<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 26, 1998
REGISTRATION NO. 333-52901
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
SIGNAL PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 8731 94-3174286
(Prior to reincorporation) (Primary Standard Industrial (I.R.S. Employer
DELAWARE Classification Code Number) Identification No.)
(After reincorporation)
(State or jurisdiction
of incorporation or organization)
</TABLE>
5555 OBERLIN DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 558-7500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------------
ALAN J. LEWIS, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SIGNAL PHARMACEUTICALS, INC.
5555 OBERLIN DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 558-7500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------------
Copies to:
<TABLE>
<S> <C>
FREDERICK T. MUTO, ESQ. J. STEPHAN DOLEZALEK, ESQ.
MICHAEL A. NEWMAN, ESQ. TIMOTHY R. CURRY, ESQ.
COOLEY GODWARD LLP BROBECK, PHLEGER & HARRISON LLP
4365 EXECUTIVE DRIVE TWO EMBARCADERO PLACE
SUITE 1100 2200 GENG ROAD
SAN DIEGO, CA 92121 PALO ALTO, CA 94303
(619) 550-6000 (650) 424-0160
</TABLE>
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
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 of 1933, check the following box and list the
Securities Act registration statement 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. [ ]
------------------------------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<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 MAY 26, 1998
PROSPECTUS
2,500,000 SHARES
LOGO
COMMON STOCK
All of the 2,500,000 shares of Common Stock offered hereby are being sold
by the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price of the Common Stock will be between $11.00 and $13.00 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 have
the Common Stock approved for quotation on the Nasdaq National Market under the
symbol SGNL.
The DuPont Merck Pharmaceutical Company ("DuPont Merck") has entered into a
collaborative agreement with the Company. As part of such collaboration, DuPont
Merck has agreed to purchase $2.0 million of the Company's Common Stock in a
private transaction concurrent with the closing of this offering at a price per
share equal to the initial public offering price. See "Business--Research and
Development Partners."
------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
------------------
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>
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=============================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
Per Share........................ $ $ $
- -------------------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $
=============================================================================================================
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters 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 certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of Hambrecht
& Quist LLC in New York, New York.
HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
LEHMAN BROTHERS
, 1998
<PAGE> 3
[Graphic depicting the integrated discovery of gene regulating targets and drugs
and
the gene regulating drug discovery programs of the Company. The left side of the
graphic depicts the progression from target discovery to drug discovery to drug
commercialization. The right side of the graphic depicts the progression of
cellular models of disease from identification and validation of gene regulating
targets to high throughput screening to combinatorial, computational and
structural chemistry to gene regulating drugs. The base of the graphic
elucidates the Company's gene regulating drug discovery programs: autoimmunity,
inflammation, bone metabolism, neurology, cardiovascular, cancer and virology.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR OVER-ALLOTMENTS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
Signal Pharmaceuticals(TM) and the Company's stylized logo are trademarks
of the Company. All other trade names or trademarks appearing 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 the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. The Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
THE COMPANY
Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated
target and drug discovery company focused on identifying new classes of small
molecule drugs that regulate genes and the production of disease-causing
proteins. The Company applies advanced cellular, molecular and genomic
technologies to map gene regulating pathways in cells and to identify
proprietary molecular targets that activate or deactivate genes and result in
disease. Signal is advancing the application of genomics beyond identifying and
elucidating the functions of genes to designing novel classes of
disease-modifying drugs that selectively regulate the activation of
disease-causing genes. The Company conducts its target and drug discovery
programs both independently and with its five collaborative partners: Ares
Trading S.A. ("Ares-Serono"), an affiliate of Ares-Serono S.A.; the Roche
Bioscience division ("Roche Bioscience") of Syntex (U.S.A.) Inc., a member of
the Roche Group of Companies; Nippon Kayaku Co., Ltd. ("Nippon Kayaku"); N.V.
Organon ("Organon"), a business unit of Akzo Nobel N.V.; and The DuPont Merck
Pharmaceutical Company ("DuPont Merck").
Signal's target and drug discovery programs are focused on intracellular
gene regulating pathways that play a fundamental role in controlling cell
proliferation, cell metabolism and cell death, as well as the replication of
viral pathogens. These pathways provide important new targets for treating
autoimmune and inflammatory diseases, diseases associated with bone metabolism,
neurological and cardiovascular diseases, cancer and viral infections. Pathways
targeted by Signal include the Nuclear Factor-kB ("NF-kB") pathway, the jun
N-terminal kinase ("JNK") and p38 mitogen-activated protein kinase ("MAP
kinase") pathways, an estrogen-regulated gene ("ERG") pathway and five viral
pathways. These pathways provide multiple drug targets for therapeutic
intervention, many of which regulate the activation of multiple genes involved
in disease. The Company pursues patent exclusivity for its drug targets and
related drug leads, and owns or has licensed five issued U.S. patents relating
principally to MAP kinase pathways, 21 pending U.S. patents and 43 pending
foreign patents.
Signal has developed an integrated target and drug discovery platform that
enables the Company to proceed rapidly from target identification and validation
through lead discovery and optimization. Signal's target discovery capabilities
combine proprietary human cell lines with molecular biology and functional
genomic and proteomic technologies to identify key gene regulating pathways and
associated drug targets. To date, Signal has built a portfolio of 18 clinically
important drug targets, including IkB kinases ("IKKs"), JNKs and p38-2 (a
subtype of p38). The Company's drug discovery capabilities include proprietary
biochemical and cell-based screening assays and high throughput screening
systems for rapid, target-directed screening of diverse compound libraries. The
Company develops drug leads by integrating combinatorial and computational
chemistry with structure-based drug design technologies to optimize the activity
of drug leads on gene regulating targets. Applying its expertise in gene
regulating kinase targets, Signal has developed a kinase array screening
technology ("KAST") and a signaling kinase inhibitor library ("SKIL") to enhance
the speed and quality of Signal's drug discovery activities. The Company has
initiated screening in 16 drug discovery assays and has demonstrated efficacy of
certain of its drug leads in animal models of arthritis and osteoporosis.
Signal's business objective is to develop and commercialize a broad
pipeline of clinically important drug targets and drug candidates, initially in
collaboration with pharmaceutical partners and academic institutions. These
collaborations facilitate the discovery of targets and drug leads in multiple
therapeutic fields, significantly expanding the Company's commercial
opportunities and diversifying Signal's scientific risk. Pharmaceutical partners
also provide Signal with multiple sources of revenue, as well as substantial
development, manufacturing and marketing resources, which reduce the Company's
financial risk. In addition to its five current pharmaceutical partners, Signal
has target
3
<PAGE> 5
discovery collaborations with researchers at 24 academic institutions. The
Company's strategy is to retain U.S. co-commercialization rights in certain of
its pharmaceutical collaborations. To date, Signal has secured U.S.
co-commercialization rights in its collaboration with Ares-Serono and worldwide
co-commercialization rights (excluding Japan) in its drug development
collaboration with Nippon Kayaku. On a select basis, Signal plans to
independently develop and commercialize drugs for specialty clinical markets in
the U.S., principally in the fields of oncology and inflammation.
To date, Signal has entered into collaborative discovery agreements with
five pharmaceutical partners: Ares-Serono for the discovery and development of
small molecule modulators of the NF-kB pathway to treat autoimmune,
cardiovascular and neurodegenerative diseases and cancer; Roche Bioscience for
the development of human neuronal cell lines for use in discovering new classes
of drugs for the treatment of pain and other disorders of the peripheral nervous
systems ("PNS"); Nippon Kayaku for the optimization of drug leads for the
treatment of PNS disorders, including neuropathies resulting from diabetes and
cancer chemotherapy; Organon for the identification of genomic targets and the
development of screening assays for neurological, cardiovascular, gynecological
and other diseases; and DuPont Merck for the identification of new classes of
anti-viral drugs that inhibit gene regulating targets of the hepatitis C virus
("HCV") and the human immunodeficiency virus ("HIV"). Signal also has licensed
worldwide rights for a drug lead discovered by the Company to a sixth partner,
Tanabe Seiyaku Co., Ltd. ("Tanabe"), for the treatment of autoimmune,
inflammatory and other diseases. The Company has multiple additional partnering
opportunities in its other drug discovery programs.
The Company was incorporated in California in July 1992 and intends to
reincorporate in Delaware prior to the completion of this offering. Unless the
context otherwise requires, references in this Prospectus to "Signal" and the
"Company" refer to Signal Pharmaceuticals, Inc., a Delaware corporation, and,
where applicable, to its California predecessor. The Company's offices are
located at 5555 Oberlin Drive, San Diego, California 92121, and its telephone
number is (619) 558-7500.
THE OFFERING
Common Stock offered by the
Company............................. 2,500,000 shares
Common Stock to be outstanding
after the offering................ 9,433,929 shares(1)
Use of proceeds..................... For research and development, including
internal discovery programs and joint
research and development with corporate
and academic collaborators, the
acquisition of research and development
technologoies, compound screening
libraries and product rights, capital
investments and working capital and
general corporate purposes
Proposed Nasdaq National Market
Symbol.............................. SGNL
4
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................... $ -- $ 22 $ 299 $ 3,933 $ 7,579 $ 1,549 $ 4,644
Expenses:
Research and development... 682 3,799 5,173 7,724 10,337 2,459 3,288
General and
administrative........... 603 1,288 1,937 2,471 2,791 671 1,203
------- ------- ------- ------- ------- ------- -------
Total expenses........... 1,285 5,087 7,110 10,195 13,128 3,130 4,491
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations... (1,285) (5,065) (6,811) (6,262) (5,549) (1,582) 153
Interest income (expense),
net........................... (45) 161 329 53 (192) (92) 182
------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $(1,330) $(4,904) $(6,482) $(6,209) $(5,740) $(1,673) $ 335
======= ======= ======= ======= ======= ======= =======
Pro forma net income (loss) per
share, basic and diluted...... $ (1.20) $ 0.05
======= =======
Shares used in computing
pro forma net income (loss)
per share(2):
Basic...................... 4,776 6,628
Diluted.................... 4,776 6,875
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------
ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $20,671 $49,971
Working capital............................................. 14,635 43,935
Total assets................................................ 24,755 54,055
Long-term obligations, less current portion................. 1,344 1,344
Accumulated deficit......................................... (24,410) (24,410)
Total stockholders' equity.................................. 15,649 44,949
</TABLE>
- ------------------------------
(1) Based on the number of shares outstanding at March 31, 1998. Includes the
sale of 166,666 shares of Common Stock to DuPont Merck in a private
transaction concurrent with the closing of this offering at an assumed
initial public offering price of $12.00 per share. Excludes 1,581,097 shares
of Common Stock reserved for issuance under the Company's stock option
plans, of which 662,676 shares were subject to outstanding options as of
March 31, 1998 at a weighted average exercise price of $0.87 per share.
Subsequent to March 31, 1998, the Company granted options to purchase an
aggregate of 221,525 shares of Common Stock at a weighted average exercise
price of $2.00 per share. Also excludes 62,500 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants as of March 31,
1998 at an exercise price of $8.40 per share. See "Capitalization,"
"Management--Equity Incentive Plan" and Note 5 of Notes to Financial
Statements.
(2) Computed on the basis described in Note 1 of Notes to Financial Statements.
(3) As adjusted to reflect the receipt of $1,999,992 from DuPont Merck in
exchange for 166,666 shares of Common Stock to be issued in a private
transaction concurrent with the closing of this offering and the sale of
2,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $12.00 per share and the receipt of the estimated proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
------------------------------
Except as otherwise noted, all information in this Prospectus assumes: (i)
no exercise of the Underwriters' over-allotment option, (ii) a 4-for-1 reverse
split of the Common Stock and the Company's reincorporation in Delaware, both to
be effected prior to the completion of this offering, and (iii) the conversion
of all outstanding shares of Series A, B, C, C-1, D, E and F Preferred Stock
(collectively, the "Preferred Stock") into shares of Common Stock, which will
occur upon the closing of the offering. See "Description of Capital Stock,"
"Underwriting" and Notes to Financial Statements.
5
<PAGE> 7
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to other information in this
Prospectus before purchasing the shares of Common Stock offered hereby. See
"Special Note Regarding Forward-Looking Statements" on page 17 of this
Prospectus.
Limited Operating History; Early Stage of Development. The Company was
formed in 1992, has a limited operating history and is at an early stage of
development. All of the Company's active compounds are in the research stage,
and there can be no assurance that any such compounds will enter clinical
trials, be commercialized or will generate revenue in the future. The Company
has experienced significant operating losses since inception and, as of March
31, 1998, had an accumulated deficit of approximately $24.4 million. The Company
expects to continue to incur significant operating losses for the foreseeable
future as it continues to incur increasing costs of research and development,
acquisition of technologies, compound libraries and product rights, expansion of
its operations and initiation of clinical trials. The Company has completed less
than six years of operations, and its business is subject to all of the risks
inherent in the establishment of a new business enterprise, including all of the
problems, expenses and delays frequently encountered in connection with the
development of pharmaceutical products, the utilization of unproven technology
and the competitive environment in which the Company operates. Accordingly, the
extent of future losses and the time required to achieve profitability, if ever,
is highly uncertain. Payments, if any, from corporate collaborators, interest
income, and academic and governmental grants are expected to be the Company's
only sources of revenue for the foreseeable future. The Company has not yet
received any milestone payments under its collaborative agreements. Royalties or
other revenue from commercial sales of products based upon any target or
compound identified by the Company are not expected for a number of years, if at
all, and are dependent on the Company's ability, alone or with others, to
successfully research, develop, obtain regulatory approval for, manufacture and
market its products under development. See "--Dependence on Pharmaceutical and
Biopharmaceutical Collaborations and Milestone Payments," "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business--Research and Development Partners."
Technological Uncertainty. Target and drug discovery and development
methods directed toward intracellular signaling pathways and gene regulation are
relatively new. The Company is working on a number of costly long-term discovery
and development projects which involve experimental and unproven methods and
which may ultimately prove unsuccessful. There is limited scientific
understanding relating to the role of genes in most diseases, and relatively few
products based on gene discoveries have been developed and commercialized. In
addition, the Company is not aware of any drugs that have been developed and
commercialized that were designed specifically to target intracellular signaling
pathways. There can be no assurance that the Company's techniques for
elucidating intracellular signaling pathways and identifying drug targets will
lead to the discovery or development of commercial pharmaceutical products.
Moreover, as the technology of the Company and its competitors continues to
evolve, the Company will need to continue to develop novel and innovative
technologies, enter into relationships with additional corporate collaborators
and aggressively pursue patent and other protection for the Company's
proprietary rights. The Company's failure to properly address the changing
technological landscape, enter into collaborations to pursue development of its
technologies or develop additional competitive technologies could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Uncertainties Associated with Product Development. The development of new
pharmaceutical products is highly uncertain and subject to a number of
significant risks. Lead compounds and drug candidates that appear to be
promising at early stages of development may not advance to and through clinical
trials and reach the market for a number of reasons. Such reasons include the
possibilities that the drug candidates will be found ineffective or cause
harmful side effects during preclinical testing or
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<PAGE> 8
clinical trials, fail to receive necessary regulatory approvals, be difficult to
manufacture on a large scale, be uneconomical, fail to generate market demand or
be precluded from commercialization by proprietary rights of third parties. To
date, none of the compounds generated by the Company or through its
collaborations has been approved for clinical testing, and there can be no
assurance that any of such current or proposed compounds will be submitted for
clinical testing. In addition, the safety and efficacy of compounds generated by
the Company or through its collaborations has not been conclusively demonstrated
in animal models or humans. If any potential products are identified by the
Company, either independently or through its collaborations, such products will
require significant additional development, extensive preclinical and clinical
testing, regulatory approval and additional investment in manufacturing scale-up
and sales and marketing prior to their commercialization, and there can be no
assurance that any of these efforts will be successful. No assurance can be
given that any of the Company's discovery and development programs will be
successfully completed, any investigational new drug application ("IND") will be
accepted by the United States Food and Drug Administration (the "FDA") or other
applicable regulatory authorities, clinical trials will commence or be completed
as planned, required regulatory approvals will be obtained on a timely basis, if
at all, or any products for which approval is obtained will be commercially
successful. If any of the Company's or its collaborators' development programs
are not successfully completed, required regulatory approvals are not obtained
or products for which approvals are obtained are not commercially successful,
the Company's business, financial condition and results of operation could be
materially adversely affected.
Dependence on Pharmaceutical and Biopharmaceutical Collaborations and
Milestone Payments. The Company's strategy for the discovery, development and
commercialization of new gene regulating targets and drugs involves the
formation of multiple collaborations in addition to focused internal development
efforts. To date, substantially all revenue received by the Company has been
from its collaborations, and the Company expects that substantially all revenue
for the foreseeable future will be generated by collaborations. The Company has
not yet entered into collaborations for a number of its existing or prospective
programs. The Company's ability to continue to fund its research and development
programs, maintain adequate capital reserves and, ultimately, achieve
profitability will be dependent upon the ability of the Company to achieve
certain milestones under existing collaborations with Ares-Serono, Roche
Bioscience, Nippon Kayaku, Organon and DuPont Merck, and under an existing
license agreement with Tanabe, and its ability to enter into additional
collaborations. Because pharmaceutical and biopharmaceutical companies engaged
in drug discovery activities have historically conducted target and drug
discovery through their own internal research departments, these companies must
be convinced that the Company's technologies and research discoveries justify
entering into collaborative agreements with the Company. The Company also must
compete with other companies for the limited number of existing opportunities to
enter into such collaborative arrangements with pharmaceutical and
biopharmaceutical companies. There can be no assurance that the Company will be
able to negotiate additional collaborative agreements in the future on
acceptable terms, if at all, that current or future collaborative agreements
will be successful, or that current or future collaborators will not pursue or
develop alternative technologies either on their own or in collaboration with
others, including the Company's competitors, as a means for identifying targets
or lead compounds. To the extent the Company chooses not to or is unable to
enter into such agreements, it will require substantially greater capital to
undertake the research, development, clinical testing, manufacturing, sales and
marketing of products at its own expense. In the absence of such collaborative
agreements, the Company may be required to delay or curtail its research and
development activities to a significant extent.
The Company has not received any milestone payments from its corporate
collaborators to date. The Company's future revenue will depend in part on its
ability to realize milestone payments and royalties triggered by the development
and commercialization of drugs identified through the use of the Company's
technologies. The Company's research and development efforts may result in
developed and commercialized pharmaceutical products generating milestone
payments and royalties only after lengthy and costly preclinical and clinical
development efforts, the receipt of requisite regulatory
7
<PAGE> 9
approvals, the development and integration of manufacturing capabilities, the
receipt of patents and successful marketing efforts. The Company's collaborators
are not obligated to develop or commercialize potential products identified
through the use of the Company's technologies. Development and commercialization
of potential products will therefore depend not only on the achievement of
research and development objectives by the Company and its collaborators, which
cannot be assured, but also on each collaborator's own financial, technical,
competitive, marketing and strategic considerations, all of which are outside
the Company's control. Such strategic considerations may include the relative
advantages of alternative products being marketed or developed by the Company's
collaborators and others, including relevant patent and proprietary positions.
There can be no assurance that the interests and motivations of the Company's
collaborators are, or will remain, aligned with those of the Company, that
current or future collaborators will not pursue alternative technologies or
potential products in preference to those of the Company or that such
collaborators will successfully perform their development, regulatory,
compliance, manufacturing or marketing and sales functions. In general, should
the Company or a collaborator fail to develop or commercialize a potential
product identified through the use of the Company's or its collaborators'
technologies, or should such a potential product be determined to be unsafe, of
no therapeutic benefit, uneconomical, or not sufficiently superior to competing
products, the Company may not receive any future milestone payments or royalties
associated with such potential products, and the Company may have only limited
or no rights to independently develop and commercialize such potential products.
There can be no assurance that any potential product will be developed and
commercialized as a result of such collaborations, that any such development or
commercialization would be successful or that disputes will not arise over the
application of payment provisions to such potential products.
Modification or termination of the Company's existing or future
collaborative agreements, or the failure to enter into a sufficient number of
additional collaborative agreements on favorable terms, could result in loss of
anticipated revenue as well as potential delay or curtailment of ongoing
research and development activities and have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
collaborations may generally be terminated upon a breach by either party.
Moreover, certain of the Company's collaborations may be terminated by its
collaborators if Signal fails to achieve certain research and development
milestones. The Company has in the past encountered, and may in the future
encounter, difficulty in satisfying certain milestones under its collaboration
agreements due to the early stage of development of the Company's technology,
the inherent uncertainties associated with product development and the
aggressive discovery and developmental timetables presented by certain
milestones. Accordingly, the Company has in the past renegotiated, and may in
the future need to renegotiate, its collaboration agreements to modify the
timing and requirements of certain milestones. There can be no assurance that
the Company would be able to renegotiate any milestone requirements in the
future, and any failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. In March
1998, Signal and Tanabe mutually agreed to conclude their research collaboration
and Tanabe paid an additional license fee to Signal for an exclusive worldwide
license to a lead compound that was discovered during the collaboration.
Moreover, regardless of whether Signal satisfies future milestone obligations,
beginning in August 1998, Roche Bioscience can terminate its collaboration
agreement with the Company at its discretion upon ninety days' written notice.
Additionally, Organon may terminate its funding of certain Signal research
effective January 1999 if the Company does not meet specified milestones by
October 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Research and Development Partners."
Future Capital Requirements; Uncertainty of Additional Funding. The
Company has expended and will continue to expend substantial funds to continue
the research, development and testing of its potential products. The Company's
future capital requirements will depend on, and could increase substantially as
a result of, many factors, including progress in its research and development
programs; the scope, prioritization and number of programs; the acquisition and
development of enabling technologies; the expansion or initiation of academic
licensing arrangements; the acquisition of potential products; the progress of
preclinical and clinical testing; the Company's ability to enter into
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<PAGE> 10
additional collaborations; the receipt of milestone, royalty and other payments
from its collaborations; the modification or termination of any of the Company's
current corporate collaborations or any future collaborations; the time and
costs involved in obtaining regulatory approvals; the costs involved in
preparing, filing, prosecuting, maintaining, enforcing and defending patent
claims; competing technological and market developments; the costs of
establishing manufacturing facilities for clinical or commercial production; and
the costs inherent in retaining and developing commercialization rights for
certain compounds. The Company currently depends on its corporate collaborators
for substantially all of its research and development funding. As of March 31,
1998, the Company had received approximately $20.8 million from its
collaborators. There can be no assurance that the Company will continue to
receive funding under its existing collaborative agreements or that the
Company's existing or potential future collaborative arrangements will be
adequate to fund the Company's operations. The Company also may seek alternative
sources of financing or financing structures in the future to efficiently
discover and develop its potential products, and there can be no assurance that
such alternative financing arrangements will be available, and if available,
will lead to the successful development of potential products. The Company
believes that the net proceeds of this offering, together with its existing
capital resources, committed revenue from its existing collaborations and
interest income should be sufficient to fund its anticipated operating expenses
and capital requirements through the end of the year 2000.
The Company intends to raise additional funds through additional equity or
debt financings, research and development financings, collaborative
relationships or other joint venture relationships and may seek to finance
certain of its programs through other financing mechanisms. Because of its
long-term capital requirements, the Company may seek to access the public or
private equity markets whenever it deems conditions to be favorable, even if it
does not have an immediate need for additional capital at that time. There can
be no assurance that any such funding will be available to the Company, or, if
available, that it will be available on acceptable terms. If additional funds
are raised by issuing equity securities, further dilution to stockholders may
result, and debt financing, if available, may involve restrictive covenants. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of or eliminate one or more of its research, development or clinical
programs which would materially adversely affect the Company's business,
financial condition and results of operations. The Company also may be required
to seek funds through arrangements with collaborative partners or others that
require the Company to relinquish rights to certain of its technologies,
potential products, products or marketing territories that the Company would
otherwise seek to retain, develop or commercialize itself. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence on Patents and Proprietary Rights. The Company's success will
depend in part on its ability to obtain and retain patent protection for its
proprietary technologies, targets and potential products, effectively preserve
its trade secrets and to operate without infringing the proprietary rights of
third parties. Because of the substantial length of time and expense associated
with bringing potential products through the development and regulatory approval
processes to reach the marketplace, the pharmaceutical industry places
considerable importance on obtaining patent and trade secret protection for new
technologies, products and processes. Accordingly, the Company seeks patent
protection for its proprietary technology, targets and potential products.
However, there can be no assurance that the Company or its collaborators have
developed or will continue to develop potential products or processes that are
patentable or that patents will issue from any of the Company's pending
applications, including patent applications that have been allowed. There also
can be no assurance that the Company's or its collaborators' current patents, or
patents that issue on pending applications, will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide proprietary
protection or competitive advantages to the Company. Patent applications in the
United States are maintained in secrecy until patents issue, patent applications
are not generally published until many months or years after they are filed and
publication of technological developments in the scientific and patent
literature often occurs long after the date of such developments. Accordingly,
the Company cannot be certain that it or one of its collaborators was the
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<PAGE> 11
first to invent the subject matter covered by the patent applications or that it
or one of its collaborators was the first to file patent applications for such
inventions. Further, there can be no assurance as to the success or timeliness
in obtaining any patents, that the breadth of claims obtained, if any, will
provide adequate protection of the Company's proprietary technology, targets or
potential products, or that the Company or its licensors will be able to or will
in fact adequately enforce any such claims to protect its proprietary
technology, targets or potential products.
Patent law relating to the scope and enforceability of claims in the fields
in which the Company operates is still evolving. The patent positions of
biopharmaceutical and pharmaceutical companies, including the Company, are
highly uncertain and involve complex legal and technical questions for which
legal principles are not firmly established. The degree of future protection for
the Company's proprietary rights, therefore, is highly uncertain. In this
regard, there can be no assurance that independent patents will issue from the
Company's and its licensors' patent applications, which include many
interrelated applications directed to common or related subject matter. Further,
there may be issued patents and pending applications owned by others directed to
technologies relevant to the Company's, its licensors' or its collaborators'
research, development and commercialization efforts. There can be no assurance
that the Company's or its collaborators' technology can be developed and
commercialized without a license to such patents or that such patent
applications will not be granted priority over patent applications filed by the
Company, its licensors or one of its collaborators. Furthermore, there can be no
assurance that third parties will not independently develop similar or
alternative technologies to those of the Company, its licensors or any of its
collaborators, duplicate any of the Company's, its licensors' or its
collaborators' technologies or design around the patented technologies developed
by the Company, its licensors or its collaborators, any of which may have a
material adverse effect on the Company's business, financial condition and
results of operations.
The commercial success of the Company depends significantly on its ability
to operate without infringing the patents and proprietary rights of third
parties, and there can be no assurance that the Company's, its licensors' and
its collaborators' technologies do not and will not infringe the patents or
proprietary rights of others. A number of pharmaceutical companies,
biopharmaceutical companies, independent researchers, universities and research
institutions may have filed patent applications or may have been granted patents
that cover technologies similar to the technologies owned, optioned by or
licensed to the Company or its collaborators. For instance, a number of patents
may have issued and may issue in the future on certain targets or their use in
screening assays that could prevent the Company and its collaborators from
developing screens using such targets, compounds relating to such targets or
relate to certain other aspects of technology utilized or expected to be
utilized by the Company. In addition, the Company is unable to determine all of
the patents or patent applications that may materially affect the Company's or
its collaborators' ability to make, use or sell any potential products. The
Company is aware of one allowed U.S. patent application relating to certain
methods for transcriptional modulation. The Company believes that it has not
infringed, and is not currently infringing, the claims of the allowed
application. Nonetheless, the Company may in the future be required to obtain a
license to such allowed patent, and there can be no assurance that such a
license will be available on commercially reasonable terms, if at all. In
addition, the Company is aware of an issued U.S. patent claim for certain human
MAP kinases, including MAP kinases in the p38 pathway, which may be useful as
targets for drug discovery. The Company is negotiating a license to patent
rights covering such MAP kinase targets that may be useful in the Company's
research programs, although there can be no assurance that such a license will
be available on commercially reasonable terms, if at all. Any conflicts
resulting from third-party patent applications and patents could significantly
reduce the coverage of the patents owned, optioned by or licensed to the Company
or its collaborators and limit the ability of the Company or its collaborators
to obtain meaningful patent protection. If patents are issued to third parties
that contain competitive or conflicting claims, the Company, its licensors or
its collaborators may be enjoined from pursuing research, development or
commercialization of potential products or be required to obtain licenses to
these patents or to develop or obtain alternative technology. There can be no
assurance that the Company or its collaborators will not be so enjoined or will
be able to obtain any license to the patents and
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<PAGE> 12
technologies of third parties on acceptable terms, if at all, or be able to
obtain or develop alternative technologies. If the Company or any of its
collaborators is enjoined from pursuing its research, development or
commercialization activities or if any such license is or alternative
technologies are not obtained or developed, the Company or such collaborator may
be delayed or prevented from commercializing its potential products, which would
result in a material adverse effect on the Company's business, financial
condition and results of operations.
The drug discovery industry has a history of patent litigation and there
will likely continue to be numerous patent litigation suits concerning drug
discovery technologies and potential products. The patent positions of
pharmaceutical, biopharmaceutical and drug discovery companies, including the
Company, generally are uncertain and involve complex legal and factual
questions. Litigation to establish the validity of patents, to defend against
patent infringement claims of others and to assert infringement claims against
others can be expensive and time consuming, even if the outcome is favorable. An
outcome of any patent prosecution or litigation that is unfavorable to the
Company or one of its licensors or collaborators may have a material adverse
effect on the Company. In particular, litigation may be necessary to enforce any
patents issued or licensed to the Company, its licensors or its collaborators,
to protect trade secrets or know-how of the Company, its licensors or its
collaborators, or to determine the scope and validity of a third party's
proprietary rights. The Company could incur substantial costs if litigation is
required to defend itself in patent suits brought by third parties, if the
Company participates in patent suits brought against or initiated by its
licensors or collaborators or if the Company initiates such suits, and there can
be no assurance that funds or resources would be available to the Company in the
event of such litigation. Additionally, there can be no assurance that the
Company, its licensors or its collaborators would prevail in any such action. An
adverse outcome in litigation or an interference to determine priority or other
proceeding in a court or patent office could subject the Company to significant
liabilities, require disputed rights to be licensed from or to other parties or
require the Company, its licensors, or its collaborators to cease using certain
technology, any of which may have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to patent protection, the Company also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities. In an effort to maintain the confidentiality and
ownership of trade secrets and proprietary information, the Company requires
employees, consultants and certain collaborators to execute confidentiality and
invention assignment agreements upon commencement of a relationship with the
Company. These agreements generally provide that all confidential information
developed or made known to the individual by the Company during the course of
the individual's relationship with the Company will be kept confidential and not
disclosed to third parties except in specific circumstances. The agreements also
generally provide that all inventions conceived by the individual in the course
of rendering services to the Company shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets, confidential information
or inventions in the event of unauthorized use or disclosure of such information
or that adequate remedies would exist in the event of such unauthorized use or
disclosure. The loss or exposure of trade secrets possessed by the Company could
materially adversely affect its business. Like many high technology companies,
the Company may from time to time hire scientific personnel formerly employed by
other companies involved in one or more areas similar to the activities
conducted by the Company. Although the Company requires its employees to
maintain the confidentiality of all confidential information of previous
employers, there can be no assurance that the Company or these individuals will
not be subject to allegations of trade secret misappropriation or other similar
claims as a result of their prior affiliations. See "Business--Patents and
Proprietary Rights."
