acquisition of compounds from academic laboratories and research institutions.
To date, Transcend has acquired compounds from Cornell and has an exclusive
right to obtain an additional compound from the Massachusetts General Hospital
and the University of Maryland. Transcend believes its scientific and
development expertise provide the Company with an ability to recognize
opportunities for commercial development at an early stage.
MANUFACTURING
The Company contracts with third-party manufacturers to produce its
compounds for preclinical research and for clinical trials. The Company expects
to utilize third-party manufacturers for commercial production. The Company has
established relationships with a third party to produce bulk quantities of
Procysteine and with other parties to formulate the compound into i.v. and oral
forms of Procysteine for clinical trials. Through third-party manufacturers and
formulators, the Company has produced sufficient Procysteine for use in its
planned Phase III clinical trial for the treatment of ARDS.
The Company believes that it will be able to reach arrangements with
third-party manufacturers and formulators on commercially reasonable terms, and
that it will not be necessary for it to develop internal manufacturing
capability in order to successfully commercialize Procysteine. The manufacturing
process for Procysteine involves established technology, and the Company
believes that other potential suppliers are available should the Company be
unable to obtain reasonable terms in the future from its current vendors.
However, in the event that the Company is unable to obtain contract
manufacturing or formulation services on reasonable terms, it may need to
acquire manufacturing capability or it may be unable to commercialize its
products as planned. There can be no assurance that the Company's existing or
future outside vendors or prospective corporate collaborators will be able to
manufacture Procysteine or any other developed product on a commercial scale or
that any collabora-
28
<PAGE> 30
tor or vendor will be able to manufacture such products on a timely basis, in
quantities or at prices which will be commercially viable or beneficial for the
Company. See "Risk Factors -- Limited Source of Supply; Dependence on
Third-Party Manufacturers."
SALES AND MARKETING
The Company has not yet developed sales, marketing and distribution
capabilities. The Company plans to form strategic alliances with established
pharmaceutical or biotechnology companies in order to finance the development of
certain of its products. If the development of any planned products is
successful, these companies may also provide the Company with access to
established marketing and distribution organizations. The Company may elect to
establish a sales force to market and distribute those products and indications
over which it retains marketing rights or shares rights with corporate partners.
There can be no assurance that the Company will be able to establish in-house
sales, marketing or distribution capabilities or enter into one or more
strategic relationships for sales, marketing and distribution on a timely basis,
or at all. Even if the Company does develop or obtain sales, marketing and
distribution capabilities, there can be no assurance that any product developed
by the Company will be successfully marketed. See "Risk Factors -- Lack of
Commercial Sales and Marketing Experience."
PATENTS AND PROPRIETARY RIGHTS
The Company's commercial success will depend to a significant extent on
obtaining and enforcing patent protection for its products and methods,
including methods for treating or preventing human disease, or for such products
and methods licensed from third parties, maintaining trade secret protection and
operating without infringing the proprietary rights of third parties. As of
August 20, 1996, the Company owns or has exclusively licensed 16 United States
patents and 11 United States applications as well as counterparts of these
patents and applications in various foreign jurisdictions. Of these, eight
United States patents and two United States applications relate to the Company's
business as described in this Prospectus. Specifically, the Company owns a
pending United States patent application for the use of Procysteine in treating
pulmonary disease, including ARDS. Corresponding applications have been filed in
Canada, Australia and Japan and in the European Patent Office (designating
countries including Austria, Denmark, France, Germany, Italy, Spain, Sweden,
Switzerland and the United Kingdom). In June 1996, the Company was notified by
the European Patent Office that certain claims to uses of Procysteine in the
treatment and/or prevention of pulmonary disease, including ARDS, are allowable
and that the application will be passed to grant.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to methods for treating or preventing human disease, and most particularly for
diseases such as ARDS and MOD, for which there is currently no commercially
available drug for treatment or prevention. Substantial periods of time pass
before the USPTO responds on the merits to patent applications and submissions
on behalf of the inventors. In addition, the coverage claimed in a patent
application can be significantly reduced or modified before and after a patent
is issued. Consequently, there can be no assurance that any of the Company's or
any licensor's pending or future patent applications will result in the issuance
of patents or, if any patents are issued, whether the patents will be subjected
to further proceedings limiting their scope, and whether they will provide
significant proprietary protection or competitive advantage, or will be
circumvented or invalidated. Because patent applications in the United States
are maintained in secrecy until patents issue and patent applications in certain
other countries generally are not published until more than 18 months after they
are filed, and since publication of inventions in scientific or patent
literature often lags behind actual dates of invention, the Company cannot be
certain that it or any licensor was the first inventor of inventions covered by
pending patent applications or that it or such licensor was the first to file
patent applications on such inventions.
29
<PAGE> 31
There can be no assurance that the Company's or its licensor's patents, if
issued, would not be found invalid or unenforceable by a court or that such
patents would cover products or technologies of the Company's competitors.
Competitors or potential competitors may have filed applications for or received
patents, and may obtain additional patents and proprietary rights relating to
products or methods for treating or preventing human disease that are
competitive with those of the Company. To protect its proprietary rights, the
Company may be required to participate in interference proceedings declared by
the USPTO to determine priority of invention, which could result in substantial
cost to the Company. Moreover, even if the Company's or its licensor's patents
issue, there can be no assurance that they will provide sufficient proprietary
protection or will not be later limited, circumvented or invalidated.
The Company may be required to obtain licenses to patents or other
proprietary rights of third parties. No assurance can be given that any licenses
required under any such patents or proprietary rights would be made available on
terms acceptable to the Company, if at all. If the Company does not obtain such
licenses, it could encounter delays in product market introductions while it
attempts to design around such patents or other rights, or it may be unable to
develop, manufacture or sell products. See "Risk Factors -- Patents and
Proprietary Rights; Third Party Rights."
There is substantial uncertainty concerning whether human clinical data
will be required for the issuance of patents for methods of treating or
preventing human disease, particularly for diseases such as ARDS and MOD, for
which there is currently no commercially available drug for treatment or
prevention. If such data is required, the Company's ability to obtain patent
protection could be delayed or otherwise adversely affected. Although the USPTO
issued new utility guidelines in July 1995 that address the requirements for
demonstrating utility for biotechnology inventions, including for inventions
relating to methods for treating or preventing human disease, there can be no
assurance that USPTO patent examiners will follow such guidelines or that the
USPTO' s position will not change with respect to what is required to establish
utility for Procysteine or future potential products of the Company in the
treatment of human diseases. In addition, there can be no assurance that
compliance with such guidelines will result in valid and enforceable patents.
Furthermore, the enactment of legislation implementing the General Agreement on
Trade and Tariffs has resulted in certain changes to United States Patent laws
that became effective on June 8, 1995. Most notably, the term of patent
protection for patent applications filed on or after June 8, 1995 is no longer a
period of 17 years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years, a
20-year term from the effective date of filing may result in a substantially
shortened term of patent protection, which may adversely impact the Company's
patent position. In addition, if this change results in a shorter period of
patent coverage, and if the Company negotiates royalties based on the existence
of a valid patent, the Company's business could be adversely affected.
The Company also seeks to protect its proprietary technology, including
technology which may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventor's rights agreements with its
collaborators, advisors, employees and consultants. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not be
otherwise disclosed to, or discovered by, competitors. Moreover, the Company
conducts a significant amount of research through academic advisors and
collaborators who are prohibited from entering into confidentiality or
inventor's rights agreements by their academic institutions. Any unauthorized
dissemination of the Company's confidential information could have an adverse
effect on the Company's business.
30
<PAGE> 32
TECHNOLOGY AND LICENSE AGREEMENTS
The Company was formed to develop and commercialize the pharmaceutical
applications of Procysteine and related pharmaceutical applications (the
"Glutathione Technology"). The Glutathione Technology was originally developed
at Cornell and licensed to Baxter Healthcare Corporation ("Baxter"). In 1989,
Baxter and Nestle SA ("Nestle") established Clintec Nutrition Company
("Clintec") and Baxter assigned its rights in the Glutathione Technology to
Clintec. From 1988 to 1994, Baxter and Clintec completed various studies of
Procysteine, including preclinical assay development, toxicology, formulation
and several clinical studies. In April 1994, the Company acquired rights to the
Glutathione Technology from Cornell and Clintec.
Cornell Research Foundation
In connection with a Contribution Agreement dated April 5, 1994 (the
"Contribution Agreement") between the Company and Clintec, the Company obtained
an exclusive worldwide license from Cornell (the "Cornell Agreement") to certain
patents covering methods of using Procysteine to increase intracellular levels
of glutathione and/or cysteine. The Company's rights under the Cornell Agreement
include an exclusive license under a composition of matter patent for the TR-500
series of glutathione-repleting agents.
In consideration for the licenses granted to Transcend under the Cornell
Agreement, Cornell received 35,028 shares of Common Stock (of which 7,026 shares
were returned to the Company in settlement of a dispute). See "Certain
Transactions." In addition, Transcend agreed to (i) provide funding to Cornell
Medical College of an aggregate of $400,000 over a three-year period; (ii) pay
royalties on sales of products covered by the licensed patents, if any; and
(iii) pay annual minimum royalties which would be credited in any year against
earned royalties due for such year. Under the Cornell Agreement, Transcend
agreed to exercise due diligence in development and commercialization of
products covered by the licensed patents. Any failure to exercise such diligence
with respect to a particular technology licensed under the Agreement would
permit Cornell to cause the license to become non-exclusive.
Clintec Nutrition Company
Pursuant to the Contribution Agreement, the Company granted to Clintec an
exclusive, royalty-free license to the use of the Glutathione Technology for
certain nutritional applications, while retaining exclusive rights to all
pharmaceutical applications of the Glutathione Technology. The Company has
agreed, until April 1999, not to develop compounds for use in certain
nutritional applications, and Clintec has agreed, during the same period, not to
develop compounds for use in pharmaceutical applications. The restrictions on
the ability of each of the Company and Clintec to develop compounds for use in
the other's field do not apply to development of compounds for use in both
fields. Although no disputes have arisen to date regarding the exclusive rights
of the Company and Clintec in their respective fields, such a dispute could have
a material adverse effect on the Company's ability to enter into corporate
alliances and license arrangements, and if resolved in a manner adverse to the
Company would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Potential
For Conflict With Clintec."
In addition, the Company acquired various clinical supplies, data, records,
contractual and intellectual property rights related to pharmaceutical
applications of the Glutathione Technology from Clintec in exchange for 680,000
shares of Common Stock and 9,000 shares of Nonconvertible Redeemable Preferred
Stock. The agreement also provides that if the Company should decide not to
maintain the patents or decides to abandon the application which are the subject
of the agreement, the Company will assign such patents and applications to
Clintec. See "Certain Transactions."
31
<PAGE> 33
Massachusetts General Hospital/University of Maryland
The Company holds an option to obtain an exclusive United States license
for TR-810, a novel fusion protein, from Massachusetts General Hospital and the
University of Maryland. TR-810 combines a hybrid recombinant protein having
human superoxide dismutase (copper, zinc) activity with a non-toxic portion of
tetanus toxin that is taken up by nerve cells. This hybrid protein retains
certain functional properties of both molecules, and the Company believes the
hybrid protein may have application in a number of central nervous system
conditions where oxidative damage is believed to play a role, such as ischemic
stroke. The option expires on December 31, 1996. There can be no assurance that
the Company will exercise this option. Exercise of the option would require the
Company to undertake certain diligence obligations and to make certain royalty
payments. The Company will determine whether to exercise this option based on
its analysis of the results of ongoing research being conducted by Massachusetts
General Hospital and the University of Maryland with respect to TR-810 and the
availability of funds.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by
rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. Many entities, including pharmaceutical and biotechnology
companies, academic institutions and other research organizations are actively
engaged in the discovery and development of products in the therapeutic areas
pursued by the Company. Many of these entities have greater financial,
technical, manufacturing and marketing resources than the Company. In addition,
many of these competitors have become more active in seeking patent protection
and licensing arrangements in anticipation of collecting royalties for use of
technology that they have developed.
The Company's ability to compete effectively will depend on its ability to
advance its core technology, maintain a proprietary position on its technology
and products, obtain required governmental approvals on a timely basis, attract
and retain key personnel and develop effective products that can be manufactured
cost-effectively and marketed successfully. The Company expects that competition
among products approved for sales will be based, among other things, on
efficacy, reliability, product safety, price and patent position.
Currently there are no commercially available drugs to prevent or treat
ARDS. However, Liposome initiated in September 1995 a Phase III trial for a drug
designed to treat ARDS through a mechanism different from that of Procysteine.
There can be no assurance that research and development by Liposome and others
will not render any of the Company's planned products obsolete or uneconomical,
or result in therapies superior to any developed by the Company, or that any
products developed by the Company will be preferred to any existing or newly
developed technologies. See "Risk Factors -- Competition."
GOVERNMENT REGULATION
The production, marketing, sales and distribution of the Company's products
and its research and development activities are subject to extensive regulation
for safety, efficacy and quality by numerous governmental authorities in the
United States and other countries. In the United States, drugs and certain
biological products are subject to rigorous FDA regulation under the Federal
Food, Drug and Cosmetic Act (the "FDCA"), and the regulations promulgated
thereunder, as well as other federal and state statutes and regulations that
govern, among others, the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of the Company's
products. Product development and approval within this regulatory framework can
take a number of years and requires the expenditure of substantial resources.
Any failure by the Company or its collaborators or licensees to obtain
regulatory approval, or any delay in obtaining such approvals, could adversely
affect the marketing of products being developed by the Company, its ability to
receive product or royalty revenues and its liquidity and capital resources.
32
<PAGE> 34
Human therapeutics are normally subject to rigorous preclinical and
clinical testing. The standard process required by the FDA before a drug may be
marketed in the United States includes (i) preclinical laboratory tests; (ii)
submission to the FDA of an investigational new drug application ("IND"), which
must be approved before human clinical trials may commence; (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug in its intended indication; (iv) submission to the FDA of an NDA; and
(v) FDA approval of the NDA prior to any commercial sale or shipment of the
drug.
Preclinical animal testing is generally conducted in the laboratory to
evaluate the potential safety and efficacy of a drug. Although the results of
preclinical testing may show the efficacy of a product tested in animals, and
may support an application to begin clinical testing, subsequent clinical
testing may not demonstrate comparable effectiveness in humans. The results of
these animal studies are submitted to the FDA as part of the IND and NDA. See
"Risk Factors -- Uncertainties Associated with Clinical Trials."
Clinical trials involve the administration of the investigational new drug
to healthy volunteers or to patients, under the supervision of a qualified
principal investigator. Clinical trials must be conducted in accordance with
good clinical practices under protocols that detail the objectives of the study,
the parameters to be used to monitor safety and, if applicable, the efficacy
criteria to be evaluated. Each protocol must be submitted to the FDA as part of
the IND. Further, each clinical trial must be conducted under the auspices of an
IRB at the institution at which the trial will be conducted. IRBs will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution. Typically, clinical evaluation involves a
three-phase process. In Phase I, trials are conducted with a small number of
human subjects to determine the safety profile, the pattern of drug distribution
and metabolism. In Phase II, trials are conducted with a larger group of
patients afflicted with a specific condition in order to determine preliminary
efficacy, optimal dosages and expanded evidence with respect to safety. In Phase
III, large-scale, often multi-center, comparative trials are conducted with
patients afflicted with a target disease in order to provide enough data for the
statistical proof of safety and efficacy required by the FDA and other
regulatory authorities. The pertinent IRB or the FDA may suspend clinical trials
at any time if they believe that the subjects or patients are being exposed to
an unacceptable health risk.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of an NDA. The testing and
approval process is likely to require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.
The FDA may deny an NDA if applicable regulatory criteria are not satisfied,
require additional testing or information, or approve an NDA subject to
postmarketing testing and surveillance or limitations on the indicated uses for
which the subject drug may be marketed. Finally, product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
Domestic manufacturing establishments are subject to inspection by the FDA
and must comply with the FDA's cGMP. To supply products for use in the United
States, foreign manufacturing establishments must comply with cGMP and are
subject to periodic inspection by the FDA or by regulatory authorities in such
countries under reciprocal agreements with the FDA.
The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases or diseases where fewer than 200,000 persons in the United States would
be likely to receive the treatment. A drug that both receives orphan drug
designation by the FDA and is the first product of a chemical moiety to receive
FDA marketing approval for its indication is entitled to receive up to
seven-year exclusive marketing period in the United States for that indication.
A drug that is considered by the FDA to be different from a particular orphan
drug is not barred from sale in the United States during such exclusive
marketing period. Legislation has previously been introduced in Congress to
limit the marketing exclusivity provided for certain orphan drugs. Although the
outcome of that legislation, if reintroduced, is
33
<PAGE> 35
uncertain, there remains a possibility that future legislation will limit the
incentives currently afforded to the developers of orphan drugs.
The Company has been granted orphan drug designation for Procysteine for
the treatment of ARDS and ALS. There can be no assurance, however, that a
product considered by the FDA to be different from Procysteine will not be
successfully introduced by a competitor of the Company. Any such product would
not be barred from sale in the United States by the designation of Procysteine
as an orphan drug. If such a drug proved to be safer, more effective or less
costly than Procysteine, the Company's business could be materially adversely
affected.
If and when the Company markets its products outside the United States,
whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign
jurisdictions must be obtained prior to the commencement of human clinical
trials or marketing approval for drugs. The requirements governing the conduct
of clinical trials, product licensing, pricing and reimbursement vary widely
from country to country. In addition, the Company's products may be subject to
export control. See "Risk Factors -- No Assurance of FDA Approval; Comprehensive
Government Regulation."
PRODUCT LIABILITY
The testing, marketing and sale of human therapeutic products entail an
inherent risk of exposure to product liability claims by consumers, health care
providers, pharmaceutical and biotechnology companies or other sellers of the
Company's products. There can be no assurance that substantial product liability
claims will not be asserted against the Company. While the Company has liability
insurance with respect to clinical trials, the Company does not have product
liability insurance coverage for the commercial sale of Procysteine, the
Company's lead product candidate. There can be no assurance that the Company
will be able to maintain clinical trials liability insurance on acceptable terms
or that such insurance will provide adequate coverage against potential
liabilities. The Company will seek to obtain product liability insurance
coverage for commercial sales if and when its products are commercialized.
However, there can be no assurance that adequate insurance coverage will be
available in sufficient amounts and at acceptable costs, if at all. In addition,
pursuant to the terms of certain licensing agreements entered into by the
Company, the Company has agreed to indemnify certain third parties with respect
to losses incurred as a result of the manufacture, supply or sale of potential
product candidates. Any indemnification or product liability claim or product
recall could inhibit or prevent commercialization of products being developed by
the Company and otherwise have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors --
Product Liability."
EMPLOYEES
As of August 20, 1996, the Company employed 13 people, four of whom hold
Ph.D. and/or M.D. degrees. The Company's employees are not members of a union,
and the Company believes that it has good employee relations. All of the
Company's employees have signed agreements obligating them to protect the
proprietary nature of the Company's confidential information. See "Risk Factors
- -- Dependence on Key Personnel."
FACILITIES
The Company currently holds an operating lease on and occupies
approximately 7,700 square feet of leased office and administrative space at 640
Memorial Drive, Cambridge, Massachusetts. The Company pays approximately
$180,000 annually under its facilities lease. The lease on these facilities
expires in December 1999. The Company believes that these facilities should be
sufficient to meet the Company's needs through December 1999.
34
<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ---- -----------------------------------------------
<S> <C> <C>
Hector J. Gomez, M.D., Ph.D. ........ 57 President, Chief Executive Officer and Director
John J. Whalen, M.D. ................ 49 Senior Vice President and Chief Scientific
Officer
B. Nicholas Harvey, LL.B. ........... 36 Vice President, Finance, Chief Financial
Officer and Secretary
Jerry T. Jackson(1).................. 55 Chairman of the Board
Philippe Chambon, M.D., Ph.D.(1)..... 38 Director
Frank L. Douglas, M.D., Ph.D.(2)..... 53 Director
Richard W. Hunt, C.P.A.(2)........... 42 Director
William C. Mills III(2).............. 41 Director
Gerard M. Moufflet(1)................ 52 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
HECTOR J. GOMEZ, M.D., PH.D. has served as President, Chief Executive
Officer and a director of the Company since November 1994. He previously served
as Vice President of Medical Affairs at Vertex Pharmaceuticals Incorporated, a
rational drug design company, from May 1992 to November 1994. From December 1991
to May 1992, Dr. Gomez served as Associate Vice President at Immunomedics, Inc.,
a biotechnology company. From December 1988 to December 1991, he served as
Executive Director of Cardiovascular Clinical Research at Ciba-Geigy Corporation
("Ciba-Geigy"), a pharmaceutical company. Previously, Dr. Gomez served as
Director of Clinical Research from 1979 to 1984, and as Senior Director of
Clinical Research from 1985 to December 1988, at Merck & Co., Inc. ("Merck"), a
pharmaceutical company. During his tenures at Merck and Ciba-Geigy, Dr. Gomez
successfully directed the clinical development phase of ten NDAs. His
accomplishments include the management of the clinical program, from IND filing
through marketing approval, for enalapril (Vasotec(R)) and lisinopril
(Prinivil(R) and Zestril(R)), cardiovascular products. Dr. Gomez received his
M.D. from National University in Bogota, Colombia, his Ph.D. in Pharmacology
from Marquette University and his Diploma in Clinical Pharmacology from Tulane
University.
JOHN J. WHALEN, M.D. has served as Senior Vice President and Chief
Scientific Officer of the Company since October 1995. In addition, he has served
as Chairman of the Company's Scientific Advisory Board since October 1995. From
1990 to 1995, he served as Senior Vice President and General Manager of the
Pharmaceutical Division at Alpha Therapeutic Corporation, a pharmaceutical
company. He has also held senior management positions as Vice President of
Clinical Research at G.H. Besselaar Associates ("Besselaar") and as Director of
Clinical Research for Cardiovascular/Renal Products at Merck, Sharp & Dohme
Research Laboratories. Dr. Whalen has an extensive background in directing
clinical trials at Besselaar, Merck and Alpha Therapeutic Corporation. Dr.
Whalen's achievements include the clinical development of Fluosol(R),
Lotensin(R), Vasotec I.V.(R), Oncolym(R) and Venoglobulin S(R). Dr. Whalen
received his B.S. in Physics from Rensselaer Polytechnic Institute and his M.D.
from the University of Virginia and participated in a pulmonary fellowship at
New York University.
B. NICHOLAS HARVEY, LL.B. has served as Vice President, Finance, Chief
Financial Officer and Secretary of the Company since December 1992. From
February 1992 to December 1992, he was Treasurer at The Computer Power Group, a
computer services and software company. From May 1986 to February 1989, he was
Executive Director at Brunckhorst & Co., an Australian investment firm that
35
<PAGE> 37
he helped to found. Mr. Harvey received his B.Econ. and LL.B. from the
Australian National University and his M.B.A. from the Harvard Business School
in 1992.
JERRY T. JACKSON has served as Chairman of the Board of the Company since
May 1996 and has been a director of the Company since September 1995. He was an
Executive Vice President of Merck from January 1993 until his retirement in
January 1995. During 1994, Mr. Jackson had responsibility for Merck's
International Human Health, Vaccines, AgVet and Astra/Merck U.S. divisions and
for worldwide marketing. In 1993, he also served as President of the Merck Human
Health Division and from February 1986 to December 1992, Mr. Jackson was Senior
Vice President at Merck. Mr. Jackson also serves as a director of Cor
Therapeutics, Inc. and SunPharm Corporation.
PHILIPPE CHAMBON, M.D., PH.D. has been a director of the Company since
November 1995. Dr. Chambon has been Vice President of Sprout Group ("Sprout"), a
venture capital firm, since May 1995. From May 1993 to April 1995, Dr. Chambon
served as a Manager in the Healthcare Practice of The Boston Consulting Group, a
management consulting firm. Dr. Chambon was an executive with Sandoz
Pharmaceuticals Corp., a leading pharmaceutical company, from September 1987 to
April 1993, most recently serving as the Executive Director of New Product
Management.
FRANK L. DOUGLAS, M.D., PH.D. has been a director of the Company since
September 1995. Dr. Douglas is Global Head of Research for Hoechst Marion
Roussel, Inc. since 1995. Prior to its acquisition by Hoechst Marion Roussel,
Dr. Douglas was Executive Vice President of the Research and Development
Division and served as a director at Marion Merrell Dow, Inc. from 1992 to 1995.
In 1992, he was also an Adjunct Professor of Medicine and Pharmacology at the
University of Kansas. In 1991, Dr. Douglas was a Vice President and Partner of
the Biocine Company, a joint venture between Ciba-Geigy and Chiron. From 1988 to
1991, he was Senior Vice President and Director of Research for Ciba-Geigy
Pharmaceutical Corp.
RICHARD W. HUNT, C.P.A. has been a director of the Company since November
1995. Mr. Hunt has been Vice President and Chief Financial Officer of Clintec
International Inc., a joint venture of Baxter International Inc., a worldwide
developer and manufacturer of health care products and systems, and Nestle in
the development of clinical nutrition products, since January 1995. From January
1982 to January 1995, Mr. Hunt held various positions with Baxter International
Inc., most recently as Vice President, Controller. From November 1978 to January
1982, Mr. Hunt served in various senior level financial positions with Searle
Pharmaceuticals, Inc.
WILLIAM C. MILLS III has been a director of the Company since April 1994
and was Chairman of the Board from April 1994 to May 1996. He served as interim
Chief Executive Officer of the Company from April 1994 to November 1994. Since
1988, Mr. Mills has been a General Partner of The Venture Capital Fund of New
England ("VCFNE"), a venture capital firm. From 1981 until 1988, he served as a
Managing General Partner and General Partner at PaineWebber Ventures/Ampersand,
a venture capital firm. Mr. Mills also serves as a director of Cytogen
Corporation, where he served as Chairman of the Board from January 1995 to May
1996.
GERARD MOUFFLET has been a director of the Company since April 1994. Since
1989, Mr. Moufflet has been Senior Vice President in charge of the medical
sector for Advent International Corporation ("Advent"), a private equity
investment firm. Mr. Moufflet has served in a number of senior management,
financial and marketing positions at Baxter for the previous 17 years. He also
serves as a director of Curative Health Services, Inc.
Certain of the current directors of the Company were nominated and elected
in accordance with a stockholder's voting agreement. This agreement will
terminate upon the consummation of the Offering. See "Certain Transactions."
Each officer serves at the discretion of the Board of Directors. There are no
family relationships among any of the directors or executive officers of the
Company.
CLASSIFIED BOARD OF DIRECTORS
The Company's Restated Certificate of Incorporation will be amended upon
the closing of the Offering to provide for a classified Board of Directors
consisting of three classes, as nearly equal in
36
<PAGE> 38
number as possible, with the directors in each class serving staggered
three-year terms. The Class I directors are Mr. Mills and Drs. Chambon and
Douglas; the Class II directors are Messrs. Moufflet and Hunt; and the Class III
directors are Dr. Gomez and Mr. Jackson. The terms of the Class I, Class II and
Class III Directors will expire initially in 1997, 1998 and 1999, respectively.
At each annual meeting of the stockholders of the Company, the successors to the
class of directors whose term expires at such meeting will be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election. See "Description of Capital
Stock -- Delaware Anti-Takeover Law and Certain Charter and By-Law Provisions."
BOARD COMMITTEES
The Board of Directors has a Compensation Committee which has
responsibility for reviewing the performance of the officers of the Company,
making recommendations to the Board concerning salaries and incentive
compensation for such officers and administering the Company's Amended and
Restated 1994 Equity Incentive Plan. The Compensation Committee consists of
Messrs. Moufflet and Jackson and Dr. Chambon.
The Board of Directors also has an Audit Committee which has responsibility
for reviewing the Company's financial statements and significant audit and
accounting practices with the Company's independent auditors and making
recommendations to the Board of Directors with respect thereto. The Audit
Committee consists of Messrs. Mills and Hunt and Dr. Douglas.
BOARD COMPENSATION
The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors are
reimbursed for certain expenses in connection with attendance at Board of
Directors and committee meetings. Two of the Company's non-employee directors,
Dr. Douglas and Mr. Jackson, were each granted stock options to purchase 8,000
shares of Common Stock in 1996 with an exercise price of $.50 per share in
connection with their service on the Board of Directors. Each option vests 50
percent on the first anniversary of the date of grant, and the remainder of each
option vests monthly over the following year. The options terminate upon the
earlier of the tenth anniversary of the date of grant or the termination of the
director's service on the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Company's Compensation Committee are Messrs.
Jackson and Moufflet and Dr. Chambon, none of whom is an employee of the
Company.
SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board, whose members
review the Company's research, development and clinical activities and are
available for consultation with the Company's management and scientific staff
relating to their respective areas of expertise. Dr. Whalen, Senior Vice
President and Chief Scientific Officer of the Company, is Chairman of the
Company's Scientific Advisory Board. The other members of the Company's
Scientific Advisory Board and their primary academic or professional
affiliations are listed below:
GORDON R. BERNARD, M.D. chairs the Steering Committee for the National
Institutes of Health ("NIH") ARDS Clinical Trials, and is currently a Professor
of Medicine at the Vanderbilt University School of Medicine. In addition, Dr.
Bernard has served as principal investigator for clinical trials of
glutathione-repleting agents in ARDS.
NORMAN K. HOLLENBERG, M.D., PH.D. is a Professor of Medicine at Harvard
Medical School and the Brigham and Women's Hospital. Dr. Hollenberg's research
interests include renal perfusion and function, and the genetic underpinnings of
hypertension and renal injury.
37
<PAGE> 39
JOHN E. REPINE, M.D. is the Director of the Webb-Waring Institute for
Biomedical Research, and Professor of Medicine and Associate Dean for Student
Affairs at the University of Colorado Health Sciences Center. Dr. Repine has a
distinguished research record on oxidative stress and disease pathology.
ROBERT T. SCHOOLEY, M.D. is Professor of Medicine and Head of the
Infectious Disease Division at the University of Colorado Health Services
Center. His research includes work on AIDS, immunology, and infectious diseases.
Dr. Schooley served as Chair of numerous groups at the NIH, including the Core
Immunology Committee of the AIDS Clinical Trials Group.
STEVEN R. TANNENBAUM, PH.D. is a Professor of Chemistry and Toxicology at
the Massachusetts Institute of Technology. Dr. Tannenbaum's research efforts
include the chemistry of free radicals in biological systems, and leading work
on N-nitroso compounds and other environmental carcinogens and mutagens.
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended December 31, 1995
the compensation for services rendered to the Company in all capacities with
respect to its Chief Executive Officer and each of its other executive officers
whose cash compensation in 1995 exceeded $100,000 (the Chief Executive Officer
and such other executive officers are hereinafter referred to as the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------
ANNUAL COMPENSATION NUMBER OF SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- -------------------------------- --------- -------- -------------------- ---------------
<S> <C> <C> <C> <C>
Hector J. Gomez, M.D., Ph.D..... $230,000 $20,000 -- $ 1,755(1)
President and Chief
Executive Officer
John J. Whalen, M.D.(2)......... 34,792 30,000 28,000 5,000(3)
Senior Vice President and
Chief Scientific Officer
B. Nicholas Harvey.............. 118,346 20,000 10,000 --
Vice President, Finance
and Chief Financial Officer
</TABLE>
- ---------------
(1) Consists of premiums paid by the Company on a term life insurance policy on
behalf of Dr. Gomez.
(2) Dr. Whalen joined the Company in September 1995. Dr. Whalen's estimated base
salary for fiscal year 1996 is $160,000.
(3) Consists of relocation expenses reimbursed by the Company.
38
<PAGE> 40
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options to the Named Executive Officers during the fiscal year ended December
31, 1995.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM($)(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SHARE)(2) DATE 5% 10%
- ----------------------------- ---------- -------------- -------------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Hector J. Gomez, M.D.,
Ph.D....................... -- --% $ -- -- $ -- $ --
John J. Whalen, M.D.......... 28,000 41 .50 9/12/05 8,400 22,400
B. Nicholas Harvey, LL.B..... 10,000 16 .50 2/9/05 3,000 8,000
</TABLE>
- ---------------
(1) Based on options to purchase 68,600 shares of Common Stock granted to
employees in fiscal 1995.
(2) All options were granted at an exercise price equal to the fair market value
of the Common Stock on the date of grant, as determined by the Board of
Directors.
(3) The potential realizable value is based on the term of the option at its
time of grant (ten years). It is calculated by assuming that the stock price
on the date of grant appreciates at the indicated annual rate, compounded
annually for the entire term of the option, and that the option is exercised
and sold on the last day of its term for the appreciated stock price. Actual
gains, if any, on stock option exercises will depend on the future
performance of the Common Stock and the date at which the options are
exercised.
FISCAL YEAR END OPTION VALUES
The following table contains information concerning the value of
unexercised options for each of the Named Executive Officers, as of December 31,
1995. No options were exercised by the Named Executive Officers during fiscal
year ended December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL
YEAR END(1)
-------------------------
NAME EXERCISABLE/UNEXERCISABLE
- ---------------------------------------------------------------------- -------------------------
<S> <C>
Hector J. Gomez, M.D., Ph.D........................................... 29,794/80,206
John J. Whalen, M.D. ................................................. 0/28,000
B. Nicholas Harvey, LL.B.............................................. 17,186/12,389
</TABLE>
- ---------------
(1) The fair market value of the Common Stock as of December 31, 1995 was equal
to the exercise price of $.50.
EMPLOYMENT AGREEMENTS
On November 29, 1994, the Company entered into an employment agreement with
Dr. Gomez, which provides for an annual base salary of $230,000, subject to
increase upon annual review. Under the agreement, Dr. Gomez received an option
to purchase 110,000 shares of Common Stock at an exercise price of $.50 per
share. Such option vests monthly over four years and terminates on November 28,
2004. Upon termination of employment by the Company other than for cause (as
defined in the agreement), the Company will pay Dr. Gomez his then current
salary, less any consulting income earned by Dr. Gomez, until the earlier of six
months from the date of such termination or the date upon which Dr. Gomez
secures other employment. The agreement provides that, for a period of twelve
months following termination of employment for any reason, Dr. Gomez will not
engage, directly or indirectly, in activities which compete with those of the
Company.
AMENDED AND RESTATED 1994 EQUITY INCENTIVE PLAN
The Company's 1994 Equity Incentive Plan was initially adopted by the Board
of Directors and approved by the stockholders in April 1994. The Amended and
Restated 1994 Plan (the "1994 Equity
39
<PAGE> 41
Incentive Plan") was adopted by the Board of Directors and approved by the
stockholders in August 1996. Under the terms of the 1994 Equity Incentive Plan,
the Company is authorized to make awards of restricted stock and to grant
incentive stock options and non-statutory stock options to employees (including
officers and employee directors) and directors of, and consultants and advisors
to, the Company to purchase shares of the Common Stock of the Company. A total
of 379,721 shares of Common Stock have been reserved for issuance upon exercise
of outstanding options granted under the 1994 Equity Incentive Plan. An
additional 471,639 shares of Common Stock have been reserved for future options
or awards under the 1994 Equity Incentive Plan.
Stock option grants under the 1994 Equity Incentive Plan entitle the
optionee to purchase Common Stock from the Company, for a specified exercise
price, during the periods specified in the applicable option agreement. The
Compensation Committee of the Board of Directors will select the persons to whom
options are granted, and determine the number of shares covered by each option,
its exercise price, its vesting schedule and its expiration date. Options are
generally not assignable or transferable except by will or the laws of descent
and distribution.
Restricted stock awards under the 1994 Equity Incentive Plan entitle the
recipient to purchase Common Stock from the Company under terms which provide
for vesting over a period of time and a right of repurchase of unvested stock
when the recipient's relationship with the Company terminates. The Compensation
Committee of the Board of Directors will select the recipients of restricted
stock awards, determine the times at which restricted stock awards are made, and
determine the number of shares of Common Stock subject to the award, the
purchase price (which can be less than the fair market value of the Common
Stock) and the vesting schedule for such shares. The recipients may not sell,
transfer or otherwise dispose of shares subject to a restricted stock award
until such shares are vested. Upon termination of the recipient's relationship
with the Company, the Company will be entitled to repurchase those shares which
are not vested on the termination date at a price equal to their original
purchase price.
As of August 20, 1996, the Company had 13 employees, all of whom were
eligible to participate in the 1994 Equity Incentive Plan. The number of
individuals receiving stock options varies from year to year depending on
various factors, such as the number of promotions and the Company's hiring needs
during the year.
The Compensation Committee may, in its sole discretion, include additional
provisions in any option or award granted or made under the 1994 Equity
Incentive Plan, including without limitation restrictions on transfer,
repurchase rights, commitments to pay cash bonuses, to make, arrange for or
guaranty loans or to transfer other property to optionees upon exercise of
options, or such other provisions as shall be determined by the Compensation
Committee, provided they are not inconsistent with the 1994 Equity Incentive
Plan and applicable law. The Compensation Committee may also, in its sole
discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the 1994 Equity Incentive Plan may be
exercised.
CERTAIN TRANSACTIONS
On April 5, 1994, the Company acquired the Glutathione Technology from
Clintec, in exchange for 680,000 shares of Common Stock and 9,000 shares of the
Company's Nonconvertible Redeemable Preferred Stock. Richard W. Hunt, a director
of the Company, is Vice President and Chief Financial Officer of Clintec
International Inc., a subsidiary of Clintec. Concurrently, the Company entered
into a license agreement with Cornell related to the Glutathione Technology in
return for 35,028 shares of Common Stock, payment of minimum royalties and a
three-year research agreement with Cornell Medical College providing for the
payment of $133,000 per year ending in July 1997. On October 4, 1995, Cornell
agreed to return to the Company 7,026 shares of Common Stock in settlement of a
dispute related to the abandonment by Cornell of a patent application in Japan.
See "Business -- Technology and License Agreements."
40
<PAGE> 42
In connection with the organization of the Company in December 1992, the
Company's two founding scientists from Clintec, Dr. Gary Pace and Dr. Dennis
Goldberg, purchased from the Company 100 shares of Common Stock at a price of
$.05 per share. On April 5, 1994, upon the Company's acquisition of the
Glutathione Technology from Clintec, the previously issued and outstanding
shares of Common Stock held by Dr. Pace and Dr. Goldberg were exchanged for
44,109 shares of Common Stock, effected in the form of a stock dividend.
Also on April 5, 1994, the Company issued and sold an aggregate of
6,500,000 shares of Series A Convertible Preferred Stock at a price of $1.00 per
share in a private placement to certain institutional investors, including
3,500,000 shares to entities affiliated with Advent, 1,000,000 shares to
entities affiliated with Sprout, 1,000,000 shares to VCFNE, 500,000 shares to
Baxter and 500,000 shares to an entity affiliated with Nestle (the "1994
Financing"). Gerard Moufflet, a director of the Company, is a Senior Vice
President of Advent. Philippe Chambon, M.D., Ph.D., a director of the Company,
is a Vice President of Sprout. William C. Mills III, a director of the Company,
is a General Partner of FH & Co. III, L.P., the General Partner of VCFNE. The
Company concurrently issued warrants (the "Series A Warrants") to purchase an
aggregate of 1,625,000 shares of Series A Convertible Preferred Stock to the
same investors at an exercise price of $1.00 per share (including warrants to
purchase 875,000 shares to entities affiliated with Advent, 250,000 shares to
entities affiliated with Sprout, 250,000 shares to VCFNE, 125,000 shares to
Baxter and 125,000 shares to an entity affiliated with Nestle). In accordance
with the terms of such warrants, on September 13, 1995, Series A Warrants for an
aggregate of 250,000 shares of Series A Convertible Preferred Stock were
cancelled. In connection with the August 1996 Financing, the Series A Warrants
will be exercised pursuant to a net exercise provision resulting in the issuance
of an aggregate of 789,894 shares of Series A Convertible Preferred Stock
(including 502,659 shares to Advent, 143,617 shares to Sprout and 143,617 shares
to VCFNE.
In connection with the 1994 Financing, the Company entered into a
Stockholders' Agreement with its stockholders, which was amended and restated on
September 13, 1995 and further amended on May 31, 1996 (as so amended, the
"Stockholders' Agreement"). Each party to the Stockholders' Agreement has agreed
to vote all shares over which such party exercises control to elect as directors
of the Company: (i) one representative designated by VCFNE; (ii) one
representative designated by Advent; (iii) one representative designated by
Sprout; (iv) one representative designated by Clintec; and (v) the Chief
Executive Officer of the Company. Messrs. Mills, Moufflet and Hunt and Dr.
Chambon currently serve as the designees of VCFNE, Advent, Clintec and Sprout,
respectively. The Stockholders' Agreement will terminate upon the consummation
of the Offering.
Also in connection with the 1994 Financing, the Company became a party to a
Right of First Refusal Agreement and a Right of First Refusal and Co-sale
Agreement (collectively, the "Right of First Refusal Agreements") with certain
stockholders of the Company (the "Holders"). The Right of First Refusal
Agreements provide each of the Holders with a right of first refusal with
respect to securities issued by the Company, a right of first refusal with
respect to any proposed transfer of shares by another Holder and a right to
participate in any proposed transfer of shares by any other Holder. The Right of
First Refusal Agreements will terminate upon the consummation of the Offering.
In addition, in connection with the 1994 Financing, the Company agreed to
register in certain circumstances shares of its capital stock held by certain
investors. See "Description of Capital Stock -- Registration Rights."
On September 13, 1995, the Company sold Series A Notes in the aggregate
principal amount of $2.0 million to certain institutional investors, including
notes in the aggregate principal amount of $1.3 million to entities affiliated
with Advent, $363,000 to entities affiliated with Sprout and $364,000 to VCFNE.
The Series A Notes bear interest at 30 percent per annum, payable in every four
months in the form of shares of Series A Convertible Preferred Stock (at one
share per $1.00 of interest due and payable). The Series A Notes mature on
January 15, 1997, and are convertible into shares of Series A Convertible
Preferred Stock (at one share per $1.00 of principal outstanding) upon the
closing of a private financing resulting in gross proceeds to the Company of
$2.0 million or more. The Company has issued an aggregate of 397,806 shares of
Series A Convertible Preferred Stock in lieu of interest on the Series A Notes
to the holders thereof and at the closing of the 1996 Financing, the Company
will
41
<PAGE> 43
issue 98,631 shares of Series A Convertible Preferred Stock in full payment of
accrued and unpaid interest through the closing date (including 62,765 shares to
entities affiliated with Advent, 17,933 shares to entities affiliated with
Sprout and 17,933 shares to VCFNE). The Series A Notes will convert into an
aggregate of 2,000,000 shares of Series A Convertible Preferred Stock upon the
closing of the August 1996 Financing (including 1,272 shares to entities
affiliated with Advent, 363,000 shares to entities affiliated with Sprout and
364,000 shares to VCFNE).
In January 1996, the Company issued an aggregate of 130,000 shares of
Series A Convertible Preferred Stock to two of its directors, Dr. Douglas and
Mr. Jackson, and one former director of the Company. Such shares were issued (at
$1.00 per share) for an aggregate of $130,000.
On May 29, 1996, the Company issued Series B Notes in the aggregate
principal amount of $1.0 million to certain institutional investors, including
notes in the aggregate principal amount of $636,363 to entities affiliated with
Advent, $181,818 to entities affiliated with Sprout and $181,818 to VCFNE. These
Series B Notes were issued pursuant to the exercise of an option granted under
the Series A Notes. The Series B Notes bear interest at 30 percent per annum,
payable every four months in the form of Series B Convertible Preferred Stock
(at one share per $1.50 of interest due and payable). The Series B Notes mature
on January 15, 1997, and are convertible into shares of Series B Convertible
Preferred Stock (at one share per $1.50 of principal) upon the closing of a
private financing of $1.0 million. In addition, at the closing of the 1996
Financing, the Company will issue 24,109 shares of Series B Convertible
Preferred Stock in full payment of accrued and unpaid interest on the Series B
Notes through the closing date (including 15,342 shares to entities affiliated
with Advent, 4,383 shares to entities affiliated with Sprout and 4,384 shares to
entities affiliated with VCFNE). The Series B Notes will convert into an
aggregate of 666,666 shares of Series B Convertible Preferred Stock upon the
closing of the August 1996 Financing (including 424,242 shares to entities
affiliated with Advent, 121,212 shares to entities affiliated with Sprout and
121,212 shares to VCFNE).
Pursuant to the Nonconvertible Preferred Stock Exchange, which is expected
to close on or about August 30, 1996, the Company has agreed to issue 3,404,255
shares of Series C Convertible Preferred Stock to Clintec in exchange for all of
the outstanding shares of Nonconvertible Redeemable Preferred Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Pursuant to the August 1996 Financing, which is expected to close on or
about August 30, 1996, the Company has agreed to issue and sell an aggregate of
851,064 shares of Series C Convertible Preferred Stock (including 150,205 shares
to the Advent Group, 42,953 shares to VCFNE and 19,342 shares to Sprout Group)
at a price of $2.35 per share ($11.75 per share on a post-split common stock
equivalent basis). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
42
<PAGE> 44
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company on a pro forma basis (as described
below) as of August 20, 1996, and on a pro forma basis as adjusted to reflect
the sale of the shares of Common Stock offered hereby, by (i) each person or
entity known to the Company to own beneficially more than 5% of the Company's
Common Stock; (ii) each of the Company's directors; (iii) each of the Named
Executive Officers; and (iv) all directors and executive officers as a group.
The number of shares beneficially owned is presented on a pro forma basis to
give effect to the following transactions as if they had occurred as of August
20, 1996: (i) the sale of shares of Series C Convertible Preferred Stock in the
August 1996 Financing; (ii) the Nonconvertible Preferred Stock Exchange; (iii)
the conversion of Series A Notes and Series B Notes; and (iv) the exercise of
the Series A Convertible Preferred Stock Warrants. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE OF
PRO FORMA SHARES
NUMBER OF OUTSTANDING(2)(3)
SHARES ---------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- ------------------------------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
5% STOCKHOLDERS
Baxter Healthcare Corporation(4)............................ 1,588,511 42.4% 27.6%
One Baxter Parkway
Deerfield, IL 60015
Clintec Nutrition Company................................... 1,360,851 36.3 23.7
800 North Brand Boulevard
Glendale, CA 91203
Advent Group(5)............................................. 1,234,323 32.9 21.5
101 Federal Street
Boston, MA 02110
The Venture Capital Fund of New England III, L.P............ 353,218 9.4 6.1
160 Federal Street, 23rd Floor
Boston, MA 02110
Sprout Capital VI, L.P.(6).................................. 348,490 9.3 6.1
140 Broadway
New York, NY 10005-1295
DIRECTORS
Jerry T. Jackson............................................ 10,000 * *
Philippe Chambon, M.D., Ph.D.(6)............................ 348,490 9.3 6.1
Frank L. Douglas, M.D., Ph.D................................ 10,000 * *
Richard W. Hunt(7).......................................... 1,360,851 36.3 23.7
William C. Mills III(8)..................................... 353,218 9.4 6.1
Gerard M. Moufflet(5)....................................... 1,234,323 32.9 21.5
NAMED EXECUTIVE OFFICERS
Hector J. Gomez, M.D., Ph.D.(9)............................. 50,418 1.3 1.0
John J. Whalen, M.D.(10).................................... 7,588 * *
B. Nicholas Harvey(11)...................................... 22,730 1.0 *
All directors and executive officers as a group
(nine persons)(5)(6)(7)(8)(9)(10)(11)..................... 3,397,619 88.7 58.2
</TABLE>
- ---------------
*Less than 1%
(1) Unless otherwise indicated, the address for each beneficial owner is c/o
the Company, 640 Memorial Drive, Cambridge, Massachusetts 02139.
43
<PAGE> 45
(2) The inclusion herein of any shares of Common Stock as beneficially owned
does not constitute an admission of beneficial ownership of those shares.
Unless otherwise indicated, each person listed above has sole investment
and voting power with respect to the shares listed. In accordance with the
rules of the Securities and Exchange Commission, each person is deemed to
beneficially own any shares issuable upon exercise of stock options held by
such person that are currently exercisable or that become exercisable
within 60 days after August 20, 1996, and any reference in these footnotes
to shares subject to stock options held by the person in question refers
only to such shares.
(3) The number of shares deemed outstanding for purposes of calculating these
percentages is comprised of the shares outstanding as of August 20,
1996, plus any shares subject to stock options held by the person in
question.
(4) Includes 1,360,851 shares held by Clintec, a joint venture between Baxter
and Nestle SA.
(5) Represents 791,981 shares held by Global Private Equity II Limited
Partnership, 318,983 shares held by Rovent II Limited Partnership, 119,827
shares held by Advent Performance Materials Limited Partnership and 3,532
shares held by Advent International II Limited Partnership. Includes
1,234,323 shares held by members of the Advent Group. Mr. Moufflet is a
Senior Vice President of Advent International Corporation, which is a
general partner of Advent International Investors II Limited Partnership
and of Advent International Limited Partnership, the general partner of
each of the other members of the Advent Group.
(6) Includes 300,848 shares held by Sprout Capital VI, L.P. and 47,642 shares
held by DLJ Capital Corporation. DLJ Capital Corporation is the managing
general partner of Sprout Capital VI, L.P. Dr. Chambon is Vice President of
Sprout Group.
(7) Represents 1,360,851 shares held by Clintec. Mr. Hunt is Vice President and
Chief Financial Officer of Clintec International Corporation, a subsidiary
of Clintec.
(8) Includes 353,218 shares held by the VCFNE. Mr. Mills is a general partner
of FH & Co. III, L.P., a general partner of the VCFNE.
(9) Represents shares subject to a stock option held by Dr. Gomez.
(10) Represents shares subject to a stock option held by Dr. Whalen.
(11) Represents an aggregate of shares subject to stock options held by Mr.
Harvey.
44
<PAGE> 46
DESCRIPTION OF CAPITAL STOCK
The Company's current Restated Certificate of Incorporation (the
"Certificate of Incorporation"), authorizes 41,000,000 shares of capital stock,
consisting of 25,000,000 shares of Common Stock, $.01 par value, and 16,000,000
shares of Preferred Stock, $.01 par value. In connection with the Offering, the
Company's Certificate of Incorporation will be amended and restated (the
"Restated Certificate of Incorporation"). Upon completion of the Offering, the
Restated Certificate of Incorporation will authorize the issuance of 30,000,000
shares of capital stock, consisting of 25,000,000 shares of Common Stock, par
value $.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01
per share. Set forth below is a description of the capital stock of the Company.
COMMON STOCK
As of August 20, 1996, assuming the conversion all outstanding shares of
Preferred Stock into Common Stock, there were 3,749,126 shares of Common Stock
issued and outstanding held of record by 21 stockholders and 249,520 shares of
Common Stock issuable upon the exercise of outstanding stock options.
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders and are not entitled to cumulative
voting rights with respect to the election of directors. Accordingly, holders of
a majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor,
subject to preferences that may be applicable to any outstanding Preferred
Stock. In the event of liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all net assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption, conversion or other subscription rights, and there are
no sinking fund provisions applicable to the Common Stock. All currently
outstanding shares of Common Stock are, and the shares of Common Stock being
issued and sold in the Offering will be, duly authorized, validly issued, fully
paid and nonassessable.
SERIES CONVERTIBLE PREFERRED STOCK
The Company currently has outstanding 7,027,806 shares of Series A
Convertible Preferred Stock and 666,666 shares of Series B Convertible Preferred
Stock, and has entered into an agreement with respect to the issuance of
4,255,319 shares of Series C Convertible Preferred Stock, $.01 par value per
share (respectively, the "Series A Preferred Stock," "Series B Preferred Stock"
and "Series C Preferred Stock"). See "Certain Transactions." After giving effect
to the one-for-five reverse stock split to be effected prior to the closing of
the Offering, each share of Convertible Preferred Stock will automatically
convert, into one-fifth of a share of Common Stock upon closing of the Offering.
Following completion of the Offering and the conversion of all of the
outstanding shares of Preferred Stock, the Board of Directors will have the
authority to issue from time to time up to 5,000,000 shares of Preferred Stock
in one or more series and to fix the powers, designations, preferences and
relative, participating, optional or other rights thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares constituting each such series, without any
further vote or action by the Company's stockholders. The issuance of Preferred
Stock could adversely affect the rights of holders of Common Stock and could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plans to issue any of these shares of
Preferred Stock.
NONCONVERTIBLE PREFERRED STOCK
The Company has outstanding 9,000 shares of Nonconvertible Redeemable
Preferred Stock, $.01 par value per share (the "Nonconvertible Preferred
Stock"). The shares of Nonconvertible Preferred
45
<PAGE> 47
Stock yield annual cumulative dividends of $70 per share, whether or not
declared. Upon liquidation, dissolution or winding up of the Company, holders of
Nonconvertible Preferred Stock are entitled to receive an amount equal to $1,000
per share prior to amounts being paid to holders of Common Stock, but after
appropriate amounts are set aside and paid to the holders of Series A, Series B
and Series C Preferred Stock. The Nonconvertible Preferred Stock is redeemable
at a price equal to $1,000 per share, plus accrued and unpaid dividends, at the
option of the Company at any time and at the option of the holders in the event
of transfers aggregating more than 50 percent of the Company's Series A
Preferred Stock to persons who are not stockholders of the Company, the original
holders of Series A Preferred Stock or Clintec or affiliates. Except as required
by law, the Nonconvertible Preferred Stock has no voting rights. Pursuant to the
Nonconvertible Preferred Stock Exchange in August 1996, the Company and Clintec
entered into an agreement to exchange all of the outstanding shares of
Nonconvertible Preferred Stock for 3,404,255 shares of Series C Preferred Stock
of the Company. The closing is expected to occur on or about August 30, 1996.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
SENIOR SECURED CONVERTIBLE NOTES
The Company has issued $2.0 million in aggregate principal amount of Series
A Notes. The Series A Notes bear interest at 30 percent per annum, are
convertible into shares of Series A Preferred Stock at a price of $1.00 per
share and will automatically convert upon the closing of one or more private
financings resulting in gross proceeds to the Company of $2.0 million or more.
Interest on the Series A Notes is payable in shares of Series A Preferred Stock
at a rate equal to one share of Series A Preferred Stock for each $1.00 of
interest.
The Company has also issued $1.0 million in aggregate principal amount of
Series B Notes. The Series B Notes bear interest at 30 percent per annum, are
convertible into shares of Series B Preferred Stock at a price of $1.50 per
share and will automatically convert upon the closing of one or more private
financings resulting in gross proceeds to the Company of $1.0 million or more.
Interest on the Series B Notes shall be paid in shares of Series B Preferred
Stock at a rate equal to one share of Series B Preferred Stock for each $1.50 of
interest.
The Series A Notes and the Series B Notes, including principal and interest
thereon, will automatically convert into an aggregate of 2,098,631 shares of
Series A Preferred Stock and 690,775 shares of Series B Preferred Stock,
respectively, upon the closing of the August 1996 Financing. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
WARRANTS
Upon the issuance of shares of Series A Preferred Stock in April 1994, the
Company also issued the Series A Warrants to purchase an aggregate of 1,625,000
shares of Series A Preferred Stock at a price of $1.00 per share. Series A
Warrants to purchase an aggregate of 250,000 shares of Series A Preferred Stock
were cancelled in September 1995. The remaining Series A Warrants will be
exercised pursuant to a net exercise provision for an aggregate of 789,893
shares of Series A Preferred Stock upon the closing of the August 1996
Financing. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
In connection with the execution of a lease of real property from the
Massachusetts Institute of Technology ("MIT") in October 1994, the Company
issued a warrant to MIT to purchase 5,000 shares of Common Stock at a price of
$5.00 per share. This warrant expires on October 28, 1999.
REGISTRATION RIGHTS
At the completion of the Offering, certain stockholders of the Company (the
"Rightsholders") will be entitled to certain rights with respect to the
registration under the Securities Act of a total of 3,652,486 shares of Common
Stock (the "Registrable Shares") pursuant to the terms of an agreement
46
<PAGE> 48
among the Company and the Rightsholders (the "Registration Rights Agreement").
Under the Registration Rights Agreement beginning 6 months after the effective
date of the Company's registration statement relating to the Offering, on not
more than one occasion and subject to certain limitations, the Company is
required to use its best efforts to file a registration statement under the
Securities Act if requested by the holders of (i) 35 percent of the outstanding
shares of Preferred Stock held by Rightsholders immediately prior to the
Offering (the "Preferred Rightsholders"); or (ii) 35 percent of the outstanding
shares of Common Stock held by Rightsholders immediately prior to the Offering
(the "Common Rightsholders"). In addition, at any time after the Company becomes
eligible to use Form S-3, or not more than one occasion, the Company is required
to use its best efforts to file a registration statement on Form S-3 if
requested by (i) 35 percent of the Preferred Rightsholders or (ii) 35 percent of
the Common Rightsholders. The Registration Rights Agreement also provides that
in the event the Company proposes to file a registration statement under the
Securities Act with respect to an offering by the Company, the Rightsholders
shall be entitled to include Registrable Shares in such registration, subject to
the right of the managing underwriter of any such offering to exclude some or
all of such Registrable Shares from such registration if and to the extent that
inclusion of such Shares would adversely affect the marketing of the shares to
be sold by the Company. In such event, the amount of Registrable Shares to be
offered for the accounts of the Rightsholders shall be reduced pro rata among
all of the requesting Rightsholders based upon the number of shares requested to
be included in such registration by all requesting Rightsholders. The Company is
required to bear the expenses of the first registration requested by Preferred
Rightsholders and the first registration requested by Common Rightsholders,
except underwriting discounts and commissions and fees of more than one counsel
to the Rightsholders. The Rightsholders are subject to certain lock-up
agreements. See "Shares Eligible For Future Sale."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15 percent or more of the
corporation's voting stock.
The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms. See "Management." In addition, the Restated
Certificate of Incorporation provides that directors may be removed only for
cause by the affirmative vote of the holders of two-thirds of the shares of
capital stock of the corporation entitled to vote. Under the Restated
Certificate of Incorporation, any vacancy on the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
only be filled by vote of a majority of the directors then in office. The
classification of the Board of Directors and the limitations on the removal of
directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Restated Certification of Incorporation also provides that after the
closing of the Offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting and
may not be taken by written action in lieu of a meeting. The Restated
Certificate of Incorporation further provides that special meetings of the
stockholders may only be called by the Chairman of the Board of Directors, the
Chief Executive Officer or, if none, the President of the Company or by the
Board of Directors. Under the Company's Amended and Restated By-Laws (the
"By-Laws"), in order for any matter to be considered "properly brought" before a
meeting, a stockholder must comply with
47
<PAGE> 49
certain requirements regarding advance notice to the Company. The foregoing
provisions could have the effect of delaying until the next stockholders meeting
stockholder actions which are favored by the holders of a majority of the
outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Company's
Common Stock, because such person or entity, even if it acquired a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only at
a duly called stockholders meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Restated Certificate of Incorporation and
the By-Laws require the affirmative vote of the holders of at least 66 2/3
percent of the shares of capital stock of the Company issued and outstanding and
entitled to vote to amend or repeal any of the provisions described in the prior
two paragraphs.
The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. Further, the Restated Certificate of Incorporation contains provisions to
indemnify the Company's directors and officers to the fullest extent permitted
by the General Corporation Law of Delaware. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock
is .
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for the Common
Stock and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after the Offering. Sales of
substantial amounts of Common Stock in the public market after the Offering, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities. See "Risk Factors -- Shares
Eligible for Future Resale."