Substantial Competition. Competition among pharmaceutical and
biopharmaceutical companies to identify drug targets and drug candidates for
development is intense and is expected to increase. In the pharmaceutical
industry, the Company competes with the research and development departments of
pharmaceutical and biopharmaceutical companies and other commercial enterprises,
as well as numerous academic and research institutions and governmental
agencies. In addition, the pharmaceu-
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tical and biopharmaceutical industries are subject to rapid and substantial
technological change. Pharmaceutical and biopharmaceutical companies and others
are conducting research in various areas which overlap with the Company's
technology platform, either on their own or in collaboration with others. There
can be no assurance that pharmaceutical and biopharmaceutical companies which
compete with the Company in specific areas will not merge or enter into
collaborations or joint ventures or other alliances with one or more other such
companies or academic and research institutions and become substantial
competitors or that the Company's collaborators will not initiate or expand
their own internal target and drug discovery and development efforts.
At the present time, the Company has not conducted any clinical trials and
has no commercial manufacturing capability, sales or marketing force. Many of
the Company's competitors and potential competitors have substantially greater
capital resources, research and development resources, manufacturing, sales and
marketing experience and production facilities than does the Company.
Additionally, many of these competitors have significantly greater experience
than does the Company in undertaking target and drug discovery, preclinical
product development and testing and clinical trials of new pharmaceutical
products and obtaining FDA and other regulatory approvals. Smaller companies
also may prove to be significant competitors, particularly through proprietary
research discoveries and collaborative arrangements with large pharmaceutical
and established biopharmaceutical companies. Many of these competitors have
significant products that have been approved or are in development and operate
large, well funded research and development programs. Academic institutions,
governmental agencies and other public and private research organizations also
conduct research, seek patent protection and establish collaborative
arrangements for the discovery, development and commercialization of potential
products. In addition, these companies and institutions compete with the Company
in recruiting and retaining highly qualified scientific and management
personnel. There can be no assurance that the Company's competitors will not
discover lead compounds, develop more effective, safer, more affordable or more
easily administered potential products or achieve patent protection or
commercialize potential products sooner than the Company. Failure to compete
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business--Signal's
Drug Discovery Programs" and "--Competition."
Attraction and Retention of Key Employees and Consultants. The Company's
success is highly dependent on the principal members of its scientific and
management staff, as well as its scientific advisors and consultants. The loss
of one or more of these individuals could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not maintain "key person" insurance on any of its employees. The Company's
future success also will depend in part on its ability to identify, recruit and
retain additional qualified personnel. There is intense competition for such
personnel in the areas of the Company's activities, and there can be no
assurance that the Company will be able to continue to attract and retain
personnel with the advanced technical qualifications necessary for the
development of the Company's business. Failure to attract and retain key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Scientific
Advisory Board" and "Management."
Government Regulation; No Assurance of Regulatory Approvals. The Company's
and its collaborators' research, preclinical testing and clinical trials of
their respective potential products, if any, and the manufacturing and marketing
of their potential products, will be subject to extensive and rigorous
regulation by numerous government authorities in the United States and in other
countries where the Company and its collaborators intend to test, manufacture
and market their potential products. Prior to marketing any product developed by
the Company, the Company or its collaborators, as applicable, must undergo an
extensive regulatory approval process. This regulatory process, which includes
preclinical testing and clinical trials of each potential product to establish
its safety and efficacy, will take many years and require the expenditure of
substantial resources, and also may include post-marketing surveillance. Data
obtained from preclinical testing and clinical trials are susceptible to varying
interpretations which could delay, limit or prevent regulatory approval. In
addition, delays or
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<PAGE> 14
rejection may be encountered based upon changes in FDA policy for drug approval
during the period of product development and FDA regulatory review of each
submitted new drug application ("NDA") or product license application ("PLA").
Similar delays or rejection also may be encountered in foreign countries. There
can be no assurance that regulatory approval will be obtained for any potential
products developed by the Company or its collaborators. Moreover, regulatory
approval may entail limitations on the indicated uses of a drug. Further, even
if regulatory approval is obtained, a marketed drug and its manufacturer are
subject to continuing review, and discovery of previously unknown problems with
a drug or manufacturer can result in the withdrawal of a drug from the market or
a significant decrease in market demand, which would have an adverse effect on
the Company's business, financial condition and results of operations.
Violations of regulatory requirements at any stage, including preclinical
testing and clinical trials, the approval process or post-approval, may result
in various adverse consequences including a delay by the FDA or other applicable
regulatory authority in approving or its refusal to approve a potential product,
withdrawal of an approved drug from the market and the imposition of criminal
penalties against the manufacturer and NDA or PLA holder. Neither the Company
nor its collaborators has submitted any IND applications for any potential
product of the Company, and none has been approved for commercialization in the
United States or internationally. No assurance can be given that the Company or
its collaborators will be able to obtain FDA or other applicable regulatory
authority approval for any potential products. Failure to obtain requisite
regulatory approvals or failure to obtain approvals of the scope requested will
delay or preclude the Company or its collaborators from marketing the Company's
or its collaborators' products or limit the commercial use of the potential
products and would have material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
Expansion of Operations; Management of Growth. The Company will need to
expand and effectively manage its operations and facilities in order to
successfully complete its existing corporate collaborative agreements,
facilitate additional pharmaceutical and biopharmaceutical collaborations and
pursue future internal research, development and commercialization efforts.
There can be no assurance that the Company will be able to manage its growth, to
meet the staffing requirements of current or additional collaborative
relationships or internal programs or to successfully assimilate, train and
manage its new employees. In addition, the Company will be required to expand
its management capabilities, enhance its operating and financial systems and
expand its facilities to manage its growth effectively. If the Company continues
to grow, there can be no assurance that the management or scientific skills,
systems and facilities currently in place will be adequate or that the Company
will be able to manage any additional growth effectively. Failure to achieve any
of these goals could have a material adverse effect on the Company's business,
financial condition and results of operations.
No Manufacturing Experience; Reliance on Third-Party Manufacturing. To
date, the Company has not manufactured any products for preclinical, clinical or
commercial purposes and does not have any manufacturing facilities. The Company
intends to utilize third-party contract manufacturers or its corporate
collaborators for the production of material for use in preclinical and clinical
trials and for the manufacture of future products for commercialization. In the
event that the Company is unable to secure such outside manufacturing
capabilities, it will not be able to conduct preclinical product development,
clinical trials or commercialize its potential products as planned. Even if the
Company were able to establish its own internal manufacturing capability, doing
so would require the expenditure of significant resources which could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company or any outside
manufacturers can produce potential products of suitable quality in sufficient
quantity in a cost-effective manner, if at all. The manufacture of the Company's
potential products for preclinical and clinical trials and commercial purposes
is subject to current Good Manufacturing Practices ("cGMP") regulations
promulgated by the FDA and other applicable domestic and foreign regulations. No
assurance can be given that in the future the Company or any outside
manufacturers can maintain full compliance with cGMP regulations or other
applicable regulations. See "Business--Research and Development Partners" and
"--Manufacturing."
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Possible Volatility of Stock Price. The market prices for securities of
comparable companies have been highly volatile, and the market in general has
experienced significant price and volume fluctuations that often are unrelated
to the operating performance of particular companies. Announcements of
technological innovations, collaborations or new products by the Company or its
competitors, disputes or other developments concerning proprietary rights,
including patents and litigation matters, publicity regarding actual or
potential results with respect to technologies, collaborations or products under
development by the Company, its collaborators or its competitors, changes in the
terms or status of the Company's collaborations, regulatory developments in both
the United States and foreign countries, public concern as to the feasibility of
new technologies, changes in recommendations of securities analysts, general
market conditions, as well as quarterly fluctuations in the Company's revenues
and financial results and other factors, may have a significant impact on, and
may cause significant fluctuation in, the market price and liquidity of the
Common Stock. In particular, the realization of any of the risks described in
these "Risk Factors" could have a dramatic and materially adverse impact on such
market price.
Hazardous Materials. The research and development processes of the Company
involve the controlled use of hazardous materials, including microbial organisms
and other biological materials, chemicals and various radioactive compounds. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. The risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company. There can be no
assurance that the Company will not be required to incur significant costs to
comply with environmental laws and regulations in the future.
Uncertainty of Pharmaceutical Pricing and Reimbursement. The Company's
business and the availability of capital in the future 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 or profitability of prescription
pharmaceuticals is subject to governmental control. In the United States, there
have been, and the Company expects that there will continue to be, a number of
federal and state proposals to implement similar government control on pricing
or profitability of prescription pharmaceuticals in such jurisdictions. In
addition, an increasing emphasis on managed care in the United States has put,
and will continue to put, pressure on pharmaceutical pricing and product demand.
Such initiatives and proposals, if adopted, could decrease the demand or the
price that the Company receives for any products it or its collaborators may
develop and sell in the future, and thereby have a material adverse effect on
the Company's business, financial condition and results of operations. Further,
to the extent that such proposals or initiatives have a material adverse effect
on other pharmaceutical companies that are collaborators or prospective
collaborators for certain of the Company's potential products, the Company's
ability to commercialize its potential products may be materially adversely
affected.
The ability of the Company and its collaborators to commercialize products
may depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government 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, and third-party payors are increasingly
challenging the prices charged for medical products and services. There can be
no assurance that any third-party insurance coverage will be available to
patients for any products developed by the Company or its collaborators.
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 or other
applicable regulatory authorities have not granted marketing approval. If
adequate coverage and reimbursement levels are not provided by government and
third-party payors for the Company's or its
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collaborators' products, the market acceptance of these products would be
materially adversely affected.
Potential Product Liability Exposure and Limited Insurance Coverage. The
use of any of the Company's or its collaborators' drug candidates in clinical
trials, and the sale of any approved products, may expose the Company to
liability claims resulting from the use of its products. These claims might be
made directly by consumers, consumer groups, health care providers,
pharmaceutical companies, governmental agencies or others selling such products.
The Company intends to obtain limited product liability insurance coverage for
clinical trials and plans to expand any such insurance coverage to include the
sale of commercial products if marketing approval is obtained for any products
in development and intends to receive certain indemnities from its
collaborators. However, insurance coverage is becoming increasingly expensive
and difficult to obtain, and no assurance can be given that the Company will be
able to maintain insurance coverage at a reasonable cost or in sufficient
amounts to protect the Company against losses due to liability. A successful
product liability claim or series of claims brought against the Company could
have a material adverse effect on its business, financial condition and results
of operations.
Control By Management and Existing Stockholders. Upon completion of this
offering, the Company's principal stockholders, executive officers, directors
and affiliated individuals and entities together will beneficially own
approximately 55.5% of the outstanding shares of Common Stock (53.4% if the
Underwriters' over-allotment option is exercised in full). As a result, these
stockholders, acting together, will be able to influence significantly and
possibly control most matters requiring approval by the stockholders of the
Company, including approvals of amendments to the Company's Certificate of
Incorporation, mergers, a sale of all or substantially all of the assets of the
Company, going private transactions and other fundamental transactions. In
addition, the Company's Certificate of Incorporation, as it is proposed to be
amended and restated concurrently with the closing of this offering (the
"Restated Certificate"), does not provide for cumulative voting with respect to
the election of directors. Consequently, the present directors and executive
officers of the Company, together with the Company's principal stockholders,
will be able to control the election of the members of the Board of Directors of
the Company. Such a concentration of ownership could have an adverse effect on
the price of the Common Stock, and may have the effect of delaying or preventing
a change in control of the Company, including transactions in which stockholders
might otherwise receive a premium for their shares over then current market
prices. See "Management" and "Principal Stockholders."
No Prior Public Market for Common Stock. Prior to this offering, there has
been no public market for the Common Stock, and there can be no assurance that
an active trading market will develop or be sustained after this offering. The
initial public offering price will be determined by negotiations between the
Company and the representatives of the Underwriters and may not be indicative of
the market price at which the Common Stock of the Company will trade after this
offering. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.
Availability of Preferred Stock for Issuance; Anti-Takeover
Provisions. The Restated Certificate authorizes the Board of Directors of the
Company, without stockholder approval, to issue additional shares of Common
Stock and to fix the rights, preferences and privileges of and issue up to
5,000,000 shares of Preferred Stock with voting, conversion, dividend and other
rights and preferences that could adversely affect the voting power or other
rights of the holders of Common Stock. The issuance of Preferred Stock, rights
to purchase Preferred Stock or additional shares of Common Stock may have the
effect of delaying or preventing a change in control of the Company. In
addition, the possible issuance of Preferred Stock or additional shares of
Common Stock could discourage a proxy contest, make more difficult the
acquisition of a substantial block of the Company's Common Stock or limit the
price that investors might be willing to pay for shares of the Company's Common
Stock. Further, the Restated Certificate provides that any action required or
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by
written consent. Special meetings of the stockholders of the Company may be
called only
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<PAGE> 17
by the Chairman of the Board of Directors, the Chief Executive Officer of the
Company, by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors or by the holders of 10% of
the outstanding voting stock of the Company. The Restated Certificate also
provides for staggered terms for the members of the Board of Directors. These
and other provisions contained in the Restated Certificate and the Company's
Bylaws, as well as certain provisions of Delaware law, could delay or make more
difficult certain types of transactions involving an actual or potential change
in control of the Company or its management (including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices) and may limit the ability of stockholders to remove
current management of the Company or approve transactions that stockholders may
deem to be in their best interests and, therefore, could adversely affect the
price of the Company's Common Stock. See "Description of Capital
Stock--Preferred Stock" and "--Delaware Anti-Takeover Law and Certain Charter
Provisions."
Shares Eligible for Future Sale and Potential Adverse Effect on Market
Price. Sales of Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock. Upon completion of this
offering, the Company will have 9,433,929 shares of Common Stock outstanding,
assuming no exercise of currently outstanding options or warrants. Of these
shares, the 2,500,000 shares sold in this offering (plus any additional shares
sold upon exercise of the Underwriters' over-allotment option) will be freely
transferable without restriction under the Securities Act of 1933, as amended
(the "Securities Act"), unless they are held by "affiliates" of the Company as
that term is used under the Securities Act and the regulations promulgated
thereunder. The remaining 6,933,929 shares of Common Stock held by existing
stockholders are restricted securities as that term is defined in Rule 144 under
the Securities Act (the "Restricted Shares"). Restricted Shares may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act. As a result of
agreements limiting the resale of such shares (the "Lock-up Agreements") and the
provisions of Rules 144 and 701, additional shares will be available in the
public market as follows: (i) no Restricted Shares will be eligible for
immediate sale on the effective date of this offering; (ii) 6,677,325 Restricted
Shares (plus 623,687 shares of Common Stock issuable upon exercise of vested
stock options) will be eligible for sale upon expiration of Lock-up Agreements
180 days after the date of this Prospectus; and (iii) the remainder of the
Restricted Shares will be eligible for sale from time to time thereafter upon
expiration of their respective one-year holding periods, and could be sold
earlier if the holders exercise any available registration rights. The holders
of 6,058,449 shares of Common Stock have the right in certain circumstances to
require the Company to register their shares under the Securities Act for resale
to the public beginning at the end of the 180-day lock-up period. If such
holders, by exercising their demand registration rights, 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. If the
Company were required to include in a Company-initiated registration shares held
by such holders pursuant to the exercise of their piggyback registration rights,
such sales may have an adverse effect on the Company's ability to raise needed
capital. In addition, the Company expects to file a registration statement on
Form S-8 registering shares of Common Stock subject to outstanding stock options
or reserved for issuance under the Company's stock option plans. Such
registration statement is expected to be filed and to become effective as soon
as practicable after the effective date of this offering. Shares registered
under such registration statement will, subject to Rule 144 volume limitations
applicable to affiliates, be available for sale in the open market, unless such
shares are subject to vesting restrictions with the Company or the lock-up
agreements described above. See "Management," "Description of Capital
Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
Immediate and Substantial Dilution. Purchasers of the shares of Common
Stock offered hereby will experience immediate and substantial dilution in the
net tangible book value of their investment from the initial public offering
price. Additional dilution will occur upon exercise of outstanding options and
outstanding warrants. See "Dilution" and "Shares Eligible for Future Sale."
16
<PAGE> 18
Broad Discretion in Application of Net Proceeds. The net proceeds to the
Company from the sale of the shares of Common Stock offered hereby plus the sale
of shares of Common Stock to DuPont Merck to be issued in a private transaction
concurrent with the closing of this offering at an assumed initial public
offering price of $12.00 per share are estimated to be approximately $29.3
million ($33.5 million if the Underwriters' over-allotment option is exercised
in full). The Company intends to use the net proceeds from this offering
principally for research and development, including internal discovery programs
and joint research and development with corporate and academic collaborators,
the acquisition of research and development technologies, compound screening
libraries and product rights, capital investments and working capital and
general corporate purposes. The Company's management and Board of Directors have
broad discretion with respect to the application of such proceeds, and the
amounts actually expended by the Company for working capital purposes may vary
significantly depending on a number of factors, including the amount and timing
of revenues from the Company's current or future collaborators, including any
amendments of the terms of such collaborative arrangements, the expense incurred
in pursuing the Company's research and development programs and the amount of
cash, if any, generated by the Company's operations. See "Use of Proceeds."
Year 2000 Compliance. Some older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than 2000. This failure to use four digits to define the
applicable year has created what is commonly referred to as the "Year 2000
Issue" and could cause a system failure or miscalculations causing disruption of
operations, including a temporary inability to process transactions or engage in
similar normal business activities.
The Company recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 Issue. The Company does not believe that it
has material exposure to the Year 2000 Issue with respect to its own information
systems since its existing systems correctly define the Year 2000. Any required
expenditures will be expensed as incurred. The Company intends to assess its
position regarding the Year 2000 Issue with respect to external information
systems by the end of 1998. This process will entail communications with
significant business partners, customers, suppliers, financial institutions,
insurance companies and other parties that provide significant services to the
Company. There can be no assurance that any of such third parties are using
systems that are Year 2000 compliant or will address any Year 2000 issues in a
timely fashion, or at all. Any Year 2000 compliance problems of either the
Company or the third parties with whom the Company does business or from whom it
receives services, could have a material adverse effect on the Company's
business, operating results and financial condition.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this
Prospectus, including without limitation, statements containing the words
"believes," "anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These forward-looking statements include, but are not limited to,
statements concerning the Company's plans to continue development of its current
potential products; conduct clinical trials with respect to potential products;
evaluate potential products under development for subsequent clinical
development; utilize the Company's capital resources and the net proceeds from
this offering and the time periods related thereto; seek regulatory approvals;
engage third-party contract manufacturers to supply its clinical trials and
commercial requirements; and establish a marketing and distribution
17
<PAGE> 19
capability. These forward-looking statements may be found in the "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
Forward-looking statements not specifically set forth above may also be found in
these and other sections of this Prospectus. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company hereby and the sale of shares of Common
Stock to DuPont Merck to be issued in a private transaction concurrent with the
closing of this offering at an assumed initial public offering price of $12.00
per share are estimated to be approximately $29.3 million ($33.5 million if the
Underwriters' over-allotment option is exercised in full) after deducting the
underwriting discount and estimated offering expenses payable by the Company.
The Company intends to use the net proceeds from this offering primarily
for research and development, including internal discovery programs and joint
research and development with corporate and academic collaborators, the
acquisition of research and development technologies, compound screening
libraries and product rights, capital investments and working capital and
general corporate purposes. The amounts actually expended by the Company for
working capital purposes will vary significantly depending on a number of
factors, primarily the amount and timing of revenues from the Company's current
or future collaborators, including amendments of the terms of such collaborative
arrangements. The Company's management will retain broad discretion in the
allocation of the net proceeds of this offering. The Company also may use a
portion of the net proceeds to fund acquisitions of complementary technologies,
products or businesses, although the Company has no current agreements or
commitments for any such acquisition. Pending such uses, the Company intends to
invest the net proceeds of this offering in interest-bearing, investment-grade
securities. The Company believes that the net proceeds of this offering,
together with its existing capital resources, interest income and committed
revenue from its existing collaborations should be sufficient to fund its
anticipated operating expenses and capital requirements at least through the end
of the year 2000.
DIVIDEND POLICY
The Company has never declared nor paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for funding growth
and, therefore, does not intend to pay any cash dividends on its Common Stock in
the foreseeable future. In addition, the Company is prohibited from paying any
dividends and making any distributions, and also is limited in its ability to
repurchase stock, pursuant to the terms of a secured loan to the Company by
MMC/GATX Partnership No. 1. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 (i) on an actual basis and (ii) as adjusted to reflect the
automatic conversion of all shares of Preferred Stock, the receipt of $1,999,992
from DuPont Merck for the purchase of 166,666 shares of Common Stock to be
issued in a private transaction concurrent with the closing of this offering at
an assumed initial public offering price of $12.00 per share, and the sale by
the Company of the 2,500,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, less current portion(1).............. $ 1,344 $ 1,344
-------- --------
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 6,113,485
shares authorized and 6,050,949 shares issued and
outstanding, actual; 5,000,000 shares authorized and
no shares issued or outstanding, as adjusted.......... 6 --
Common Stock, $.001 par value; 8,750,000 shares
authorized and 716,314 shares issued and outstanding,
actual; 25,000,000 shares authorized and 9,433,929
shares issued and outstanding, as adjusted(2)......... 1 9
Additional paid-in capital............................. 41,433 70,731
Deferred compensation.................................. (1,387) (1,387)
Accumulated other comprehensive income................. 6 6
Accumulated deficit.................................... (24,410) (24,410)
-------- --------
Total stockholders' equity........................ 15,649 44,949
-------- --------
Total capitalization......................... $ 16,993 $ 46,293
======== ========
</TABLE>
- ------------------------------
(1) See Note 3 of Notes to Financial Statements for a description of the
Company's long-term obligations.
(2) Excludes 1,581,097 shares of Common Stock reserved for issuance under the
Company's stock option plans, of which 662,676 shares were subject to
outstanding options as of March 31, 1998 at a weighted average exercise
price of $0.87 per share. Also excludes 62,500 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants as of March 31,
1998 at an exercise price of $8.40 per share. Subsequent to March 31, 1998,
the Company granted options to purchase an aggregate of 221,525 shares of
Common Stock at a weighted average exercise price of $2.00 per share. See
"Management-- Equity Incentive Plan," "Description of Capital Stock" and
Note 5 of Notes to Financial Statements.
20
<PAGE> 22
DILUTION
As of March 31, 1998, the pro forma net tangible book value was
$15,649,014, or $2.31 per share. Pro forma net tangible book value per share
represents the amount of total tangible assets less total liabilities divided by
6,767,263 shares of Common Stock outstanding after giving effect to the
conversion of all outstanding shares of Preferred Stock into Common Stock.
Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the offering and the pro forma net tangible book value per share of
Common Stock immediately after completion of this offering. After giving effect
to the sale of the 2,500,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $12.00 per share and the
application of the net proceeds therefrom and the receipt of $1,999,992 from
DuPont Merck for the purchase of 166,666 shares of Common Stock to be issued in
a private transaction concurrent with the closing of this offering at an assumed
initial public offering price of $12.00 per share, the Company's pro forma net
tangible book value at March 31, 1998 would have been $44,949,006, or $4.76 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.45 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $7.24 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of March
31, 1998............................................... $2.31
Increase per share attributable to new investors.......... 2.45
-----
Pro forma net tangible book value per share after this
offering.................................................. 4.76
------
Net tangible book value dilution per share to new
investors.............................................. $ 7.24
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the differences between existing stockholders and the new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 6,767,263 71.7% $41,038,247 56.2% $ 6.06
New investors............ 2,666,666 28.3 31,999,992 43.8 12.00
--------- ----- ----------- -----
Total.......... 9,433,929 100.0% $73,038,239 100.0%
========= ===== =========== =====
</TABLE>
Other than as noted above, the foregoing computations assume the exercise
of no stock options or warrants after March 31, 1998. As of March 31, 1998,
options to purchase 662,676 shares of Common Stock were outstanding, with a
weighted average exercise price of $0.87, and warrants to purchase 62,500 shares
of Common Stock were outstanding, with an exercise price of $8.40 per share.
Subsequent to March 31, 1998, the Company granted options to purchase an
aggregate of 221,525 shares of Common Stock at a weighted average exercise price
of $2.00 per share. To the extent these options and warrants are exercised,
there will be further dilution to new investors. See "Risk Factors -- Immediate
and Substantial Dilution," "Capitalization," "Management," "Description of
Capital Stock" and Note 5 of Notes to Financial Statements.
21
<PAGE> 23
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for the years ended December 31, 1995, 1996 and 1997
and with respect to the Company's balance sheet at December 31, 1996 and 1997,
are derived from the financial statements of the Company that have been audited
by Ernst & Young LLP, independent auditors, which are included elsewhere herein
and are qualified by reference to such financial statements. The Company's
statement of operations data for the years ended December 31, 1993 and 1994 and
the balance sheet data at December 31, 1993, 1994 and 1995 have been derived
from the financial statements audited by Ernst & Young LLP, independent
auditors, which are not included herein. The statement of operations data for
the three-months ended March 31, 1997 and 1998 and the balance sheet data at
March 31, 1998 have been derived from unaudited financial statements also
appearing herein which, in the opinion of the management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for the
unaudited interim periods. The operating results for the three months ended
March 31, 1998 are not indicative of the results that may be expected for the
full fiscal year ending December 31, 1998 or for any subsequent period. The
selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Collaborative agreements:
Related party................... $ -- $ -- $ -- $ -- $ 250 $ -- $ 750
Unrelated parties............... -- -- -- 3,586 7,065 1,476 3,794
Grant income......................... -- 22 299 347 264 72 100
------- ------- ------- ------- ------- ------- -------
-- 22 299 3,933 7,579 1,548 4,644
Expenses:
Research and development............. 682 3,799 5,173 7,724 10,337 2,459 3,288
General and administrative........... 603 1,288 1,937 2,471 2,791 671 1,203
Income (loss) from operations........... (1,285) (5,065) (6,811) (6,262) (5,549) (1,582) 153
------- ------- ------- ------- ------- ------- -------
1,285 5,087 7,110 10,195 13,128 3,130 4,491
------- ------- ------- ------- ------- ------- -------
Interest income......................... 8 237 453 187 326 60 283
Interest expense........................ (53) (76) (124) (134) (517) (152) (101)
------- ------- ------- ------- ------- ------- -------
Net income (loss)....................... $(1,330) $(4,904) $(6,482) $(6,209) $(5,740) $(1,674) $ 335
======= ======= ======= ======= ======= ======= =======
Pro forma net income (loss) per share,
basic and diluted(1)................. $ (1.20) $ 0.05
======= =======
Number of shares used in computing pro
forma net income (loss) per share(1):
Basic.............................. 4,776 6,628
Diluted............................ 4,776 6,875
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term $ 614 $ 11,384 $ 4,211 $ 5,460 $ 20,866 $ 20,671
investments............................
Working capital........................... 259 10,294 3,616 2,606 15,379 14,635
Total assets.............................. 1,756 13,669 6,866 9,047 23,838 24,755
Long-term obligations, less current 212 488 513 2,746 1,548 1,344
portion................................
Accumulated deficit....................... (1,410) (6,314) (12,796) (19,005) (24,745) (24,410)
Total stockholders' equity................ 1,188 12,065 5,574 1,512 15,164 15,649
</TABLE>
- ------------------------------
(1) Computed on the basis described in Note 1 of Notes to Financial Statements.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus. Except for the historical information
contained herein, the discussion in this Prospectus contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
Prospectus. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors," as well as those discussed elsewhere
herein. See "Special Note Regarding Forward-Looking Statements" on page 17 of
this Prospectus.
OVERVIEW
The Company was incorporated in July 1992 and has devoted substantially all
of its resources since that time to research and development in order to
identify proprietary drug targets and discover novel small molecule drugs that
regulate genes and the production of disease-causing proteins. Signal, through
both internally funded programs and in collaboration with its pharmaceutical and
biopharmaceutical partners, is working to identify gene regulating drug targets
and potential products for treating autoimmune and inflammatory diseases,
diseases associated with bone metabolism, neurological and cardiovascular
diseases, cancer and viral infections. The Company has incurred significant
losses since inception, with an accumulated deficit of $24.4 million as of March
31, 1998, due primarily to ongoing expenditures related to its research
programs. The Company expects to continue to incur a substantial increase in
expenditures and operating losses for at least the next several years as it
expands its target and drug discovery and development efforts. Such expansion
will result in increases in research and development expenses, general and
administrative expenses and related capital expenditures. The Company's results
of operations have fluctuated from period to period and likely will continue to
fluctuate substantially in the future based upon the timing and composition of
funding under various collaborative agreements, the initiation and expansion of
research and development programs, the acquisition of technologies, compound
libraries and product rights, as well as the progress of its research and
development programs. Results of operations for any period may be unrelated to
results of operations for any other period. In addition, historical results
should not be viewed as indicative of future operating results. See "Risk
Factors--Limited Operating History; Early Stage of Development,"
"--Technological Uncertainty," "--Uncertainties Associated with Product
Development," "--Dependence on Pharmaceutical and Biopharmaceutical
Collaborations and Milestone Payments," "--Future Capital Requirements;
Uncertainty of Additional Funding" and "--Governmental Regulation; No Assurance
of Regulatory Approvals."
A key element of the Company's strategy is to enter into collaborations
with pharmaceutical and biopharmaceutical companies in order to enhance certain
of its target and drug discovery programs and to fund its capital requirements.
The Company's principal sources of revenue for the next several years are
expected to consist of license fees and upfront payments, research funding and
milestone payments under such collaborations, payments from future
collaborations, licensing arrangements, government grants, if any, and interest
income. To date, the Company's revenue has been attributable primarily to
collaborative arrangements with the following partners: Tanabe, which was
entered into in March 1996 and concluded in March 1998; Organon, which was
entered into in July 1996; Roche Bioscience, which was entered into in August
1996; Ares-Serono, which was entered into in November 1997; DuPont Merck, which
was entered into in December 1997; and Nippon Kayaku, which was entered into in
February 1998. Under these collaborative arrangements, the Company has received
payments of $20.8 million to date, of which $15.4 million has been recognized as
revenue. See "Risk Factors--Dependence on Pharmaceutical and Biopharmaceutical
Collaborations and Milestone Payments" and "Business--Research and Development
Partners."
23
<PAGE> 25
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenue. Since its inception, Signal has received revenue principally from
its corporate collaborators, as well as from government research grants, and has
received no revenue from product sales. Revenue for the three months ended March
31, 1998 increased to $4.6 million from $1.5 million for the three months ended
March 31, 1997. The increase was attributable primarily to (i) the additional
collaborative agreements that were in place during 1998, which resulted in the
Company's recognition of additional revenue from license fees and research
funding; (ii) the Amendment to the Collaborative Development and Licensing
Agreement with Tanabe which resulted in the one-time recognition of additional
research funding; and (iii) increased research funding from Tanabe, Organon and
Roche Bioscience as a result of increased staffing under their respective
research programs. Timing and amount of revenues from corporate collaborations
is expected to vary on a quarterly basis.
Research and Development Expenses. The Company's research and development
expenses for the three months ended March 31, 1998 increased to $3.3 million
from $2.5 million for the three months ended March 31, 1997. The increase was
due largely to the hiring of additional personnel, increased travel expenses,
equipment depreciation expenses, facility expansion, patent-related activities,
the initiation of additional academic research collaborations and amortization
of deferred compensation. The Company expects research and development expenses
to increase significantly in the future.
General and Administrative Expenses. General and administrative expenses
for the three months ended March 31, 1998 increased to $1.2 million from
$671,000 for the three months ended March 31, 1997. The increase was due
primarily to the hiring of additional personnel, equipment depreciation
expenses, legal fees, fees associated with new business development activities
and amortization of deferred compensation. The Company expects general and
administrative expenses to increase in the future to support the expansion of
its research and business development activities and increased expenses
associated with being a public company.
Interest Income (Expense), Net. Net interest income for the three months
ended March 31, 1998 increased to $182,000 from a net interest expense of
$92,000 for the three months ended March 31, 1997. The increase was due
primarily to increased income as a result of higher average cash balances and
lower interest expense as a result of lower average capital lease and debt
obligations.
Net Income (Loss). Net income for the three months ended March 31, 1998
increased to $335,000 from a net loss of $1.7 million for the three months ended
March 31, 1997. The Company's profitability during the three months ended March
31, 1998 was due largely to the one-time recognition of additional research
funding resulting from the amended agreement with Tanabe. The Company does not
expect continued profitability in the near future.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenue. Revenue for the year ended December 31, 1997 increased to $7.6
million from $3.9 million and $299,000 for the years ended December 31, 1996 and
1995, respectively. The increase in 1997 from 1996 was attributable primarily to
the Company's recognition of an aggregate of $7.3 million in revenue from
license fees and research funding from Ares-Serono, Tanabe, Roche Bioscience and
Organon during 1997, a 104% increase over the $3.6 million recognized during
1996. Revenue for 1995 was comprised solely of a research grant from the
National Institutes of Health (the "NIH").
Research and Development Expenses. The Company's research and development
expenses for the year ended December 31, 1997 increased to $10.3 million from
$7.7 million and $5.2 million for the years ended December 31, 1996 and 1995,
respectively. These increases were due primarily to the hiring of additional
personnel, facility expansion, equipment depreciation expenses, increased
patent-related activities, acquisition of compound libraries, the purchase of
research materials and laboratory
24
<PAGE> 26
supplies for expansion of the Company's research programs and the initiation of
additional academic research collaborations.
General and Administrative Expenses. The Company's general and
administrative expenses for the year ended December 31, 1997 increased to $2.8
million from $2.5 million and $1.9 million for the years ended December 31, 1996
and 1995, respectively. These expenses increased primarily as a result of
increased compensation paid to executive management, the hiring of additional
personnel, facility expansion and related amortization expenses.
Interest Income (Expense), Net. Net interest income (expense) for the
years ended December 31, 1997, 1996 and 1995 was $(191,000), $53,000 and
$329,000, respectively. The decrease in net interest income from 1996 to 1997
was primarily due to an increase in interest expense attributable to a $3.0
million secured promissory note used for general corporate purposes and working
capital during 1997. The decrease in net interest income from 1995 to 1996
resulted primarily from lower average cash balances during 1996.
Net Income (Loss). Net loss for the years ended December 31, 1997, 1996
and 1995 was $5.7 million, $6.2 million and $6.5 million, respectively.
Income Taxes. At December 31, 1997, the Company had federal and state net
operating loss carryforwards of approximately $23.3 million and $4.8 million,
respectively. The federal and state tax loss carryforwards will begin expiring
in 2007 and 1998, respectively, unless previously utilized. Future utilization
of these carryforwards may be limited in any one fiscal year pursuant to the
Internal Revenue Code and similar state provisions; however, the annual
limitation will not prevent the entire amount of the carryforwards from being
used during the carryforward period. Therefore, the Company does not believe any
such limitation will have a material effect upon the utilization of these
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private placements of Preferred Stock, funds provided under the Ares-Serono,
Roche Bioscience, Nippon Kayaku, Organon, DuPont Merck and Tanabe collaborative
agreements, and, to a lesser extent, through debt and equipment financings,
government research grant revenue and interest income. As of March 31, 1998, the
Company had received $39.6 million in net proceeds from the sales of equity
securities, $20.8 million under its collaborative agreements, $5.3 million in
debt and equipment financings, $1.0 million in research grants from the NIH and
$1.5 million in interest income. As of March 31, 1998, the Company had
approximately $20.7 million in cash, cash equivalents and short-term
investments.
Net cash used in operations was $2.3 million, $2.4 million and $6.7 million
in 1997, 1996 and 1995, respectively. Net cash used in operations after 1995
declined due primarily to initial license payments and research funding under
the Company's collaborative agreements, coupled with a lower net loss during
1997.
As of March 31, 1998, the Company had invested $5.4 million in property and
equipment, primarily for facility improvements and laboratory and office
equipment. The Company has financed substantially all of its equipment through
capital leases and equipment note obligations.
At March 31, 1998, the Company had outstanding long-term debt of $2.1
million under its Secured Promissory Note held by MMC/GATX Partnership No. 1
issued on December 2, 1996 (the "Secured Promissory Note"). The principal amount
of the Secured Promissory Note is payable in monthly installments of $88,334,
with the final monthly payment scheduled for May 31, 2000. The Secured
Promissory Note is secured by substantially all of the Company's assets except
for the Company's intellectual property. The terms of the loan limit the
Company's ability to incur additional debt, repurchase its stock and pay
dividends. The Company was in compliance with all covenants under the
arrangement as of March 31, 1998.
25
<PAGE> 27
The Company believes the net proceeds of this offering, together with its
existing capital resources, committed revenue from its existing collaborations
and interest income should be sufficient to fund its anticipated operating
expenses and capital requirements at least through the end of the year 2000.
These funding requirements include continued and increased expenditures for
research and development activities, as well as expenditures related to
leasehold improvements, the purchase of additional laboratory and other
equipment, the purchase of technology, compound libraries and product rights and
the repayment of debt. The Company has not entered into any formal commitments
to use the proceeds from the offering for increased personnel, capital
expenditures or any other purpose. There can be no assurance that changes in the
Company's research and development plans and collaborations, the acquisition of
additional technology, compound libraries and product rights, or other changes
affecting the Company's operating expenses will not result in the expenditure of
available resources before such time, and in any event, the Company will need to
raise substantial additional capital to fund its operations in future periods.
The Company intends to seek additional funding through collaborative
arrangements, public or private equity or debt financings, equipment financings
or other financing sources that may be available. If additional funds are raised
through the sale of equity securities, substantial dilution to existing
stockholders may result, and debt financing, if available, may involve
restrictive covenants. Further, there can be no assurance that additional
financing will be available on acceptable terms, if at all. If adequate funds
are not available, the Company may be required to delay, or reduce the scope of,
or eliminate one or more of its research or development programs or to obtain
funds through strategic collaborations that are on unfavorable terms or that may
require the Company to relinquish rights to certain of its technologies, product
candidates, products or marketing territories that the Company would otherwise
seek to retain. The failure of the Company to raise capital when needed could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors -- Future Capital Requirements;
Uncertainty of Additional Funding."
IMPACT OF YEAR 2000
Some older computer programs were written using two digits rather than four
to define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than 2000. This failure to use four digits to define the applicable year has
created what is commonly referred to as the "Year 2000 Issue" and could cause a
system failure or miscalculations causing disruption of operations, including a
temporary inability to process transactions or engage in similar normal business
activities.
The Company recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 Issue. The Company does not believe that it
has material exposure to the Year 2000 Issue with respect to its own information
systems since its existing systems correctly define the Year 2000. Any required
expenditures will be expensed as incurred. The Company intends to assess its
position regarding the Year 2000 Issue with respect to external information
systems by the end of 1998. This process will entail communications with
significant business partners, customers, suppliers, financial institutions,
insurance companies and other parties that provide significant services to the
Company. The Company is currently unable to predict the extent the Year 2000
Issue will affect these parties or the extent to which the Company would be
vulnerable to any such party's failure to remediate any Year 2000 Issue on a
timely basis.
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BUSINESS
Signal Pharmaceuticals, Inc. ("Signal" or the "Company") is an integrated
target and drug discovery company focused on identifying new classes of small
molecule drugs that regulate genes and the production of disease-causing
proteins. The Company applies advanced cellular, molecular and genomic
technologies to map gene regulating pathways in cells and to identify
proprietary molecular targets that activate or deactivate genes and result in
disease. Signal is advancing the application of genomics beyond identifying and
elucidating the functions of genes to designing novel classes of
disease-modifying drugs that selectively regulate the activation of
disease-causing genes. The Company conducts its target and drug discovery
programs both independently and with its five collaborative partners,
Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon, and DuPont Merck.
BACKGROUND
THE ROLE OF GENES IN HEALTH AND DISEASE
Genes control all cellular functions responsible for maintaining human
health by serving as blueprints for the production of proteins in cells. When
activated, usually in response to specific stimuli, a gene is expressed and
produces a protein. Proteins, including receptors, enzymes, cytokines and
hormones, initiate and carry out biochemical reactions that direct a cell's
normal biological functions. These functions include cell growth and
differentiation, cell activation and cell death.
Recent advances in cellular and molecular biology have shown that
malfunctions in gene expression either cause or predispose humans to most
diseases. Such malfunctions cause cells to produce inappropriate amounts or
types of proteins. For example, the uncontrolled proliferation of cells
characteristic of inflammatory diseases and cancer is the result of
over-activation of specific genes and the subsequent over-production of
proteins, such as cytokines and regulatory enzymes. Conversely, under-expression
of critical genes and their protein products, such as tumor suppressors and
growth factors, also may give rise to disease, including cancer and neurological
disorders.
THE ROLE OF INTRACELLULAR SIGNALING IN GENE REGULATION
Genes are selectively activated and suppressed when molecules such as
neurotransmitters, hormones or growth factors bind to, and activate, cell
surface receptors. This event initiates a cascade of biochemical reactions
within a cell, termed "intracellular signaling," in which distinct sets of gene
regulating enzymes (typically, kinases and phosphatases) are activated serially
to relay information from surface receptors to proteins in the nucleus. These
cascades of biochemical reactions culminate in the activation or deactivation of
specialized nuclear proteins, known as "transcription factors," that act as
molecular switches by binding to the regulatory regions of specific genes to
control the level and duration of gene activation and protein production.
Together, these cascades of gene regulating enzymes and transcription factors
comprise gene regulating, or intracellular signaling, pathways. Recent advances
in molecular biology and genomics are facilitating the identification of new
gene regulating pathways and specific molecules in these pathways that may serve
as novel targets for drug discovery.
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INTRACELLULAR SIGNALING AND GENE REGULATION PATHWAYS
[Graphic depicting intracellular signaling and gene regulation pathways. Text
down the right side of the graphic identifies the location in the pathways where
receptors are stimulated, gene regulating enzymes are activated, transcription
factors activate genes, gene expression are initiated, and normal and
disease-associated proteins are produced.]
Many transcription factors maintain normal expression of essential genes.
In response to certain stimuli, transcription factors are activated or "induced"
by gene regulating enzymes to increase the level, duration and sets of genes
expressed. Gene regulation is a highly coordinated process in which the
estimated 100,000 genes that comprise the human genome are switched on and off
in specific tissues. The pathways which regulate these genes enable cells to
respond to combinations of stimuli by integrating signals from multiple
receptors to regulate distinct sets of genes. These pathways are highly
interlinked and, when correctly controlled, maintain the body's essential
functions. The activity of these pathways varies depending on cell type,
permitting the activation of only those subsets of genes that are relevant to a
specific cell or tissue type. Normally functioning pathways precisely modulate
the level and duration of gene expression, ensuring that cells respond to
extracellular stimuli in the appropriate manner. However, when activation of a
gene regulating pathway triggers either an under-or over-production of certain
proteins, a broad range of diseases can result.
LIMITATIONS OF CONVENTIONAL TARGET AND DRUG DISCOVERY
Conventional drug discovery efforts principally are focused on identifying
compounds that modulate readily accessible extracellular targets, such as cell
surface receptors and secreted proteins. Drugs directed toward these
extracellular targets have a number of potential limitations in treating complex
diseases where molecular mechanisms are located within cells. Therefore, such
complex diseases may not be effectively treated using receptor activators or
inhibitors. Many diseases, such as inflammatory, neurological and cardiovascular
diseases and cancer, continue to represent large unmet medical needs due to
difficulties in identifying and targeting the underlying intracellular
mechanisms of these diseases.
Recent advances in genomics have the potential to significantly improve
drug discovery. While initial genomics efforts were directed principally toward
the mapping and sequencing of genes, current initiatives also are focused on
discerning the functions of specific genes in health and disease. However, there
remains a gap between the generation of genomic information and its effective
application to drug discovery.
An increased understanding of the pathways that regulate the expression of
disease-related genes has paved the way for a new drug discovery process. In
this process, individual genes and their regulatory pathways may be targeted to
prevent the onset and progression of disease. The ability to
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identify proprietary drug targets in gene regulating pathways provides a method
for applying genomic information to disease therapy. Drugs designed to intervene
at pivotal points in a gene regulating pathway can have a major impact on the
downstream production of proteins which cause disease. This approach provides
the opportunity to design novel classes of disease-modifying drugs that can
alter the course of a disease by targeting underlying mechanisms of disease
rather than providing only symptomatic relief. Additionally, drugs can be
designed that selectively target gene regulating pathways responsible for
abnormal gene expression and disease without affecting healthy cells.
SIGNAL'S APPROACH: GENE REGULATING DRUGS
Signal is a leader in identifying and elucidating gene regulating pathways
and specific targets in these pathways for use in drug discovery. The Company's
drug discovery efforts are focused on identifying new classes of small molecule
drugs designed to regulate genes through their intracellular signaling pathways.
These potential drugs may have wide-ranging clinical application by modulating
abnormal expression of genes which cause disease. Several leading
pharmaceuticals are now known to function as regulators of gene expression,
including cyclosporine for organ transplantation, tamoxifen for cancer therapy
and estrogen for osteoporosis. A fundamental advantage of Signal's approach is
the ability to target pivotal junctures in specific gene regulating pathways,
following the integration of signals from multiple cellular receptors and prior
to the production of abnormal levels of proteins.
Signal has developed an integrated target and drug discovery platform to
identify gene regulating pathways, targets and drug candidates with several
important features:
Multiple Targets for Therapeutic Intervention. Signal's target discovery
efforts are focused on identifying cascades of gene regulating enzymes that
activate or suppress genes in a broad range of cell types and disease states.
Each of these pathways contains multiple potential drug targets for therapeutic
intervention. The Company believes that identifying multiple targets in each of
its therapeutic programs increases the likelihood of successfully discovering
novel drugs. For example, Signal and its collaborators have identified four gene
regulating enzymes in the NF-kB pathway (IKK1, IKK2, NF-kB inducing kinase
("NIK") and inhibitor of kB ("IkB") ligases) which are current or planned
targets for the Company's autoimmunity and inflammation, cardiovascular disease
and cancer programs.
Individual Targets Modulate Multiple Disease-Related Genes. Signal is
designing drugs that may be effective in treating diseases where a single target
regulates the activation of multiple genes involved in disease. For instance, by
targeting a pivotal molecule in a signaling cascade, such as JNK in its
autoimmunity and inflammation disease program, the Company is screening for
compounds which block the production of a broad set of pathogenic levels of
proteins, such as interleukin-2, gamma interferon and tissue-destructive
enzymes. In addition, Signal has identified and licensed to Tanabe a lead
compound that has demonstrated, in vitro and in animal models, the ability to
modulate multiple genes regulated by the AP-1 and NF-kB signaling pathways.
Targets Selective for Specific Cell Types. While most gene regulating
enzymes, along with the genes they control, are present in each cell of the
body, many subtypes of these enzymes and genes function only in specific cell
types. Signal is using several approaches to identify drug targets, their
specific subtypes and corresponding drug leads which function in a cell-specific
manner. For example, Signal researchers and collaborators have shown that JNK3
principally is expressed in brain tissue. When activated, JNK3 has been shown to
play a key role in neuronal cell death and in animal models of epilepsy.
Targets Selectively Regulate Abnormal Gene Expression. Signal's drug
discovery programs principally target inducible gene regulating pathways that
may cause abnormal gene expression and give rise to disease. These discovery
initiatives focus on regulating genes functioning in an over- or under-
activated state, without interfering with normal levels of gene expression
required to maintain essential cellular functions. For example, Signal's
autoimmunity and inflammation disease program
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focuses on MAP kinase gene regulating pathways that are selectively induced by
cytokines and other stress molecules in response to tissue injury.
SIGNAL'S STRATEGY
The Company's goal is to be a leader in the discovery of small molecule
drugs that target gene regulating pathways fundamental to disease processes. To
accomplish this goal, the Company pursues the following technology and business
strategies:
Integrate Advanced Target and Drug Discovery Technologies. Signal
integrates an extensive set of target and drug discovery technologies to
expedite the application of genomics to the discovery of important new classes
of drugs. These technologies include proprietary human cell lines, functional
genomics and proteomics, high throughput biochemical and cell-based screening
and combinatorial and computational chemistry. Signal believes this extensive
set of discovery and preclinical development capabilities provides the Company
and its partners with a distinct combination of tools and technologies for
target and drug discovery. Applying these capabilities, the Company has
successfully elucidated the structure and functions of several clinically
important gene regulating pathways, including the NF-kB, AP-1 and p38 pathways,
developed a portfolio of 18 drug targets and demonstrated efficacy of its drug
leads in animal models of arthritis and osteoporosis.
Leverage Targets Across Multiple Diseases. Signal seeks to identify
multiple targets within each gene regulating pathway and to select for drug
discovery those targets which can be validated in multiple clinical indications.
In addition to enhancing the clinical potential of each pathway, this strategy
also serves to limit the Company's scientific risk in any one gene regulating
pathway or drug target. For example, Signal and its collaborators have
demonstrated the role of specific JNK subtypes in mediating key cellular events
that give rise to, or exacerbate, autoimmune, inflammatory and neurological
diseases and cancer.
Build Partner-Funded Business. Signal aggressively pursues collaborations
with pharmaceutical partners to fully develop and exploit its pipeline of
targets and lead compounds, as well as its discovery technologies. These
collaborations provide Signal with multiple potential sources of revenue, enable
the Company to diversify scientific and financial risk, and provide access to
its collaborators' substantial development, manufacturing and marketing
resources. By focusing its efforts on drug discovery and utilizing corporate
collaborations to fund the progression of programs from discovery into the
clinic, the Company intends to maintain a sustainable level of net cash flow. As
these programs mature or any additional corporate collaborations are initiated,
the Company may increase its funding of research and development programs. To
date, Signal has collaborative agreements with five pharmaceutical partners, has
licensed worldwide rights for a drug lead to a sixth partner and has several
additional target and drug discovery programs available for future corporate
collaborations.
Retain Significant Product Commercialization Rights. The Company has
retained certain commercialization rights in two of its existing corporate
collaborations. These include co-commercialization rights in the U.S. in the
Company's collaboration with Ares-Serono and joint worldwide commercial rights,
excluding Japan, with Nippon Kayaku. The Company expects to seek to retain
certain additional commercialization rights in future corporate collaborations.
SIGNAL'S TARGET AND DRUG DISCOVERY TECHNOLOGIES
Signal has developed complementary technology platforms designed to
identify proprietary drug targets and discover novel drugs active on these
targets. The Company believes that, together, these integrated target and drug
discovery capabilities enable it to proceed rapidly from target identification
to compound screening and lead optimization. To date, the Company and its
collaborators have identified 18 drug targets, are working to identify seven
additional targets and are continuing to elucidate new gene regulating pathways
and their targets. The Company has developed and initiated screening in 16 drug
discovery assays and is optimizing drug leads in three therapeutic areas.
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Signal's integrated discovery capabilities are depicted below:
INTEGRATED PLATFORM FOR THE DISCOVERY OF GENE REGULATING TARGETS AND DRUGS
[Graphic depicting Signal's integrated platform for the discovery of gene
regulating targets and drugs. The graphic is a flowchart depicting Signal's
capabilities in (1) target discovery as proprietary human cell lines, functional
genomics and proteomics, gene regulating target discovery and target validation,
and (2) drug discovery as assay development and compound libraries, lead
discovery, lead optimization, and gene regulating drug candidates.]
DISCOVERY PLATFORM FOR GENE REGULATING TARGETS
Signal is developing and applying advanced cellular, molecular and genomic
technologies to discover clinically important targets that are the focus of the
Company's drug discovery programs and corporate collaborations. These discovery
technologies include:
Proprietary Human Cell Lines. The Company has developed a proprietary
technology to immortalize and perpetualize human cells. Signal uses these human
cell lines to identify and validate novel gene regulating pathways and drug
targets, and in screening assays for drug discovery. These cell lines are
designed to include the full set of functional genes and related pathways
involved in both normal and pathogenic cellular functions. Signal uses
proprietary human cell lines to develop in vitro models of important disease
processes, including neurodegeneration, bone formation and resorption and
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vascular disease. Signal's proprietary human bone cell co-culture system closely
mimics the natural environment of bone metabolism, and is used by Signal for
target identification and validation, as well as for testing drug leads prior to
preclinical evaluation in animal models.
Functional Genomics and Proteomics. In many of its corporate
collaborations, Signal utilizes functional genomics and proteomics to elucidate
the role genes and their protein products play in health and disease. Signal has
implemented advanced genomic technologies to expedite the identification and
prioritization of disease-associated gene targets. These include proprietary
methods for differential gene display, subtraction hybridization and gene chip
arrays. To decipher the gene regulating pathways involved in specific diseases,
Signal is developing highly sensitive protein microanalysis capabilities that
integrate peptide chromatography, microfluidics and mass spectrometry for
identification of potential drug targets that regulate specific disease
pathways. Signal utilizes these gene and protein discovery tools, in combination
with the Company's proprietary cell lines, to generate a more comprehensive
profile of signaling pathways involved in diseases and to facilitate the rapid
identification of novel and specific therapeutic targets. For example, Signal is
applying functional genomics technologies to identify and characterize the role
of certain genomic targets and their regulatory pathways in neuronal,
cardiovascular and gynecological disease therapy.
Target Discovery and Validation. The Company applies cellular and
molecular biology techniques to elucidate the regulatory pathways of
disease-related genes. An initial step in this process involves mapping the
regulatory regions of disease-related genes to identify which transcription
factors selectively activate or inhibit each gene's expression. Signal then
utilizes genomics and proteomics to identify and characterize specific enzyme
targets in a pathway that regulate the activation of these transcription
factors. When novel gene regulating enzymes are identified, the Company applies
bioinformatic tools to search proprietary and public gene databases and to
identify subtypes of these targets with distinct therapeutic applications and
specificity for different tissues.
After a potential target has been identified, the Company utilizes
antisense, mutant enzymes, gene knockout models, antibodies and other techniques
to validate the role of the target in specific disease processes and its utility
for drug discovery. Such target validation is a critical step before committing
resources to assay development and screening for target-specific drug leads.
DISCOVERY PLATFORM FOR GENE REGULATING DRUGS
Signal develops and integrates several advanced technologies for lead
discovery and optimization. The Company's lead discovery platform permits rapid,
target-directed screening of diverse compound libraries in a broad range of high
throughput assays. The Company optimizes drug leads by integrating combinatorial
and computational chemistry with technologies for profiling the effects of drug
leads on specific targets in cellular pathways. This facilitates the design of
drugs that properly regulate gene expression and protein production. These drug
discovery activities are coordinated using an integrated cheminformatics and
bioinformatics data management system to facilitate library design, primary and
secondary screening and the subsequent design and synthesis of optimized drug
candidates.
Assay Development. Signal develops and utilizes proprietary biochemical
and cell-based assays to screen for compounds that regulate gene expression in a
target- and cell-specific manner. Signal researchers have designed modular
systems for developing biochemical and cell-based assays, enabling the Company
to substitute different drug targets into standardized assay formats for use in
various discovery programs. Signal develops and uses biochemical assays to
screen compounds for activity on specific drug targets. These biochemical assays
are designed to mimic the functional activity of a drug target in its native
cellular environment. The Company's cell-based assays facilitate the
identification of compounds that modulate gene transcription through distinct
intracellular pathways and in specific cell types. Active compounds identified
in these primary assays are rapidly qualified in a series of secondary
pharmacological assays which provide further information regarding a compound's
clinical potential. These secondary assays measure the effects of potential drug
leads on disease-related genes and proteins, including inhibition of specific
gene regulating enzymes, inhibition of abnormal protein
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production, cytotoxicity, potency and target selectivity. Signal has developed
and initiated screening in 16 drug discovery assays and also is developing
additional new high throughput screening assays.
High Throughput Screening and Compound Library. Signal utilizes
robotics-based high throughput screening systems for rapid, target-specific
screening of diverse compound libraries. These automated systems enhance the
precision, reproducibility and integration of chemical and biological data. The
Company's screening library currently consists of approximately 350,000 diverse
compounds, which include small molecule, natural product and combinatorial
compounds. For example, Signal currently screens more than 60,000 compounds per
month on four kinase targets and plans to significantly increase its screening
throughput and drug targets. To expedite lead identification, Signal researchers
have developed a KAST that enables the Company to screen on multiple kinase
targets in parallel. The KAST system provides activity and specificity data
across multiple kinase targets for a given screening library.
Lead Optimization: Combinatorial, Computational and Structural
Technologies. Combinatorial chemistry involves the rapid synthesis of large and
diverse compound libraries by sequentially adding different molecular building
blocks to a core chemical structure. Signal has developed a proprietary SKIL
based on structures of both known kinase inhibitors and data generated by its
internal screening programs. The SKIL is being applied in these programs with
the goal of rapidly identifying more selective and potent inhibitors of gene
regulating kinases. The Company uses combinatorial chemistry techniques
principally to expedite the optimization of lead compounds and also to build
target-based combinatorial libraries for subsequent screening. Signal's
combinatorial chemistry capabilities also may help strengthen the Company's
patent position in a particular chemical series by generating a relatively large
analog library around an active compound.
To expedite the lead optimization process, Signal also uses computational
chemistry to guide the design and synthesis of new compounds. Computational
chemistry involves the use of computer-based algorithms to model the structure
of an active compound and its interaction with a drug target to generate
directed libraries for screening. Alternatively, computational chemistry can be
used to construct "virtual libraries" around core chemical structures, providing
a method for examining large numbers of potential analogs prior to synthesizing
representative compounds for screening.
Signal researchers have designed a computer-generated three-dimensional
model of the JNK enzyme's structure and its active site. Using computer-based
simulation, a chemical database of more than 700,000 compounds has been
"virtually" screened to identify potential JNK inhibitors. Signal plans to use
this technology to develop other target-directed libraries. These
structure-based drug design efforts are intended to further enhance a lead
compound's potency, selectivity, bioavailability and safety.
SIGNAL'S GENE REGULATING PATHWAYS
The Company is conducting target and drug discovery programs directed
toward five mammalian gene regulating pathways. Many of these pathways regulate
the activation of multiple disease-related genes and have multiple drug targets,
allowing the Company to pursue a diverse number of therapeutic programs for each
pathway. The Company expects that ongoing efforts to map and sequence the human
genome, including Signal's internal genomics initiatives, will lead to an
expansion in the number of known disease-related genes and further enhance the
Company's ability to identify additional gene regulating pathways and drug
targets. In addition, the Company is conducting target and drug discovery
programs directed toward five viral gene regulating pathways.
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SELECTED HUMAN GENE REGULATING PATHWAYS TARGETED BY SIGNAL
[Graphic depicting selected human gene regulating pathways targeted by Signal,
specifically the NF-kB pathway, MAP kinase pathways and estrogen-regulated gene
pathway. The graphic depicts a flow chart for each pathway showing the stimuli,
intracellular signaling, gene activation and protein production.]