After the Offering, the Company will have outstanding 5,749,126 shares of
Common Stock (6,049,126 shares if the Underwriters' over-allotment option is
exercised in full). Of these shares, the 2,000,000 shares offered hereby will be
freely tradable in the public market without restriction under the Securities
Act, unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act.
The remaining 3,749,126 shares of Common Stock outstanding upon completion
of the Offering will be "restricted securities" as that term is defined in Rule
144 (the "Restricted Shares"). The Restricted Shares were issued and sold by the
Company in private transactions in reliance upon exemptions from registration
under the Securities Act. Restricted Shares may be sold in the public market
only if they are registered or if they qualify for an exemption from
registration under the Securities Act, including an exemption under Rule 144 or
701, which are summarized below.
Pursuant to "lock-up" agreements, all of the Company's executive officers
and directors and certain employees and stockholders of the Company, who
collectively hold 3,652,486 of such Restricted Shares, have agreed not to offer,
sell, or otherwise dispose of (i) any of their Restricted Shares for a period of
180 days from the date of this Prospectus (the "Initial Lock-Up Period"), and
(ii) in excess of 50 percent of such Restricted Shares for a period of 90 days
following such 180-day period (the
48
<PAGE> 50
"Secondary Lock-Up Period") without the prior written consent of Vector
Securities International, Inc. The Company has also agreed that it will not
offer, sell or otherwise dispose of Common Stock for a period of 180 days from
the date of this Prospectus, other than pursuant to existing stock option plans,
without the prior written consent of Vector Securities International, Inc. Upon
termination of each of the Initial Lock-Up Period and the Secondary Lock-Up
Period, approximately 1,409,415 of the Restricted Shares will be eligible for
immediate sale in the public market, subject to certain volume, manner of sale,
and other limitations under Rule 144. In addition, of the Restricted Shares not
subject to lock-up agreements, approximately 44,109 shares will be eligible for
immediate sale, without limitation under Rule 144(k), and approximately 52,531
of such Restricted Shares will be eligible for sale beginning 90 days after the
date of this Prospectus, subject to certain volume, manner of sale and other
limitations under Rule 144 and Rule 701.
Following the expiration of such lock-up periods, certain shares issued
upon exercise of options granted by the Company prior to the date of this
Prospectus will also be available for sale in the public market pursuant to Rule
701 under the Securities Act. Rule 701 permits resales of such shares in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirement, imposed under Rule 144. In general,
under Rule 144 as currently in effect, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares of the Company are aggregated) who
has beneficially owned Restricted Shares for at least two years (including the
holding period of any prior owner who is not an affiliate of the Company) would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (approximately 57,491 shares immediately after the Offering), or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a report on Form 144 with respect to such
sale. Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least three years
(including the holding period of any prior owner who is not an affiliate of the
Company) is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
The Securities and Exchange Commission has recently proposed amendments to
Rule 144 and Rule 144(k) that would permit resale of restricted shares under
Rule 144 after a one-year, rather than a two-year holding period, subject to
compliance with the other provisions of Rule 144, and would permit resale of
restricted shares by non-affiliates under Rule 144(k) after a two-year, rather
than a three-year holding period. Adoption of such amendments could result in
resale of Restricted Shares sooner than would be the case under Rule 144 and
Rule 144(k) as currently in effect.
As of August 20, 1996, options to purchase a total of 379,721 shares of
Common Stock were outstanding under the Company's 1994 Equity Incentive Plan. Of
such shares, an aggregate of approximately 293,575 shares are subject to lock-up
agreements as described above, and the remaining 86,146 shares will be available
for sale in the public market 90 days after the date of this Prospectus pursuant
to Rule 701. As of August 20, 1996, 471,639 shares were available for future
option grants under the 1994 Equity Incentive Plan.
The Company intends to file after the effective date of the Offering a
Registration Statement on Form S-8 to register an aggregate of 970,218 shares of
Common Stock reserved for issuance under the 1994 Equity Incentive Plan. Such
Registration Statement will become effective automatically upon filing. Shares
issued under the 1994 Equity Incentive Plan, after the filing of the
Registration Statement on Form S-8, may be sold in the open market, subject, in
the case of certain holders, to the Rule 144 limitations applicable to
affiliates, the above-referenced lock-up agreements and vesting restrictions
imposed by the Company.
At the completion of the Offering, certain stockholders will be entitled to
certain rights with respect to the registration of shares for resale under the
Securities Act. See "Description of Capital Stock."
49
<PAGE> 51
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters (the "Underwriters") named below, for whom Vector Securities
International, Inc. and Tucker Anthony Incorporated are acting as
representatives (the "Representatives"), have severally agreed to purchase,
subject to the terms and conditions of the Underwriting Agreement, and the
Company has agreed to sell to the Underwriters, the following respective number
of shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
----------------------------------------------------------------- ---------
<S> <C>
Vector Securities International, Inc.............................
Tucker Anthony Incorporated......................................
---------
Total....................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock to the public
at the offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow to selected dealers and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares of Common Stock, the offering
price and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period after the date of this Prospectus, to purchase up
to an additional 300,000 shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less underwriting
discounts and commissions. The Underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, in connection with the
Offering. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares listed in the table.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The executive officers, directors and certain employees of the Company and
other stockholders have agreed that they will not, without the prior written
consent of Vector Securities International, Inc., offer, sell or otherwise
dispose of (i) any shares of Common Stock, options or warrants to acquire shares
of Common Stock, or securities exchangeable for or convertible into shares of
Common Stock for a period of 180 days from the date of this Prospectus and (ii)
in excess of 50 percent of such Common Stock, options or exchangeable
securities, during the 90 days following such 180-day period. The Company has
agreed that it will not, without the prior written consent of Vector Securities
International, Inc., offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of any
50
<PAGE> 52
shares of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock for a
period of 180 days after the date of this Prospectus, except for securities
issued under its option plan. See "Shares Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the shares of Common
Stock included in the Offering will be determined by negotiations between the
Company and the Representatives. Among the factors considered in determining
such price will be the history of and prospects for the Company's business and
the industry in which it competes, an assessment of the Company's management and
the present state of the Company's development, its past and present operations
and financial performance, the prospects for future earnings of the Company, the
present state of the Company's research programs, the current state of the
economy in the United States and the current level of economic activity in the
industry in which the Company competes and in related or comparable industries,
and the current prevailing condition in the securities markets, including
current market valuations of publicly traded companies that are comparable to
the Company.
LEGAL MATTERS
Hale and Dorr, Boston, Massachusetts will pass upon the validity of the
shares of Common Stock offered by the Company hereby for the Company. Skadden,
Arps, Slate, Meagher & Flom, Chicago, Illinois, will pass upon certain legal
matters relating to the Offering for the Underwriters.
EXPERTS
The financial statements of Transcend Therapeutics, Inc. at December 31,
1994 and 1995, and for each of the three years in the period ended December 31,
1995 appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as stated in their report thereon
(which contains an explanatory paragraph with respect to the Company's ability
to continue as a going concern) appearing elsewhere herein and are included in
reliance upon such report, given upon the authority of such firm as experts in
accounting and auditing.
The statements in this Prospectus under the captions "Risk Factors --
Patents and Proprietary Rights; Third-Party Rights", "Business -- Patents and
Proprietary Rights" relating to United States patent matters have been reviewed
and approved by Pennie & Edmonds, New York, New York, patent counsel to the
Company, and have been included herein in reliance upon the review and approval
by such firm as experts in patent law.
ADDITIONAL INFORMATION
As a result of the Offering, the Company will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended, and in accordance therewith will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish to its stockholders annual
reports containing financial statements audited by an independent public
accounting firm and [will make available copies of] quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal year.
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (which term shall include all amendments, exhibits and
schedules thereto) on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission, to which Registration
Statement reference is hereby made. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
51
<PAGE> 53
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at N.W., Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. In addition, the Company is required to file
electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
52
<PAGE> 54
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors....................................................... F-2
Balance Sheets....................................................................... F-3
Statements of Operations............................................................. F-4
Statements of Cash Flows............................................................. F-5
Statements of Redeemable Preferred Stock and Stockholders' Deficit................... F-6
Notes to the Financial Statements.................................................... F-7
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Transcend Therapeutics, Inc.
We have audited the accompanying balance sheets of Transcend Therapeutics,
Inc. (a development stage company) as of December 31, 1994 and 1995, and the
related statements of operations, redeemable preferred stock and stockholders'
deficit, and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transcend Therapeutics, Inc.
(a development stage company) as of December 31, 1994 and 1995, and the results
of its operations and its cash flows each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 1, the Company is a development stage company that has
not and will not achieve revenues to support future operations without
additional financing. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are discussed in Note 1. The 1995 and 1994 financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
Boston, Massachusetts
January 18, 1996, except for Note 11
as to which the date is August 21, 1996
F-2
<PAGE> 56
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------- JUNE 30, PRO FORMA
1996 JUNE 30,
----------- 1996
(UNAUDITED) -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 3,461 $ 1,276 $ 546 $ 2,550
Prepaid expenses and other current assets................ 200 38 42 42
------- -------- -------- --------
Total current assets................................ 3,661 1,314 588 2,592
Property and equipment, net................................... 40 53 52 52
Other assets:
Patents and licenses, net................................ 501 444 417 417
Other assets............................................. 55 55 55 55
------- -------- -------- --------
Total assets........................................ $ 4,257 $ 1,866 $ 1,112 $ 3,116
======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses.................... $ 320 $ 404 $ 427 $ 427
Accounts payable to related party........................ 35
Interest payable to related party........................ 178 105 --
Notes payable to related party........................... 170
Senior secured convertible notes......................... -- -- 3,000 --
------- -------- -------- --------
Total current liabilities........................... 525 582 3,532 427
Senior secured convertible notes.............................. 2,000
Redeemable preferred stock:
Series A Redeemable Convertible Preferred Stock, $.01 par
value, 12,091,000 shares authorized, 6,500,000,
6,500,000, 7,027,806, and no shares issued and
outstanding, respectively (liquidation preference
$6,500,000 at December 31, 1995)....................... 6,500 6,500 7,028 --
Series B Redeemable Convertible Preferred Stock, $.01 par
value, 3,000,000 shares authorized at June 30, 1996, no
shares issued and outstanding
Redeemable Nonconvertible Preferred Stock, $.01 par
value, 9,000 shares authorized, 9,000, 9,000, 9,000 and
no shares issued and outstanding, respectively
(liquidation preference $9,472,500 at December 31,
1995).................................................. 1,600 3,081 3,822 --
Stockholders' equity (deficit):
Common Stock, $.01 par value, 5,000,000 shares
authorized, 759,135, 763,306, 768,641 and 3,749,126
shares issued and outstanding, respectively............ 8 8 8 37
Additional paid-in capital............................... 366 368 371 20,509
Accretion of dividend on Redeemable Nonconvertible
Preferred Stock........................................ (473) (1,103) (1,418) --
Accretion of liquidation preference on Redeemable
Nonconvertible Preferred Stock......................... (638) (1,489) (1,915) --
Deficit accumulated during the development stage......... (3,631) (8,081) (10,316) (17,857)
------- -------- -------- --------
Total stockholders' equity (deficit)................ (4,368) (10,297) (13,270) 2,689
------- -------- -------- --------
Total liabilities and stockholders' equity
(deficit)......................................... $ 4,257 $ 1,866 $ 1,112 $ 3,116
======= ======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 57
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 1
SIX MONTHS ENDED 1993 (DATE OF
YEAR ENDED DECEMBER 31, JUNE 30, INCEPTION)
---------------------------- -------------------------- TO JUNE 30,
1993 1994 1995 1995 1996 1996
------ ------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue..................... $6,095 $ -- $ -- $ -- $ -- $ 6,095
Operating expenses:
Research and
development.......... 4,498 2,627 2,739 1,116 941 10,805
General and
administrative....... 1,625 1,115 1,645 807 981 5,366
------ ------- ------- ------- ------- --------
Total operating expenses.... 6,123 3,742 4,384 1,923 1,922 16,171
Interest income............. 139 111 68 13 263
Interest expense............ (177) (325) (502)
------ ------- ------- ------- ------- --------
Net loss.................... (28) (3,603) (4,450) (1,855) (2,234) (10,315)
Accretion of dividends and
liquidation preference on
Redeemable Nonconvertible
Preferred Stock........... -- (1,111) (1,481) (741) (741) (3,333)
------ ------- ------- ------- ------- --------
Net loss to common
stockholders.............. $ (28) $(4,714) $(5,931) $(2,596) $(2,975) $ (13,648)
====== ======= ======= ======= ======= ========
Pro forma net loss per
common share.............. $ (1.55) $ (.68) $ (.78)
======= ======= =======
Pro forma weighted average
common shares
outstanding............... 3,833 3,831 3,833
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 58
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 1,
SIX MONTHS ENDED 1993 (DATE OF
YEAR ENDED DECEMBER 31, JUNE 30, INCEPTION)
-------------------------- -------------------------- TO JUNE 30,
1993 1994 1995 1995 1996 1996
---- ------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net loss........................ $(28) $(3,603) $(4,450) $(1,855) $(2,234) $ (10,315)
Adjustments to reconcile net
loss to cash provided by (used
in) operating activities:
Depreciation and
amortization............. 2 49 64 32 33 148
Loss on sale of property
and equipment............ -- -- 5 -- -- 5
Forgiveness of loan to
related party............ -- 304 -- -- -- 304
Change in operating assets
and liabilities:
Prepaid expenses and
other current
assets................ (7) (193) 162 193 (4) (42)
Other assets............. (4) (50) 3 -- -- (51)
Accounts payable and
accrued expenses...... 88 233 84 (233) 391 796
Accounts payable to
related party......... 48 (13) 143 -- (43) 135
---- ------- ------- ------- ------- --------
Net cash provided by (used in)
operating activities.......... 99 (3,273) (3,989) (1,863) (1,857) (9,020)
INVESTING ACTIVITIES:
Purchase of equipment and
improvements.................. (33) (18) (29) (1) (6) (86)
Proceeds from sale of
equipment..................... -- -- 1 -- -- 1
---- ------- ------- ------- ------- --------
Net cash used in investing
activities.................... (33) (18) (28) (1) (6) (85)
FINANCING ACTIVITIES:
Proceeds from issuance of
debt.......................... -- 170 2,000 1,000 3,170
Payment on note payable to
related party................. -- -- (170) (170) -- (170)
Issuance of Series A Preferred
Stock Warrants................ -- 16 -- -- -- 16
Issuance of Series A Redeemable
Convertible Preferred Stock... -- 6,500 -- -- 130 6,630
Proceeds from issuance of Common
Stock......................... -- -- 2 2 3 5
---- ------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities.......... -- 6,686 1,832 (168) 1,133 9,651
---- ------- ------- ------- ------- --------
Increase (decrease) in cash and
cash equivalents.............. 66 3,395 (2,185) (2,032) (730) 546
Cash and cash equivalents at
beginning of period........... -- 66 3,461 3,461 1,276 --
---- ------- ------- ------- ------- --------
Cash and cash equivalents at end
of period..................... $ 66 $ 3,461 $ 1,276 $ 1,429 $ 546 $ 546
==== ======= ======= ======= ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 59
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE REDEEMABLE
PREFERRED NONCONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------- ----------------- ----------------- ADDITIONAL
NUMBER OF NUMBER OF NUMBER OF PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------ --------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock, December 1992................. 44,109 $1 $ (1)
Purchase of Treasury Stock..............................
Net loss................................................
--
------- ----
Balance at December 31, 1993............................ 44,109 1 (1)
April 1994:
Issuance of Common Stock from treasury for
services...........................................
Issuance of Series A Redeemable Convertible Preferred
Stock.............................................. 6,500,000 $6,500
Issuance of Redeemable Nonconvertible Preferred Stock
for technology..................................... 9,000 $ 489
Issuance of Common Stock for technology.............. 715,026 7 351
Issuance of Series A Preferred Stock Warrants........ 16
Preferred dividend accretion............................ 473
Preferred liquidation preference accretion.............. 638
Net loss................................................
--
--------- ------ ----- ------ ------- ----
Balance at December 31, 1994............................ 6,500,000 6,500 9,000 1,600 759,135 8 366
Cancellation of common shares........................... (7,026) --
Extinguishment of Series A Preferred Stock Warrants..... (3)
Conversion of options to common shares.................. 11,197 -- 5
Preferred dividend accretion............................ 630
Preferred liquidation preference accretion.............. 851
Net loss................................................
--
--------- ------ ----- ------ ------- ----
Balance at December 31, 1995............................ 6,500,000 6,500 9,000 3,081 763,306 8 368
Issuance of Series A Redeemable Convertible Preferred
Stock for cash (unaudited)............................. 130,000 130
Issuance of Series A Redeemable Convertible Preferred
Stock in lieu of interest due on senior secured
convertible notes (unaudited).......................... 397,806 398
Conversion of options to common stock (unaudited)....... 5,335 -- 3
Preferred dividend accretion (unaudited)................ 315
Preferred liquidated preference accretion (unaudited)... 426
Net loss (unaudited)....................................
--
--------- ------ ----- ------ ------- ----
Balance at June 30, 1996 (unaudited).................... 7,027,806 $7,028 9,000 $3,822 768,641 $8 $371
========= ====== ===== ====== ======= == ====
<CAPTION>
CUMULATIVE
CUMULATIVE ACCRETION OF
ACCRETION OF LIQUIDATION DEFICIT
DIVIDEND ON PREFERENCE ON ACCUMULATED TREASURY STOCK
REDEEMABLE REDEEMABLE DURING -----------------
NONCONVERTIBLE NONCONVERTIBLE DEVELOPMENT NUMBER OF
PREFERRED STOCK PREFERRED STOCK STAGE SHARES AMOUNT
--------------- --------------- ----------- --------- ------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock, December 1992.................
Purchase of Treasury Stock.............................. 24,795 $ 0
Net loss................................................ $ (28)
--
-------- -------
Balance at December 31, 1993............................ (28) 24,795 0
April 1994:
Issuance of Common Stock from treasury for
services........................................... (24,795) 0
Issuance of Series A Redeemable Convertible Preferred
Stock..............................................
Issuance of Redeemable Nonconvertible Preferred Stock
for technology.....................................
Issuance of Common Stock for technology..............
Issuance of Series A Preferred Stock Warrants........
Preferred dividend accretion............................ $ (473)
Preferred liquidation preference accretion.............. $ (638)
Net loss................................................ (3,603)
--
------- ------- -------- -------
Balance at December 31, 1994............................ (473) (638) (3,631) 0 0
Cancellation of common shares...........................
Extinguishment of Series A Preferred Stock Warrants.....
Conversion of options to common shares..................
Preferred dividend accretion............................ (630)
Preferred liquidation preference accretion.............. (851)
Net loss................................................ (4,450)
--
------- ------- -------- -------
Balance at December 31, 1995............................ (1,103) (1,489) (8,081) 0 0
Issuance of Series A Redeemable Convertible Preferred
Stock for cash (unaudited).............................
Issuance of Series A Redeemable Convertible Preferred
Stock in lieu of interest due on senior secured
convertible notes (unaudited)..........................
Conversion of options to common stock (unaudited).......
Preferred dividend accretion (unaudited)................ (315)
Preferred liquidated preference accretion (unaudited)... (426)
Net loss (unaudited).................................... (2,235)
--
------- ------- -------- -------
Balance at June 30, 1996 (unaudited).................... $(1,418) $(1,915) $ (10,316) 0 $ 0
======= ======= ======== ======= ==
</TABLE>
See accompanying notes.
F-6
<PAGE> 60
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
COMPANY
Transcend Therapeutics, Inc. (the "Company") was incorporated on December
23, 1992 and began operations in January 1993. The Company is a
development-stage enterprise, as defined in Statement of Financial Accounting
Standards No. 7, and is devoting its efforts to developing novel pharmaceuticals
for the treatment of diseases resulting from oxidative stress and related tissue
damage, with a particular therapeutic focus on critical care.
GOING CONCERN
The financial statements have been prepared on a going concern basis. For
the current year ended December 31, 1995, the Company recorded a net loss of
$4,450,000, as funds were primarily expended by the Company for the Procysteine
clinical development program for the treatment of acute respiratory distress
syndrome ("ARDS"), the prevention of multiple organ disfunction ("MOD"), and a
number of proof-of-principle clinical studies of Procysteine(R) in other
indications, including anystrophic lateral sclerosis ("ALS") and atherosclerotic
cardiovascular disease ("ASCVD"). Management believes that to continue as a
going concern, the Company will require additional funding to complete both its
clinical development program and, ultimately, the marketing of its products.
Management plans to fund the company with the December 31, 1995 cash on
hand of $1,276,000 plus the proceeds from the sale of additional Senior Secured
Convertible Notes, in whole or in part, to existing corporate and venture
capital shareholders of the Company. The 1995 financial statements do not
include any adjustments for the planned new fundraising.
2. SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over their estimated useful lives of five years. The cost
and accumulated depreciation of property and equipment at December 31 are as
follows:
<TABLE>
<CAPTION>
1994 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Furniture and equipment................................. $ 50 $ 69
Less accumulated depreciation........................... (10) (16)
---- ----
Furniture and equipment, net............................ $ 40 $ 53
==== ====
</TABLE>
F-7
<PAGE> 61
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PATENTS AND OTHER INTANGIBLE ASSETS
Patent costs are expensed as incurred as research and development costs.
The carrying value of intangible assets are reviewed on an ongoing basis to
assess if facts or circumstances suggest that the Company's intangible assets
may be impaired. If this review indicates that intangible assets will not be
recoverable, as determined based on the expected future cash flows to be
generated by these assets over their remaining amortization period, the
Company's carrying value of the intangible assets is reduced by the estimated
shortfall of cash flows.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
establishes criteria for the recognition and measurement of impairment loss
associated with longlived assets. The Company adopted this standard in the first
quarter of 1996. The adoption did not have a material impact on the Company's
financial position or results of operations.
REDEEMABLE NONCONVERTIBLE PREFERRED STOCK
The Company has recorded the 9,000 shares of Redeemable Nonconvertible
Preferred Stock issued to Clintec Nutrition Company ("Clintec") as partial
consideration for the intellectual property rights relating to the
pharmaceutical applications of Procysteine and related technologies at their
fair value of $500,000. The Company will accrete the value of the Redeemable
Nonconvertible Preferred Stock, up to its redemption value of $9,000,000, plus
any accrued dividends, over a ten-year period.
PRO FORMA BALANCE SHEET (UNAUDITED)
Upon the closing of this Offering, all outstanding shares of Series A, B
and C Redeemable Convertible Preferred Stock will automatically convert into an
aggregate 2,972,485 shares of Common Stock. The unaudited pro forma presentation
of the balance sheet has been prepared assuming (i) the conversion of the
Redeemable Convertible Preferred Stock, (ii) the prior conversion of the
Nonconvertible Redeemable Preferred Stock into Redeemable Convertible Preferred
Stock, (iii) the prior conversion of senior secured convertible notes and
accrued interest thereon into Convertible Redeemable Preferred Stock, (iv) the
anticipated sale of Series C Redeemable Convertible Preferred Stock, (v) the
related conversion of the remaining Series A Preferred Stock Warrants and (vi)
the exercise of options to purchase 8,000 shares of Common Stock. (See Note 11)
REVENUE RECOGNITION
Research and development revenue is recognized as related costs are
incurred. During the year ended December 31, 1993, the Company received a
contract research fee of $6,095,000 for various research and development
services.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
stock-based compensation plans, rather than the alternative fair value
accounting method provided for under Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation."
PRO FORMA NET LOSS PER COMMON SHARE (UNAUDITED)
Pro forma net loss per common share is computed using the weighted average
number of common shares, convertible preferred shares assuming conversion at
date of issuance and dilutive equivalent
F-8
<PAGE> 62
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
shares from stock options and warrants using the treasury stock method. Pursuant
to the Securities and Exchange Commission Staff Accounting Bulletin No. 83,
shares and equivalent shares issued by the Company at prices below the assumed
public offering price during the twelve-month period prior to the proposed
offering have been included in the calculation as if they were outstanding for
all periods presented (using the treasury stock method and using the assumed
midpoint of the initial public offering price range).
The accretion of dividends and liquidation preference on Redeemable
Nonconvertible Preferred Stock are added to the Company's net loss in order to
arrive at net loss available to common stockholders in the calculation of net
loss per common share. Had the anticipated exchange of all of the Redeemable
Nonconvertible Preferred Stock for Series C Redeemable Convertible Preferred
Stock valued by the Company at $8,000,000, as further described in Note 11, been
effected during the six months ended June 30, 1996, the net loss to common
stockholders and pro forma net loss per common share would have been as follows:
<TABLE>
<S> <C>
Net loss........................................................... $(2,234)
Accretion of dividends and liquidation preference on Redeemable
Nonconvertible Preferred Stock................................... (741)
Accretion to fair value of consideration transferred to holders of
Redeemable Nonconvertible Preferred Stock........................ (4,178)
-------
Net loss to common stockholders.................................... $(7,153)
=======
Pro forma net loss per common share................................ $ (1.87)
=======
Pro forma weighted average common shares outstanding............... 3,833
=======
</TABLE>
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The balance sheet at June 30, 1996, the statements of operations and
statements of cash flows for the six months ended June 30, 1995 and 1996 and the
period from January 1, 1993 (date of inception) through June 30, 1996, and the
statements of Redeemable Preferred Stock and Stockholders' Deficit for the six
months ended June 30, 1996 are unaudited, but, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of results for these interim periods. The results of
operations for the six months ended June 30, 1996 are not necessarily indicative
of results to be expected for the entire year.
3. ACCRUED LIABILITIES
Included in accounts payable and accrued expenses were the following
accrued expenses at December 31:
<TABLE>
<CAPTION>
1994 1995
-------------- ----
(IN THOUSANDS)
<S> <C> <C>
Accrued vacation...................................... $ 14 $ 33
Accrued severance..................................... 125 --
Accrued clinical costs................................ -- 177
Accrued other......................................... -- 98
---- ----
Total accrued expenses...................... $139 $308
==== ====
</TABLE>
F-9
<PAGE> 63
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SENIOR SECURED CONVERTIBLE NOTES
On September 13, 1995 the Company issued $2,000,000 in Senior Secured
Convertible Notes to certain existing stockholders.
Each note matures on January 15, 1997, bearing interest of 30% per annum,
payable every four months beginning on January 13, 1996. Interest payments will
be made in the form of Series A Convertible Preferred Stock, $.01 par value (the
"Series A Stock"). At December 31, 1995, the Company recorded accrued interest
of $178,000. All principal and accrued interest will be automatically converted
into shares of the Company's Series A Convertible Preferred Stock in an amount
equal to one share of preferred stock for each $1.00 of principal or interest
upon the closing of sales of equity securities of the Company which yield
cumulative gross proceeds of not less than $2,000,000.
Because no market rate for similar financial instruments was available at
December 31, 1995, it was not practicable to estimate the fair value of the
outstanding notes, which are carried at their cost of $2,000,000.
5. INCOME TAXES
The Company accounts for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109 (FAS 109), "Accounting for Income
Taxes." Under FAS 109, deferred taxes are recognized using the liability method,
whereby tax rates are applied to cumulative temporary differences based on when
and how they are expected to affect the tax return. Deferred tax assets and
liabilities are adjusted for tax rate changes.
At December 31, 1995, the Company had available tax loss carryforwards of
approximately $7,800,000, which expire through 2008. The tax net operating loss
may be subject to certain limitations when an "ownership change" occurs, as
defined, under Section 382 of the Internal Revenue Code.
Deferred income taxes reflect the net tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Due to the Company's net
loss position, a valuation allowance for 100% of its deferred tax assets has
been established. The Company has the following deferred tax assets as of
December 31:
<TABLE>
<CAPTION>
1994 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $1,440 $3,213
Vacation accrual.................................. 6 8
------- -------
Total gross deferred tax assets........................ 1,446 3,221
Valuation allowance.................................... (1,446) (3,221)
------- -------
Net deferred tax assets................................ $ 0 $ 0
======= =======
</TABLE>
The net increases during 1994 and 1995 in the total valuation allowance
were $1,438,000 and $1,775,000, respectively, as a result of the Company's
unbenefited net loss.
F-10
<PAGE> 64
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY
COMMON STOCK
On April 5, 1994, the Company acquired a exclusive license from Cornell
Research Foundation ("Cornell") to intellectual property rights to Procysteine
and related technologies for the issuance of 35,025 shares of Common Stock. In
accordance with the same agreement, the Company issued 680,000 shares of Common
Stock to Clintec as part consideration for the acquisition of the intellectual
property rights to Procysteine and related technologies. The technology has been
recorded at the Common Stock's fair value of $.10 per share at the time of the
transaction.
COMMON STOCK WARRANTS
On October 28, 1994, as additional consideration for the execution of the
lease on the office space, the Company issued to its lessor a warrant to
purchase 5,000 shares of Common Stock, exercisable through October 28, 1999, at
$5.00 per share.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1994, the Company sold 6,500,000 shares of Series A Stock for $1.00
per share. The Series A Stock is convertible into shares of Common Stock, at a
conversion price of $5.00 per share, and has a liquidation preference over the
Redeemable Nonconvertible Preferred Stock and the Common Stock of up to $5.00
per share plus any accrued, but unpaid, dividends. In addition, the Series A
Stock will participate on an as-converted basis with Common Stock in remaining
assets in liquidation. The Series A Stock is redeemable, at the option of the
holder, in certain circumstances. In addition, interest on the Senior Secured
Convertible Notes is payable in Series A Stock.
SERIES A PREFERRED STOCK WARRANTS
In conjunction with the issuance of the Series A Stock, the Company sold
1,625,000 warrants to purchase Series A Stock at a price per share equal to the
lesser of (i) the per share purchase price of the securities issued in the next
financing round or (ii) $1.00. During 1995, warrants to purchase 250,000 shares
of Common Stock were canceled by the Company in accordance with the terms and
conditions stipulated in the Series A Preferred Stock Purchase Warrant
agreement, dated April 4, 1994, as a result of the investor's failure to
participate in a subsequent private placement offering.
REDEEMABLE NONCONVERTIBLE PREFERRED STOCK
The Company issued 9,000 shares of Redeemable Nonconvertible Preferred
Stock to Clintec as partial consideration for the acquisition of the
intellectual property rights to Procysteine and related technologies. The
Redeemable Nonconvertible Preferred Stock is redeemable, upon certain conditions
at the option of the holder, at a price of $1,000 per share plus any unpaid
dividends which accrue at a rate of $70 per share per annum. The Redeemable
Nonconvertible Preferred Stock has a liquidation preference over Common Stock of
$1,000 per share, plus any accrued, but unpaid, dividends.
7. STOCK OPTION PLAN
The Company has a 1994 Equity Incentive Plan, which authorizes the Board of
Directors to grant stock options to purchase up to an aggregate of 275,891
shares of Common Stock. Stock options granted under the 1994 Plan may qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code. The
price at which shares may be purchased with an option shall be specified by the
Board at the date the option is granted, but in the case of an incentive stock
option, shall not be less than fair market value on the date of grant. The
duration of any option shall be specified by the Board, but no option
F-11
<PAGE> 65
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
designated as an "incentive stock option" may be exercised beyond ten years from
the date of grant. Options granted under the Plan vest ratably over two to four
years beginning after one year of service.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
OPTION
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- -----------
<S> <C> <C>
Options granted.................................................. 203,838 $ .50
------- ----
Balances at December 31, 1994.................................... 203,838 .50
Options granted............................................. 96,600 .50
Options exercised........................................... (11,197) .50
Options terminated unexercised.............................. (26,786) .50
------- ----
Balances at December 31, 1995.................................... 262,455 .50
Options granted (unaudited)................................. 400 .50
Options exercised (unaudited)............................... (5,334) .50
------- ----
Balances at June 30, 1996 (unaudited)............................ 257,521 .50
=======
Options exercisable at December 31, 1995......................... 90,507 .50
=======
</TABLE>
8. LEASE OBLIGATIONS
The Company leases office space under a five-year operating lease which
commenced in December 1994, with the option to extend for an additional five
years, subject to certain rights of first refusal held by other parties. The
Company also leases certain office equipment. Future minimum lease payments
under noncancelable lease agreements are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1996..................................................... $249
1997..................................................... 241
1998..................................................... 195
1999..................................................... 185
2000..................................................... 6
----
$876
====
</TABLE>
Rent expense amounted to $70,000, $68,000 and $186,000 for the years ended
December 31, 1993, 1994 and 1995, respectively.
On November 15, 1994, the Company entered into a commitment for a $250,000
equipment lease line. Through December 31, 1995, the Company had leased
equipment totaling approximately $145,000 over a three-year lease period.
9. COMMITMENTS AND CONTINGENCIES
The Company is committed to pay minimum royalties to Cornell under patent
licenses of $60,000 per annum through 2000, net of certain patent costs. In
addition, the Company has an ongoing research agreement with Cornell Medical
College with $133,000 due in July 1996.
10. RELATED-PARTY TRANSACTIONS
During 1995, Baxter provided various services to the Company and billed
$51,000 for the cost of those services. These services included clinical
inventory storage and recordkeeping, stability operations, particle analysis,
formulation development, quality management and laboratory services. These
arrangements were terminated during 1995 and transferred to other vendors.
F-12
<PAGE> 66
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the Company repaid a note payable due to Clintec in the amount
of $170,000 for fees paid by Clintec on behalf of the Company for delivery of
certain clinical trial data.
11. SUBSEQUENT EVENTS
In August 1996, the Company effected a one-for-five reverse stock split of
its Common Stock. All common share and per share amounts have been adjusted
retroactively to reflect the stock split.
In January of 1996, the Company received $130,000 from the sale of shares
of Series A Preferred Stock at a price of $1.00 per share to three individual
investors.
On January 13, 1996, the Company issued 198,904 shares of Series A
Preferred Stock in lieu of interest on the Senior Secured Convertible Notes for
the period September 13, 1995 through January 13, 1996.
On May 29, 1996, the Company issued Series B Notes in the aggregate
principal amount of $1,000,000 to certain institutional investors. These Series
B Notes were issued pursuant to the exercise of an option granted under the
Series A Notes. The Series B Notes bear interest at 30 percent per annum,
payable in three annual installments in the form of Series B Convertible
Preferred Stock (at one share per $1.50 of interest due and payable). The Series
B Notes mature on January 15, 1997, and are convertible into shares of Series B
Convertible Preferred Stock. The Company will issue 24,109 shares of Series B
Convertible Preferred Stock in full payment of accrued and unpaid interest
through the closing date.
In addition, in August 1996, the Company entered in to an agreement to
issue and sell 851,064 shares of Series C Convertible Preferred Stock,
respectively, at a price of $2.35 per share ($11.75 per share on a post-split
common stock equivalent basis). These transactions are expected to close on or
about August 30, 1996. Upon closing of the August 1996 Financing, (i) the Series
A Notes will convert into an aggregate of 2,000,000 shares of Series A Preferred
Stock and the Series B Notes will convert into an aggregate of 666,666 shares of
Series B Preferred Stock; and (ii) the Series A Warrants will be exercised
pursuant to a net exercise provision resulting in the issuance of an aggregate
of 789,894 shares of Series A Convertible Preferred Stock.
In August 1996, the Company entered into an agreement to exchange all of
its Redeemable Nonconvertible Preferred Stock for 3,404,255 shares of Series C
Redeemable Convertible Preferred Stock which have been valued by the Company at
$8,000,000. The difference between the carrying value of the Redeemable
Nonconvertible Preferred Stock and the value of the Series C Redeemable
Convertible Preferred Stock of $4,178,000 will be an addition to the net loss to
common stockholders in the calculation of net loss per share.
In August 1996, the Company's Board of Directors approved an Amended and
Restated Certificate of Incorporation, subject to stockholder approval, which
provides that upon the closing of the initial public offering the Company's
capital stock will consist of 25,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock.
The Company's 1994 Equity Incentive Plan was initially adopted by the Board
of Directors and approved by the stockholders in April 1994. The Amended and
Restated 1994 Plan (the "1994 Equity Incentive Plan") was adopted by the Board
of Directors and approved by the stockholders in August 1996. Under the terms of
the 1994 Equity Incentive Plan, the Company is authorized to make awards of
restricted stock and to grant incentive stock options and non-statutory stock
options to employees (including officers and employee directors) and directors
of, and consultants and advisors to, the Company to purchase shares of the
Common Stock of the Company. A total of 379,721 shares of
F-13
<PAGE> 67
TRANSCEND THERAPEUTICS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock have been reserved for issuance upon exercise of outstanding
options granted under the 1994 Equity Incentive Plan. An additional 471,639
shares of Common stock have been reserved for future options or awards under the
1994 Equity Incentive Plan.
During the period from May 1996 through August 20, 1996, the Board of
Directors approved the grant of stock options to purchase 130,200 shares of
Common Stock at exercise prices ranging from $1.50 to $2.50 per share. In the
quarter ended September 30, 1996, the Company intends to record a deferred
compensation amount of $1.1 million relating to the grant of these options,
which amount will be amortized over the four-year vesting period of these
options.
F-14
<PAGE> 68
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON IS AUTHORIZED IN
CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 5
Use of Proceeds........................... 16
Dividend Policy........................... 16
Capitalization............................ 17
Dilution.................................. 18
Selected Financial Data................... 19
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations.............................. 20
Business.................................. 23
Management................................ 35
Certain Transactions...................... 40
Principal Stockholders.................... 43
Description of Capital Stock.............. 45
Shares Eligible for Future Sale........... 48
Underwriting.............................. 50
Legal Matters............................. 51
Experts................................... 51
Additional Information.................... 51
Index to Financial Statements............. F-1
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
</TABLE>
2,000,000 SHARES
LOGO
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
Vector Securities International, Inc.
Tucker Anthony
Incorporated
, 1996
- ------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
------------------------------------------------------
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission registration fee and the NASD filing
fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
------------------------------------------------------------------------- --------
<S> <C>
SEC Registration Fee..................................................... $ 11,104
NASD Filing Fee.......................................................... 3,270
Nasdaq National Market Listing Fee....................................... 31,823
Blue Sky Fees and Expenses............................................... 15,000
Transfer Agent and Registrar Fees........................................ 5,000
Accounting Fees and Expenses............................................. 150,000
Legal Fees and Expenses.................................................. 250,000
Printing, Engraving and Mailing Expenses................................. 120,000
Miscellaneous............................................................ 13,803
--------
Total............................................................... $600,000
========
</TABLE>
- ---------------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VIII of the Registrant's Restated Certificate of Incorporation (the
"Restated Certificate of Incorporation") provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach of
fiduciary duty as a director, except to the extent that a Delaware General
Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
Article IX of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
II-1
<PAGE> 70
Article VIII of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
The Company also currently has in place standard director and officer
liability insurance which, subject to customary exclusions and specified limits,
insures its directors and officers against certain losses and expenses suffered
or incurred by such persons as a result of serving in such capacity.
Under Section of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed as
Exhibit 1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of Common and Preferred Stock issued, and the number of options
granted and warrants issued, by the Registrant since its incorporation. Further
included is the consideration, if any, received by the Registrant for such
shares and options, and information relating to the section of the Securities
Act of 1933, as amended (the "Securities Act"), or rule of the Securities and
Exchange Commission under which exemption from registration was claimed. Awards
of options did not involve any sale under the Securities Act and none of these
securities was registered under the Securities Act.
1. In December 1992, the Registrant sold an aggregate of 100 shares of its
Common Stock for $.01 per share to Dr. Gary Pace and Dr. Dennis Goldberg,
founders of the Registrant.
2. In April 1994, the previously issued and outstanding shares of Common
Stock of the Registrant issued to Dr. Pace and Dr. Goldberg were exchanged for
an aggregate of 44,109 shares of its Common Stock effected in the form of a
stock dividend.
3. In April 1994, the Registrant issued 680,000 shares of its Common Stock
and 9,000 shares of its Nonconvertible Redeemable Preferred Stock to Clintec
Nutrition Company upon receipt from Clintec of its rights in Procysteine and
related pharmaceutical technologies.
4. In April 1994, as part of a license agreement with Cornell Research
Foundation ("Cornell"), the Registrant issued 35,024 shares of its Common Stock
to Cornell. On October 4, 1995, Cornell agreed to return 7,026 such shares for
cancellation in settlement of a dispute related to the abandonment by Cornell of
a patent application in Japan licensed to the Registrant under the license
agreement.
5. In April 1994, the Registrant sold an aggregate of 6,500,000 shares of
its Series A Convertible Preferred Stock to a group of investors at a purchase
price of $1.00 per share for an aggregate of $6.5 million. As part of the same
transaction, the investors also purchased from the Registrant warrants to
purchase an aggregate of 1,625,000 shares of Series A Preferred Stock for $.01
per share of Series A Preferred Stock issuable upon the exercise of such
warrants. The exercise price of the warrants was $1.00 per share.
II-2
<PAGE> 71
6. In October 1994, in connection with the Registrant's lease of office
space from the Massachusetts Institute of Technology ("MIT"), the Registrant
issued to MIT 5,000 shares of its Common Stock at an exercise price of $5.00 per
share.
7. In September 1995, the Registrant sold $2.0 million aggregate principal
amount of its Senior Secured Convertible Notes ("Series A Notes") to a group of
investors. The Series A Notes bear interest on the Series A Notes of 30 percent
per annum is payable in, and the principal amount of such notes is convertible
into, shares of Series A Convertible Preferred Stock (at one share per $1.00 of
such interest or principal).
8. In January 1994, the Registrant sold an aggregate of 130,000 shares of
Series A Preferred Stock to Jerry Jackson and Frank Douglas, directors of the
Registrant, and one former director of the Registrant, for an aggregate purchase
price of $130,000 at $1.00 per share.
9. In January 1996, the Registrant issued an aggregate of 198,903 shares of
Series A Convertible Preferred Stock to a group of investors as interest due and
payable on Series A Notes held by such investors.
10. In May 1996, the Registrant issued an aggregate of 198,903 shares of
Series A Preferred Stock to a group of investors as interest due and payable on
Series A Notes held by such investors.
11. In May 1996, the Registrant issued $1.0 million in aggregate principal
amount of notes ("Series B Notes") to the holders of Series A Notes. Interest on
the Series B Notes of 30 percent per annum is payable in, and the principal
amount of such notes is convertible into, shares of Series B Convertible
Preferred Stock (at one share per $1.50 of such interest or principal).
12. In August 1996, the Registrant sold an aggregate of 851,064 shares of
its Series C Convertible Preferred Stock to a group of investors at a purchase
price of $2.70 per share for an aggregate of $2.0 million. As part of the same
transaction, (a) the sole holder of 9,000 shares of the Registrant's
Nonconvertible Redeemable Preferred Stock exchanged such shares for 3,404,255
shares of the Series C Convertible Preferred Stock, (b) holders of warrants to
purchase shares of Series A Convertible Preferred Stock were issued an aggregate
of 789,892 shares of Series A Convertible Preferred Stock pursuant to a net
exercise of such warrants, and (c) $3.1 million in aggregate principal amount
of, and interest on, the Series A Notes and Series B Notes were converted into
an aggregate of 2,098,631 shares of Series A Convertible Preferred Stock and
690,775 shares of Series B Convertible Preferred Stock.
13. From April 1994 through August 20, 1996, the Registrant granted options
to purchase 379,721 shares of Common Stock at exercise prices ranging from $.50
to $2.50.
No underwriters were engaged in connection with any of the foregoing sales
of securities. The issuance of shares of capital stock and securities in the
transactions described in paragraphs (1) through (12) above were offered and
sold in reliance upon the exemption from registration under Section 4(2) of the
Securities Act and/or Regulation D promulgated under the Securities Act, for
sales by an issuer not involving any public offering. The issuances of
securities in the transaction described in paragraph 13 above are deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder in that they were offered and sold pursuant to writen
compensatory benefits plans or pursuant to written contract relating to
compensation.
II-3
<PAGE> 72
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -------------------------------------------------------------------------------
<S> <C>
1* Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant, as amended.
3.2* Forms of Certificate of Amendment to Restated Certificate of Incorporation of
the Registrant, as amended.
3.3* Form of Second Amended and Restated Certificate of Incorporation of the
Registrant (to be filed prior to the consummation of the public offering).
3.4* Amended and Restated By-Laws of the Registrant.
4.1* Specimen certificate for shares of Common Stock, $.01 par value, of the
Registrant.
4.2* Amended and Restated Registration Rights Agreement dated September 13, 1995, as
amended December 22, 1995 and May 31, 1996, by and among the Registrant and The
Venture Capital Fund of New England III, L.P., Advent International Investors
II Limited Partnership, Advent Performance Materials Limited Partnership,
Global Private Equity II Limited Partnership, Rovent II Limited Partnership,
Paal C. Gisholt, Charles Hsu, Sprout Capital VI, L.P., DLJ Capital Corporation,
Baxter Healthcare Corporation, Clinical Nutrition Holdings, Inc., Clintec
Nutrition Company, the Massachusetts Institute of Technology, Jerry T. Jackson,
Frank L. Douglas and Richard B. Egen (collectively, the "Holders").
4.3* Second Amended and Restated Registration Rights Agreement dated August , 1996
among the Registrant and the Holders.
5 * Opinion of Hale and Dorr with respect to the validity of the securities being
offered.
10.1* Amended and Restated 1994 Equity Incentive Plan.
+10.2 Contribution Agreement dated April 5, 1994 by and between the Registrant and
Clintec Nutrition Company.
10.4 Non-solicitation Agreement dated April 5, 1994 between the Registrant and
Baxter Healthcare Corporation.
+10.5 License Agreement dated April 5, 1994 between the Registrant and Clintec
Nutrition Company.
+10.6 Amended and Restated Exclusive License Agreement CRF D-416 and D-052, D-913, D-
1069, D-1239, D-1258, D-1403, D-1426, dated August 12, 1996 between the
Registrant and Cornell Research Foundation, Inc.
10.7* Letter Agreement dated October 28, 1994 between the Registrant and the
Massachusetts Institute of Technology.
10.8 Common Stock Purchase Warrant dated October 28, 1994 for 5,000 shares of Common
Stock issued to the Massachusetts Institute of Technology.
10.9 Lease dated October 28, 1994 between the Registrant and the Massachusetts
Institute of Technology.
10.10 Employment Agreement dated November 28, 1994 between the Registrant and Hector
J. Gomez.
10.11 Letter Agreement dated June 23, 1995 among the Registrant, The General Hospital
Corporation and the University of Maryland.
10.12 Letter Agreement dated October 4, 1995 between the Registrant and Cornell
Research Foundation, Inc.
</TABLE>
II-4
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -------------------------------------------------------------------------------
<S> <C>
10.13* Series C Convertible Preferred Stock Purchase Agreement dated as of August ,
1996 among the Registrant and certain Holders.
10.14* Warrantholder Agreement dated as of August , 1996 among the Registrant and
certain Warrantholders
11 Calculation of shares used in determining pro forma net loss per common share.
23.1* Consent of Hale and Dorr (included in Exhibit 5).
23.2 Consent of Pennie & Edmonds
23.3 Consent of Ernst & Young LLP.
24 Powers of Attorney (included on page II-6).
27 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions
are omitted and filed separately with the Commission.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required or because
the required information is given in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cambridge,
Commonwealth of Massachusetts, on this 21st day of August, 1996.
TRANSCEND THERAPEUTICS, INC.
By: /s/ HECTOR J. GOMEZ
------------------------------------
Hector J. Gomez, M.D., Ph.D.,
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Transcend Therapeutics, Inc.,
hereby severally constitute and appoint Hector J. Gomez, B. Nicholas Harvey and
Steven D. Singer, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, the Registration Statement on Form S-1 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement (or any other registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act), and generally to do all such things in our names and on our
behalf in our capacities as officers and directors to enable Transcend
Therapeutics, Inc. to comply with the provisions of the Securities Act of 1933,
as amended, and all requirements of the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said Registration Statement and any and all
amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ HECTOR J. GOMEZ President, Chief Executive August 21, 1996
- ------------------------------------------ Officer and Director (Principal
Hector J. Gomez, M.D., Ph.D. Executive Officer)
/s/ B. NICHOLAS HARVEY Vice President, Finance and Chief August 21, 1996
- ------------------------------------------ Financial Officer (Principal
B. Nicholas Harvey Financial and Accounting Officer)
/s/ JERRY T. JACKSON Chairman of the Board of August 21, 1996
- ------------------------------------------ Directors
Jerry T. Jackson
/s/ PHILIPPE CHAMBON Director August 21, 1996
- ------------------------------------------
Philippe Chambon, M.D., Ph.D.
/s/ FRANK L. DOUGLAS Director August 21, 1996
- ------------------------------------------
Frank L. Douglas, M.D., Ph.D.
/s/ RICHARD W. HUNT Director August 21, 1996
- ------------------------------------------
Richard W. Hunt
/s/ WILLIAM C. MILLS III Director August 21, 1996
- ------------------------------------------
William C. Mills III
/s/ GERARD M. MOUFFLET Director August 21, 1996
- ------------------------------------------
Gerard M. Moufflet
</TABLE>
II-6
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
-------- -------------------------------------------------------------------- ------------
<S> <C> <C>
1* Form of Underwriting Agreement. ....................................
3.1 Restated Certificate of Incorporation of the Registrant, as
amended. ...........................................................
3.2* Form of Certificate of Amendment to Restated Certificate of
Incorporation of the Registrant, as amended. .......................
3.3* Form of Second Amended and Restated Certificate of Incorporation of
the Registrant (to be filed prior to the consummation of the public
offering). .........................................................
3.4* Amended and Restated By-Laws of the Registrant. ....................
4.1* Specimen certificate for shares of Common Stock, $.01 par value, of
the Registrant. ....................................................
4.2* Amended and Restated Registration Rights Agreement dated September
13, 1995, as amended December 22, 1995 and May 31, 1996, by and
among the Registrant and The Venture Capital Fund of New England
III, L.P., Advent International Investors II Limited Partnership,
Advent Performance Materials Limited Partnership, Global Private
Equity II Limited Partnership, Rovent II Limited Partnership, Paal
C. Gisholt, Charles Hsu, Sprout Capital VI, L.P., DLJ Capital
Corporation, Baxter Healthcare Corporation, Clinical Nutrition
Holdings, Inc., Clintec Nutrition Company, the Massachusetts
Institute of Technology, Jerry T. Jackson, Frank L. Douglas and
Richard B. Egen (collectively, the "Holders"). .....................
4.3* Second Amended and Restated Registration Rights Agreement dated
August , 1996 among the Registrant and the Holders. ..............
5 * Opinion of Hale and Dorr with respect to the validity of the
securities being offered. ..........................................
10.1* Amended and Restated 1994 Equity Incentive Plan. ...................
+10.2 Contribution Agreement dated April 5, 1994 by and between the
Registrant and Clintec Nutrition Company. ..........................
10.4 Non-solicitation Agreement dated April 5, 1994 between the
Registrant and Baxter Healthcare Corporation. ......................
+10.5 License Agreement dated April 5, 1994 between the Registrant and
Clintec Nutrition Company. .........................................
+10.6 Amended and Restated Exclusive License Agreement CRF D-416 and
D-052, D-913, D-1069, D-1239, D-1258, D-1403, D-1426, dated August
12, 1996 between the Registrant and Cornell Research Foundation,
Inc. ...............................................................
10.7* Letter Agreement dated October 28, 1994 between the Registrant and
the Massachusetts Institute of Technology. .........................
10.8 Common Stock Purchase Warrant dated October 28, 1994 for 5,000
shares of Common Stock issued to the Massachusetts Institute of
Technology. ........................................................
10.9 Lease dated October 28, 1994 between the Registrant and the
Massachusetts Institute of Technology. .............................
10.10 Employment Agreement dated November 28, 1994 between the Registrant
and Hector J. Gomez. ...............................................
10.11 Letter Agreement dated June 23, 1995 among the Registrant, The
General Hospital Corporation and the University of Maryland. .......
10.12 Letter Agreement dated October 4, 1995 between the Registrant and
Cornell Research Foundation, Inc. ..................................
10.13* Series C Convertible Preferred Stock Purchase Agreement dated as of
August , 1996 among the Registrant and certain Holders. ..........
10.14* Warrantholder Agreement dated as of August , 1996 among the
Registration and certain Warrantholders. ...........................
11* Calculation of shares used in determining pro forma net loss per
common share. ......................................................
23.1* Consent of Hale and Dorr (included in Exhibit 5). ..................
23.2 Consent of Pennie & Edmonds ........................................
23.3 Consent of Ernst & Young LLP. ......................................
</TABLE>
<PAGE> 76
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
-------- -------------------------------------------------------------------- ------------
<S> <C> <C>
24 Powers of Attorney (included on page II-6). ........................
27 Financial Data Schedule ............................................
</TABLE>
- ---------------
* To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions
are omitted and filed separately with the Commission.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
FREE RADICAL SCIENCES, INC.
Incorporated pursuant to an original Certificate of Incorporation
filed with the Secretary of State on December 23, 1992.
The undersigned, for the purpose of amending and restating the Certificate
of Incorporation of Free Radical Sciences, Inc. (the "Corporation") under the
laws of the State of Delaware, hereby certifies as follows:
FIRST: The name of the Corporation is Free Radical Sciences, Inc.
SECOND: The address of the Corporation's registered office in the State of
Delaware is 32 Loockerman Square, Suite L-100, Dover, Delaware 19901, Kent
County. The name of the registered agent at such address is The Prentice-Hall
Corporation System, Inc.
THIRD: The nature of the business or the purposes to be conducted or
promoted are to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
FOURTH: The total number and classes of shares of capital stock that the
Corporation shall have authority to issue is as follows: (i) 25,000,000 shares
of Common Stock, par value $0.01 per share ("Common Stock") and (ii) 8,134,000
shares of Preferred Stock, par value $0.01 per share ("Preferred Stock").
The following is a statement of the designation and the powers, privileges
and rights, and the qualifications, limitations of restrictions thereof in
respect of each class of capital stock of the Corporation.
A. COMMON STOCK
------------
1. GENERAL. The voting, dividend and liquidation rights of the holders of
the Common Stock are subject to and qualified by the rights of the holders of
the Preferred stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
<PAGE> 2
2. VOTING. The holders of the Common Stock are entitled to one vote for
each share held at all meetings of stockholders (and written actions in lieu of
meetings). There shall be no cumulative voting.
3. Dividends.
---------
(a) Dividends may be declared and paid on the Common Stock from funds
lawfully available therefor as and when determined by the Board of Directors,
provided, however, that (i) the declaration and payment of any such dividends
shall be subject to any preferential dividend rights of any then outstanding
Preferred Stock, (ii) no dividends shall be declared and paid on the Common
Stock unless there is at the same time a dividend declared and paid on each
share of Series A Preferred Stock in an amount equal to the dividends declared
and paid on the number of whole shares of Common Stock into which such shares is
convertible (as adjusted from time to time pursuant to Section 5 hereof), and
(iii) there shall not be declared or paid any dividends or distributions (as
defined below) on shares of Common Stock without the approval of the holders of
at least 75% of the shares of Series A Preferred Stock then outstanding.
(b) For purposes of this Section 3, unless the context requires
otherwise, "distribution" shall mean the transfer of cash or property without
consideration, whether by way of dividend or otherwise, payable other than in
Common Stock or other securities of the Corporation, or the purchase or
redemption of shares of the Corporation (other than repurchases of Common Stock
held by employees or directors of, or consultants to, the Corporation pursuant
to agreements providing for such repurchase upon a right of first refusal,
restricted stock agreement or other similar agreement, and other than
redemptions in liquidation or dissolution of the Corporation) for cash or
property, including any such transfer, purchase or redemption by a subsidiary of
this Corporation.
4. LIQUIDATION. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
5. SPECIAL VOTES. The number of authorized shares of Common Stock may be
increased or decreased (but not below the number of shares then outstanding) by
the affirmative vote of the holders of 75% of the then outstanding shares of the
Common Stock and Series A Preferred Stock (as defined below), voting as a single
class.
-2-
<PAGE> 3
B. PREFERRED STOCK.
---------------
1. Designation.
-----------
(a) Eight million, one hundred and twenty-five thousand (8,125,000)
shares of the authorized and unissued Preferred Stock of the Corporation are
hereby designated "Series A Convertible Preferred Stock" (the "Series A
Preferred Stock") with the rights, preferences, powers, privileges and
restrictions, qualifications and limitations set forth below.
(b) Nine thousand (9,000) shares of the authorized and unissued
Preferred Stock of the Corporation are hereby designated "Non-Convertible
Preferred Stock" (the "Non-Convertible Preferred Stock") with the rights,
preferences, powers, privileges and restrictions, qualifications and limitations
set forth below.
2. Dividends.
---------
(a) The holders of the Series A Preferred Stock shall be entitled to
receive, out of any funds legally available therefor, dividends in an amount per
share equal to the dividends declared and paid on the number of whole shares of
Common Stock into which a shares of Series A Preferred Stock is convertible (as
adjusted from time to time pursuant to Section 5 hereof).
(b) The holders of the Non-Convertible Preferred Stock shall be
entitled to receive, out of any funds legally available therefor, cumulative
dividends at an annual rate of $70.00 per share. Dividends shall be cumulative
and shall accrue, whether or not declared, from and after the date of issuance.
3. Liquidation, Dissolution and Winding Up.
---------------------------------------
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series A
Preferred stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, before any
payment shall be made to the holders of Non-Convertible Preferred Stock or
Common Stock by reason of their ownership thereof, an amount equal to $1.00 per
share (subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization affecting such
shares), plus any dividends declared but unpaid thereon. If upon any such
liquidation, dissolution or winding up of the Corporation the remaining assets
of the Corporation available for distribution to its stockholders shall be
insufficient to pay the holders of shares of Series A Preferred Stock the full
amount to which they shall be entitled, the holders of shares of Series A
Preferred Stock shall share
-3-
<PAGE> 4
ratably in any distribution of the remaining assets and funds of the Corporation
in proportion to the respective amount which would otherwise be payable in
respect of the shares held by them upon such distribution if all amounts payable
on or with respect to such shares were paid in full.
(b) After the payment of all preferential amounts required to be paid
to the holders of Series A Preferred Stock, upon the dissolution, liquidation or
winding up of the Corporation, the holders of shares of Non-Convertible
Preferred Stock then outstanding shall be entitled, by reason of their ownership
thereof, to receive an amount equal to $1,000.00 per share (subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares), plus any
dividends declared or accrued but unpaid thereon. If upon any such liquidation,
dissolution or winding up of the Corporation, the remaining assets of the
Corporation available for distribution to its stockholders shall be insufficient
to pay the holders of shares of Non-Convertible Preferred Stock the full amount
to which they shall be entitled, the holders of shares of Non-Convertible
Preferred Stock shall share ratably in any distribution of the remaining assets
and funds of the Corporation in proportion to the respective amounts which would
otherwise be payable in respect of the shares held by them upon such
distribution if all amounts payable on or with respect to such shares were paid
in full.
(c) After the payment of all preferential amounts required to be paid
to the holders of Series A Preferred Stock and Non-Convertible Preferred stock,
upon the dissolution, liquidation or winding up of the Corporation, subject to
paragraph (d) of this Section 3 below, the remaining assets and funds of the
Corporation available for distribution to its stockholders shall be distributed
among the holders of shares of Series A Preferred Stock and Common Stock held by
each (assuming conversion into Common Stock of all such shares).