NF-KB GENE REGULATING PATHWAY
NF-kB plays a pivotal role in autoimmune, inflammatory and cardiovascular
disease processes by regulating cytokine genes, such as TNF-a, IL-1, IL-2, IL-6,
IL-8, along with genes which code for cell adhesion molecules and the COX-2 and
iNOS enzymes. In addition, studies published in Science link NF-kB to increased
cancer cell resistance to radiation and chemotherapies and demonstrate the
ability of NF-kB inhibitors to enhance the sensitivity of cancerous cells to
these therapies. NF-kB is a family of transcription factors held in the
cytoplasm of cells by IkB. In response to extracellular stimuli, IkB is
degraded, allowing NF-kB to migrate into the nucleus and activate select genes
which elicit important immunological and proliferative responses. Signal
researchers and collaborators have identified three proprietary drug targets
which regulate NF-kB activation by processing IkB prior to its degradation: (i)
two IkB kinases which Signal terms "IKK1" and "IKK2" and (ii) an IkB ligase,
which Signal currently is cloning and characterizing. The discovery of IKK1 and
IKK2 by Signal researchers and collaborators was reported in 1997 in the
journals Science, Nature and Cell. In addition, as part of its collaboration
with Ares-Serono, the Company has obtained rights to a fourth novel target in
the NF-kB pathway, NIK. The Company believes that drugs which inhibit IKK1 and
IKK2, NIK and IkB ligases will prevent NF-kB activation and the subsequent
expression of select disease-associated genes. Signal has filed patent
applications for the IKK1 and IKK2 and an IkB ligase, and Ares-Serono's research
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collaborator, the Weizmann Institute, has filed patent applications for the NIK
gene regulating enzyme.
MAP KINASE GENE REGULATING PATHWAYS
Signal has established a leading position in the discovery of proprietary
drug targets in mitogen-activated protein kinase, or MAP kinase, pathways. MAP
kinase pathways consist of distinct cascades of regulatory enzymes that serially
activate one another to control the expression of specific sets of genes in
response to growth factors, cytokines, tumor promoters and other biological
stimuli. These pathways control cell proliferation and metabolism and cell
survival in response to tissue injury, infection, malignancy and other diseases.
MAP kinase gene regulating pathways provide novel targets for drug discovery in
a wide range of disease processes, including autoimmune and inflammatory
diseases, diseases associated with bone metabolism, neurological and
cardiovascular diseases and cancer. Signal's researchers, scientific founders
and academic collaborators have identified nine proprietary targets in MAP
kinase pathways, including targets in the JNK and p38 MAP kinase pathways.
JNK Gene Regulating Pathway
Activation of the JNK gene regulating pathway increases the expression of a
set of autoimmune and inflammatory genes, including IL-2 and gamma interferon.
There are multiple subtypes of the JNK regulatory enzyme, each of which induces
the expression of genes in a cell- and stimulus-specific manner. In 1993, Dr.
Michael Karin at the University of California, San Diego, a scientific founder
of the Company, and Dr. Roger Davis at the University of Massachusetts, a
Scientific Advisor of the Company, discovered two novel kinases in the JNK
pathway. These regulatory enzymes (termed "JNK1" and "JNK2") are pivotal
activators of c-Jun, a component of AP-1 and other transcription factors, and
genes under c-Jun's control. Signal researchers subsequently have cloned and
sequenced the upstream activator of the JNK regulatory enzymes, termed JNKK,
which also may serve as a target for drug discovery. The over-activation of JNK
causes numerous diseases, including autoimmune, inflammatory and neurological
diseases and proliferative cancers. Drugs which inhibit JNK activation are
expected to selectively block the over-activation of inducible genes, and not
affect normal cellular functions, since JNKs do not regulate normal gene
expression. One of the Company's collaborators, Dr. Roger Davis, reported in
1997 in the journal Nature that mice engineered to be deficient in the
brain-specific JNK subtype, JNK3, are resistant to experimentally induced
seizure and associated neuronal cell death. JNK3 inhibitors therefore may have
therapeutic value for treating epilepsy, as well as neurodegeneration associated
with Alzheimer's disease, Parkinson's disease, stroke and head trauma. The
Company has exclusively licensed certain rights to three issued U.S. patents and
related patent applications with regard to JNK and its use in drug discovery.
p38 Gene Regulating Pathway
Activation of the p38 gene regulating pathway causes the expression of
multiple cytokine genes, including IL-1, IL-6, IL-8 and TNF-a, which regulate
the development and proliferation of cells in response to disease and tissue
injury. To date, the Company and its academic collaborators have identified
three proprietary drug targets in the p38 pathway. One such target is p38-2, a
subtype of p38, which is highly expressed in heart and skeletal muscle and which
is activated by stress-inducing stimuli and proinflammatory cytokines. The
second target discovered in the p38 pathway is MEK6, a novel MAP kinase which
activates p38 in vivo and which is highly expressed in skeletal muscle. Signal
researchers have validated the role of MEK6 in regulating the production of IL-1
and TNF-alpha cytokines. The third target in the p38 pathway, MKK3, specifically
activates p38 and p38-2 in response to stress stimuli and pro-inflammatory
cytokines. When defective, the p38 pathway is believed to play an important role
in diseases arising from abnormal production of cytokines, including autoimmune
and inflammatory diseases, diseases associated with bone metabolism and
neurological and cardiovascular diseases. The Company has licensed exclusive
worldwide rights covering MKK3 use in drug discovery and has filed patent
applications for p38-2 and MEK6.
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c-Fos Gene Regulating Pathway
The transcription factor c-Fos controls the development and activation of
certain bone-resorbing cells, termed osteoclasts. These cells continually remove
older bone material so that new bone can be deposited in its place. Mice lacking
c-Fos demonstrate reduced bone resorption, thereby validating c-Fos as a drug
target. Signal researchers have developed a proprietary human bone cell
co-culture system to further validate the role of c-Fos in bone metabolism and
to evaluate c-Fos inhibitors identified in its screens. The Company believes
that drugs which inhibit the expression or activation of c-Fos will slow the
overactive bone resorption associated with osteoporosis. Signal is working to
map the c-Fos signaling pathway and identify key molecular targets that regulate
increased c-Fos expression.
In addition to regulating bone metabolism, c-Fos also plays a critical role
in tumor formation and cancer metastasis by regulating several properties of
malignancy, including the activation of matrix metalloproteinase ("MMP") genes
which cause tumors to metastasize. This role of c-Fos has been validated, in
part, by animal studies in which tumors induced in mice lacking c-Fos did not
metastasize. Conversely, over-expression of c-Fos in mice resulted in the
proliferation and spread of highly aggressive forms of cancers. Based on these
findings, the Company believes that inhibitors of c-Fos expression and
activation may represent an important new class of drugs for cancer therapy.
OTHER GENE REGULATING PATHWAYS
Estrogen-Regulated Gene Pathway
Signal researchers have discovered a novel estrogen-regulated gene pathway
by which estrogen inhibits production of IL-6, a cytokine that causes bone
resorption. Signal has validated the role of IL-6 in the activation of bone
resorption using a proprietary human bone cell co-culture system and in animal
models of osteoporosis. This validation is consistent with published studies
demonstrating that bone loss can be prevented in mice where the IL-6 gene was
deleted. The Company believes that drugs which inhibit IL-6 will slow overactive
bone resorption associated with osteoporosis.
Viral Gene Regulating Pathways
Viral infections occur when viruses insert their genetic material into a
host cell and then use the infected cell's biochemical machinery to express
viral proteins and produce new viruses. Viral transcription and translation
events regulate the production of these viral proteins. Signal and its
collaborators have determined the molecular mechanisms of action of key viral
transcription factors responsible for replication of HCV, HIV, human
papillomavirus ("HPV"), cytomegalovirus ("CMV") and herpes simplex virus
("HSV"). The Company has validated these viral gene regulation factors as drug
targets by using genetically modified viruses and antisense oligonucleotides
which block viral infections in cells. Signal and its collaborators also have
determined the mechanism of action of translational regulation of a key HCV
protein and have cloned and expressed another important regulatory enzyme
responsible for HCV replication. In addition, one of Signal's academic
collaborators has identified a novel function for a key HIV target which may
facilitate the discovery of novel HIV inhibitors.
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SIGNAL'S DRUG DISCOVERY PROGRAMS
Signal's drug discovery programs are directed toward autoimmunity and
inflammation, bone metabolism, neurological disease, cardiovascular disease,
cancer and viral infections, and are summarized in the following table:
<TABLE>
<CAPTION>
PROGRAM/TARGET CURRENT INDICATIONS(1) STATUS(2) COMMERCIAL RIGHTS(3)
- ---------------------- ------------------------------- ------------------ --------------------
<S> <C> <C> <C>
AUTOIMMUNITY AND
INFLAMMATION
AP-1 / NF-kB........ Lead Optimization Tanabe
JNK1 and 2.......... Rheumatoid Arthritis Lead Optimization Signal
IKK1 and 2.......... Osteoarthritis Screening Signal, Ares-Serono
p38-2............... Allergy Screening Signal
NIK................. Asthma Assay Development Signal, Ares-Serono
MEK6................ Inflammatory Bowel Disease Assay Development Signal
MKK3................ Psoriasis Assay Development Signal
JNKK1 and 2......... Transplant Rejection Assay Development Signal
IkB Ligases......... Target Discovery Signal, Ares-Serono
BONE METABOLISM
IL-6................ Osteoporosis Lead Optimization Signal
c-Fos............... Paget's Disease Assay Development Signal
Bone Mitogenesis.... Bone Repair Target Discovery Signal
NEUROLOGY
PNS................. Peripheral Neuropathies Lead Optimization Signal, Nippon Kayaku
JNK1 and 2.......... Neurodegeneration Screening Signal
JNK3................ Neurodegeneration Assay Development Signal
CNS Cell Lines...... Neurodegeneration, Stroke, Head Assay Development
Trauma Target Discovery Signal
PNS Cell Lines...... Assay Development/
Pain, Incontinence Target Discovery Roche Bioscience
CNS Genomic Neurodegeneration,
Targets............... Psychiatric Diseases Target Discovery Organon
CARDIOVASCULAR
JNK1 and 2.......... Ischemia Lead Optimization Signal
IKK1 and 2.......... Atherosclerosis Screening Signal, Ares-Serono
p38-2............... Ischemia Screening Signal
NIK................. Atherosclerosis Assay Development Signal, Ares-Serono
JNK3................ Ischemia Assay Development Signal
MEK6................ Ischemia Assay Development Signal
IkB Ligases......... Atherosclerosis Target Discovery Signal, Ares-Serono
Vascular Genomic
Targets............... Atherosclerosis, Ischemia Target Discovery Organon
CANCER
JNK1 and 2.......... Lead Optimization Signal
IL-6................ Lung Cancer Lead Optimization Signal
IKK1 and 2.......... Breast Cancer Screening Signal, Ares-Serono
NIK................. Ovarian Cancer Assay Development Signal, Ares-Serono
JNKK1 and 2......... Myeloma Assay Development Signal
c-Fos............... Leukemia Assay Development Signal
IkB Ligases......... Target Discovery Signal, Ares-Serono
VIROLOGY
Various............. Hepatitis C Virus Assay Development Signal, DuPont Merck
Various............. Human Immunodeficiency Virus Assay Development Signal, DuPont Merck
ICP4................ Herpes Simplex Virus
(Types 1, 2) Screening Signal
IE86................ Cytomegalovirus Screening Signal
E2.................. Human Papillomavirus Screening Signal
</TABLE>
- ------------------------------
(1) All diseases referenced by brackets are potential clinical indications for
each target listed in the respective therapeutic program.
(2) LEAD OPTIMIZATION indicates that Signal and/or its pharmaceutical partners
are applying combinatorial and computational chemistry, as well as
structure-based drug design, to enhance the potency, selectivity,
bioavailability, safety and other pharmaceutical properties of active
compounds.
SCREENING indicates that Signal is testing libraries of organic small
molecules and natural products in biochemical and/or cell-based assays to
identify compounds which either inhibit or induce activation of a drug
target.
ASSAY DEVELOPMENT indicates that Signal is creating biochemical and/or
cell-based in vitro assays which incorporate a specific drug target and are
used to identify compounds which regulate the drug target.
TARGET DISCOVERY indicates that Signal is identifying new disease-related
genes and their protein products, cloning and characterizing novel enzymes
and other proteins which regulate activation of disease-related genes and is
validating the utility of these regulatory proteins as drug targets.
(3) See "--Research and Development Partners."
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AUTOIMMUNE AND INFLAMMATORY DISEASE PROGRAM
The human immune system is comprised of cells and biochemical mediators
which protect the body from infectious organisms, physical injury and abnormal
cellular events such as cancer. Key components of the immune system, such as
white blood cells, mount a localized protective or inflammatory response at
sites of injury and disease. Autoimmune and inflammatory diseases arise from the
over-activation of the immune system resulting in the over-production of immune
cells, inflammatory cytokines and tissue-destructive enzymes. These cells and
proteins attack and destroy healthy tissue, giving rise to a number of diseases
such as rheumatoid arthritis, osteoarthritis, allergies, asthma, inflammatory
bowel disease and psoriasis, as well as transplant rejection. In 1996, the U.S.
market for anti-inflammatory and immunosuppressive drugs used to treat these
diseases totaled approximately $2.0 billion. Many current drugs are relatively
non-selective and have dose-limiting side effects. More importantly, although
these current drugs alleviate many symptoms of disease, they generally do not
target the underlying mechanisms and therefore do not actually modify disease
processes.
Signal is identifying and cloning drug targets in key gene regulating
pathways and screening for new classes of small molecule drugs which regulate
autoimmune and inflammatory diseases at the level of gene function. The Company
currently is screening for inhibitors of regulatory enzymes in three distinct
pathways, NF-kB, JNK and p38. In November 1997, Signal initiated a three-year
collaborative development and license agreement with Ares-Serono to discover
novel anti-inflammatory, immunosuppressive and certain other drugs that regulate
targets in the NF-kB gene regulating pathway. Additionally, in March 1998, the
Company licensed to Tanabe worldwide rights to a dual AP-1/NF-kB drug lead with
demonstrated oral efficacy in an animal model of arthritis. See "--Research and
Development Partners."
NF-kB Inhibitor Program
NF-kB regulates the activation of multiple cytokine, adhesion molecule and
other pro-inflammatory genes. Signal has developed and initiated high throughput
screens for inhibitors of NF-kB using proprietary IKK1 and IKK2 biochemical
assays and cell-based NF-kB screening assays. The Company also is developing
secondary assays which profile the effects of active compounds on a number of
other immune-inflammatory genes and proteins. The Company has identified several
compounds active on the IKK1 and IKK2 targets. Signal plans to apply
combinatorial, computational and structure-based drug design to develop NF-kB
inhibitors with enhanced potency, specificity and bioavailability. Signal also
is working with collaborators to develop high throughput screens for the NIK
drug target and to clone and express the genes for IkB ligases as novel targets
for drug discovery.
MAP Kinase Inhibitor Program
JNK and p38 pathways control the activation of cytokine and other
pro-inflammatory genes during an inflammatory response. Company researchers have
developed and initiated high throughput screening for JNK1, JNK2, JNK3 and p38
inhibitors using proprietary biochemical and whole cell gene transcription
assays. Signal has identified several compounds which inhibit JNK activation
with a high level of specificity. The Company is utilizing its SKIL library and
a proprietary computer-generated homology model of JNK to design analog
compounds with enhanced potency and selectivity. Additionally, Signal is working
to validate the role of upstream activators of JNK, JNKK1 and JNKK2, which also
may be valid targets for drug discovery. In the p38 pathway, the Company is
developing biochemical high throughput screening assays for MEK6 and MKK3 drug
discovery, and has initiated screening on its p38-2 target.
Dual AP-1/NF-kB Inhibitor Program
Signal researchers have identified a new class of compounds that inhibit
genes regulated by both the AP-1 and NF-kB transcription factors. In vitro
assays and in vivo animal studies indicate this series of compounds is highly
selective for T-cells and has potent anti-inflammatory and immunosuppressive
activity. Signal's most advanced lead compound has demonstrated efficacy, safety
and oral bioavailability in an animal model of arthritis, and the Company has
filed patent applications covering the molecule's structure. In March 1998, the
Company licensed to Tanabe worldwide rights to this drug lead for autoimmune,
inflammatory and other diseases.
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BONE METABOLISM DISEASE PROGRAM
Bone disease results from an imbalance in the bone remodeling process,
causing either inadequate bone formation or excess bone loss. Diseases involving
abnormal bone remodeling include osteoporosis, Paget's disease, hyperthyroidism
and periodontal disease. Osteoporosis, which occurs primarily in post-menopausal
women due to loss of estrogen, is an age-related disease characterized by
persistent loss of bone mass. According to the National Osteoporosis Foundation,
in 1997 this disease afflicted more than 28 million people in the United States
and over 200 million people worldwide. In 1995, sales of therapeutics to treat
osteoporosis totaled more than $6.5 billion.
Most current osteoporosis treatments are intended to slow bone resorption.
While estrogen replacement therapy remains the primary treatment for most women
at risk for osteoporosis, it is associated with risks including cancer and heart
disease, endometriosis and abnormal blood clotting. Presently, there are no
FDA-approved therapies that increase bone formation. Signal has initiated a
broad, multi-target approach to regulating both bone resorption and formation
for the treatment of osteoporosis, bone fractures, periodontal disease and other
disorders of bone metabolism. The Company is working to develop new classes of
drugs that potently and selectively control the mechanisms of bone disease at
the level of gene function. Signal has established a target and drug discovery
program focused on identifying novel classes of drugs for treating osteoporosis
that target the IL-6, c-Fos and certain novel gene regulating targets for
inducing bone formation. See "--Research and Development Partners."
IL-6 Inhibitor Program
The cytokine IL-6 plays a fundamental role in the differentiation and
activation of bone-resorbing osteoclasts in women following menopause. Signal
has initiated a program to discover drugs that selectively inhibit the
production of IL-6 in bone cells through a novel estrogen-regulated gene
pathway. This new class of drugs is being designed to inhibit transcription
factors responsible for inducing IL-6 gene expression and resulting bone
resorption. These drugs, if successfully developed, would provide clinicians
with an alternative, non-estrogen treatment for osteoporosis which may minimize
some of the adverse side effects of traditional estrogen therapy and which may
be used to treat both women and men. Signal has identified novel classes of
compounds that inhibit IL-6 production in bone cells. These compounds have
demonstrated biological activity in an animal model of osteoporosis and
currently are undergoing further optimization. To expedite lead optimization,
Signal has developed a series of secondary assays to examine the selectivity and
potential side-effects of lead compounds by profiling the compounds' effects on
gene and protein expression.
c-Fos Inhibitor Program
Utilizing its detailed understanding of the AP-1 and other MAP kinase
signaling pathways, the Company is pursuing the discovery of drugs to prevent or
treat osteoporosis through a c-Fos signaling mechanism. Recent studies have
demonstrated that targeted knockout of the c-Fos transcription factor gene
results in excess bone resorption and osteoporosis. These academic studies,
along with data generated by Signal's in vitro bone co-culture model, establish
that the development and activation of bone-resorbing osteoclasts is highly
dependent on the presence of the c-Fos transcription factor. Based on these
recent findings, the Company is developing a high throughput screening assay to
identify novel, non-estrogenic compounds that inhibit c-Fos production and the
subsequent over-activation of osteoclasts which cause excess bone loss.
Bone Formation Program
Signal also has initiated an osteogenic program to identify drugs that
induce bone formation. Researchers at Signal have cloned key bone regulating
factors and are applying their expertise in MAP kinase signaling to characterize
novel pathways in osteoblasts that regulate genes involved in bone growth. To
facilitate this process, the Company uses proprietary human bone cell lines to
rapidly validate and evaluate drug targets and leads. This system can precisely
measure the effects of new targets and leads on each stage of osteoblast cell
development, including bone formation. Company
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researchers presently are focused on isolating regulatory mechanisms in these
pathways that would serve as targets for drug discovery. Small molecule drugs
that regulate these potential targets would complement anti-resorptive therapies
and have potentially broader application in treating multiple forms of
osteoporosis, including post-menopausal, drug-induced and age-related forms of
the disease. To date, no orally active drugs which induce bone formation are
available for the treatment of bone diseases and disorders.
NEUROLOGICAL DISEASE PROGRAM
The human nervous system consists of two distinct components: the central
nervous system ("CNS"), which includes the brain and spinal cord, and the PNS,
which includes all nerves outside the CNS. Within the PNS, neurons transmit
information such as pain to the CNS, and motor pathways transmit commands from
the CNS to muscles. Defects or damage in the CNS can lead to Parkinson's
disease, Alzheimer's disease, stroke or epilepsy, as well as psychiatric
disorders such as depression and schizophrenia. PNS disorders can lead to acute
and chronic pain, and peripheral neuropathies caused by diabetes and
chemotherapy can cause chronic motor or sensory defects. In 1996, annual
worldwide sales of neuropharmaceuticals totaled $8.5 billion, including
pharmaceuticals such as anti-depressants, analgesics, psychotropics, anxiolytics
and anti-epileptics. Many current CNS and PNS drugs exhibit undesirable side
effects. There also are disorders such as chronic pain and Alzheimer's disease
for which there are no effective treatments due to a limited understanding of
neurological disease processes at the molecular and genomic levels.
Signal researchers and collaborators have developed a proprietary cell
immortalization technology for producing cloned human neuronal cells that are
homogenous, stable and fully functional in vitro for use in target discovery and
validation, and in drug screening. This technology is designed to overcome many
current limitations of neuropharmaceutical research. Cell lines developed by
Signal express the receptors, ion channels and cytochemical markers required to
produce functional, morphologically mature human neurons. Signal's cell line
technology also can be used to "lock in" human neuronal cells to a specific
stage of maturation, providing a stable cell-based assay system for drug
screening. To date, the Company has developed human neuronal and glial cell
lines of the CNS and, it believes, the first human sensory neuronal cell lines
of the PNS. Signal's human CNS cell lines can be differentiated into a variety
of cell types, including neurons and astrocytes, and also can be induced to
undergo cell death, in vitro, in model systems characteristic of stroke,
traumatic head injury and neurological diseases.
The Company plans to continue to develop proprietary CNS and PNS cell lines
with corporate collaborators to identify and functionally validate specific
genes and their regulatory pathways involved in neurological diseases. Signal
believes genomic information obtained from these cell lines may provide a
foundation for identifying novel drugs that regulate CNS genes involved in
neurological diseases (Alzheimer's and Parkinson's disease, head trauma and
stroke) and psychiatric diseases (anxiety, depression and psychosis), and that
target disorders of the PNS (pain, incontinence and peripheral neuropathies).
Applying the Company's functional genomics capabilities, researchers at Signal
have generated a library of differentially expressed genes from an in vitro
model of Alzheimer's disease. Signal also has developed a proprietary CNS whole
cell screening assay for inhibitors of neurodegeneration induced by cytokines
and growth factor withdrawal. Further, the Company is investigating the role of
MAP kinase targets, including JNK and p38, in neurodegeneration. One such
target, JNK3, has been validated in animal models and is being formatted in a
high throughput screening assay for drug discovery. As part of its neurogenomics
initiative, Signal is collaborating with Organon to discover genomic drug
targets involved in neurological diseases.
In September 1996, Signal commenced a three-year research collaboration
with Roche Bioscience to develop human PNS cell lines for use in target and drug
discovery directed toward the treatment of pain and incontinence. Signal
subsequently developed and transferred to Roche Bioscience certain PNS cell
lines for potential use in Roche Bioscience's target and drug discovery
programs. Signal retains the right to use the PNS cell lines in other
therapeutic areas, such as peripheral neuropathies.
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In February 1998, Signal entered into a two-year research collaboration with
Nippon Kayaku to optimize a lead compound discovered by Nippon Kayaku for use in
treating diabetic and chemotherapy-induced peripheral neuropathies. See
"--Research and Development Partners."
CARDIOVASCULAR DISEASE PROGRAM
Cardiovascular disease, including congestive heart failure, myocardial
infarction and stroke, largely results from restricted blood flow caused by
atherosclerosis and hypertension. Cardiovascular disease is the leading cause of
death in the United States and Europe and results in an estimated 12 million
annual deaths worldwide according to the World Health Organization. In the
United States, approximately 58 million people are afflicted with cardiovascular
disease, leading to an estimated 960,000 deaths each year. In 1998,
pharmaceutical sales of cardiovascular drugs will exceed $14.8 billion in the
United States, according to the American Heart Association. Several classes of
cardiovascular drugs have been developed to prevent and treat chronic
cardiovascular disease, including beta blockers, calcium channel blockers and
ACE inhibitors designed to maintain proper blood vessel dilation and normal
blood flow. While these drugs reduce disease morbidity and mortality, they also
cause a number of adverse side effects such as depression, headaches and
fatigue. None of these classes of cardiovascular drugs acts on the molecular
mechanisms of cardiovascular disease which damage vessel walls and impair blood
flow.
Abnormalities in the expression of endothelial and smooth muscle genes in
vascular tissue play a fundamental role in cardiovascular disease. When
endothelial cells are activated by injury or trauma, these cells frequently
overproduce such proteins as cell adhesion molecules, growth factors and
cytokines, leading to the formation of lesions that block normal blood flow and
cause vasculitis and atherosclerosis. Many of these proteins are controlled by
the NF-kB, JNK and p38 gene regulating pathways. Activated or damaged
endothelial cells also can induce genes in vascular smooth muscle cells. These
genes cause the proliferation of smooth muscle cells, leading to vessel-wall
thickening and impaired blood flow. NF-kB and MAP kinase pathways have been
demonstrated to be over-activated in animal models of angioplasty-induced
restenosis.
The Company currently is using its KAST system to identify selective
inhibitors of its IKK1 and IKK2, JNK and p38-2 targets. The Company has
identified inhibitors of these targets in its biochemical screens, and certain
of these compounds are undergoing lead optimization. Signal plans to evaluate
active compounds in secondary assays which use proprietary human vascular cell
lines to assess their cardioprotective effects. In July 1996, the Company
entered into a three-year collaboration with Organon, amended in January 1998,
to discover genomic drug targets in cardiovascular disease. In November 1997,
the Company entered into a three-year collaboration with Ares-Serono to develop
inhibitors of NF-kB for potential treatment of cardiovascular diseases. See
"--Research and Development Partners."
CANCER PROGRAM
Cancer is characterized by uncontrolled growth, proliferation and migration
of cells. Malignancies result from abnormalities in the expression of genes that
regulate cell proliferation, migration and cell death. In 1997, cancer was the
second leading cause of death in the United States with 560,000 deaths and an
estimated 1.2 million new cancer cases. According to the American Cancer
Society, the oncolytic drug market totaled approximately $1.6 billion in the
United States and $4.7 billion worldwide in 1996.
Signal is elucidating several gene regulating pathways which play a
fundamental role in tumor growth and metastasis, including the JNK and c-Fos
pathways, the NF-kB pathway regulated by IKK1 and IKK2, NIK and the IkB ligases,
as well as the ERG pathway that controls IL-6 production. These pathways control
the expression of specific sets of genes involved in cancer, including: (i)
cytokines and growth factors which promote the growth of cancer cells, (ii) cell
adhesion molecules and tissue-destructive enzymes which enable tumors to spread
to distant sites in the body and invade normal
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tissues and organs, (iii) angiogenic growth factors that vascularize and thereby
facilitate the growth of newly established tumors, and (iv) certain other
factors which make cancer cells resistant to chemotherapy and radiation therapy.
Signal is designing new classes of drugs that target abnormalities in
inducible gene regulating pathways to inhibit the transformation, growth and
spread of cancer without affecting other essential gene regulating pathways.
Applying its high throughput screening capabilities, the Company has identified
a novel class of IL-6 inhibitors which demonstrate anti-proliferative activity
in vitro in human breast cancer cells. The Company currently is optimizing small
molecule inhibitors of IL-6, in addition to leads identified in Signal's screens
for NF-kB and JNK pathway inhibitors. Additionally, Signal and its collaborators
are developing a high throughput screening assay for c-Fos and are working to
identify IkB ligase drug targets. Signal plans to evaluate active compounds in
secondary assays that use tumor cell lines to assess anti-cancer effects. The
Company believes that drugs which selectively inhibit these targets may be
useful in treating several cancers, including lung, breast and ovarian
carcinomas, myelomas and leukemias, and may cause fewer dose-limiting side
effects than current chemotherapies.
In November 1997, the Company initiated a three-year collaboration with
Ares-Serono to develop drugs that target the NF-kB pathway for the potential
treatment of certain cancers. See " --Research and Development Partners."
VIROLOGY PROGRAM
Viruses are pathogenic microorganisms that infect cells and subsequently
use the biochemical machinery of their host cells to produce new viruses. An
estimated 30 million people are infected with HIV and 50 million people are
infected with HCV throughout the industrialized world. Other viral pathogens
being transmitted at epidemic rates include the herpes simplex-2 virus and HPV,
both of which cause chronic, lifelong genital infections, and afflict an
estimated 31 million and six million people in the United States, respectively.
Despite the high incidence of chronic viral infections, only a limited number of
antiviral drugs have been approved to date. New classes of antivirals are needed
which act on novel, virus-specific targets while overcoming problems of toxicity
and viral resistance.
Signal is applying its expertise in gene regulation to the discovery of
small molecule antiviral drugs that selectively inhibit viral genes. The Company
believes that gene regulating antivirals may provide more potent and selective
therapy due to three factors: (i) viral gene regulating targets are structurally
different from human factors and, therefore, potentially may be used to inhibit
viral replication without interfering with normal human cellular functions, (ii)
each virus possesses distinct transcription factors that distinguish it from
other viruses, facilitating the design of virus-specific therapeutics, and (iii)
drugs which target these mechanisms will be useful in the treatment of viruses
resistant to current therapies.
Signal's viral infection program is directed toward six viral gene
regulating targets: two regulatory proteins for HCV, a transcription factor for
HIV, the E2 transcription factor for HPV, the ICP4 transcription factor for HSV
and the IE86 transcription factor for CMV. The Company and its collaborators
have validated each of these targets in vitro. Signal has developed proprietary
viral infection assays for identifying novel inhibitors of HPV, HSV and CMV gene
activation. The Company is developing target-specific screening assays for small
molecule HCV and HIV inhibitors as part of its three-year collaboration with
DuPont Merck initiated in December 1997. Active compounds have been identified
in the Company's HSV and CMV screens. See "--Research and Development Partners."
RESEARCH AND DEVELOPMENT PARTNERS
Partnerships with pharmaceutical and biopharmaceutical companies are an
integral part of Signal's business strategy. To date, Signal has established a
number of collaborative agreements and has received payments of $20.8 million
thereunder. Signal's principal collaborative agreements are with Ares-Serono,
Roche Bioscience, Nippon Kayaku, Organon and DuPont Merck. In addition, the
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Company has licensed worldwide rights for a drug lead to Tanabe. There can be no
assurance that the Company will maintain its existing collaborative or licensing
arrangements or establish any additional arrangements or that its current or
future relationships, if established, will result in receipt by the Company of
milestone payments, the development of marketable pharmaceutical products or
receipt by the Company of significant royalties on sales of such products.