(d) In the event of any merger or consolidation of the Corporation
into or with another corporation (except one in which the holders of capital
stock of the Corporation immediately prior to such merger or consolidation
continue to hold greater than 50% by voting power of the capital stock of the
surviving corporation), or the sale of all or substantially all of the assets of
the Corporation, such merger, consolidation or asset sale shall be deemed to be
a liquidation of the Corporation. In the event of such merger, consolidation or
asset sale, each holder of Series A Preferred Stock shall receive such holder's
preference pursuant to the terms of Paragraph (a) of this Section 3 and to
participate with the holders of Common Stock pursuant to Paragraph (c) of this
Section 3, up to a cap of total proceeds
-4-
<PAGE> 5
from the liquidation of $3.00 per share in 1994, or $4.00 per share in
subsequent years; provided, however, that each holder of Series A Preferred
Stock shall have the right to elect to participate in the transaction pursuant
to the provisions of Subsection 5(i) hereof in lieu of receiving such holder's
preference and participating up to a cap. The amount deemed distributed to the
holders of Series A Preferred Stock upon any such merger or consolidation shall
be cash or the value of the property, rights or securities distributed to such
holders by the acquiring person, firm or other entity. The value of such
property, rights or other securities shall be determined in good faith by the
Board of Directors of the Corporation.
4. Voting.
------
(a) Each holder of outstanding shares of Series A Preferred Stock
shall be entitled to the number of votes equal to the number of whole shares of
Common Stock into which the shares of Series A Preferred Stock held by such
holder are convertible (as adjusted from time to time pursuant to Section 5
hereof), at each meeting of stockholders of the Corporation (and written actions
of stockholders in lieu of meetings) with respect to any and all matters
presented to the stockholders of the Corporation for their action or
consideration. Except as provided by law or as otherwise set forth herein,
holders of Series A Preferred Stock shall vote together with the holders of
Common Stock as a single class.
(b) The Corporation shall not amend, alter or repeal the preferences,
special rights or other powers of the Series A Preferred Stock so as to affect
adversely the Series A Preferred Stock, without the written consent or
affirmative vote of the holders of 75% of the then outstanding shares of Series
A Preferred Stock, given in writing or by vote at a meeting, consenting or
voting (as the case may be) separately as a class. For this purpose, without
limiting the generality of the foregoing, the authorization or issuance of any
series of Series A Preferred Stock with preference or priority over the Series A
Preferred Stock as to the right to receive either dividends or amounts
distributable upon liquidation, dissolution or winding up of the Corporation
shall be deemed to affect adversely the Series A Preferred Stock, and the
authorization or issuance of any series of Series A Preferred Stock on a parity
with Series A Preferred Stock as to the right to receive either dividends or
amounts distributable upon liquidation, dissolution or winding up of the
Corporation shall not be deemed to affect adversely the Series A Preferred
Stock. The number of authorized shares of Series A Preferred Stock may be
increased or decreased (but not below the number of shares then outstanding) by
the affirmative
-5-
<PAGE> 6
vote of the holders of 75% of the then outstanding shares of Series A Preferred
Stock, voting as a single class.
(c) Except as provided by law, the Non-Convertible Preferred Stock
shall have no voting rights.
5. OPTIONAL CONVERSION. The holders of the Series A Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time and from time to
time, into such number of fully paid and nonassessable shares of Common Stock as
is determined by dividing $1.00 by the Conversion Price (as defined below) in
effect at the time of conversion. The conversion price at which shares of Common
stock shall be deliverable upon conversion of Series A Preferred Stock without
the payment of additional consideration by the holder thereof (the "Conversion
Price") shall initially be $1.00. Such initial Conversion Price, and the rate at
which shares of Series A Preferred Stock may be converted into shares of Common
Stock, shall be subject to adjustment as provided below.
In the event of a notice of redemption of any shares of Series A Preferred
Stock pursuant to Section 7 hereof, the Conversion Rights of the shares
designated for redemption shall terminate at the close of business on the fifth
full day preceding the date fixed for redemption, unless the redemption price is
not paid when due, in which case the Conversion Rights for such shares shall
continue until such price is paid in full. In the event of a liquidation,
dissolution or winding up of the Corporation, the Conversion Rights shall
terminate at the close of business on the fifth full day preceding the date
fixed for the payment of any amounts distributable on liquidation, dissolution
or winding up to the holders of Series A Preferred Stock.
(b) FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued upon conversion of the Series A Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
applicable Conversion Price.
(c) MECHANICS OF CONVERSION.
-----------------------
(i) In order for a holder of Series A Preferred Stock to convert
shares of Series A Preferred Stock into shares of Common Stock, such holder
shall surrender the certificate or certificates for such shares of Series A
Preferred Stock, at the office of the transfer agent for the Series A Preferred
Stock (or
-6-
<PAGE> 7
at the principal office of the Corporation if the Corporation serves as its own
transfer agent), together with written notice that such holder elects to convert
all or any number of the shares of the Series A Preferred Stock represented by
such certificate or certificates. Such notice shall state such holder's name or
the names of the nominees in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. If required by the
Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by a written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or his
or its attorney duly authorized in writing. The date of receipt of such
certificates and notice by the transfer agent (or by the Corporation if the
Corporation serves as its own transfer agent) shall be the conversion date
("Conversion Date"). The Corporation shall, as soon as practicable after the
Conversion Date, issue and deliver at such office to such holder of Series A
Preferred Stock, or to his or its nominees, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled,
together with cash in lieu of any fraction of a share, and all declared but
unpaid dividends.
(ii) The Corporation shall at all times when the Series A
Preferred Stock is outstanding, reserve and keep available out of its authorized
but unissued stock, for the purpose of effecting the conversion of the Series A
Preferred Stock, such number of its duly authorized shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding Series A Preferred Stock. Before taking any action which would cause
an adjustment reducing the Conversion Price below the then par value of the
shares of Common Stock issuable upon conversion of the Series A Preferred Stock,
the Corporation will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue fully paid and nonassessable shares of Common Stock at such adjusted
Conversion Price.
(iii) Upon any such conversion, no adjustment to the Conversion
Price shall be made for any declared and unpaid dividends on the Series A
Preferred Stock surrendered for conversion or on the Common Stock delivered upon
conversion, which dividends shall be paid in accordance with clause (iv) below.
(iv) All shares of Series A Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote, shall immediately cease and terminate on
the Conversion Date, except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor and payment of
-7-
<PAGE> 8
any declared and unpaid dividends thereon. Any shares of Series A Preferred
Stock so converted shall be retired and cancelled and shall not be reissued, and
the Corporation (without the need for stockholder action) may from time to time
take such appropriate action as may be necessary to reduce the authorized Series
A Preferred Stock accordingly.
(v) The Corporation shall pay any and all issue and other taxes
that may be payable in respect of any issuance or delivery of shares of Common
Stock upon conversion of shares of Series A Preferred Stock pursuant to this
Section 4. The Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issuance and delivery
of shares of Common Stock in a name other than that in which the shares of
Series A Preferred Stock so converted were registered, and no such issuance or
delivery shall be made unless and until the person or entity requesting such
issuance has paid to the Corporation the amount of any such tax or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
(d) ADJUSTMENTS FOR DILUTING ISSUES.
-------------------------------
(i) SPECIAL DEFINITIONs. For purposes of this Subsection 4(d),
the following definitions shall apply:
(A) OPTION shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities, excluding (i) awards granted to employees or consultants of the
Corporation pursuant to the Corporation's 1994 Equity Incentive Plan (the
"Plan") adopted by the Board of Directors, to acquire up to a maximum of
1,379,453 shares of Common Stock (subject to appropriate adjustment for any
stock dividend, stock split, combination or other similar recapitalization
affecting such shares) and (ii) warrants issued to the original holders of the
Series A Preferred Stock (the "Warrants").
(B) ORIGINAL ISSUE DATE shall mean the date on which a share
of Series A Preferred Stock was first issued.
(C) CONVERTIBLE SECURITIES shall mean any evidences of
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common Stock, excluding shares of Series A Preferred Stock
issued in exercise of the Warrants.
(D) ADDITIONAL SHARES OF COMMON STOCK shall mean all shares
of Common Stock issued (or, pursuant to Subsection 5(d)(iii) below, deemed to be
issued) by the
-8-
<PAGE> 9
Corporation after the Original Issue Date, other than shares of Common Stock
issued or issuable:
(I) upon conversion of shares of Series A Preferred Stock
outstanding on the Original Issue Date or upon
conversion of shares of Series A Preferred issued upon
the exercise of the Warrants;
(II) as a dividend or distribution on Series A Preferred
Stock;
(III) by reason of a dividend or distribution covered by
Subsection 5(f) hereof, a stock split, or subdivision
of shares of Common Stock covered by Subsection 5(e)
hereof, or by reason of a dividend, stock split
subdivision or other distribution on shares of Common
Stock excluded from the definition of Additional Shares
of Common Stock by the foregoing clauses (I) and (II)
or this clause (III); or
(IV) upon the exercise of awards or warrants excluded from
the definition of "Option" in Subsection 5(d)(i)(A).
(V) to Cornell Research Foundation, Inc., Gary W. Pace and
Dennis I. Goldberg of 395,674 shares of Common Stock in
the aggregate.
(ii) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the number of
shares of Common Stock into which the Series A Preferred Stock is convertible
shall be made by adjustment in the applicable Conversion Price thereof: (a)
unless the consideration per share (determined pursuant to Subsection 5(d)(v))
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the applicable Conversion Price in effect on the date
of, and immediately prior to, the issue of such Additional Shares, or (b) if
prior to such issuance, the Corporation receives written notice from the holders
of at least 75% of the then outstanding shares of Series A Preferred Stock
agreeing that no such
-9-
<PAGE> 10
adjustment shall be made as the result of the issuance of Additional Shares of
Common Stock.
(iii) ISSUE OF OPTIONS AND CONVERTIBLE SECURITIES DEEMED ISSUE OF
ADDITIONAL SHARES OF COMMON STOCK.
If the Corporation at any time or from time to time after the Original
Issue Date shall issue any Options or Convertible Securities or shall fix a
record date for the determination of holders of any class of securities entitled
to receive any such Options or Convertible Securities, then the maximum number
of shares of Common Stock (as set forth in the instrument relating thereto
without regard to any provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that
Additional Shares of Common Stock shall not be deemed to have been issued unless
the consideration per share (determined pursuant to Subsection 5(d)(v) hereof)
of such Additional Shares of Common Stock would be less than the applicable
Conversion Price in effect on the date of and immediately prior to such issue,
or such record date, as the case may be, and provided further that in any such
case in which Additional Shares of Common Stock are deemed to be issued:
(A) No further adjustment in the Conversion Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common Stock upon
the exercise of such Options or conversion or exchange of such Convertible
Securities;
(B) If such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any increase in the consideration
payable to the Corporation, or decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the Conversion
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming effective, be recomputed to
reflect such increase or decrease insofar as it affects such Options or the
rights of conversion or exchange under such Convertible Securities;
(C) No readjustment pursuant to clause (B) above shall have the effect
of increasing the Conversion Price to an amount which exceeds the lower of (i)
the Conversion Price on
-10-
<PAGE> 11
the original adjustment date, or (ii) the Conversion Price that would have
resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date;
(D) Upon the expiration or termination of any unexercised Option, the
Conversion Price shall not be readjusted, but the Additional Shares of Common
Stock deemed issued as the result of the original issue of such Option shall not
be deemed issued for the purposes of any subsequent adjustment of the Conversion
Price; and
(E) In the event of any change in the number of shares of Common Stock
issuable upon the exercise, conversion or exchange of any Option or Convertible
Security, including, but not limited to, a change resulting from the
antidilution provisions thereof, the Conversion Price then in effect shall
forthwith be adjusted to such Conversion Price as would have obtained had the
adjustment which was made upon the issuance of such Option or Convertible
Security (prior to such change) been made upon the basis of such change, but no
further adjustment shall be made for the actual issuance of Common Stock upon
the exercise or conversion of any such Option or Convertible Security.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF
COMMON STOCK.
In the event the Corporation shall issue, at any time or from time to time
after the Original Issue Date, Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Subsection
5(d)(iii), but excluding shares issued as a dividend or distribution as provided
in Subsection 5(f) or upon a stock split or combination as provided in
Subsection 5(e)), without consideration or for a consideration per share less
than the applicable Conversion Price in effect on the date of and immediately
prior to such issue, then and in such event, such Conversion Price shall be
reduced, concurrently with such issue, to a price (calculated to the nearest
cent) determined by multiplying such Conversion Price by a fraction, (A) the
numerator of which shall be (1) the number of shares of Common Stock outstanding
immediately prior to such issue plus (2) the number of shares of Common Stock
which the aggregate consideration received by the Corporation for the total
number of Additional Shares of Common Stock so issued would purchase at such
Conversion Price; and (B) the denominator of which shall be the number of shares
of Common Stock outstanding immediately prior to such issue plus the number of
such Additional Shares of Common Stock so issued; PROVIDED THAT, for the purpose
of this Subsection 5(d)(iv), all shares of Common Stock issuable upon conversion
of shares of Series A Preferred Stock outstanding
-11-
<PAGE> 12
immediately prior to such issue shall be deemed to be outstanding, and
immediately after any Additional Shares of Common Stock are deemed issued
pursuant to Subsection 5(d)(iii) (other than shares excluded from the definition
of "Additional Shares of Common Stock" by virtue of clause (IV) of Subsection
5(d)(i)(D)), such Additional Shares of Common Stock shall be deemed to be
outstanding.
Notwithstanding the foregoing, the applicable Conversion Price shall not be
so reduced at such time if the amount of such reduction would be an amount less
than $.05, but any such amount shall be carried forward and reduction with
respect thereto made at the time of and together with any subsequent reduction
which, together with such amount and any other amount or amounts so carried
forward, shall aggregate $.05 or more.
(v) DETERMINATION OF CONSIDERATION. For purposes of this Subsection
5(d), the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(A) CASH AND PROPERTY: Such consideration shall:
(I) insofar as it consists of cash, be computed at the
aggregate of cash received by the Corporation, excluding amounts paid or payable
for accrued interest or accrued dividends;
(II) insofar as it consists of property other than cash, be
computed at the fair market value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and
(III) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (I) and (II) above,
as determined in good faith by the Board of Directors.
(B) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per
share received by the Corporation for Additional Shares of Common Stock deemed
to have been issued pursuant to Subsection 5(d)(iii), relating to Options and
Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate
-12-
<PAGE> 13
amount of additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a subsequent
adjustment of such consideration) payable to the Corporation upon the exercise
of such Options or the conversion or exchange of such Convertible Securities, or
in the case of Options for Convertible Securities, the exercise of such Options
for Convertible Securities and the conversion or exchange of such Convertible
Securities, in either case for the issuance of the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, by
(y) the maximum number of shares of Common Stock (as set forth
in the instruments relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such number) issuable upon the exercise
of such Options or the conversion or exchange of such Convertible Securities.
(e) ADJUSTMENTS FOR STOCK SPLITS AND COMBINATIONS. If the Corporation
shall, at any time or from time to time after the Original Issue Date, effect a
subdivision of the outstanding Common Stock, the Conversion Price then in effect
immediately before that subdivision shall be proportionately decreased. If the
Corporation shall, at any time or from time to time while there are any shares
of Series A Preferred Stock outstanding, combine the outstanding shares of
Common Stock, the Conversion Price then in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
paragraph shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(f) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event
the Corporation at any time, or from time to time after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Conversion
Price then in effect shall be decreased as of the time of such issuance or, in
the event such a record date shall have been fixed, as of the close of business
on such record date, by multiplying the Conversion Price then in effect by a
fraction:
(1) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date, and
-13-
<PAGE> 14
(2) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend
or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Price shall be recomputed accordingly as of the close
of business on such record date and thereafter the Conversion Price shall be
adjusted pursuant to this paragraph as of the time of actual payment of such
dividends or distributions.
(g) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event
the Corporation at any time or from time to time after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, then and in
each such event provision shall be made so that the holders of Series A
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation that they would have received had the Series A Preferred Stock been
converted into Common Stock on the date of such event and had thereafter, during
the period from the date of such event to and including the conversion date,
retained such securities receivable by them as aforesaid during such period
giving application to all adjustments called for during such period, under this
paragraph with respect to the rights of the holders of the Series A Preferred
Stock.
(h) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE, OR SUBSTITUTION. If the
Common Stock issuable upon the conversion of the Series A Preferred Stock shall
be changed into the same or a different number of shares of any class or classes
of stock, whether by capital reorganization, reclassification, or otherwise
(other than a subdivision or combination of shares of stock dividend provided
for above, or a reorganization, merger, consolidation, or sale of assets
provided for below), then and in each such event the holder of each such share
of Series A Preferred Stock shall have the right thereafter to convert such
share into the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification, or other change,
by holders of the number of shares of Common Stock into which such shares of
Series A Preferred Stock might have been converted immediately prior to
-14-
<PAGE> 15
such reorganization, reclassification, or change, all subject to further
adjustment as provided herein.
(i) ADJUSTMENT FOR MERGER OR REORGANIZATION, ETC. Subject to Section 3
hereof, in case of any consolidation or merger of the Corporation with or into
another corporation (except one in which the holders of capital stock of the
Corporation immediately prior to such merger or consolidation continue to hold
greater than 50% by voting power of the capital stock of the surviving
corporation), or the sale of all or substantially all of the assets of the
Corporation to another corporation, each share of Series A Preferred Stock shall
thereafter be convertible into the kind and amount of shares of stock or other
securities or property to which a holder of the number of shares of Common Stock
of the Corporation deliverable upon conversion of such Series A Preferred Stock
would have been entitled upon such consolidation, merger or sale and, in such
case, appropriate adjustment (as determined in good faith by the Board of
Directors) shall be made in the application of the provisions set forth in this
Section 5 with respect to the rights and interest thereafter of the holders of
the Series A Preferred Stock, to the end that the provisions set forth in this
Section 5 (including provisions with respect to changes in and other adjustments
of the Conversion Price) shall thereafter be applicable, as nearly as reasonably
may be, in relation to any shares of stock or other property thereafter
deliverable upon the conversion of the Series A Preferred Stock.
(j) NO IMPAIRMENT. The Corporation will not, by amendment of its
Certificate of Incorporation or By-laws 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 to be observed or performed hereunder by the Corporation,
but will at all times in good faith assist in the carrying out of all the
provisions of this Section 5 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred Stock against impairment.
(k) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 5,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series A Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a similar certificate setting forth (i) such adjustments and
-15-
<PAGE> 16
readjustments, (ii) the Conversion Price then in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which then
would be received upon the conversion of Series A Preferred Stock.
(I) NOTICE OF RECORD DATE. In the event:
(i) that the Corporation declares a dividend (or any other
distribution) on its Common Stock payable in Common Stock or
other securities of the Corporation;
(ii) that the Corporation splits, subdivides or combines its
outstanding shares of Common Stock;
(iii) of any reclassification of the Common Stock of the
Corporation (other than a stock split, subdivision or
combination of its outstanding shares of Common Stock or a
stock dividend or stock distribution thereon), or of any
consolidation or merger of the Corporation into or with
another corporation, or of the sale of all or substantially
all of the assets of the Corporation; or
(iv) of the involuntary or voluntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Series A Preferred Stock, and shall cause to
be mailed to the holders of the Series A Preferred Stock at their last addresses
as shown on the records of the Corporation or such transfer agent, at least ten
days prior to the record date specified in (A) below or twenty days before the
date specified in (B) below, a notice stating:
(A) the record date of such dividend, distribution, stock split,
subdivision or combination, or, if a record is not to be
taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, stock
split, subdivision or combination are to be determined, or
-16-
<PAGE> 17
(B) the date on which such reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such
reclassification, consolidation, merger, sale, dissolution
or winding up.
6. Mandatory Conversion.
--------------------
a. The Corporation may, at its option, require all (but not less than
all) of the shares of Series A Preferred Stock then outstanding to be converted
automatically into shares of Common Stock, at the then current Conversion Price,
upon the consummation of an underwritten public offering of Common Stock of the
Corporation pursuant to a registration statement filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, covering the
offer and sale of Common Stock to the public in a firm commitment underwriting
at a price of at least $3.00 per share during 1994 and at least $4.00 per share
thereafter, resulting in the receipt by the Corporation of net proceeds from
such sale of not less than $10,000,000 (a "Qualified Public Offering").
b. All holders of record of shares of Series A Preferred Stock will be
given at least 10 days' prior written notice of the date fixed and the place
designated for mandatory conversion of all of such shares of Series A Preferred
Stock pursuant to this Section 6. Such notice will be sent by first class or
registered mail, postage prepaid, to each record holder of Series A Preferred
Stock at such holder's address appearing on the stock register. On or before the
date fixed for conversion, each holder of shares of Series A Preferred Stock
shall surrender his or its certificate or certificates for all such shares to
the Corporation at the place designated in such notice, and shall thereafter
receive certificates for the number of shares of Common Stock to which such
holder is entitled pursuant to this Section 6. On the date fixed for conversion,
all rights with respect to the Series A Preferred Stock so converted will
terminate, except only the rights of the holders thereof, upon surrender of
their certificate or certificates therefor, to receive certificates for the
number of shares of Common Stock into which such Series A Preferred Stock has
been converted. If so requested by the Corporation, certificates surrendered for
conversion shall be endorsed or accompanied by written instrument or instruments
of
-17-
<PAGE> 18
transfer, in form satisfactory to the Corporation, duly executed by the
registered holder or by his or its attorney duly authorized in writing. All
certificates evidencing shares of Series A Preferred Stock which are required to
be surrendered for conversion in accordance with the provisions hereof shall,
from and after the date such certificates are so required to be surrendered, be
deemed to have been retired and canceled and the shares of Series A Preferred
Stock represented thereby converted into Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date. As soon as practicable after the date of
such mandatory conversion and the surrender of the certificate or certificates
for Series A Preferred Stock, the Corporation shall cause to be issued and
delivered to such holder, or on his or its written order, a certificate or
certificates for the number of full shares of Common Stock issuable on such
conversion in accordance with the provisions hereof and cash as provided in
Subsection 5(b) in respect of any fraction of a share of Common Stock otherwise
issuable upon such conversion.
7. Redemption of Series A Preferred Stock at Option of Holder.
----------------------------------------------------------
a. Upon the fifth or any later anniversary of April 5, 1994, if the
Corporation receives notice from holders of at least 75% of the then outstanding
shares of Series A Preferred Stock agreeing to the redemption (the "Election
Date"), on the date 30 days after the Election Date and the two following
anniversaries of such day (collectively, the "Redemption Dates" and
individually, a "Redemption Date"), each holder of Series A Preferred Stock
shall have the right to require the Corporation to redeem on each of those dates
up to 33%, 66% and 100% of the shares of Series A Preferred Stock held by such
holder on each of those dates, or such lesser number of shares of Series A
Preferred Stock as the holder may determine. If any shares of Series A Preferred
Stock are eligible for redemption in one year and the holder elects not to have
such shares redeemed on that Redemption Date, such holder may elect to have all
or a portion of such shares redeemed on the anniversary of a Redemption Date in
a later year; provided, that, such election is not made after the third
anniversary of the first Redemption Date. Any holder desiring to exercise the
redemption right granted herein (a "Requesting Holder") shall provide written
notice to the Corporation setting forth the number of shares to be redeemed. On
the Redemption Date and upon a holder's surrender, in accordance with this
Section 7(a), of his or its certificates representing shares to be redeemed, the
redemption price shall be paid by the Corporation in cash in an amount equal to
$1.00 per share (subject to appropriate adjustment for stock splits, stock
dividends, combinations and
-18-
<PAGE> 19
other similar recapitalizations affecting such shares) of Series A Preferred
Stock, plus an amount equal to all declared but unpaid dividends payable in
accordance with Section 1 hereof on each share of Series A Preferred Stock to be
redeemed (the "Redemption Price").
b. Subject to the satisfaction of the condition set forth in the first
sentence of Subsection 7(a) above, within five days following its receipt from a
Requesting Holder of a notice of intent to exercise redemption rights pursuant
to Subsection 7(a) hereof, the Corporation shall provide each holder of Series A
Preferred Stock, other than the Requesting Holder, with a written notice
(addressed to the holder at its address as it appears on the stock transfer
books of the Corporation) containing an offer to redeem shares of Series A
Preferred Stock as provided above, which notice shall specify the applicable
Redemption Price. Each holder of Series A Preferred Stock, other than the
Requesting Holder, will have until 10 days prior to the Redemption Date to
provide the Corporation with written notice of such holder's acceptance of the
redemption offer, which notice shall specify the number of shares to be
redeemed. All notices or offers hereunder shall be sent by first class or
registered mail, postage prepaid, and shall be deemed to have been provided when
mailed.
c. In the event that any holder of Series A Preferred Stock, other
than the Requesting Holder, does not provide the Corporation with written notice
of the holder's acceptance of the redemption offer on or before the date 10 days
prior to the applicable Redemption Date, the Corporation shall have no
obligation to redeem any shares of Series A Preferred Stock of such holder on
the Redemption Date specified in its notice to such holder or at any time
thereafter.
d. The provisions of Subsection 7(a) notwithstanding, any such
optional redemption is subject to the approval of a majority of the Board of
Directors of the Corporation and such majority may, in the good faith belief
that the requested redemption would be detrimental to the future prospects of
the Corporation, postpone such redemption for a period of one year.
e. In addition to the redemption rights set forth in Subsection 7(a),
in the event that, (i) prior to the selection by the Corporation of a permanent
Chief Executive Officer, the holders of 75% of the then outstanding shares of
Series A Preferred Stock agree, or (ii) subsequent to such selection, a majority
of the Corporation's Board of Directors agrees that an adverse change in the
business prospects of the Corporation has occurred, then each holder of shares
of Series A Preferred Stock may elect, at his or its option, to have the
Corporation redeem
-19-
<PAGE> 20
(on the date 30 days after such election) some or all of such shares at the
Redemption Price; provided that, if the Corporation's funds are insufficient to
make the requested redemption possible at the Redemption Price, then each holder
who elected to redeem shall be entitled to redeem a ratable portion of his or
its shares based on the availability of funds.
f. On or prior to the Redemption Date, unless postponed pursuant to
Subsection 7(d) above, the Requesting Holder and each other holder of Series A
Preferred Stock accepting the Corporation's redemption offer shall surrender his
or its certificate or certificates representing the shares to be redeemed, in
the manner and at the place designated in the Corporation's redemption offer. If
less than all shares represented by such certificate or certificates are
redeemed, the Corporation shall issue a new certificate for the unredeemed
shares. From and after the Redemption Date, unless there shall be a default in
payment of the Redemption Price, all rights of each holder with respect to
shares of Series A Preferred Stock redeemed on the Redemption Date shall cease
(except the right to receive the Redemption Price without interest upon
surrender of the certificate or certificates therefor), and such shares shall
not be deemed to be outstanding for any purpose whatsoever. Such shares of
Series A Preferred Stock shall not be reissued, and the Corporation may from
time to time take such appropriate action as may be necessary to reduce the
authorized Preferred Stock accordingly.
g. For the purpose of determining whether funds are legally available
for redemption of shares of Series A Preferred Stock as provided herein, the
Corporation shall value its assets at the highest amount permissible under
applicable law. If on the Redemption Date funds of the Corporation legally
available therefor shall be insufficient to redeem all the shares of Series A
Preferred Stock required to be redeemed as provided herein, funds to the extent
legally available shall be used for such purpose and the Corporation shall
effect such redemption pro rata according to the number of shares of Series A
Preferred Stock held by each holder accepting the Corporation's redemption
offer. The redemption requirements provided hereby shall be continuous, so that
if on the Redemption Date such requirements shall not be fully discharged,
without further action by any holder of Series A Preferred Stock, funds legally
available shall be applied therefor until such requirements are fully
discharged.
h. The foregoing provisions of this Section 7 shall terminate on the
consummation of a Qualified Public Offering.
-20-
<PAGE> 21
8. Redemption of Non-Convertible Preferred Stock at Option of Holder.
-----------------------------------------------------------------
a. In the event of transfers aggregating more than 50% of the
Corporation's outstanding Series A Preferred Stock to holders of record who are
not (i) stockholders of the Corporation, (ii) the original holders of Series A
Preferred Stock, (iii) Clintec Nutrition Company or (iv) any affiliates,
partners or stockholders of any individuals or entities set forth in clauses
(ii) or (iii) hereof and upon the election at any time thereafter of the holders
of a majority of the Non-Convertible Preferred Stock, the Corporation will
redeem upon the later of (A) thirty (30) days after the consummation of the last
such transfer or (B) ten (10) days after the Corporation's receipt of the notice
of election of redemption from holders of a majority of the Non-Convertible
Preferred Stock one quarter of the then outstanding shares of Non-Convertible
Preferred Stock (the "Initial Redemption Date") and one quarter of such shares
in each of the following three years on the anniversary date of the Initial
Redemption Date (collectively, the "Redemption Dates" each a "Redemption Date")
at a price equal to $1,000 per share plus any accrued, but unpaid dividends. The
Corporation shall give written notice to the holders of record of the
Non-Convertible Preferred Stock within 30 business days after there have been
transfers of more than 50% of the Corporation's outstanding Series A Preferred
Stock as provided in this subsection 8(a).
If at the time of any due date of a redemption payment pursuant to this
Subsectoin 8(a) the Corporation is then obligated to make a redemption pursuant
to Section 7, no payment shall be made under this Subsection 8(a) until the
Corporation's obligations under Section 7 have been satisfied in full.
b. The provisions of Subsection 8(a) notwithstanding, a majority of
the Board of Directors of the Corporation may, in the good faith belief that the
requested redemption would be detrimental to the Corporation's interests,
postpone such redemption for a period of one year.
c. The Corporation may elect, at any time, to redeem 100% of the
then-outstanding shares of Non-Convertible Preferred Stock at a price equal to
$1,000 per share plus any accrued, but unpaid dividends.
d. On or prior to the Redemption Date, unless postponed pursuant to
Section 8(b) above, each holder of NonConvertible Preferred Stock shall
surrender his or its certificate or certificates representing the shares to be
redeemed, in the manner and at the place designated by the Corporation. If less
-21-
<PAGE> 22
than all shares represented by such certificate or certificates are redeemed,
the Corporation shall issue a new certificate for the unredeemed shares. From
and after the Redemption Date, unless there shall be a default in payment of the
Redemption Price, all rights of each holder with respect to shares of
Non-Convertible Preferred Stock redeemed on the Redemption Date shall cease
(except the right to receive the Redemption Price without interest upon
surrender of the certificate or certificates therefor), and such shares shall
not be deemed to be outstanding for any purpose whatsoever. Such shares of
Non-Convertible Preferred Stock shall not be reissued, and the Corporation may
from time to time take such appropriate action as may be necessary to reduce the
authorized Non-Convertible Preferred Stock accordingly.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. The Board of Directors is expressly authorized to exercise all
powers granted to the Directors by law except insofar as such powers are limited
or denied herein or in the by-laws of the Corporation. In furtherance of such
powers, the Board of Directors shall have the right to make, alter or repeal the
by-laws of the Corporation.
SEVENTH. Meetings of stockholders of the Corporation may be held within or
without the State of Delaware, as the by-laws may provide. The books of the
Corporation may be kept outside the State of Delaware at such place or places as
may be designated from time to time by the Board of Directors or in the by-laws
of the Corporation. Elections of Directors need not be by written ballot unless
the by-laws of the Corporation shall so provide.
EIGHTH. The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as amended from
time to time, indemnify each person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was, or has agreed to become, a director or officer of the
corporation, or is or was serving, or has agreed to serve, at the request of the
corporation, as a director, officer or trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom.
Indemnification may include payment by the Corporation of expenses in
defending an action or proceeding in advance of the
-22-
<PAGE> 23
final disposition of such action or proceeding upon receipt of any undertaking
by the person indemnified to repay such payment if it is ultimately determined
that such person is not entitled to indemnification under this Article, which
undertaking may be accepted without reference to the financial ability of such
person to make such repayments.
The Corporation shall not indemnify any such person seeking indemnification
in connection with a proceeding (or part thereof) initiated by such person
unless the initiation thereof was approved by the Board of Directors of the
Corporation.
The indemnification rights provided in this Article Eighth (i) shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any law, agreement or vote of stockholders or disinterested directors or
otherwise, and (ii) shall inure to the benefit of the heirs, executors and
administrators of such persons. The Corporation may, to the extent authorized
from time to time by its Board of Directors, grant indemnification rights to
other employees or agents of the Corporation or other persons serving the
Corporation and such rights may be equivalent to, or greater or less than, those
set forth in this Article.
NINTH. No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director. Notwithstanding the foregoing sentence, a director shall
be liable to the extent provided by applicable law (i) for breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit. If the Delaware General Corporation Law is
hereinafter amended to authorize a further limitation or elimination of the
liability of directors or officers, then the liability of a director or officer
of the Corporation shall, in addition to the limitation on personal liability
provided herein, be limited or eliminated to the fullest extent permitted by the
Delaware General Corporation Law, as from time to time amended. No amendment to
or repeal of this Article Ninth shall apply to or have any effect on the
liability or alleged liability of any director or officer of the Corporation for
or with respect to any acts or omissions of such director of officer occurring
prior to such amendment or repeal.
TENTH. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated
-23-
<PAGE> 24
Certificate of Incorporation, in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders herein are granted subject
to this reservation.
This Restated Certificate of Incorporation was duly adopted in accordance
with the provisions of Sections 242 and 245 of the Delaware General Corporation
Law by written consent in accordance with Section 228 of the Delaware General
Corporation Law.
Signed this 4th day of April, 1994.
/s/ Gary W. Pace
-----------------------
Gary W. Pace, President
Attest:
/s/ Inge Henriksen
- -----------------------------------
Inge Henriksen, Assistant Secretary
-24-
<PAGE> 25
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FREE RADICAL SCIENCES, INC.
Pursuant to Section 242
of the General Corporation Law of
the State of Delaware
---------------------------------
Free Radical Sciences, Inc. (hereinafter called the
"Corporation"), organized and existing under and by virtue of the
General Corporation Law of the State of Delaware, does hereby
certify as follows:
FIRST: That the Board of Directors of the Corporation, by
written action in lieu of a meeting, proposed and declared
advisable the following amendment to the Corporation's Restated
Certificate of Incorporation:
That the Board of Directors of the Corporation deems it advisable that
the Certificate of Incorporation of the Corporation be amended to
change the name of the Company to "Transcend Therapeutics, Inc.", such
amendment to be effected by amending Article First of the Certificate
of Incorporation of the Corporation to read as follows:
"ARTICLE FIRST: The name of the Corporation is
Transcend Therapeutics, Inc."; and
such amendment be submitted to the stockholders of the Corporation for
their review and approval.
SECOND: That the stockholders of the Corporation have duly
consented to the adoption of the foregoing resolution and the
amendment contained therein; that written notice of such consent
has been delivered to all stockholders not so consenting; and that
the aforesaid amendment was duly adopted in accordance with the
applicable provisions of Section 228 and 242 of the General
Corporation Law of the State of Delaware.
-25-
<PAGE> 26
IN WITNESS WHEREOF, the Corporation has caused its corporate
seal to be affixed hereto and this Certificate of Amendment to be
signed by its President and attested by its Secretary this 9th day
of June, 1995
FREE RADICAL SCIENCES, INC.
/s/ B. Nicholas Harvey
---------------------------
B. Nicholas Harvey
Chief Financial Officer
[Corporate Seal]
-26-
<PAGE> 27
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
TRANSCEND THERAPEUTICS, INC.
Pursuant to Section 242
of the General Corporation Law of
the State of Delaware
---------------------------------
Transcend Therapeutics, Inc., a Delaware corporation (the "Corporation"),
does hereby certify, pursuant to Section 242 of the General Corporation Law of
the State of Delaware, that:
FIRST: In a Written Action in Lieu of a Meeting of all of the members of
the Board of Directors of the Corporation on September 1, 1995, resolutions were
duly adopted proposing an Amendment to the Restated Certificate of
Incorporation, as amended, of the Corporation changing Article Fourth of the
Restated Certificate of Incorporation as provided for herein, and submitting
such proposal to the shareholders of the Corporation.
SECOND: Pursuant to Section 228 of the General Corporation Law of the State
of Delaware, the proposed Amendment to the Restated Certificate of Incorporation
has been approved and adopted by the shareholders of the Corporation.
THIRD: Accordingly, Article Fourth of the Restated Certificate of
Incorporation of the Corporation is hereby amended as follows:
9. The first paragraph of Article FOURTH of the Restated Certificate
of Incorporation, as amended, of the Corporation is hereby deleted in its
entirety and replaced with the following:
FOURTH: The total number and classes of shares of capital stock
that the Corporation shall have authority to issue is as follows: (i)
25,000,000 shares of Common Stock, par value $0.01 per share ("Common
Stock") and (ii) 12,100,000 shares of Preferred Stock, par value $0.01
per share ("Preferred Stock").
10. Section B.1. of Article FOURTH of the Restated Certificate of
Incorporation, as amended, of the Corporation is hereby deleted in its
entirety and replaced with the following:
-27-
<PAGE> 28
C. PREFERRED STOCK.
1. Designation.
-----------
(a) Twelve million, ninety-one thousand (12,091,000) shares of
the authorized and unissued Preferred Stock of the Corporation are hereby
designated "Series A Convertible Preferred Stock" (the "Series A Preferred
Stock") with the rights, preferences, powers, privileges and restrictions,
qualifications and limitations set forth below.
(b) Nine thousand (9,000) shares of the authorized and unissued
Preferred Stock of the Corporation are hereby designated "Non-Convertible
Preferred Stock" (the "Non-Convertible Preferred Stock") with the rights,
preferences, powers, privileges and restrictions, qualifications and
limitations set forth below.
IN WITNESS WHEREOF, Transcend Therapeutics, Inc. has caused this
Certificate of Amendment to its Restated Certificate of Incorporation, as
amended, to be executed by B. Nicholas Harvey, Treasurer and Secretary of the
Corporation, this 12th day of September, 1995.
TRANSCEND THERAPEUTICS, INC.
By: /s/ B. Nicholas Harvey
-------------------------
B. Nicholas Harvey
Treasurer and Secretary
-28-
<PAGE> 29
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
TRANSCEND THERAPEUTICS, INC.
Pursuant to Section 242
of the General Corporation Law of
the State of Delaware
---------------------------------
Transcend Therapeutics, Inc., a Delaware corporation (the "Corporation"),
does hereby certify, pursuant to Section 242 of the General Corporation Law of
the State of Delaware, that:
FIRST: In a Written Action in Lieu of a Meeting of all of the members of
the Board of Directors of the Corporation on December 20, 1995, resolutions were
duly adopted proposing an Amendment to the Restated Certificate of
Incorporation, as amended, of the Corporation changing Article Fourth of the
Restated Certificate of Incorporation as provided for herein, and submitting
such proposal to the shareholders of the Corporation.
SECOND: Pursuant to Section 228 of the General Corporation Law of the State
of Delaware, the proposed Amendment to the Restated Certificate of Incorporation
has been approved and adopted by the shareholders of the Corporation.
THIRD: Accordingly, Article Fourth of the Restated Certificate of
Incorporation of the Corporation is hereby amended as follows:
2. The first paragraph of Article FOURTH of the Restated Certificate
of Incorporation, as amended, of the Corporation is hereby deleted in its
entirety and replaced with the following:
FOURTH: The total number and classes of shares of capital stock
that the Corporation shall have authority to issue is as follows: (i)
25,000,000 shares of Common Stock, par value $0.01 per share ("Common
Stock") and 13,000,000 shares of Preferred Stock, par value $0.01 per
share ("Preferred Stock").
3. Section B.1. of Article FOURTH of the Restated Certificate of
Incorporation, as amended, of the Corporation is hereby deleted in its
entirety and replaced with the following:
-29-
<PAGE> 30
E. PREFERRED STOCK.
---------------
1. Designation.
-----------
(a) Twelve million, nine hundred ninety-one thousand (12,991,000)
shares of the authorized and unissued Preferred Stock of the Corporation
are hereby designated "Series A Convertible Preferred Stock" (the "Series A
Preferred Stock") with the rights, preferences, powers, privileges and
restrictions, qualifications and limitations set forth below.
(b) Nine thousand (9,000) shares of the authorized and unissued
Preferred Stock of the Corporation are hereby designated "Non-Convertible
Preferred Stock" (the "Non-Convertible Preferred Stock") with the rights,
preferences, powers, privileges and restrictions, qualifications and
limitations set forth below.
IN WITNESS WHEREOF, Transcend Therapeutics, Inc. has caused this
Certificate of Amendment to its Restated Certificate of Incorporation, as
amended, to be executed by B. Nicholas Harvey, Treasurer and Secretary of the
Corporation, this 24th day of January, 1996.
TRANSCEND THERAPEUTICS, INC.
By: /s/ B. Nicholas Harvey
-------------------------
B. Nicholas Harvey
Treasurer and Secretary
-30-
<PAGE> 31
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
TRANSCEND THERAPEUTICS, INC.
Pursuant to Section 242
of the General Corporation Law of
the State of Delaware
---------------------------------
Transcend Therapeutics, Inc., a Delaware corporation (the "Corporation"),
does hereby certify, pursuant to Section 242 of the General Corporation Law of
the State of Delaware, that:
FIRST: In a meeting of the members of the Board of Directors of the
Corporation at which a quorum was present at all times held on July 25, 1996,
resolutions were duly adopted proposing an Amendment to the Restated Certificate
of Incorporation of the Corporation changing Article FOURTH of the Restated
Certificate of Incorporation as provided for herein, and submitting such
proposal to the shareholders of the Corporation.
SECOND: Pursuant to Section 228 of the General Corporation Law of the State
of Delaware, the proposed Amendment to the Restated Certificate of Incorporation
has been approved and adopted by the shareholders of the Corporation and written
notice has been given as provided in Section 228.
THIRD: Accordingly, Article FOURTH of the Restated Certificate of
Incorporation of the Corporation is hereby deleted in its entirety and replaced
as set forth in EXHIBIT A hereto.
IN WITNESS WHEREOF, Transcend Therapeutics, Inc. has caused this
Certificate of Amendment to its Restated Certificate of Incorporation, as
amended, to be executed by B. Nicholas Harvey, Treasurer and Secretary of the
Corporation, this 30 day of July, 1996.
TRANSCEND THERAPEUTICS, INC.
By: /s/ B. Nicholas Harvey
-------------------------
B. Nicholas Harvey
Treasurer and Secretary
-31-
<PAGE> 32
Exhibit A
---------
FOURTH: The total number and classes of shares of capital stock that the
Corporation shall have authority to issue is as follows: (i) 25,000,000 shares
of Common Stock, par value $0.01 per share ("Common Stock") and (ii) 16,000,000
shares of Preferred Stock, par value $0.01 per share ("Preferred Stock").
The following is a statement of the designation and the powers, privileges
and rights, and the qualifications, limitations of restrictions thereof in
respect of each class of capital stock of the Corporation.
F. COMMON STOCK
------------
1. GENERAL. The voting, dividend and liquidation rights of the holders of
the Common Stock are subject to and qualified by the rights of the holders of
the Preferred stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. VOTING. The holders of the Common Stock are entitled to one vote for
each share held at all meetings of stockholders (and written actions in lieu of
meetings). There shall be no cumulative voting.
3. DIVIDENDS.
---------
(a) Dividends may be declared and paid on the Common Stock from funds
lawfully available therefor as and when determined by the Board of Directors,
provided, however, that (i) the declaration and payment of any such dividends
shall be subject to any preferential dividend rights of any then outstanding
Preferred Stock, (ii) no dividends shall be declared and paid on the Common
Stock unless there is at the same time a dividend declared and paid on each
share of Series A Preferred Stock and Series B Preferred stock (each as defined
below) in an amount equal to the dividends declared and paid on the number of
whole shares of Common Stock into which such shares is convertible (as adjusted
from time to time pursuant to Section 5 hereof), and (iii) there shall not be
declared or paid any dividends or distributions (as defined below) on shares of
Common Stock without the approval of the holders of at least 75% of the shares
of Series A Preferred Stock and 75% of the Series B Preferred Stock then
outstanding.
(b) For purposes of this Section 3, unless the context requires
otherwise, "distribution" shall mean the transfer of cash or property without
consideration, whether by way of dividend or
-32-
<PAGE> 33
otherwise, payable other than in Common Stock or other securities of the
Corporation, or the purchase or redemption of shares of the Corporation (other
than repurchases of Common Stock held by employees or directors of, or
consultants to, the Corporation pursuant to agreements providing for such
repurchase upon a right of first refusal, restricted stock agreement or other
similar agreement, and other than redemptions in liquidation or dissolution of
the Corporation) for cash or property, including any such transfer, purchase or
redemption by a subsidiary of this Corporation.
4. LIQUIDATION. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
5. SPECIAL VOTES. The number of authorized shares of Common Stock may be
increased or decreased (but not below the number of shares then outstanding) by
the affirmative vote of the holders of 75% of the then outstanding shares of the
Common Stock, Series A Preferred Stock and Series B Preferred Stock (each as
defined below) voting as a single class.
G. PREFERRED STOCK.
1. DESIGNATION.
-----------
(a) Twelve Million, nine hundred ninety one (12,991,000) shares of the
authorized and unissued Preferred Stock of the Corporation are hereby designated
"Series A Convertible Preferred Stock" (the "Series A Preferred Stock") with the
rights, preferences, powers, privileges and restrictions, qualifications and
limitations set forth below.
(b) Three Million (3,000,000) shares of the authorized and unissued
Preferred Stock of the Corporation are hereby designated "Series B Convertible
Preferred Stock" (the "Series B Preferred Stock") with the rights, preferences,
powers, privileges and restrictions, qualifications and limitations set forth
below. The Series A Preferred Stock and Series B Preferred Stock are sometimes
referred to collectively herein as the "Convertible Preferred Stock".
(c) Nine thousand (9,000) shares of the authorized and unissued
Preferred Stock of the Corporation are hereby designated "Non-Convertible
Preferred Stock" (the "Non-Convertible Preferred Stock") with the rights,
preferences, powers, privileges and restrictions, qualifications and limitations
set forth below.
-33-
<PAGE> 34
2. Dividends.
---------
(a) The holders of the Convertible Preferred Stock shall be entitled
to receive, out of any funds legally available therefor, dividends in an amount
per share equal to the dividends declared and paid on the number of whole shares
of Common Stock into which a share of such series of Convertible Preferred Stock
is convertible (as adjusted from time to time pursuant to Section 5 hereof).
(b) The holders of the Non-Convertible Preferred Stock shall be
entitled to receive, out of any funds legally available therefor, cumulative
dividends at an annual rate of $70.00 per share. Dividends shall be cumulative
and shall accrue, whether or not declared, from and after the date of issuance.
3. Liquidation, Dissolution and Winding Up.
---------------------------------------
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of
Convertible Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its stockholders,
before any payment shall be made to the holders of Non-Convertible Preferred
Stock or Common Stock by reason of their ownership thereof, an amount equal to
$1.00 per share (with respect to shares of Series A Preferred Stock) and $1.50
per share (with respect to shares of Series B Preferred Stock) (subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares), plus any
dividends declared but unpaid thereon. If upon any such liquidation, dissolution
or winding up of the Corporation the remaining assets of the Corporation
available for distribution to its stockholders shall be insufficient to pay the
holders of shares of Convertible Preferred Stock the full amount to which they
shall be entitled, the holders of shares of Convertible Preferred Stock shall
share ratably in any distribution of the remaining assets and funds of the
Corporation in proportion to the respective amount which would otherwise be
payable in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to such shares were paid in full.
(b) After the payment of all preferential amounts required to be paid
to the holders of Convertible Preferred Stock, upon the dissolution, liquidation
or winding up of the Corporation, the holders of shares of Non-Convertible
Preferred Stock then outstanding shall be entitled, by reason of their ownership
thereof, to receive an amount equal to $1,000.00 per share (subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar
-34-
<PAGE> 35
recapitalization affecting such shares), plus any dividends declared or accrued
but unpaid thereon. If upon any such liquidation, dissolution or winding up of
the Corporation, the remaining assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay the holders of
shares of Non-Convertible Preferred Stock the full amount to which they shall be
entitled, the holders of shares of Non-Convertible Preferred Stock shall share
ratably in any distribution of the remaining assets and funds of the Corporation
in proportion to the respective amounts which would otherwise be payable in
respect of the shares held by them upon such distribution if all amounts payable
on or with respect to such shares were paid in full.
(c) After the payment of all preferential amounts required to be paid
to the holders of Convertible Preferred Stock and Non-Convertible Preferred
stock, upon the dissolution, liquidation or winding up of the Corporation,
subject to paragraph (d) of this Section 3 below, the remaining assets and funds
of the Corporation available for distribution to its stockholders shall be
distributed among the holders of shares of Convertible Preferred Stock and
Common Stock held by each (assuming conversion into Common Stock of all such
shares).
(d) In the event of any merger or consolidation of the Corporation
into or with another corporation (except one in which the holders of capital
stock of the Corporation immediately prior to such merger or consolidation
continue to hold greater than 50% by voting power of the capital stock of the
surviving corporation), or the sale of all or substantially all of the assets of
the Corporation, such merger, consolidation or asset sale shall be deemed to be
a liquidation of the Corporation. In the event of such merger, consolidation or
asset sale, each holder of Convertible Preferred Stock shall receive such
holder's preference pursuant to the terms of Paragraph (a) of this Section 3 and
participate with the holders of Common Stock pursuant to Paragraph (c) of this
Section 3, up to a cap of total proceeds from the liquidation of $4.00 per
share; provided, however, that each holder of Convertible Preferred Stock shall
have the right to elect to participate in the transaction pursuant to the
provisions of Subsection 5(i) hereof in lieu of receiving such holder's
preference and participating up to a cap. The amount deemed distributed to the
holders of Convertible Preferred Stock upon any such merger or consolidation
shall be cash or the value of the property, rights or securities distributed to
such holders by the acquiring person, firm or other entity. The value of such
property, rights or other securities shall be determined in good faith by the
Board of Directors of the Corporation.
4. Voting.
------
-35-
<PAGE> 36
(a) Each holder of outstanding shares of Convertible Preferred Stock
shall be entitled to the number of votes equal to the number of whole shares of
Common Stock into which the shares held by such holder are convertible (as
adjusted from time to time pursuant to Section 5 hereof), at each meeting of
stockholders of the Corporation (and written actions of stockholders in lieu of
meetings) with respect to any and all matters presented to the stockholders of
the Corporation for their action or consideration. Except as provided by law or
as otherwise set forth herein, holders of Convertible Preferred Stock and Common
Stock shall vote together as a single class.
(b) The Corporation shall not amend, alter or repeal the preferences,
special rights or other powers of any series of Convertible Preferred Stock so
as to affect adversely such series of Convertible Preferred Stock, without the
written consent or affirmative vote of the holders of 75% of the then
outstanding shares of such series of Preferred Stock, given in writing or by
vote at a meeting, consenting or voting (as the case may be) separately as a
class. For this purpose, without limiting the generality of the foregoing, the
authorization or issuance of any series of Preferred Stock with preference or
priority over either series of Convertible Preferred Stock as to the right to
receive either dividends or amounts distributable upon liquidation, dissolution
or winding up of the Corporation shall be deemed to affect adversely such series
of Convertible Preferred Stock, and the authorization or issuance of any series
of Preferred Stock on a parity with either series of Convertible Preferred Stock
as to the right to receive either dividends or amounts distributable upon
liquidation, dissolution or winding up of the Corporation shall not be deemed to
affect adversely such series of Preferred Stock. The number of authorized shares
of either series of Convertible Preferred Stock may be increased or decreased
(but not below the number of shares then outstanding) by the affirmative vote of
the holders of 75% of the then outstanding shares of such series of Convertible
Preferred Stock, voting as a single class.
(c) Except as provided by law, the Non-Convertible Preferred Stock
shall have no voting rights.
5. OPTIONAL CONVERSION. The holders of the Convertible Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Convertible Preferred Stock shall
be convertible, at the option of the holder thereof, at any time and from time
to time, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing $1.00 (with respect to the conversion of shares of
Series A Preferred Stock) and $1.50 (with respect to the
-36-
<PAGE> 37
conversion of shares of Series B Preferred Stock) by the appropriate Conversion
Price (as defined below) in effect at the time of conversion. The conversion
price at which shares of Common stock shall be deliverable upon conversion of
Convertible Preferred Stock without the payment of additional consideration by
the holder thereof (the "Conversion Price") shall initially be $1.00 (with
respect to the conversion of shares of Series A Preferred Stock) and $1.50 (with
respect to the conversion of shares of Series B Preferred Stock). Such initial
Conversion Price, and the rate at which shares of Convertible Preferred Stock
may be converted into shares of Common Stock, shall be subject to adjustment as
provided below.
In the event of a notice of redemption of any shares of Convertible
Preferred Stock pursuant to Section 7 hereof, the Conversion Rights of the
shares designated for redemption shall terminate at the close of business on the
fifth full day preceding the date fixed for redemption, unless the redemption
price is not paid when due, in which case the Conversion Rights for such shares
shall continue until such price is paid in full. In the event of a liquidation,
dissolution or winding up of the Corporation, the Conversion Rights shall
terminate at the close of business on the fifth full day preceding the date
fixed for the payment of any amounts distributable on liquidation, dissolution
or winding up to the holders of Convertible Preferred Stock.
(b) FRACTIONAL SHARES. No fractional shares of Common Stock shall be
issued upon conversion of the Convertible Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
applicable Conversion Price.
(c) Mechanics of Conversion.
-----------------------
(i) In order for a holder of shares of Convertible Preferred
Stock to convert such shares of Convertible Preferred Stock into shares of
Common Stock, such holder shall surrender the certificate or certificates for
such shares of Convertible Preferred Stock at the office of the transfer agent
for such Convertible Preferred Stock (or at the principal office of the
Corporation if the Corporation serves as its own transfer agent), together with
written notice that such holder elects to convert all or any number of the
shares of such Convertible Preferred Stock represented by such certificate or
certificates. Such notice shall state such holder's name or the names of the
nominees in which such holder wishes the certificate or certificates for shares
of Common Stock to be issued. If required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by a written
instrument or instruments of transfer, in form satisfactory to the Corporation,
duly executed
-37-
<PAGE> 38
by the registered holder or his or its attorney duly authorized in writing. The
date of receipt of such certificates and notice by the transfer agent (or by the
Corporation if the Corporation serves as its own transfer agent) shall be the
conversion date ("Conversion Date"). The Corporation shall, as soon as
practicable after the Conversion Date, issue and deliver at such office to such
holder of such shares of Convertible Preferred Stock, or to his or its nominees,
a certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled, together with cash in lieu of any fraction of a
share, and all declared but unpaid dividends.
(ii) The Corporation shall at all times when any Convertible
Preferred Stock is outstanding, reserve and keep available out of its authorized
but unissued stock, for the purpose of effecting the conversion of the
Convertible Preferred Stock, such number of its duly authorized shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding Convertible Preferred Stock. Before taking any action which would
cause an adjustment reducing the Conversion Price below the then par value of
the shares of Common Stock issuable upon conversion of the Convertible Preferred
Stock, the Corporation will take any corporate action which may, in the opinion
of its counsel, be necessary in order that the Corporation may validly and
legally issue fully paid and nonassessable shares of Common Stock at such
adjusted Conversion Price.
(iii) Upon any such conversion, no adjustment to the Conversion
Price shall be made for any declared and unpaid dividends on the Convertible
Preferred Stock surrendered for conversion or on the Common Stock delivered upon
conversion, which dividends shall be paid in accordance with clause (iv) below.
(iv) All shares of Convertible Preferred Stock which shall have
been surrendered for conversion as herein provided shall no longer be deemed to
be outstanding and all rights with respect to such shares, including the rights,
if any, to receive notices and to vote, shall immediately cease and terminate on
the Conversion Date, except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor and payment of any declared and
unpaid dividends thereon. Any shares of Convertible Preferred Stock so converted
shall be retired and cancelled and shall not be reissued, and the Corporation
(without the need for stockholder action) may from time to time take such
appropriate action as may be necessary to reduce accordingly the authorized
shares of either or both series of Convertible Preferred Stock.
(v) The Corporation shall pay any and all issue and other taxes
that may be payable in respect of any issuance or
-38-
<PAGE> 39
delivery of shares of Common Stock upon conversion of shares of Convertible
Preferred Stock pursuant to this Section 4. The Corporation shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of shares of Common Stock in a name other
than that in which the shares of Convertible Preferred Stock so converted were
registered, and no such issuance or delivery shall be made unless and until the
person or entity requesting such issuance has paid to the Corporation the amount
of any such tax or has established, to the satisfaction of the Corporation, that
such tax has been paid.
(d) Adjustments for Diluting Issues.
-------------------------------
(i) SPECIAL DEFINITIONS. For purposes of this Subsection 4(d),
the following definitions shall apply:
(A) Option shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities, excluding (i) awards granted to employees or consultants of the
Corporation pursuant to the Corporation's 1994 Equity Incentive Plan (the
"Plan") as adopted and amended by the Board of Directors, to acquire up to a
maximum of 1,879,453 shares of Common Stock (subject to appropriate adjustment
for any stock dividend, stock split, combination or other similar
recapitalization affecting such shares) and (ii) warrants issued to the original
holders of the Series A Preferred Stock and not subsequently cancelled (the
"Warrants").
(B) ORIGINAL ISSUE DATE shall mean the date on which a share
of Series A Preferred Stock was first issued.
(C) CONVERTIBLE SECURITIES shall mean any evidences of
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common Stock, excluding shares of Series A Preferred Stock
issued in exercise of the Warrants and shares of Convertible Preferred Stock
issued upon conversion of the Company's Secured Convertible Term Notes due
January 15, 1997 (the "Notes").
(D) ADDITIONAL SHARES OF COMMON STOCK shall mean all shares
of Common Stock issued (or, pursuant to Subsection 5(d)(iii) below, deemed to be
issued) by the Corporation after the Original Issue Date, other than shares of
Common Stock issued or issuable:
(I) upon conversion of shares of Series A Preferred
Stock outstanding on the Original Issue Date or
upon conversion of shares of Series A
-39-
<PAGE> 40
Preferred Stock issued upon the
exercise of the Warrants;
(II) as a dividend or distribution on
Convertible Preferred Stock;
(III) by reason of a dividend or
distribution covered by
Subsection 5(f) hereof, a stock
split, or subdivision of shares of
Common Stock covered by
Subsection 5(e) hereof, or by reason
of a dividend, stock split
subdivision or other distribution on
shares of Common Stock excluded from
the definition of Additional Shares
of Common Stock by the foregoing
clauses (I) and (II) or this clause
(III);
(IV) upon the exercise of awards or
warrants excluded from the
definition of "Option" in
Subsection 5(d)(i)(A);
(V) upon conversion of shares of Convertible
Preferred Stock issued as interest on or
upon conversion of the Notes; or
(VI) to Cornell Research Foundation,
Inc., Gary W. Pace and Dennis I.
Goldberg of 360,547 shares of Common
Stock in the aggregate.
(ii) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the
number of shares of Common Stock into which the Convertible Preferred Stock is
convertible shall be made by adjustment in the applicable Conversion Price
thereof: (a) unless the consideration per share (determined pursuant to
Subsection 5(d)(v)) for an Additional Share of Common Stock issued or deemed to
be issued by the Corporation is less than the applicable Conversion Price in
effect on the date of, and immediately prior to, the issue of such Additional
Shares, or (b) if prior to such issuance, the Corporation receives written
notice from the holders of (i) at least 75% of the then outstanding shares of
Series A Preferred Stock (with respect to the Conversion Price thereof) and/or
(ii) at least 75% of the then outstanding shares of Series B Preferred Stock
(with respect to the Conversion Price thereof) agreeing that no such adjustment
-40-
<PAGE> 41
shall be made as the result of the issuance of Additional Shares of Common
Stock.