ARES-SERONO
In November 1997, Signal entered into a collaborative agreement with
Ares-Serono, under which Ares-Serono agreed to fund certain research for an
initial three-year period, which term will automatically be extended for
additional three-year periods unless earlier terminated as described below. The
Ares-Serono collaboration is focused on identifying compounds that modulate
NF-kB gene regulating pathways to which Ares-Serono has rights for all clinical
indications in all countries of the world excluding Asia. Ares-Serono S.A. has
purchased approximately $10.0 million of Signal's Series E and Series F
Preferred Stock. Ares-Serono also has agreed to provide Signal with annual
research and development support for Signal's cost of this program at a
percentage level approximating Ares-Serono's relative share of worldwide
marketing rights. In addition, Ares-Serono is obligated to make payments to
Signal based on the achievement of certain research and development milestones
and to pay Signal royalties on any future product sales arising from the
collaboration.
Pursuant to an exclusive license granted by Signal, Ares-Serono will be
solely responsible for preclinical and clinical development of drug candidates
and the development and commercialization of any drugs arising from the
collaboration in all countries of the world excluding Asia. Signal has co-
commercialization rights for all products marketed in the United States,
exercisable at any time during the term of the agreement and up to 30 days
following receipt of notice from Ares-Serono of the filing of an NDA or
equivalent regulatory application, with respect to products arising from the
collaboration. In the event that Signal exercises co-commercialization rights,
Signal will forego royalties in exchange for a share of product revenue, and a
portion of revenue will be payable to Ares-Serono as reimbursement for
development costs.
Unless, at least six months prior to the expiration of the initial
three-year term, Ares-Serono gives Signal notice of its decision to terminate
the research being conducted pursuant to the collaboration agreement, such
research and Ares-Serono's research support obligation will continue for an
additional three-year period, subject to each party's early termination rights.
Ares-Serono may terminate the agreement upon six months' notice any time after
the end of the initial three-year term.
ROCHE BIOSCIENCE
In August 1996, Signal entered into a three-year collaborative agreement
with Roche Bioscience. Under the agreement, Signal is applying its proprietary
cell line development technology toward the development of human PNS cell lines
for use by Roche Bioscience in target and drug discovery. Pursuant to an
exclusive, worldwide, royalty-free license granted by Signal, Roche Bioscience
may utilize these PNS cells to discover and commercialize drugs for treating
pain, incontinence and peripheral vascular disease. Under the agreement, Signal
retains the right to use the PNS cell lines for its internal target and drug
discovery programs in other therapeutic fields. Roche Bioscience has paid Signal
a license fee and has agreed to pay annual research and development support at a
level approximating Signal's cost of the PNS cell line program. To date, Signal
has developed and transferred to Roche Bioscience clonal human PNS cell lines as
specified in the collaborative agreement.
Roche Bioscience may terminate the agreement beginning in August 1998 at
its discretion upon 90 days' written notice. If the collaboration agreement is
terminated for any reason, the licenses granted to Roche Bioscience by Signal
shall survive for as long as Roche Bioscience continues to pay annual license
maintenance fees to Signal. As long as Roche Bioscience pays these annual
license maintenance fees, Signal may not enter into any other collaborations
with respect to cloned immortalized PNS cell lines in the covered fields of
pain, incontinence and peripheral vascular disease.
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NIPPON KAYAKU
In February 1998, Signal entered into a collaborative agreement with Nippon
Kayaku under which Nippon Kayaku agreed to fund certain research at Signal for
two years. Under the agreement, Signal and Nippon Kayaku will develop and
commercialize products based on or derived from a compound supplied by Nippon
Kayaku for the treatment and prevention of diseases and disorders of the CNS and
PNS. Signal will perform combinatorial chemistry and use its proprietary human
neuronal cell lines to further optimize the compound and characterize its
mechanism of action prior to the start of clinical studies. Nippon Kayaku has
agreed to provide Signal with annual research and development support at a level
approximating Signal's cost of the program. Each party also is obligated to pay
the other royalties on future product sales arising from the collaboration.
Pursuant to a commercialization agreement to be concluded by Signal and
Nippon Kayaku following the initial research phase of the collaboration, Nippon
Kayaku will be solely responsible for the development and commercialization of
products in Japan for the treatment or prevention of diseases and disorders of
the PNS and will receive co-commercialization rights in Japan with respect to
products for the treatment and prevention of CNS diseases and disorders. Under
such future commercialization agreement, development and commercialization
rights for products outside Japan for the treatment or prevention of both PNS
and CNS diseases and disorders will be agreed upon by the parties on a
product-by-product basis, with Nippon Kayaku not guaranteed any minimum level of
co-commercialization rights. Signal and Nippon Kayaku also have granted each
other co-exclusive commercialization rights outside the field with respect to
each analog compound arising from the collaboration which is developed and
commercialized by one or both of the parties.
ORGANON
In July 1996, Signal entered into a collaborative agreement with Organon
for the discovery of new genomic targets, under which Organon agreed to fund
certain research at Signal for three years. Such agreement may be extended for
up to two additional years by mutual consent of the parties. Pursuant to an
amendment dated January 1998, Organon may terminate the research, effective in
either January 1999 or July 1999, for failure to meet certain milestones by
either October 1998 or January 1999, respectively. Initially, Signal will
utilize its cellular, molecular and genomic technologies to identify and
validate novel genes in certain target tissues. Signal will then develop high
throughput screening assays for use by Organon in identifying small molecule
drugs to treat cardiovascular, neurological, gynecological and certain other
diseases. Pursuant to this collaboration, Organon has received rights for, and
will be solely responsible for, the worldwide development and commercialization
of any drugs arising from the collaboration.
To date, Organon has paid Signal a license fee and annual research and
development support payments at a level approximating Signal's cost of this
program. In addition, Organon is obligated to make payments to Signal based on
the achievement of certain research and development milestones, and Organon must
pay Signal royalties on any future product sales arising from the collaboration.
DUPONT MERCK
In December 1997, Signal entered into a collaborative agreement with DuPont
Merck, under which DuPont Merck agreed to fund certain research at Signal for
three years. The agreement may be extended for up to three additional years at
DuPont Merck's option. The DuPont Merck collaboration is focused on identifying
compounds for the treatment or prevention of HCV and HIV infections. Signal also
has granted DuPont Merck an option, exercisable through August 1998, to expand
the collaboration to include the identification of compounds directed toward an
additional viral target. Pursuant to this collaboration, Signal and Dupont Merck
will be responsible for developing target specific screening assays and will be
jointly responsible for identifying lead compounds. DuPont Merck will be solely
responsible for lead optimization and the worldwide development and
commercialization of any drugs arising from the collaboration.
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DuPont Merck has paid Signal a license fee and has agreed to provide Signal
with annual research and development support at a level approximating Signal's
cost of these programs. DuPont Merck also is obligated to make payments to
Signal and to purchase its Common Stock upon the achievement of certain research
and development milestones, and to pay Signal royalties on any future product
sales arising from the collaboration. In addition, DuPont Merck has agreed to
purchase $2.0 million of Common Stock of Signal in a private transaction
concurrent with the closing of this offering at a price per share equal to the
initial public offering price.
TANABE
From March 1996 to March 1998, Signal and Tanabe were engaged in a
collaborative program under which Tanabe funded certain research by Signal in
target and drug discovery in the fields of inflammatory disease and
osteoporosis. In connection with the collaboration, Tanabe paid Signal a license
fee and reimbursed Signal for research and development costs. Tanabe also
purchased shares of Signal's Series D Preferred Stock.
In March 1998, Signal and Tanabe mutually agreed to conclude their research
collaboration, and Tanabe licensed from Signal a lead compound that was
discovered during the collaboration. This compound has been validated in animal
models of arthritis, and may have application for the treatment of autoimmune,
inflammatory and certain other diseases. Signal retained all other intellectual
property rights, including rights to all other drug targets and drug leads,
created before or during the collaboration. Tanabe paid an additional license
fee to Signal for the exclusive worldwide license to the lead compound and is
obligated to make payments to Signal based on the achievement of certain
research and development milestones and to pay Signal royalties on any future
product sales.
LICENSE AGREEMENTS
Signal has established a number of license agreements with academic
institutions. Signal's principal license agreements are:
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
In October 1993, Signal entered into a license agreement with The Regents
of the University of California ("The Regents"), as amended in June 1997 and
February 1998, pursuant to which Signal obtained a worldwide exclusive license
for the JNK signaling enzyme based on the research of Dr. Michael Karin, a
scientific founder and advisor of the Company. The license also covers methods
for the production and screening of neuroblasts. In addition, Signal has secured
from The Regents exclusive worldwide license rights to certain patents filed by
Dr. Karin relating to specified NF-kB signaling molecules, IKK1 and IKK2. Under
the license agreement, Signal has paid initial license fees, certain extension
payments and issued Common Stock to The Regents, and is obligated to make
certain royalty and milestone payments. The term of the license remains in
effect for the life of the last-to-expire patent covered under the agreement.
THE UNIVERSITY OF MASSACHUSETTS
In October 1996 and 1997, Signal entered into worldwide exclusive license
agreements with the University of Massachusetts ("U Mass"). Pursuant to the
license agreements, Signal has exclusive rights under a certain patent
application and nonexclusive worldwide rights under certain unpatented know-how
to develop drugs targeting JNK and two intracellular signaling proteins in the
p38 pathway, MKK3 and MKK4, based on the research of Dr. Roger J. Davis, a
scientific advisor of the Company. Upon entering into both of the license
agreements, Signal paid a license fee and issued shares of Common Stock to U
Mass and is obligated to make certain royalty and milestone payments. The term
of the licenses remains in effect for the longer of 10 years or the life of the
last-to-expire patent under the agreements.
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PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain and
retain patent protection for its proprietary technologies, targets and potential
products, effectively preserve its trade secrets and to operate without
infringing the proprietary rights of third parties. Because of the substantial
length of time and expense associated with bringing potential products through
the development and regulatory approval processes to reach the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes.
Accordingly, the Company seeks patent protection for its proprietary technology,
targets and potential products. As of April 30, 1998, the Company owned or had
licensed five issued U.S. patents, 15 notices of allowance from the U.S. Patent
and Trademark Office, no corresponding issued foreign patents, 21 pending U.S.
patent applications, as well as seven corresponding international filings under
the Patent Cooperation Treaty, and 43 pending foreign national patent
applications. However, there can be no assurance that the Company or its
collaborators have developed or will continue to develop potential products or
processes that are patentable or that patents will issue from any of the
Company's pending applications, including patent applications that have been
allowed. There also can be no assurance that the Company's or its collaborators'
current patents, or patents that issue on pending applications, will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection or competitive advantages to the Company.
Patent applications in the U.S. are maintained in secrecy until patents issue,
patent applications are not generally published until many months or years after
they are filed and publication of technological developments in the scientific
and patent literature often occurs long after the date of such developments.
Accordingly, the Company cannot be certain that it or one of its collaborators
was the first to invent the subject matter covered by the patent applications or
that it or one of its collaborators was the first to file patent applications
for such inventions. Further, there can be no assurance as to the success or
timeliness in obtaining any patents, that the breadth of claims obtained, if
any, will provide adequate protection of the Company's proprietary technology,
targets or products, or that the Company or its licensors will be able to or
will in fact adequately enforce any such claims to protect its proprietary
technology, targets or potential products.
Patent law relating to the scope and enforceability of claims in the fields
in which the Company operates is still evolving. The patent positions of
biopharmaceutical and pharmaceutical companies, including the Company, are
highly uncertain and involve complex legal and technical questions for which
legal principles are not firmly established. The degree of future protection for
the Company's proprietary rights, therefore, is highly uncertain. In this
regard, there can be no assurance that independent patents will issue from the
Company's and its licensors' patent applications, which include many
interrelated applications directed to common or related subject matter. Further,
there may be issued patents and pending applications owned by others directed to
technologies relevant to the Company's, its licensors' or its collaborators'
research, development and commercialization efforts. There can be no assurance
that the Company's or its collaborators' technology can be developed and
commercialized without a license to such patents or that such patent
applications will not be granted priority over patent applications filed by the
Company, its licensors or one of its collaborators. Furthermore, there can be no
assurance that third parties will not independently develop similar or
alternative technologies to those of the Company, its licensors or any of its
collaborators, duplicate any of the Company's, its licensors' or its
collaborators' technologies or design around the patented technologies developed
by the Company, its licensors or its collaborators, any of which may have a
material adverse effect on the Company's business, financial condition and
results of operations.
The commercial success of the Company depends significantly on its ability
to operate without infringing the patents and proprietary rights of third
parties, and there can be no assurance that the Company's, its licensors' and
its collaborators' technologies do not and will not infringe the patents or
proprietary rights of others. A number of pharmaceutical companies,
biopharmaceutical companies, independent researchers, universities and research
institutions may have filed patent applications or may have been granted patents
that cover technologies similar to the technologies owned, optioned by
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<PAGE> 48
or licensed to the Company or its corporate collaborators. For instance, a
number of patents may have issued and may issue in the future on certain targets
or their use in screening assays that could prevent the Company and its
collaborators from developing screens using such targets, compounds relating to
such targets or relate to certain other aspects of technology utilized or
expected to be utilized by the Company. In addition, the Company is unable to
determine all of the patents or patent applications that may materially affect
the Company's or its corporate collaborators' ability to make, use or sell any
potential products. The Company is aware of one allowed U.S. patent application
relating to certain methods for transcriptional modulation. Signal believes that
it has not infringed, and is not currently infringing, the claims of the allowed
application. Nonetheless, the Company may in the future be required to obtain a
license to such allowed patent, and there can be no assurance that such a
license will be available on commercially reasonable terms, if at all. In
addition, the Company is aware of an issued U.S. patent claim for certain human
MAP kinases, including MAP kinases in the p38 pathway, which may be useful as
targets for drug discovery. The Company is negotiating a license to patent
rights covering such MAP kinase targets that may be useful in the Company's
research programs, although there can be no assurance that such a license will
be available on commercially reasonable terms, if at all. Any conflicts
resulting from third-party patent applications and patents could significantly
reduce the coverage of the patents owned, optioned by or licensed to the Company
or its collaborators and limit the ability of the Company or its collaborators
to obtain meaningful patent protection. If patents are issued to third parties
that contain competitive or conflicting claims, the Company, its licensors or
its collaborators may be enjoined from pursuing research, development or
commercialization of potential products or be required to obtain licenses to
these patents or to develop or obtain alternative technology. There can be no
assurance that the Company or its collaborators will not be so enjoined or will
be able to obtain any license to the patents and technologies of third parties
on acceptable terms, if at all, or be able to obtain or develop alternative
technologies. If the Company or any of its collaborators is enjoined from
pursuing its research, development or commercialization activities or if any
such license is or alternative technologies are not obtained or developed, the
Company or such collaborator may be delayed or prevented from commercializing
its potential products, which would result in a material adverse effect on the
Company's business, financial condition and results of operations.
The drug discovery industry has a history of patent litigation and there
will likely continue to be numerous patent litigation suits concerning drug
discovery technologies and potential products. The patent positions of
pharmaceutical, biopharmaceutical and drug discovery companies, including the
Company, generally are uncertain and involve complex legal and factual
questions. Litigation to establish the validity of patents, to defend against
patent infringement claims of others and to assert infringement claims against
others can be expensive and time consuming, even if the outcome is favorable. An
outcome of any patent prosecution or litigation that is unfavorable to the
Company or one of its licensors or collaborators may have a material adverse
effect on the Company. In particular, litigation may be necessary to enforce any
patents issued or licensed to the Company, its licensors, or its collaborators,
to protect trade secrets or know-how of the Company, its licensors or its
collaborators or to determine the scope and validity of a third party's
proprietary rights. The Company could incur substantial costs if litigation is
required to defend itself in patent suits brought by third parties, if the
Company participates in patent suits brought against or initiated by its
licensors or collaborators or if the Company initiates such suits, and there can
be no assurance that funds or resources would be available to the Company in the
event of such litigation. Additionally, there can be no assurance that the
Company, its licensors or its collaborators would prevail in any such action. An
adverse outcome in litigation or an interference to determine priority or other
proceeding in a court or patent office could subject the Company to significant
liabilities, require disputed rights to be licensed from or to other parties or
require the Company, its licensors or its collaborators to cease using certain
technology, any of which may have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to patent protection, the Company also relies on copyright
protection, trade secrets, know-how, continuing technological innovation and
licensing opportunities. In an effort to maintain
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<PAGE> 49
the confidentiality and ownership of trade secrets and proprietary information,
the Company requires employees, consultants and certain collaborators to execute
confidentiality and invention assignment agreements upon commencement of a
relationship with the Company. These agreements generally provide that all
confidential information developed or made known to the individual by the
Company during the course of the individual's relationship with the Company will
be kept confidential and not disclosed to third parties except in specific
circumstances. The agreements also generally provide that all inventions
conceived by the individual in the course of rendering services to the Company
shall be the exclusive property of the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's trade secrets, confidential information or inventions in the event of
unauthorized use or disclosure of such information or that adequate remedies
would exist in the event of such unauthorized use or disclosure. The loss or
exposure of trade secrets possessed by the Company could adversely affect its
business. Like many high technology companies, the Company may from time to time
hire scientific personnel formerly employed by other companies involved in one
or more areas similar to the activities conducted by the Company. Although the
Company requires its employees to maintain the confidentiality of all
confidential information of previous employers, there can be no assurance that
the Company or these individuals will not be subject to allegations of trade
secret misappropriation or other similar claims as a result of their prior
affiliations.
COMPETITION
Competition among pharmaceutical and biopharmaceutical companies to
identify drug targets and drug candidates for development is intense and is
expected to increase. In the pharmaceutical industry, the Company competes with
the research and development departments of pharmaceutical and biopharmaceutical
companies and other commercial enterprises, as well as numerous academic and
research institutions and governmental agencies. In addition, the pharmaceutical
and biopharmaceutical industries are subject to rapid and substantial
technological change. Pharmaceutical and biopharmaceutical companies and others
are conducting research in various areas which overlap with the Company's
technology platform, either on their own or in collaboration with others. There
can be no assurance that pharmaceutical and biopharmaceutical companies which
compete with the Company in specific areas will not merge or enter into
collaborations or joint ventures or other alliances with one or more other such
companies or academic and research institutions and become substantial
competitors or that the Company's collaborators will not initiate or expand
their own internal target and drug discovery and development efforts.
At the present time, the Company has not conducted any clinical trials and
has no commercial manufacturing capability, sales or marketing force. Many of
the Company's competitors and potential competitors have substantially greater
capital resources, research and development resources, manufacturing, sales and
marketing experience and production facilities than does the Company.
Additionally, many of these competitors have significantly greater experience
than does the Company in undertaking target and drug discovery, preclinical
product development and testing and clinical trials of potential pharmaceutical
products and obtaining FDA and other regulatory approvals. Smaller companies
also may prove to be significant competitors, particularly through proprietary
research discoveries and collaborative arrangements with large pharmaceutical
and established biopharmaceutical companies. Many of these competitors have
significant products that have been approved or are in development and operate
large, well funded research and development programs. Academic institutions,
governmental agencies and other public and private research organizations also
conduct research, seek patent protection and establish collaborative
arrangements for the discovery, development and commercialization of new
pharmaceutical products. In addition, these companies and institutions compete
with the Company in recruiting and retaining highly qualified scientific and
management personnel. There can be no assurance that the Company's competitors
will not discover lead compounds, develop more effective, safer, more affordable
or more easily administered potential products or achieve patent protection or
commercialize potential products sooner than the Company.
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Failure to compete effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
The Company's and its collaborators' research, preclinical testing and
clinical trials of their respective potential products, if any, and the
manufacturing and marketing of their potential products, will be subject to
extensive and rigorous regulation by numerous government authorities in the
United States and in other countries where the Company and its collaborators
intend to test, manufacture and market their potential products. Prior to
marketing any product developed by the Company, the Company or its
collaborators, as applicable, must undergo an extensive regulatory approval
process. This regulatory process, which includes preclinical testing and
clinical trials of each potential product to establish its safety and efficacy,
will take many years and require the expenditure of substantial resources, and
also may include post-marketing surveillance. Data obtained from preclinical
testing and clinical trials 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 FDA policy for drug approval
during the period of product development and FDA regulatory review of each
submitted new drug application ("NDA") or product license application ("PLA").
Similar delays or rejection also may be encountered in foreign countries. There
can be no assurance that regulatory approval will be obtained for any potential
products developed by the Company or its collaborators. Moreover, regulatory
approval may entail limitations on the indicated uses of a drug. Further, even
if regulatory approval is obtained, a marketed drug and its manufacturer are
subject to continuing review, and discovery of previously unknown problems with
a drug or manufacturer can result in the withdrawal of a drug from the market or
a significant decrease in market demand, which would have an adverse effect on
the Company's business, financial condition and results of operations.
Violations of regulatory requirements at any stage, including preclinical
testing and clinical trials, the approval process or post-approval, may result
in various adverse consequences including a delay by the FDA or other applicable
regulatory authority in approving or its refusal to approve a potential product,
withdrawal of an approved drug from the market and the imposition of criminal
penalties against the manufacturer and NDA or PLA holder. Neither the Company
nor its collaborators has submitted any IND applications for any potential
product of the Company, and none has been approved for commercialization in the
United States or internationally. No assurance can be given that the Company or
its collaborators will be able to obtain FDA or other applicable regulatory
authority approval for any potential products. Failure to obtain requisite
regulatory approvals or failure to obtain approvals of the scope requested will
delay or preclude the Company or its collaborators from marketing the Company's
or its collaborators' products or limit the commercial use of the potential
products and would have material adverse effect on the Company's business,
financial condition and results of operations.
MANUFACTURING
To date, the Company has not manufactured any products for preclinical,
clinical or commercial purposes and does not have any manufacturing facilities.
The Company intends to utilize third-party contract manufacturers or its
corporate collaborators for the production of material for use in preclinical
and clinical trials and for the manufacture of future products for
commercialization. In the event that the Company is unable to secure such
outside manufacturing capabilities, it will not be able to conduct preclinical
product development, clinical trials or commercialize its potential products as
planned. Even if the Company were able to establish its own internal
manufacturing capability, doing so would require the expenditure of significant
resources which could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company or any outside manufacturers can produce potential products of
suitable quality in sufficient quantity in a cost-effective manner, if at all.
The manufacture of the Company's potential products for preclinical and clinical
trials and commercial purposes is subject to current Good Manufacturing
Practices ("cGMP") regulations promulgated by the FDA and other applicable
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domestic and foreign regulations. No assurance can be given that in the future
the Company or any outside manufacturers can maintain full compliance with cGMP
regulations or other applicable regulations.
EMPLOYEES
As of April 30, 1998 the Company had 82 full-time employees, including 39
with Ph.D. degrees. Of the Company's workforce, 66 employees are engaged in
discovery research and 16 are engaged in business development, finance and
administration. The Company has assembled a group of experienced scientists and
managers skilled in each phase of target and drug discovery, including cell line
development, functional genomics, molecular biology, assay development,
automated high throughput screening and medicinal chemistry. The Company also
retains outside consultants. None of the Company's employees are covered by
collective bargaining arrangements, and management considers its relationships
with its employees to be good.
FACILITIES
Signal currently leases 23,000 square feet of laboratory and office space
at 5555 Oberlin Drive, San Diego, California. The Company's lease for such
facility expires on January 31, 2001, with an option to renew the lease for two
additional periods of one year each. Signal also leases 11,000 square feet of
laboratory and office space at 5626 Oberlin Drive, San Diego, California. The
Company's lease for such facility expires on December 31, 2003. The Company
believes that its existing facilities are adequate to meet its business
requirements for the near-term and that additional space will be available on
commercially reasonable terms, if required.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings at this time.
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board consists of its five scientific
founders, as well as other individuals with expertise in the fields of
immunology, cytokine biology, virology and synthetic chemistry. The Scientific
Advisory Board generally advises the Company concerning long-term scientific
planning, research and development, and also evaluates the Company's research
programs, recommends personnel to the Company and advises the Company on
specific scientific and technical issues. The Scientific Advisory Board meets at
least two times per year, and certain individual scientific advisors consult
with and meet informally with the Company on a more frequent basis. Certain
scientific advisors own shares of Common Stock of the Company, and the Company
has entered into consulting agreements with all of its scientific advisors.
None of the scientific advisors is employed by the Company, and any or all
of such advisors may have commitments to or consulting or advisory contracts
with their employers or other entities that may conflict or compete with their
obligations to Signal. Accordingly, such persons are expected to devote only a
small portion of their time to Signal. The members of Signal's Scientific
Advisory Board are:
SCIENTIFIC FOUNDERS
Fred H. Gage, Ph.D., is a Professor in the Laboratory of Genetics of the
Salk Institute for Biological Studies. He is an internationally respected
innovator in the fields of neurological diseases and transplantation. Dr. Gage
has won the IPSEN Prize, the Ameritec Prize, the Metropolitan Award, the
Chancellor's Associate Award and the Allied Signal Award.
Stephen F. Heinemann, Ph.D., is a Professor and Director of the Molecular
Neurobiology Laboratory at The Salk Institute and an external member of the Max
Planck Institute. He is considered one of
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the foremost experts in the field of receptor neurobiology and is a member of
the National Academy of Sciences.
Tony Hunter, Ph.D., is a Professor at The Salk Institute, an American
Cancer Society Research Professor. Dr. Hunter is a world-renowned expert in the
field of gene regulating kinases and established their roles in the regulation
of cellular growth and tumor development. Dr. Hunter was elected a fellow of the
Royal Society of London and has received several awards for his research,
including a 1994 Gairdner Foundation International Award.
Michael Karin, Ph.D., is a Professor in the Department of Pharmacology,
University of California, San Diego. He is an internationally recognized expert
in the field of transcriptional regulation and has made fundamental
contributions to the understanding of a variety of gene regulating pathways,
including JNK, FRK and NF-k B.
Inder Verma, Ph.D., is Chairman of Signal's Scientific Advisory Board. Dr.
Verma is an American Cancer Society Professor of Molecular Biology and
Co-Director of the Laboratory of Genetics at The Salk Institute, and is a member
of the National Academy of Sciences. Dr. Verma is internationally recognized for
his work in the field of NF-k B gene regulation.
OTHER SCIENTIFIC ADVISORY BOARD MEMBERS
Elliot J. Androphy, M.D., is the Associate Chairman of the Department of
Dermatology at the New England Medical Center and Tufts University School of
Medicine, as well as a practicing physician. He is considered to be a world
expert in the field of HPV, where he has made seminal contributions.
Melanie Cobb, Ph.D., is a Professor in the Department of Pharmacology at
the University of Texas Southwestern Medical Center in Dallas. Dr. Cobb is
internationally renowned for her research on MAP kinase gene regulating
pathways.
Roger J. Davis, Ph.D., is a Professor in Molecular Medicine and the
Department of Biochemistry & Molecular Biology at the University of
Massachusetts Medical Center, and an Associate Investigator at the Howard Hughes
Medical Institute. Dr. Davis is regarded as one of the leading researchers
worldwide in the field of signal transduction. Dr. Davis is a principal or
co-discoverer of several important gene regulating kinases, including molecular
mechanisms of the JNK and p38 signaling pathways.
Neal A. DeLuca, Ph.D., is an Associate Professor in the Department of
Molecular Genetics and Biochemistry at the University of Pittsburgh School of
Medicine. Dr. DeLuca is an internationally recognized researcher in the field of
herpes virology.
Charles Dinarello, M.D., is a Professor of Medicine at the University of
Colorado School of Medicine in Denver. Dr. Dinarello is an internationally
respected expert in the field of cytokines and their role in immunological and
infectious diseases.
Anjana Rao, Ph.D., is an Associate Professor of Pathology at the Harvard
Medical School. Dr. Rao has conducted seminal research on signal transduction
mechanisms of the human immune system, including the NF-ATp and NF-k B
transcription factors. Dr. Rao is a recipient of the Leukemia Society of America
Scholar Award.
K. Barry Sharpless, Ph.D., is the William M. Keck Professor of Chemistry in
the Department of Chemistry at The Scripps Research Institute. He is an
internationally renowned synthetic chemist relating to his work in asymmetric
chemical synthesis and has received numerous honors for his work including the
King Faisal International Prize for Science. Dr. Sharpless is a fellow of the
American Academy of Arts and Sciences and the National Academy of Sciences, and
is a Guggenheim Fellow.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information regarding the Company's
executive officers, directors and key employees as of May 15, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Alan J. Lewis, Ph.D. ..................... 52 President, Chief Executive Officer and
Director
Carl F. Bobkoski.......................... 45 Executive Vice President
David W. Anderson, Ph.D. ................. 46 Senior Vice President, Drug Development
Bradley B. Gordon......................... 44 Vice President Finance, Chief Financial
Officer and Corporate Secretary
Douglas E. Richards....................... 35 Vice President, Corporate Development
Miguel S. Barbosa, Ph.D. ................. 40 Senior Director of Experimental
Therapeutics and Virology
Anthony M. Manning, Ph.D. ................ 36 Director of Inflammation and Immunology
Shripad S. Bhagwat, Ph.D. ................ 42 Director of Medicinal Chemistry
Mark J. Suto, Ph.D. ...................... 42 Director of Technology Management
John P. Walker............................ 49 Chairman of the Board
Brook H. Byers(1)......................... 52 Director
Luke B. Evnin, Ph.D.(1)................... 34 Director
Harry F. Hixson, Ph.D.(2)................. 59 Director
Patrick F. Latterell(1)(2)................ 39 Director
Arnold Oronsky, Ph.D.(2).................. 57 Director
</TABLE>
- ------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Alan J. Lewis, Ph.D. has served the Company as Chief Executive Officer and
director since 1996 and as President of the Company since 1994. Prior to joining
the Company, Dr. Lewis worked for 15 years at the Wyeth-Ayerst Research division
of American Home Products Corporation ("Wyeth-Ayerst"), a pharmaceutical
company, where he served as Vice President of Research from 1990 to 1994. At
Wyeth-Ayerst, Dr. Lewis was responsible for research efforts in CNS,
cardiovascular, inflammatory, allergy and bone metabolism diseases. Dr. Lewis
currently serves as a director of Allergan Specialty Therapeutics, Inc., a
pharmaceutical company. He holds a Ph.D. in Pharmacology from the University of
Wales in Cardiff and completed his post-doctoral training at Yale University.
Carl F. Bobkoski has served the Company as Executive Vice President since
1995. Before joining Signal, from 1990 to 1995, Mr. Bobkoski was Executive Vice
President and a director at Gensia, Inc. ("Gensia"), a biopharmaceutical
company, where he was responsible for directing all commercialization activities
for proprietary products, overseeing the operations of Gensia Laboratories,
Ltd., a wholly-owned subsidiary of Gensia, and supervising product development,
finance, management information systems and corporate development. Mr. Bobkoski
received an M.B.A. from The University of Chicago.
David W. Anderson, Ph.D. has served as Senior Vice President, Drug
Development since May 1998 and served as Vice President, Drug Discovery and
Preclinical Development of the Company from 1994 to May 1998. Prior to joining
Signal, Dr. Anderson spent six years at Johnson & Johnson, a medical product and
pharmaceutical company, most recently as Director, Drug Discovery at the R.W.
Johnson Pharmaceutical Research Institute. He holds a Ph.D. in Medical
Microbiology and Immunology from the University of Missouri-Columbia and
completed his post-doctoral training at The University of Colorado Health
Science Center.
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Bradley B. Gordon has served the Company as Vice President Finance, Chief
Financial Officer and Corporate Secretary since 1994. For the seven years prior
to joining Signal, Mr. Gordon served in various management positions with
Viagene, Inc., a biopharmaceutical company acquired by Chiron Corp. in 1995,
including Corporate Vice President, Vice President Corporate Development and
Vice President, Finance. Mr. Gordon received an M.B.A. from the University of
Southern California.
Douglas E. Richards has served the Company as Vice President, Corporate
Development since May 1998. Before joining Signal, from 1995 to 1998, Mr.
Richards served most recently as Director of Biotechnology Licensing at
Bristol-Myers Squibb, Inc., a public pharmaceutical company. Between 1992 and
1995, Mr. Richards served as Manager of Technology Licensing at Gensia, where he
was responsible for partnering and technology licensing activities. Mr. Richards
received an M.B.A. from The University of Chicago and an M.S. in Molecular
Biology from the University of Wisconsin.
Miguel S. Barbosa, Ph.D. has served the Company as Senior Director of
Experimental Therapeutics and Virology since 1994. Prior to joining the Company,
from 1990 to 1994, Dr. Barbosa was an Assistant Professor of Microbiology at the
University of Texas Southwestern Medical Center, where he elucidated the
interaction between HPV oncoproteins and cellular tumor suppressor proteins that
results in human cervical cancer. Dr. Barbosa obtained his Ph.D. in the
department of Microbiology and Immunology at the University of California, Los
Angeles School of Medicine.
Anthony M. Manning, Ph.D. has served the Company as Director of
Inflammation and Immunology since 1996. Prior to joining Signal, from 1992 to
1996, Dr. Manning was Senior Research Scientist and NF-k B Drug Discovery
Program Team Leader at Pharmacia & Upjohn, Inc., a pharmaceutical company. Dr.
Manning received his Ph.D. in Biochemistry from the University of Otago, New
Zealand and pursued post-graduate studies in the Department of Pediatrics,
University of Otago and in the Institute for Molecular Genetics, Baylor College
of Medicine, where he was also an Assistant Professor in the Department of
Pediatrics.
Shripad S. Bhagwat, Ph.D. has served as Director of Medicinal Chemistry at
Signal since May 1998. Between 1994 and 1998, Dr. Bhagwat was Senior Group
Leader, Neuroscience Research at Abbott Laboratories, a pharmaceutical company,
with responsibility for managing the medicinal chemistry activities for two lead
optimization programs, including one drug candidate currently in clinical
development. From 1985 through 1994, Dr. Bhagwat was a staff scientist with
Ciba-Geigy Corp., a pharmaceutical company, where he managed several medicinal
chemistry programs in the fields of cardiology and virology. Dr. Bhagwat
received his Ph.D. in Organic Chemistry from the State University of New York at
Stony Brook and conducted post-doctoral research at Columbia University.
Mark J. Suto, Ph.D. has served the Company as Director of Technology
Management since January 1998. During the period from 1994 through 1997, Dr.
Suto was Director of Medicinal Chemistry at the Company. Prior to joining
Signal, from 1993 to 1994, Dr. Suto was Senior Director of Medicinal Chemistry
at Trega Biosciences, Inc. (formerly Houghten Pharmaceuticals, Inc.) ("Trega"),
a biopharmaceutical company. Prior to joining Trega, from 1982 to 1993, Dr. Suto
was a Senior Research Associate at Parke-Davis Pharmaceutical Research Division,
Warner-Lambert Company. Dr. Suto received his Ph.D. in Medicinal Chemistry from
the State University of New York at Buffalo.
John P. Walker has served as Chairman of the Board of the Company since
1996. Mr. Walker is currently Chairman, Chief Executive Officer and a director
of AxyS Pharmaceuticals, Inc., a public biopharmaceutical company ("AxyS"). From
1993 to 1997, he was President and Chief Executive Officer of Arris
Pharmaceutical Corporation ("Arris"), a predecessor corporation to AxyS. From
1991 to 1993, he was a venture capitalist at Alpha Venture Partners. In
addition, Mr. Walker was the Chairman and Chief Executive Officer of Vitaphore
Corporation, a biomaterials company which was sold to Union Carbide Corporation
in 1990, and for a period of 15 years was an executive with American Hospital
Supply Corporation. Mr. Walker also serves on the board of directors of
Microcide Corporation and Geron Corporation. He conducted graduate business
studies at Northwestern University Institute for Management.
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Brook H. Byers has served as a director of the Company since 1993. Mr.
Byers is a general partner of Kleiner Perkins Caufield & Byers, a private
venture capital firm, which he joined in 1977. He has been the founding
president and chairman of four life sciences companies: Hybritech Incorporated,
IDEC Pharmaceuticals Corporation, Ligand Pharmaceuticals, Inc. and InSite
Vision, Inc. Mr. Byers currently serves as a director of AxyS. He also serves as
a director of a number of privately held technology companies and sits on the
University of California, San Francisco Foundation Board of Directors. Mr. Byers
received his M.B.A. from Stanford Graduate School of Business.
Luke B. Evnin, Ph.D. has served as a director of the Company since 1993. He
has been a Managing Director at MPM Asset Management LLC, a venture capital
firm, since March 1998 and from 1994 to 1998 served as a General Partner at
Accel Partners, a venture capital firm. He has been involved in healthcare
investing since 1990 and currently serves on the boards of several privately
held companies and one public company, EPIX Medical, Inc. Dr. Evnin received his
Ph.D. from the Department of Biochemistry at the University of California, San
Francisco.
Harry F. Hixson, Ph.D. has served as a director of the Company since 1993.
Dr. Hixson was employed by Amgen Inc. from 1985 to 1991, where he last served as
President and Chief Operations Officer. From 1991 to present, Dr. Hixson has
been a private investor specializing in biotechnology start-up companies. From
1991 until its merger with Somatix Therapy Corporation in 1992, Dr. Hixson
served as President and Chief Executive Officer of GeneSys Therapeutics, Inc., a
biotechnology company. Dr. Hixson presently is a director of Neurocrine
Biosciences, Inc. Dr. Hixson holds a Ph.D. in Physical Biochemistry from Purdue
University and an M.B.A. from The University of Chicago.
Patrick F. Latterell has served the Company as a director since 1993, as
Chairman of the Board from 1993 to 1996, and as Chief Executive Officer from
1994 to 1996. Mr. Latterell is a General Partner of Venrock Associates, a
venture capital investment group, which he joined in 1989. Mr. Latterell
currently is a director of Vical, Inc. and several private biomedical companies.
Mr. Latterell holds an M.B.A. from Stanford Graduate School of Business.
Arnold Oronsky, Ph.D. has served as a director of the Company since 1994.
Since 1994, Dr. Oronsky has been a general partner at InterWest Partners, a
private venture capital firm. From 1995 to 1996, Dr. Oronsky served as President
and Chief Executive Officer of Coulter Pharmaceutical, Inc., a biopharmaceutical
company. From 1984 to 1994, Dr. Oronsky served as Vice President for Discovery
Research at Lederle Laboratories, a pharmaceutical division of American
Cyanamid, Inc., where he was responsible for the research of new drugs. Since
1988, Dr. Oronsky has served as a senior lecturer in the Department of Medicine
at Johns Hopkins Medical School. Dr. Oronsky received his Ph.D. in Physiology
and Biochemistry from Columbia University College of Physicians and Surgeons.
Under the terms of the Restated Certificate, the Company's Board of
Directors is divided into three classes, serving staggered terms of three years,
and any vacancies that occur during the year may be filled by the Company's
Board of Directors for the remainder of the full term. Dr. Lewis and Mr. Walker
serve as Class I directors, whose term will expire at the first annual meeting
of stockholders following the closing of this offering. Dr. Evnin and Dr.
Oronsky serve as Class II directors, whose term will expire at the second annual
meeting of stockholders following the closing of this offering. Mr. Byers, Dr.
Hixson and Mr. Latterell serve as Class III directors, whose term will expire at
the third annual meeting of stockholders following the closing of this offering.
Officers serve at the discretion of the Board of Directors. There are no family
relationships between any directors or executive officers of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Compensation Committee consists of Mr. Latterell, Dr. Oronsky and Dr.
Hixson. The Compensation Committee makes recommendations regarding the Company's
1998 Equity Incentive Plan, Non-Employee Directors' Stock Option Plan and
Employee Stock Purchase Plan, as well as prior stock option plans, and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.
54
<PAGE> 56
The Audit Committee consists of Dr. Evnin, Mr. Latterell and Mr. Byers. The
Audit Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.
DIRECTOR COMPENSATION
The Company's directors currently do not receive any cash compensation for
services on the Board of Directors or any committee thereof, but directors may
be reimbursed for certain expenses in connection with attendance at Board and
committee meetings. Notwithstanding the foregoing, John P. Walker, the Chairman
of the Board of Directors, currently receives $1,000 compensation for each
meeting of the Board of Directors that he attends pursuant to a consulting
agreement dated April 1, 1996. In 1997, each non-employee director also received
options to purchase 12,500 shares of Common Stock of the Company. All directors
are eligible to participate in the Company's 1998 Equity Incentive Plan.
Non-employee directors receive automatic grants of options under the Company's
Non-Employee Directors' Stock Option Plan as described below. See
"Management--Equity Incentive Plan" and "--Non-Employee Directors' Stock Option
Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee. See "Certain Transactions" for a description of transactions between
the Company and entities affiliated with members of the Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
awarded to, earned by, or accrued for services rendered to, the Company in all
capacities during the fiscal year ended December 31, 1997 by (i) the Company's
Chief Executive Officer and (ii) the Company's three other most highly
compensated executive officers whose salary and bonus for each year were in
excess of $100,000 (together, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION AWARDS
-------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS (#)
--------------------------- --------- -------- ---------------------
<S> <C> <C> <C>
Alan J. Lewis, Ph.D., President, Chief Executive
Officer and Director.......................... $266,815 $36,544 18,750
Carl F. Bobkoski, Executive Vice President...... 192,346 27,179 --
David W. Anderson, Ph.D., Senior Vice President,
Drug Development.............................. 198,129 27,368 25,000
Bradley B. Gordon, Vice President Finance, Chief
Financial Officer............................. 145,564 20,536 20,000
</TABLE>
- ------------------------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits which are available
generally to all salaried employees of the Company and certain perquisites
and other personal benefits received which do not exceed the lesser of
$50,000 or 10% of any officer's salary and bonus disclosed in this table.
55
<PAGE> 57
EMPLOYMENT AGREEMENTS
The Company entered into an employment letter agreement with Alan J. Lewis,
dated December 8, 1993, providing for an annual salary of $225,000, a signing
bonus of $50,000, additional bonuses and options subject to certain performance
milestones, assistance with home financing, and an opportunity to acquire
112,500 shares of Common Stock of the Company pursuant to the Company's stock
option plan. The term of the employment letter agreement was for one year,
renewable annually. See "Certain Transactions."
The Company entered into an employment letter agreement with David W.
Anderson, dated March 4, 1994, providing for an annual salary of $165,000,
subject to adjustment from time to time, and an opportunity to acquire 50,000
shares of Common Stock of the Company pursuant to the Company's stock option
plan. The employment letter agreement indicates that Dr. Anderson's employment
is terminable at will by either party.
The Company entered into an employment letter agreement with Bradley B.
Gordon, dated August 18, 1994, providing for an annual salary of $130,000,
subject to adjustment from time to time, certain severance arrangements, and an
opportunity to acquire 37,500 shares of Common Stock of the Company pursuant to
the Company's stock option plan. The employment letter agreement indicates that
Mr. Gordon's employment is terminable at will by either party.
The Company entered into an employment letter agreement with Carl F.
Bobkoski, dated June 13, 1995, providing for an annual salary of $175,000,
subject to adjustment from time to time, plus bonuses and options subject to
certain performance and corporate-partnering milestones. The employment letter
agreement indicates that Mr. Bobkoski's employment is terminable at will by
either party.
1998 EQUITY INCENTIVE PLAN
The Company adopted its 1993 Stock Option Plan, 1993 Founders' Stock Option
Plan and 1997 Stock Option Plan (collectively, the "Prior Plans") and amended,
restated and retitled them in February 1998 as the 1998 Equity Incentive Plan
(as amended, restated and retitled, the "1998 Plan"). Outstanding options will
continue to be governed by the original terms of those grants. An aggregate of
2,016,667 shares of the Company's Common Stock have been reserved for issuance
pursuant to the exercise of stock awards granted to employees, directors and
consultants under the 1998 Plan. The 1998 Plan will terminate in April 2008,
unless sooner terminated by the Board.
The 1998 Plan permits the granting of options intended to qualify as
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
employees (including officers and employee directors), and options that do not
so qualify ("Nonstatutory Stock Options," and, together with Incentive Stock
Options, the "Options") to employees (including officers and employee
directors), directors and consultants (including non-employee directors). In
addition, the 1998 Plan permits the granting of stock appreciation rights
("SARs") appurtenant to or independently of Options, as well as stock bonuses
and rights to purchase restricted stock (Options, SARs, stock bonuses and rights
to purchase restricted stock are hereinafter referred to as "Stock Awards"). No
person is eligible to be granted Options and SARs covering more than 750,000
shares of the Company's Common Stock in any calendar year.
The 1998 Plan is administered by the Board or a committee appointed by the
Board. Subject to the limitations set forth in the 1998 Plan, the Board has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each Stock Award, to determine whether an
Option is to be an Incentive Stock Option or a Nonstatutory Stock Option, to
establish vesting schedules, to specify the Option exercise price and the type
of consideration to be paid to the Company upon exercise and, subject to certain
restrictions, to specify other terms of Stock Awards.
The maximum term of Options granted under the 1998 Plan is 10 years. The
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which Incentive Stock Options are exercisable for
the first time by an optionee during any calendar year (under all
56
<PAGE> 58
such plans of the Company and its affiliates) may not exceed $100,000, or the
Options or portion thereof which exceed such limit (according to the order in
which they are granted) shall be treated as Nonstatutory Stock Options. Options
granted under the 1998 Plan generally are non-transferable and expire three
months after the termination of an optionee's service to the Company. In
general, if an optionee is permanently disabled or dies during his or her
service to the Company, such person's Options may be exercised up to 12 months
following such disability and following such death.
The exercise price of Options granted under the 1998 Plan is determined by
the Board of Directors in accordance with the guidelines set forth in the 1998
Plan. The exercise price of an Incentive Stock Option cannot be less than 100%
of the fair market value of the Common Stock on the date of the grant. The
exercise price of a Nonstatutory Stock Option cannot be less than 85% of the
fair market value of the Common Stock on the date of grant. Options granted
under the 1998 Plan vest at the rate specified in the option agreement. The
exercise price of Incentive Stock Options granted to any person who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of the Company's capital stock must be at least 110% of the
fair market value of such stock on the date of grant and the term of such
Incentive Stock Options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the
1998 Plan shall be in such form and will contain such terms and conditions as
the Board deems appropriate. The purchase price under any restricted stock
purchase agreement will not be less than 85% of the fair market value of the
Company's Common Stock on the date of grant. Stock bonuses and restricted stock
purchase agreements awarded under the 1998 Plan are generally non-transferable.
Pursuant to the 1998 Plan, shares subject to Stock Awards that have expired
or otherwise terminated without having been exercised in full again become
available for grant, but shares subject to exercised stock appreciation rights
will not again become available for grant. The Board of Directors has the
authority to reprice outstanding Options and SARs and to offer optionees and
holders of SARs the opportunity to replace outstanding options and SARs with new
options or SARs for the same or a different number of shares.
Upon certain changes in control of the Company, all outstanding Stock
Awards under the 1998 Plan must either be assumed or substituted by the
surviving entity. In the event the surviving entity does not assume or
substitute such Stock Awards, such Stock Awards will be terminated to the extent
not exercised prior to such change in control.
As of March 31, 1998, the Company had issued 435,570 shares of Common Stock
pursuant to the exercise of Options granted under the 1998 Plan, and had granted
additional Options to purchase an aggregate of 662,676 shares of Common Stock.
As of March 31, 1998, 918,421 shares of Common Stock remained available for
future grants under the 1998 Plan.
57
<PAGE> 59
The following tables set forth information for 1997 concerning individual
grants of stock options to Named Officers, the exercise of stock options by
Named Officers and aggregate stock options held by the Named Officers at
year-end:
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION ------------------
NAME GRANTED(1) 1997 PER SHARE DATE 5% 10%
---- ---------- ------------ -------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Alan J. Lewis........ 18,750 10.8% $ 1.12 6/3/07 $34,207 $54,469
Carl F. Bobkoski..... -- -- -- -- -- --
David W. Anderson.... 8,750 5.0 0.56 2/19/07 7,982 12,709
16,250 9.4 1.12 6/3/07 29,645 47,206
Bradley B. Gordon.... 20,000 11.5 1.12 4/17/07 36,487 58,100
</TABLE>
- ------------------------------
(1) Twenty-five percent of such options vest on the first anniversary of the
grant date and the remaining options vest thereafter in 36 equal
installments. The Board of Directors of the Company has the right to
accelerate the vesting of such options. The term of the options is 10 years.
(2) The potential realizable value is calculated based on the term of the option
and is calculated by assuming that the fair market value of Common Stock on
the date of the grant as determined by the Board appreciates at the
indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and the Common Stock received therefore is
sold on the last day of the term of the option for the appreciated price.
The 5% and 10% rates of appreciation are derived from the rules of the
Securities and Exchange Commission. The actual value realized may be greater
than or less than the potential realizable values set forth in the table.
AGGREGATED 1997 OPTION EXERCISES AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR END AT YEAR END($)(1)
ACQUIRED ON VALUE ------------------------------ ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan J. Lewis......... -- -- 106,250 -- $1,213,000 --
Carl F. Bobkoski...... 73,750(3) $ 0 -- -- -- --
David W. Anderson..... -- -- 25,000 -- 276,900 --
Bradley B. Gordon..... -- -- 57,500 -- 646,600 --
</TABLE>
- ------------------------------
(1) Based on an assumed initial public offering price of $12.00 per share minus
the per share exercise price multiplied by the number of shares.
(2) All stock options granted by the Company are immediately exercisable for
shares of restricted common stock, subject to a right of repurchase by the
Company pursuant to a vesting schedule. At year-end, Alan J. Lewis held
70,000 exercisable options remaining subject to a vesting schedule; David W.
Anderson held 25,000 exercisable options remaining subject to a vesting
schedule; and Bradley B. Gordon held 32,500 exercisable options remaining
subject to a vesting schedule.
(3) Includes 36,876 shares of Common Stock subject to a right of repurchase by
the Company pursuant to a vesting schedule.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In February 1998, the Company adopted its Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of Common Stock to non-employee directors of the
Company. The Directors' Plan is administered by the Board, unless the Board
delegates administration to a committee of at least two disinterested directors.
58
<PAGE> 60
The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 200,000. Pursuant to the terms of
the Directors' Plan: (i) each person who, after the effective date of this
offering, for the first time becomes a Non-Employee Director automatically will
be granted, upon the date of his or her initial appointment or election to be a
Non-Employee Director, a one-time option to purchase 20,000 shares of Common
Stock; and (ii) on the date of each annual meeting of the stockholders of the
Company after the effective date of this offering (other than any such annual
meeting held in 1998), each person who is elected at such annual meeting to
serve as a Non-Employee Director (who was also a Non-Employee Director prior to
such annual meeting) automatically will be granted an option to purchase 5,000
shares of Common Stock.
No options granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. Options granted under the
Directors' Plan vest monthly over a three-year period. The exercise price of
options under the Directors' Plan will equal 100% of the fair market value of
the Common Stock on the date of grant. Options granted under the Directors' Plan
are generally non-transferable. Unless otherwise terminated by the Board of
Directors, the Directors' Plan automatically terminates on the tenth anniversary
of the date of this offering. As of the date hereof, no options to purchase
shares of Common Stock have been granted under the Directors' Plan. Options
granted under the Directors' Plan vest in full upon certain changes in ownership
or control of the Company, unless assumed or replaced with similar options by
the entity gaining such ownership or control of the Company.
EMPLOYEE STOCK PURCHASE PLAN
In February 1998, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 200,000 shares of Common Stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The initial offering
under the Purchase Plan will commence on the effective date of this offering and
terminate on July 31, 2000.
Unless otherwise determined by the Board, employees are eligible to
participate in the Purchase Plan only if they are employed by the Company or a
subsidiary of the Company designated by the Board for at least 20 hours per week
and are customarily employed by the Company or a subsidiary of the Company
designated by the Board for at least five months per calendar year. Employees
who participate in an offering may have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld is then used to purchase
shares of the Common Stock on specified dates determined by the Board. The price
of Common Stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the Common Stock at the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
In the event of a merger, reorganization, consolidation or liquidation
involving the Company, the Board has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation, or the Board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction. The Board has the
authority to amend or terminate the Purchase Plan, provided, however, that no
such action may adversely affect any outstanding rights to purchase Common
Stock.
401(K) PLAN
Effective September 15, 1994, the Company adopted the Signal
Pharmaceuticals, Inc. Employees Retirement Investment Plan & Trust which was
amended and restated on January 1, 1998 (the "401(k) Plan"), covering the
Company's employees. Pursuant to the 401(k) Plan, eligible employees may elect
59
<PAGE> 61
to reduce their current compensation by up to the statutorily prescribed annual
limit ($10,000 in 1998) and have the amount of such reduction contributed to the
401(k) Plan. In addition, eligible employees may make roll-over contributions to
the 401(k) Plan from a tax-qualified retirement plan. The 401(k) Plan allows for
the Company to make discretionary matching and additional profit sharing
contributions, each as determined by a committee of the Board of Directors. No
discretionary or profit sharing contributions were made by the Company in 1997
and the Company has no intention of making such contributions in the near
future. Company contributions, if any, become 20% vested after two years of
service, with an additional 20% becoming vested for each year of service
thereafter. The 401(k) Plan is intended to qualify under Section 401 of the
Code, so that contributions by employees and the Company to the 401(k) Plan, and
income earned on the 401(k) Plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions by the Company,
if any, will be deductible by the Company when made. The trustees under the
401(k) Plan, at the direction of each participant, invest the 401(k) Plan
employee salary deferrals in selected investment options.
LIMITATIONS ON DIRECTORS' AND EXECUTIVE OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law, except with respect to
certain proceedings initiated by such persons. The Company is also empowered
under its Bylaws to enter into indemnification contracts with its directors and
executive officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, the Company has
entered into indemnification agreements with each of its directors and executive
officers.
In addition, the Company's Restated Certificate provides that a director of
the Company will not be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which the
director derives an improper personal benefit. The Restated Certificate also
provides that if the Delaware General Corporation Law is amended after the
approval by the Company's stockholders of the Restated Certificate to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of the Company's directors shall be eliminated or
limited to the fullest extent permitted by the Delaware General Corporation Law,
as so amended. The provision does not affect a director's responsibilities under
any other law, such as the federal securities laws or state or federal
environmental laws.
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<PAGE> 62
CERTAIN TRANSACTIONS
The following is a description of transactions since January 1, 1995, to
which the Company has been a party, in which the amount involved in the
transaction exceeds $60,000 and in which any director, executive officer or
holder of more than five percent of the capital stock of the Company had or will
have a direct or indirect material interest, other than compensation
arrangements that are otherwise required to be described under "Management."
In December 1997, the Company sold in a private placement 680,628 shares of
Series F Preferred Stock to Ares-Serono, a five percent holder of capital stock
of the Company, in exchange for an aggregate purchase price of $8,200,001,
pursuant to a Series F Preferred Stock Purchase Agreement dated November 25,
1997 (the "Series F Agreement"). Upon the closing of this offering, each share
of Series F Preferred Stock will automatically convert into one share of Common
Stock. See Note 5 of Notes to Financial Statements for a description of the
Series F Preferred Stock. In addition, on November 25, 1997, the Company entered
into a Research Development and License Agreement with Ares-Serono focused on
the identification of compounds that modulate NF-k B gene regulating pathways.
Ares-Serono has paid Signal a license fee and is obligated to provide Signal
with annual research and development support, make payments to Signal based on
the achievement of certain research and development milestones, and to pay
Signal royalties on any future product sales arising from the collaboration. See
"Business--Research and Development Partners."
In September 1997, the Company sold in a private placement 1,613,865 shares
of Series E Preferred Stock in exchange for an aggregate purchase price of
$11,999,997, pursuant to a Series E Preferred Stock Purchase Agreement dated
September 9, 1997 (the "Series E Agreement"). Upon the closing of this offering,
each share of Series E Preferred Stock will automatically convert into one share
of Common Stock. See Note 5 of Notes to Financial Statements for a description
of the Series E Preferred Stock. The following directors and beneficial owners
of more than five percent of the Company's Common Stock (assuming the conversion
of all shares of Preferred Stock into Common Stock) acquired beneficial
ownership of Series E Preferred Stock pursuant to the Series E Agreement:
<TABLE>
<CAPTION>
NO. OF
DIRECTORS/5% STOCKHOLDERS SHARES
------------------------- -------
<S> <C>
Patrick F. Latterell/Venrock Associates..................... 25,273
Luke B. Evnin/Accel Partners................................ 25,273
Brook H. Byers/Kleiner Perkins Caufield & Byers............. 25,273
Arnold Oronsky/InterWest Partners........................... 19,826
Oxford Bioscience Partners.................................. 13,217
U.S. Venture Partners....................................... 13,217
Ares-Serono S.A............................................. 246,575
Lombard Odier Immunology Fund............................... 392,670
</TABLE>
The Company has entered into certain other agreements in connection with
the Series E and Series F Agreements. Pursuant to one such agreement, certain
stockholders acquired registration rights. See "Description of Capital
Stock--Registration Rights." Further, the Company and its stockholders agreed to
certain restrictions on the issuance and transfer of shares of the Company's
capital stock, and to certain voting rights relating to the election of
directors, all of which restrictions and voting rights are not applicable to and
shall terminate upon the closing of this offering.
In June 1994, the Company loaned $250,000 to Alan J. Lewis, the Company's
President and Chief Executive Officer and a director of the Company, to assist
with the purchase of a residence in connection with Dr. Lewis' relocation to San
Diego, California. Pursuant to the terms of a Promissory Note dated June 14,
1994, the principal amount of the loan plus accrued interest shall be amortized
over a period of five years following June 14, 1999, with monthly payments
commencing in July 1999. The principal amount of the loan will be interest-free
for five years from the date of the Promissory Note, and thereafter will accrue
interest at the per annum rate of 7.52%, compounded annually.
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<PAGE> 63
Interest will also begin to accrue at the same rate in the event that Dr. Lewis'
employment is terminated for any reason. The parties also entered into a
Security Agreement on the same date whereby Dr. Lewis pledged all present and
future shares of Common Stock of the Company held by him (plus all cash and
stock dividends attributable to such shares) as security for the loan.
In May 1998, the Company loaned $62,000 to Alan J. Lewis in connection with
the exercise of options to purchase 106,250 shares of Common Stock of the
Company. Pursuant to the terms of a Promissory Note delivered to the Company by
Dr. Lewis, dated May 8, 1998, the principal amount of the loan plus accrued
interest at a per annum rate equal to 5.69%, compounded annually, shall be due
and payable five years from the date of the loan. Pursuant to a Stock Pledge
Agreement entered into on the same date, Dr. Lewis, pledged all present and
future shares of Common Stock of the Company held by him (plus all cash and
stock dividends attributable to such shares) as security for the loan.
The Company has entered into employment letter agreements with Alan J.
Lewis, its President and Chief Executive Officer, Carl F. Bobkoski, its
Executive Vice President, David W. Anderson, its Senior Vice President, Drug
Development, and Bradley B. Gordon, its Vice President Finance, Chief Financial
Officer and Corporate Secretary. See "Management--Employment Agreements."
The Company has granted options to certain of its directors and executive
officers. The Company has also entered into an indemnification agreement with
each of its directors and executive officers. See "Management--Limitations on
Directors' and Executive Officers' Liability and Indemnification."
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<PAGE> 64
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
holder of more than five percent of the Company's Common Stock, (ii) each of the
Named Executive Officers, (iii) each of the Company's directors, and (iv) all
current directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED(1)
SHARES -------------------
5% STOCKHOLDERS, DIRECTORS BENEFICIALLY BEFORE AFTER
AND NAMED EXECUTIVE OFFICERS OWNED(1) OFFERING OFFERING
---------------------------- ------------ -------- --------
<S> <C> <C> <C>
Ares-Serono S.A.......................................... 927,203 13.7% 9.8%
15bis Chemin des Mines
1202 Geneva, Switzerland
Luke B. Evnin, Ph.D(2)................................... 745,653 11.0 7.9
Accel Partners
428 University Avenue
Palo Alto, California 94301
Patrick F. Latterell(3).................................. 743,031 11.0 7.9
Venrock Associates
755 Page Mill Road, Suite A230
Palo Alto, California 94304
Brook H. Byers(4)........................................ 720,663 10.6 7.6
Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, California 94025
Arnold Oronsky, Ph.D.(5)................................. 568,040 8.4 6.0
InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, California 94025
Lombard Odier & Cie...................................... 392,670 5.8 4.2
11, rue de la Corraterie
1204 Geneva, Switzerland
Oxford Bioscience Partners(6)............................ 370,358 5.5 3.9
650 Town Center Drive, Suite 180
Costa Mesa, California 92626
U.S. Venture Partners(7)................................. 370,358 5.5 3.9
2180 Sand Hill Road, Suite 300
Menlo Park, California 94025
Alan J. Lewis, Ph.D.(8).................................. 187,500 2.8 2.0
Harry F. Hixson, Ph.D.(9)................................ 99,880 1.5 1.1
Carl F. Bobkoski(10)..................................... 98,750 1.5 1.0
David W. Anderson, Ph.D.(11)............................. 85,000 1.3 *
Bradley B. Gordon(12).................................... 70,000 1.0 *
John P. Walker(13)....................................... 37,500 * *
All directors and executive officers as a group (10
persons)(14)........................................... 3,356,017 48.2 34.8
</TABLE>
- ------------------------------
* Represents beneficial ownership of less than one percent.