(iii) ISSUE OF OPTIONS AND CONVERTIBLE SECURITIES
DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON
STOCK.
If the Corporation at any time or from time to time after the Original
Issue Date shall issue any Options or Convertible Securities or shall fix a
record date for the determination of holders of any class of securities entitled
to receive any such Options or Convertible Securities, then the maximum number
of shares of Common Stock (as set forth in the instrument relating thereto
without regard to any provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that
Additional Shares of Common Stock shall not be deemed to have been issued unless
the consideration per share (determined pursuant to Subsection 5(d)(v) hereof)
of such Additional Shares of Common Stock would be less than the applicable
Conversion Price in effect on the date of and immediately prior to such issue,
or such record date, as the case may be, and provided further that in any such
case in which Additional Shares of Common Stock are deemed to be issued:
(A) No further adjustment in the Conversion Price shall be made upon
the subsequent issue of Convertible Securities or shares of Common Stock upon
the exercise of such Options or conversion or exchange of such Convertible
Securities;
(B) If such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any increase in the consideration
payable to the Corporation, or decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the Conversion
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming effective, be recomputed to
reflect such increase or decrease insofar as it affects such Options or the
rights of conversion or exchange under such Convertible Securities;
(C) No readjustment pursuant to clause (B) above shall have the effect
of increasing the Conversion Price to an amount which exceeds the lower of (i)
the Conversion Price on
-41-
<PAGE> 42
the original adjustment date, or (ii) the Conversion Price that would have
resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date;
(D) Upon the expiration or termination of any unexercised Option, the
Conversion Price shall not be readjusted, but the Additional Shares of Common
Stock deemed issued as the result of the original issue of such Option shall not
be deemed issued for the purposes of any subsequent adjustment of the Conversion
Price; and
(E) In the event of any change in the number of shares of Common Stock
issuable upon the exercise, conversion or exchange of any Option or Convertible
Security, including, but not limited to, a change resulting from the
antidilution provisions thereof, the Conversion Price then in effect shall
forthwith be adjusted to such Conversion Price as would have obtained had the
adjustment which was made upon the issuance of such Option or Convertible
Security (prior to such change) been made upon the basis of such change, but no
further adjustment shall be made for the actual issuance of Common Stock upon
the exercise or conversion of any such Option or Convertible Security.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL SHARES OF
COMMON STOCK.
In the event the Corporation shall issue, at any time or from time to time
after the Original Issue Date, Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Subsection
5(d)(iii), but excluding shares issued as a dividend or distribution as provided
in Subsection 5(f) or upon a stock split or combination as provided in
Subsection 5(e)), without consideration or for a consideration per share less
than the applicable Conversion Price in effect on the date of and immediately
prior to such issue, then and in such event, such Conversion Price shall be
reduced, concurrently with such issue, to a price (calculated to the nearest
cent) determined by multiplying such Conversion Price by a fraction, (A) the
numerator of which shall be (1) the number of shares of Common Stock outstanding
immediately prior to such issue plus (2) the number of shares of Common Stock
which the aggregate consideration received by the Corporation for the total
number of Additional Shares of Common Stock so issued would purchase at such
Conversion Price; and (B) the denominator of which shall be the number of shares
of Common Stock outstanding immediately prior to such issue plus the number of
such Additional Shares of Common Stock so issued; PROVIDED THAT, for the purpose
of this Subsection 5(d)(iv), all shares of Common Stock issuable upon conversion
of shares of Convertible Preferred Stock outstanding
-42-
<PAGE> 43
immediately prior to such issue shall be deemed to be outstanding, and
immediately after any Additional Shares of Common Stock are deemed issued
pursuant to Subsection 5(d)(iii) (other than shares excluded from the definition
of "Additional Shares of Common Stock" by virtue of clause (IV) of Subsection
5(d)(i)(D)), such Additional Shares of Common Stock shall be deemed to be
outstanding.
Notwithstanding the foregoing, the applicable Conversion Price shall not be
so reduced at such time if the amount of such reduction would be an amount less
than $.05, but any such amount shall be carried forward and reduction with
respect thereto made at the time of and together with any subsequent reduction
which, together with such amount and any other amount or amounts so carried
forward, shall aggregate $.05 or more.
(v) DETERMINATION OF CONSIDERATION. For purposes of this Subsection
5(d), the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(A) CASH AND PROPERTY: Such consideration shall:
(I) insofar as it consists of cash, be
computed at the aggregate of cash received by the Corporation, excluding amounts
paid or payable for accrued interest or accrued dividends;
(II) insofar as it consists of property
other than cash, be computed at the fair market value thereof at the time of
such issue, as determined in good faith by the Board of Directors; and
(III) in the event Additional Shares of
Common Stock are issued together with other shares or securities or other assets
of the Corporation for consideration which covers both, be the proportion of
such consideration so received, computed as provided in clauses (I) and (II)
above, as determined in good faith by the Board of Directors.
(B) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per
share received by the Corporation for Additional Shares of Common Stock deemed
to have been issued pursuant to Subsection 5(d)(iii), relating to Options and
Convertible Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate
-43-
<PAGE> 44
amount of additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a subsequent
adjustment of such consideration) payable to the Corporation upon the exercise
of such Options or the conversion or exchange of such Convertible Securities, or
in the case of Options for Convertible Securities, the exercise of such Options
for Convertible Securities and the conversion or exchange of such Convertible
Securities, in either case for the issuance of the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, by
(y) the maximum number of shares of Common Stock (as set forth in
the instruments relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such number) issuable upon the exercise
of such Options or the conversion or exchange of such Convertible Securities.
(e) ADJUSTMENTS FOR STOCK SPLITS AND COMBINATIONS. If the Corporation
shall, at any time or from time to time after the Original Issue Date, effect a
subdivision of the outstanding Common Stock, the Conversion Price then in effect
immediately before that subdivision shall be proportionately decreased. If the
Corporation shall, at any time or from time to time while there are any shares
of Convertible Preferred Stock outstanding, combine the outstanding shares of
Common Stock, the Conversion Price then in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
paragraph shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(f) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event
the Corporation at any time, or from time to time after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Conversion
Price then in effect shall be decreased as of the time of such issuance or, in
the event such a record date shall have been fixed, as of the close of business
on such record date, by multiplying the Conversion Price then in effect by a
fraction:
(1) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and
-44-
<PAGE> 45
(2) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend
or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Price shall be recomputed accordingly as of the close
of business on such record date and thereafter the Conversion Price shall be
adjusted pursuant to this paragraph as of the time of actual payment of such
dividends or distributions.
(g) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the event
the Corporation at any time or from time to time after the Original Issue Date
shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, then and in
each such event provision shall be made so that the holders of Convertible
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation that they would have received had such holder's shares of
Convertible Preferred Stock been converted into Common Stock on the date of such
event and had thereafter, during the period from the date of such event to and
including the conversion date, retained such securities receivable by them as
aforesaid during such period giving application to all adjustments called for
during such period, under this paragraph with respect to the rights of the
holders of the Convertible Preferred Stock.
(h) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE, OR SUBSTITUTION. If the
Common Stock issuable upon the conversion of the Convertible Preferred Stock
shall be changed into the same or a different number of shares of any class or
classes of stock, whether by capital reorganization, reclassification, or
otherwise (other than a subdivision or combination of shares of stock dividend
provided for above, or a reorganization, merger, consolidation, or sale of
assets provided for below), then and in each such event the holder of each such
share of Convertible Preferred Stock shall have the right thereafter to convert
such share into the kind and amount of shares of stock and other securities and
property receivable upon such reorganization, reclassification, or other change,
by holders of the number of shares of Common Stock into which such shares of
Convertible Preferred Stock might have been converted immediately prior to
-45-
<PAGE> 46
such reorganization, reclassification, or change, all subject to further
adjustment as provided herein.
(i) ADJUSTMENT FOR MERGER OR REORGANIZATION, ETC. Subject to Section 3
hereof, in case of any consolidation or merger of the Corporation with or into
another corporation (except one in which the holders of capital stock of the
Corporation immediately prior to such merger or consolidation continue to hold
greater than 50% by voting power of the capital stock of the surviving
corporation), or the sale of all or substantially all of the assets of the
Corporation to another corporation, each share of Convertible Preferred Stock
shall thereafter be convertible into the kind and amount of shares of stock or
other securities or property to which a holder of the number of shares of Common
Stock of the Corporation deliverable upon conversion of such Convertible
Preferred Stock would have been entitled upon such consolidation, merger or sale
and, in such case, appropriate adjustment (as determined in good faith by the
Board of Directors) shall be made in the application of the provisions set forth
in this Section 5 with respect to the rights and interest thereafter of the
holders of the Convertible Preferred Stock, to the end that the provisions set
forth in this Section 5 (including provisions with respect to changes in and
other adjustments of the Conversion Price) shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Convertible Preferred
Stock.
(j) NO IMPAIRMENT. The Corporation will not, by amendment of its
Certificate of Incorporation or By-laws 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 to be observed or performed hereunder by the Corporation,
but will at all times in good faith assist in the carrying out of all the
provisions of this Section 5 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Convertible Preferred Stock against impairment.
(k) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 5,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series A Preferred Stock and/or Series B Preferred Stock (as applicable) a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of shares of
Convertible
-46-
<PAGE> 47
Preferred Stock, furnish or cause to be furnished to such holder a similar
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price then in effect, and (iii) the number of shares of Common Stock
and the amount, if any, of other property which then would be received upon the
conversion of Series A Preferred Stock or and/or Series B Preferred Stock (as
applicable).
(I) NOTICE OF RECORD DATE. In the event:
(i) that the Corporation declares a dividend (or any other
distribution) on its Common Stock payable in Common
Stock or other securities of the Corporation;
(ii) that the Corporation splits, subdivides or combines its
outstanding shares of Common Stock;
(iii) of any reclassification of the Common Stock of the
Corporation (other than a stock split, subdivision or
combination of its outstanding shares of Common Stock
or a stock dividend or stock distribution thereon), or
of any consolidation or merger of the Corporation into
or with another corporation, or of the sale of all or
substantially all of the assets of the Corporation; or
(iv) of the involuntary or voluntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Convertible Preferred Stock, and shall cause
to be mailed to the holders of the Convertible Preferred Stock at their last
addresses as shown on the records of the Corporation or such transfer agent, at
least ten days prior to the record date specified in (A) below or twenty days
before the date specified in (B) below, a notice stating:
(A) the record date of such dividend, distribution, stock
split, subdivision or combination, or, if a record is
not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend,
distribution, stock
-47-
<PAGE> 48
split, subdivision or combination are to be determined,
or
(B) the date on which such reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up is
expected to become effective, and the date as of which
it is expected that holders of Common Stock of record
shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, sale,
dissolution or winding up.
6. Mandatory Conversion.
--------------------
a. The Corporation may, at its option, require all (but not less than
all) of the shares of Series A Preferred Stock or Series B Preferred Stock, or
both then outstanding to be converted automatically into shares of Common Stock,
at the then current Conversion Price, upon the consummation of an underwritten
public offering of Common Stock of the Corporation pursuant to a registration
statement filed with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock to the
public in a firm commitment underwriting at a price of at least $4.00 per share
and resulting in the receipt by the Corporation of net proceeds from such sale
of not less than $10,000,000 (a "Qualified Public Offering").
b. All holders of record of shares of Convertible Preferred Stock to
be converted hereunder will be given at least 10 days' prior written notice of
the date fixed and the place designated for mandatory conversion of all of such
shares of Convertible Preferred Stock pursuant to this Section 6. Such notice
will be sent by first class or registered mail, postage prepaid, to each record
holder of Convertible Preferred Stock at such holder's address appearing on the
stock register. On or before the date fixed for conversion, each holder of
shares of Convertible Preferred Stock shall surrender his or its certificate or
certificates for all such shares to the Corporation at the place designated in
such notice, and shall thereafter receive certificates for the number of shares
of Common Stock to which such holder is entitled pursuant to this Section 6. On
the date fixed for conversion, all rights with respect to the Convertible
Preferred Stock so converted will terminate, except only the rights of the
holders thereof, upon surrender of their certificate or certificates therefor,
to receive certificates for the number of shares of Common Stock into which such
Convertible Preferred
-48-
<PAGE> 49
Stock has been converted. If so requested by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by written
instrument or instruments of transfer, in form satisfactory to the Corporation,
duly executed by the registered holder or by his or its attorney duly authorized
in writing. All certificates evidencing shares of Convertible Preferred Stock
which are required to be surrendered for conversion in accordance with the
provisions hereof shall, from and after the date such certificates are so
required to be surrendered, be deemed to have been retired and canceled and the
shares of Convertible Preferred Stock represented thereby converted into Common
Stock for all purposes, notwithstanding the failure of the holder or holders
thereof to surrender such certificates on or prior to such date. As soon as
practicable after the date of such mandatory conversion and the surrender of the
certificate or certificates for Convertible Preferred Stock, the Corporation
shall cause to be issued and delivered to such holder, or on his or its written
order, a certificate or certificates for the number of full shares of Common
Stock issuable on such conversion in accordance with the provisions hereof and
cash as provided in Subsection 5(b) in respect of any fraction of a share of
Common Stock otherwise issuable upon such conversion.
7. Redemption of Convertible Preferred Stock at Option of Holder.
-------------------------------------------------------------
a. Upon the fifth or any later anniversary of April 5, 1994, if the
Corporation receives notice from holders of at least 75% of the then outstanding
shares of Series A Preferred Stock and/or 75% of the then outstanding shares of
Series B Preferred Stock agreeing to the redemption (the "Election Date"), on
the date 30 days after the Election Date and the two following anniversaries of
such day (collectively, the "Redemption Dates" and individually, a "Redemption
Date"), each holder of shares of such series of Convertible Preferred Stock
shall have the right to require the Corporation to redeem on each of those dates
up to 33%, 66% and 100% of the shares of such series of Convertible Preferred
Stock held by such holder on each of those dates, or such lesser number of
shares of such series of Convertible Preferred Stock as the holder may
determine. If any shares of Convertible Preferred Stock are eligible for
redemption in one year and the holder elects not to have such shares redeemed on
that Redemption Date, such holder may elect to have all or a portion of such
shares redeemed on the anniversary of a Redemption Date in a later year;
provided, that, such election is not made after the third anniversary of the
first Redemption Date. Any holder desiring to exercise the redemption right
granted herein (a "Requesting Holder") shall provide written notice to the
Corporation setting forth the number of shares to be redeemed. On
-49-
<PAGE> 50
the Redemption Date and upon a holder's surrender, in accordance with this
Section 7(a), of his or its certificates representing shares to be redeemed, the
redemption price shall be paid by the Corporation in cash in an amount equal to
$1.00 per share (with respect to the redemption of shares of Series A Preferred
Stock) and $1.50 per share (with respect to the redemption of shares of Series B
Preferred Stock) (subject to appropriate adjustment for stock splits, stock
dividends, combinations and other similar recapitalizations affecting such
shares), plus an amount equal to all declared but unpaid dividends payable in
accordance with Section 1 hereof on each share of Convertible Preferred Stock to
be redeemed (the "Redemption Price").
b. Subject to the satisfaction of the condition set forth in the first
sentence of Subsection 7(a) above, within five days following its receipt from a
Requesting Holder of a notice of intent to exercise redemption rights pursuant
to Subsection 7(a) hereof with respect to either or both series of Convertible
Preferred Stock, the Corporation shall provide each holder of shares of such
series of Convertible Preferred Stock, other than the Requesting Holder, with a
written notice (addressed to the holder at its address as it appears on the
stock transfer books of the Corporation) containing an offer to redeem shares of
such series of Convertible Preferred Stock as provided above, which notice shall
specify the applicable Redemption Price. Each holder of such series of
Convertible Preferred Stock, other than the Requesting Holder, will have until
10 days prior to the Redemption Date to provide the Corporation with written
notice of such holder's acceptance of the redemption offer, which notice shall
specify the number of shares to be redeemed. All notices or offers hereunder
shall be sent by first class or registered mail, postage prepaid, and shall be
deemed to have been provided when mailed.
c. In the event that any holder of Convertible Preferred Stock, other than
the Requesting Holder, does not provide the Corporation with written notice
pursuant to Section 7(b) of the holder's acceptance of the redemption offer on
or before the date 10 days prior to the applicable Redemption Date, the
Corporation shall have no obligation to redeem any shares of such series of
Convertible Preferred Stock of such holder on the Redemption Date specified in
its notice to such holder or at any time thereafter.
d. The provisions of Subsection 7(a) notwithstanding, any such optional
redemption is subject to the approval of a majority of the Board of Directors of
the Corporation and such majority may, in the good faith belief that the
requested redemption would be detrimental to the future prospects of the
Corporation, postpone such redemption for a period of one year.
-50-
<PAGE> 51
e. In addition to the redemption rights set forth in Subsection 7(a), in
the event that, (i) prior to the selection by the Corporation of a permanent
Chief Executive Officer, the holders of 75% of the then outstanding shares of
Series A Preferred Stock agree, or (ii) subsequent to such selection, a majority
of the Corporation's Board of Directors agrees that an adverse change in the
business prospects of the Corporation has occurred, then each holder of shares
of Convertible Preferred Stock may elect, at his or its option, to have the
Corporation redeem (on the date 30 days after such election) some or all of such
shares at the Redemption Price; provided that, if the Corporation's funds are
insufficient to make the requested redemption possible at the Redemption Price,
then each holder who elected to redeem shall be entitled to redeem a ratable
portion of his or its shares based on the availability of funds.
f. On or prior to the Redemption Date, unless postponed pursuant to
Subsection 7(d) above, the Requesting Holder and each other holder of
Convertible Preferred Stock accepting the Corporation's redemption offer shall
surrender his or its certificate or certificates representing the shares to be
redeemed, in the manner and at the place designated in the Corporation's
redemption offer. If less than all shares represented by such certificate or
certificates are redeemed, the Corporation shall issue a new certificate for the
unredeemed shares. From and after the Redemption Date, unless there shall be a
default in payment of the Redemption Price, all rights of each holder with
respect to shares of Convertible Preferred Stock redeemed on the Redemption Date
shall cease (except the right to receive the Redemption Price without interest
upon surrender of the certificate or certificates therefor), and such shares
shall not be deemed to be outstanding for any purpose whatsoever. Such shares of
redeemed Convertible Preferred Stock shall not be reissued, and the Corporation
may from time to time take such appropriate action as may be necessary to reduce
the authorized Preferred Stock accordingly.
g. For the purpose of determining whether funds are legally available for
redemption of shares of Convertible Preferred Stock as provided herein, the
Corporation shall value its assets at the highest amount permissible under
applicable law. If on the Redemption Date funds of the Corporation legally
available therefor shall be insufficient to redeem all the shares of Convertible
Preferred Stock required to be redeemed as provided herein, funds to the extent
legally available shall be used for such purpose and the Corporation shall
effect such redemption pro rata according to the amount otherwise receivable by
each holder accepting the Corporation's redemption offer. The redemption
requirements provided hereby shall be continuous, so that if on the Redemption
Date such requirements shall not be fully
-51-
<PAGE> 52
discharged, without further action by any holder of Convertible Preferred Stock,
funds legally available shall be applied therefor until such requirements are
fully discharged.
h. The foregoing provisions of this Section 7 shall terminate on the
consummation of a Qualified Public Offering.
8. Redemption of Non-Convertible Preferred Stock at Option of Holder.
-----------------------------------------------------------------
a. In the event of transfers aggregating more than 50% of the
outstanding Series A Preferred Stock or more than 50% of the outstanding Series
B Preferred Stock to holders of record who are not (i) stockholders of the
Corporation, (ii) the original holders of Convertible Preferred Stock, (iii)
Clintec Nutrition Company (with respect solely to transfers of shares of Series
A Preferred Stock) or (iv) any affiliates, partners or stockholders of any
applicable individuals or entities set forth in clauses (ii) or (iii) hereof and
upon the election at any time thereafter of the holders of a majority of the
Non-Convertible Preferred Stock, the Corporation will redeem upon the later of
(A) thirty (30) days after the consummation of the last such transfer or (B) ten
(10) days after the Corporation's receipt of the notice of election of
redemption from holders of a majority of the NonConvertible Preferred Stock one
quarter of the then outstanding shares of Non-Convertible Preferred Stock (the
"Initial Redemption Date") and one quarter of such shares in each of the
following three years on the anniversary date of the Initial Redemption Date
(collectively, the "Redemption Dates" each a "Redemption Date") at a price equal
to $1,000 per share plus any accrued, but unpaid dividends. The Corporation
shall give written notice to the holders of record of the Non-Convertible
Preferred Stock within 30 business days after there have been transfers of more
than 50% of the outstanding shares of Series A Preferred Stock and/or more than
50% of the outstanding Series B Preferred Stock as provided in this subsection
8(a).
If at the time of any due date of a redemption payment pursuant to this
Subsection 8(a) the Corporation is then obligated to make a redemption pursuant
to Section 7, no payment shall be made under this Subsection 8(a) until the
Corporation's obligations under Section 7 have been satisfied in full.
b. The provisions of Subsection 8(a) notwithstanding, a majority of
the Board of Directors of the Corporation may, in the good faith belief that the
requested redemption would be detrimental to the Corporation's interests,
postpone such redemption for a period of one year.
-52-
<PAGE> 53
c. The Corporation may elect, at any time, to redeem 100% of the
then-outstanding shares of Non-Convertible Preferred Stock at a price equal to
$1,000 per share plus any accrued, but unpaid dividends.
d. On or prior to the Redemption Date, unless postponed pursuant to
Section 8(b) above, each holder of NonConvertible Preferred Stock shall
surrender his or its certificate or certificates representing the shares to be
redeemed, in the manner and at the place designated by the Corporation. If less
than all shares represented by such certificate or certificates are redeemed,
the Corporation shall issue a new certificate for the unredeemed shares. From
and after the Redemption Date, unless there shall be a default in payment of the
Redemption Price, all rights of each holder with respect to shares of
Non-Convertible Preferred Stock redeemed on the Redemption Date shall cease
(except the right to receive the Redemption Price without interest upon
surrender of the certificate or certificates therefor), and such shares shall
not be deemed to be outstanding for any purpose whatsoever. Such shares of
Non-Convertible Preferred Stock shall not be reissued, and the Corporation may
from time to time take such appropriate action as may be necessary to reduce the
authorized Non-Convertible Preferred Stock accordingly.
-53-
<PAGE> 1
EXHIBIT 10.2
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
CONTRIBUTION AGREEMENT
between
FREE RADICAL SCIENCES, INC.
and
CLINTEC NUTRITION COMPANY
-----------------------
April 5, 1994
-----------------------
<PAGE> 2
TABLE OF CONTENTS
Page
SECTION 1 - CONTRIBUTION OF ASSETS 1
1.1 Contribution of Assets 1
1.2 Assumption of Liabilities 2
1.3 Issuance of Common Shares and Non-Convertible
Preferred Shares; Contingent Payments 3
1.4 Transfer of Contributed Assets 6
1.5 Delivery of Records and Contracts 6
1.6 Closing 6
1.7 Section 351 Transaction 6
1.8 Tax Definition 6
1.9 Certain Payments Relating to Contract with
Dickson Research Group 6
1.10 Cooperation with FRS in Obtaining Rights under
Contract de Recherche 7
SECTION 2 - REPRESENTATIONS AND WARRANTIES OF CLINTEC 7
2.1 Organization and Qualification 7
2.2 Authority to Execute and Perform Agreements 7
2.3 Compliance with Laws 8
2.4 Consents; No Breach 8
2.5 Actions and Proceedings 9
2.6 Contracts and Other Agreements 9
2.7 Intangible Property 10
2.8 Title to Assets; Liens 11
2.9 Insurance 11
2.10 Brokerage 12
2.11 Full Disclosure 12
2.12 Contract de Collaboration 12
2.13 Investment Representations 12
SECTION 3 - CONDITIONS PRECEDENT TO THE OBLIGATION OF
FRS TO CLOSE 13
3.1 Representations, Warranties and Covenants 13
3.2 Third Party Consents 13
3.3 Baxter Agreement with Pace 14
3.4 Non-Solicitation Agreement 14
3.5 License Agreement 14
3.6 Services Letter 14
3.7 Letter Agreement 14
3.8 Opinion of Counsel to Clintec 14
3.9 Litigation 14
3.10 Delivery of Instruments of Transfer 14
3.11 Stock Purchase Agreement 14
(i)
<PAGE> 3
SECTION 4 - CONDITIONS PRECEDENT TO THE OBLIGATION OF
CLINTEC TO CLOSE 15
4.1 Delivery of Assumption Agreement 15
4.2 Litigation 15
4.3 License 15
4.4 Stock Purchase Agreement 15
SECTION 5 - NON-COMPETITION AND EMPLOYEE NON-SOLICITATION.. 15
5.1 No Competing Business 15
5.2 Certain Acquisitions of Competing Businesses 16
5.3 Non-Solicitation of FRS Employees 16
5.4 No Disclosure of Proprietary Information 17
5.5 Remedies 17
SECTION 6 - INDEMNIFICATION 17
6.1 Survival 17
6.2 Obligation of Clintec to Indemnify 19
6.3 Obligation of FRS to Indemnify 19
6.4 Notice and Opportunity to Defend 19
6.5 Other Benefits 20
6.6 Limitation on Representations and Warranties 20
6.7 Exclusion 20
SECTION 7 - MISCELLANEOUS 21
7.1 Publicity 21
7.2 Notices 21
7.3 Entire Agreement 22
7.4 Australian Insurance 22
7.5 Confidentiality Letter 22
7.6 Waivers and Amendments; Non-Contractual Remedies;
Preservation of Remedies 22
7.7 Governing Law 23
7.8 Binding Effect; No Assignment 23
7.9 Expenses 23
7.10 Taxes 23
7.11 Variations in Pronouns 23
7.12 Counterparts 23
7.13 Exhibits and Schedules 23
7.14 Headings 24
(ii)
<PAGE> 4
SCHEDULES
1.1(i) Inventory
1.1(ii) Contributed Contracts
1.1(iv) Intangible Property
1.2 Assumed Liabilities
2.3 Permits
2.4 Consents
2.5 Actions and Other Proceedings
2.6 Contracts and Other Agreements
2.7 Intangible Property
(i)
<PAGE> 5
CONTRIBUTION AGREEMENT
CONTRIBUTION AGREEMENT dated as of April 5, 1994, among Free Radical
Sciences, Inc., a Delaware corporation ("FRS") and Clintec Nutrition
Company, an Illinois general partnership ("Clintec").
WITNESSETH
WHEREAS, Clintec is the owner of certain intangible property described
on Schedule 1.1(iv) hereto (collectively, the "Technology").
WHEREAS, Clintec desires to contribute to FRS, and FRS desires to
acquire, all of Clintec's right, title and interest in and to the
Technology in exchange for Common Stock and NonConvertible Preferred Stock
of FRS and for certain rights to receive contingent payments from FRS, as
part of a transaction in which certain other investors will acquire Common
Stock and Series A Preferred Stock of FRS.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants set forth below, the parties hereby agree as follows:
SECTION I. - CONTRIBUTION OF ASSETS
A. CONTRIBUTION OF ASSETS. Subject to the provisions of this
Agreement, at the Closing (as defined in Section 1.6 hereof), Clintec
agrees to sell and FRS agrees to purchase, effective as of the Effective
Date (as defined in Section 1.6 hereof), free and clear of any mortgage,
lien, pledge, charge, security, interest or encumbrance of any kind,
including, without limitation, Tax liens (a "Lien"), other than Permitted
Liens (as hereinafter defined), all right, title and interest of Clintec
in, to and under:
(i) the clinical supplies listed on Schedule 1.1(i);
(ii) All rights under all contracts, agreements, licenses and
commitments listed on Schedule 1.1(ii) except for Clintec's rights
under Section 10.14 of the contract (the "Dickson Contract") between
Clintec and Dickson Research Group ("Dickson"), entered into on the
date hereof, (collectively, the "Contributed Contracts");
-1-
<PAGE> 6
(iii) all of Clintec's rights, claims, credits, causes of action or
rights of set-off against third parties relating to any of the
Contributed Contracts, the other items referred to in paragraphs (i)
and (iii) - (vii) of this Section 1.1 or to the Compounds, including,
without limitation, unliquidated rights under manufacturers' and
vendors' warranties;
(iv) the items listed on Schedule 1.1(iv) and all patents, licensed
patents, copyrights, trademarks, tradenames, technology, know-how,
processes, trade secrets, inventions, invention records, proprietary
data, formulae, research and development data, human clinical data,
computer software programs and other intangible property and any
applications for the same owned or licensed by Clintec and relating to
the molecular entities L-2-oxothiazolidine-4-carboxylate
(Procysteine), its isomers, its esters (including diesters) and its
neutral salts, the cysteine derivative N-acetyl-cysteine, and
glutathione esters (including diesters) including the alkyl monoesters
(collectively, the "Compounds");
(v) all books, records, files and papers, whether in hard copy or
computer format, relating to the items described in paragraphs (i) -
(iii) and (vi) - (vii) of this Section 1.1 or to the Compounds,
including, without limitation, manuals and data and correspondence
relating to the Contributed Contracts;
(vi) all transferable licenses, permits or other governmental
authorizations affecting, or relating in any way to, items described
in paragraphs (i) - (iii) and (v) - (vii) of this Section 1.1 or to
the Compounds, if any;
(vii) all rights to commercially exploit any other free-radical
scavengers which have been developed or are being developed, as of the
date hereof, by or on behalf of Clintec for a primary purpose or use
as a pharmaceutical, if any (collectively, the "Other Compounds");
Section 1.1(i) through (vii) shall be referred to collectively as the
"Contributed Assets".
-2-
<PAGE> 7
At the closing, Clintec shall also contribute to the capital of FRS
all of FRS's indebtedness to Clintec for money borrowed or other amounts
advanced to FRS, except that Clintec shall not contribute to the capital of
FRS but FRS shall repay to Clintec by wire transfer of immediately
available funds at the Closing an amount equal to $175,304, determined as
set forth in the Reconciliation Letter between Clintec and FRS of even date
herewith.
B. ASSUMPTION OF LIABILITIES. Upon the sale and purchase of the
Contributed Assets, FRS shall assume and agree to pay or discharge when due
the liabilities and obligations of Clintec which are to be performed after
the Closing Date (as defined in Section 1.6 below) as are described on
Schedule 1.2. Such liabilities to be assumed by FRS under this Agreement
are hereinafter sometimes referred to as the "Assumed Liabilities." Except
as otherwise specifically provided in this Section 1.2, (a) FRS shall not
assume or be liable for any obligation or liability of Clintec, of any kind
or nature, known, unknown, contingent or otherwise, including without
limitation: (i) any liability of Clintec incurred in connection with this
Agreement and the transactions provided for herein, including brokerage,
accounting and counsel fees, transfer and other taxes, and expenses
pertaining to the performance by Clintec of its obligations hereunder, (ii)
any liability or obligation of Clintec arising out of any contract or
agreement, (iii) any liability or obligation arising out of or relating to
the clinical development or testing of the Compounds or the Other Compounds
on or prior to Closing, (iv) any obligations to Clintec's employees,
including without limitation, any pension, retirement, or profit-sharing
plan or trust, (v) any litigation, proceeding, claim by any person or
entity or other obligation of Clintec arising out of the conduct of
Clintec's business or its use of the Compounds or other Contributed Assets
prior to the Closing Date, whether or not such litigation, proceeding,
claim or obligation is pending, threatened, or asserted before, on, or
after the Closing Date, (vi) Taxes (as defined in Section 1.8) whether
relating to periods before or after the Closing Date, and (vii) any
obligations under any law, including but not limited to antitrust, civil
rights, health, safety, labor, discrimination and environmental laws; and
(b) Clintec shall be solely responsible for, and shall discharge, any and
all liabilities and obligations of Clintec not included within the Assumed
Liabilities. The assumption of the Assumed Liabilities by FRS hereunder
shall be treated as independent of its existing business and shall not
enlarge any rights of third parties under contracts or arrangements with
FRS or Clintec. Nothing herein shall prevent FRS from contesting in good
faith any of the Assumed Liabilities.
-3-
<PAGE> 8
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
C. ISSUANCE OF COMMON SHARES AND NON-CONVERTIBLE PREFERRED SHARES;
CONTINGENT PAYMENTS. (a) In consideration of the contribution of the
Contributed Assets to FRS, at the Closing, FRS shall deliver to Clintec
certificates for an aggregate of 3,400,000 shares (the "Common Shares") of
FRS's Common Stock, $.01 par value per share, and 9,000 shares (the
"Preferred Shares") of FRS's Non-Convertible Preferred Stock, $.01 par
value per share, registered in the name of Clintec.
(b) From and after the Closing, FRS shall pay to Clintec in U.S.
dollars, within 30 days after the end of each calendar quarter after the
Closing, a royalty equal to **** of FRS's Gross Margin (as hereinafter
defined) on Net Sales (as hereinafter defined) of drugs sold by FRS or any
subsidiary, affiliate or sublicensee of FRS during such calendar quarter
for applications for patients with AIDS approved by the FDA (in the case of
sales in the United States) or approved by any foreign regulatory agency,
if applicable (in the case of sales outside the United States) (the "AIDS
Drugs"); provided however, that no such royalty will be payable by FRS
until FRS's cumulative Gross Margin on Net Sales of AIDS Drugs exceeds the
total amount of costs incurred for clinical inventory used in the AIDS
clinical studies (up to a maximum of **** million of such costs), which
royalty shall be payable only on such excess; and provided further, that
the sum of all royalty obligations with respect to technology involved in
the manufacture, use or sale of such AIDS drug will in no case, in the
aggregate, exceed **** of Net Sales, which percentage will include payments
to Cornell Research Foundation and any other third party for technology
involved in the manufacture, use or sale of such AIDS drug (the "Contingent
Payment").
(c) For this purpose, Gross Margin shall mean Net Sales less the
direct cost of goods sold, which will include royalties paid to Cornell and
any other third party for technology involved in the manufacture, use or
sale of the drug. Also for this purpose, Net Sales shall mean the gross
amount of money billed by FRS to its customers on sale or use of drugs for
FDA approved applications for patients with AIDS subsequent to the Closing,
**************************************************************************
**************************************************************************
**************************************************************************
**************************************************************************
************************************************************** FRS will
deliver to Clintec within 30 days after the end of each calendar year
ending after the Closing a report in writing setting forth sales of the
AIDS Drugs and will accompany such
-4-
<PAGE> 9
report with an appropriate payment of royalty due for such period. FRS will
keep accurate records for at least three years, certified by it, showing
the information by which FRS arrived at a royalty determination and will
permit an auditor appointed and paid for by Clintec and acceptable to FRS
to make such inspection of said records as may be necessary to verify
royalty reports made by FRS. However, if such inspection demonstrates that
the royalties paid were less than 90% of the royalties due, and FRS' Net
Sales of the AIDS Drugs for the applicable year was $500,000 or more, then
FRS shall reimburse Clintec the reasonable charges charged by the auditor
for such inspection.
(d) In the event it is ultimately determined, by a court of
competent jurisdiction or pursuant to any agreement between FRS and the
Internal Revenue Service ("IRS") and/or any applicable state tax authority
(collectively "Tax Authority"), that any payment made pursuant to Section
1.3(b) is not currently deductible by FRS for federal or state income tax
purposes (a "Final Determination"), then the amounts payable by FRS under
Section 1.3(b) after such Final Determination becomes final shall be
reduced to the extent necessary so that the present value, as of the first
day of the first year for which any payment is determined not to be
currently deductible, of (i) all payments made by FRS under Section 1.3(b)
(taking into account the reduction under this Section 1.3(d)) minus (ii)
all Tax Reductions attributable to such payments, is equivalent to the
present value, as of the first day of the first year for which any payment
is determined not to be currently deductible, of (iii) all payments that
would be provided for under Section 1.3(b) but for this Section 1.3(d) and
Section 1.3(e) if all such payments had been currently deductible for
federal and state income tax purposes, minus (iv) all Tax Reductions
attributable to such payments, it being the intention of the parties that
FRS be put in the same economic position it would have been in had the
amounts payable pursuant to Section 1.3(b) been currently deductible for
federal and state income tax purposes. For this purpose, (i) present value
of a payment of Tax Reduction shall be determined by using, for each
calendar year of the computation, the federal mid-term rate determined
using an annual compounding convention under Section 1274(d) of the
Internal Revenue Code of 1986, as amended (the "Code"), announced for
January of such calendar year, and (ii) the "Tax Reduction" attributable to
a payment is the amount of the actual reduction in federal and state income
tax liability resulting from the payment.
-5-
<PAGE> 10
(e) In the event the IRS asserts that any payment made pursuant to
Section 1.3(b) is not currently deductible by FRS for federal income tax
purposes and the matter has not been settled or resolved upon the
completion of the audit examination (including an appeal to the IRS appeals
office) (an "Interim Determination") then, notwithstanding the provisions
of Section 1.3(d), the amounts payable by FRS under Section 1.3(b) after
the Interim Determination may be reduced to the extent they could have been
reduced under Section 1.3(d) if such deficiency had been upheld or agreed
to in a Final Determination, provided, however, that if there is a Final
Determination in which such deficiency is not upheld or agreed to in its
entirety, then FRS shall pay to Clintec, within 90 days of such Final
Determination, the amount necessary to put Clintec in the same economic
position it would have been in if this Section 1.3(e) had not applied.
(f) In the event that the amounts payable under Section 1.3(b)
without regard to Sections 1.3(d) and 1.3(e) are insufficient to permit any
reduction in the amounts payable under Section 1.3(b) that is required
pursuant to Section 1.3(d) or 1.3(e) as a result of a Final Determination
or Interim Determination to be effected within the four next succeeding
calendar quarters after such Final Determination or Initial Determination,
then Clintec shall pay to FRS, within 90 days after the end of the last of
such calendar quarters, the amount necessary to put FRS in the economic
position it would have been in if the amounts payable under Section 1.3(b)
had been sufficient to permit the full amount of any such required
reduction to be effected.
(g) FRS shall give Clintec a reasonable period of time (i) to
review any federal or state income tax returns of FRS in which FRS claims a
deduction for payments made pursuant to Section 1.3(b) prior to the filing
of any such returns and (ii) to control the manner in which any such
deductions are claimed on such return.
(h) FRS shall promptly notify Clintec of any claim by a Tax
Authority that any payment made by FRS under Section 1.3(b) is not
currently deductible, and in such event Clintec shall have the exclusive
right to assume the defense of any such claim and to control any
controversy resulting therefrom, at Clintec's expense. FRS agrees to
cooperate with Clintec in the defense of any such claim and to cooperate
with Clintec and the FRS Firm or the Joint Firm (as hereinafter defined) in
the determination of the amount of any reduction in payments required
hereunder. Such cooperation shall include, but not be limited to, (i) the
execution and delivery of any power of attorney required to allow
-6-
<PAGE> 11
Clintec and its representatives to represent FRS in any controversy which
Clintec has the right to control hereunder, (ii) the prompt and timely
filing of appropriate claims for any refund, and (iii) making available to
Clintec and its representatives all books, records (including working
papers and schedules), information and employees necessary or useful in
connection with any tax inquiry, audit, investigation, dispute or
litigation relating to the matters described in this Section 1.3(h).
(i) The determination of the amount of any reduction pursuant to
Sections 1.3(d) or 1.3(e) hereof shall initially be made by the independent
certified public accountants then serving as auditor for FRS (the "FRS
Firm"), and such determination shall be furnished to Clintec in writing,
which shall include a computation of the amount of any reduction and a
detailed written explanation of the manner in which such computation was
made. If Clintec objects in writing to such determination within 60 days
after it is received by Clintec, then the amount of any reduction shall be
determined by a "Big Six" firm of independent certified public accountants
jointly selected by Clintec and FRS (or, if they are unable to agree, then
such a firm jointly selected by the FRS Firm and a firm of independent
public accountants designated by Clintec) (the "Joint Firm"), and the
decision of the Joint Firm shall be final and binding upon the parties. If
Clintec does not object in writing to the determination of the FRS Firm
within such time period, then the decision of the FRS Firm shall be final
and binding upon the parties. No reduction in the payments provided for in
Section 1.3(b) shall be made until a decision of the FRS Firm or the Joint
Firm has become final. The fees and expenses of the FRS Firm shall be borne
by FRS, and the fees and expenses of the Joint Firm shall be shared equally
by Clintec and FRS, except that if the Joint Firm decides that the amount
of any reduction in payments required hereunder is less than 90% of the
amount of the reduction decided by the FRS Firm, then FRS shall bear all of
the fees and expenses of the Joint Firm.
D. TRANSFER OF CONTRIBUTED ASSETS. At the Closing, Clintec shall
deliver or cause to be delivered to FRS good and sufficient instruments of
transfer transferring to FRS title to all of the Contributed Assets. Such
instruments of transfer (a) shall be in the form and will contain the
warranties, covenants and other provisions (not inconsistent with the
provisions hereof) which are usual and customary for transferring the type
of property involved under the laws of the jurisdictions applicable to such
transfers, (b) shall be in form and substance satisfactory to FRS and its
counsel, and (c) shall effectively vest in FRS good title to all the
Contributed Assets free and clear of all Liens.
-7-
<PAGE> 12
E. DELIVERY OF RECORDS AND CONTRACTS. At the Closing, Clintec, to the
extent FRS does not already have possession of such documents or rights,
shall deliver or cause to be delivered to FRS, at FRS' request, all written
leases, contracts, commitments and rights evidencing Contributed Assets and
Assumed Liabilities, with such assignments thereof and consents to
assignments as are necessary to assure FRS of the full benefit of the same.
From time to time, pursuant to the request of FRS delivered to Clintec
after the Closing, Clintec, at Clintec's expense and without any further
consideration, will execute and deliver to FRS such instruments and
documents of conveyance and transfer, and do and cause to be done such acts
or things, as FRS may reasonably request in order to more effectively
contribute, convey, transfer and assign to FRS, or to perfect or record
FRS's interest in or title to, or to enable FRS to use, any and all of the
Contributed Assets, or otherwise to carry out the purposes and intent of
this Agreement.
F. Closing. The closing of the sale and purchase of the transactions
contemplated hereby (the "Closing"), shall take place at the offices of
Palmer & Dodge, One Beacon Street, Boston, MA at 10:00 a.m., local time, on
April 5, 1994, or at such other time and place as agreed to by the parties
(the "Closing Date") and the effective date of such sale and purchase shall
be February 1, 1994 (hereinafter referred to as the "Effective Date").
G. Section 351 Transaction. The parties intend that the contribution
of the Contributed Assets be treated as a transfer described in Section 351
of the Internal Revenue Code of 1986, as amended (the "Code"), and the
parties agree that they will prepare and file their federal and any state
or local income tax returns in a manner consistent with such
characterization.
H. Tax Definition. For purposes of this Agreement, the term "Taxes" or
individually, a "Tax" shall mean all federal, state, county, local, foreign
and other taxes, including, without limitation, income taxes, estimated
taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes,
import duties, value-added taxes, gross receipts taxes, franchise taxes,
capital stock taxes, employment and payroll-related taxes, withholding
taxes, stamp taxes, transfer taxes, windfall profit taxes, environmental
taxes and property taxes, whether or not measured in whole or in part by
net income and all deficiencies, or other additions to such taxes and
interest, fines and penalties thereon.
-8-
<PAGE> 13
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
I. Certain Payments Relating to Contract with Dickson Research Group.
Upon the fulfillment, to FRS's satisfaction, of all of Dickson's
obligations to FRS with respect to Study 3.0 under the Dickson Contract,
FRS shall pay to Clintec by certified check or wire transfer of immediately
available funds an amount equal to ********* representing the value of
Clintec's prepayment under the Dickson Contract. FRS agrees that after the
Closing it will continue to use Dickson for the completion of Study 3.0
unless it has a valid business reason for terminating Dickson.
J. Cooperation with FRS in Obtaining Rights under Contract de
Recherche. Clintec Technologies, S.A. and L'Institut National de la
Recherche Agronomique ("INRA") entered into a Research Contract on December
24, 1992 (the "INRA Contract") under which Clintec may have rights to
commercially exploit any research results, inventions or discoveries. To
the extent that Clintec has such rights (including the right to license
FRS) under the INRA Contract as such rights relate to Pharmaceutical
Applications (as defined in the License Agreement) without the payment by
Clintec of additional consideration therefor, Clintec will execute an
exclusive, fully paid, royalty-free license granting to FRS all such
rights. To the extent Clintec is unable to license such rights, Clintec
will use its best efforts to cause INRA to offer to FRS an exclusive
license, granting FRS all such rights, provided, however, that Clintec
shall not be required to make any payment to INRA or to incur any
out-of-pocket expenses in connection therewith. Clintec will provide FRS
copies of all correspondence between Clintec and INRA which relates to the
INRA Contract and Pharmaceutical Applications (as defined in the License
Agreement), and will give FRS an opportunity to respond to such
correspondence to the extent that such correspondence relates to
Pharmaceutical Applications of the Compounds or the Other Compounds.
SECTION II. - REPRESENTATIONS AND WARRANTIES
OF CLINTEC
Clintec represents and warrants to FRS as follows:
A. Organization and Qualification. Clintec is a general partnership
duly established, validly existing and in good standing under the laws of
Illinois and has full power and lawful authority to own, lease and operate
its assets, properties and business and to carry on its business as now
being and as heretofore conducted. Clintec is not required to be qualified
or otherwise authorized to transact business as a foreign
-9-
<PAGE> 14
partnership in any jurisdiction (in the United States and outside of the
United States) in which such qualification or authorization is required by
law and in which the failure to so qualify or be authorized could have a
material adverse effect on the Contributed Assets. Clintec does not file
and is not required to file any franchise, income or other tax returns in
any jurisdiction (in the United States or outside of the United States)
other than in Illinois, based upon the ownership or use of the Contributed
Assets therein or the derivation of income therefrom.
B. Authority to Execute and Perform Agreements. Clintec has the full
legal right and power and all authority and approvals required to enter
into, execute and deliver this Agreement and the Related Agreements (as
hereinafter defined) and to perform fully its respective obligations
hereunder and thereunder, and each of this Agreement and the Related
Agreements has been or will be duly executed and delivered and is the valid
and binding obligation of Clintec enforceable in accordance with its terms.
Clintec has obtained the necessary approval of its partners, (collectively,
the "Partners"), and third parties to the transactions contemplated by this
Agreement and the Related Agreements.
C. Compliance with Laws.
(a) Clintec is not in violation of any order, judgment,
injunction, award or decree binding upon it relating to the Contributed
Assets, or which would affect the transactions contemplated hereunder.
Subject to the exception that Clintec makes no representation or warranty
in respect of the activities of FRS at its offices located at 245 First
Street, Cambridge, Massachusetts, neither Clintec nor FRS, nor their
respective officers, directors, employees or agents, is in violation of any
Environmental or Clinical Testing Law (as hereinafter defined). For
purposes of this Agreement, Environmental or Clinical Testing Law shall
mean the regulations and requirements of the Occupational Safety and Health
Administration ("OSHA"), and laws, ordinances, regulations and other
requirements respecting the clinical testing of health care products,
pollution or protection of the environment, including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes into the environment (including, without limitation,
ambient air, surface water, ground water or land), or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, human bodily
fluids,
-10-
<PAGE> 15
chemicals or industrial, toxic or hazardous substances or wastes. Clintec
and, to the best of Clintec's knowledge, FRS have never received notice of,
and there has never been, any citation, fine or penalty imposed or asserted
against Clintec, or, to the best knowledge of Clintec, FRS for any such
violation or alleged violation.
(b) Set forth on Schedule 2.3 are all of the licenses issued by
OSHA and all other licenses, permits, franchises, orders or approvals of
any federal, state, local or foreign governmental or regulatory body,
relating to the clinical testing of health care products and environmental
matters, including, without limitation, the treatment, storage, disposal,
transport or handling of human bodily fluids (collectively, "Permits") that
are material to the use of the Contributed Assets. Clintec holds all
Permits necessary to the operation and use of the Contributed Assets as
presently used. Such Permits are in full force and effect and, except as
set forth on Schedule 2.3, such Permits will be transferred to FRS as part
of the Contributed Assets. No violations are or have been recorded with any
governmental or regulatory body in respect of any Permit; and no proceeding
is pending or, to the best knowledge of Clintec, threatened to revoke or
limit any Permit.
D. Consents; No Breach. All consents, permits, authorizations and
approvals from any person pursuant to applicable law or contracts or other
agreements with Clintec, that are required in connection with the
performance of Clintec's obligations under this Agreement, or the
assignment of the Contributed Assets or the assumption of the Assumed
Liabilities are set forth on Schedule 2.4 hereto. The execution, delivery
and performance of this Agreement and the Related Agreements and the
consummation of the transactions contemplated hereby and thereby will not
(i) violate any provision of the Partnership Agreement of Clintec; (ii)
except as set forth on Schedule 2.4, violate, conflict with or result in
the breach of any of the terms or conditions of, result in modification of
the effect of, or otherwise give any other contracting party the right to
terminate, or constitute (or with notice or lapse of time or both
constitute) a default under, any material instrument, contract or other
agreement to which Clintec is a party or to which any of its assets or
properties may be bound or subject; (iii) violate any order, judgment,
injunction, award or decree of any court, arbitrator or governmental or
regulatory body against, or binding upon, Clintec or the securities,
properties, assets or business of Clintec; (iv) violate any statute, law or
regulation of any jurisdiction as such statute, law or regulation relates
to Clintec or to the securities, properties, assets or business of
-11-
<PAGE> 16
Clintec; (v) violate any Permit; (vi) except as set forth in Schedule 2.4,
require the approval or consent of any foreign, federal, state, local or
other governmental or regulatory body or the approval or consent of any
other person; or (vii) result in the creation of any Lien on the
Contributed Assets.
E. ACTIONS AND PROCEEDINGS. There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, governmental or
regulatory body or arbitration tribunal against or involving Clintec which
are reasonably likely to affect or relate to any of the Contributed Assets
or the transactions contemplated hereunder. Except as set forth on Schedule
2.5, there are no actions, suits or claims or legal, administrative (other
than patent office proceedings not involving third parties) or arbitral
proceedings or, to the best knowledge of Clintec, governmental
investigations (whether or not the defense thereof or liabilities in
respect thereof are covered by insurance) pending or, to the best knowledge
of Clintec, threatened against or involving Clintec which are reasonably
likely to affect or relate to any of the Contributed Assets or the
transactions contemplated hereunder. To the best of Clintec's knowledge,
there is no fact, event or circumstance that may give rise to any suit,
action, claim, governmental investigation or proceeding based upon a
material violation of any law governing environmental matters, including,
without limitation, the treatment, storage, disposal, transport or handling
of human bodily fluids, or regulating the clinical testing of health care
products that individually or in the aggregate would have a material
adverse effect on the Contributed Assets or the transactions contemplated
hereunder.
F. CONTRACTS AND OTHER AGREEMENTS. Schedule 2.6 contains a complete
and correct list of all agreements, contracts and commitments of the
following types, written or oral, (1) to which Clintec is a party and which
relate to the Compounds or the Other Compounds, (2) to which the
Contributed Assets are bound, subject to or affected by (except to the
extent any such agreements, contracts or commitments relate solely to
Clinical Nutrition (as defined in the License Agreement), or (3) to the
best of Clintec's knowledge, to which FRS is a party:
(i) contracts and other agreements for the purchase or sale
of materials, supplies, equipment, merchandise or services;
(ii) partnership or joint venture agreements;
-12-
<PAGE> 17
(iii) contracts, options and other agreements for the
purchase of any asset, tangible or intangible calling for an aggregate
purchase price or payments in any one year of more than $25,000 in any
one case (or in the aggregate, in the case of any related series of
contracts and other agreements);
(iv) contracts and other agreements that cannot by their
terms be canceled by Clintec and any successor or assignee of Clintec
without liability, premium or penalty on no less than thirty days
notice;
(v) contracts and other agreements with customers or
suppliers for the sharing of fees, the rebating of charges or other
similar arrangements;
(vi) contracts and other agreements containing covenants of
Clintec not to compete in any line of business or with any person or
covenants of any other person not to compete with Clintec in any line
of business;
(vii) contracts, indentures, mortgages, promissory notes,
loan agreements, guaranties, security agreements, pledge agreements,
and other agreements relating to the borrowing of money or securing
any such liability;
(viii) distributorship or licensing agreements;
(ix) contracts under which Clintec will acquire or has
acquired ownership of, or license to, intangible property, including
software (other than software licensed by Clintec as an end user for
less than $25,000 and not distributed by it); or
(x) any other material contract or other agreement whether
or not made in the ordinary course of business.
There have been delivered or made available to FRS true and complete
copies of all of the written contracts and other agreements (and all
amendments, waivers or other modifications thereto) and accurate
descriptions of all oral contracts and other agreements set forth on
Schedule 2.6. Except as set forth in Schedule 2.6, all of such contracts
and other agreements are valid, subsisting, in full force and effect,
binding upon Clintec or FRS, as applicable, and to the best knowledge of
Clintec, binding upon the other parties thereto in accordance with their
terms, and Clintec or FRS, as applicable, has paid in full or
-13-
<PAGE> 18
accrued all amounts now due thereunder and has satisfied in full or
provided for all of its liabilities and obligations thereunder which are
presently required to be satisfied or provided for, and is not in default
under any of them, nor, to the best knowledge of Clintec, is any other
party to any such contract or other agreement in default thereunder, nor
does any condition exist that with notice or lapse of time or both would
constitute a default thereunder.
G. INTANGIBLE PROPERTY. (a) Except as set forth on Schedule 2.7,
Clintec has exclusive ownership of all patents, trademarks and trade names;
all applications to register any of the foregoing; all trade secrets,
inventions, customer lists, manufacturing or other processes, designs, data
compilations, research results and other confidential information and
legally protected proprietary rights (collectively, "Proprietary Rights")
that constitute Contributed Assets and Clintec has the right to use, free
and clear of claims or rights of others, all such Proprietary Rights.
(b) Clintec has not received any notices claiming infringement by
Clintec of any Proprietary Rights of others, and, to the best knowledge of
Clintec none of the present activities of Clintec or its products or assets
infringe on any Proprietary Rights of others, including unauthorized use of
any confidential information or trade secrets of any person, including
without limitation any former employer of any past or present employees of
Clintec.
(c) All patents, patent applications, trademarks, trademark
applications and registrations and registered copyrights (or applications
therefor) which constitute Contributed Assets are listed in Schedule 2.7
("Registered Rights"). All of the Registered Rights have been duly
registered in, filed in or issued by the United States Patent and Trademark
Office, the United States Register of Copyrights, or the corresponding
offices of other jurisdictions as identified on said Schedule, and have
been properly maintained and renewed in accordance with all applicable
provisions of law and administrative regulations in the United States and,
to the best of Clintec's knowledge, in each such other jurisdiction,
provided, however, that Clintec makes no representation or warranty as to
the validity or enforceability of any issued patent or trademark.
(d) Clintec has disclosed or made available confidential
information and trade secrets included in the Proprietary Rights only to
(i) employees of Clintec who required
-14-
<PAGE> 19
such disclosure or access for Clintec's business purposes and who, to the
best of Clintec's knowledge, have exercised the same degree of care to
preserve the confidentiality of such information and trade secrets as they
have to preserve the confidentiality of other confidential information and
trade secrets of Clintec, and (ii) consultants or other third parties
(other than employees of FRS) who have executed written confidentiality
agreements governing their use of such confidential information and trade
secrets. Clintec is not aware of any unauthorized disclosure of any such
confidential information or trade secrets by any of its employees or of any
breach of any obligation of any such consultants or other third parties
under the confidentiality agreements referred to above.
(e) To the best of Clintec's knowledge, none of the activities of
Clintec's employees relating to the Proprietary Rights violate any
agreements which any such employees have with former employers.
H. TITLE TO ASSETS; LIENS. Clintec owns outright and has good title to
all the Contributed Assets, free and clear of any Liens, except for liens
or other encumbrances securing the claims of materialmen, carriers,
landlords and like persons or attorneys' liens, all of which are not yet
due and payable ("Permitted Liens"). Upon delivery of and payment for the
Contributed Assets as herein provided, FRS will acquire all of Clintec's
right, title and interest thereto, free and clear of any Liens. The
Contributed Assets constitute all assets of Clintec which relate to the
Compounds or the Other Compounds.
I. INSURANCE. Clintec is covered by all policies or binders of
liability, product liability, clinical trial and other insurance that are
customary and reasonable in relation to the Contributed Assets. Such
policies and binders are in full force and effect, all premiums with
respect thereto are currently paid and are in conformity with the
requirements of all contracts to which Clintec is a party and are valid and
enforceable in accordance with their terms. Neither Clintec nor the
Partners is in default with respect to any provision contained in any such
policy or binder nor has Clintec or the Partners failed to give any notice
or present any claim under any such policy or binder in due and timely
fashion. There are no outstanding unpaid claims under any such policy or
binder. Neither Clintec nor the Partners has received notice of
cancellation or non-renewal of any such policy or binder.
-15-
<PAGE> 20
J. BROKERAGE. No broker, finder, agent or similar intermediary has
acted on behalf of Clintec, the Partners or their respective affiliates in
connection with this Agreement or the transactions contemplated hereby, and
there are no brokerage commissions, finders fees or similar fees or
commissions payable in connection therewith based on any agreement,
arrangement or understanding with Clintec, the Partners or their respective
affiliates, or any action taken by them.
K. FULL DISCLOSURE. No representation or warranty of Clintec contained
in this Agreement, including the schedules attached hereto, contains an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements made, in
the context in which made, not false or misleading.
L. CONTRACT DE COLLABORATION. Clintec has the authority to transfer
and assign to FRS, without the consent (written or otherwise) by the other
parties thereto, and will transfer and assign to FRS at the Closing, all of
Clintec's rights and interests in the following research contracts which
are described on Schedule 1.1(ii), section 3:
(i) Contract de Collaboration between Clintec Technologies S.A.
and L'Universite, Joseph Fourier, and
(ii) Contract de Collaboration between Clintec Technologies S.A.
and L'Institut National de la Recherche Agronomique dated October 25, 1993.
M. INVESTMENT REPRESENTATIONS.
(a) Clintec has not relied upon the advice of a "purchaser
representative," as defined in Regulation D under the Securities Act of
1933, as amended (the "Securities Act") in evaluating the risks and merits
of the Common Shares and Preferred Shares (collectively, the "Shares").
(b) Clintec has had an opportunity to ask questions of and receive
answers from FRS, or a person or persons acting on FRS's behalf, concerning
the terms and conditions of the Shares.
(c) Clintec understands that the Shares have not been registered
under the Securities Act or under the securities laws of any state or other
jurisdiction in reliance upon exemptions for private offerings, and that,
while FRS may in the future register the Shares, except as set forth in the
Registration Rights Agreement of even date herewith between FRS, Clintec
and
-16-
<PAGE> 21
the other parties named therein ("Registration Rights Agreement") it is
under no obligation to do so, and Clintec further understands that Clintec
is acquiring the Shares without being furnished any offering literature or
prospectus.
(d) Clintec represents that the Shares are being acquired solely
for its own account, for investment and not with a view to or for the
resale, distribution, subdivision, or fractionalization thereof; Clintec
has no present plans to enter into any contract, undertaking, agreement, or
arrangement relating thereto.