63
<PAGE> 65
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 6,767,263 shares of Common
Stock outstanding as of March 31, 1998 (after giving effect to the
conversion of all outstanding shares of Preferred Stock into 6,050,949
Common Stock) and 9,433,929 shares of Common Stock outstanding after
completion of this offering.
(2) Includes 613,658 shares held by Accel IV L.P., 27,124 shares held by Accel
Investors '93 L.P., 13,195 shares held by Accel Keiretsu L.P., 58,652
shares held by Accel Japan L.P., 16,127 shares held by Ellmore C. Patterson
Partners and 4,397 shares held by Prosper Partners, affiliated entities for
which Dr. Evnin is a General Partner or officer of some. Dr. Evnin
disclaims beneficial ownership of all such shares, except to the extent of
his pecuniary or pro rata interest in such shares. Also includes 12,500
shares subject to options exercisable within 60 days of March 31, 1998.
(3) Includes 499,600 shares held by Venrock Associates and 234,056 shares held
by Venrock Associates II, L.P., entities for which Mr. Latterell is a
general partner. Mr. Latterell disclaims beneficial ownership of all such
shares, except to the extent of his pecuniary or pro rata interest in such
shares.
(4) Includes 708,163 shares held by Kleiner Perkins Caufield & Byers VI, an
entity for which Mr. Byers is a partner. Mr. Byers disclaims beneficial
ownership of all such shares, except to the extent of his pecuniary or pro
rata interest in such shares. Also includes 12,500 shares subject to
options exercisable within 60 days of March 31, 1998.
(5) Includes 552,068 shares held by InterWest Partners V and 3,472 shares held
by InterWest Investors V, which are affiliated entities. Dr. Oronsky is a
general partner of InterWest Partners V. Dr. Oronsky disclaims beneficial
ownership of all such shares, except to the extent of his pecuniary or pro
rata interest in such shares. Also includes 12,500 shares subject to
options exercisable within 60 days of March 31, 1998.
(6) Includes 231,942 shares held by Oxford Bioscience Partners L.P., 74,071
shares held by Oxford Bioscience Partners (Adjunct) L.P. and 64,345 shares
held by Oxford Bioscience Partners (Bermuda) Limited Partnership.
(7) Includes 320,361 shares held by U.S. Venture Partners IV, L.P., 38,887
shares held by Second Ventures II, L.P. and 11,110 shares held by USVP
Entrepreneur Partners II, L.P.
(8) Includes 18,750 shares subject to options exercisable within 60 days of
March 31, 1998.
(9) Includes 79,880 shares held by the Harry F. Hixson, Jr. Separate Property
Trust Dated December 15, 1995, of which Dr. Hixson is the sole trustee.
Also includes 12,500 shares subject to options exercisable within 60 days
of March 31, 1998.
(10) Includes 25,000 shares subject to options exercisable within 60 days of
March 31, 1998.
(11) Includes 35,000 shares subject to options exercisable within 60 days of
March 31, 1998.
(12) Includes 70,000 shares subject to options exercisable within 60 days of
March 31, 1998.
(13) Includes 37,500 shares held by the Walker Living Trust Dated March 3, 1995,
of which Mr. Walker is the sole trustee.
(14) Includes 198,750 shares subject to options exercisable within 60 days of
March 31, 1998.
64
<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, the authorized capital stock
of the Company will consist of 25,000,000 shares of Common Stock, $.001 par
value per share, and 5,000,000 shares of preferred stock, $.001 par value per
share.
COMMON STOCK
As of March 31, 1998, there were 6,767,263 shares of Common Stock
outstanding, after giving effect to the conversion of all outstanding shares of
Preferred Stock into 6,050,949 shares of Common Stock.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preferences of any outstanding shares of
Preferred Stock. Holders of Common Stock have no preemptive, conversion,
subscription or other rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred
Stock will be converted into 6,050,949 shares of Common Stock. See Note 5 of
Notes to Financial Statements for a description of the currently outstanding
Preferred Stock. Following the conversion, the Company's Certificate of
Incorporation will be amended and restated to delete all references to such
shares of Preferred Stock. Under the Restated Certificate, the Board has the
authority, without further action by stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix or alter the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon any wholly unissued series of preferred stock, and to establish from time
to time the number of shares constituting any such series or any of them; and to
increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. The issuance of preferred stock could adversely affect
the voting power of holders of Common Stock and reduce the likelihood that such
holders will receive dividend payments and payments upon liquidation. Such
issuance could have the effect of decreasing the market price of the Common
Stock. The issuance of preferred stock could have the effect of delaying,
deterring or preventing a change in control of the Company. The Company has no
present plans to issue any shares of preferred stock.
WARRANTS
As of March 31, 1998, there were warrants outstanding to purchase an
aggregate of 62,500 shares of Series C-1 Preferred Stock at an exercise price of
$8.40 per share, which will convert into warrants to purchase Common Stock upon
the closing of this offering.
REGISTRATION RIGHTS
After this offering, the holders of 6,050,949 shares of Common Stock will
be entitled to certain rights with respect to the registration of such shares
under the Securities Act, pursuant to that certain Amended and Restated Investor
Rights Agreement dated September 9, 1997, as amended on November 25, 1997 (the
"Investors' Rights Agreement"). Under the terms of the Investors' Rights
Agreement, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other security
holders exercising registration rights, such holders are entitled to notice of
such registration and are entitled, subject to certain limitations, to include
shares therein. Commencing with the date that is 180 days after this offering,
the holders may also require the
65
<PAGE> 67
Company to file a registration statement under the Securities Act with respect
to their shares, and the Company is required to use its best efforts to effect
to such registration. Furthermore, the holders may require the Company to
register their shares on a registration statement on Form S-3 when such form
becomes available to the Company. Such registration rights terminate on the
seventh anniversary of the effective date of this offering.
The holder of a warrant to purchase 62,500 shares of Series C-1 Preferred
Stock of the Company, granted November 23, 1996, will be entitled, upon exercise
of such warrant, to notice whenever the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights. The holder of
such warrant is entitled to include in any such registration the shares of
Common Stock into which the Series C-1 Preferred Stock underlying the warrant
may be converted. Such registration rights terminate on the seventh anniversary
of the effective date of this offering.
After this offering, a holder of 11,093 shares of Common Stock purchased
pursuant to two certain Restricted Stock Purchase Agreements dated October 26,
1993 and February 18, 1998, respectively, will be entitled, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders exercising
registration rights, to notice of such registration and, subject to certain
limitations, to include such shares therein. In addition, such holder may obtain
an additional 23,750 shares of Common Stock pursuant to the attainment of
certain regulatory milestones whereby such additional shares would be entitled
to the same registration rights as the 11,093 shares currently held.
After this offering, a holder of 7,500 shares of Common Stock purchased
pursuant to two certain Restricted Stock Purchase Agreements dated October 31,
1996 and December 7, 1997, respectively, will be entitled, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders exercising
registration rights, to notice of such registration and, subject to certain
limitations, to include such shares therein. In addition, such holder may obtain
an additional 5,625 shares of Common Stock pursuant to the attainment of certain
regulatory milestones whereby such additional shares would be entitled to the
same registration rights as the 7,500 shares currently held.
Generally, the Company is required to bear all registration and selling
expenses incurred in connection with any of the registrations described above.
The registration rights are also subject to certain conditions and limitations,
among them the right of the underwriters of a public offering to limit the
number of shares included in the registration statement filed in connection
therewith.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is governed by the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). In general, Section 203 prohibits a
public 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 or other transactions resulting in a
financial benefit to the stockholder. An "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of the corporation's outstanding voting stock. This provision
could delay, discourage or prohibit transactions not approved in advance by the
Board of Directors, such as takeover attempts that might result in a premium
over the market price of the Common Stock.
The Company's Restated Certificate provides that the Board of Directors
will be divided into three classes of directors, with each class serving a
staggered three-year term. The classification system of electing directors may
tend to discourage a third party from making a tender offer or otherwise
attempting to obtain control of the Company and may maintain the composition of
the Board of Directors, as the classification of the Board of Directors
generally increases the difficulty of replacing a majority of directors. The
Company's Restated Certificate provides that any action required or
66
<PAGE> 68
permitted to be taken by stockholders of the Company must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing. In addition, the Company's Bylaws provide that special
meetings of the stockholders of the Company may be called only by the Chairman
of the Board of Directors, the Chief Executive Officer of the Company, by the
Board of Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors, or by the holders of 10% of the outstanding
voting stock of the Company. The Company's Restated Certificate also specifies
that the authorized number of directors may be changed only by resolution of the
Board of Directors and does not include a provision for cumulative voting for
directors. Under cumulative voting, a minority stockholder holding a sufficient
percentage of a class of shares may be able to ensure the election of one or
more directors. These and other provisions contained in the Restated Certificate
and the Company's Bylaws could delay or discourage certain types of transactions
involving an actual or potential change in control of the Company or its
management (including transactions in which stockholders might otherwise receive
a premium for their shares over then current prices) and may limit the ability
of stockholders to remove current management of the Company or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of the Company's Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
67
<PAGE> 69
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. Furthermore, since only a
limited number of shares will be available for sale shortly after the offering
because of certain contractual and legal restrictions on resale described below,
sales of substantial amounts of Common Stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and the
ability of the Company to raise equity capital in the future.
Upon completion of this offering, the Company will have 9,433,929 shares of
Common Stock outstanding, assuming no exercise of currently outstanding options
or warrants. Of these shares, the 2,500,000 shares sold in this offering (plus
any additional shares sold upon exercise of the Underwriters' over-allotment
option) will be freely transferable without restriction under the Securities
Act, unless they are held by "affiliates" of the Company as that term is used
under the Securities Act and the rules and regulations promulgated thereunder.
The remaining 6,933,929 shares of Common Stock held by existing stockholders are
Restricted Shares. Restricted Shares may be sold in the public market only if
registered or of they qualify for an exemption from registration under Rules 144
or 701 promulgated under the Securities Act, which rules are summarized below.
As a result of Lock-up Agreements and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
(i) no Restricted Shares will be eligible for immediate sale on the effective
date of this offering; (ii) 6,677,325 Restricted Shares (plus approximately
623,687 shares of Common Stock issuable upon exercise of vested stock options)
will be eligible for sale upon expiration of the Lock-up Agreements 180 days
after the date of this Prospectus; and (iii) the remainder of the Restricted
Shares will be eligible for sale from time to time thereafter upon expiration of
their respective one-year holding periods and could be sold earlier if the
holders exercise any available registration rights. The holders of 6,058,449
shares of Common Stock have the right in certain circumstances to require the
Company to register their shares under the Securities Act for resale to the
public beginning 180 days from the effective date of this offering. If such
holders, by exercising their demand registration rights, 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. If the
Company were required to include in a Company-initiated registration shares held
by such holders pursuant to the exercise of their piggyback registration rights,
such sales may have an adverse effect on the Company's ability to raise needed
capital. In addition, the Company expects to file a registration statement on
Form S-8 registering shares of Common Stock subject to outstanding stock options
or reserved for issuance under the Company's stock option plans. Such
registration statement is expected to be filed and to become effective as soon
as practicable after the effective date of this offering. Shares registered
under such registration statement will, subject to Rule 144 volume limitations
applicable to Affiliates, be available for sale in the open market, unless such
shares are subject to vesting restrictions with the Company or the lock-up
agreements described above.
In general, under Rule 144 as in effect on the date of this Prospectus,
beginning 90 days after the effective date of this offering, an Affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares (as defined under Rule 144) for at least
one year is entitled to sell within any three-month period a number of shares
that does not exceed greater of (i) one percent of the then outstanding shares
of the Company's Common Stock or (ii) the average weekly trading volume of the
Company's Common Stock in The Nasdaq National Market during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Commission. Sales pursuant to Rule 144 are subject to certain requirements
relating to the manner of sale, notice, and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who was not an Affiliate of the Company at any time during the 90 days
immediately preceding the sale and who has beneficially owned Restricted Shares
for at least two years is entitled to sell such shares under Rule 144(k) without
regard to the limitations described above.
68
<PAGE> 70
An employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with the
Rule 144 holding period restrictions, in each case commencing 90 days after the
effective date of this offering. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
69
<PAGE> 71
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their representatives, Hambrecht & Quist LLC,
BancAmerica Robertson Stephens and Lehman Brothers Inc. (the "Representatives")
have severally agreed to purchase from the Company the following respective
numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.......................................
BancAmerica Robertson Stephens..............................
Lehman Brothers Inc.........................................
---------
Total............................................. 2,500,000
=========
</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, 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 directly to
the public at the initial public 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 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, the offering price and other
selling terms may be changed by the Representatives of the Underwriters. The
Representatives have advised the Company that the Underwriters do not intend to
confirm discretionary sales in excess of 5% of the shares of Common Stock
offered hereby.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling
70
<PAGE> 72
concession from a syndicate member in connection with the offering when shares
of Common Stock sold by the syndicate member are purchased in syndicate covering
transactions. Such transactions may be effected on the Nasdaq National Market,
in the over-the-counter market, or otherwise. Such stabilizing, if commenced,
may be discontinued at any time.
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, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Stockholders of the Company, including the executive officers and
directors, who hold in the aggregate 6,933,929 shares of Common Stock after the
offering, have agreed that they will not, without the prior written consent of
Hambrecht & Quist LLC, offer, sell or otherwise dispose of 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 owned by them during
the 180-day period following the date of this Prospectus. The Company has agreed
that it will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell or otherwise dispose of 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 during the 180-day period following the
date of this Prospectus, except that the Company may issue shares to DuPont
Merck in accordance with its stock purchase agreement and under agreements that
may be entered into with collaborators in the future. In addition, the Company
may issue shares upon the exercise of options granted prior to the date hereof
and may grant additional options and issue stock under its 1998 Equity Incentive
Plan, and Employee Stock Purchase Plan (and will cause any person to whom such
options are granted or shares are issued to enter into an agreement restricting
the transfer of any securities of the Company held by such person during the
180-day period following the date of this Prospectus without the prior written
consent of Hambrecht & Quist LLC). See "Shares Eligible for Future Sale."
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price are the
prevailing market and economic conditions, revenue and earnings of the Company,
market valuations of other companies engaged in activities similar to the
Company, estimates of the business potential and prospects of the Company, the
present state of the Company's business operations, the Company's management and
other factors deemed relevant. The estimated initial public offering price range
set forth on the cover of this Prospectus is subject to change as a result of
market conditions and other factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, San Diego, California. Certain legal
matters will be passed upon for the Underwriters by Brobeck, Phleger & Harrison
LLP, Palo Alto, California.
EXPERTS
The financial statements of Signal Pharmaceuticals, Inc. as of December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
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<PAGE> 73
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Common Stock offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus, which is a part of the Registration Statement,
omits certain information, exhibits, schedules and undertakings set forth in the
Registration Statement. For further information pertaining to the Company and
the Common Stock offered hereby, reference is made to the Registration Statement
and the exhibits and schedules thereto. Statements contained in this Prospectus
as to the contents or provisions of any contract or other document referred to
herein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement may be inspected without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any
part of the Registration Statement may be obtained from such offices upon the
payment of the fees prescribed by the Commission. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's web site on the Internet at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
72
<PAGE> 74
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SIGNAL PHARMACEUTICALS, INC.
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-3
Statements of Operations for each of the three years in the
period ended December 31, 1997 and the three months ended
March 31, 1997 (unaudited) and 1998 (unaudited)........... F-4
Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1997 and the three
months ended March 31, 1998 (unaudited)................... F-5
Statements of Cash Flows for each of the three years in the
period ended December 31, 1997 and the three months ended
March 31, 1997 (unaudited) and 1998 (unaudited)........... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 75
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Signal Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Signal Pharmaceuticals,
Inc. as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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 Signal Pharmaceuticals, Inc.
at December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
San Diego, California
January 16, 1998,
except for Note 7, as to which the date is
May 5, 1998
- --------------------------------------------------------------------------------
THE FOREGOING REPORT IS IN THE FORM THAT WILL BE SIGNED UPON THE COMPLETION OF
THE CHANGES IN CAPITALIZATION DESCRIBED IN NOTE 7 TO THE FINANCIAL STATEMENTS.
ERNST & YOUNG LLP
San Diego, California
May 5, 1998
F-2
<PAGE> 76
SIGNAL PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
--------------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 5,459,696 $ 8,736,469 $ 12,916,238
Short-term investments.......................... -- 12,129,506 7,754,955
Grant revenue receivable........................ 308,062 90,449 99,931
Other current assets............................ 218,750 189,366 502,383
------------ ------------ ------------
Total current assets.............................. 5,986,508 21,145,790 21,273,507
------------ ------------ ------------
Property and equipment, net....................... 2,280,168 2,252,568 2,776,621
Deposits and other assets......................... 530,476 189,438 455,114
Note receivable from officer...................... 250,000 250,000 250,000
------------ ------------ ------------
$ 9,047,152 $ 23,837,796 $ 24,755,242
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 426,718 $ 268,714 $ 538,702
Accrued liabilities............................. 312,599 1,207,719 591,355
Current portion of promissory note.............. 583,380 1,000,080 1,000,080
Current portion of obligations under capital 395,780 205,911 209,151
leases and equipment notes payable............
Current portion of deferred revenue under 1,662,497 3,083,956 4,298,743
collaborative agreements......................
------------ ------------ ------------
Total current liabilities......................... 3,380,974 5,766,380 6,638,031
------------ ------------ ------------
Promissory note, net of current portion........... 2,255,549 1,302,612 1,064,377
Obligations under capital leases and equipment 490,849 245,669 279,324
notes payable, net of current portion...........
Deferred revenue under collaborative agreements, 1,339,579 1,281,254 1,016,675
net of current portion..........................
Deferred rent..................................... 67,851 78,167 107,821
Commitments
Stockholders' equity:
Convertible Preferred Stock, $.001 par value; 3,698 6,051 6,051 $ --
6,113,485 shares authorized; 3,698,306,
6,050,949 and 6,050,949 shares issued and
outstanding at December 31, 1996, 1997 and
March 31, 1998, respectively; liquidation
preference -- $40,909,587 at December 31, 1997
and March 31, 1998 (5,000,000 shares
authorized, no shares issued and outstanding
pro forma)....................................
Common Stock, $.001 par value; 8,750,000 shares 522 664 716 6,767
authorized; 522,424, 664,602 and 716,314
shares issued and outstanding at December 31,
1996, 1997 and March 31, 1998, respectively,
(25,000,000 shares authorized, 6,767,263
shares issued and outstanding pro forma)......
Additional paid-in capital...................... 20,513,608 40,365,615 41,433,814 41,433,814
Deferred compensation........................... -- (511,510) (1,387,318) (1,387,318)
Accumulated other comprehensive income.......... -- 48,341 6,015 6,015
Accumulated deficit............................. (19,005,478) (24,745,447) (24,410,264) (24,410,264)
------------ ------------ ------------ ------------
Total stockholders' equity........................ 1,512,350 15,163,714 15,649,014 $ 15,649,014
------------ ------------ ------------ ============
$ 9,047,152 $ 23,837,796 $ 24,755,242
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 77
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue under collaborative agreements:
Related party.................................... $ -- $ -- $ 250,000 $ -- $ 750,000
Unrelated parties................................ -- 3,585,414 7,065,356 1,476,565 3,793,696
Grant income....................................... 299,152 347,198 264,257 72,261 99,932
----------- ----------- ----------- ----------- ----------
299,152 3,932,612 7,579,613 1,548,826 4,643,628
Expenses:
Research and development......................... 5,172,992 7,724,178 10,337,318 2,458,817 3,287,649
General and administrative....................... 1,937,226 2,470,910 2,791,084 671,325 1,203,118
----------- ----------- ----------- ----------- ----------
7,110,218 10,195,088 13,128,402 3,130,142 4,490,767
----------- ----------- ----------- ----------- ----------
Income (loss) from operations...................... (6,811,066) (6,262,476) (5,548,789) (1,581,316) 152,861
Interest income.................................... 452,609 187,488 325,529 59,859 282,863
Interest expense................................... (123,730) (134,019) (516,709) (152,274) (100,541)
----------- ----------- ----------- ----------- ----------
Net income (loss).................................. $(6,482,187) $(6,209,007) $(5,739,969) $(1,673,731) $ 335,183
=========== =========== =========== =========== ==========
Pro forma net income (loss) per share, basic and
diluted.......................................... $ (1.20) $ 0.05
=========== ==========
Number of shares used in computing pro forma net
income (loss) per share:
Basic.......................................... 4,775,952 6,628,046
=========== ==========
Diluted........................................ 4,775,952 6,875,100
=========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 78
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
------------------ ---------------- PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) DEFICIT
--------- ------ ------- ------ ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994........................ 3,573,306 $3,573 497,357 $497 $18,375,335 $ -- $ -- $(6,314,284)
Issuance of Common Stock,
net of repurchases...... -- -- 3,875 4 315 -- -- --
Offering costs related to
issuance of Series C
Preferred Stock......... -- -- -- -- (9,547) -- -- --
Net loss.................. -- -- -- -- -- -- -- (6,482,187)
--------- ------ ------- ---- ----------- ----------- -------- ------------
Balance at December 31,
1995........................ 3,573,306 3,573 501,232 501 18,366,103 -- -- (12,796,471)
Issuance of Series D
Preferred Stock......... 125,000 125 -- -- 1,974,875 -- -- --
Issuance of warrants...... -- -- -- -- 165,000 -- -- --
Issuance of Common Stock,
net of repurchases...... -- -- 21,192 21 7,630 -- -- --
Net loss.................. -- -- -- -- -- -- -- (6,209,007)
--------- ------ ------- ---- ----------- ----------- -------- ------------
Balance at December 31,
1996........................ 3,698,306 3,698 522,424 522 20,513,608 -- -- (19,005,478)
Issuance of Series D
Preferred Stock......... 58,150 58 -- -- (58) -- -- --
Issuance of Series E
Preferred Stock......... 1,613,865 1,614 -- -- 10,975,517 -- -- --
Issuance of Series F
Preferred Stock......... 680,628 681 -- -- 8,161,399 -- -- --
Issuance of Common Stock,
net of repurchases...... -- -- 141,774 142 99,294 -- -- --
Unrealized gain on
available for sale
securities.............. -- -- -- -- -- -- 48,341 --
Deferred compensation..... -- -- -- -- 615,855 (615,855) -- --
Amortization of deferred
compensation............ -- -- -- -- -- 104,345 -- --
Net loss.................. -- -- -- -- -- -- -- (5,739,969)
--------- ------ ------- ---- ----------- ----------- -------- ------------
Balance at December 31,
1997........................ 6,050,949 6,051 664,198 664 40,365,615 (511,510) 48,341 (24,745,447)
Issuance of Common Stock,
net of repurchases
(unaudited)............. -- -- 52,116 52 49,029 -- -- --
Unrealized loss on
available for sale
securities
(unaudited)............. -- -- -- -- -- -- (42,326) --
Deferred compensation
(unaudited)............. -- -- -- -- 1,019,170 (1,019,170) -- --
Amortization of deferred
compensation
(unaudited)............. -- -- -- -- -- 143,362 -- --
Net income (unaudited).... -- -- -- -- -- -- -- 335,183
--------- ------ ------- ---- ----------- ----------- -------- ------------
Balance at March 31, 1998
(unaudited)................. 6,050,949 $6,051 716,314 $716 $41,433,814 $(1,387,318) $ 6,015 $(24,410,264)
========= ====== ======= ==== =========== =========== ======== ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31,
1994........................ $12,065,121
Issuance of Common Stock,
net of repurchases...... 319
Offering costs related to
issuance of Series C
Preferred Stock......... (9,547)
Net loss.................. (6,482,187)
-----------
Balance at December 31,
1995........................ 5,573,706
Issuance of Series D
Preferred Stock......... 1,975,000
Issuance of warrants...... 165,000
Issuance of Common Stock,
net of repurchases...... 7,651
Net loss.................. (6,209,007)
-----------
Balance at December 31,
1996........................ 1,512,350
Issuance of Series D
Preferred Stock......... --
Issuance of Series E
Preferred Stock......... 10,977,131
Issuance of Series F
Preferred Stock......... 8,162,080
Issuance of Common Stock,
net of repurchases...... 99,436
Unrealized gain on
available for sale
securities.............. 48,341
Deferred compensation..... --
Amortization of deferred
compensation............ 104,345
Net loss.................. (5,739,969)
-----------
Balance at December 31,
1997........................ 15,163,714
Issuance of Common Stock,
net of repurchases
(unaudited)............. 49,081
Unrealized loss on
available for sale
securities
(unaudited)............. (42,326)
Deferred compensation
(unaudited)............. --
Amortization of deferred
compensation
(unaudited)............. 143,362
Net income (unaudited).... 335,183
-----------
Balance at March 31, 1998
(unaudited)................. $15,649,014
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 79
SIGNAL PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $(6,482,187) $(6,209,007) $ (5,739,969) $(1,673,731) $ 335,183
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:
Depreciation and amortization............... 518,014 633,797 879,327 205,314 258,551
Amortization of warrants.................... -- 3,929 47,142 11,785 11,785
Amortization of deferred compensation....... -- -- 104,345 -- 143,362
Common stock issued for technology and
services.................................. -- -- 14,600 -- 8,400
Deferred revenue under collaborative
agreements................................ -- 3,002,076 1,363,134 (893,746) 950,208
Deferred rent............................... -- -- 10,316 (8,398) 29,654
Changes in operating assets and liabilities:
Other current assets.................... (158,072) (342,271) 246,997 150,967 (322,499)
Accounts payable........................ (546,392) 337,027 (158,004) 44,061 269,988
Accrued liabilities and other........... 14,824 188,550 895,120 139,629 (616,364)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used for) operating
activities.................................... (6,653,813) (2,385,899) (2,336,992) (2,024,119) 1,068,268
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............. (1,560,728) -- (12,081,165) -- --
Sales or maturities of short-term investments... -- 1,560,728 -- -- 4,332,225
Purchase of property and equipment.............. (1,009,941) (874,175) (630,220) (155,059) (695,502)
(Increase) decrease in deposits and other
assets........................................ 279,930 (349,074) 341,038 3,240 (265,676)
----------- ----------- ------------ ----------- -----------
Net cash provided by (used for) investing
activities.................................... (2,290,739) 337,479 (12,370,347) (151,819) 3,371,047
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on obligations under capital
leases, equipment notes payable and promissory
note.......................................... (426,737) (503,506) (1,239,935) (144,562) (300,227)
Proceeds from issuance of promissory note....... -- 3,000,000 -- -- --
Proceeds from issuance of equipment notes
payable....................................... 646,810 379,064 -- -- --
Issuance of Preferred Stock, net................ (9,547) 1,975,000 19,139,211 -- --
Issuance of Common Stock, net................... 319 7,651 84,836 42,889 40,681
----------- ----------- ------------ ----------- -----------
Net cash provided by (used for) financing
activities.................................... 210,845 4,858,209 17,984,112 (101,673) (259,546)
----------- ----------- ------------ ----------- -----------
Increase (decrease) in cash and cash
equivalents................................... (8,733,707) 2,809,789 3,276,773 (2,277,611) 4,179,769
Cash and cash equivalents at beginning of
period........................................ 11,383,614 2,649,907 5,459,696 5,459,696 8,736,469
----------- ----------- ------------ ----------- -----------
Cash and cash equivalents at end of period...... $ 2,649,907 $ 5,459,696 $ 8,736,469 $ 3,182,085 $12,916,238
=========== =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid................................... $ 123,730 $ 128,337 $ 469,565 $ 152,274 $ 100,541
=========== =========== ============ =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations entered into for
equipment..................................... $ -- $ -- $ 221,507 $ 221,507 $ 87,102
=========== =========== ============ =========== ===========
Warrant issued in conjunction with promissory
note.......................................... $ -- $ 165,000 $ -- $ -- $ --
=========== =========== ============ =========== ===========
Unrealized gain (loss) on investments........... $ -- $ -- $ 48,341 $ -- $ (42,326)
=========== =========== ============ =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 80
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Signal Pharmaceuticals, Inc. ("Signal" or the "Company") was incorporated
in California in July 1992. The Company is an integrated target and drug
discovery company focused on identifying new classes of small molecule drugs
that regulate genes and the production of disease-causing proteins. The Company
applies advanced cellular, molecular and genomic technologies to map gene
regulating pathways in cells and to identify proprietary molecular targets that
activate or deactivate genes and result in disease. Signal is advancing the
application of genomics beyond identifying and elucidating the functions of
genes to designing novel classes of disease-modifying drugs that selectively
regulate the activation of disease-causing genes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
related disclosures at the date of the financial statements, and the amounts of
revenues and expenses reported during the period. Actual results could differ
from those estimates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers instruments purchased with an original maturity of
three months or less, principally a money market account and U.S. government and
corporate debt securities, to be cash equivalents.
All investment securities are classified as available-for-sale, and are
carried at fair value. Unrealized gains and losses, if any, are reported in a
separate component of stockholders' equity. The cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
The amortization, along with realized gains and losses, is included in interest
income. The cost of securities sold is based on the specific identification
method.