(e) Clintec acknowledges and is aware that there are substantial
restrictions on the transferability of the Shares; the Shares cannot be
resold unless the Shares are registered under the Securities Act and any
applicable securities law of any state or other jurisdiction, or an
exemption from registration is available; except as set forth in the
Registration Rights Agreement, Clintec has no rights to require that the
Shares be registered under the Securities Act; and there currently is no
and there may never be, a public market for the Shares.
(f) Clintec has such knowledge and experience in financial and
business matters that it is capable of evaluating the relative risks and
merits of the Shares.
(g) Clintec is a general partnership organized and with its
principal place of business in the state of Illinois.
SECTION III. - CONDITIONS PRECEDENT TO
THE OBLIGATION OF FRS TO CLOSE
The obligation of FRS to enter into and complete the Closing is
subject, at the option of FRS acting in accordance with the provisions of
this Agreement with respect to termination hereof, to the fulfillment of
the following conditions, any one or more of which may be waived by it:
A. REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and
warranties of Clintec contained in this Agreement shall be true on and as
of the Closing Date with the same force and effect as though made on and as
of the Closing Date. Clintec shall have performed and complied with all
covenants and agreements required by this Agreement to be performed or
complied with by Clintec on or prior to the Closing Date. Clintec shall
have delivered to FRS a certificate, dated
-17-
<PAGE> 22
the Closing Date and signed by an officer of Clintec to the foregoing
effect and stating that all conditions to FRS's obligations hereunder have
been satisfied.
B. THIRD PARTY CONSENTS. FRS shall have received evidence of the
receipt of all authorizations, consents and permits of others required to
permit the consummation by FRS and Clintec of the transactions contemplated
by this Agreement, including but not limited to, all consents set forth on
Schedule 2.4, except to the extent waived by FRS in writing.
C. BAXTER AGREEMENT WITH PACE. Baxter shall have executed and
delivered a waiver of certain rights of Baxter under its contract with Gary
Pace, dated August 22, 1989, (the "Waiver") in the form agreed by the
parties.
D. NON-SOLICITATION AGREEMENT. Baxter shall have executed and
delivered the Employee Non-Solicitation Agreement between Baxter and FRS,
dated of even date herewith.
E. LICENSE AGREEMENT. Clintec shall have executed and delivered the
License Agreement between Clintec and FRS, dated of even date herewith (the
"License Agreement").
F. SERVICES LETTER. Baxter shall have executed and delivered the
letter relating to the provision by Baxter of certain services, dated of
even date herewith, together with the Non-Solicitation Agreement and the
Waiver (together with the License Agreement and the Letter Agreement
described in Section 3.7 the "Related Agreements").
G. LETTER AGREEMENT. The Letter Agreements, dated June 15, 1993 and
December 22, 1993, respectively, between FRS and Clintec shall be
terminated and of no further force and effect.
H. OPINION OF COUNSEL TO CLINTEC. FRS shall have received the opinion
of Bell, Boyd & Lloyd, counsel to Clintec, dated the Closing Date,
addressed to FRS, and in the form agreed by the parties.
I. LITIGATION. No action, suit or proceeding shall have been
instituted before any court or governmental or regulatory body, or
instituted or threatened by any governmental or regulatory body, to
restrain, modify or prevent the carrying out of the transactions
contemplated hereby, or to seek damages or a discovery order in connection
with such transactions, or that has or may have, in the reasonable opinion
of FRS, a materially adverse effect on the Contributed Assets.
-18-
<PAGE> 23
J. DELIVERY OF INSTRUMENTS OF TRANSFER. Clintec shall have delivered
or caused to be delivered to FRS instruments of transfer in conformity with
Section 1.4 above.
K. STOCK PURCHASE AGREEMENT. The transactions contemplated by the
Series A Convertible Preferred Stock Purchase Agreement of even date
herewith among The Venture Capital Fund of New England III, L.P., Advent
International Investors II Limited Partnership, Rovent II Limited
Partnership, Global Private Equity II Limited Partnership, Paal C. Gisholt,
Charles Hsu, Sprout Capital VI, L.P., DLJ Capital Corporation Baxter,
Clinical Nutrition Holdings, Inc. ("CNHI") and FRS (the "Stock Purchase
Agreement") shall have been consummated, and the other Financing Documents
(as defined in the Stock Purchase Agreement) shall have been executed and
delivered by the parties thereto other than FRS (except to the extent
waived in writing by the parties thereto).
SECTION IV. - CONDITIONS PRECEDENT
TO THE OBLIGATION OF CLINTEC TO CLOSE
The obligation of Clintec to enter into and complete the Closing is
subject, at the option of Clintec acting in accordance with the provisions
of this Agreement with respect to termination hereof, to the fulfillment of
the following conditions, any one or more of which may be waived:
A. DELIVERY OF ASSUMPTION AGREEMENT. FRS shall have delivered or
caused to be delivered to Clintec an agreement for assumption of the
Assumed Liabilities by FRS containing provisions (not inconsistent with the
provisions hereof) which are usual and customary for assuming the
liabilities involved.
B. LITIGATION. No action, suit or proceeding shall have been
instituted before any court or governmental or regulatory body, or
instituted or threatened by any governmental or regulatory body, to
restrain, modify or prevent the carrying out of the transactions
contemplated hereby, and such action, suit or proceeding shall not have
been stayed.
C. LICENSE. FRS shall have executed and delivered the License
Agreement.
D. STOCK PURCHASE AGREEMENT. The transactions contemplated by the
Stock Purchase Agreement shall have been consummated, and the other
Financing Documents shall have been executed and delivered by the parties
thereto other than Clintec, Baxter and CNHI (except to the extent waived in
writing by the parties thereto).
-19-
<PAGE> 24
SECTION V. - NON-COMPETITION AND EMPLOYEE NON-SOLICITATION
A. NO COMPETING BUSINESS. Clintec hereby agrees that during the period
commencing on the Closing Date and ending on the fifth anniversary of the
Closing Date (the "Restricted Period"), Clintec will not directly or
indirectly own, manage, operate, control, invest or acquire an interest in,
or otherwise engage or participate in (whether as a proprietor, partner,
stockholder, joint venturer, investor or other participant) in the
development or sale of (i) the Compounds or the Other Compounds, except for
Clinical Nutrition Products (as defined in the License Agreement), in the
field of Nutrition (as defined in the License Agreement), or as otherwise
expressly permitted by the License Agreement, or (ii) products or compounds
that have as their principal purpose Pharmaceutical Applications (as
defined in the License Agreement) for the purpose of manipulating
glutathione levels for human therapeutic, prophylactic or other medical
purposes anywhere in the world, or grant any license to any third party to
do any of the foregoing, except as expressly permitted by the License
Agreement (any such development or sale being herein referred to as a
"Restricted Business"). It is anticipated that a number of products and
compounds may be both a Clinical Nutrition Product and have Pharmaceutical
Applications and this Section 5.1 shall not apply to the development or
sale of such products or compounds. This section only applies to Clintec
and in no way places any restrictions on any of Clintec's general partners
or their affiliates, subsidiaries, and related companies.
B. CERTAIN ACQUISITIONS OF COMPETING BUSINESSES. Notwithstanding the
definition of Restricted Business contained in Section 5.1, the term
Restricted Business shall not include the following business activities:
(a) The acquisition and ownership of not more than 5% of the
outstanding shares of any class of stock or other securities of any
entity which engages in a Restricted Business (a "Competing Business")
if such shares or securities are traded on a national securities
exchange or in the over-the-counter market.
(b) The acquisition and ownership of the outstanding shares of
any class of stock or other securities or assets and properties of a
Competing Business provided that the total fair market value of all
assets and properties of the Competing Business (i) which are
acquired, in the case of an asset purchase, or which are among the
assets and properties
-20-
<PAGE> 25
of such Competing Business, in the case of a stock purchase, and (ii)
which are used by the Competing Business in the Restricted Business,
does not exceed the greater of (A) 5% of the total fair market value
of all stock or other ownership interests or assets or properties of
such Competing Business acquired in such transaction, or (B)
$1,000,000; and provided further that upon acquiring control of such
Competing Business or upon acquiring the assets and properties of such
Competing Business which are used in the Restricted Business, as the
case may be, Clintec shall offer to sell the assets and properties of
the Competing Business which are used in the Restricted Business (the
"Assets") to FRS on the following terms and conditions: Clintec shall
offer the Assets to FRS by giving to FRS prompt written notice of such
offer which offer shall identify, in reasonable detail, the Assets,
the nature and type of transaction which Clintec desires to effect
with respect thereto and, if applicable, any indications of interest
in or offers for the Assets which Clintec has received (the "Notice").
During the 60-day period after receipt of the Notice (the "Negotiation
Period"), FRS shall have the right to negotiate with Clintec, and if
FRS elects to do so based upon such negotiations, to make a written
offer or offers to acquire all of the Assets. During the Negotiation
Period, Clintec agrees to negotiate with FRS in good faith, to make
available such information as FRS may reasonably request with respect
to the Assets (subject to receipt of a customary confidentiality
agreement from FRS) and to respond promptly to any offer made by FRS.
In the event Clintec accepts FRS' offer for the Assets, Clintec and
FRS agree to enter into a mutually acceptable definitive agreement
with respect thereto and to complete the acquisition of the Assets
within 60 days of Clintec's acceptance of FRS' offer (or such longer
period as may be required by regulatory constraints). In the event
that during the Negotiation Period FRS does not make an offer, or
makes an offer or offers which Clintec rejects, Clintec is free to (1)
retain the Assets and operate the business associated therewith or (2)
sell, assign or otherwise transfer the Assets after the expiration of
the Negotiation Period to an unrelated third party on terms which are
no less favorable, considered as a whole, to Clintec than the terms of
FRS' final bona fide offer.
-21-
<PAGE> 26
C. NON-SOLICITATION OF FRS EMPLOYEES. Clintec hereby agrees that
during the Restricted Period it will not (i) directly or indirectly
recruit, solicit or otherwise induce or influence any technical,
professional or managerial employee of FRS to discontinue such employment
with FRS, or (ii) willfully induce any person or firm that performs
consulting services for both Clintec and FRS at the time of the Closing to
discontinue the provision of such services to FRS. Clintec also agrees that
for a period of five (5) years from the Closing Date, it will not hire any
employee of FRS. Nothing herein shall prevent either party from (a) hiring
any employee of the other who was discharged by the other, or (b) hiring
any employee of the other who quit that employment without inducement by
the hiring party.
D. No Disclosure of Proprietary Information.
(a) Clintec hereby agrees that, except as expressly permitted by
the Clinical Nutrition License Agreement, it will not directly or
indirectly disclose to anyone, or use or otherwise exploit for its own
benefit or for the benefit of anyone else, any trade secrets which are
being contributed hereunder as Contributed Assets for as long as they
remain trade secrets.
(b) Clintec hereby agrees that, except as expressly permitted by
the Clinical Nutrition License Agreement, during the Restricted Period it
will not directly or indirectly disclose to anyone, or use or otherwise
exploit for its own benefit or for the benefit of anyone else, any
confidential information which is being contributed hereunder as
Contributed Assets.
(c) Clintec shall use reasonable efforts to require its employees
to abide by the obligations of Sections 5.1, 5.2, 5.3 and 5.4.
E. Remedies. Clintec agrees that (i) if it breaches any provision of
this Section 5, the damage to FRS will be substantial, although difficult
to ascertain, and money damages will not afford FRS an adequate remedy, and
(ii) if it is in breach of this Section 5, or threatens a breach of this
Section 5, FRS shall be entitled, in addition to all other rights and
remedies as may be provided by law and this Agreement, to specific
performance, injunctive and other equitable relief to prevent or restrain a
breach of this Section 5.
-22-
<PAGE> 27
SECTION VI. - INDEMNIFICATION
A. Survival. Notwithstanding any right of any party to fully
investigate the affairs of the other party, each party has the right to
rely fully upon the representations, warranties, covenants and agreements
of each other party in this Agreement or in any Schedule, certificate
(except for certificates delivered by officers of FRS) or financial
statement delivered by any party pursuant hereto. All such representations,
warranties, covenants and agreements shall survive the execution and
delivery hereof and the Closing hereunder and be indemnified in accordance
with this Section 6, and, except as otherwise specifically provided in this
Agreement, shall thereafter:
(a) survive forever, with respect to (i) any claim based
upon, arising out of or otherwise in respect of any inaccuracy in, or
any breach of, any representation or warranty of Clintec contained in
Sections 2.2, 2.4, 2.8 and 2.13 hereof or covenant of Clintec
contained in Sections 1.2, 1.5, and 1.10 (a "Clause (i) Claim") (ii)
any Tax Claim or (iii) any Clinical Testing Claim; and
(b) terminate and expire on the second anniversary of the
Closing Date with respect to any General Claim or Clintec Claim (as
such Terms are hereinafter defined) or on the fifth anniversary of the
Closing Date with respect to a Non-Competition/Non-Solicitation Claim
based upon, arising out of or otherwise in respect of any fact,
circumstance, action or proceeding of which the party asserting such
claim shall have given no notice on or prior to the second anniversary
or, in the case of a Non-Competition/Non-Solicitation Claim, the fifth
anniversary of the Closing Date to the party against which such
General Claim, Clintec Claim or Non-Competition/Non-Solicitation Claim
is asserted; provided, however, once notice of any such claim has been
given hereunder, additional claims based upon, arising out of or
otherwise in respect of such fact, circumstance, action or proceeding
upon which the original claim arose may be made at any time prior to
the final resolution of such claim (by means of a final,
non-appealable judgment of a court of competent jurisdiction, a
binding arbitration decision or a settlement approved by the parties
involved) even if such resolution occurs after the second anniversary
or, in the case of a Non-Competition/Non-Solicitation Claim, the fifth
anniversary of the Closing Date, such date being deemed to have been
extended to the date of such final resolution.
-23-
<PAGE> 28
As used in this Section 6, the following terms have the following meanings:
(i) "General Claim" means any claim (other than a Clause (i)
Claim, a Tax Claim, Clinical Testing Claim or
Non-Competition/Non-Solicitation Claim) based upon, arising out of or
otherwise in respect of any inaccuracy in or any breach of any
representation, warranty, covenant or agreement of Clintec contained
in this Agreement.
(ii) "Tax Claim" means any claim based upon, arising out of
or otherwise in respect of (A) issues raised on audit by Tax
authorities with respect to Clintec's business, (B) any inaccuracy in
or any breach of any representation, warranty, covenant or agreement
of Clintec contained in this Agreement related to Taxes or (C) any
other Tax liabilities of Clintec.
(iii) "Clintec Claim" means any claim based upon, arising
out of or otherwise in respect of any breach of any covenant or
agreement of FRS contained in this Agreement.
(iv) "Non-Competition/Non-Solicitation Claim" means any claim
based upon, arising out of or otherwise in respect of any breach of
any covenant of Clintec contained in Section 5.
(v) "FRS Claim" means any clause (i) Claim, Tax Claim,
Non-Competition/Non-Solicitation Claim, Clinical Testing Claim or
General Claim.
(vi) "Clinical Testing Claim" any claim based upon, arising
out of or otherwise in respect of any liability or obligation of FRS
arising out of, relating to, based upon or otherwise in respect of (i)
violations of any Environmental or Clinical Testing Law prior to the
Closing Date, (ii) products liability for occurrences prior to the
Closing Date or (iii) clinical testing of the Compounds or Other
Compounds prior to the Closing, except for liabilities arising out of
violations of laws other than Environmental or Clinical Testing Laws
or liabilities arising out of labor or employment matters.
B. Obligation of Clintec to Indemnify. Subject to the limitations set
forth below and in Sections 6.5 and 6.6 hereof and to the termination
provisions set forth in Section 6.1, Clintec agrees to indemnify, defend
and hold harmless FRS (and its directors, officers, employees, affiliates
and assigns) from and against all losses, liabilities, damages,
deficiencies, costs
-24-
<PAGE> 29
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
or expenses (including interest and penalties imposed or assessed by any
judicial or administrative body and reasonable attorneys fees) ("Losses")
based upon, arising out of or otherwise in respect of any FRS Claim.
Clintec shall have no obligation to indemnify FRS unless the total of all
FRS Claims for indemnification under this Section 6.2 exceeds $******* in
the aggregate (the "FRS Threshold"), whereupon the full amount of such
claims shall be recoverable in accordance with the terms hereof. In no
event shall the aggregate amount payable by Clintec pursuant to this
Section 6.2 exceed ********** (the "FRS Cap"). Notwithstanding the
foregoing, the FRS Threshold and the FRS Cap shall not apply to
Non-Competition/Non-Solicitation Claims, and claims based on the failure to
perform the covenants contained in Sections 1.2, 1.4, 1.5, 1.10, 7.9 and
7.10.
C. Obligation of FRS to Indemnify. Subject to the limitations set
forth below and in Sections 6.5 and 6.6 hereof and to the termination
provisions set forth in Section 6.1, FRS agrees to indemnify, defend and
hold harmless Clintec from and against any Losses based upon, arising out
of or otherwise in respect of any Clintec Claim. FRS shall have no
obligation to indemnify Clintec unless the total of all Clintec Claims for
indemnification under this Section 6.3 exceeds $******* (the "Clintec
Threshold") in the aggregate, whereupon the full amount of such claims
shall be recoverable in accordance with the terms hereof. In no event shall
the aggregate amount payable by FRS pursuant to this Section 6.3 exceed
$*********(the "Clintec Cap"). Notwithstanding the foregoing, the Clintec
Threshold and the Clintec Cap shall not apply to claims based on the
failure to perform the covenants in Sections 1.2, 1.9 and 7.9.
D. NOTICE AND OPPORTUNITY TO DEFEND.
1. Notice of Asserted Liability. Promptly after receipt by any
party hereto (the "Indemnitee") of notice of any demand, claim or
circumstances which, with the lapse of time, would give rise to a claim or
the commencement (or threatened commencement) of any action, proceeding or
investigation (an "Asserted Liability") that may result in a Loss, the
Indemnitee shall give notice thereof (the "Claims Notice") to any other
party or parties) obligated to provide indemnification pursuant to Sections
6.2 or 6.3 hereof (the "Indemnifying Party"). The Claims Notice shall
describe the Asserted Liability in reasonable detail, and shall indicate
the amount (estimated, if necessary) of the Loss that has been or may be
suffered by the Indemnitee.
-25-
<PAGE> 30
2. Opportunity to Defend. The Indemnifying Party may elect to
compromise or defend, and control the defense of, at its own expense and by
counsel reasonably satisfactory to the Indemnitee, any Asserted Liability,
provided that the Indemnitee shall have no liability under any compromise
or settlement agreed to by the Indemnifying Party which it has not approved
in writing. If the Indemnifying Party elects to compromise or defend such
Asserted Liability, it shall within 30 days (or sooner, if the nature of
the Asserted Liability so requires) notify the Indemnitee of its intent to
do so, and the Indemnitee shall cooperate upon the request and at the
expense of the Indemnifying Party, in the compromise of, or defense
against, such Asserted Liability. If the Indemnifying Party elects not to
compromise or defend the Asserted Liability, or fails to notify the
Indemnitee of its election as herein provided, the Indemnitee may pay,
compromise or defend such Asserted Liability and receive full
indemnification for its Losses as provided in Sections 6.2 and 6.3 hereof.
In any event, the Indemnitee and the Indemnifying Party may participate, at
their own expense, in the defense of such Asserted Liability by the
Indemnifying Party or the Indemnitee, respectively. If the Indemnifying
Party chooses to defend any claim, the Indemnitee shall make available to
the Indemnifying Party any books, records or other documents within its
control that are reasonably requested for such defense and shall otherwise
cooperate with the Indemnifying Party, in which event the Indemnitee shall
be reimbursed for its out-of-pocket expense.
E. OTHER BENEFITS. In determining the amount of any Loss, there shall
be taken into account any tax benefit, insurance proceeds or other similar
recovery or offset realized, directly or indirectly, by the Indemnitee.
F. LIMITATION ON REPRESENTATIONS AND WARRANTIES. In the event that, as
of the Closing Date, an Indemnitee (or, in the case of FRS, if all of the
purchasers other than Clintec or its affiliates, under the Stock Purchase
Agreement (the "Purchasers")) has(ve) obtained actual knowledge of a breach
of any representation, warranty or covenant made in this Agreement and
has(ve) had a reasonably sufficient time in the circumstances to recognize
and investigate the same, (A) such Indemnitee shall give the Claims Notice
before the Closing (in the event FRS is the Indemnitee, the Purchasers
shall give such Claims Notice on its behalf), (B) the parties shall
thereupon negotiate in good faith to resolve such breach and/or to make
appropriate adjustment to the terms of this Agreement and any related
agreement, and (C) no indemnification shall be available under this Section
6 with respect to any breach as to which the Indemnitee has not complied
with clause (A) of this subsection.
G. EXCLUSION. The provisions of this Section 6 shall not apply to
Sections 1.3(b)-(i), Section 1.7 or Section 7.4.
-26-
<PAGE> 31
SECTION VII. - MISCELLANEOUS
A. PUBLICITY. No publicity release or announcement concerning this
Agreement or the transactions contemplated hereby shall be made without
advance approval thereof by Clintec and FRS.
B. NOTICES. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be
deemed given when so delivered personally, telegraphed, telexed or sent by
facsimile transmission or, if mailed, two days after the date of deposit in
the United States mails, as follows:
(i) if to FRS, to:
Free Radical Sciences, Inc.
245 First Street
14th Floor
Cambridge, Massachusetts 02142
Attention: Chief Executive Officer
Facsimile: (617) 374-1202
with a copy to:
Palmer & Dodge
One Beacon Street
Boston, MA 02108
Attention: Michael Lytton, Esq.
Facsimile: (617) 227-4420
(ii) if to Clintec:
Clintec Nutrition Company
Three Parkway North
Deerfield, Illinois 60015
Attention: Chief Executive Officer
Facsimile: (708) 317-3182
with a copy to:
Bell, Boyd & Lloyd
Three First National Plaza, 70 W. Madison Street
Chicago, IL 60602
Attention: Paul Strasen, Esq.,
Facsimile: (312) 372-2098
-27-
<PAGE> 32
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices
hereunder.
C. ENTIRE AGREEMENT. This Agreement (including the Schedules), the
Related Agreements and all other documents executed in connection with the
consummation of the transactions contemplated herein contain the entire
agreement among the parties with respect to the purchase of the Shares and
the Contributed Assets and related transactions, and supersedes all prior
agreements, written or oral, with respect thereto. Other than the
purchasers named in the Stock Purchase Agreement, this Agreement is for the
sole benefit of the parties hereto and nothing herein expressed shall give
or be construed to give any person or entity, other than the parties hereto
and the purchasers named in the Stock Purchase Agreement, any legal or
equitable rights hereunder.
D. AUSTRALIAN INSURANCE. Clintec hereby covenants and agrees to
maintain, at its sole expense, in full force and effect the clinical trial
insurance in effect on the Effective Date for the Australian Co-trimoxazole
study (the "Study") through June 30, 1994 (the "Roll-Over Date"). At the
election of FRS, by written notice to Clintec ten days prior to the
Roll-Over Date, Clintec shall renew and maintain such policy in full force
and effect until December 31, 1994. Notwithstanding any provision hereof to
the contrary, FRS's only responsibilities and liabilities with respect to
the Study shall be (i) payment to Clintec of the renewal premium, up to a
maximum of $1,000, on the Roll-Over Date and (ii) payment of any insurance
deductible for third-party claims made after the Closing Date, up to a
maximum of $250,000.
E. CONFIDENTIALITY LETTER. The Letter Agreement, effective as of
January 27, 1994, between Advent International Corporation, Clintec and FRS
shall automatically terminate and be of no further force and effect upon
the Closing.
F. WAIVERS AND AMENDMENTS; NON-CONTRACTUAL REMEDIES; PRESERVATION OF
REMEDIES. This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written instrument
signed by the parties or, in the case of a waiver, by the party waiving
compliance. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall
any waiver on the part of any party of any such right, power or privilege,
nor any single or partial exercise of any such right, power or privilege,
preclude any further exercise thereof or the
-28-
<PAGE> 33
exercise of any other such right, power or privilege. The rights and
remedies herein provided are cumulative and are not exclusive of any rights
or remedies that any party may otherwise have at law or in equity. The
rights and remedies of any party based upon, arising out of or otherwise in
respect of any inaccuracy in or breach of any representation, warranty,
covenant or agreement contained in this Agreement shall in no way be
limited by the fact that the act, omission, occurrence or other state of
facts upon which any claim of any such inaccuracy or breach is based may
also be the subject matter of any other representation, warranty, covenant
or agreement contained in this Agreement (or in any other agreement between
the parties) as to which there is not inaccuracy or breach.
G. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of The Commonwealth of Massachusetts, without
regard to the conflicts of law rules of The Commonwealth of Massachusetts.
H. BINDING EFFECT; NO ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
legal representatives. This Agreement is not assignable except by operation
of law or by FRS to any of its affiliates, except that (i) Clintec and FRS
may assign their respective rights under Sections 1.3(b)-(i) and (ii)
Clintec may assign any of its rights hereunder to its partners or their
affiliates (but such assignment shall not release Clintec from its
obligations hereunder). In the event of a sale (which shall be deemed not
to include a license) of a substantial portion of the Technology related to
the AIDS Drugs, FRS shall obtain the agreement of the Transferee of such
Technology to be bound by the provisions of Section 1.3(b)-(i) hereof, as
such provisions would be modified by substituting the name of the
Transferee for FRS therein, and upon obtaining such agreement FRS shall be
released from its obligations under Section 1.3(b)-(i) to the extent such
obligations relate to the sales of AIDS Drugs by the Transferee.
I. EXPENSES. Except as otherwise provided in this Agreement, all costs
and expenses incurred in connection with this Agreement shall be paid by
the party incurring such cost or expense; provided, that, Clintec shall pay
the legal fees and expenses of Palmer & Dodge incurred in connection with
negotiating, drafting and consummation of the transactions contemplated by
this Agreement, up to a maximum amount of $25,000.
J. TAXES. Clintec shall be responsible for the payment of any sales,
transfer, documentary or similar tax due as a result of the transactions
contemplated by this Agreement.
-29-
<PAGE> 34
K. VARIATIONS IN PRONOUNS. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or plural, as the
context may require.
L. COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute
one and the same instrument. Each counterpart may consist of a number of
copies hereof each signed by less than all, but together signed by all of
the parties hereto.
M. EXHIBITS AND SCHEDULES. The Exhibits and Schedules are a part of
this Agreement as if fully set forth herein. All references herein to
Sections, subsections, clauses, Exhibits and Schedules shall be deemed
references to such parts of this Agreement, unless the context shall
otherwise require.
N. HEADINGS. The headings in this Agreement are for reference only,
and shall not affect the interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement under
seal as of the date first above written.
Attest: FREE RADICAL SCIENCES, INC.
_________________________ By: /s/ Gary W. Pace
Title: -----------------------------
Name: Gary W. Pace
Title: President
Attest: CLINTEC NUTRITION COMPANY
_________________________ By: /s/ T.C. Rojahn
Title: -----------------------------
Name: T.C. Rojahn
Title: Vice President
-30-
<PAGE> 1
EXHIBIT 10.4
NON-SOLICITATION AGREEMENT
--------------------------
AGREEMENT dated as of April 5, 1995, by and among Baxter
Healthcare Corporation, a Delaware corporation ("Baxter"), and Free
Radical Sciences, Inc., a Delaware corporation ("FRS").
WHEREAS, FRS and Clintec Nutrition Company ("Clintec"), an
Illinois general partnership, have entered into a Contribution
Agreement dated as of the date hereof (the "Contribution Agreement")
whereby Clintec is contributing certain assets to FRS; and
WHEREAS, Baxter is a General Partner of Clintec; and
WHEREAS, in order to protect the assets to be contributed to FRS
under the terms of the Contribution Agreement, FRS and Clintec have
agreed that the obligations of FRS to consummate the transactions
contemplated by the Contribution Agreement are subject to the
condition, among others, that FRS and Baxter shall have entered into
this Agreement; and
WHEREAS, in order to induce FRS to consummate the transactions
contemplated by the Contribution Agreement, Baxter is willing to enter
into this Agreement;
NOW THEREFORE, in consideration of the promises and the covenants
set forth herein, the parties agree as follows:
1. NO SOLICITATION. Baxter and FRS hereby agree that for a period
of five (5) years from the date hereof, Baxter and its subsidiaries
will not, directly or indirectly, recruit, solicit or otherwise induce
any technical, professional or managerial employee of FRS to
discontinue such employment with FRS. Baxter and FRS further agree that
for a period of five (5) years from the date of this Agreement, Baxter
and its subsidiaries and divisions will not hire any employee of FRS.
Notwithstanding the foregoing, nothing herein shall prevent Baxter and
its subsidiaries from (i) hiring any employee of FRS who was discharged
by FRS, or (ii) hiring any employee of FRS who quit that employment
without inducement by Baxter and its subsidiaries.
2. REMEDIES. The parties to this Agreement agree that (i) if
Baxter breaches any provision of this Agreement, the damage to FRS will
be substantial, although difficult to ascertain, and money damages will
not afford FRS an adequate remedy, and (ii) if Baxter is in breach of
this Agreement, or threatens a breach of this Agreement, FRS shall be
entitled, in addition to all other rights and remedies as may be
provided by law, to specific
-1-
<PAGE> 2
performance, injunctive and other equitable relief to prevent, restrain
or remedy a breach of this Agreement.
3. WAIVERS. FRS shall not be deemed, as a consequence of any act,
delay, failure, omission, forbearance or other indulgences granted from
time to time or for any other reason: (i) to have waived, or to be
estopped from exercising, any of its rights or remedies under this
Agreement provided that such rights or remedies are enforced by legal
action within two (2) years after the act, delay, failure, omission,
forbearance or other indulgence, or (ii) to have modified, changed,
amended, terminated, rescinded, or superseded any of the terms of this
Agreement or any of the other similar agreements with Baxter, unless
such waiver, modification, amendment, change, termination, rescission,
or supersession is expressed in writing and signed by a duly authorized
officer of FRS. No single or partial exercise by FRS of any right or
remedy under this Agreement will preclude other or further exercise
thereof or preclude the exercise of any other right or remedy, and a
waiver expressly made in writing on one occasion will be effective only
in that specific instance and only for the precise purpose for which it
is given, and will not be construed as a consent to or a waiver of any
right or remedy on any future occasion or a waiver of any right or
remedy against Baxter under similar agreements with FRS. No notice to
or demand on Baxter in any instance will entitle Baxter to any other or
future notice or demand in similar or other circumstances.
4. SUCCESSORS & ASSIGNS. This Agreement, shall be binding upon
Baxter and its subsidiaries and FRS and their respective successors
and assigns. This Agreement shall inure to the benefit of the parties
hereto and their respective successors and assigns.
5. NOTICES. Notices or demands relating to this Agreement
shall be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed as follows, or telexed, telecopied or
delivered by overnight or other courier:
If to Baxter: Baxter Healthcare Corporation
One Baxter Parkway
Deerfield, IL 60015
Attn: General Counsel
Facsimile: (708) 948-4266
with a copy to: Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison Street
Chicago, IL 60602
Attn: Paul Strasen, Esq.
Facsimile: (312) 372-2098
-2-
<PAGE> 3
If to FRS: Free Radical Sciences, Inc.
245 First Street
14th Floor
Cambridge, MA 02142
Attention: Chief Executive Officer
Facsimile: (617) 374-1202
with a copy to: Palmer & Dodge
One Beacon Street
Boston, MA 02108
Attention: Michael Lytton, Esq.
Facsimile: (617) 227-4420
6. COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall
together constitute one and the same instrument. Each counterpart may
consist of a number of copies hereof, each signed by less than all, but
together singed by all of the parties hereto.
7. HEADINGS. The headings in this Agreement are for reference
only, and shall not affect the interpretation of this Agreement.
8. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of
Massachusetts, without regard to the conflicts of law rules of the
Commonwealth of Massachusetts of any other jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
BAXTER HEALTHCARE CORPORATION
By: /s/ David N. Jonas
-------------------------------
Name: David N. Jonas
Title: Vice President, Strategic
Initiatives
FREE RADICAL SCIENCES, INC.
By: /s/ Gary W. Pace
-------------------------------
Name: Gary W. Pace
Title:
-3-
<PAGE> 1
EXHIBIT 10.5
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
LICENSE AGREEMENT
THIS AGREEMENT, effective this 5th day of April, 1994 ("Effective
Date"), is entered into by and between Clintec Nutrition Company, an
Illinois partnership organized under the laws of the State of Illinois,
having offices at Three Parkway North, Suite 500, Deerfield, Illinois
60015-0760 ("CLINTEC") and Free Radical Sciences, Inc., a Delaware
corporation, having offices at 245 First Street, 14th Floor, Cambridge,
Massachusetts 02142 ("FRS").
WHEREAS, CLINTEC and FRS have entered into a Contribution Agreement of
even date herewith;
WHEREAS, pursuant to the Contribution Agreement, various patents and
patent applications and other technology were transferred by CLINTEC to
FRS;
WHEREAS, CLINTEC wants to acquire a sublicense to the patents, patent
applications, and technology that were transferred to FRS for use in the
fields of clinical nutrition and nutrition; and
WHEREAS, FRS is willing to grant such a sublicense to Clintec.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants set forth below, the parties hereby agree as follows:
1. DEFINITIONS.
-----------
1.1 CLINICAL NUTRITION shall mean the feeding under professional
supervision of patients requiring special food administration techniques
and devices or nutrients in relation to their medical condition and (for
purposes of this Agreement) shall be deemed to exclude the administration
of any product in which the Compounds (as defined below) (i) ********** by
dry weight of the total content of the amino acids, amino acid precursors
and amino acid substrates, or (ii) ********* by weight volume of the
product administered in liquid form to patients, unless FRS otherwise
consents (which consent shall not be unreasonably withheld). Clinical
Nutrition comprises parenteral (intravenous and intraperitoneal) and
enteral (nasogastric, jejunal and oral) nutrition for patient needs in
hospitals, nursing homes, extended care facilities and, if taken under
professional supervision, private residences.
<PAGE> 2
1.2 CLINICAL NUTRITION PRODUCTS shall mean products used or that can
be used in the field of Clinical Nutrition. Clinical Nutrition Products
include those products that replete nutritional deficits, return naturally
occurring cellular constituents or cellular products toward or to accepted
normal clinical ranges, ameliorate malnutrition, maintain or improve
nutrition status, offset negative nitrogen balance or replete energy
deficit. In biological systems Clinical Nutrition Products are handled by
known metabolic pathways which may or may not be altered by disease state
or clinical condition.
1.3 COMPOUND(S) shall mean any of the molecular entities
L-2-oxothiazolidine-4-carboxylate (Procysteine), its isomers, its esters
(including diesters) and its neutral salts, the cysteine derivative
N-acetyl-cysteine, and glutathione esters (including diesters) including
the alkyl monoesters.
1.4 CORNELL LICENSE AGREEMENT shall mean the "Exclusive License
Agreement CRF D-416 and D-520, D-913, D-169, D-1239, D-1258, D-1403,
D-1426" by and between Cornell Research Foundation Inc. ("Cornell") and FRS
having an Effective Date as of the date of this Agreement.
1.5 CORNELL LICENSED PATENTS shall mean the United States (U.S.) and
non-U.S. patents and patent applications licensed to FRS under the Cornell
License Agreement.
1.6 DATA shall mean all Data and information resulting from any
studies, including stability, toxicology, preclinical and clinicals,
relating to Compounds that was generated prior to the Effective Date of
this Agreement.
1.7 FRS PATENTS shall mean the U.S. and non-U.S. patents identified on
Schedule A attached hereto including any reissues or reexaminations
thereof, as well as any U.S. or non-U.S. patents that may issue from FRS
Patent Applications (defined below).
1.8 FRS PATENT APPLICATIONS shall mean the patent applications
identified on Schedule B attached hereto, as well as any patent application
that is filed after the Effective Date of this Agreement that: is based in
whole, or in part, on the invention records identified on Schedule C;
claims priority, at least in part, from a patent application identified on
Schedule B; is based in whole, or in part, on Licensed Know-How; or is
filed as a divisional, continuation, or continuation-in-part of a patent
application identified on Schedule B.
-2-
<PAGE> 3
1.9 LICENSED KNOW-HOW shall mean any proprietary right in existence as
of the date of this Agreement, other than a patent or patent application,
owned by, controlled by, or licensed to FRS with the right to sublicense
relating to Clinical Nutrition or Clinical Nutrition Products.
1.10 NUTRITION shall mean the feeding of individuals and shall include
all products not having therapeutic claims and not included in the
definition of Clinical Nutrition that have as their principal purpose
providing nutrients to an individual.
1.11 OTHER COMPOUNDS shall have the meaning ascribed to such term in
the Contribution Agreement.
1.12 PHARMACEUTICAL APPLICATIONS shall mean the provision of a
medicinal substance or a drug other than a nutrient with the intent to
bypass or to alter or restore normal in vivo synthesis, metabolic or
physiologic state, including redox status. Generally, medicinal substances
or drugs will be synthetic, specifically isolated or specifically produced
and will require an approved drug license to allow sale and promotion of
the claimed indication regardless of the route of administration. Such
medicinal substances or drugs can be administered alone or with other
entities such as nutrients.
2. GRANT.
-----
2.1 GRANT TO CLINTEC. In consideration of the Contribution Agreement,
as well as other good and valuable consideration the sufficiency of which
is hereby acknowledged, FRS grants to CLINTEC an exclusive, even as to FRS,
paid-up, royalty-free license to the Other Compounds, FRS Patents, FRS
Patent Applications, and Cornell Patents limited to the field of Clinical
Nutrition and a paid-up, royalty-free non-exclusive license limited to the
field of Nutrition.
2.2 ROYALTY FOR CORNELL PATENTS. To the extent any royalty is due and
owing under the Cornell License Agreement in view of CLINTEC's sale of a
Clinical Nutrition Product under this Agreement, CLINTEC agrees to pay the
applicable royalty to Cornell.
2.3 DATA AND KNOW-HOW. FRS grants to CLINTEC a royalty-free
nonexclusive license to Licensed Know-How. Additionally, FRS will make
available to CLINTEC at no cost to CLINTEC, at CLINTEC's request all Data
for use by CLINTEC in the development and regulatory approvals of Clinical
Nutrition Products.
-3-
<PAGE> 4
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
2.4 CLINTEC'S RIGHT OF FIRST REFUSAL. FRS grants to CLINTEC a right of
first refusal to any Clinical Nutrition Product developed by FRS after the
Effective Date of this Agreement and for a period of *******************
********* that is based on or includes Other Compounds or a Compound. The
parties shall negotiate in good faith an exclusive license to such Clinical
Nutrition Product. If the parties fail to reach agreement with respect to
any such Clinical Nutrition Product, FRS may solicit other offers and
engage in negotiations with third parties with respect to that specific
Clinical Nutrition Product. However, prior to concluding any such Agreement
with any third party, FRS must offer CLINTEC the option to accept the
proposed Agreement with respect to the Clinical Nutrition Product on the
terms agreed to with the third party. If CLINTEC does not accept such offer
within forty-five (45) days after written notice by FRS, FRS will be free
to enter into an agreement with the third party on such terms.
2.5 FRS RIGHT OF FIRST REFUSAL. CLINTEC grants to FRS a right of first
refusal to any Pharmaceutical Applications developed by CLINTEC after the
Effective Date of this Agreement and for a period of ******** years
thereafter that is based on or includes a Compound. The parties shall
negotiate in good faith an exclusive license to such Pharmaceutical
Applications. If the parties fail to reach an agreement with respect to any
such Pharmaceutical Applications, CLINTEC may solicit other offers and
engage in negotiations with third parties with respect to that specific
Pharmaceutical Application. However, prior to concluding any such Agreement
with any third party, CLINTEC must offer FRS the option to accept the
proposed Agreement with respect to the Pharmaceutical Applications on the
terms agreed to with the third party. If FRS does not accept such offer
within forty-five (45) days after written notice by CLINTEC, CLINTEC will
be free to enter into an agreement with the third party on such terms.
2.6 FRS NON-COMPETITION. FRS agrees that during the period commencing
on the date of signature of this License Agreement and ending on the *****
anniversary of such date, FRS will not directly or indirectly own, manage,
operate, control, invest or acquire an interest in, or otherwise engage or
participate in (whether as a proprietor, partner, stockholder, joint
venturer, investor, other participant in) the development or sale of
products or compounds that have as their principal purpose Clinical
Nutrition for the purpose of manipulating glutathione levels, anywhere in
the world, or grant any license to any third party for Clinical Nutrition
Products (any such development or sale being herein referred to as a
"Restricted Business"). It is anticipated that a number of products and
compounds may be both a
-4-
<PAGE> 5
Clinical Nutrition Product and have Pharmaceutical Applications and this
Section 2.6 shall not apply to the development or sale of such products or
compounds.
2.7 CERTAIN ACQUISITIONS OF COMPETING BUSINESSES. Notwithstanding the
definition of Restricted Business contained in Section 2.6, the term
Restricted Business shall not include the following business activities:
(a) The acquisition and ownership of not more than 5% of the
outstanding shares of any class of stock or other securities of any entity
which engages in a Restricted Business (a "Competing Business") if such
shares or securities are traded on a national securities exchange or in the
over-the-counter market.
(b) The acquisition and ownership of the outstanding shares of any
class of stock or other securities or assets and properties of a Competing
Business provided that the total fair market value of all assets and
properties of the Competing Business (i) which are acquired, in the case of
an asset purchase, or which are among the assets and properties of such
Competing Business in the Restricted Business, does not exceed the greater
of (A) 5% of the total fair market value of all stock or other ownership
interests or assets or properties of such Competing Business acquired in
such transaction, or (B) $1,000,000; and provided further that upon
acquiring control of such Competing Business or upon acquiring the assets
and properties of such Competing Business which are used in the Restricted
Business, as the case may be, FRS shall offer to sell the assets and
properties of the Competing Business which are used in the Restricted
Business (the "Assets") to Clintec on the following terms and conditions:
FRS shall offer the Assets to Clintec by giving to Clintec prompt written
notice of such offer which offer shall identify, in reasonable detail, the
Assets, the nature and type of transaction which FRS desires to effect with
respect thereto and, if applicable, any indications of interest in or
offers for the Assets which FRS has received (the "Notice"). During the
60-day period after receipt of the Notice (the "Negotiation Period"),
Clintec shall have the right to negotiate with FRS, and if Clintec elects
to do so based upon such negotiations, to make a written offer or offers to
acquire all of the Assets. During the Negotiation Period, FRS agrees to
negotiate with Clintec in good faith, to make available such information as
Clintec may reasonably request with respect to the Assets (subject to
receipt of a customary confidentiality agreement from Clintec) and to
respond promptly to any offer made by Clintec. In the event FRS accepts
Clintec's offer for the Assets, FRS and Clintec agree to enter into a
mutually acceptable definitive agreement with respect
-5-
<PAGE> 6
thereto and to complete the acquisition of the Assets within 60 days of
FRS's acceptance of Clintec's offer (or such longer period as may be
required by regulatory constraints). In the event that during the
Negotiation Period Clintec does not make an offer, or makes an offer or
offers which FRS rejects, FRS is free to (1) retain the Assets and operate
the business associated therewith or (2) sell, assign or otherwise transfer
the Assets after the expiration of the Negotiation Period to an unrelated
third party on terms which are no less favorable, considered as a whole, to
FRS than the terms of Clintec's final bona fide offer.
3. PATENT COSTS.
------------
3.1 FRS PATENTS AND PATENT APPLICATIONS. FRS shall have the
responsibility to pay all attorney's fees, maintenance fees, and any and
all other costs associated with any FRS Patent or FRS Patent Application.
Should FRS decide not to pay any cost or expense for any FRS Patent or FRS
Patent Application or decide to allow any such FRS Patent or FRS Patent
Application to go abandoned, prior to abandoning such FRS Patent
Application or FRS Patent, FRS shall advise CLINTEC in writing. CLINTEC
shall then have the right to pay such expense and maintain the FRS Patent
or FRS Patent Application. In such case, FRS agrees to assign to CLINTEC
such FRS Patent or FRS Patent Application.
3.2 CORNELL LICENSED PATENTS. To the extent any fees are due and owing
under the Cornell License Agreement for a Cornell Licensed Patent, FRS will
be responsible to pay all costs and expenses. However, prior to allowing
any Cornell Licensed Patent to go abandoned for failure to pay any cost or
expense, FRS shall advise CLINTEC and CLINTEC shall have the right, but not
the obligation, to pay the applicable expense or fee. Should CLINTEC pay
the expense or fee, FRS will then transfer to CLINTEC, to the extent
permitted by the Cornell License Agreement, the rights to the applicable
Cornell Licensed Patent.
4. TERM.
----
The term of this Agreement shall last for the effective life of the
last to expire FRS Patent or Cornell Licensed Patent. Upon expiration of
this License Agreement, CLINTEC shall enjoy a royalty-free license to
Licensed Know-How for the purpose of making, using, and selling Clinical
Nutrition Products or products used in the field of Nutrition.
-6-
<PAGE> 7
5. ENFORCEMENT.
-----------
Upon learning of an infringement of an FRS Patent or Cornell Patent,
CLINTEC will advise FRS of such infringement in writing. FRS will then be
free, at its expense, to file a law suit in its name and at its expense
against the infringer. FRS shall be entitled to all damages it recovers. If
FRS does not file a law suit within ninety (90) days of CLINTEC's notice,
CLINTEC, at its cost and expense, can bring suit against the infringer.
CLINTEC will be entitled to all damages it may recover from any such law
suit. FRS agrees, to the extent requested by CLINTEC, to join CLINTEC and
assist CLINTEC, at CLINTEC's expense, in maintaining such law suit.
6. ASSIGNMENT.
----------
The rights and obligations of CLINTEC under this Agreement can be
assigned to any party by CLINTEC upon thirty (30) days' notice from
CLINTEC.
7. TERMINATION.
-----------
Either CLINTEC or FRS may terminate this Agreement if there is a
material breach of this Agreement by the other party by providing the other
party with written notice of such breach. The breaching party will then
have a six (6) month period in which to cure such breach. If such breach
remains uncured at the end of the six (6) month period, this Agreement will
then terminate.
8. SUBLICENSING.
------------
CLINTEC may sublicense its rights under this Agreement to any third
party.
9. MISCELLANEOUS.
-------------
9.1 Notices. Any notices to be given under any provision of this
Agreement may be given by sending by registered or certified mail to the
address of the party concerned as follows:
If to FRS: Free Radical Sciences, Inc.
Attn: Chief Executive Officer
245 First Street
14th Floor
Cambridge, Massachusetts 02142
Facsimile: 617/374-1202
-7-
<PAGE> 8
If to CLINTEC: Clintec Nutrition Company
Attn: President
Three Parkway North, Suite 500
Deerfield, Illinois 60015
Facsimile: 708/317-3180
9.2 APPLICABLE LAW. This Agreement shall be deemed to be made under
and to be governed by the laws of the State of Illinois.
9.3 SEPARABILITY. Should any part or provision of this Agreement be
held unenforceable or in conflict with the law of any jurisdiction, the
enforceability of the remaining parts or provisions shall not be affected
by such holding.
9.4 HEADINGS. The headings and subheadings of the various articles and
sections of this Agreement are inserted merely for the purpose of
convenience and do not express or imply any limitation, definition, or
extension of the specific terms and sections so designated.
9.5 SUCCESSORS AND ASSIGNS. This Agreement is binding on any
successors of FRS or assigns of any FRS Patents, FRS Patent Applications,
Licensed Know-How, or any rights under the Cornell License Agreement.
IN WITNESS WHEREOF, the parties have caused this instrument to be
executed in duplicate as of the day and year first above written.
ATTEST: CLINTEC NUTRITION COMPANY
By /s/ T.C. Rojahn
---------------------------- --------------------------------
Title Vice President
----------------------------
Date April 4, 1996
----------------------------
Attest: FREE RADICAL SCIENCES, INC.
By /s/ Gary W. Pace
------------------------------
Title President
---------------------------
Date April 4, 1996
---------------------------
-8-
<PAGE> 9
SCHEDULE A TO LICENSE AGREEMENT
-------------------------------
U.S. Patents
------------
U.S. Patent No. 5,095,027 "Method for Treating Reperfusion
Injury Employing L-2-
oxothiazolidine-4-carboxylic Acid"
Date Issued: March 10, 1992
U.S. Patent No. 5,208,249 "Method for Stimulating
Intracellular Synthesis of
Glutathione Using Esters of
L-2-Oxothiazolidine-4-carboxylate"
Date Issued: May 4, 1993
U.S. Patent No. 5,214,062 "Method and Composition for
Treating Immune Disorders,
Inflammation and Chronic
Infections"
Date Issued: May 25, 1993
-9-
<PAGE> 10
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
SCHEDULE B TO LICENSE AGREEMENT
-------------------------------
PENDING PATENT APPLICATIONS
---------------------------
******* *********************************************
**********
****************************
****************************
******* *********************************************
****************************
****************************
Corresponding Non-U.S. Applications:
Country Application No. Filing Date
------- --------------- -----------
******** *********** *****************
******** *********** *****************
******** *********** *****************
******** *********** *****************
******* *********************************************
**********
****************************
****************************
Corresponding Non-U.S. Applications:
Country Application No. Filing Date
------- --------------- -----------
******** *********** *****************
******** *********** *****************
******** *********** *****************
******** *********** *****************
******* *********************************************
**********
****************************
****************************
-10-
<PAGE> 11
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
Corresponding Non-U.S. Applications:
Country Application No. Filing Date
------- --------------- -----------
******** *********** *****************
******** *********** *****************
******** *********** *****************
******** *********** *****************
******* *********************************************
**********
****************************
****************************
******* *********************************************
**********
****************************
****************************
Corresponding Non-U.S. Applications:
Country Application No. Filing Date
------- --------------- -----------
******** *********** *****************
******** *********** *****************
******** *********** *****************
******** *********** *****************
******* *********************************************
****************************
****************************
Corresponding Non-U.S. Applications:
*************************************
******* *********************************************
****************************
****************************
Corresponding Non-U.S. Applications:
Country Application No. Filing Date
------- --------------- -----------
******** *********** *****************
******** *********** *****************
******** *********** *****************
******** *********** *****************
-11-
<PAGE> 12
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
******* *********************************************
**********
****************************
****************************
******* *********************************************
**********
****************************
****************************
******* *********************************************
**********
****************************
****************************
******* *********************************************
**********
****************************
****************************
******* *********************************************
**********
****************************
****************************
******* *********************************************
**********
****************************
****************************
***************************************************************
***************************************************************
***************************************************************
******
Country Application No. Filing Date
------- --------------- -----------
******** *********** *****************
******** *********** *****************
******** *********** *****************
******** *********** *****************
-12-
<PAGE> 13
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
Non-U.S. Applications Corresponding to U.S. Patent No. 5,208,249,
"Method for Stimulating Intracellular Synthesis of Glutathione Using
Esters of L-2-Oxothiazolidine-4-Carboxylate"; Date Issued: May 4,
1993:
Country Application No. Filing Date
------- --------------- -----------
******** *********** *****************
******** *********** *****************
******** *********** *****************
******** *********** *****************
Non-U.S. Applications Corresponding to U.S. Patent No. 5,214,062,
"Method and and Composition for Treating Immune Disorders,
Inflammation and Chronic Infections"; Date Issued: May 25, 1993:
Country Application No. Filing Date
------- --------------- -----------
******** *********** *****************
******** *********** *****************
******** *********** *****************
******** *********** *****************
-13-
<PAGE> 14
SCHEDULE C TO LICENSE AGREEMENT
-------------------------------
INVENTION RECORDS
-----------------
Goldberg, "Stimulation of Intracellular Glutathione Synthesis for
Prevention of Diabetic Complications" dated August 8, 1990
Pace et al., "Topical Elevation of Intracellular Glutathione as Treatment
for Psoriasis' dated October 1, 1990
Kamarei, "Diets Containing Glutathione for Hepatic Diseases" dated December
4, 1990
Mark et al., "Novel Methods for the Reduction of Difluromethylornithine
Associated Toxicity" dated March 29, 1991
Goldberg, "Topical Applications of Glutathione Esters for Treatment of
Local Herpes, Bursus and Inflammations" dated April 8, 1991
Mark et al., "Method of Treatment of Autoimmune Diseases" dated April 11,
1991
Mark et al., "Method of Modifying in Vitro Cell Culture Media to Enhance
Cellular Functions Including Replication" dated July 23, 1991
Rowe et al., "A Solid Oral Dosage Form for Procysteine" dated July 29, 1991
Madsen, "Amelioration of Valproate Toxicity of Co-adminstration of
Procysteine" dated October 30, 1991
Mark, "Methods of Enhancing the Use of Nitric Oxide to Treat Severe Adult
Respiratory Distress Syndrome" dated November 8, 1991
Goldberg et al., "Method to Reduce Muscle Injury and Damage and Enhance
Recovery from High Intensity Exercise" dated March 31, 1992
Goldberg, "Method for Enhancing Glutathione Synthesis by Concomitant
Administration of Glutamine and Cysteine" dated April 1, 1992
Mark, "Methods of Modifying in Vitro Tissue Culture Media to Enhance
Cellular Functions, Including Replication" dated October 30, 1992
-14-
<PAGE> 1
EXHIBIT 10.6
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
AMENDED AND RESTATED
--------------------
EXCLUSIVE LICENSE AGREEMENT CRF D-416 AND D-520
-----------------------------------------------
D-913, D-1069, D-1239, D-1258, D-1403, D-1426
---------------------------------------------
THIS AGREEMENT, executed as of August 12, 1996, amends, restates and
supersedes the Exclusive License Agreement CRF D-416 and D-520, D-913,
D-1069, D-1239, D-1258, D-1403, D-1426 dated April 5, 1994 (the "Original
Agreement") by and between the CORNELL RESEARCH FOUNDATION, INC., having
offices at Cornell Business & Technology Park, 20 Thornwood Drive, Suite
105, Ithaca, New York 14850, hereinafter referred to as "FOUNDATION" and
TRANSCEND THERAPEUTICS, INC., having offices at 640 Memorial Drive,
Cambridge, Massachusetts 02139, hereinafter referred to as "LICENSEE." This
Agreement (i) shall be retroactively effective as of April 6, 1994, (ii) is
executed for administrative convenience to avoid the requirement of certain
exhibits attached to the Original Agreement, and (iii) is subject to
agreements executed by FOUNDATION and LICENSEE subsequent to April 6, 1994,
including but not limited to the Letter Agreement dated October 5, 1995
between FOUNDATION and LICENSEE.
W I T N E S S E T H T H A T:
- - - - - - - - - - - - - -
WHEREAS, United States Patent No. 4,710,489, entitled "Glutathione
Delivery System," was issued on December 1, 1987;
<PAGE> 2
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
WHEREAS, United States Patent No. 4,784,685, entitled "Glutathione
Delivery System," was issued on November 15, 1988;
WHEREAS, United States Patent No. 4,879,370, entitled "Glutathione
Delivery System," was issued on November 7, 1989;
WHEREAS, a United States patent application entitled
*********************************************, as filed in the U.S. Patent
and Trademark Office on ****************;
WHEREAS, a United States patent application entitled
*************************************, was filed in the U.S. Patent and
Trademark Office on **************;
WHEREAS, Japanese Patent No. 1,592,957 was issued on July 11, 1989;
WHEREAS, the above group of patents and patent applications is
hereinafter referred to as the "Glutathione Technology" and includes all
the patents and patent applications presently owned by FOUNDATION that are
necessary to practice the inventions that comprise Glutathione Technology
as well as all patents and patent applications that name Alton Meister as
an inventor and relate to Glutathione Technology;
WHEREAS, United States Patent No. 4,335,210, entitled "Method of
Producing L-Cysteine," was issued on July 15, 1992;
WHEREAS, United States Patent No. 4,434,158 entitled "Cysteine
Delivery System," was issued on February 28, 1984;
-2-
<PAGE> 3
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
WHEREAS, United States Patent No. 4,647,571, entitled "Cysteine
Delivery Composition," was issued on March 3, 1987;
WHEREAS, United States Patent No. 4,665,082 entitled "Cysteine
Delivery System," was issued on May 12, 1987;
WHEREAS, United States Patent No. 4,438,124 entitled "Cysteine
Delivery System," was issued in March 20, 1984;
WHEREAS, counterpart European Patent No. 0057942 and Canadian Patent
1,167,766, have issued;
WHEREAS, the immediately-above group of patents is hereinafter
referred to as the "Procysteine Technology" and includes all the patents
and patent applications presently owned by FOUNDATION that are necessary to
practice the inventions that comprise Procysteine Technology as well as all
patents and patent applications that name Alton Meister as an inventor an
relate to Procysteine Technology;
WHEREAS, a United States patent application entitled
***************************************************************, was filed
in the U.S. Patent and Trademark Office on ************;
WHEREAS, a United States patent application entitled ******
******************************************************* **********, was
filed in the U.S. Patent and Trademark Office on *************;
WHEREAS, a United States patent application entitled
*************************************************, was filed in the U.S.
Patent and Trademark Office on *************;
-3-
<PAGE> 4
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
WHEREAS, a patent application is presently being prepared related to
*************************************************************************
********************************************;
WHEREAS, a PCT application equivalent to U.S. Serial No. 07/862,525,
was filed on July 9, 1993;
WHEREAS, the immediately-above group of patent applications is
hereinafter referred to as the "Gene Technology";
WHEREAS, the invention or inventions disclosed and claimed in the
above-listed patents and patent applications are assigned to FOUNDATION and
FOUNDATION is a wholly owned subsidiary corporation of Cornell University
having as one of its principal purposes the holding of ownership interests
of patents issued on inventions made by Cornell University's staff and the
administration of licenses in pursuance thereof in a manner consistent with
the patent policy of Cornell University;
WHEREAS, FOUNDATION represents that it is assignee of the above-listed
patents and patent applications and any patents issuing thereon, and has
the right to grant exclusive worldwide licenses under said patents, it
being pointed out however with respect to U.S. Serial No. SN 07/862,525,
FOUNDATION is the joint assignee thereof with Fox Chase Cancer Center
(hereinafter "Fox");
WHEREAS, FOUNDATION represents that it can grant licenses under U.S.
Serial No. 07/862,525 to LICENSEE without LICENSEE incurring any
obligations or liability to Fox;
-4-
<PAGE> 5
WHEREAS, the work leading to the inventions disclosed and claimed in
above-identified patents and patent applications was supported in part by
an agency of the U.S. Government, FOUNDATION is obligated to comply with
the U.S. Office of Management and Budget Circular No. A-124;
WHEREAS, FOUNDATION is not aware of any patent or patent application
that it owns, controls, or is licensed under with the right to sublicense
that is necessary to manufacture, sell, or use any product that falls
within the scope of any of the patents or patent applications that comprise
Glutathione Technology or Procysteine Technology;
WHEREAS, LICENSEE is desirous of securing an exclusive worldwide
license under the discoveries and inventions embodied in said patents and
patent applications and patents issuing therein to make, use and sell
products;
WHEREAS, FOUNDATION is willing to grant an exclusive worldwide license
in said patents and patent applications and any patents issuing thereon to
LICENSEE upon the terms and conditions hereinafter set forth;
WHEREAS, LICENSEE holds the complete LICENSEE'S interest in two prior
license agreements entitled respectively "Exclusive License Agreement
D-416" and "Exclusive License Agreement D-520" both effective July 1, 1989
(hereinafter collectively referred to as "The Prior Agreements"), with the
LICENSEE on their face being
-5-
<PAGE> 6
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
Baxter International, Inc., and whereas, LICENSEE and FOUNDATION both
intend that this agreement will supersede and replace The Prior Agreements;
NOW, THEREFORE, in consideration of the covenants and obligations
hereinafter set forth, the parties hereto hereby agree as follows:
I
DEFINITIONS
-----------
The following definitions will apply throughout this
agreement:
1. IMPROVEMENTS shall mean any patents or patent applications, other
than Licensed Patents or Licensed Patent Applications (as defined
below), relating to any Licensed Product or Procysteine
Technology, Glutathione Technology, or Gene Technology that is
developed during the term of this Agreement, and owned by the
FOUNDATION, which is not committed to a third party by law or
prior research agreement.
2. LICENSED PATENT APPLICATIONS shall mean U.S. Patent applications
S/N's *********************************************************
***** as well as the patent application to be filed on ********
*********************** and any continuation, continuation-
in-part, or
-6-
<PAGE> 7
divisional applications thereof, as well as foreign counterparts
thereof, if any.
3. LICENSED KNOW HOW shall mean any proprietary right other than a
patent or patent application owned by, controlled by, or licensed
to FOUNDATION with right to sublicense that relates to
Procysteine Technology, Glutathione Technology, or Gene
Technology.
4. LICENSED PATENTS shall mean U.S. Patents 4,710,489; 4,784,685;
4,879,370; 4,335,210; 4,434,158; 4,438,124; 4,647,571 and
4,665,082 and European Patent No. 0057942, Canadian Patent No.
1,167,766, and Japanese Patent No. 1,592,957 and any patents
issuing on a Licensed Patent Application and all reissues
thereof, as well as foreign counterparts to a Licensed Patent or
Licensed Patent Application.
5. LICENSED PRODUCTS shall mean a product that would infringe a
valid Licensed Patent in the country it is manufactured, used, or
sold but for the licenses granted herein.
6. LICENSE YEAR shall mean each twelve (12) month period beginning
on the effective date of this Agreement first written above and
thereafter on the anniversary date thereof.
-7-
<PAGE> 8
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
7. LICENSEE shall mean the above named company and any of its
affiliates in which it owns or controls at least 50 percent of
the voting stock or in the case of a partnership or other entity
50% of the interests in profits or capital of the entity.
8. NET SALES PRICE shall mean the gross amount of money billed by
LICENSEE to its customers on sale or use of Licensed Products
subsequent to the effective date of this Agreement,
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
**************************************************************
9. REDUCTION TO PRACTICE shall mean that the applicable invention is
in such a form as to render it capable of practical and
successful use. For a method of treatment or pharmaceutical
invention, this requires the demonstration of in vivo efficacy.
II
GRANT
-----
Subject only to the rights of and obligations to the U.S. Government
as set forth in OMB Circular No. A-124 and 37 CFR Part
-8-
<PAGE> 9
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
401, and existing in Law, and except for application Serial No. **********,
the FOUNDATION hereby grants to the LICENSEE for the term set forth below
and under the royalty basis set forth herein, an exclusive worldwide
license to the Licensed Patents and Licensed Applications including the
right to make, have made, use and/or sell Licensed Products. With respect
to application Serial No. **********, the FOUNDATION hereby grants to the
LICENSEE for the term set forth below and under the royalty basis set forth
herein, a non-exclusive worldwide license to that application and any
patent issuing therefrom including the right to make, have made, use and/or
sell Licensed Products. The period of the license in each country shall be
coextensive with the enforceable life of the patent in that country.
Additionally, FOUNDATION grants to LICENSEE a royalty free non-exclusive
license to Licensed Know How.
III
EQUITY AS CONSIDERATION FOR THE EXECUTION OF THIS AGREEMENT
-----------------------------------------------------------
Provided that FOUNDATION'S equity position is approved in writing by
the Executive Committee of FOUNDATION'S Board of Directors and that the
interaction with LICENSEE of all Cornell University Employees, if any, who
have an interest in LICENSEE, is approved in writing by the Dean of the
Cornell University Medical College, FOUNDATION at its option will receive
from LICENSEE, as consideration for entering into this Agreement an equity
position
-9-
<PAGE> 10
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
in LICENSEE that is 175,127 shares of the common stock of LICENSEE.
At FOUNDATION'S sole option, should said approval of the Dean and
Board not be obtained in writing six months from the effective date of this
Agreement, FOUNDATION and LICENSEE will negotiate in good faith to
determine a monetary equivalent of equity position referred to above, which
equivalent shall be granted by LICENSEE to FOUNDATION.
In addition, LICENSEE will provide, over a three (3) year period from
the Effective Date of this Agreement, *********** in cumulative funding for
Dr. Mary Anderson and/or Dr. Alton Meister laboratories for research in the
areas of the subject matter of Licensed patents and Licensed Patent
Applications pursuant to the Research Agreement attached hereto as Exhibit
A. In exchange for supporting such research, LICENSEE shall receive an
exclusive worldwide license to any patentable invention that results from
the research and is conceived or reduced to practice during the term of the
Research Agreement or one (1) year thereafter for the royalty rate set
forth herein. Any patent application filed on such patentable invention
shall become a Licensed Patent Application under this Agreement.
Additionally, LICENSEE shall receive a royalty free exclusive right to any
unpatentable inventions that result from the research and are conceived or
Reduced to Practice during the term of the Research Agreement or one (1)
year thereafter.
-10-
<PAGE> 11
IV
PAYMENT OF EXISTING PATENTS AND APPLICATIONS RENEWAL FEES AND CONTINUING
PROSECUTION COSTS
------------------------------------------------------------------------
Where a Licensed Patent Application is pending in the United States or
a foreign country, LICENSEE agrees to pay all reasonable prosecution costs
for such Licensed Patent Application incurred after the date of this
Agreement and all maintenance fees that become due on Licensed Patents
after the date of this Agreement; provided, however, that LICENSEE shall
have the right to deduct the costs and fees that are paid by LICENSEE from
any royalty that may be due and owing the FOUNDATION. Additionally,
LICENSEE shall have the right to not pay or discontinue payment of said
prosecution costs and/or maintenance fees upon thirty (30) days written
notice to FOUNDATION, in which case said patent application or patent, as
the case may be shall no longer be deemed a Licensed Patent Application or
Licensed Patent and LICENSEE shall have no further license under such
Licensed Patent Application or Licensed Patent.
FOUNDATION agrees to promptly provide LICENSEE with copies of all
Office Actions received from the applicable Patent Office, as well as
proposed responses to same for LICENSEE'S comments, before the responses
are filed. FOUNDATION shall make reasonable efforts to consider LICENSEE'S
comments and revise the proposed response if appropriate.
-11-
<PAGE> 12
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
Prior to abandoning or failing to prosecute any Licensed Patent or
Licensed Patent Application, FOUNDATION shall advise LICENSEE and provide
LICENSEE with the option to assume financial responsibility for such
Licensed Patent or Licensed Patent Application. If LICENSEE agrees to
assume such financial responsibility, FOUNDATION agrees to transfer all
relevant files to LICENSEE and assign such Licensed Patent or Licensed
Patent Application to LICENSEE and LICENSEE shall therefore not be
obligated to pay royalties under such patent or patent application.
V
FUTURE FOREIGN PATENTS AND APPLICATIONS AND PAYMENT OF COSTS
------------------------------------------------------------
In the event that after the date of this Agreement an opportunity
arises to file counterpart patent applications to the United States
Licensed Patent Applications in any foreign country, FOUNDATION shall
notify LICENSEE in writing of said opportunity. Within sixty (60) days
after receipt of said notice, LICENSEE shall advise FOUNDATION in which
foreign countries LICENSEE intends to pay all expenses incurred in the
preparation, filing, prosecution, renewal and continuation of the Licensed
Patent Applications , including all taxes, official fees and attorney fees
("Foreign Licensed Patent Application Expenses"); however, LICENSEE shall
have the right to deduct ******************* of any
-12-
<PAGE> 13
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
such Foreign Licensed Patent Application Expenses from any royalties that
may be due and owing FOUNDATION under this Agreement. In the event that
LICENSEE elects not to pay said Foreign Licensed Patent Application
Expenses in any foreign country, and FOUNDATION elects to pay said Foreign
Licensed Patent Application Expenses, then and in such foreign country,
LICENSEE'S right to the Foreign Licensed Patent or Licensed Patent
Application in that foreign country shall become a non-exclusive license.
Should LICENSEE agree to pay the Foreign Licensed Patent Application
Expenses, FOUNDATION will promptly provide LICENSEE with copies of all
communications from the relevant Patent Offices and proposed responses
thereto for LICENSEE'S comments prior to filing. FOUNDATION shall make
reasonable efforts to consider LICENSEE'S comments and revise the proposed
response if appropriate.
VI
ROYALTIES AND ADVANCE ROYALTIES TO BE PAID DURING THE LICENSE AGREEMENT
-----------------------------------------------------------------------
In consideration for the rights granted herein LICENSEE will pay to
the FOUNDATION in U.S. dollars a royalty on Net Sales Price of Licensed
Products sold by LICENSEE according to the following schedule:
************************************** in annual sales, and ***********
****************** on all annual sales ****************** annually. In
determining annual sales, net sales of Licensed
-13-
<PAGE> 14
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
Product in each Technology shall be separately considered and shall not be
combined for purposes of the royalty schedule.
LICENSEE'S obligation to pay royalty upon each such Licensed Product
in any country shall cease:
(i) if the applicable claims in the Licensed Patent in that country
are held invalid by an unappealed or unappealable decision of a
court of competent jurisdiction, in that country, or
(ii) upon expiration of the last said Licensed Patent in that country.
On July 1 of each License Year commencing on the effective date of
this Agreement, LICENSEE shall pay FOUNDATION *************************
*********** for each of the Glutathione Technology and the Procysteine
Technology (i.e., a combined total of ********** as an advance royalty
payment for that License Year and such moneys will be considered as a
credit for the royalties due on each respective Technology for that License
Year under this Agreement and the royalty reports should reflect the use of
such credit. Such provision is to be construed as an annual minimum royalty
payment requirement for each Technology and none of the advance royalty
payments are refundable or applicable to succeeding License Years. Payment
of actual royalties in excess of minimum royalties on one Technology does
not remove the obligation to pay minimum royalties on the second
Technology.
-14-
<PAGE> 15
No minimum royalty payment is due for Gene Technology.
FOUNDATION acknowledges the payment due on July 1993 under The Prior
Agreements has been paid and the next annual payment is due July 1, 1994.
VII
ACCOUNTING
----------
LICENSEE will deliver to the FOUNDATION within ninety (90) days after
the end of each License Year a report in writing setting forth sales of
Licensed Products by Technology (including a negative report if
appropriate) and will accompany such report with an appropriate payment of
royalty due for such period. LICENSEE will keep accurate records for at
least three (3) years, certified by it, showing the information by which
LICENSEE arrived at a royalty determination and will permit an auditor
appointed and paid for by the FOUNDATION and acceptable to LICENSEE to make
such inspection of said records as may be necessary to verify royalty
reports made by LICENSEE. However, if such inspection demonstrates that the
royalties paid were less than 90% of the royalties due, and LICENSEE'S Net
Sales of Licensed Product for the applicable year was $500,000.00 or more
than LICENSEE shall reimburse FOUNDATION the reasonable charges charged by
the auditor for such inspection.
-15-
<PAGE> 16
VIII
TERM
----
The aforesaid exclusive license under a Licensed Patent Application or
Licensed Patent shall last for a period of not to exceed the effective life
of the last to expire Licensed Patent. After the last to expire Licensed
patent, LICENSEE shall have a royalty free license to all Licensed Know
How.
IX
DUTY OF DILIGENCE
-----------------
LICENSEE shall exercise due diligence to effect the introduction of
Licensed Product(s) within each Technology group into the commercial market
as soon as practical. FOUNDATION acknowledges that the licensees of The
Prior Agreements have exercised due diligence under each of The Prior
Agreements. LICENSEE agrees to develop and exploit Licensed Product for the
duration of the term of this Agreement, or alternatively by the use of
sublicensing. LICENSEE further agrees to maintain quality control over
Licensed Products and generally attend to proper, safe, fair, lawful and
reasonable development and exploitation of the market for Licensed
Products. Sublicensees, if any will be held to the same standards as
LICENSEE.
At the end of each licensee year, LICENSEE will provide a report on
the progress toward commercialization made within each
-16-
<PAGE> 17
Technology group and a projection of efforts to be made in the coming year.
FOUNDATION'S determination of a lack of due diligence must be made in good
faith and the written notice must specifically state why FOUNDATION
believes LICENSEE has not exercised due diligence. LICENSEE shall have six
(6) months after written notice to exercise due diligence in the relevant
Technology. After the six (6) month period should the FOUNDATION in good
faith using reasonable standards determine that due diligence has not been
exercised by LICENSEE in the relevant technology, FOUNDATION can upon
written notice to LICENSEE convert LICENSEE'S exclusive license to the
Licensed Patents and Applications in the relevant Technology to a
non-exclusive license. Failure to exercise due diligence in one Technology
shall not adversely effect LICENSEE'S exclusive rights in another
Technology under this Agreement.
X
ENFORCEMENT
-----------
Upon learning of the infringement of a Licensed Patent by a third
party, FOUNDATION shall inform LICENSEE in writing of that fact and shall
supply LICENSEE with any evidence available pertaining to the infringement.
LICENSEE may at its own expense take whatever steps are necessary to stop
any infringement of a Licensed Patent and recover damages therefore, and
shall be
-17-
<PAGE> 18
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
entitled to retain all damages so recovered except the royalty that would
otherwise be due FOUNDATION had the infringing sales been made by LICENSEE
under this Agreement. FOUNDATION agrees to cooperate at LICENSEE'S expense
to allow LICENSEE to prosecute such action. With respect to royalties
otherwise due and payable by it to FOUNDATION, LICENSEE shall have the
right to use such royalties to pay for or defray the costs of enforcing
said Licensed Patent against the infringement. In withholding royalties to
pay for the cost of enforcing said Licensed Patent, LICENSEE shall only be
entitled to withhold royalties due to FOUNDATION subsequent to the start of
the litigation. During proceedings relating to the enforcement of said
Licensed Patent, LICENSEE shall submit semiannual written reports
accompanying its royalty reports showing royalties accruing to FOUNDATION
and the expenses of enforcing the Licensed Patent against the infringement.
Upon termination of all proceedings involving such claims or allegations,
LICENSEE shall remit the balance, if any, of the royalties accrued but not
yet paid to FOUNDATION. If the withheld royalties have not equalled the
expenses of conducting the suit at the termination of all proceedings in
the suit, LICENSEE shall be entitled to continue withholding **** of the
royalties due until it has recovered all the expenses incurred in
conducting the suit.
If LICENSEE does not undertake within sixty (60) days of
-18-
<PAGE> 19
notice by FOUNDATION to enforce the Licensed Patent against the infringing
party, FOUNDATION shall have the right to take whatever action it deems
appropriate at FOUNDATION'S expense. FOUNDATION shall have the right to
retain all damages it recovers.
Where LICENSEE takes action to enforce the Licensed Patent, LICENSEE
shall hold FOUNDATION harmless from all claims, counterclaims and the like
rising from LICENSEE'S' action.
XI
ASSIGNMENT
----------
The rights and obligations of the LICENSEE are not assignable except
that said rights and obligations may be assigned to its successor to the
entire business to which this agreement pertains.
XII
TERMINATION
-----------
The FOUNDATION may terminate this License Agreement for failure of the
LICENSEE to make a royalty payment or to comply with [Section]XI or the hold
harmless provision on page 21 by giving notice of its intentions to do so six
(6) months before termination. If LICENSEE shall, within the six-month notice
period correct the breach, the notice shall have no further effect and this
License Agreement shall continue.
LICENSEE may terminate this License Agreement by giving notice of its
intentions to do so six (6) months before termination.
-19-
<PAGE> 20
XIII
SUBLICENSING
------------
LICENSEE may sublicense third parties provided that FOUNDATION is
provided with a copy of all sublicense agreements.
With regard to Glutathione Technology and Procysteine Technology, all
such sublicense agreements must insure that FOUNDATION receives the royalty
on all Net Sales that would otherwise be due FOUNDATION under this
Agreement.
However, with respect to Gene Technology, LICENSEE shall pay
FOUNDATION, instead of the royalty set forth in Section VI, one-third of
all financial value received from the sublicensee in consideration for a
sublicense agreement related to Gene Technology be it cash or other things
of value.
XIV
FAVORED NATIONS
---------------
If, under Sections V or IX, LICENSEE'S rights to any Licensed Patent
Application or Licensed Patent become non-exclusive and the FOUNDATION
grants nonexclusive licenses to others under such Licensed Patent
Application or Licensed Patent, such licenses will not be granted at a
royalty rate which is more favorable than the rate herein granted to
LICENSEE unless such more favorable rates are extended to the LICENSEE.
This Favored Nations clause does not apply to License agreements which are
in settlement of patent litigation.
-20-
<PAGE> 21
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
XV
RIGHT OF FIRST NEGOTIATION
--------------------------
FOUNDATION grants LICENSEE, to the extent not granted under another
section or paragraph of this Agreement, a right of first negotiation with
respect to any Improvement. LICENSEE shall have an exclusive right to
negotiate an agreement with FOUNDATION for any such Improvement for a
******************************************************* to LICENSEE or
Reduction to Practice of the invention that comprises the Improvement,
whichever is later. FOUNDATION will negotiate in good faith such an
agreement with LICENSEE during this period.
XVI
OTHER
-----
LICENSEE agrees that it will not use the indicia or names FOUNDATION
or of Cornell University or any of their personnel in advertising,
promotion, or labeling of Licensed Products without prior written approval
of the FOUNDATION. Such approval shall not be unreasonably withheld by
FOUNDATION. It is understood, however, that LICENSEE shall be free to
disclose the terms and conditions of this Agreement to any third parties
including potential investors.
FOUNDATION makes no representations other than those
-21-
<PAGE> 22
specified in the WHEREAS clauses. FOUNDATION MAKES NO EXPRESS OR IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
FOUNDATION by this Agreement makes no representation as to the
patentability and/or breadth of the inventions and/or discoveries involved
in a Licensed Patent. FOUNDATION by this Agreement makes no representation
as to patents now held or which will be held by others in the field of the
Licensed Products for a particular purpose.
LICENSEE agrees to defend, indemnify and hold FOUNDATION harmless from
and against all liability, demands, damages, expenses or losses for death,
personal injury, illness or property damage arising (a) out of use by
LICENSEE or its sublicensees of inventions licensed or information
furnished under this Agreement, or (b) out of any use, sale or other
disposition by LICENSEE or its sublicensees of products made by use of such
inventions or information. As used in this clause, FOUNDATION includes its
Trustees, Officers, Agents and Employees, and those of Cornell University,
and "LICENSEE" includes its Affiliates, Subsidiaries, Contractors and
Sub-Contractors.
This Agreement shall be interpreted under the Laws of the State of New
York.
Reports, notices and other communications to the FOUNDATION shall be
addressed to:
-22-
<PAGE> 23
H. Walter Haeussler, President
CORNELL RESEARCH FOUNDATION, INC.
Cornell Business & Technology Park
20 Thornwood Drive, Suite 105
Ithaca, NY 14850
and other notices and other communications to the LICENSEE to:
Dr. Hector J. Gomez, M.D., Ph.D.
TRANSCEND THERAPEUTICS, INC.
640 Memorial Drive
Cambridge, MA 02139
IN WITNESS WHEREOF, the parties have caused this instrument to be
executed in duplicate as of the day and year first above written.
ATTEST: CORNELL RESEARCH FOUNDATION, INC.
/s/ C. E. Casterline By: /s/ H. Walter Haeussler
-------------------------- ------------------------------
H. Walter Haeussler
Title: President
---------------------------
Date: August 12, 1996
---------------------------
ATTEST: TRANSCEND THERAPEUTICS, INC.
/s/ C. E. Casterline By: /s/ Hector J. Gomez
--------------------------- ------------------------------
Title: President
---------------------------
Date: August 12, 1996
---------------------------
-23-
<PAGE> 24
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
ASTERISKS DENOTE SUCH OMISSIONS.
Exhibit A
---------
RESEARCH AGREEMENT
------------------
AGREEMENT between
CORNELL UNIVERSITY, for its Medical College, hereinafter Called "the
Medical College," and FREE RADICAL SCIENCES, INC., an Illinois partnership,
having offices at 245 First Street, Cambridge, Massachusetts 02142,
hereinafter called "FRS".
The Medical College will undertake the following project:
1. Title (protocol number if applicable).
-------------------
2. The Scope of Work. The work to be performed is as described in the
attached scope of work labeled Attachment "A".
3. Principal Investigators. The project will be under the supervision
of:
Mary Anderson, M.D., as Principal Investigator, and Alton Meister,
M.D., as Co-Principal Investigator.
4. Period. The period of performance will be from ______, 1994 to
________, 1997.
5. Payments. The total costs to FRS under the agreement will be
*******************************************. The payment schedule will
be as follows:
******** paid on _________, 1994
******** paid on _________, 1995
******** paid on _________, 1996
6. Applicable Law. FRS and the Medical College agree to comply with all
applicable local, state, and Federal laws, regulations, and guidelines
with respect to the conduct of the study.
A-1
<PAGE> 25
7. Inventions. All inventions, developments, findings and discoveries
conceived solely by the Investigators or other employees of the
Medical College relating to this Agreement ("Inventions") shall be the
property of, and title to reported Inventions will be held by, the
Cornell Research Foundation, Inc. (Foundation), the research and
technology transfer arm of Cornell University. It is hereby
acknowledged that FRS and the Foundation have entered into a License
Agreement to which this Research Agreement is attached as Exhibit R.
The Foundation hereby grants an exclusive license to any such
Inventions to FRS pursuant to the terms of the License Agreement
between Foundation and FRS. This grant shall apply to any invention
that is developed pursuant to this Research Agreement or with any
funding from this Research Agreement, whether such invention is
patentable or not, if such invention is conceived or reduced to
practice during the term of this Agreement or one (1) year thereafter.
8. Proprietary Data. The Medical College's acceptance and use of any
proprietary data which may be supplied by FRS in the course of this
research project shall be subject to the following:
(a) The date must be marked or designated in writing as proprietary
to FRS.
(b) The Medical College retains the right to refuse to accept any
such data which it does not consider to be essential to the
completion of the project or which it believes to be improperly
designated, or for any reason.
(c) Where the Medical College does accept such data as proprietary,
it agrees to exercise its best efforts not to publish or
otherwise reveal the data to others outside the Medical College
without the permission of FRS, unless the data has already been
published or disclosed publicly by third parties or is required
to be disclosed by order of a court of law.
9. Publications and Copyrights. The Medical College will be free to
publish papers dealing with results of research under this Research
Agreement, after giving a copy of the paper to FRS and allowing FRS to
object to the disclosure of proprietary information, which information
will not be disclosed for a period of ninety (90) days or until
appropriate patent applications are filed whichever is sooner. FRS
will be given full credit and acknowledgment for
A-2
<PAGE> 26
the support provided to the Medical College in any publication
resulting from this research. Original research data will belong to
the Medical College. Title to and the right to determine the
disposition of any copyrights, or copyrightable material, first
produced or composed in the performance of this research, shall remain
with the Medical College, provided that the Medical College shall
grant to FRS an irrevocable royalty free, non-exclusive right to
reproduce, translate, and use all such copyrighted material for its
own purposes.
10. Reports. A final report of the progress of the work shall be made to
FRS by the Principal Investigators within three months of completion.
The Principal Investigators shall provide FRS with written interim
reports at no more often than four-month intervals following
initiation of the study as mutually agreed upon by the Principal
Investigators and FRS.
11. Changes. FRS or the Medical College may, at any time, in writing to
each other, suggest and by mutual agreement make changes within the
general scope of the work, including but not limited to (a) revising
or adding to the work or deleting portions thereof, (b) revising the
period or schedule of performance, or (c) increasing or decreasing the
total cost. Upon receipt of such notice of change and their mutual
agreement thereto, the parties shall immediately use their best
efforts to take all necessary steps to comply therewith.
12. On-Site Visits. During normal business hours, FRS representative(s)
will be permitted on-site visits for the purposes of monitoring the
study and conferring with the Investigators. Additional monitoring
activities will include telephone and letter communication.
13. Use of Drugs and/or Chemicals. If drugs and/or chemicals are supplied
by FRS, and if requested by the Medical College, FRS agrees to accept
unused portions of drugs and/or chemicals supplied by FRS under this
agreement, including the containers in which the drugs and/or
chemicals are shipped, provided that said drugs and/or chemicals and
containers are properly labeled by the Medical College, upon the
return to FRS. Further, for each drug and/or chemical supplied under
this agreement, FRS agrees to furnish the Medical College with
sufficient information to permit reasonable interpretation of the
results obtained in the investigations described herein, and to
identify precautions needed to help protect the health and safety of
personnel using the drugs
A-3
<PAGE> 27
and/or chemicals. FRS agrees to indemnify the Medical College, its
officers, trustees, agents, and employees, and hold them harmless from
any and all injury, illness, death, property damage, claim, lawsuit,
judgment thereon, or cause of action which results either in whole or
in part from the use of the drugs and/or chemicals if such use was
pursuant to FRS's directions or reasonable under the circumstances.
14. Indemnification. FRS shall defend, indemnify and hold harmless the
Medical College, its officers, trustees, employees and agents from and
against all claims, liabilities, losses, damages, costs or expenses of
any kind (including attorneys' fees) which may arise as a result of
injuries caused solely by the negligence of FRS. The party to be
indemnified shall notify FRS within ten (10) days of receipt of such
claim and shall cooperation in the defense of the claim.
15. Notices. All communications, reports, and notices required or
permitted hereunder shall be deemed sufficiently given if in writing
and personally delivered or sent by registered mail, postage prepaid,
return receipt requested, addressed to the parties as follows or at
such other address as a party shall have given notice of pursuant
hereto:
If to the Medical College:
Associate Dean for Research and Sponsored Programs
Cornell University Medical College
1300 York Avenue, Room A-131
New York, NY 10021
If to FRS:
Gary W. Pace, Ph.D.
FREE RADICAL SCIENCES, INC.
245 First Street
Cambridge, MA 02142
16. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the Laws of the State of New York.
17. General Provisions.
(a) This Agreement shall be binding upon, and inure to the benefit of
the parties and their successors and assigns.
A-4
<PAGE> 28
(b) All rights under this Agreement shall be assignable by a party
only with the written consent of the other, except that FRS may assign
this Agreement in whole or in part to any subsidiary or to any entity
that owns at least 50% of FRS's ownership interest.
The respective parties have executed this Agreement on the dates
indicated below:
CORNELL UNIVERSITY FOR ITS FREE RADICAL SCIENCES, INC.
MEDICAL COLLEGE
-------------------------- --------------------------
Medical College Official
-------------------------- --------------------------
Typed Name Typed Name
-------------------------- --------------------------
Title Title
------------------------- --------------------------
Date Date
CORNELL RESEARCH FOUNDATION, INC.
---------------------------
---------------------------
Typed Name
---------------------------
Title
---------------------------
Date
We agree to act as Principal
Investigator for the project
described above:
-------------------------- ---------------------------
Principal Investigator Co-Principal Investigator
Mary Anderson, M.D. Alton Meister, M.D.
Chairman and Israel Rogosin
Professor of Biochemistry
-------------------------- ---------------------------
Date Date
A-5
<PAGE> 1
EXHIBIT 10.8
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS
EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON
TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT
-----------------------------------------------------------
Warrant No. ____ Number of Shares: 25,000
(subject to adjustment)
Date of Issuance: October 28, 1994
FREE RADICAL SCIENCES, INC.
Common Stock Purchase Warrant
-----------------------------
(Void after October 28, 2004)
Free Radical Sciences, Inc., a Delaware corporation (the
"Company"), for value received, hereby certifies that Massachusetts
Institute of Technology (the "Investor"), or its registered assigns
(the "Registered Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company, at any time or from time to time
on or after the date of issuance and on or before October 28, 1999 at
not later than 5:00 p.m. (Boston, Massachusetts time), 25,000 shares of
Common Stock, $.01 par value per share, of the Company, at a purchase
price of $1.00 per share; PROVIDED HOWEVER, that if the term of the
Lease Agreement, dated October 28, 1994, between the Company and the
Investor (the "Lease Agreement"), is extended pursuant to Section 2.2
of the Lease Agreement, the Investor or the Registered Holder will be
entitled to purchase such shares at any time before the termination of
the Extension Term (as that term is defined in the Lease). The shares
purchasable upon exercise of this Warrant, and the purchase price per
share, each as adjusted from time to time pursuant to the provisions of
this Warrant, are hereinafter referred to as the "Warrant Shares" and
the "Purchase Price," respectively.
1. EXERCISE.
(a) This Warrant may be exercised by the Registered Holder,
in whole or in part, by surrendering this Warrant, with the purchase
form appended hereto as EXHIBIT I duly executed by such Registered
Holder or by such Registered Holder's duly authorized attorney, at the
principal office of the Company, or at such other office or agency as
the Company may designate, accompanied by payment in full, in lawful
money of the United States, of the Purchase Price payable in respect of
the number of Warrant Shares purchased upon such exercise.
<PAGE> 2
(b) The Registered Holder may, at its option, elect to pay
some or all of the Purchase Price payable upon an exercise of this
Warrant by cancelling a portion of this Warrant exercisable for such
number of Warrant Shares as is determined by dividing (i) the total
Purchase Price payable in respect of the number of Warrant Shares being
purchased upon such exercise by (ii) the excess of the Fair Market
Value per share of Common Stock as of the effective date of exercise,
as determined pursuant to subsection 1(c) below (the "Exercise Date")
over the Purchase Price per share. If the Registered Holder wishes to
exercise this Warrant pursuant to this method of payment with respect
to the maximum number of Warrant Shares purchasable pursuant to this
method, then the number of Warrant Shares so purchasable shall be equal
to the total number of Warrant Shares, minus the product obtained by
multiplying (x) the total number of Warrant Shares by (y) a fraction,
the numerator of which shall be the Purchase Price per share and the
denominator of which shall be the Fair Market Value per share of Common
Stock as of the Exercise Date. The Fair Market Value per share of
Common Stock shall be determined as follows:
(i) If the Common Stock is listed on a national
securities exchange, the NASDAQ National Market System, the NASDAQ
system, or another nationally recognized exchange or trading system as
of the Exercise Date, the Fair Market Value per share of Common Stock
shall be deemed to be the last reported sale price per share of Common
Stock thereon on the Exercise Date; or, if no such price is reported on
such date, such price on the next preceding business day (provided that
if no such price is reported on the next preceding business day, the
Fair Market Value per share of Common Stock shall be determined
pursuant to clause (ii)).
(ii) If the Common Stock is not listed on a national
securities exchange, the NASDAQ National Market System, the NASDAQ
system or another nationally recognized exchange or trading system as
of the Exercise Date, the Fair Market Value per share of Common Stock
shall be deemed to be the amount most recently determined by the Board
of Directors to represent the fair market value per share of the Common
Stock (including without limitation a determination for purposes of
granting Common Stock options or issuing Common Stock under an employee
benefit plan of the Company); and, upon request of the Registered
Holder, the Board of Directors (or a representative thereof) shall
promptly notify the Registered Holder of the Fair Market Value per
share of Common Stock. Notwithstanding the foregoing, if the Board of
Directors has not made such a determination within the three-month
period prior to the Exercise Date, then (A) the Fair Market Value per
share of Common Stock shall be the amount next determined by the Board
of Directors to represent the fair market value per
-2-
<PAGE> 3
share of the Common Stock (including without limitation a determination
for purposes of granting Common Stock options or issuing Common Stock
under an employee benefit plan of the Company), (B) the Board of
Directors shall make such a determination within 15 days of a request
by the Registered Holder that it do so, and (C) the exercise of this
Warrant pursuant to this subsection 1(b) shall be delayed until such
determination is made.
(c) Each exercise of this Warrant shall be deemed to have
been effected immediately prior to the close of business on the day on
which this Warrant shall have been surrendered to the Company as
provided in subsection 1(a) above. At such time, the person or persons
in whose name or names any certificates for Warrant Shares shall be
issuable upon such exercise as provided in subsection 1(d) below shall
be deemed to have become the holder or holders of record of the Warrant
Shares represented by such certificates.
(d) As soon as practicable after the exercise of this Warrant
in full or in part, and in any event within 10 days thereafter, the
Company, at its expense, will cause to be issued in the name of, and
delivered to, the Registered Holder, or as such Holder (upon payment by
such Holder of any applicable transfer taxes) may direct:
(i) a certificate or certificates for the number of full
Warrant Shares to which such Registered Holder shall be entitled upon
such exercise plus, in lieu of any fractional share to which such
Registered Holder would otherwise be entitled, cash in an amount
determined pursuant to Section 3 hereof; and
(ii) in case such exercise is in part only, a new warrant
or warrants (dated the date hereof) of like tenor, calling in the
aggregate on the face or faces thereof for the number of Warrant Shares
equal (without giving effect to any adjustment therein) to the number
of such shares called for on the face of this Warrant minus the sum of
(a) the number of such shares purchased by the Registered Holder upon
such exercise plus (b) the number of Warrant Shares (if any) covered by
the portion of this Warrant cancelled in payment of the Purchase Price
payable upon such exercise pursuant to subsection 1(b) above.
2. ADJUSTMENTS.
(a) If outstanding shares of the Company's Common Stock shall
be subdivided into a greater number of shares or a dividend in Common
Stock shall be paid in respect of Common Stock, the Purchase Price in
effect immediately prior to such subdivision or at the record date of
such dividend shall simultaneously with the
-3-
<PAGE> 4
effectiveness of such subdivision or immediately after the record date
of such dividend be proportionately reduced. If outstanding shares of
Common Stock shall be combined into a smaller number of shares, the
Purchase Price in effect immediately prior to such combination shall,
simultaneously with the effectiveness of such combination, be
proportionately increased. When any adjustment is required to be made
in the Purchase Price, the number of Warrant Shares purchasable upon
the exercise of this Warrant shall be changed to the number determined
by dividing (i) an amount equal to the number of shares issuable upon
the exercise of this Warrant immediately prior to such adjustment,
multiplied by the Purchase Price in effect immediately prior to such
adjustment, by (ii) the Purchase Price in effect immediately after such
adjustment.
(b) If there shall occur any capital reorganization or
reclassification of the Company's Common Stock (other than a change in
par value or a subdivision or combination as provided for in subsection
2(a) above), or any consolidation or merger of the Company with or into
another corporation, or a transfer of all or substantially all of the
assets of the Company, then, as part of any such reorganization,
reclassification, consolidation, merger or sale, as the case may be,
lawful provision shall be made so that the Registered Holder of this
Warrant shall have the right thereafter to receive upon the exercise
hereof the kind and amount of shares of stock or other securities or
property which such Registered Holder would have been entitled to
receive if, immediately prior to any such reorganization,
reclassification, consolidation, merger or sale, as the case may be,
such Registered Holder had held the number of shares of Common Stock
which were then purchasable upon the exercise of this Warrant. In any
such case, appropriate adjustment (as reasonably determined in good
faith by the Board of Directors of the Company) shall be made in the
application of the provisions set forth herein with respect to the
rights and interests thereafter of the Registered Holder of this
Warrant, such that the provisions set forth in this Section 2
(including provisions with respect to adjustment of the Purchase Price)
shall thereafter be applicable, as nearly as is reasonably practicable,
in relation to any shares of stock or other securities or property
thereafter deliverable upon the exercise of this Warrant.
(c) When any adjustment is required to be made in the
Purchase Price, the Company shall promptly mail to the Registered
Holder a certificate setting forth the Purchase Price after such
adjustment and setting forth a brief statement of the facts requiring
such adjustment. Such certificate shall also set forth the kind and
amount of stock or other securities or property into which this Warrant
shall be exercisable following the occurrence of any of the events
specified in subsection 2(a) or (b) above.
-4-
<PAGE> 5
3. FRACTIONAL SHARES. The Company shall not be required upon the
exercise of this Warrant to issue any fractional shares, but shall make
an adjustment therefor in cash on the basis of the Fair Market Value
per share of Common Stock, as determined pursuant to subsection 1(b)
above.
4. REQUIREMENTS FOR TRANSFER.
(a) This Warrant and the Warrant Shares shall not be sold or
transferred unless either (i) they first shall have been registered
under the Securities Act of 1933, as amended (the "Act"), or (ii) the
Company first shall have been furnished with an opinion of legal
counsel, reasonably satisfactory to the Company, to the effect that
such sale or transfer is exempt from the registration requirements of
the Act.
(b) Notwithstanding the foregoing, no registration or opinion
of counsel shall be required for (i) a transfer by a Registered Holder
which is a partnership to a partner of such partnership or a retired
partner of such partnership who retires after the date hereof, or to
the estate of any such partner or retired partner, if the transferee
agrees in writing to be subject to the terms of this Section 4, or (ii)
a transfer made in accordance with Rule 144 under the Act.
(c) Each certificate representing Warrant Shares shall bear a
legend substantially in the following form:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be offered, sold or otherwise transferred, pledged or
hypothecated unless and until such securities are registered
under such Act or an opinion of counsel satisfactory to the
Company is obtained to the effect that such registration is
not required."
The foregoing legend shall be removed from the certificates
representing any Warrant Shares, at the request of the holder thereof,
at such time as they become eligible for resale pursuant to Rule 144(k)
under the Act.
5. NO IMPAIRMENT. The Company will not, by amendment of its
charter or through reorganization, consolidation, merger, dissolution,
sale of assets 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
-5-
<PAGE> 6
action as may be necessary or appropriate in order to protect the
rights of the holder of this Warrant against impairment.
6. LIQUIDATING DIVIDENDS. If the Company pays a dividend or
makes a distribution on the Common Stock payable otherwise than in
cash out of earnings or earned surplus (determined in accordance with
generally accepted accounting principles) except for a stock dividend
payable in shares of Common Stock (a "Liquidating Dividend"), then the
Company will pay or distribute to the Registered Holder of this
Warrant, upon the exercise hereof, in addition to the Warrant Shares
purchased upon such exercise, the Liquidating Dividend which would
have been paid to such Registered Holder if he had been the owner of
record of such Warrant Shares immediately prior to the date on which a
record is taken for such Liquidating Dividend or, if no record is
taken, the date as of which the record holders of Common Stock
entitled to such dividends or distribution are to be determined.
7. NOTICES OF RECORD DATE, ETC. In Case:
(a) the Company shall take a record of the holders of its
Common Stock (or other stock or securities at the time deliverable upon
the exercise of this Warrant) for the purpose of entitling or enabling
them to receive any dividend or other distribution, or to receive any
right to subscribe for or purchase any shares of stock of any class or
any other securities, or to receive any other right; or
(b) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation
or merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the surviving entity),
or any transfer of all or substantially all of the assets of the
Company; or
(c) of the voluntary or involuntary dissolution,
liquidation or winding-up of the Company,
then, and in each such case, the Company will mail or cause to be
mailed to the Registered Holder of this Warrant a notice specifying, as
the case may be, (i) the date on which a record is to be taken for the
purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right, or (ii) the
effective date on which such reorganization, reclassification,
consolidation, merger, transfer, dissolution, liquidation or winding-up
is to take place, and the time, if any is to be fixed, as of which the
holders of record of Common Stock (or such other stock or securities at
the time deliverable upon the exercise of this Warrant) shall be
entitled to exchange their shares of Common Stock (or such other stock
or
-6-
<PAGE> 7
securities) for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, transfer,
dissolution, liquidation or winding-up. Such notice shall be mailed at
least ten (10) days prior to the record date or effective date for the
event specified in such notice.
8. RESERVATION OF STOCK. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the exercise
of this Warrant, such number of Warrant Shares and other stock,
securities and property, as from time to time shall be issuable upon
the exercise of this Warrant.
9. EXCHANGE OF WARRANTS. Upon the surrender by the Registered
Holder of any Warrant or Warrants, properly endorsed, to the Company at
the principal office of the Company, the Company will, subject to the
provisions of Section 4 hereof, issue and deliver to or upon the order
of such Holder, at the Company's expense, a new Warrant or Warrants of
like tenor, in the name of such Registered Holder or as such Registered
Holder (upon payment by such Registered Holder of any applicable
transfer taxes) may direct, calling in the aggregate on the face or
faces thereof for the number of shares of Common Stock called for on
the face or faces of the Warrant or Warrants so surrendered.
10. REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and (in the case of loss, theft or
destruction) upon delivery of an indemnity agreement (with surety if
reasonably required) in an amount reasonably satisfactory to the
Company, or (in the case of mutilation) upon surrender and cancellation
of this Warrant, the Company will issue, in lieu thereof, a new Warrant
of like tenor.
11. TRANSFERS, ETC.
(a) The Company will maintain a register containing the names
and addresses of the Registered Holders of this Warrant. Any Registered
Holder may change its or his address as shown on the warrant register
by written notice to the Company requesting such change.
(b) Subject to the provisions of Section 4 hereof, this
Warrant and all rights hereunder are transferable, in whole or in part,
upon surrender of this Warrant with a properly executed assignment (in
the form of EXHIBIT II hereto) at the principal office of the Company.
(c) Until any transfer of this Warrant is made in the warrant
register, the Company may treat the Registered Holder of this Warrant
as the absolute owner hereof for all purposes;
-7-
<PAGE> 8
PROVIDED, HOWEVER, that if and when this Warrant is properly assigned
in blank, the Company may (but shall not be obligated to) treat the
bearer hereof as the absolute owner hereof for all purposes,
notwithstanding any notice to the contrary.
12. REGISTRATION RIGHTS. The shares of Common Stock issuable upon
exercise of this Warrant shall have the registration rights set forth
in Section 3 of the Registration Rights Agreement, dated April 5, 1994,
between the Company and certain investors listed on the signature pages
thereto.
13. MAILING OF NOTICES, ETC. All notices and other communications
from the Company to the Registered Holder of this Warrant shall be
mailed by first-class certified or registered mail, postage prepaid, to
the address furnished to the Company in writing by the last Registered
Holder of this Warrant who shall have furnished an address to the
Company in writing. All notices and other communications from the
Registered Holder of this Warrant or in connection herewith to the
Company shall be mailed by first-class certified or registered mail,
postage prepaid, to the Company at its principal office set forth
below. If the Company should at any time change the location of its
principal office to a place other than as set forth below, it shall
give prompt written notice to the Registered Holder of this Warrant and
thereafter all references in this Warrant to the location of its
principal office at the particular time shall be as so specified in
such notice.
14. NO RIGHTS AS STOCKHOLDER. Until the exercise of this
Warrant, the Registered Holder of this Warrant shall not have or
exercise any rights by virtue hereof as a stockholder of the
Company.
15. CHANGE OR WAIVER. Any term of this Warrant may be
changed or waived only by an instrument in writing signed by the
party against which enforcement of the change or waiver is sought.
16. HEADINGS. The headings in this Warrant are for purposes
of reference only and shall not limit or otherwise affect the
meaning of any provision of this Warrant.
-8-
<PAGE> 9
17. GOVERNING LAW. This Warrant will be governed by and
construed in accordance with the laws of the Commonwealth of
Massachusetts.
FREE RADICAL SCIENCES, INC.
By: /s/ B. Nicholas Harvey
---------------------------------
[Corporate Seal] Title: CFO/Secretary
------------------------------
ATTEST:
----------------------------
-9-
<PAGE> 10
EXHIBIT I
---------
PURCHASE FORM
-------------
To: Free Radical Sciences, Inc. Dated:______________
The undersigned, pursuant to the
provisions set forth in the attached Warrant (No. ___), hereby
irrevocably elects to purchase _____ shares of the Common Stock covered
by such Warrant. The undersigned herewith makes payment of
$____________, representing the full purchase price for such shares at
the price per share provided for in such Warrant. Such payment takes
the form of (check applicable box or boxes):
/ / $_________ in lawful money
of the United States,
and/or
/ / the cancellation of such
portion of the attached
Warrant as is exercisable
for a total of ______
Warrant Shares (using a
Fair Market Value of
$_______ per share for
purposes of this
calculation).
Signature:__________________________
Address:____________________________
____________________________
<PAGE> 11
EXHIBIT II
----------
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, ________________________________________
hereby sells, assigns and transfers all of the rights of the
undersigned under the attached Warrant (No. ____) with respect to the
number of shares of Common Stock covered thereby set forth below, unto:
Name of Assignee Address No. of Shares
---------------- ------- -------------
Dated:______________ Signature:_______________________________
Dated:______________ Witness:_________________________________
<PAGE> 1
EXHIBIT 10.9
LEASE
DATED: OCTOBER 28, 1994
MASSACHUSETTS INSTITUTE OF TECHNOLOGY, LESSOR
FREE RADICAL SCIENCES, INC., LESSEE
640 MEMORIAL DRIVE, CAMBRIDGE, MASSACHUSETTS
TABLE OF CONTENTS
-----------------
1.0 Parties and Premises.................................. 1
--------------------
1.1 Parties and Premises............................. 1
--------------------
1.2 Common Areas..................................... 1
------------
1.3 Cafeteria Expansion.............................. 2
-------------------
2.0 Term ................................................. 2
----
2.1 Term; Commencement Date.......................... 2
-----------------------
2.2 Extension Option................................. 2
----------------
3.0 Rent ................................................. 3
----
3.1 Payment of Rent.................................. 3
---------------
3.2 Computation of Basic Rent........................ 3
-------------------------
3.3 Determination of Fair Market Rent................ 3
---------------------------------
4.0 Permitted Uses........................................ 7
--------------
5.0 Taxes; Operating Expenses............................. 7
-------------------------
5.1 Taxes............................................ 7
-----
5.2 Operating Expenses............................... 8
------------------
5.3 Payment of Taxes and Operating Expenses.......... 10
---------------------------------------
5.4 Abatement of Taxes............................... 11
------------------
5.5 Audit of Books and Records....................... 12
--------------------------
6.0 Electric Service; Payment as Additional Rent.......... 12
--------------------------------------------
7.0 Insurance............................................. 12
---------
7.1 Public Liability Insurance....................... 12
--------------------------
7.2 Casualty Insurance............................... 13
------------------
7.3 Certificate of Insurance......................... 13
------------------------
7.4 Lessor's Insurance............................... 13
------------------
7.5 Waiver of Subrogation............................ 14
---------------------
7.6 Waiver of Rights................................. 14
----------------
8.0 Assignment and Subletting............................. 15
-------------------------
<PAGE> 2
9.0 Parking............................................... 19
-------
10.0 Late Payment of Rent.................................. 19
--------------------
11.0 Lessee's Covenants.................................... 20
------------------
12.0 Construction.......................................... 27
------------
13.0 Casualty and Eminent Domain........................... 27
---------------------------
13.1 Substantial Taking............................... 27
------------------
13.2 Partial Taking................................... 27
--------------
13.3 Awards........................................... 27
------
13.4 Substantial Casualty............................. 28
--------------------
13.5 Repair and Restoration........................... 28
----------------------
14.0 Defaults; Events of Default; Remedies................. 29
-------------------------------------
14.1 Defaults; Events of Default...................... 29
---------------------------
14.2 Termination...................................... 30
-----------
14.3 Survival of Covenants............................ 31
---------------------
14.4 Damages.......................................... 31
-------
14.5 Right to Relet................................... 32
--------------
14.6 Right to Equitable Relief........................ 33
-------------------------
14.7 Right to Self Help............................... 33
------------------
14.8 Further Remedies................................. 33
----------------
15.0 Real Estate Broker.................................... 33
------------------
16.0 Notices............................................... 34
-------
17.0 No Waivers............................................ 35
----------
18.0 Services Provided by Lessor........................... 35
---------------------------
19.0 Ground Leases; Mortgages.............................. 35
------------------------
19.1 Rights of Ground Lessors and Mortgagees.......... 35
---------------------------------------
19.2 Lease Subordinate................................ 36
-----------------
20.0 Notices of Lease; Estoppel Certificates............... 36
---------------------------------------
21.0 Holding Over.......................................... 37
------------
22.0 Force Majeure......................................... 37
-------------
23.0 Entire Agreement...................................... 37
----------------
24.0 Security Deposit...................................... 37
----------------
25.0 Warrants.............................................. 38
--------
26.0 Successors and Assigns................................ 38
----------------------
<PAGE> 3
27.0 Applicable Law, Severability and Construction......... 39
---------------------------------------------
28.0 Quiet Enjoyment....................................... 39
---------------
29.0 Authority............................................. 39
---------
EXHIBIT A: Plan of the Premises
EXHIBIT B: Plan of the Land
EXHIBIT C: Work Letter
EXHIBIT D: Lessor's Services
EXHIBIT E: Lessee' Services
EXHIBIT F: Warrant Agreement
<PAGE> 4
LEASE
Dated: October 28, 1994
1.0 Parties and Premises.
--------------------
1.1 PARTIES AND PREMISES. MASSACHUSETTS INSTITUTE OF
TECHNOLOGY ("Lessor") hereby LEASES unto FREE RADICAL
SCIENCES, INC. ("Lessee"), the following premises:
7,736 square feet of rentable area, shown as the
cross-hatched area on EXHIBIT A attached hereto (the
"Premises") located on the west side of the third
floor of the building known as and numbered 640
Memorial Drive, Cambridge, Massachusetts, containing a
total of 182,124 rentable square feet (the
"Building"), which is located on the parcel of land
shown on EXHIBIT B attached hereto (the "Land"),
together with the benefit of, and subject to (as the case
may be) all rights, easements, covenants, conditions,
encumbrances, encroachments and restrictions of record as
of the date of this Lease. Lessor shall have the right,
without the necessity of obtaining Lessee's consent thereto
or joinder therein, to grant, permit, or enter into during
the term of this Lease such additional rights, easements,
covenants, conditions, encumbrances, encroachments and
restrictions with respect to the Land as Lessor may deem
appropriate, PROVIDED THAT no such rights, easements,
covenants, conditions, encumbrances, encroachments or
restrictions shall materially affect Lessee's use of the
Premises for the "Permitted Uses" (as defined in Section
4.0 below).
Lessor hereby reserves the right to maintain, use, repair
and replace pipes, ducts, wires, meters and any other
equipment, machinery, apparatus and fixtures located within
the Premises and serving other parts of the Building.
Lessee, its employees and invitees shall have access to the
Premises at all times, subject to Lessor's reasonable
security procedures.
1.2 COMMON AREAS. Lessor also grants to Lessee, and Lessee's
invitees, the right, in common with others entitled
thereto, to use for the purposes for which they were
designed, the common facilities of the Building, including
but not limited to, all entrances, hallways, elevator
foyers, air shafts, elevator shafts
<PAGE> 5
and elevators, stairwells and stairs, restrooms, passenger
elevators, freight elevator, loading bays, and the "Parking
Area" (as defined in Section 9.0 below) (collectively, the
"Common Areas"). Lessor hereby reserves the right to close
the cafeteria in the Building.
1.3 CAFETERIA EXPANSION. In the event that at any time during
the Term, Lessor determines, after consulting the tenants
of the Building, to expand the cafeteria in the Building
(which expansion is anticipated to involve adding
approximately 2,600 usable square feet to the common area
of the Building), Lessor shall so notify Lessee and all
other tenants of the Building and include in such notice a
recalculation of the rentable area of each of their
premises to reflect the increase in the common area of the
Building. Such notices shall be effective upon the opening
for business of the expansion portion of the cafeteria. Any
such expansion of the cafeteria shall be performed at
Lessor's sole cost and no portion of such cost shall be
included in "Operating Expenses" (as hereinafter defined).
2.0 Term; Commencement Date; Extension Option.
-----------------------------------------
2.1 TERM; COMMENCEMENT DATE. The initial term of this Lease
(the "Initial Term") shall commence on the "Commencement
Date" (as defined in the Work Letter attached hereto as
EXHIBIT C), and expire on the day immediately preceding the
fifth (5th) anniversary thereof, unless sooner terminated
as hereinafter provided. For purposes of this Lease, the
phrase "Term" shall mean collectively (a) the Initial Term,
and (b) if Lessee duly exercises the "Extension Option,"
the "Extension Term" (as these phrases are defined in
Section 2.2 below).
2.2 EXTENSION OPTION. (a) Lessee acknowledges that its option
to extend the Term of this Lease as provided in this
Section 2.2 (the "Extension Option") for a term of five (5)
additional years (unless sooner terminated as hereinafter
provided) (the "Extension Term"), is subject to prior
rights of Lifeline Systems, Inc., Endogen, Incorporated,
and Pathology Services, Inc. (collectively, the "Offerees")
to lease the Premises upon the expiration of the Initial
Term. Lessor shall give written notice of the availability
for lease of the Premises upon the expiration of the
Initial Term to each of the Offerees prior to the
commencement of
-2-
<PAGE> 6
the last Lease Year of the Initial Term, offering to lease
the Premises upon the terms set forth in Lessor's written
offer. After Lessor receives the response of all of the
Offerees (or if no response is received by Lessor within
the time provided therefor), Lessor shall give written
notice (the "Availability Notice") to Lessee of whether the
Premises are available to Lessee for the exercise of its
Extension Option. Lessor shall give the Availability Notice
to Lessee not later than the first day of the fifth Lease
Year.
(b) Provided that (x) none of the Offerees accepts Lessor's
offer to lease the Premises upon the expiration of the
Initial Term, and (y) no "Event of Default" (as defined in
Section 14.1 below) has occurred prior to the day on which
Lessor gives the Availability Notice or prior to the first
day of the Extension Term, and (z) the Lessee named herein
is actually occupying the entire Premises as of each of the
dates described in the preceding clause (y), Lessee shall
have the option to exercise the Extension Option by giving
written notice thereof ("Lessee's Exercise Notice") to
Lessor within two (2) months after Lessor gives the
Availability Notice to Lessee. If Lessee gives Lessee's
Exercise Notice to Lessor within such 2-month period, then
(subject to the rescission of Lessee's Exercise Notice as
provided in Section 3.3 below), the Lease Term shall be
extended for the Extension Term subject to all the terms of
this Lease except for the change in Basic Rent as provided
in Section 3.2(c) of this Lease. If Lessee fails to give
such notice to Lessor within such time, Lessee shall be
deemed to have waived the right to exercise the Extension
Option.
(c) Lessor agrees from and after the date of this Lease not
to grant to any third party any right to lease all or any
portion of the Premises upon the expiration of the Initial
Term which right would be superior to the Extension Option
granted in this Section 2.2 to Tenant.
3.0 Rent.
----
3.1 PAYMENT OF RENT. Lessee shall pay Lessor, without offset or
deduction and without previous demand therefor, as items
constituting rent (collectively, "Rent"):
-3-
<PAGE> 7
(a) Basic rent ("Basic Rent") at the rate hereinafter
set forth, in equal monthly installments, in
advance, commencing on the Commencement Date, and
continuing thereafter on the first day of each
calendar month or portion thereof during the
Term. Basic Rent shall be PRO-RATED for partial
months occurring at the beginning or the end of
the Term; and
(b) All other costs, charges, or expenses which
Lessee in this Lease agrees to pay, or which
Lessor pays or incurs as the result of a default
by Lessee hereunder, including any penalty or
interest which may be added for nonpayment or
late payment thereof as provided in this Lease
(collectively, "Additional Rent"). All recurring
payments of Additional Rent, such as payment on
account of "Taxes" and "Operating Expenses" (as
these terms are hereinafter defined), shall be
due and payable on the same day on which Basic
Rent is due. Unless otherwise specifically
provided in this Lease, all non-recurring items
constituting Additional Rent shall be due and
payable within ten (10) days after written demand
therefor by Lessor.
All payments shall be made to Lessor or such agent, and at
such place, as Lessor shall, from time to time, in writing
designate, the following being now so designated:
Meredith & Grew, Inc.
160 Federal Street
Boston, MA 02110-1701
Attention: Kristin Blount
3.2 COMPUTATION OF BASIC RENT. Basic Rent shall be due
and payable hereunder in the following amounts:
(a) for each of the first two (2) Lease Years in the
Initial Term, $13.50 per rentable square foot of area
per Lease Year ($104,436.00 per Lease Year), in
installments of $8,703.00 per month;
(b) for each of the remaining three (3) Lease Years in the
Initial Term, $16.00 per rentable square foot of area
per Lease Year ($123,776.00 per Lease Year), in
installments of $10,314.67 per month; and
-4-
<PAGE> 8
(c) for each Lease Year in the Extension Term, an amount
equal to the "Fair Market Rent" (as defined in Section
3.3 below) of the Premises as of the first day of the
Extension Term.
As used in this Lease, "Lease Year" means the twelve (12)
month period commencing on the Commencement Date, or a
successive twelve (12) month period included in the Term
commencing on an anniversary of that day, but if the
expiration of the Term or the earlier termination of the
Lease does not coincide with the termination of such a
twelve (12) month period, the term "Lease Year" shall mean
the portion of such twelve (12) month period before such
expiration or termination.
3.3 DETERMINATION OF FAIR MARKET RENT. As used in this Lease,
"Fair Market Rent" means the effective fair market rent for
the Premises in its "as is" condition, including those
portions of the "Initial Improvements" (as defined in the
Work Letter attached hereto as EXHIBIT C) and "Alterations"
(as defined in Section 11.0(f) below) which Lessee is not
permitted or required hereunder to remove at the expiration
or earlier termination of this Lease), as of the day with
respect to which such determination is being made, for a
term of five (5) years. Fair Market Rent shall be based
upon the rents generally in effect for similar premises for
office/research and development uses in similar buildings
in the Cambridge, Massachusetts area in which the Premises
is located, adjusted to a "net" lease basis, taking into
account all facts and circumstances customarily taken into
account by prudent and commercially reasonable lessors and
lessees including, without limitation, concessions then
customarily granted to lessees of similar premises for
similar uses in similar buildings in the Cambridge,
Massachusetts area in which the Premises is located, but
specifically excluding moving allowances.
Within ten (10) days after Lessor receives Lessee's
Exercise Notice, Lessor shall provide to Lessee Lessor's
good faith determination of Fair Market Rent. If Lessor and
Lessee are unable to agree on the Fair Market Rent within
thirty (30) days thereafter, then Lessee shall have the
right, by giving written notice to Lessor within ten (10)
days after the expiration of such 30-day period, to rescind
its exercise of the Extension Option, in which case the
Lease Term shall expire on the last day of the Initial
Term. If Lessee
-5-
<PAGE> 9
does not give such notice of rescission to Lessor within
such 10-day period, then Lessor and Lessee shall, not later
than thirty (30) days after the expiration of such initial
30-day period, each retain a real estate professional with
at least ten (10) years' continuous experience in the
business of appraising or marketing commercial real estate
in the Cambridge, Massachusetts vicinity, who shall, within
thirty (30) days of his or her selection, prepare a written
report summarizing his or her conclusion as to Fair Market
Rent. Lessor and Lessee shall simultaneously exchange such
reports; PROVIDED, HOWEVER, that if one party has not
obtained such a report within such 30-day period, then the
determination set forth in the other party's report shall
be final and binding upon the parties. If both parties
receive reports within such time and the lesser of the two
determinations is within ten (10%) percent of the higher
determination, then the average of these determinations
shall be deemed to be Fair Market Rent. If these
determinations differ by more than ten (10%) percent, then
Lessor and Lessee shall mutually select a person with the
qualifications stated above (the "Final Professional") to
resolve the dispute as to Fair Market Rent. If Lessor and
Lessee cannot agree upon the designation of the Final
Professional within thirty (30) days of the exchange of the
first valuation reports, either party may apply to the
American Arbitration Association, the Greater Boston Real
Estate Board, or any successor thereto for the designation
of a Final Professional. Within ten (10) days of the
selection of the Final Professional, Lessor and Lessee
shall each submit to the Final Professional a copy of their
respective real estate professional's determination of Fair
Market Rent. The Final Professional shall not perform his
or her own valuation but rather shall, within thirty (30)
days after such submissions, select the submission which is
closest to the determination of Fair Market Rent which the
Final Professional would have made acting alone. The Final
Professional shall give notice of his or her selection to
Lessor and Lessee and such decision shall be final and
binding upon Lessor and Lessee. Each party shall pay the
fees and expenses of its real estate professional and
counsel, if any, in connection with any proceeding under
this paragraph, and the losing party shall pay the fees and
expenses of the Final Professional.
-6-
<PAGE> 10
In the event that Fair Market Rent has not been finally
determined in the manner provided above as of the first day
of any Extension Term, then Basic Rent shall be due and
payable at the rate stated by Lessor as its good faith
estimate of Fair Market Rent, and Lessor and Lessee shall
make such adjustment (and payment or credit as necessary)
within thirty (30) days after Fair Market Rent is finally
determined.
4.0 PERMITTED USES. The Premises shall be occupied continuously
by Lessee and used for the following purposes (the
"Permitted Uses") only and for no other:
Office/research and development and accessory laboratory
uses; in each case to the extent permitted as a matter of
right under the Zoning Ordinance of the City of Cambridge
as of the date of this Lease.
5.0 TAXES; OPERATING EXPENSES.
5.1 TAXES. Lessee shall pay as Additional Rent its pro rata
share ("Lessee's Share") of all taxes, special or general
assessments, water rents, rates and charges, sewer rents
and other impositions and charges imposed by governmental
authorities of every kind and nature whatsoever,
extraordinary as well as ordinary and each and every
installment thereof which shall or may during the Term be
charged, levied, laid, assessed, imposed, become due and
payable or become liens upon or for or with respect to the
Land or any part thereof and the Building or the Premises,
or appurtenances or equipment owned by Lessor thereon or
therein or any part thereof, or on this Lease, and any tax
based on a percentage fraction or capitalized value of the
Rent (whether in lieu of or in addition to the taxes
hereinbefore described) (collectively, "Taxes"). Taxes
shall not include inheritance, estate, excise, succession,
transfer, gift, franchise, income, gross receipt, or profit
taxes except to the extent such are in lieu of or in
substitution for Taxes as now imposed on the Building, the
Land, the Premises or this Lease (and if any such tax rate
is based upon Lessor's income, such tax shall be applied to
the Building and the Land as if they were the only
income-generating real property owned by Lessor in the
Commonwealth of Massachusetts). "Lessee's Share" shall be
computed on the basis of a fraction whose numerator is the
number of rentable square feet in the Premises and whose
-7-
<PAGE> 11
denominator is the total number of rentable square feet in
the Building. As of the date hereof, Lessee's Share is
4.25%.
5.2 OPERATING EXPENSES. Lessee shall pay as Additional Rent
Lessee's Share of all expenses, costs, and disbursements of
every kind and nature (collectively, "Operating Expenses")
which Lessor shall pay or become obligated to pay in
connection with the ownership, operation and maintenance of
the Building or the Land, including all facilities in
operation on the Commencement Date and such additional
facilities in subsequent years as may be determined by
Lessor to be necessary or beneficial for the operation of
the Building or the Land or the provision of services to
lessees, including, but not limited to:
(a) all salaries, wages, fringe benefits, payroll taxes
and workmen's compensation insurance premiums related
thereto of and for employees engaged in the operation
of the Building and the Land (with respect to
employees who are engaged in the operation of other
properties as well as the Building and the Land,
these amounts shall be prorated on the basis of the
relative amount of time spent by such employees on
the various properties);
(b) painting, repairs, maintenance and cleaning of all
Common Areas;
(c) utilities (including, without limitation, electricity,
water, sewer and gas) for all interior Common Areas
and lighting of exterior areas and the "Parking Area"
(as defined in Section 9.0 below);
(d) maintenance and repair of the Building heating and
cooling systems, the plumbing systems, the fire
detection and suppression systems, the electrical
system and the elevators;
(e) all maintenance, janitorial, and service agreements;
(f) all insurance, including the cost of casualty and
liability insurance applicable to the Parking Area,
the Land, the Building and Lessor's personal property
used in connection therewith,
-8-
<PAGE> 12
including the amount of any reasonable deductible
payable by Lessor in making repairs and restoration
after a casualty;
(g) maintenance of landscaped areas and paved areas, and
snow removal;
(h) maintenance of the Building security system;
(i) management fees not in excess of those customarily
charged in arm's length transactions for properties
comparable to the Land and the Building in the
vicinity of the Building, and the fair market value of
office space for the manager of the Building;
(j) capital items which are for the purpose of reducing
Operating Expenses or upgrading services or which are
required by a governmental authority or the provisions
of any insurance policy which is first adopted or
first becomes applicable to the Premises, the Building
or the Land after the date of this Lease, amortized
over the reasonable life of the capital items on a
straight line basis with the reasonable life being
determined by Lessor in accordance with generally
accepted accounting principles;
(k) reasonable expenses incurred in pursuing an
application for an abatement of Taxes pursuant to
Section 5.4 below;
(l) legal (excluding legal fees with respect to lease
negotiations and enforcement of lease terms against
lessees), accounting and other professional fees and
disbursements (excluding leasing commissions);
(m) all costs and expenses incurred by Lessor in
connection with the operation of the cafeteria in
the Building; PROVIDED, HOWEVER, that notwithstanding
anything to the contrary contained in this Lease,
(i) all subsidies or other amounts payable by Lessor
to the cafeteria operator, (ii) the cost of all
services which are separately invoiced to Lessor for
the cafeteria (e.g., cleaning), and (iii) the cost to
Lessor of supplying to the cafeteria separately
metered utilities shall be allocated 100% among the
occupants of the Building at the time that these
-9-
<PAGE> 13
costs and expenses are incurred and no portion of
these costs and expenses shall be borne by Lessor; and
PROVIDED FURTHER that this item (m) shall be included
in Operating Expenses hereunder only for so long as
the cafeteria is available to all tenants of the
Building on an equal basis;
(n) services to be provided by Lessor as set forth on
EXHIBIT D attached.
There shall be excluded from "Operating Expenses" for the
purposes of this Lease (1) costs and expenses incurred by
Lessor in connection with the removal or remediation of
"Hazardous Materials" (as hereinafter defined) present in
the Building, or in, on or under the surface of the Land,
as of the date of this Lease, or (2) the correction of
construction defects in the Building.
In the event that the average occupancy rate for the
Building is less than ninety-five (95%) percent for any
fiscal year, then for purposes of calculating Operating
Expenses, the Operating Expenses for such fiscal year shall
be increased by the additional costs and expenses that
Lessor reasonably estimates would have been incurred if the
average occupancy rate had been ninety-five (95%) percent
for such fiscal year. It is not the intent of this
provision to permit Lessor to charge Lessee for any
Operating Expenses attributable to unoccupied space, or to
seek reimbursement from Lessee for costs Lessor never
incurred. Rather, the intent of this provision is to allow
Lessor to recover only those increases in Operating
Expenses properly attributable to occupied space in the
Building and this provision is designed to calculate the
actual cost of providing a variable Operating Expense
service to the portions of the Building receiving such
service. This "gross-up" treatment shall be applied only
with respect to variable Operating Expenses arising from
services provided to leased space in the Building in order
to allocate equitably such variable Operating Expenses to
the lessees of the Building.
5.3 PAYMENT OF TAXES AND OPERATING EXPENSES. On or about the
Commencement Date, and thereafter within a reasonable time
after the end of each fiscal year (or portion thereof)
included in the Term, Lessor shall deliver to Lessee (i) a
statement of actual Operating Expenses and Taxes for the
fiscal year just ended,
-10-
<PAGE> 14
together with reasonable supporting documentation therefor,
and (ii) a budget of Operating Expenses and Taxes for the
then-current fiscal year based on the actual Operating
Expenses and Taxes for the preceding year and projected
increases or decreases reasonably anticipated by Lessor.
Commencing on the Commencement Date Lessee shall pay to
Lessor, as Additional Rent, on account of its share of
anticipated Operating Expenses and Taxes for the
then-current year, 1/12th of the total annualized amount of
Lessee's Share of Operating Expenses and Taxes as shown on
such budget (but if such budget is delivered by Lessor
after the Commencement Date, then Lessee shall commence
such payments on the next day on which Basic Rent is due
and payable hereunder after such delivery, but Lessee shall
pay on such date all installments of Taxes and Operating
Expenses accrued from the Commencement Date to such date).
Lessor reserves the right to revise the budget during any
fiscal year to cause it to more accurately reflect the
actual Taxes or Operating Expenses being paid or incurred
by Lessor, and upon any such revision the parties shall
make adjustments in the same time and manner as hereinafter
provided for fiscal year-end adjustments. Upon delivery to
Lessee of the statement of actual Operating Expenses and
Taxes for the preceding fiscal year, Lessor shall adjust
Lessee's account accordingly. If the total amount paid by
Lessee on account of the preceding fiscal year is less than
the amount due hereunder, Lessee shall pay the balance due
within twenty (20) days after delivery by Lessor of such
statement. If the total amount paid by Lessee on account of
the preceding fiscal year exceeds the amount due hereunder,
such excess shall be credited by Lessor against the monthly
installments of Additional Rent next falling due or
refunded to Lessee upon the expiration or termination of
this Lease. Lessor's current fiscal year is July 1-June 30,
but Lessor reserves the right to change the fiscal year at
any time during the Term.
5.4 ABATEMENT OF TAXES. Lessor may at any time and from time to
time make application to the appropriate governmental
authority for an abatement of Taxes. If (i) such an
application is successful and (ii) Lessee has made any
payment in respect of Taxes pursuant to Section 5 for the
period with respect to which the abatement was granted,
Lessor shall (a) pay to Lessee Lessee's Share (adjusted for
any period for which Lessee had made a partial payment) of
the abatement,
-11-
<PAGE> 15
with interest, if any, paid by the governmental authority
on such abatement, and (b) retain the balance, if any.
5.5 AUDIT OF BOOKS AND RECORDS. Lessee shall have the right, at
Lessee's sole expense, upon reasonable advance written
request to Lessor, to audit, or to cause its designees to
audit, Lessor's books and records relating to Operating
Expenses and Taxes for the fiscal year just ended (and not
for any other fiscal year) by giving written notice to
Lessor within sixty (60) days after Lessee's receipt of the
statement described in Section 5.3 above. Any such audit
shall be conducted during Lessor's normal business hours at
the location at which Lessor maintains the books and
records relating to the Building, and shall be concluded
within thirty (30) days after it is commenced. During the
pendency of such audit, Tenant shall continue to make
payments on account of Operating Expenses at the time, in
the manner, and in the amounts set forth in the preceding
sections of this Section 5.0. If, after such audit, a
certified public accountant certifies in writing to Lessor
and Lessee that the Operating Expenses for the fiscal year
just ended differed by more than five (5%) percent from
those set forth in the statement delivered by Lessor to
Lessee pursuant to Section 5.3 above, then there shall be
an adjustment made between Lessor and Lessee in the manner
provided in Section 5.3 above.
6.0 ELECTRIC SERVICE; PAYMENT AS ADDITIONAL RENT. Lessee shall make
its own arrangements for the provision of electricity to the
Premises, and shall pay when due, as Additional Rent, all charges
therefor directly to the company which provides such electrical
service. Lessor hereby represents to Lessee that electricity will
be made available to Lessee at the Premises at the utility
company's customary rates therefor.
7.0 INSURANCE
7.1 PUBLIC LIABILITY INSURANCE. Lessee shall take out and
maintain in force throughout the Term (and for so long
thereafter as Lessee remains in occupancy) comprehensive
public liability insurance naming Lessor and persons
claiming by, through or under Lessor as additional
insureds, against all claims and demands for any injury to
persons or property which may be claimed to have occurred
on the Premises, the Building, the Land or on the ways
adjoining the Land,
-12-
<PAGE> 16
in an amount which at the beginning of the Term shall not
be less than $1,000,000 for personal injury or death or
property damage per occurrence, and $3,000,000 in the
aggregate for personal injury or death or property damage,
or such higher amounts as Lessor thereafter reasonably
determines to be consistent with sound commercial practice
in Cambridge. Such policy shall also include contractual
liability coverage covering Lessee's liability assumed
under this Lease.
7.2 CASUALTY INSURANCE. Lessee shall take out and maintain
throughout the Lease Term a policy of fire, vandalism,
malicious mischief, extended coverage and so-called all
risk coverage insurance insuring "Lessee's Property" (as
defined in Section 11.0(i) below) for the benefit of Lessor
and Lessee, as their respective interests may appear, in an
amount equal to the replacement value thereof. Lessor shall
be named as a certificate holder on such policy. Lessor
shall, at Lessee's cost and expense, cooperate fully with
Lessee and execute any and all consents and other
instruments and take all other actions necessary to obtain
the largest possible recovery. Lessor shall not carry any
insurance concurrent in coverage and contributing in the
event of loss with any insurance required to be furnished
by Lessee hereunder if the effect of such separate
insurance would be to reduce the protection or the payment
to be made under Lessee's insurance.
7.3 CERTIFICATE OF INSURANCE. The insurance required by
Sections 7.1 and 7.2 above shall be placed with insurers
reasonably satisfactory to Lessor and authorized to do
business in Massachusetts. Such insurance shall provide
that it shall not be amended or canceled with respect to
the additional insureds or certificate holders without
thirty (30) days' prior written notice to each of them.
Lessee shall furnish to Lessor certificates of insurance
for all insurance required to be maintained by Lessee under
this Lease, together with evidence satisfactory to Lessor
of the payment of all premiums for such policies. Lessee,
at Lessor's request, shall also deliver such certificates
and evidence of payment of premiums to the holder of any
mortgage affecting the Land and Building.
7.4 LESSOR'S INSURANCE. Lessor shall take out and maintain in
force throughout the Term, in a company or companies
authorized to do business in Massachusetts,
-13-
<PAGE> 17
casualty insurance on the Building (exclusive of "Lessee's
Property" (as defined in Section 11.0(i) below)) in an
amount equal to the full replacement cost of the Building
(exclusive of foundations and those items set forth in the
preceding parenthetical in this sentence), covering all
risks of direct physical loss or damage and so-called
"extended coverage" risks. This insurance may be maintained
in the form of a blanket policy covering the Building as
well as other properties owned by Lessor. Notwithstanding
the foregoing provisions of this Section 7.4, while the
Massachusetts Institute of Technology is the lessor
hereunder, it shall have the right, at any time during the
Term, to self-insure all or any portion of the coverages
required by this Section.
7.5 WAIVER OF SUBROGATION. To the extent to which a waiver of
subrogation clause is available, Lessor and Lessee shall
obtain a provision in all insurance policies carried by
such party covering the Premises, including but not limited
to contents, fire and casualty insurance, expressly waiving
any right on the part of the insurer against the other
party. If extra cost is chargeable for such provision, then
the party requesting such provision shall pay such extra
cost. Notwithstanding the foregoing, with respect to such
portion of the Term during which Lessor elects to
self-insure under Section 7.4 above, then for purposes of
this Section 7.5, Lessor shall be deemed to have maintained
fire and all-risk coverage in an amount equal to one
hundred (100%) percent of the replacement cost of the
Building (subject to the exceptions and exclusions set
forth in Section 7.4 above) with a waiver of subrogation
clause contained therein.
7.6 WAIVER OF RIGHTS. All claims, causes of action and rights
of recovery for any damage to or destruction of persons,
property or business which shall occur on or about the
Premises, the Building or the Land, which result from any
of the perils insured under any and all policies of
insurance maintained by Lessor or Lessee, are waived by
each party as against the other party, and the officers,
directors, employees, contractors, servants and agents
thereof, regardless of cause, including the negligence of
the other party and its respective officers, directors,
employees, contractors, servants and agents, but only to
the extent of recovery, if any, under such policy or
policies of insurance; PROVIDED, HOWEVER, that (i)
-14-
<PAGE> 18
this waiver shall be null and void to the extent that any
such insurance shall be invalidated by reason of this
waiver, and (ii) with respect to such portion of the Term
during which Lessor elects to self-insure under Section 7.4
above, then for purposes of this Section 7.6, Lessor shall
be deemed to have maintained fire and all-risk coverage in
an amount equal to one hundred (100%) percent of the
replacement cost of the Building (subject to the exceptions
and exclusions set forth in Section 7.4 above).
8.0 ASSIGNMENT AND SUBLETTING. (a) Except as hereinafter provided in
subparagraph (j) of this Section 8.0, Lessee shall not mortgage,
pledge, hypothecate, grant a security interest in, or otherwise
encumber this Lease or any sublease hereinafter entered into by
Lessee, or assign this Lease, or sublease the Premises or any
portion thereof (the term "sublease" shall be deemed to include
any arrangement pursuant to which a third party is permitted by
Lessee to occupy all or any portion of the Premises), without
obtaining, on each occasion, the prior written consent of Lessor,
which consent shall not be unreasonably withheld as to an
assignment or sublease. Notwithstanding anything to the contrary
herein contained, Lessee shall not have the right to assign this
Lease or to sublet any portion of the Premises prior to the first
anniversary of the Commencement Date. Notwithstanding anything to
the contrary herein contained, Lessee shall have the right to
enter into leases or financing arrangements of personal property
placed within the Premises without the necessity of obtaining
Lessor's prior written consent provided that such arrangements
involve only discrete, removable items of personal property which
Lessee identifies by description or serial number in writing to
Lessor at the time Lessee enters into such lease or financing
arrangement.
(b) If Lessee wishes to assign this Lease or sublease all or any
portion of the Premises, Lessee shall so notify Lessor in writing
and request Lessor's consent thereto. Such notice shall include
(i) the name of the proposed assignee or sublessee, (ii) a
general description of the types of business conducted by the
proposed assignee or sublessee and a reasonably detailed
description of the business operations proposed to be conducted
in the Premises by such person or entity, (iii) such financial
information concerning the proposed assignee or sublessee as
Lessor may reasonably require, and (iv) all terms and provisions
upon which such assignment or sublease is proposed to be made,
including a copy of the assignment or sublease-agreement which
Lessee proposes to execute. Lessor shall have fifteen
-15-
<PAGE> 19
(15) business days from the day on which it receives Lessee's
notice and such required information to give notice to Lessee
that either (i) Lessor consents to such assignment or sublease,
or (ii) Lessor withholds its consent to such assignment or
sublease (which consent shall not be unreasonably withheld), in
which event Lessor shall state its reasons therefor in such
notice with reasonable specificity, or (iii) where applicable,
Lessor is exercising its right of recapture pursuant to paragraph
(e) below.
(c) If Lessor consents to an assignment or sublease: (i) Lessee
shall promptly deliver to Lessor a fully executed copy of said
assignment or sublease, which shall be in the form previously
submitted to Lessor for review; (ii) after any such assignment or
sublease, Lessee shall remain primarily liable to Lessor
hereunder (which liability shall be joint and several with the
assignee or sublessee); and (iii) if the aggregate rent and other
amounts payable to Lessee under or in connection with such
assignment or sublease, after deduction of the costs reasonably
incurred by Lessee in entering into such assignment or sublease
(including, without limitation, reasonable attorneys' fees and
expenses, brokerage commissions, and alteration costs amortized
on a straight-line basis over the term of such sublease or, in
the case of an assignment, over the remaining Term of this
Lease), exceeds the Rent payable hereunder with respect to the
portion of the Premises subject to such sublease (or, in the case
of an assignment, the entire Premises), Lessee shall pay to
Lessor, as Additional Rent, one-half (1/2) of the amount of such
excess immediately upon receipt thereof by Lessee.
(d) If Lessor withholds its consent to such assignment or
sublease, Lessee shall not enter into the proposed assignment or
sublease with such person or entity.
(e) If Lessor elects, it shall have the right to consider
Lessee's request for Lessor's consent to any assignment of the
Lease, or a request for Lessor's consent to a sublease which
either (i) has a proposed term (including extension options) of
two years or more, or (ii) would cover ten (10%) percent of the
rentable area of the Premises or more, as an offer to Lessor to
release from this Lease that portion of the Premises which is
proposed to be the subject of such sublease for the term of such
proposed sublease or, in the case of a proposed assignment of
this Lease, the entire Premises for the entire Lease Term. If
Lessor accepts such offer, then (i) in the case of a proposed
sublease, this Lease shall be deemed to be amended as of the
proposed effective date of such sublease so as to delete the
portion
-16-
<PAGE> 20
of the Premises which would have been subject thereto from the
Premises for purposes of this Lease (with a commensurate
adjustment in Rent and Lessee's Share) for the time period of
what would have been the term of such sublease, or (ii) in the
case of a proposed assignment, this Lease shall terminate as of
the proposed effective date of such assignment as if such date
was the last day of the Term.
(f) Regardless of whether Lessor grants such consent, Lessee
shall reimburse Lessor on demand, as Additional Rent, for all out
of pocket costs and expenses (including, without limitation,
attorneys' fees) reasonably incurred by Lessor in responding to a
request for such consent.
(g) Lessee shall not be entitled to enter into any assignment or
sublease, or to request Lessor's consent thereto, during the
continuance of a default hereunder by Lessee.
(h) Any assignment or sublease entered into pursuant to this
Section 8.0 shall be subject to all of the terms and provisions
of this Lease, including without limitation this Section 8.0. If
Lessee enters into any such assignment or sublease, Lessor may,
at any time and from time to time after the occurrence of a
default hereunder, collect rent from such assignee or sublessee,
and apply the net amount collected against Lessee's obligations
hereunder, but no such assignment or sublease or collection shall
be deemed an acceptance by Lessor of such assignee or sublessee
as a lessee hereunder or as a release of the original named
Lessee hereunder.
(i) Notwithstanding anything contained in this Lease, Lessee
shall not enter into any assignment or sublease with any person
or entity if the identity of the assignee or sublessee is
inconsistent with the investment policies of Lessor as set forth
in writing by the Executive Committee of Lessor prior to its
receipt of Lessee's notice of such proposed assignment or
sublease, and any such transaction shall be void ABINITIO. From
time to time during the Term (but not more frequently than once
per Lease Year), Lessee may request in writing that Lessor
deliver to it copies of all investment policies set forth in
writing by the Executive Committee of Lessor since the last
request made by Lessee which are relevant to the Premises or to
this Lease, and Lessor shall provide the same within a reasonable
time after receiving such request. Lessee shall maintain the
confidentiality of all investment policies provided by Lessor
pursuant to this Section, and shall not disclose the
-17-
<PAGE> 21
contents thereof or distribute copies thereof to any persons
whatsoever without the prior written consent of Lessor in each
instance.
(j) In the event that Lessee desires to assign this Lease or to
sublease the Premises (or any portion thereof) to any
corporation, partnership, association or other business
organization directly or indirectly controlling or controlled by
Lessee or under common control with Lessee, or to any successor
by merger, consolidation or purchase of all or substantially all
of the assets or stock of Lessee, Lessee shall give at least
twenty (20) days' prior written notice thereof to Lessor (unless
Lessee is prohibited by applicable laws, codes, rules or
regulations, or by the terms of the operative merger agreement or
purchase and sale agreement from providing notice to Lessor at
such time, in which event such notice shall be provided to Lessor
as soon as Lessee is no longer subject to such prohibition).
Notwithstanding any other provision of this Lease to the
contrary, no consent of Lessor shall be required for any such
assignment or sublease EXCEPT that Lessor shall have the right to
withhold its consent if the identity of the assignee or sublessee
is inconsistent with the investment policies identified in the
foregoing paragraph (i) of this Section. Any assignee or
sublessee which claims an interest in this Lease pursuant to a
transfer of the type described in this paragraph (j) shall be
bound by all of the terms and conditions of this Lease including,
without limitation, those of the foregoing paragraph (i) of this
Section, and if the identity of such assignee or successor is
inconsistent with such investment policies, Lessor shall have the
right to terminate this Lease and to exercise against such
assignee or sublessee the remedies available to Lessor under this
Lease, at law or in equity for a breach of the provisions hereof
by Lessee. For the purpose of this Lease, the sale of Lessee's
capital stock through any public exchange or private placement
shall not be deemed an assignment or sublease of the Lease or of
the Premises and no consent thereto shall be required.
(k) Notwithstanding anything contained in this Lease, Lessee
shall not, either voluntarily or by operation of law, make any
transfer of this Lease or the Premises (or any portion thereof)
which results in Lessee (or anyone claiming by, through or under
Lessee) collecting in connection with the Premises any rental or
other charge based on the net income or on the profits of any
person so as to render any
-18-
<PAGE> 22
part of the Rent due hereunder "unrelated business taxable
income" of Lessor as described in Section 512 of the Internal
Revenue Code of 1986, as amended, and any such transfer shall be
void AB INITIO.
9.0 PARKING. Lessee shall have the right to lease in the parking area
on the Land (the "Parking Area") up to one and one-half (1.5)
spaces per 1,000 square feet of rentable area in the Premises
(the "On-Site Parking Spaces"). Lessee shall have the right to
lease up to twelve (12) parking spaces in the Parking Area.
Lessee shall give written notice to Lessor not later than the
Commencement Date setting forth the number (not to exceed twelve)
of such parking spaces which Lessee will lease as of the
Commencement Date, and Lessee shall have the right to give
further written notice to Lessor during the first nine (9) months
of the Term to increase the number of parking spaces leased by
Lessee (but in no event shall Lessee have the right to lease, in
the aggregate, more than twelve (12) parking spaces in the
Parking Area. Lessee shall have no right to increase the number
of parking spaces leased in the Parking Area after the first nine
(9) months of the Term. Lessee shall pay for each parking space
leased hereunder, as Additional Rent, in advance on the first
calendar day of each month, (i) $60.00 per month for the first
Lease Year, and (ii) thereafter, an amount equal to the Fair
Market Rent of such parking spaces, as determined annually. Fair
Market Rent shall be determined in the manner provided in Section
3.3 above except that if Lessor and Lessee are unable to agree on
Fair Market Rent, it shall be determined by one real estate
professional (rather than by two or three as provided in Section
3.3) who shall have the qualifications stated in said Section and
shall be mutually acceptable to Lessor and Lessee.
10.0 LATE PAYMENT OF RENT. Lessee agrees that in the event that any
payment of Basic Rent or Additional Rent shall remain unpaid at
the close of business on the tenth business day after the same is
due and payable hereunder (without reliance and any applicable
grace period), such payment shall bear interest from the date the
same was due at a rate equal to the "Prime Rate" as published
from time to time in THE WALL STREET JOURNAL while such payment
is overdue PLUS three (3%) percent, which shall be due and
payable by Lessee as Additional Rent as compensation for Lessor's
extra administrative costs in investigating the circumstances of
late Rent. The assessment or collection of such a charge shall
not be deemed to be a waiver by Lessor of any default by Lessee
arising out of such failure to pay Rent when due.
-19-
<PAGE> 23
11.0 LESSEE'S COVENANTS. Lessee covenants, at its sole cost and
expense, during the Term and such further time as Lessee
occupies any part of the Premises:
(a) to pay when due the Basic Rent and all Additional Rent,
and, if separately metered at any time during the Term, all
charges for electricity and other utilities;
(b) damage by fire or casualty and reasonable wear and tear
only excepted, to keep the Premises (including window
glass) in as good order, repair and condition as the same
are in at the commencement of the Term, or may be put in
thereafter;
(c) not to injure, overload or deface the Premises or the
Building, nor to suffer or commit any waste therein,
nor to place a load upon any floor which exceeds the
floor load which the floor was designed to carry, nor
to connect any equipment or apparatus to any Building
system (e.g., electrical, plumbing, mechanical) which
exceeds the capacity of such system, nor to permit on
the Premises any auction sale or any nuisance or the
emission therefrom of any objectionable vibration,
noise, or odor, nor to permit the use of the Premises
for any purpose other than the Permitted Uses, nor any
use thereof which is improper, offensive, or contrary
to any laws, ordinances, codes, rules and regulations,
or the provisions of any license, permit or other
governmental consent or approval required for or
applicable now or at any time during the Term to the
Land, the Building or the Premises or Lessee's use
therefor (collectively, "Legal Requirements"), or
which is liable to invalidate or increase the premiums
for any insurance on the Building or its contents, or
liable to render necessary any alterations or
additions to the Building;
(d) not to obstruct in any manner any portion of the Building
not hereby leased, or the sidewalks or approaches to the
Building, or the Parking Area, or any hallways or Common
Areas, and to conform to all reasonable rules now or
hereafter made by Lessor for the care and use of the
Building, its facilities and approaches;
(e) to comply with all Legal Requirements and all
recommendations of Lessor's fire insurance rating
organization now or hereafter in effect which in either
case are applicable to Lessee's use of the
-20-
<PAGE> 24
Premises, to keep the Premises equipped with all safety
appliances, and to procure (and maintain in full force and
effect) all licenses, permits and other governmental
consents and approvals required by any Legal Requirement or
by the provisions of any applicable insurance policy
because of the use made of the Premises by Lessee (without
hereby intending to vary the provisions of Section 4.0
above), and, if requested by Lessor, to make all repairs,
alterations, replacements or additions so required in and
to the Premises;
(f) not, without on each occasion obtaining the prior written
consent of Lessor, which consent may be withheld by Lessor
in its sole discretion, to make any alterations,
renovations, improvements and/or additions to the Premises
(collectively, "Alterations") except those made pursuant to
the Work Letter attached hereto as EXHIBIT C, (except that
no such prior written consent of Lessor shall be required
for Alterations which (i) shall not exceed $5,000 in cost
in each instance, and (ii) do not affect the structural
integrity of the Building, and (iii) are not detrimental to
or incompatible with the Building systems, and (iv) do not
affect the exterior appearance of the Building, PROVIDED
that in each such case (x) Lessee shall still provide
advance notice to Lessor of the intended Alterations, and
(y) such Alterations shall be subject to all of the
provisions of this paragraph (f) other than the requirement
of Lessor's prior consent), or to permit the making of any
holes in any part of the Building or the painting or
placing of any signs, awnings, or the like, visible from
outside of the Premises. Prior to commencing any
Alterations, Lessee shall: secure all necessary licenses,
permits and other governmental consents and approvals;
obtain the written approval of Lessor as to the plans and
specifications for such work; obtain the written approval
of Lessor as to the general contractor (or as to each trade
contractor if there is no general contractor); cause each
contractor and subcontractor to carry workmen's
compensation insurance in statutory amounts covering all
of the contractor's and subcontractor's employees; and
cause each general contractor (or each trade contractor if
there is no general contractor) and subcontractor to carry
comprehensive public liability insurance in amounts
reasonably satisfactory to Lessor (such insurance to be
written by companies reasonably satisfactory to Lessor and
insuring Lessee and Lessor
-21-
<PAGE> 25
as well as the contractors and subcontractors). All
Alterations shall be of a quality equal to or better than
the "Initial Improvements" (as defined in the Work Letter
attached hereto). All Alterations (other than Lessee's
removable personal property and trade fixtures) and all of
the "Initial Improvements" (as defined in the Work Letter)
shall remain part of the Premises and shall not be removed
upon the expiration or earlier termination of the Term
EXCEPT for (i) Lessee's telephone and computer systems, and
(ii) those items which Lessor designates for removal in a
notice given to Lessee at the time that Lessee requests
Lessor's approval of such Alteration. Lessee shall pay
promptly when due the entire cost of such work. Lessee
shall not cause or permit any liens for labor or materials
performed or furnished in connection therewith to attach to
the Land or the Building, and shall discharge or bond any
such liens which may be filed or recorded against the
Premises within fifteen (15) days after the filing or
recording thereof. All such work shall be performed in a
good and workmanlike manner and in compliance with all
Legal Requirements and the provisions of all applicable
insurance policies. Promptly after the completion of any
Alterations, Lessee shall provide an as-built plan thereof
to Lessor. Lessee shall indemnify and hold Lessor harmless
from and against any and all suits, demands, causes of
action, claims, losses, debts, liabilities, damages,
penalties or judgments, including, without limitation,
reasonable attorneys' fees, arising from injury to any
person or property occasioned by or growing out of such
work, which indemnity shall survive the expiration or
termination of this Lease;
(g) to save Lessor harmless and indemnified from any loss,
cost and expense (including, without limitation,
reasonable attorneys' fees) arising out of or relating
to (i) a claim of injury to any person or damage to
any property while on the Premises, if not due to the
negligence or willful misconduct of Lessor or its officers,
agents, employees, servants or contractors, or the breach
of Lessor's obligations under this Lease; or to (ii) a
claim of injury to any person or damage to any property
anywhere alleged to be occasioned by any omission, neglect
or default of Lessee or of anyone claiming by, through, or
under Lessee, or any officer, agent, employee, servant,
contractor or invitee of any of the foregoing. Lessor
agrees to indemnify and hold harmless Lessee from and
-22-
<PAGE> 26
against all loss, cost and expense (including, without
limitation, reasonable attorneys' fees) arising out of or
relating to a claim for personal injury or property damage
resulting from the negligence or willful misconduct of
Lessor or its officers, agents, employees, servants or
contractors, or from the breach of Lessor's obligations or
representations under this Lease. The provisions of this
clause (g) shall survive the expiration or termination of
this Lease;
(h) to permit Lessor and Lessor's agents to examine the
Premises at reasonable times (provided 24 hours' notice is
given to Lessee, except in case of emergency), and if
Lessor shall so elect (without hereby imposing any
obligation on Lessor to do so), to permit Lessor to make
any repairs or additions Lessor may deem necessary; and at
Lessee's expense to remove any Alterations, signs, awnings,
aerials, flagpoles or the like not consented to in writing;
and to permit Lessor to show the Premises to prospective
purchasers and lessees (at reasonable times on reasonable
advance notice to Lessee) and to keep affixed to any
suitable part of the Premises, during the nine (9) months
preceding the expiration of the Term, appropriate notices
for letting or selling;
(i) that all furniture, furnishings, fixtures and property
of every kind of Lessee and of all persons claiming by,
through or under Lessee which may be on the Premises from
time to time (collectively, "Lessee's Property") shall be
at the sole risk of Lessee, and Lessor shall not be liable
if the whole or any part thereof shall be destroyed or
damaged by fire, water or otherwise, or by the leakage or
bursting of water pipes, steam pipes, or other pipes, or
by theft or from any other cause unless caused by the
negligence or willful misconduct of Lessor, or its
officers, agents, employees, servants or contractors;
(j) to pay promptly when due, all taxes of any kind levied,
imposed or assessed on Lessee's Property, which taxes shall
be the sole obligation of Lessee, whether the same is
assessed to Lessee or to any other person and whether the
property on which such tax is levied, imposed or assessed
shall be considered part of the Premises or personal
property;
-23-
<PAGE> 27
(k) by the end of business on the last day of the Term (or the
effective date of any earlier termination of this Lease as
herein provided), to remove (1) all of Lessee's Property
and (2) the items or components of Alterations designated
for removal as provided in paragraph (f) above and (3) the
items or components of the "Initial Improvements" (as
defined in the Work Letter) designated for removal as
provided in the Work Letter, in each case whether the same
be permanently affixed to the Premises or not, and to
repair any damage caused by any such removal to Lessor's
reasonable satisfaction; and to remove the contents of all
neutralization tanks installed by Lessee in the Premises;
and peaceably to yield up the Premises clean and in good
order, repair and condition (reasonable wear and tear, and
damage by fire or other casualty or taking which Lessee is
not otherwise required by the terms of this Lease to repair
or replace only excepted); and to deliver the keys to the
Premises to Lessor. Any of Lessee's Property or those
Alterations designated for removal as provided in paragraph
(f) above which are not removed by such date shall be
deemed abandoned and may be removed and disposed of by
Lessor in such manner as Lessor may determine, and Lessee
shall pay to Lessor on demand, as Additional Rent, the
entire cost of such removal and disposition, together with
the costs and expenses incurred by Lessor in making any
incidental repairs and replacements to the Premises
necessitated by Lessee's failure to remove Lessee's
Property or those Alterations designated for removal as
provided in paragraph (f) above, as required herein or by
any other failure of Lessee to comply with the terms of
this Lease, and for use and occupancy during the period
after the expiration of the Term and prior to Lessee's
performance of its obligations under this paragraph (k).
Lessee shall further indemnify and hold Lessor harmless
from and against any and all suits, demands, causes of
action, claims, losses, debts, liabilities, damages,
penalties or judgments, including, without limitation,
reasonable attorneys' fees, resulting from Lessee's failure
or delay in surrendering the Premises as above provided
(such indemnity to survive the expiration or termination
of this Lease), PROVIDED, HOWEVER, that Lessee shall be
liable for consequential damages resulting from Lessee's
failure or delay in surrendering the Premises as above
provided only if prior to the last day of the Term (or the
effective date of the termination of this Lease as herein
provided, if sooner terminated) Lessor
-24-
<PAGE> 28
notifies Lessee in writing of Lessor's intention to hold
Lessee liable therefor because the Premises (or a portion
thereof) are required for occupancy by another party;
(l) to pay Lessor's reasonable expenses, including reasonable
attorneys' fees, incurred in enforcing any obligations of
Lessee under this Lease;
(m) not to generate, store or use any "Hazardous Materials"
(as hereinafter defined) in or on the Premises or elsewhere
in the Building or on the Land except those identified in
writing to Lessor from time to time, and then only in
compliance with any and all applicable Legal Requirements,
or dispose of Hazardous Materials from the Premises to any
other location except a properly approved disposal facility
and then only in compliance with any and all Legal
Requirements regulating such activity, nor permit any
occupant of the Premises to do so. As used in this Lease,
"Hazardous Materials" means and includes any chemical,
substance, waste, material, gas or emission which is
radioactive or deemed hazardous, toxic, a pollutant,
or a contaminant under any statute, ordinance, by-law,
rule, regulation, executive order or other administrative
order, judgment, decree, injunction or other judicial order
of or by any governmental authority, now or hereafter in
effect, relating to pollution or protection of human health
or the environment. By way of illustration and not
limitation, "Hazardous Materials" includes "oil,"
"hazardous materials," "hazardous waste," and "hazardous
substance" as defined in the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section
9601 ET SEQ., as amended, the Resource Conservation and
Recovery Act of 1976, 42 U.S.C. Section 6902 ET SEQ., as
amended, and the Toxic Substances Control Act, 15 U.S.C.
Section 8601 ET SEQ., as amended, the regulations
promulgated thereunder, and Massachusetts General Laws,
Chapter 21C and Chapter 21E and the regulations promulgated
thereunder. If, at any time during the Term, either (i)
any lender requires testing to determine whether there has
been any release of Hazardous Materials by Lessee or
someone claiming by, through or under Lessee, based on the
particular use being made of the Premises by such person
or entity, or (ii) any governmental authority requires
such testing by reason of the use of the Premises made by
Lessee or anyone claiming by, through or under Lessee,
then in any such
-25-
<PAGE> 29
case Lessee shall reimburse Lessor upon demand, as
Additional Rent, for the reasonable costs thereof. Lessee
shall execute affidavits, certifications and the like, as
may be reasonably requested by Lessor from time to time
concerning Lessee's best knowledge and belief concerning
the presence of Hazardous Materials in or on the Premises,
the Building or the Land resulting from the use made of the
Premises by Lessee or anyone claiming by, through or under
Lessee. Lessor reserves the right to enter the Premises at
reasonable times (provided twenty-four (24) hours' notice
is given to Lessee, except in case of emergency) to inspect
the same for Hazardous Materials. Lessee's obligations
under this paragraph (m) shall include, if at any time
during the Term Lessee or anyone claiming by, through or
under Lessee uses or stores radioactive materials on the
Premises, compliance with all so-called "close-out"
procedures of the Nuclear Regulatory Commission or other
federal, state or local governmental authorities having
jurisdiction over radioactive materials, regardless of
whether or not such procedures are completed prior to the
expiration or earlier termination of the Term. Lessee shall
indemnify, defend, and hold harmless Lessor, and the holder
of any mortgage on the Building or the Land, from and
against any claim, cost, expense, liability, obligation or
damage, including, without limitation, attorneys' fees and
the cost of litigation, arising from or relating to the
breach by Lessee or anyone claiming by, through or under
Lessee of the provisions of this clause (m), and shall
immediately discharge or cause to be discharged any lien
imposed upon the Building or the Land in connection with
any such claim. The provisions of this clause (m) shall
survive the expiration or termination of this Lease;
(n) in case Lessee takes possession of the Premises prior to
the Commencement Date, to perform and observe all of
Lessee's covenants from and after the date upon which
Lessee takes possession except that no Rent shall accrue
prior to the beginning of the Term;
(o) to comply with all rules and regulations adopted and
amended from time to time by Lessor for the operation
of the Land and the Building;
-26-
<PAGE> 30
(p) not to permit any officer, agent, employee, servant,
contractor or visitor of Lessee, or of anyone claiming by,
through or under Lessee, to violate any covenant or
obligation of Lessee hereunder; and
(q) to provide and pay for the services outlined in EXHIBIT E
attached hereto.
12.0 CONSTRUCTION. Lessor shall construct the Initial Improvements in
accordance with the provisions of the Work Letter attached hereto
as EXHIBIT C.
13.0 CASUALTY AND EMINENT DOMAIN.
13.1 SUBSTANTIAL TAKING. In the event that the entire Building,
or more than fifty percent (50%) percent of the rentable
area of the Premises, shall be taken by any exercise of the
right of eminent domain or other lawful power in pursuance
of any public or other authority during the Term, then this
Lease shall terminate as of the time that possession is
taken by the taking authority.
13.2 PARTIAL TAKING. In the event that a taking occurs and this
Lease is not terminated as provided in Section 13.1 above,
then from and after the date possession is taken by the
taking authority Rent shall be abated by an amount
representing that part of the Rent properly allocable to
the portion of the Premises so taken, but this Lease shall
otherwise continue in full force and effect.
13.3 AWARDS. Lessor reserves and excepts all rights to damage to
the Premises, the Building, the Land and the leasehold
hereby created, now accrued or hereafter accruing by reason
of any exercise of eminent domain, or by reason of anything
lawfully done in pursuance of any public or other authority
and by way of confirmation, Lessee grants to Lessor all of
Lessee's rights to such damages and covenants to execute
and deliver such further instruments of assignment thereof
as Lessor may from time to time request. Lessee shall be
entitled to such award, if any, as is specifically
allocated by the taking authority to Lessee on account of
Lessee's Property so taken or relocation expenses incurred
by Lessee as a result of such taking.
-27-
<PAGE> 31
13.4 SUBSTANTIAL CASUALTY. If the Premises are damaged by fire
or other casualty, Lessee shall promptly notify Lessor
thereof. If the Building or any part thereof shall be
damaged by fire or other casualty to the extent that
substantial alteration or reconstruction of the Building
shall, in Lessor's sole opinion, be required (whether or
not the Premises shall have been damaged), or if such
casualty renders more than fifty (50%) percent of the
rentable area of the Premises unusable by Lessee for the
operation of its business in the Premises, or if as a
result of such casualty any mortgagee of the Building
requires that insurance proceeds payable in connection with
such casualty be used to retire the mortgage debt, Lessor
may, at its option, terminate this Lease by notifying
Lessee in writing of such termination within sixty (60)
days after the date of such damage, in which event this
Lease shall terminate on the date set forth in such notice.
If such casualty renders more than fifty (50%) percent of
the rentable area of the Premises unusable by Lessee for
the operation of its business in the Premises, in the
reasonable determination of Lessee, then Lessee may
terminate this Lease as of the date of the occurrence of
such damage by written notice thereof to Lessor within
sixty (60) days after the date of such damage. In the event
that this Lease is terminated pursuant to this Section 13.4
Rent shall be abated, to the extent the Premises are
unusable for the Permitted Uses, from and after the date of
such damage to the date of such termination of this Lease,
and no further Rent shall accrue or be payable after the
date of such termination.
13.5 REPAIR AND RESTORATION. In the event of a taking which does
not result in the termination of this Lease pursuant to
Section 13.1 above, or a casualty which does not result in
the termination of this Lease pursuant to Section 13.4
above, the Premises shall be repaired and restored in the
manner provided in this Section. Lessor shall diligently
act to restore the Building and the Premises (exclusive of
Lessee's Property) or, in case of taking, what remains
thereof, to substantially the condition in which they
existed prior to the occurrence of such taking or casualty,
provided, however, that: (i) in no event shall Lessor be
required to spend in connection with restoring the Premises
more than the amount of insurance proceeds or taking award
actually received and allocable thereto (except that this
limitation with respect to insurance proceeds shall not
apply to casualties occurring
-28-
<PAGE> 32
during such time as Lessor self-insures pursuant to Section
7.4 above); (ii) Lessor shall not be required to restore or
replace any of Lessee's Property; and (iii) promptly upon
substantial completion of such work by Lessor, Lessee shall
diligently act to repair and/or restore all of Lessee's
Property to substantially the same condition it was in
prior to the occurrence of such taking or casualty. Lessor
shall not be liable for any inconvenience or annoyance to
Lessee or injury to the business of Lessee resulting in any
way from such taking or damage or the repair thereof. Rent
shall be abated from and after the date of such taking or
damage to the date on which Lessor substantially completes
the restoration described above, to the extent the Premises
are unusable for the Permitted Uses. Notwithstanding the
foregoing provisions of this Section 13.5, in the event
that within six months after the date of such taking or
damage (other than damage resulting from a casualty which
Lessor establishes was caused by Lessee, or anyone claiming
by, through or under Lessee, or the officers, agents,
servants, contractors or employees thereof), Lessor has not
substantially completed the restoration work which it is
required by this Section to perform, then Lessee shall have
the right to terminate this Lease by giving thirty (30)
days' written notice to Lessor within thirty (30) days
after the end of such 6-month period.
14.0 DEFAULTS: EVENTS OF DEFAULT; REMEDIES.
14.1 DEFAULTS; EVENTS OF DEFAULT. The following shall, if any
requirement for notice or lapse of time or both has not
been met, constitute defaults hereunder, and, if such
requirements have been met, constitute "Events of Default"
hereunder:
(a) The failure of Lessee to perform or observe any
of Lessee's covenants or agreements hereunder
concerning the payment of money for a period of ten
(10) days after written notice thereof, PROVIDED,
HOWEVER, that Lessee shall not be entitled to such
notice if Lessor has given notice to Lessee of two or
more previous such failures within a twelve-month
period, in which event such failure shall constitute
an Event of Default hereunder upon the expiration of
ten (10) days after such payment was due;
-29-
<PAGE> 33
(b) The failure of Lessee to maintain the insurance
required hereunder in full force and effect;
(c) The execution by Lessee of any assignment or sublease
without the prior written consent of Lessor;
(d) The failure of Lessee to perform or observe any
of Lessee's other covenants or agreements hereunder
for a period of thirty (30) days after written notice
thereof (provided that, in the case of defaults not
reasonably curable in thirty (30) days through the
exercise of reasonable diligence, such 30-day period
shall be extended for so long as Lessee commences cure
within such period and thereafter prosecutes such cure
to completion continuously and with reasonable
diligence, but such extended cure period shall
not in any event exceed ninety (90) days after
Lessor's initial notice to Lessee); or
(e) If the leasehold hereby created shall be taken on
execution, or by other process of law; or if any
assignment shall be made of Lessee's property for
the benefit of creditors; or if a receiver,
guardian, conservator, trustee in bankruptcy or
similar officer shall be appointed to take charge
of all or any part of Lessee's assets by a court
of competent jurisdiction; or if a petition is
filed by Lessee under any bankruptcy or
insolvency law; or if a petition is filed against
Lessee under any bankruptcy or insolvency law and
the same shall not be dismissed within sixty (60)
days from the date upon which it is filed; or a
lien or other involuntary encumbrance is filed
against Lessee's leasehold (or against the
Premises, the Building or the Land based on a
claim against Lessee) and is not discharged or
bonded within thirty (30) days after the filing
thereof.
14.2 TERMINATION. If an Event of Default shall occur, Lessor
may, at its option, immediately or any time thereafter and
without demand or notice, enter upon the Premises or any
part thereof in the name of the whole and repossess the
same as of Lessor's former estate and dispossess Lessee and
those claiming through or under Lessee and remove their
effects, forcibly if necessary, without being deemed guilty
of any manner of trespass and without prejudice to any
-30-
<PAGE> 34
remedies which might otherwise be used for arrears of rent
or preceding breach of covenant, and upon such entry this
Lease shall terminate. In lieu of making such entry, Lessor
may terminate this Lease upon three (3) business days'
prior written notice to Lessee. Upon any termination of
this Lease as the result of an Event of Default, Lessee
shall quit and peacefully surrender the Premises to Lessor.
14.3 SURVIVAL OF COVENANTS. No such termination of this Lease
shall relieve Lessee of its liability and obligations under
this Lease and such liability and obligations shall survive
any such termination.
14.4 DAMAGES. In the event of any such termination Lessee shall
pay to Lessor the Rent up to the time of such termination.
Lessee shall remain liable for, and shall pay on the days
originally fixed for such payment hereunder, the full
amount of all Basic Rent and Additional Rent as if this
Lease had not been terminated; PROVIDED, HOWEVER, if Lessor
relets the Premises, there shall be credited against such
obligation the amount actually received by Lessor each
month from such lessee after first deducting all costs and
expenses incurred by Lessor in connection with reletting
the Premises.
In lieu of any other damages hereunder, Lessee agrees to
pay to Lessor, on demand, as and for liquidated and agreed
damages for Lessee's default, the amount by which:
(a) the aggregate Rent which would have been payable under
this Lease by Lessee from the date of such termination
until what would have been the last day of the Term
but for such termination, EXCEEDS
(b) the greater of (i) the fair and reasonable rental
value of the Premises for the same period, less
Lessor's reasonable estimate of expenses to be
incurred in connection with reletting the
Premises, including, without limitation, all
repossession costs, brokerage commissions, legal
expenses, reasonable attorneys' fees, alteration
costs, and expenses of preparation for such
reletting, or (ii) the sum of (A) the amount
actually received by Lessor from reletting the
Premises (if any), and (B) the amount actually
received by Lessor from Lessee pursuant to the
preceding paragraph of this Section (if any).
-31-
<PAGE> 35
If the Premises or any part thereof are relet by Lessor for
the period prior to what would have been the last day of
the Term but for such termination, or any portion thereof,
the amount of rent reserved upon such reletting shall be,
PRIMA FACIE, the fair and reasonable rental value for the
part or the whole of the Premises so relet during the term
of the reletting.
In lieu of any other damages hereunder, Lessor may by
written notice to Lessee, at any time after this Lease is
so terminated, elect to recover, and Lessee shall pay as
full and final liquidated damages, an amount equal to (i)
the Basic Rent and Additional Rent accrued under Section
5.0 hereof in the twelve (12) months ending on the
effective date of such termination, PLUS (ii) all Basic
Rent and Additional Rent which was unpaid as of the
effective date of such termination, LESS (iii) the amount
received by Lessor pursuant to the foregoing provisions of
this Section 14.4 prior to the time of payment by Lessee of
such liquidated damages.
Nothing herein contained shall limit or prejudice the right
of Lessor to prove and obtain as liquidated damages by
reason of such termination, an amount equal to the maximum
allowed by any statute or rule of law in effect at the time
when, and governing the proceedings in which, such damages
are to be proved, whether or not such amount be greater,
equal to, or less than the amount of the difference
referred to above.
14.5 RIGHT TO RELET. At any time or from time to time after any
such termination, Lessor may relet the Premises or any part
thereof for such a term (which may be greater or less than
the period which would otherwise have constituted the
balance of the Term) and on such conditions (which may
include concessions or free rent) as Lessor, in its
reasonable discretion, may determine, and may collect and
receive the rents therefor. Lessor shall in no way be
responsible or liable for any failure to relet the Premises
or any part thereof, or for any failure to collect any rent
due upon any such reletting.
-32-
<PAGE> 36
14.6 RIGHT TO EQUITABLE RELIEF. In the event there shall occur a
default or threatened default hereunder, Lessor shall be
entitled to enjoin such default or threatened default and
shall have the right to invoke any right and remedy allowed
at law or in equity or by statute or otherwise as though
re-entry and other remedies were not provided for in this
Lease.
14.7 RIGHT TO SELF HELP. In the event of a default by Lessee
hereunder which continues beyond the expiration of the
applicable grace period, Lessor shall have the right to
perform such defaulted obligation of Lessee, including the
right to enter upon the Premises to do so. Lessor shall, as
a courtesy only, notify Lessee of its intention to perform
such obligation. In the event of a default by Lessee
hereunder which has not yet continued beyond the expiration
of the applicable grace period but which Lessor determines
constitutes an emergency threatening imminent injury to
persons or damage to property, Lessor shall have the right
to perform such defaulted obligation of Lessee (including
the right to enter upon the Premises to do so) after giving
Lessee such notice (if any) as is reasonable under the
circumstances. In either event, the aggregate of (i) all
sums so paid by Lessor, (ii) interest (at the rate of
1-1/2% per month or the highest rate permitted by law,
whichever is less) on such sum, and (iii) all necessary
incidental costs and expenses in connection with the
performance of any such act by Lessor, shall be deemed to
be Additional Rent under this Lease and shall be payable to
Lessor immediately upon demand. Lessor may exercise its
rights under this Section 14.7 without waiving any other of
its rights or releasing Lessee from any of its obligations
under this Lease.
14.8 FURTHER REMEDIES. Nothing in this Lease contained shall
require Lessor to elect any remedy for a default or Event
of Default by Lessee hereunder, and all rights herein
provided shall be cumulative with one another and with any
other rights and remedies which Lessor may have at law or
in equity in the case of such a default or Event of
Default.
15.0 REAL ESTATE BROKER. Lessor and Lessee each represent to the
other that they have dealt with no broker in connection with
this Lease other than Fallon, Hines & O'Connor, Inc. and
Meredith & Grew, Inc. (collectively, "Brokers"). Lessor
shall pay the Brokers as part of a separate agreement.
Lessee agrees to indemnify and hold Lessor harmless from and
-33-
<PAGE> 37
against any claims for commissions or fees by any person other
than the Brokers by reason of any act of Lessee or its
representatives. Lessor agrees to indemnify and hold Lessee
harmless from and against any claims for commissions or fees by
any person other than the Brokers by reason of any act of Lessor
or its representatives.
16.0 NOTICES. Whenever by the terms of this Lease notice, demand, or
other communication shall or may be given either to Lessor or to
Lessee, the same shall be in writing and shall be sent by hand
delivery, or by registered or certified mail, postage prepaid, or
by Federal Express or other similar overnight delivery service,
to:
Lessor: Massachusetts Institute of Technology
238 Main Street - Suite 200
Cambridge, Massachusetts 02142
Attention: Philip A. Trussell,
Director of Real Estate
with a copy to: Peter Friedenberg, Esquire
Rackemann, Sawyer & Brewster
One Financial Center
Boston, Massachusetts 02111
Lessee: Prior to the Commencement Date:
-------------------------------
Free Radical Sciences, Inc.
245 First Street
Cambridge, Massachusetts 02142
Attention: B. Nicholas Harvey
Chief Financial Officer
From and After the Commencement Date:
-------------------------------------
Free Radical Sciences, Inc.
640 Memorial Drive
Cambridge, Massachusetts 02139
Attention: B. Nicholas Harvey
Chief Financial Officer
with a copy to: Joel H. Sirkin, Esquire
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Any notice, demand or other communication shall be effective upon
receipt by or tender for delivery to the intended recipient
thereof.
-34-
<PAGE> 38
17.0 NO WAIVERS. Failure of Lessor to complain of any act or omission
on the part of Lessee, no matter how long the same may continue,
shall not be deemed to be a waiver by Lessor of any of its rights
hereunder. No waiver by Lessor at any time, expressed or implied,
of any breach of any provision of this Lease shall be deemed a
waiver of a breach of any other provision of this Lease or a
consent to any subsequent breach of the same or any other
provision. No acceptance by Lessor of any partial payment shall
constitute an accord or satisfaction but shall only be deemed a
partial payment on account; nor shall any endorsement or
statement on any check or any letter accompanying any check or
payment be deemed an accord and satisfaction, and Lessor may
accept such check or payment without prejudice to Lessor's right
to recover the balance of such installment or pursue any other
remedy available to Lessor in this Lease or at law or in equity.
18.0 SERVICES PROVIDED BY LESSOR. Lessor shall furnish the services
described on EXHIBIT D attached, the cost of which shall be
included in Operating Expenses. Lessor shall not be held liable
to anyone for cessation of any service rendered customarily to
the Premises or Building or agreed to by the terms of this Lease,
due to any accident, to the making of repairs, alterations or
improvements, or to the occurrence of an event of "Force Majeure"
(as defined in Section 22 below).
19.0 GROUND LEASES; MORTGAGES.
19.1 RIGHTS OF GROUND LESSORS AND MORTGAGEES. No act or failure
to act on the part of Lessor which would entitle Lessee
under the terms of this Lease, or by law, to be relieved of
Lessee's obligations hereunder or to terminate this Lease,
shall result in a release or termination of such
obligations or a termination of this Lease unless (i)
Lessee shall have first given written notice to Lessor's
ground lessors and mortgagees of record of the act or
failure to act on the part of Lessor which Lessee claims as
the basis of Lessee's rights; and (ii) such ground lessors
and mortgagees, after receipt of such notice, have failed
or refused to correct or cure the condition within a
reasonable time thereafter, but nothing in this Lease shall
be deemed to impose any obligation on any such ground
lessor or mortgagee to correct or cure any such condition.
No ground lessor shall be liable for the failure to perform
any of the obligations of Lessor hereunder unless and until
such ground lessor terminates its ground lease and takes
possession of the Premises, nor shall any mortgagee be
liable for
-35-
<PAGE> 39
the failure to perform any of the obligations of Lessor
hereunder unless and until such mortgagee enters upon and
takes possession of the Premises for purposes of
foreclosure.
19.2 LEASE SUBORDINATE. This Lease is and shall be subject and
subordinate to any ground lease or mortgage now or
hereafter on the Premises, and to all advances under any
such mortgage and to all renewals, amendments, extensions
and consolidations thereof, provided that the holder of
such ground lessor's interest or mortgagee's interest
enters into a non-disturbance and attornment agreement with
Lessee which provides that in the event that such ground
lessor or mortgagee succeeds to Lessor's interest
hereunder, then, provided that Lessee is not in default
hereunder beyond the cure period provided in this Lease,
such party shall recognize and be bound by the terms of
this Lease. In the event that any ground lessor or the
holder of any mortgage succeeds to Lessor's interest in the
Premises or any portion thereof, Lessee hereby agrees to
attorn to such ground lessor or mortgagee. In confirmation
of such subordination, Lessee shall execute and deliver
promptly any certificate in recordable form that Lessor or
any ground lessor or any mortgagee may reasonably request.
Notwithstanding the foregoing provisions of this Section,
the holder of any mortgage on the Premises may at any time
subordinate its mortgage to this Lease by written notice to
Lessee.
Lessor hereby represents to Lessee that as of the date of
this Lease, there are no mortgages or ground leases
encumbering the Premises or any portion thereof.
20.0 NOTICE OF LEASE; ESTOPPEL CERTIFICATES. Lessor and Lessee agree
that this Lease shall not be recorded. However, simultaneously
with their execution and delivery of this Lease, Lessor and
Lessee shall execute and acknowledge a Notice of Lease in
mutually acceptable and recordable form.
From time to time during the Lease Term, and without charge,
either party shall, within fifteen (15) business days of request
by the other, certify by written instrument duly executed and
acknowledged, to the requesting party or to any person reasonably
specified by the requesting party, regarding (a) the existence of
any amendments or supplements to this Lease; (b) the validity and
force and effect of this Lease; (c) the existence of any known
default or Event of Default; (d) the existence of any offsets,
counterclaims or
-36-
<PAGE> 40
defenses; (e) the Commencement Date and the expiration date of
the Lease Term; (f) the amount of Rent due and payable and the
date to which Rent has been paid; and (g) such other matters as
may be reasonably requested.
21.0 HOLDING OVER. If Lessee occupies the Premises after the day on
which the Lease Term expires (or the effective date of any
earlier termination as herein provided) without having entered
into a new lease thereof with Lessor, Lessee shall be a
tenant-at-sufferance only, subject to all of the terms and
provisions of this Lease at (i) one and one-half (1-1/2) times
the Basic Rent as in effect on the last day of the Term for the
first two (2) months (or portion thereof) of such holding over,
and (ii) twice the Basic Rent as in effect on the last day of the
Term for the balance of such holding over. Such a holding over,
even if with the consent of Lessor, shall not constitute an
extension or renewal of this Lease. If applicable, for purposes
of this Section, the failure of Lessee to complete by the last
day of the Lease Term or the effective date of any earlier
termination as herein provided the "closeout" procedures required
by the Nuclear Regulatory Commission or any other federal, state
or local governmental agency having jurisdiction over the use of
radioactive materials within the Premises shall constitute a
holding over and subject Lessee to the provisions of this
Section.
22.0 FORCE MAJEURE. Neither Lessor nor Lessee shall be deemed to be in
default hereunder (and the time for performance of any of their
respective obligations hereunder other than the payment of money
shall be postponed) for so long as the performance of such
obligation is prevented by strike, lockout, act of God, absence
of materials or any other matter not reasonably within the
control of the party which must perform the obligation
(collectively, "Force Majeure").
23.0 ENTIRE AGREEMENT. No oral statement or prior written matter
shall have any force or effect. This Agreement shall not be
modified or canceled except by writing subscribed to by all
parties.
24.0 SECURITY DEPOSIT. Lessee has deposited with Lessor
contemporaneously with its delivery to Lessor of executed
counterparts of this Lease $54,000.00 (the "Security Deposit") as
security for the full and faithful payment and performance by
Lessee of its obligations under this Lease from and after the
date of execution hereof by Lessee, and not as a prepayment of
Rent. Lessor may commingle the Security Deposit in one or more
bank accounts with other funds of Lessor, and the Security
Deposit shall earn
-37-
<PAGE> 41
interest at the rate actually paid to Lessor from time to time on
such account (which interest shall be included in the term
"Security Deposit" for the purposes of this Lease). Lessor may
use the Security Deposit to cure any Event of Default by Lessee
(whether occurring prior to the Commencement Date hereunder or
thereafter), and Lessee shall immediately pay to Lessor on
demand, as Additional Rent, the amount so expended and such
additional amount as is required to cause the Security Deposit at
all times to equal the amount set forth above. Lessor shall
assign the Security Deposit to any successor owner of the
Building and provided that such successor owner agrees to be
bound by the terms of this Section 24.0, thereafter Lessor shall
have no further responsibility therefor. Upon the expiration (or
earlier termination) of the Lease Term, Lessor shall inspect the
Premises, make such deductions from the Security Deposit as may
be required to cure any Event of Default by Lessee hereunder,
and, if Lessee is not then in default hereunder, pay the balance
of the Security Deposit, if any, to Lessee within thirty (30)
days of such expiration or termination. If Lessee is in default
hereunder at the time of such expiration or termination, then
Lessor shall be entitled to retain so much of the Security
Deposit as Lessor reasonably estimates to be Lessee's liability
to Lessor hereunder and shall pay the balance, if any, to Lessee
within such 30-day period.
Notwithstanding the foregoing provisions of this Section 24.0, if
no Event of Default has occurred hereunder during the first two
(2) Lease Years, then Lessor shall retain $25,000.00 as the
Security Deposit, and Lessor shall release to Lessee promptly
after the second anniversary of the Commencement Date the excess
portion of the Security Deposit then held by Lessor.
25.0 WARRANTS. As additional consideration, Lessee is issuing to
Lessor, contemporaneously with the execution and delivery
of this Lease, its warrants to purchase 25,000 shares of
Lessee's common stock in the form attached hereto as
EXHIBIT F. Lessor's rights in such warrants shall not be
affected by any termination of this Lease.
26.0 SUCCESSORS AND ASSIGNS. The terms, covenants and conditions of
this Lease shall run with the Land, and be binding upon and inure
to the benefit of Lessor and Lessee and their respective
successors and permitted assigns.
-38-
<PAGE> 42
27.0 APPLICABLE LAW, SEVERABILITY AND CONSTRUCTION. This Lease shall
be governed by and construed in accordance with the laws of
Massachusetts and, if any provisions of this Lease shall to any
extent be invalid, the remainder of this Lease, and the
application of such provisions in other circumstances, shall not
be affected thereby. The titles of the several Sections contained
herein are for convenience only and shall not be considered in
construing this Lease. Whenever the singular is used and when
required by the context it shall include the plural, and the
neuter gender shall include the masculine and feminine. The
Exhibits attached to this Lease are incorporated into this Lease
by reference. This Lease may be executed in several counterparts,
each of which shall be an original, but all of which shall
constitute one and the same instrument. The term "Lessor"
whenever used herein, shall mean only the owner at the time of
Lessor's interest herein, and no covenant or agreement of Lessor,
express or implied, shall be binding upon any person except for
defaults occurring during such person's period of ownership nor
binding individually upon any fiduciary, any shareholder, officer
or director, or any beneficiary under any trust, and the
liability of Lessor, in any event, shall be limited to Lessor's
interest in the Building. If Lessee is several persons or a
partnership, Lessee's obligations are joint or partnership and
also several. No officer, director Or shareholder of Lessee shall
have any personal liability hereunder. Unless repugnant to the
context, "Lessor" and "Lessee" mean the person or persons,
natural or corporate, named above as Lessor and as Lessee
respectively, and their respective heirs, executors,
administrators, successors and assigns.
28.0 QUIET ENJOYMENT. Lessor covenants that, provided that an Event of
Default has not occurred and is not then continuing, Lessee shall
quietly have and enjoy the Premises during the Term, without
hindrance or molestation from any person lawfully claiming by,
through or under Lessor.
29.0 AUTHORITY. Contemporaneously with the signing of this Lease,
Lessee shall furnish to Lessor a certified copy of the resolution
of the Board of Directors of Lessee authorizing Lessee to enter
into this Lease, and Lessor shall furnish appropriate evidence of
the authority of Lessor to enter into this Lease.
-39-
<PAGE> 43
WITNESS the execution hereof under seal the day and year first
above written.
LESSOR: MASSACHUSETTS INSTITUTE OF
TECHNOLOGY
Date: October 28, 1994 By: /s/ Allan S. Bufferd
----------------- -----------------------------
Allan S. Bufferd
Deputy Treasurer and Director
of Investments
Hereunto duly authorized
LESSEE: FREE RADICAL SCIENCES, INC.
Date: October 28, 1994 By: /s/ B. Nicholas Harvey
----------------- -----------------------------
B. Nicholas Harvey
Chief Financial Officer
Hereunto duly authorized
-40-
<PAGE> 44
EXHIBIT A
---------
PREMISES
--------
See attached plan.
[Exhibit consists of architect's drawing of the third floor of
building located at 640 Memorial Drive, Cambridge, MA, with
cross-hatching describing premises leased to tenant.]
-41-
<PAGE> 45
EXHIBIT B
---------
SITE PLAN
---------
See attached plan.
[Exhibit consists of plat map of real property owned by
Massachusetts Institute of Technology certified by civil
engineer.]
-42-
<PAGE> 46
EXHIBIT C
---------
WORK LETTER
-----------
This Work Letter is incorporated by reference into the Lease
dated October 28, 1994 by and between Massachusetts Institute of
Technology, as Lessor, and Free Radical Sciences, Inc., as Lessee.
Terms defined in or by reference in the Lease not otherwise defined
herein shall have the same meaning herein as therein.
1. ADDITIONAL DEFINITIONS. Each of the following terms shall
have the meaning stated immediately after it:
APPROVED WORKING DRAWINGS. The working drawings and
specifications for the Initial Improvements, prepared by
the Project Architect, which have been approved by Lessor
and Lessee, copies of which (or a list of which) are
attached to this Work Letter as Schedule 1.
APPROVED BUDGET. The budget for the design and construction
of the Initial Improvements as shown on the Working
Drawings, which has been approved by Lessee and Lessor, a
copy of which is attached to this Work Letter as Schedule
2.
COMMENCEMENT DATE. The earlier of (i) the date on which
Lessor has "substantially completed" (as defined below) the
Initial Improvements and received a certificate of
occupancy for the Premises, subject to adjustment as
provided in Paragraph 6 below, or (ii) the date on which
Lessee first occupies the Premises (or any portion thereof)
for the conduct of its business.
CONSTRUCTION AUTHORIZATIONS. Collectively, all
permits, licenses and other consents and approvals
required from any governmental authority for the
construction of the Initial Improvements.
GENERAL CONTRACTOR. A general contractor engaged by
Lessor to construct the Initial Improvements.
INITIAL IMPROVEMENTS. All improvements, alterations and
additions which Lessee wishes to make to the Premises as
part of the initial preparation thereof for Lessee's
occupancy, as shown on the Approved Working Drawings (as
the same may be changed as hereinafter provided).
-43-
<PAGE> 47
LESSEE'S COST. The amount, if any, by which the cost
to design and construct the Initial Improvements exceeds
the amount of Lessor's Contribution.
LESSEE'S DELAYS. Any and all delays suffered by Lessor, the
Project Architect, or the General Contractor in the course
of the design or construction of the Initial Improvements
due to any act or failure to act of Lessee or Lessee's
consultants, contractors, suppliers, servants, licensees,
or agents, including, without limitation, (i) any delay by
Lessee in providing to the Project Architect or the General
Contractor within a reasonable time after request therefor
any information reasonably requested by the Project
Architect or the General Contractor, (ii) Lessee's failure
to make a payment to Lessor within the time provided in
Paragraph 5 below, or (iii) any delay caused by Lessee's
requests for changes to the Approved Working Drawings
(notwithstanding Lessor's approval of such request).
LESSOR'S CONTRIBUTION. The amount to be paid by Lessor
towards the cost of designing and constructing the Initial
Improvement, which amount shall not exceed $25.00 per
rentable square foot of the Premises.
LESSOR'S DELAYS. Any and all delays caused by Lessor, the
Project Architect, the General Contractor or any
subcontractor or supplier thereof in the course of the
design or construction of the Initial Improvements, but
expressly excluding (i) all Lessee's Delays, and (ii) all
delays resulting from the occurrence of a Force Majeure.
PROTECT ARCHITECT. Tsoi/Kobus & Associates, or another
architectural firm engaged by Lessor to design the Initial
Improvements.
SUBSTANTIALLY COMPLETED. With reference to the Premises,
the completion of construction of the Initial Improvements
except for items of work or adjustment of equipment or
fixtures which are not necessary to make the Premises
reasonably tenantable for the Permitted Uses and which,
because of season or weather or the nature of the item,
cannot practicably be done at the time.
2. PREPARATION OF THE PREMISES. Lessor shall design and
construct the Initial Improvements in accordance with the
provisions of this Work Letter. If the cost to Lessor of
-44-
<PAGE> 48
designing and constructing the Initial Improvements exceeds the
amount of Lessor's Contribution, Lessee shall pay Lessee's Cost
to Lessor in accordance with Paragraph 5 hereof.
Lessor anticipates that the Commencement Date will occur on or
about December 15, 1994 (subject to Lessee's Delays and Force
Majeure). This is Lessor's good faith estimate of the anticipated
Commencement Date, and shall not be construed as a guaranty,
representation or warranty that the Commencement Date will occur
within such time.
3. INITIAL IMPROVEMENTS. Lessor shall be responsible for obtaining
all Construction Authorizations required for the Initial
Improvements and, upon completion of the Initial Improvements,
for obtaining a certificate of occupancy for the Premises from
the appropriate governmental authority. Lessor shall deliver to
Lessee a copy of said certificate of occupancy promptly after
receiving the same. Lessor shall cause the General Contractor to
commence construction of the Initial Improvements and shall use
reasonable efforts to cause the General Contractor diligently to
proceed to completion thereof.
4. CHANGES. It is understood that Lessee at its own expense may
request changes in the work after approval by Lessee and Lessor
of the Approved Working Drawings. All such changes shall require
the prior written approval of Lessor, which approval shall not be
unreasonably withheld or delayed. Such changes shall be priced at
the sum of (i) the cost of making such changes and (ii) the cost
of the work shown thereon (including the general contractor's
overhead, profit and general conditions). No changes shall be
made until Lessee's Representative has signed a written
authorization therefor.
If the cost of the Initial Improvements as modified by such
changes exceeds the amount of Lessor's Contribution, Lessee shall
be solely responsible for the payment of such excess in the
manner provided in Paragraph 5 below.
5. PAYMENT OF THE COSTS OF THE INITIAL IMPROVEMENTS. Lessor shall
make all payments to the Project Architect and the General
Contractor up to an aggregate amount equal to the Lessor's
Contribution. From and after such time (if any) as the cost of
designing and constructing the Initial Improvements exceeds the
amount of Lessor's Contribution, for any reason whatsoever,
Lessee shall be solely responsible for paying the balance of the
costs of designing and constructing the Initial Improvements and
shall make
-45-
<PAGE> 49
such payment to Lessor within ten (10) days of receipt of an
invoice therefor from Lessor. Notwithstanding anything to the
contrary set forth in the Lease or this Work Letter, in the event
that Lessee fails to make a payment to Lessor within such 10-day
period, Lessor shall be entitled to cease work in the Premises
until Lessor receives all sums due from Lessee on account of the
Initial Improvements. Lessee shall indemnify and hold Lessor
harmless from and against any and all claims, loss, costs,
expenses, debts, damages or liabilities, including, without
limitation, reasonable attorney's fees, incurred by Lessor as a
consequence of Lessee's failure to make a payment to Lessor
within such 10- day period.
Notwithstanding the preceding provisions of this Paragraph 5, in
the event that Lessor determines prior to the commencement of
construction of the Initial Improvements that the cost of
designing and constructing the Initial Improvements will exceed
the amount of Lessor's Contribution, Lessor shall notify Lessee
of the projected amount of such excess and Lessor shall not be
required to commence construction of the Initial Improvements
unless and until Lessee pays to Lessor the full amount of such
projected excess. Notwithstanding such payment by Lessee to
Lessor, Lessee shall remain solely responsible for any further
amount by which the actual cost of designing and constructing the
Initial Improvements exceeds the aggregate of Lessor's
Contribution and sums previously paid by Lessee to Lessor.
6. DELAYS. In the event of the occurrence of a Lessee's Delay, the
Commencement Date shall be advanced one day for each day such
Lessee's Delay continues. In the event of the occurrence of a
Lessor's Delay, the Commencement Date shall not occur until the
conditions set forth in the definition of "Commencement Date" set
forth in Paragraph 1 of this Work Letter are satisfied and,
except as provided in the next subparagraph of this Paragraph 6,
this shall be the sole remedy of Lessee for such delay.
In the event that, by reason of a Lessor's Delay, Lessor fails to
substantially complete the Initial Improvements by March 15,
1995, then Lessee may terminate this Lease by giving written
notice to Lessor within fifteen (15) days after such date, which
termination shall be without further recourse or obligation of
either party hereunder and upon which termination all rights of
Lessor under the warrant documents attached hereto as EXHIBIT F
shall automatically expire and become null and void. If Lessee
fails to give such notice of termination within such time, then
the
-46-
<PAGE> 50
Commencement Date shall be delayed beyond March 15, 1995 by the
number of days of actual delay in the substantial completion of
the Premises caused by such Lessor's Delay (as reasonably
determined by the Project Architect), and such delay in the
Commencement Date shall be the sole remedy of Lessee for Lessor's
Delay.
7. LESSEE'S ACCESS TO THE PREMISES. Lessee and Lessee's consultants,
contractors and suppliers may, at Lessee's sole risk, enter upon
the Land, the Building and the Premises prior to the Commencement
Date for the limited purpose of installing communications lines
and equipment PROVIDED that such persons work in harmony with
Lessor, the General Contractor, its subcontractors and suppliers,
and with other lessees and occupants of the Building (and their
respective contractors, subcontractors and suppliers). If at any
time such entry shall cause or threaten to cause disharmony or
otherwise interfere with the orderly completion or operation of
the Building, Lessor shall have the right upon twenty-four (24)
hours' written notice to Lessee to withdraw the consent to such
entry given in this Paragraph. Any such entry onto the Land, the
Bui1ding or the Premises shall be deemed to be under all of the
terms, covenants, conditions and provisions of this Lease except
the covenant to pay Rent.
8. LESSOR'S AND LESSEE'S REPRESENTATIVES. Prior to the commencement
of any design work for the Premises, each party hereto shall
designate in writing to the other a person as "Lessor's
Representative" and "Lessee's Representative" respectively, which
person shall be available during ordinary business hours to
review the progress of the work and to respond to issues which
arise during construction. Each party may rely on the other's
Representative with respect to all matters which pertain to this
Work Letter, each party having authorized its Representative to
make decisions binding upon such party with respect to such
matters.
9. PUNCHLIST. The punchlist shall be developed by the Project
Architect not later than the Commencement Date by means of a
joint inspection of the Premises by Lessor and Lessee. Lessor
shall complete all punchlist work as expeditiously as possible as
part of the construction of the Initial Improvements.
10. POSSESSION BY LESSEE. The Premises (including the Initial
Improvements) shall be deemed to be accepted by Lessee except for
such items as are specified in a written notice given by Lessee
to Lessor not later than thirty (30) days
-47-
<PAGE> 51
after the date on which Lessee takes possession of the Premises
except for (i) latent defects not reasonably discoverable within
such 30-day period, and (ii) defects which are not reasonably
discoverable during such 30-day period because of the seasonal
impact of the defect. Lessor shall correct the items set forth in
such notice as soon as practicable, and in all events within
thirty (30) days after such notice, as part of the construction
of the Initial Improvements.
11. GENERAL. A breach by Lessee of any provision of this Work Letter
shall constitute a default under the Lease, for which Lessor
shall have all remedies therein provided.
12. SAVINGS. In the event that after completion of the Initial
Improvements and payment in full therefor there remains
unexpended any portion of Lessor's Contribution, then Lessee
shall receive a credit against the first monthly installments of
Basic Rent due and payable under this Lease in an amount equal to
such unexpended portion of Lessor's Contribution, but in no event
shall Lessor be required to make any payment to Lessee.
-48-
<PAGE> 52
SCHEDULE 1
----------
APPROVED WORKING DRAWINGS
-------------------------
[SEE ATTACHED DRAWING]
[Exhibit consists of architect's drawing of property
leased to the Company and improvements thereto.]
-49-
<PAGE> 53
SCHEDULE 2
----------
APPROVED BUDGET
---------------
[See attached budget]
DESCRIPTION QUANTITY UNIT U/P COST TOTALS Subs
----------------------------------------------------------------------
CONCRETE
------------------------ ---------------------
SUBTOTAL CONCRETE $0
ROUGH CARPENTRY
BLOCKING 1 ALLOW $1,000.00 $1,000
------------------------ --------------------
SUBTOTAL ROUGH CARPENTRY $1,000 $0
MILLWORK
BASE CABINETS AT KITCHEN 7 LF $125.00 $875
WALL CABINETS AT KITCHEN 7 LF $135.00 $945
COUNTER TOP 2'-6" DEEP 7 LF $40.00 $280
------------------------ -------------------
SUBTOTAL MILLWORK $2,100 $20,170
Woodworks
MISC. METALS
------------------------ -------------------
SUBTOTAL MISC. IRON $0 $0
GLASS AND GLAZING
GLASS WALL AT EXEC. OFFICES 0 LF $175.00 $0
GLASS WALL AT CONFERENCE RM 18 LF $150.00 $2,700
--------------------------- -------------
SUBTOTAL GLASS AND GLAZING $2,700
$1,750
$6,475
IBG
DRYWALL
TYPE A-6" above ceiling 270 LF $28.00 $7,560
TYPE A1-6' ABOVE CEILING WITH INSULATION 297 LF $31.00
$9,207
TYPE B-ONE LAYER TO DECK WITH INSULATION 56 LF $37.00
$2,146
PERIMETER WALL BY OWNER, existing
DRYWALL CEILINGS not shown
INSTALL HM FRAMES 11 EA $35.00 $385
FINISH WINDOW SILL AND HEAD N/C
EXTERIOR WALL MULLION DETAIL 6 EA $80.00 $400
TOUCH-UP EXISTING CONCRETE COLUMNS 7 EA $225.00 $1,575
---------------------------------- -------------
SUBTOTAL DRYWALL $21,273 $21,000
TJ
-50-
<PAGE> 54
DOORS AND HARDWARE
3070 HARDWOOD DOOR, NATURAL FINISH 14 EA $185.00 $2,590
ALUMINUM ENTRY FRAME WITH SIDELITE 1 EA $750.00 $750
inc.
ALUMINUM ENTRY DOOR 1 EA $350.00 $350 inc.
DOUBLE HOLLOW METAL FRAME 1 EA $115.00 $115
SINGLE HOLLOW METAL FRAMES 7' 10 EA $90.00 $900
WOOD FRAMES 2 EA $125.00 $250 inc.
DOOR HARDWARE 13 SETS $165.00 $2,145
ELECTRIC STRIKE AT ENTRY 1 EA $300.00 $300
INSTALL DOORS AND HARDWARE 15 EA $90.00 $1,350
-------------------------- -------------
SUBTOTAL DOORS AND HARDWARE $8,750
$6,958
PSI
ACOUSTICAL CEILINGS
2X2 TEGULAR MINABOARD 7,216 SF $1.70 $12,287
PREMIUM FOR FINELINE GRID SF $0.20 N/C
PATCH 12"X12" SPLINE CEILING
AT 2ND FLR 2 MD $450.00 $900
SPLINE TILE 1 LOT $200.00 $200
----------- -------------------
SUBTOTAL ACOUSTICAL CEILINGS
$13,367 $15,000
Cheviot
FLOORING
VCT FLOORING 67 SF $1.20 $80
FLOOR PREP-INCLUDES SAWCUT
SLAB AREA 1 ALLOW $1,000.00 $1,000
CARPET (Allowance per spec. #6,
furnish and install) 847 SY $18.00 $15,243
CARPET At the elevator lobby 96 SY By Owner
VINYL BASE 1,647 LF $1.10 $1,812
COMPUTER ROOM FLOOR Not required 30oz carpet loop
------------------------------ -----------------------------
pile ($15/yd)
SUBTOTAL FLOORING $18,135 $15,635
$500
PAINTING AND WALLCOVERING JMA
FIELD FINISH WOOD DOORS Not required, field finish
PAINT FRAMES 11 EA $35.00 $385
PAINT BASE BUILDING DOOR & FRAME 1 EA $70.00 $70
FABRIC WALL COVERING Assume not required
PAINT DRYWALL CEILINGS None
PAINT INSIDE OF OUTSIDE 1,296 SF $0.30 $389
PAINT DRYWALL 12,250 SF $0.30 $3,575
PAINT COLUMNS (Extra cost of primer) 7 EA $75.00 $525
POLYMIX N/C
----------------------------- ------------------
SUBTOTAL PAINTING AND WALLCOVERING
$5,044 $4,310
EMS
-51-
<PAGE> 55
SPECIALTIES
WINDOW BLINDS N/C
SIGNAGE BY OWNER
TOILET ACC. Not required
APPLIANCES BY OTHERS
FURNITURE ITEMS NOT INCLUDED
----------------------------- ------------------
SUBTOTAL SPECIALTIES $0 $0
FIREPROOFING
PATCH FIRE PROOFING NOT REQ'D
----------------------------- ------------------
SUBTOTAL FIREPROOFING $0 $0
PLUMBING
KITCHEN SINK 1 EA $650.00 $650
DRINKING FOUNTAIN Not required
HOT AND COLD WATER PIPING 45 LF $10.00 $450
SANITARY WASTE PIPING 42 LF $12.50 $525
VENT LINE 52 LF $11.00 $572
CORE FLOOR 1 EA $80.00 $80
HOT WATER HEATER 1 EA $425.00 $425
------------------ -------------------
SUBTOTAL PLUMBING $0.35 /SF $2,702 $4,028
WMC
FIRE PROTECTION
DROP HEADS (1 per 80 sf) 56 EA $85.00 $7,305
DESIGN BUILD 1 LOT $400.00 $400
BUILDING MANAGER FEE FOR SHUTDOWNS 5 EA $20.00 $100
---------------------------------------- ----------
$500
SUBTOTAL FIRE PROTECTION $1.01 /SF $7,805
$9,000
Rustic
HVAC
VAV BOXES BY OWNER
ACTIVATE VAV CONTROLS-ALLOW 31 EA $150.00 $4,650
EXHAUST FANS AT CONF RM & computer 1,800 CFM $0.55 $990
SHEET METAL (.25#/sf)-Down stream
of the vav's 1,719 LBS $3.10 $5,328
G,R,D'S 22 EA $90.00 $1,980
LINEAR DIFFUSERS @ PERIMETER COVE 30 EA $115.00 $3,450
INSTALL ARCHITECTURAL GRILLE-FBO 25 EA Not
required, existing
DUCT INSULATION 1 LOT $2,500.00 $2,500
VOLUME DAMPERS 35 EA $20.00 INC
MOUNT THERMOSTATS-For interior
VAV boxes 14 EA $75.00 $1,050
-52-
<PAGE> 56
MOUNT THERMOSTATS-For exterior
fan powered boxes 15 EA $75.00 $1,125
BALANCING 22 EA $30.00 $660 Design
DESIGN BUILD HVAC & PLUMBING 1 LOT $2,000.00 $2,000
$1,200
SUBS OVERHEAD 12.00% $21,733.00 $2,606
--------------- -------------------
SUBTOTAL HVAC $3.42 /SF $26,341 $24,341
JMA
ELECTRICAL
LIGHTING
2X4 TROFFER 81 EA $150.00 $12,150
EDISON PRICE FIXTURE 9 EA $250.00 $2,250
FLUORESCENT DOWNLIGHT 6 EA $180.00 $1,080
EXIT LIGHTING 6 EA $155.00 $930
PREMIUM FOR BATTERY POWER BACKUP 1 LOT $500.00 $500
TASK LIGHTING EA $130.00 W/FURNTR
POWER
SWITCHES 19 EA $35.00 $665
3-WAY SWITCHES 5 EA $48.00 $240
DIMMER SWITCHES 1 LOT $250.00 $250
DUPLEX RECEPTACLES 45 EA $35.00 $1,575
30-AMP DEDICATER FOR COPIER 1 EA $80.00 $80
GFI OUTLETS 1 EA $48.00 $48
VOICE/DATA OUTLETS 20 EA $25.00 $500
FURNITURE POWER FEEDS 8 EA $275.00 $0
FURNITURE DATA POKE THRUS 0 EA $250.00 $0
METER SOCKET FOR THIS TENANT 1 EA $200.00 $200
HV PANELS 1 EA $1,900.00 $1,900
LV PANELS 1 EA $1,700.00 $1,700
TRANSFORMER-45 KVA 1 EA $1,450.00 $1,450
FEEDER CABLE 1 LOT $175.00 $175
CARD READER 1 EA $650.00 $650
WIRE HOT WATER HEATER 1 EA $275.00 $275
WIRE EXHAUST FANS 2 EA $325.00 $650
TAP BUS DUCT 1 EA $600.00 $600
FAN POWERED BOXES WIRE UNDER BASE BUILDING CONTRACT
VAV BOXES WIRE UNDER BASE BUILDING CONTRACT
DESIGN BUILD 1 LOT $600.00 $600
FIRE ALARM
PULL STATIONS 1 EA $250.00 $250
VISUAL DISPLAY 0 EA $210.00 $0
BUILDING MANAGER FEES FOR F.A. SHUTDOWNS 2 EA $20.00
$40
HORN LIGHTS 4 EA $225.00 $900
SMOKE DETECTORS 4 EA $200.00 $800 Use deduct
TEMPORARY POWER 1 LOT $500.00 $500 ($1,000)
----------------- -------------------
SUBTOTAL ELECTRICAL $4.02 /SF $30,858 $30,000
Interstate
-----------------
SUBTOTAL TRADES $140,174 $159,865
-53-
<PAGE> 57
JOB EXPENSE
TEMPORARY POWER USAGE BY OWNER
GEN LIABILITY INSURANCE 0.185 LS $7,200.00 $1,332
BUILDING PERMITS 200 M $10.00 $2,000
MISC. CLEANING LABOR 5 MD $290.00 $1,450
DUMPSTERS 4 PULLS $450.00 $1,800
FINAL CLEANING 7700 SF $0.15 $1,155
C OF O 1 LOT $400.00 $400
FIRE DEPT. PERMIT 1 EA $250.00 $250
-------------------- -------------------
SUBTOTAL JOB EXPENSE $8,387 $8,387
GENERAL CONDITIONS
PROJECT MANAGER 1.2 MOS $7,000.00 $8,400
POSTAGE 1 MOS $300.00 $300
BLUEPRINTS 1 LOT $750.00 $750
TEMP OFFICE 1 LOT $750.00 $750
TELEPHONE 1 MO $500.00 $500
MISC. GENERAL EXPENSE 1.5 MO $1,000.00 $1,500
----------------------- -------------------
SUBTOTAL GENERAL CONDITIONS $12,200
$12,200
FEE 5.00% $160,761.00 $8,038 $9,023
--------------------------- -------------------
SUBTOTAL $168,799 $189,475
CONTINGENCY $0
BOND $0
Alt #1 $2,988
Alt #2 $4,787
Alt #3 $20,560
Alt #4 $0
Alt #5 $7,099
--------------------------- -------------------
TOTAL COST OF CONSTRUCTION $204,230
$189,475
Owner furnished alternate #2 ($4,787)
($4,787)
Owner furnished alternate #5 ($7,099)
($7,099)
-------------------
Total tenant cost $192,345 $177,588
-54-
<PAGE> 58
EXHIBIT D
---------
SERVICES PROVIDED BY LESSOR
---------------------------
This Exhibit is incorporated by reference into the Lease dated
October 28, 1994 by and between Massachusetts Institute of Technology,
as Lessor, and Free Radical Sciences, Inc., as Lessee. Terms defined in
or by reference in the Lease not otherwise defined herein shall have
the same meaning herein as therein.
Lessor shall provide the following services at cost at the Building:
1. Heating and air conditioning services for the Premises as demised
at the start of the Term for normal office operations between the
hours of 8:00 a.m. and 6:00 p.m., Monday through Friday, except
on national or state holidays. Excluded from such services are
air conditioning requirements for computers or other exceptional
office machinery. If Lessee air conditioning or heating services
at hours other than those set forth above, Lessor shall provide
such service, and Lessee shall pay Lessor's costs to furnish such
service as Additional Rent.
2. Maintenance of the following:
All Building heating equipment, electrical equipment, and
plumbing systems in public areas only; all Building air
conditioning equipment, excluding special air conditioning
equipment; all window frames and glass, unless the damage
to any of the above is caused by the willful neglect or
misuse by Lessee.
3. Nightly (Monday-Friday) cleaning of the public corridors,
stairwells, lobbies, bathrooms; and cleaning of the windows, both
inside and out, two (2) times per year.
4. Extermination of all public and tenanted areas of the Building,
as the management of the Building deems necessary.
5. Structural maintenance of the Premises including repairs to the
roof, exterior walls of the building and structural damage to the
floors.
6. Lettering for up to a maximum of three names in the Building
directory located in the main lobby.
-55-
<PAGE> 59
7. Snow removal, landscaping maintenance, cafeteria management, and
other services as deemed necessary by Lessor for the normal
operation of the Building.
8. Security for the Building as reasonably determined by Lessor.
-56-
<PAGE> 60
EXHIBIT E
---------
SERVICES PROVIDED BY LESSEE
---------------------------
This Exhibit is incorporated by reference into the Lease dated
October 28, 1994 by and between Massachusetts Institute of Technology,
as Lessor, and Free Radical Sciences, Inc., as Lessee. Terms defined in
or by reference in the Lease not otherwise defined herein shall have
the same meaning herein as therein.
Lessee shall provide and pay for all maintenance of and repairs
to the Premises necessary to keep the Premises in good condition or in
as good a condition as the Premises were at the beginning of the Term
or may be put in thereafter (damage from taking or casualty or
reasonable wear and tear only excepted). Such repairs and maintenance
shall include but not be limited to the following:
A. The maintenance and repair of any plumbing systems within
the Premises (and serving solely the Premises), and the
repair of any damage to the Premises or to the Building
caused by the malfunction of such plumbing Systems;
B. The maintenance and repair of all electrical wiring,
outlets, switches and light fixtures within the Premises
(and serving solely the Premises);
C The maintenance and repair of all hardware within the
Premises;
D. The maintenance and repair of all walls, doors, ceilings,
and floors.
E. The replacement of fluorescent light tubes and ballasts.
This service is available through Building management on a
time and materials basis.
-57-
<PAGE> 61
EXHIBIT F
---------
FORM OF WARRANTS AGREEMENT
--------------------------
This Exhibit is incorporated by reference into the Lease dated
October 28, 1994 by and between Massachusetts Institute of Technology,
as Lessor, and Free Radical Sciences, Inc., as Lessee.
[SEE ATTACHED FORM OF AGREEMENT]
-58-
<PAGE> 1
[LETTERHEAD OF FREE RADICAL SCIENCES, INC.]
EXHIBIT 10.10
FREE RADICAL SCIENCES, INC.
EMPLOYMENT AGREEMENT
AGREEMENT dated as of November 28, 1994, by and between Hector J.
Gomez, M.D., Ph.D., of 66 Wayside Road, Concord, MA, 01742,
(hereinafter called "Employee") and FREE RADICAL SCIENCES, INC., a
Delaware corporation with principal operating offices at 245 First
Street, Cambridge, Massachusetts (hereinafter called the "Company").
WHEREAS, the Company is engaged in the business of commercializing
pharmaceutical products to attenuate free radical-mediated oxidative
damage in the management of various medical conditions in human health
care; and
WHEREAS, Employee wishes to be employed by the Company as
President and Chief Executive Officer, on all of the tens and
conditions contained herein; and
WHEREAS, the Company and Employee desire to set forth the
terms and conditions of the employment relationship between them;
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties
agree as follows:
1. Duties
------
During the term of his employment pursuant to this Agreement, the
Employee shall be employed as President and Chief Executive Officer,
shall serve as a member of the Board of Directors of the Company and
shall perform such duties as are assigned to him from time to time by
the Board of Directors of the Company commensurate with his experience
and the position for which he is employed. Employee agrees to devote
during the time hereof his full-time duties and best efforts to the
faithful performance of his duties hereunder.
The Employee shall commence employment with the Company, upon the
terms set forth in this Agreement, for the period commencing on Monday,
November 28, 1994 (the "Commencement Date"), and ending on November 27,
1995, (the "Term"), PROVIDED THAT the Term shall be automatically
extended for one-year periods, unless otherwise terminated in
accordance with the provisions of Section 6.
<PAGE> 2
2. Compensation
------------
During each year of employment hereunder, the Company shall pay to
Employee as compensation for all services to be rendered by Employee in
any capacity hereunder an annual salary of Two Hundred Thirty Thousand
Dollars ($230,000) DOLLARS (the "Salary"), payable in equal bi-weekly
installments of $8,846.15, subject to increase at salary reviews
conducted at least annually, the first of which shall take place on the
anniversary of the date the Employee began his employment with the
Company. In addition; the Company shall pay to Employee a guaranteed
signing bonus of Twenty Thousand Dollars ($20,000), payable on December
2, 1994.
Assuming continued employment during the first year of this
Agreement, the Company will pay the Employee a guaranteed bonus of Ten
Thousand Dollars ($10,000) on August 25, 1995 and an additional Ten
Thousand Dollars ($10,000) on December 1, 1995.
3. Employee Benefits
-----------------
Employee shall receive whatever benefits are provided to members
of the Company's full-time staff by the Board of Directors to the
extent that the Employee's position, tenure, salary, age, health and
other qualifications make him eligible to participate (see Schedule A
attached for a list of current benefits).
4. Stock Option Plan
-----------------
Employee shall receive 550,000 incentive stock options to purchase
shares of common stock of the Company pursuant to the 1994 Equity
Incentive Plan at an exercise price of $0.10 cents per share vesting
over four years upon the following schedule. To the extent noted, this
option will be exercisable at any time prior to November 28, 2004. On
December 1, 1995, an option for 137,512 shares will become vested and
fully exercisable. Thereafter, an additional option for 11,458 shares
will become vested and fully exercisable each month, effective the
first day of the month, until the earlier of (i) the termination of the
Option Holder's employment with the Company or (ii) December 1, 1998.
(see Schedule B for draft Option Certificate and terms)
5. Expenses
--------
In addition to the above compensation and benefits, Employee shall
be reimbursed by the Company for reasonable expenses actually incurred
in the course of his employment, all pursuant to policies which may be
established by the Company.
-2-
<PAGE> 3
6. Employment-at-Will; Notification of Termination
-----------------------------------------------
Employee understands that he is an Employee-at-Will. Employee's
employment hereunder shall be terminated upon the death or disability
of Employee or the election of the Employee upon three months prior
written notice or of the Company upon written notice. Such notice from
the Company will state whether such termination is (i) without Cause;
or (ii) for Cause and the Employee's employment shall be terminated as
of the date set forth in the notice.
In the event of a Termination by the Company upon the death or
disability of the Employee, the Company shall pay to the estate of the
Employee or to the Employee, as the case may be, the compensation which
would otherwise be payable to the Employee through the end of the
payroll period in which death or disability occurs. For the purposes of
this Agreement, the term "disability" shall mean the inability of the
Employee, due to a physical or mental disability, for a period of 90
days, whether or not consecutive, during any 360-day period to perform
the services contemplated under this Agreement. A determination of
disability shall be made by a physician satisfactory to both the
Employee and the Company, PROVIDED THAT if the Employee and the Company
do not agree on a physician, the Employee and the Company shall each
select a physician and these two together shall select a third
physician, whose determination as to disability shall be binding on all
parties.
In the event of a Termination without Cause, the Company shall pay
the Employee his then current annual base salary in equal bi-weekly
installments for (i) the longer of either six months or the period from
the date of termination through the anniversary of the Commencement
Date in the first year of employment, and (ii) six months in the second
year of employment and thereafter; PROVIDED THAT the Company shall not
be required to pay the Employee any salary at any time after the
Employee has secured other employment. Any such payments by the Company
will be reduced by any consulting income earned by the Employee during
these payment periods.
The Company may terminate the Employee's employment hereunder for
"Cause" upon (i) a good faith finding by the Company of dishonesty,
gross negligence or misconduct; (ii) the Employee's willful and
continued failure substantially to perform his duties hereunder; (iii)
the commission by the Employee of an act of fraud or embezzlement
against the Company; (iv) the conviction of the Employee of a felony
involving moral turpitude; or (v) the material breach by the Employee
of the covenants set forth in Sections 7, 8, or 9. In the event of a
termination for Cause, the
-3-
<PAGE> 4
Company shall pay the Employee his base annual salary at the level then
in effect through to the date of termination notice.
For purposes of this Agreement, the Employee shall not be deemed
to have been terminated for Cause unless and until there shall have
been delivered to the Employee a copy of a resolution, duly adopted by
affirmative vote of not less than a majority of the entire membership
of the Board of the Company (excluding the Employee) at a meeting
called and held for this purpose after reasonable written notice to the
Employee and an opportunity for him, together with his counsel, to be
heard by the Board, finding that, in the good faith opinion of the
Board, the Employee is guilty of conduct of the type described in this
paragraph, and specifying the particulars thereof in detail.
7. Confidential Information
------------------------
Employee understands that the Company continually obtains and
develops valuable proprietary and confidential information concerning
its business, business relationships and financial affairs (the
"Confidential Information") which may become known to the Employee in
connection with his employment.
Employee acknowledges that all Confidential Information, whether
or not in writing and whether or not labeled or identified as
confidential or proprietary, is and shall remain the exclusive property
of the Company or the third party providing such information to the
Employee or the Company. By way of illustration, but not limitation,
Confidential Information may include Inventions (as hereafter defined),
trade secrets, technical information, know-how, research and
development activities of the Company, product and marketing plans,
customer and supplier information and information disclosed to the
Company or Employee by third parties of a proprietary or confidential
nature or under an obligation of confidence. Confidential Information
is contained in various media, including without limitation, patent
applications, computer programs in object and/ or source code, flow
charts and other program documentation, manuals, plans, drawings,
designs, technical specifications, laboratory notebooks, supplier and
customer lists, internal financial data and other documents and records
of the Company.
Employee agrees that he will not, during the term of his
employment and thereafter, publish, disclose or otherwise make
available to any third party, other than employees of the Company, any
Confidential Information except as expressly authorized in writing by
the Company. Employee agrees that he will use such Confidential
Information only in the performance of his duties for the Company and
in accordance with any Company policies with respect to the protection
of Confidential Information. Employee
-4-
<PAGE> 5
agrees not to use such Confidential Information for his own benefit or
for the benefit of any other person or business entity.
Employee agrees to exercise all reasonable precautions to protect
the integrity and confidentiality of Confidential Information in his
possession and not to remove any materials containing Confidential
Information from the Company's premises except to the extent necessary
to his employment. Upon the termination of his employment, or at any
time upon the Company's request, the Employee shall return immediately
to the Company any and all materials containing any Confidential
Information then in his possession or under his control.
Confidential Information shall not include information which (a)
is or becomes generally known within the Company's industry or to the
public through no fault of the Employee; (b) was known to the Employee
at the time it was disclosed; (c) is lawfully made available to the
Employee by a third party who did not to his knowledge derive it from
the Company and who imposes no obligation of confidence on him; or (d)
is required to be disclosed by a governmental authority or by order of
a court of competent jurisdiction, provided to the extent practicable
that such disclosure is subject to all applicable governmental or
judicial protection available for like material and reasonable advance
notice is given to the Company.
8. Covenant Not to Compete
-----------------------
In consideration of the compensation, perquisites and other
benefits paid to Employee hereunder, notwithstanding termination or
expiration of this Agreement (whether voluntary or involuntary), during
the term of employment and for a period of twelve (12) months
thereafter, EMPLOYEE SHALL NOT, directly or indirectly, as an employee,
agent, servant, consultant, partner or stockholder, or in any other
capacity, for himself/herself or for any person, partnership,
organization, association, corporation or other business entity (except
in his capacity as a holder of not more than 5% of the combined voting
power of the outstanding stock of a publicly held company) sell, lease,
license, market, research, develop, design, or manufacture any products
or services which have been, or may be substituted for those which have
been sold, leased, licensed, marketed, researched, developed, designed
or manufactured by the Company at any time during the period of his
employment with the Company.
9. Inventions
----------
All Inventions related to the business of the Company that are
conceived or reduced to practice by the Employee, either alone or with
others, during the period of employment hereunder, whether
-5-
<PAGE> 6
or not done during regular working hours, are the property of the
Company. The foregoing sentence shall not apply to an Invention for
which no equipment, supplies, facilities, or trade secret information
of the Company is used and which is developed entirely on the
Employee's own time, unless (a) the Invention relates to (i) the
business of the Company, or (ii) to the Company's actual or
demonstrably anticipated research or development, or (b) the Invention
results from work performed by the Employee for the Company. For
purposes of this Agreement, "Inventions" shall mean processes,
formulas, data, discoveries, developments, designs, improvements,
inventions, techniques, programs, original works of authorship, trade
secrets and know-how, whether or not patentable or registerable under
copyright or similar statutes. The Employee hereby assigns to the
Company or its nominee all his rights, title and interest in and to
such Inventions, and any related patent rights, copyrights and
applications and registrations therefor. During and after his
Employment, Employee shall cooperate with the Company, at the Company's
expense, in obtaining proprietary protection for the Inventions and
will execute all papers and perform all lawful acts that are necessary
for the preparation, filing, prosecution, issuance, procurement,
maintenance or enforcement of patent applications and patents of the
United States and foreign countries for these Inventions, and for the
transfer of any interest Employee has therein. Employee hereby appoints
the Company his attorney to execute and deliver any such documents on
his behalf in the event she should fail or refuse to do so within a
reasonable period following the Company's request. Employee understands
that, to the extent this Agreement shall be construed in accordance
with the laws of any state which limits the assignability to the
Company of certain employee inventions, this Agreement shall be
interpreted not to apply to any such invention which a court rules or
the Company agrees is subject to such state limitation. Attached
hereto, as Schedule C, is a list of all Inventions that, as of the date
of this Agreement, Employee claims as his own.
10. Miscellaneous
-------------
10.1 INJUNCTIONS. If Employee shall engage in any of the
activities prohibited by this Agreement the Company may apply to any
court of competent jurisdiction for a restraining order or injunction
to restrain Employee from continuing any such violation.
10.2 SEVERABILITY. If any court having jurisdiction of any cause
of action arising under this Agreement shall find that any provision or
provisions hereof are unenforceable because unreasonable or excessively
broad, such provisions shall be enforced to the extent and within the
limitations that the court may find reasonable; and the invalidity of
any one or more of the
-6-
<PAGE> 7
provisions of this Agreement shall not affect the validity and
enforceability of any other provision hereof.
10.3 BINDING EFFECT. The obligations of each party hereunder shall
be binding upon and shall inure to the benefit of any successor
corporation, in each case as if such successor corporation were a
direct party to this Agreement in lieu of the Company. For purposes of
this Section 10.3, the term "successor corporation" shall mean any
corporation with which the Company shall consolidate or into which it
shall merge or liquidate, or to which the Company shall transfer all or
substantially all of its assets. This Agreement shall also be binding
upon and inure to the benefit of the successors, assigns, personal
representatives, heirs and legatees of Employee.
10.4 AMENDMENTS AND WAIVERS. This Agreement represents the entire
agreement between the parties concerning the subject matter hereof and
may not be amended, modified or revoked in whole or in part except by
written agreement of every party having rights hereunder. This
Agreement supersedes any previous agreement between the parties. Any
waiver of any provision of this Agreement must be in writing, signed by
the party to be charged therewith, and shall not constitute a waiver of
any such right or remedy on any future occasion unless the waiver
specifically provides otherwise.
10.5 PERFORMANCE AFTER TERMINATION. Notwithstanding the
termination of this Agreement for any reason, the parties shall be
required to carry out any provisions hereof which contemplate
performance by them subsequent to such termination.
10.6 NOTICES. All notices required under this Agreement shall be
sufficient if made by certified or registered mail, return receipt
requested, if to the Employee, at the above address or at the last
address for which the Employee gave notice to the Company, and if to
the Company, as its then principal office.
10.7 COUNTERPARTS. This Agreement may be executed in several
counterparts, and all so executed shall constitute one agreement,
binding upon each party, notwithstanding that such party did not sign
the same counterpart.
10.8 APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of
Massachusetts.
-7-
<PAGE> 8
IN WITNESS WHEREOF, Free Radical Sciences, Inc. has caused this
Agreement to be executed by its duly authorized officer, and the
Employee has hereunto set his hand and seal, all as of the date first
above written.
FREE RADICAL SCIENCES, INC.
By: /s/ William C. Mills
------------------------------
William C. Mills III
Title: Chairman of the Board
/s/ Hector J. Gomez
------------------------------
Hector J. Gomez, M.D., Ph.D.
-8-
<PAGE> 1
EXHIBIT 10.11
[Letterhead of Massachusetts General Hospital]
June 23, 1995
Dr. Hector Gomez
Transcend Therapeutics, Inc.
640 Memorial Drive, 3 West
Cambridge, MA 02139
re: Proposed U.S. Patent Application
Title: Tetanus Toxin/SOD Fusion Proteins
Inventors: Robert Brown, et al.
MGH Ref: 0905.0
Dear Dr. Gomez:
We are pleased to hear that Transcend Therapeutics, Inc.
("Company") is interested in the above-identified proposed U.S. patent
application, which will be filed in June 1995 and will be assigned by
Dr. Robert Brown to The General Hospital Corporation, doing business as
Massachusetts General Hospital ("General"), and by Dr. Paul Fischman to
the University of Maryland System, acting by and through the University
of Maryland at Baltimore ("UMAB"), a constituent institution of the
system. We understand that Company is willing to support all costs
incurred by General and UMAB in the preparation and filing of this
application and any additional costs incurred in prosecuting the
application ("Costs") during the Option Period defined below. Costs to
date have been approximately $1-2,000, and we estimate that preparation
and filing of the application will cost approximately an additional
$10,000; however, as you know, we cannot be certain of the precise cost
in advance.
In return for Company's payment of these Costs, General and UMAB
hereby grant to Company, for eighteen (18) months from the date of this
letter (the "Option Period"), the first option to negotiate an
exclusive license under General's and UMAB's rights in the
Company-funded application(s) in the United States and any patents
issuing thereon. The license would include license terms standard for
agreements between universities and industry, including but not limited
to provisions for the payment of
<PAGE> 2
Dr. Hector Gomez
June 23, 1995
Page 2
reasonable royalties to General and UMAB, continuing payment by Company
of patent costs in all countries covered by the license, specific
time-limited due diligence obligations for the development and
commercialization of a product, and product liability indemnification
and insurance provisions acceptable to General's and UMAB's liability
insurance carriers. This license will not include any upfront license
fees, beyond Company's continued payment of General's and UMAB's patent
Costs for this application(s).
We understand that Company is considering sponsoring additional
research in Dr. Brown's laboratory relating to the subject matter of
this application. General will grant Company a similar option to
General's rights in any invention made in the performance of research
sponsored by Company, under the terms of a Research Agreement to be
negotiated.
Since this technology was invented at least in part with federal
funding, Company's "exclusive" license would be subject to the
royalty-free non-exclusive license granted to the U.S. government by
statute (35 USC 202(c)(4)). Also, the General and UMAB would reserve
the right to continue to use the invention for research, clinical and
educational purposes.
In the event that, despite good faith negotiations, the parties
are unable to reach agreement and execute a license agreement as
described above on or before the last day of the Option Period, no
party will have any further obligation to any other under this letter
Agreement, and each party will be free to enter into agreements with
other parties covering the same or similar subject matter.
If Company agrees to the foregoing, please indicate acceptance
thereof by having an appropriate corporate official sign the enclosed
duplicate copies of this letter Agreement and returning same to General
and UMAB.
<PAGE> 3
Dr. Hector Gomez
June 23, 1995
Page 3
Very truly yours,
THE GENERAL HOSPITAL THE UNIVERSITY OF MARYLAND,
CORPORATION ACTING BY AND THROUGH THE
UNIVERSITY OF MARYLAND AT
BALTIMORE, A CONSTITUENT
INSTITUTION OF THE SYSTEM
/s/ Marvin C. Guthrie /s/ Marjorie Forster
------------------------- ----------------------------
By: Marvin C. Guthrie By: Marjorie Forster
Title: Vice President, Title: Director, Office of
Patents, Licensing Sponsored Programs
and Industry Administration
Sponsored Research
Date: June 27, 1995 Date: July 10, 1995
Agreed to and Accepted by Company:
This 7th day of July, 1995
By: /s/ B. Nicholas Harvey
Title: Vice President, Finance
<PAGE> 1
EXHIBIT 10.12
[Letterhead of Transcend Therapeutics, Inc.]
October 4, 1995
Mr. H. Walter Hauessler
President, Director
Patents & Technology Marketing
Cornell Research Foundation, Inc.
Cornell Business & Technology Park
20 Thornwood Drive, Suite 105
Ithaca, NY 14850
Dear Mr. Hauessler:
Re: Letter Agreement to modify the terms of the Exclusive
License Agreement CRF D-416 and D-520, D-913, D-1069, D-
1239, D-1258, D-1403, D-1426 dated April 5, 1994
(hereafter "the License Agreement")
In consideration for Transcend Therapeutics, Inc. (hereafter "TTI") irrevocably
releasing and holding harmless Cornell Research Foundation, Inc., its Trustees,
Officers, Agents and Employees, and those of Cornell University (hereafter
"CRF") from any liability, loss, expense, or damage related to the abandonment
of the Licensed Patent Application D-416 in Japan, it is hereby agreed that:
Transfer of Responsibility for Patents
--------------------------------------
TTI will share responsibility for prosecution and maintenance of
all Licensed Patents/Applications with CRF under Articles IV and
V of the License Agreement. CRF will accept the counsel choice of
TTI, unless CRF has reasonable objections to that choice. TTI's
counsel will provide CRF with copies of all Office Actions
received from the applicable Patent Offices, as well as proposed
responses to same for CRF's comments, before the responses are
filed. TTI shall make reasonable efforts to consider CRF's
comments and revise the proposed
<PAGE> 2
responses, if appropriate. TTI shall have the right to deduct one
hundred percent (100%) of all patent prosecution costs and/or
maintenance fees incurred in the United States or any foreign
country from any royalty that may be due and owing CRF. If such
costs and fees exceed the royalties due to CRF in any License
Year, then the excess amount can be carried forward by TTI to
succeeding License Years. Accordingly, CRF will immediately
instruct its patent attorneys, Shugrue Mayan, Jones, Tuller &
Cooper, and Kenyon & Kenyon, to transfer all files to Pennie &
Edmonds as detailed in Attachment A. The cases handled by Nixon
Hargave will be transferred over time.
Recovery of Out-of-Pocket Costs
-------------------------------
TTI will have the right to deduct up to $32,407.24 of its costs
incurred for the Japanese corporate partnering trip July 24 -
August 4 and out-of-pocket legal expenses incurred in relation
to the abandoned patents/applications from any royalty that may
be due and owing CRF. If such costs exceed the royalties due to
CRF in any License Year, then the excess amount can be carried
forward by TTI to succeeding License Years.
TTI has prepared a list of these costs and expenses to be
deducted in Attachment B.
Return of Shares of Common Stock
--------------------------------
TTI will cancel 35,127 shares of common stock equal to twenty per
cent (20%) of the 175,127 shares of common stock that was
previously issued to CRF on April 5, 1994 as part consideration
for entering the License Agreement. CRF will retain 140,000
shares of common stock in TTI.
Accordingly, CRF will immediately return its original stock
certificate for cancellation and reissue, together with a duly
executed stock power providing for such transfer of 35,127 shares
to TTI.
The parties have caused this Letter Agreement, which constitutes an amendment to
the License Agreement, to be executed in duplicate as of the day and year first
above written.
<PAGE> 3
In all other respects, the License Agreement is ratified and confirmed.
TRANSCEND THERAPEUTICS, INC.
By: /s/ B. Nicholas Harvey
-------------------------------
B. Nicholas Harvey
Title
Date
Agreed:
CORNELL RESEARCH FOUNDATION, INC.
By: /s/ H. Walter Haeussler
-----------------------------
H. Walter Haeussler
Title
Date
Attachment A: Patent Transfer Letter
List of Patents/Applications dated Sept.
28
Attachment B: List of Costs and Expenses with
documentary support
<PAGE> 4
ATTACHMENT A
------------
September 26, 1995
VIA TELEFACSIMILE
-----------------
(Name), Esq.
Firm
Address
Re: Transfer of Responsibility to Pennie & Edmonds
----------------------------------------------
Dear (Mr./Ms. Atty):
Effective upon transfer of the files, Pennie & Edmonds will assume
responsibility for prosecution of the following patents/ applications on behalf
of Cornell Research Foundation, Inc.
(list files)
Please forward your original files promptly by express mail to:
Thomas E. Friebel, Esq.
PENNIE & EDMONDS
1155 Avenue of the Americas
New York, New York 10036-2711
(212) 790-9090 (phone)
(212) 869-9741/8864 (fax)
Your assistance in maintaining pendency of all patents/ applications during
the transfer to Pennie & Edmonds will be sincerely appreciated.
Very truly yours,
H. Walter Haeussler
President, Director
Patents & Technology Marketing
cc: Thomas E. Friebel, Esq.
<PAGE> 5
<TABLE>
ATTACHMENT B
LIST OF COSTS & EXPENSES
<CAPTION>
B. Smith
M. Sullivan H. Gomez B. Dickson TOTAL COST
----------- -------- ---------- ----------
<S> <C> <C> <C> <C>
1. DIRECT TRAVEL EXPENSES:
MEALS/ $4,919.07 $4,083.28
ENTERTAINMENT
AIRFARE $4,410.25 $4,443.59
$9,329.32 $8,526.87 $8,946.07 $26,802.26
----------------------------------------------------
2. PATENT LEGAL EXPENSES:
Attorney Time $1,160.00
Maintenance Fees Paid $4,445.00 $ 5,605.00
-----------------------------------------------------------------
$32,407.26
</TABLE>
<PAGE> 1
EXHIBIT 11
TRANSCEND THERAPEUTICS, INC.
STATEMENT RE COMPUTATION OF PRO FORMA LOSS PER COMMON SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------
1995 1995 1996
------------ ----- -----
<S> <C> <C> <C>
Proforma common stock outstanding beginning of the year........ 759 759 763
Issuance of cheap stock(1)..................................... 929 929 929
Weighted average common stock issued during period............. 5 5 4
Weighted average common stock issued from conversion of
preferred stock to common stock, net......................... 2,140 2,138 2,137
------ ----- -----
Weighted average common shares outstanding..................... 3,833 3,831 3,833
</TABLE>
- ---------------
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, stock options issued during the twelve month period prior to the initial
filing date of the Company's Registration Statement at exercise prices below
the assumed midpoint of initial public offering price range have been
included in the calculation of common equivalent shares using the treasury
stock method, as if they were outstanding for all periods presented.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF COUNSEL
The undersigned hereby consents to the use of our name and the statement
with respect to us appearing under the heading "Experts" in the Registration
Statement on Form S-1 of Transcend Therapeutics, Inc.
/s/ PENNIE & EDMONDS
-----------------------------------
PENNIE & EDMONDS
New York, New York
August 21, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated January 18, 1996
(except Note 11 as to which the date is August 21, 1996) (which contains an
explanatory paragraph with respect to the Company's ability to continue as a
going concern) in the Registration Statement (Form S-1) and related Prospectus
of Transcend Therapeutics, Inc for the registration of 2,300,000 shares of its
common stock.
Ernst & Young LLP
Boston, Massachusetts
August 21, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 546
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 588
<PP&E> 69
<DEPRECIATION> 17
<TOTAL-ASSETS> 1112
<CURRENT-LIABILITIES> 3532
<BONDS> 0
10850
0
<COMMON> 8
<OTHER-SE> (13278)
<TOTAL-LIABILITY-AND-EQUITY> 1112
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1922
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 325
<INCOME-PRETAX> (2234)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2234)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 1276
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1314
<PP&E> 69
<DEPRECIATION> 16
<TOTAL-ASSETS> 1866
<CURRENT-LIABILITIES> 582
<BONDS> 2000
9581
0
<COMMON> 8
<OTHER-SE> (10305)
<TOTAL-LIABILITY-AND-EQUITY> 1866
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4384
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 177
<INCOME-PRETAX> (4450)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4450)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