FINANCIAL INSTRUMENTS
The fair values of the financial instruments approximate their carrying
value except as otherwise disclosed in the financial statements.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents and short-term investments are financial instruments
which potentially subject the Company to concentration of credit risk. The
Company invests its excess cash primarily in U.S. government securities and
marketable debt securities of financial institutions and corporations with
strong credit ratings. The Company also has established guidelines relative to
diversification and maturities to maintain safety and liquidity. These
guidelines are reviewed periodically and may be modified to take advantage of
trends in yields and interest rates. Due to Company policy, the Company has
historically held the financial instruments to maturity and has not experienced
any significant losses. However, the Company has the ability to sell these
investments before maturity.
F-7
<PAGE> 81
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (three to five years) using the
straight-line method. Leasehold improvements are stated at cost and amortized on
a straight-line basis over the shorter of the estimated useful life of the
assets or the lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. To date, the Company has not identified any
indicators of impairment nor recorded any impairment losses.
DEFERRED RENT
Rent expense is recognized on a straight-line basis over the term of the
lease. Accordingly, rent expense incurred in excess of rent paid is accrued and
recorded as deferred rent in the accompanying balance sheets.
REVENUE RECOGNITION
Contract and grant revenue are recognized ratably over the period during
which the research is conducted. Up-front license fees received under these
agreements are recorded as deferred revenue and recognized ratably over the
initial term of the contract. Continuation of certain contracts and grants are
dependent upon the Company achieving specific contractual milestones.
The Company's revenues are concentrated among a small number of customers,
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Dupont Merck........................... -- -- -- -- *
Ares-Serono............................ -- -- * -- 16%
Roche Bioscience....................... -- 11% 21% 22% *
Organon................................ -- 19% 34% 35% 15%
Nippon Kayaku.......................... -- -- -- -- *
Tanabe................................. -- 62% 39% 38% 40%
</TABLE>
---------------
* Amount earned represents less than 10% of revenues for the period.
F-8
<PAGE> 82
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION
As permitted by SFAS 123, the Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations ("APB 25") in accounting for its employee stock options.
Under APB 25, when the exercise price of the Company's employee stock options
equals the fair value of the underlying stock on the date of grant, no
compensation expense is recognized.
NET INCOME (LOSS) PER SHARE
Historical basic net income (loss) per share is computed using the weighted
average number of common shares outstanding during the periods presented. Common
equivalent shares resulting from Convertible Preferred Stock, options to
purchase Common Stock and warrants to purchase Convertible Preferred Stock are
excluded from the computation.
Historical diluted net income per share has been computed as described
above and also gives effect to the common equivalent shares resulting from
Convertible Preferred Stock, options to purchase Common Stock, and warrants to
purchase Convertible Preferred and Common Stock.
Historical net income (loss) per share information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ---------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Basic and diluted net loss per
share............................... $ (18.25) $ (14.57) $ (11.29) $ (3.53)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share.......... 355,273 426,213 508,485 473,857
======== ======== ======== ========
Basic net income per share............ $ 0.58
==========
Diluted net income per share.......... $ 0.05
==========
Shares used in computing basic net
income per share.................... 577,097
==========
Shares used in computing diluted net
income per share.................... 6,875,100
==========
</TABLE>
Pro Forma Net Income (Loss) Per Share
Pro forma basic net income (loss) per share has been computed as described
above for historical basic net income (loss) per share and also gives effect to
the conversion of the Convertible Preferred Stock, which will convert to Common
Stock upon completion of the Company's initial public offering, using the as
if-converted method from the original date of issuance. Pro forma diluted net
income per share has been computed as described above for historical diluted net
income per share.
F-9
<PAGE> 83
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted SFAS 130, Reporting
Comprehensive Income and SFAS 131, Disclosures about Segments of an Enterprise
and Related Information. The Company believes it operates in one business
segment, and therefore the adoption of SFAS 131 had no effect on the Company's
financial statements.
YEAR 2000 (UNAUDITED)
The Company currently has computer software and hardware which it believes
to be year 2000 compliant. The Company is working with its vendors and customers
to ensure their year 2000 compliance. Any necessary changes would be done in the
normal course of business during 1998 and 1999 at minimal incremental cost.
Therefore, the Company does not expect the year 2000 issue to have a significant
impact on its operations.
2. BALANCE SHEET INFORMATION
INVESTMENTS
The following is a summary of the Company's cash, cash equivalents and
short-term investments:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------------ --------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
GAINS ESTIMATED GAINS ESTIMATED
COST (LOSSES) FAIR VALUE COST (LOSSES) FAIR VALUE
---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash...................... $3,446,901 $-- $3,446,901 $ 5,512,634 $ -- $5,512,634
Corporate debt
securities.............. 2,012,795 -- 2,012,795 15,305,000 48,341 15,353,341
---------- -- ---------- ----------- ------- -----------
$5,459,696 $-- $5,459,696 $20,817,634 $48,341 $20,865,975
========== == ========== =========== ======= ===========
<CAPTION>
MARCH 31, 1998
---------------------------------------
GROSS
UNREALIZED
GAINS ESTIMATED
COST (LOSSES) FAIR VALUE
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash...................... $13,165,178 $ -- $13,165,178
Corporate debt
securities.............. 7,500,000 6,015 7,506,015
----------- ------ -----------
$20,665,178 $6,015 $20,671,193
=========== ====== ===========
</TABLE>
There were no gross realized gains or losses on sales of available-for-sale
securities for the years ended December 31, 1996 or 1997 or the three months
ended March 31, 1998. The gross unrealized gains of $48,341 and $6,015 at
December 31, 1997 and March 31, 1998, respectively, are reflected as separate
components of stockholders' equity.
The cost and estimated fair values of cash, cash equivalents and short-term
investments at December 31, 1996 and 1997 and March 31, 1998, by contractual
maturity, are shown below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998
----------------------- ------------------------- -------------------------
ESTIMATED ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE
---------- ---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less....... $5,459,696 $5,459,696 $19,817,634 $19,824,100 $19,665,178 $19,668,068
Due in one year through two
years....................... -- -- 1,000,000 1,041,875 1,000,000 1,003,125
---------- ---------- ----------- ----------- ----------- -----------
$5,459,696 $5,459,696 $20,817,634 $20,865,975 $20,665,178 $20,671,193
========== ========== =========== =========== =========== ===========
</TABLE>
F-10
<PAGE> 84
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
2. BALANCE SHEET INFORMATION (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment............................ $2,334,021 $2,665,205 $2,826,308
Office furniture and equipment..................... 763,379 1,043,110 1,119,973
Leasehold improvements............................. 639,692 880,504 1,425,142
---------- ---------- ----------
3,737,092 4,588,819 5,371,423
Less accumulated depreciation and amortization..... (1,456,924) (2,336,251) (2,594,802)
---------- ---------- ----------
$2,280,168 $2,252,568 $2,776,621
========== ========== ==========
</TABLE>
DEPOSITS AND OTHER ASSETS
Deposits and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Restricted cash....................................... $495,000 $150,000 $150,000
Other deposits........................................ 29,450 37,243 303,650
Organization costs, net............................... 6,026 2,195 1,464
-------- -------- --------
$530,476 $189,438 $455,114
======== ======== ========
</TABLE>
3. COMMITMENTS
LEASES
The Company leases its office and research facilities under two operating
lease agreements. The minimum annual rents are subject to specified annual
rental increases. The Company also reimburses the lessor for taxes, insurance
and operating costs associated with the leases. Under the terms of the leases,
the Company has an outstanding letter of credit for $150,000 in favor of the
lessor, fully collateralized by cash. In January 1998, the Company entered into
a six-year operating lease for additional office space. The minimum annual rents
are subject to specified increases and are included in the future minimum lease
payments.
In addition, the Company leases certain machinery, equipment and office
furniture under capital leases with three-year terms with options to extend the
lease term to five years. In January 1998, the Company entered into a $2.0
million equipment lease line to finance capital equipment and improvements.
F-11
<PAGE> 85
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
3. COMMITMENTS (CONTINUED)
LONG-TERM DEBT
In November 1996, the Company issued a secured promissory note for
$3,000,000. The proceeds of the note payable were used for general corporate
purposes and working capital. The note payable accrues interest at a rate of
14%, is due May 22, 2000, and is secured by certain assets of the Company. The
principal payments due on the promissory note are $1.0 million, $1.0 million and
$416,460 for 1998, 1999 and 2000, respectively.
In conjunction with the issuance of the promissory note, the Company issued
the creditor a warrant to purchase 62,500 shares of Series C-1 Preferred Stock
at a price of $8.40 per share. The warrant expires at the earliest of ten years
from the date of grant or five years from the date of an initial public
offering. The warrant is valued at $165,000, which has been recorded as a
discount on the related debt. The value of the warrant is being amortized as
interest expense over the period of the debt.
In April 1995, the Company entered into a note payable to equip its
expanded research facility. The remaining balance on the note at December 31,
1996 was $377,270. The note was repaid in full in August 1997.
Annual future minimum lease and equipment note payments as of December 31,
1997, including the office lease signed in January 1998, are as follows:
<TABLE>
<CAPTION>
OBLIGATIONS
UNDER
CAPITAL
LEASES AND
EQUIPMENT
OPERATING NOTES
YEAR ENDED DECEMBER 31, LEASES PAYABLE
----------------------- ---------- -------------
<S> <C> <C>
1998...................................................... $ 760,530 $228,525
1999...................................................... 793,867 221,239
2000...................................................... 792,337 34,521
2001...................................................... 283,526 --
2002...................................................... 280,910 --
Thereafter................................................ 287,443 --
---------- --------
Total minimum lease and equipment note payments........... $3,198,613 484,285
==========
Less amount representing interest......................... 32,705
--------
Present value of remaining minimum capital lease and
equipment note payments................................. 451,580
Less amount due in one year............................... 205,911
--------
Long-term portion of obligations under capital leases and
equipment notes payable................................. $245,669
========
</TABLE>
F-12
<PAGE> 86
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
3. COMMITMENTS (CONTINUED)
Rent expense for equipment and facility leases was $293,719, $406,453,
$784,337, $124,377 and $267,860 for the years ended December 31, 1995, 1996,
1997 and the three months ended March 31, 1997 (unaudited) and 1998 (unaudited),
respectively.
Cost and accumulated depreciation of equipment under capital leases and
equipment notes payable were as follows:
<TABLE>
<CAPTION>
ACCUMULATED
COST DEPRECIATION
---------- ------------
<S> <C> <C>
December 31, 1996.......................................... $1,978,010 $952,884
December 31, 1997.......................................... 671,482 240,087
March 31, 1998 (unaudited)................................. 759,392 285,586
</TABLE>
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS
In connection with certain license agreements, the Company paid fees of
$244,631, $602,007, $205,600, $40,000 and $38,000 for the years ended December
31, 1995, 1996, 1997 and the three months ended March 31, 1997 and 1998,
respectively, which were charged to research and development, and has future
commitments of up to $4.6 million which could be payable based on the
achievement of certain milestones, as well as royalties upon commercial sales,
if any, of certain products. Such milestone commitments may also involve the
issuance of 15,000 shares of Common Stock.
DUPONT MERCK
In December 1997, Signal entered into a collaborative agreement with The
DuPont Merck Pharmaceutical Company ("DuPont Merck"), under which DuPont Merck
agreed to fund certain research at Signal for three years. The agreement may be
extended for up to three additional years at DuPont Merck's option. The DuPont
Merck collaboration is focused on identifying compounds for the treatment or
prevention of HCV and HIV infections. Signal also has granted DuPont Merck an
option, exercisable through August 1998, to expand the collaboration to include
the identification of compounds directed toward an additional viral target.
Pursuant to this collaboration, Signal and Dupont Merck will be responsible for
developing target specific screening assays and will be jointly responsible for
identifying lead compounds. DuPont Merck will be solely responsible for lead
optimization and the worldwide development and commercialization of any drugs
arising from the collaboration.
DuPont Merck has paid Signal a $1.0 million license fee and has agreed to
provide Signal with annual research and development support at a level
approximating Signal's cost of these programs. DuPont Merck also is obligated to
make payments to Signal and to purchase $1.0 million of its stock based on the
achievement of certain research and development milestones and to pay Signal
royalties on any future product sales arising from the collaboration. In
addition, DuPont Merck has agreed to purchase $2.0 million of Common Stock of
Signal in a private transaction to be completed concurrent with the closing of
this offering at a price per share equal to the initial public offering price.
F-13
<PAGE> 87
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS (CONTINUED)
ARES-SERONO
In November 1997, Signal entered into a collaborative agreement with Ares
Trading S.A. (Ares-Serono), an affiliate of Ares-Serono S.A., under which
Ares-Serono agreed to fund certain research for an initial three-year period,
which term will automatically be extended for additional three-year periods
unless terminated at least six months prior to the end of the initial three-year
term. Ares-Serono may terminate the agreement upon six months' notice any time
after the end of the initial three-year term. The Ares-Serono collaboration is
focused on identifying compounds that modulate NF-kB gene regulating pathways to
which Ares-Serono has rights for all clinical indications in all countries of
the world excluding Asia. Ares-Serono S.A. has purchased approximately $10.0
million of Signal's Series E and Series F Preferred Stock. Ares-Serono also has
agreed to provide Signal with annual research and development support for
Signal's cost of this program at a percentage level approximating Ares-Serono's
relative share of worldwide marketing rights. In addition, Ares-Serono is
obligated to make payments to Signal based on the achievement of certain
research and development milestones and to pay Signal royalties on any future
product sales arising from the collaboration.
ROCHE BIOSCIENCE
In August 1996, Signal entered into a three-year collaborative agreement
with the Roche Bioscience division ("Roche Bioscience") of Syntex (USA) Inc., a
member of the Roche Group of Companies. Under the agreement, Signal is applying
its proprietary cell line development technology toward the development of human
PNS cell lines for use by Roche Bioscience in target and drug discovery.
Pursuant to an exclusive, worldwide, royalty-free license granted by Signal,
Roche Bioscience may utilize these PNS cells to discover and commercialize drugs
for treating pain, incontinence and peripheral vascular disease. Under the
agreement, Signal retains the right to use the PNS cell lines for its internal
target and drug discovery programs in other therapeutic fields. Roche Bioscience
has paid Signal a license fee of $500,000 and has agreed to pay annual research
and development support at a level approximating Signal's cost of the PNS cell
line program. To date, Signal has developed and transferred to Roche Bioscience
clonal human PNS cell lines as specified in the collaborative agreement.
Roche Bioscience may terminate the agreement beginning in August 1998 at
its discretion upon 90 days' written notice. If the collaboration agreement is
terminated for any reason, the licenses granted to Roche Bioscience by Signal
shall survive for as long as Roche Bioscience continues to pay annual license
maintenance fees to Signal. As long as Roche Bioscience pays these annual
license maintenance fees, Signal may not enter into any other collaborations
with respect to cloned immortalized PNS cell lines in the covered fields of
pain, incontinence and peripheral vascular disease.
ORGANON
In July 1996, Signal entered into a collaborative agreement with N.V.
Organon ("Organon"), a business unit of Akzo Nobel N.V., for the discovery of
new genomic targets, under which Organon agreed to fund certain research at
Signal for three years. Such agreement may be extended for up to two additional
years by mutual consent of the parties. Pursuant to an amendment dated January
1998,
F-14
<PAGE> 88
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
4. SPONSORED RESEARCH AND LICENSE AGREEMENTS (CONTINUED)
Organon may terminate the research, effective in either January 1999 or July
1999, for failure to meet certain milestones by October 1998 or January 1999,
respectively. Initially, Signal will utilize its cellular, molecular and genomic
technologies to identify and validate novel genes in certain target tissues.
Signal will then develop high throughput screening assays for use by Organon in
identifying small molecule drugs to treat cardiovascular, neurological,
gynecological and certain other diseases. Pursuant to this collaboration,
Organon has received rights for, and will be solely responsible for, the
worldwide development and commercialization of any drugs arising from the
collaboration.
To date, Organon has paid Signal an initial $1.0 million non-refundable
license fee and annual research and development support payments at a level
approximating Signal's cost of this program. In addition, Organon is obligated
to make payments to Signal based on the achievement of certain research and
development milestones, and Organon must pay Signal royalties on any future
product sales arising from the collaboration.
TANABE
From March 1996 to March 1998, Signal and Tanabe were engaged in a
collaborative program under which Tanabe funded certain research by Signal in
target and drug discovery in the fields of inflammatory disease and
osteoporosis. In connection with the collaboration, Tanabe paid Signal an
initial $1.0 million non-refundable license fee and reimbursed Signal for
research and development costs. Tanabe also purchased 125,000 shares of Signal's
Series D Preferred Stock at $16.00 per share. Pursuant to certain anti-dilution
provisions of the Series D agreement, the Company issued an additional 58,150
shares of Series D Preferred Stock to Tanabe during 1997. In conjunction with
the collaboration and stock purchase agreement entered into in 1996, the Company
issued Tanabe a warrant for the purchase of $2,000,000 of Common Stock, which is
only exercisable in connection with the filing of an initial public offering by
the Company, at the public offering price per common share.
In March 1998, Signal and Tanabe mutually agreed to conclude their
collaboration and Tanabe licensed from Signal a lead compound that was
discovered during the collaboration. This lead has been validated in animal
models of arthritis, for the treatment of autoimmune, inflammatory and certain
other diseases. Signal retained all other intellectual property rights,
including rights to all other drug targets and drug leads, created before or
during the collaboration. Tanabe paid an additional license fee to Signal for
the exclusive worldwide license to the lead compound and is obligated to make
payments to Signal based on the achievement of certain research and development
milestones and to pay Signal royalties on any future product sales.
F-15
<PAGE> 89
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
A summary of the Convertible Preferred Stock of the Company at December 31,
1997 and March 31, 1998 is as follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND
OUTSTANDING
--------------------------
PREFERENCE IN DECEMBER 31, MARCH 31,
LIQUIDATION 1997 1998
------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Series A....................................... $ 2,626,892 656,710 656,710
Series B....................................... 3,450,000 718,745 718,745
Series C....................................... 12,308,005 2,197,851 2,197,851
Series D....................................... 2,000,000 183,150 183,150
Series E....................................... 12,329,929 1,613,865 1,613,865
Series F....................................... 8,194,761 680,628 680,628
----------- --------- ---------
$40,909,587 6,050,949 6,050,949
=========== ========= =========
</TABLE>
Each of the Series A, B, C, D, E and F Preferred Stock is convertible on a
one-for-one basis, at the option of the holder, into shares of the Company's
Common Stock, which have been reserved for issuance upon conversion of the
Preferred Stock, subject to certain anti-dilution adjustments. The Preferred
Stock will convert automatically upon the closing of an underwritten public
offering of the Company's Common Stock with proceeds to the Company of at least
$15.0 million and at a price not less than $5.00 per share after adjustment for
any stock splits. The holders of the Series A, B, C, E and F Preferred Stock are
entitled to elect four directors to the Board of Directors, and in all other
matters the holder of each share of preferred stock is entitled to one vote for
each share of Common Stock into which it would convert.
Annual dividends of $0.32, $0.38, $0.45, $1.28, $0.61 and $0.96 per share
of Series A, B, C, D, E and F Preferred Stock, respectively, are payable
whenever funds are legally available and when and as declared by the Board of
Directors.
COMMON STOCK
In connection with certain stock purchase agreements, the Company has the
option to repurchase, at the original issue price, unvested shares in the event
of termination of employment or engagement. Shares issued under these agreements
generally vest over four to five years. At December 31, 1997 and March 31, 1998,
99,567 and 126,754 shares, respectively, were subject to repurchase by the
Company.
F-16
<PAGE> 90
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
In June 1993, the Company adopted its 1993 Founders' Stock Option Plan (the
"Founders' Plan"), under which 137,500 shares of Common Stock were reserved for
issuance upon exercise of options granted by the Company. The Founders' Plan
provides for the grant of incentive and nonstatutory options. The exercise price
of incentive stock options must equal at least the fair value on the date of
grant, and the exercise price of nonstatutory stock options may be no less than
85% of the fair value on the date of grant. The maximum term of options granted
under the Founders' Plan is ten years. Options generally are immediately
exercisable. Common Stock or options issued under the Founders' Plan generally
vest over five years. Unvested shares issued pursuant to the exercise of options
are subject to repurchase in the event of termination of employment or
engagement.
In November 1993, the Company adopted its 1993 Stock Option Plan, under
which 112,500 shares of the Company's Common Stock were reserved for issuance
upon exercise of options granted by the Company under provisions similar to the
Founders' Plan. In 1995 and 1996, the Company authorized an additional 250,000
and 262,500 shares, respectively, of the Company's Common Stock be reserved for
issuance upon exercise of options granted by the Company under the 1993 Stock
Option Plan.
In June 1997, the Company adopted its 1997 Stock Option Plan, under which
250,000 shares of Common Stock were reserved for issuance upon exercise of
options granted by the Company. In February 1998, the Company authorized an
additional 500,000 shares of the Company's Common Stock be reserved for issuance
upon exercise of options granted by the Company under the 1997 Stock Option
Plan. The options contain similar provisions to those options issued under the
1993 Founders' Stock Option Plan and the 1993 Stock Option Plan.
The Company recorded $615,855 and $1,019,170 of deferred compensation for
options granted during the year ended December 31, 1997 and the three months
ended March 31, 1998, respectively, representing the difference between the
option exercise price and the estimated fair value for financial statement
presentation purposes. The Company is amortizing the deferred compensation over
the vesting period of the options. The Company recorded $104,345 and $143,362 of
compensation expense during the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively.
A summary of the Company's stock option activity and related information
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE
---------------------------------------------------------------- MONTHS ENDED
1995 1996 1997 MARCH 31, 1998
------- ------- -------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- -------- --------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period......................... 192,624 $0.44 286,874 $0.48 407,324 $0.51 542,115 $0.80
Granted...................... 102,625 $0.56 146,987 $0.56 299,162 $1.10 166,050 $1.12
Exercised.................... (3,875) $0.56 (16,924) $0.48 (138,519) $0.61 (44,618) $0.99
Cancelled.................... (4,500) $0.56 (9,613) $0.56 (25,852) $0.64 (871) $0.69
------- ------- -------- -------
Outstanding at end of period..... 286,874 $0.48 407,324 $0.51 542,115 $0.80 662,676 $0.87
------- ------- -------- -------
Vested options at end of
period......................... 171,467 $0.40 283,172 $0.45 421,842 $0.45 454,525 $0.46
------- ------- -------- -------
</TABLE>
F-17
<PAGE> 91
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Exercise prices for options outstanding as of March 31, 1998 ranged from
$0.08 to $1.12. The weighted average remaining contractual life of those options
is 8.4 years. The weighted average fair value of the options granted in 1995,
1996 and 1997 are $0.16, $0.16 and $0.28, respectively.
As of December 31, 1997, options for 79,433 common shares were available
for future grant. As of March 31, 1998, options for 414,254 common shares were
available for future grant.
Adjusted pro forma information regarding net loss is required to be
disclosed by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method prescribed in that
Statement. The fair value of options was estimated at the date of grant using
the minimum value pricing model with the following weighted average assumptions
for 1995, 1996 and 1997: risk-free interest rate of 6.0%, dividend yield of 0%;
and an expected life of five years.
The minimum value pricing model is similar to the Black-Scholes option
valuation model which was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor for volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the vesting period of the related
options. The effects of applying SFAS 123 for adjusted pro forma disclosure
purposes are not likely to be representative of the effects on adjusted pro
forma net loss in future years because it does not take into consideration
adjusted pro forma compensation expense related to grants made prior to 1995.
The Company's adjusted pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Adjusted pro forma net loss...................... $(6,483,838) $(6,214,581) $(5,757,845)
Adjusted pro forma basic net loss per share...... $ (18.25) $ (14.58) $ (11.32)
</TABLE>
F-18
<PAGE> 92
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
6. INCOME TAXES
Significant components of the Company's deferred tax assets as of December
31, 1996 and 1997 are shown below. A valuation allowance of $10,477,000, of
which $2,278,000 is related to 1997, has been recognized as of December 31, 1997
to offset the deferred tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Capitalized research expenses.......................... $ 825,000 $ 861,000
Net operating loss carryforwards....................... 6,576,000 8,422,000
Research and development credits....................... 825,000 1,163,000
Other, net............................................. 118,000 104,000
----------- -----------
Total deferred tax assets................................... 8,344,000 10,550,000
Deferred tax liability:
Depreciation........................................... (145,000) (73,000)
----------- -----------
Net deferred tax assets..................................... 8,199,000 10,477,000
Valuation allowance for deferred tax assets................. (8,199,000) (10,477,000)
----------- -----------
Net deferred taxes.......................................... $ -- $ --
=========== ===========
</TABLE>
At December 31, 1997, the Company has federal and California net operating
loss carryforwards of approximately $23,276,000 and $4,789,000, respectively.
The difference between the federal and California tax loss carryforwards is
attributable to the capitalization of research and development expenses for
California tax purposes and the fifty percent limitation on California loss
carryforwards. The federal and California tax loss carryforwards will begin
expiring in 2007 and 1998, respectively, unless previously utilized. The Company
also has federal and California research and development tax credit
carryforwards of approximately $857,000 and $470,000, respectively, which will
begin expiring in 2008 unless previously utilized.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, future
utilization of these carryforwards may be limited in any one fiscal year
pursuant to the Internal Revenue Code and similar state provisions; however, the
annual limitation will not prevent the entire amount of the carryforwards from
being used during the carryforward period. Therefore, the Company does not
believe any such limitation will have a material effect upon the utilization of
these carryforwards.
7. SUBSEQUENT EVENTS
DEFERRED COMPENSATION
The Company granted an additional 221,525 options and recorded $1,267,123
of additional deferred compensation in May 1998, representing the difference
between the option exercise price and the estimated fair value of the Common
Stock for financial statement presentation purposes at the date of such grant.
F-19
<PAGE> 93
SIGNAL PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(Information subsequent to December 31, 1997, except for Note 7, and pertaining
to March 31, 1998
and the three months ended March 31, 1997 and 1998 is unaudited)
7. SUBSEQUENT EVENTS (CONTINUED)
CHANGES IN CAPITALIZATION
On May 5, 1998, the Company's Board of Directors authorized management of
the Company to file a Registration Statement with the Securities and Exchange
Commission for the Company to sell shares of its Common Stock in an initial
public offering and approved (subject to shareholder ratification) that, prior
to the effective date of the Offering contemplated by this Prospectus, the
Company will change the authorized shares of Preferred Stock from 6,113,482 to
5,000,000; authorized shares of Common Stock from 8,750,000 to 25,000,000 and
reincorporate the Company in Delaware and effect a 4-for-1 reverse split of the
Common Stock. The financial statements and accompanying notes have been
retroactively restated to reflect the effect of the reverse split and
reincorporation in Delaware.
AMENDMENT AND CONCLUSION OF COLLABORATIVE AGREEMENT
On March 31, 1998, Signal and Tanabe Seiyaku Co., Ltd. ("Tanabe") mutually
agreed to conclude the research and development collaboration component of their
Collaborative Development and Licensing Agreement and Tanabe subsequently
licensed from Signal a lead compound discovered during the collaboration, and
validated in animal models of arthritis, for the treatment of autoimmune,
inflammatory and other diseases. Signal retained all other intellectual property
rights, including rights to all other drug targets and drug leads, discovered
before or during the collaboration. Tanabe paid an additional $2.0 million
license fee to Signal for the exclusive worldwide license to the lead compound
and is obligated to make further payments to Signal based on the achievement of
certain research and development milestones and to pay Signal royalties on any
future product sales.
NEW COLLABORATIVE RESEARCH AGREEMENT
In February 1998, Signal entered into a collaborative agreement with Nippon
Kayaku Co., Ltd. ("Nippon Kayaku") under which Nippon Kayaku agreed to fund
certain research at Signal, totaling $4.0 million, for two years. Under the
agreement, Signal and Nippon Kayaku will develop and commercialize products
based on or derived from a compound supplied by Nippon Kayaku for the treatment
and prevention of diseases and disorders of the CNS and PNS. Signal will perform
combinatorial chemistry and use its proprietary human neuronal cell lines to
further optimize the compound and characterize its mechanism of action prior to
the start of clinical studies. Nippon Kayaku has agreed to provide Signal with
annual research and development support at a level approximating Signal's cost
of the program. Each party also is obligated to pay the other royalties on
future product sales arising from the collaboration.
Pursuant to a commercialization agreement to be concluded by Signal and
Nippon Kayaku following the initial research phase of the collaboration, Nippon
Kayaku will be solely responsible for the development and commercialization of
products in Japan for the treatment or prevention of diseases and disorders of
the PNS and will receive co-commercialization rights in Japan with respect to
products for the treatment and prevention of CNS diseases and disorders. Under
such future commercialization agreement, development and commercialization
rights for products outside Japan for the treatment or prevention of both PNS
and CNS diseases and disorders will be agreed upon by the parties on a
product-by-product basis, with Nippon Kayaku not guaranteed any minimum level of
co-commercialization rights. Signal and Nippon Kayaku also have granted each
other co-exclusive commercialization rights outside the field with respect to
each analog compound arising from the collaboration which is developed and
commercialized by one or both of the parties.
F-20
<PAGE> 94
[Graphic depicting logos or unstylized names of Signal's corporate
collaborators, including Ares-Serono, Roche Bioscience, Nippon Kayaku, Organon,
and DuPont Merck. Below each logo are disease programs addressed by the
collaboration. These logos or names surround the Signal logo centered on the
page.]
(inside back cover)
<PAGE> 95
============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS 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 TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 6
Use of Proceeds.......................... 19
Dividend Policy.......................... 19
Capitalization........................... 20
Dilution................................. 21
Selected Financial Data.................. 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 23
Business................................. 27
Management............................... 52
Certain Transactions..................... 61
Principal Stockholders................... 63
Description of Capital Stock............. 65
Shares Eligible for Future Sale.......... 68
Underwriting............................. 70
Legal Matters............................ 71
Experts.................................. 71
Additional Information................... 72
Index to Consolidated Financial
Statements............................. F-1
</TABLE>
------------------
UNTIL , 1998 (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 OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
============================================================
============================================================
2,500,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
HAMBRECHT & QUIST
BANCAMERICA ROBERTSON STEPHENS
LEHMAN BROTHERS
, 1998
============================================================
<PAGE> 96
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Common Stock being registered. All the amounts
shown are estimates except for the SEC registration fee, the NASD filing fee and
the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 11,026
NASD filing fee............................................. 4,238
Nasdaq Stock Market Listing Application fee.................
Blue sky qualification fees and expenses....................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer agent and registrar fees...........................
Miscellaneous...............................................
--------
Total.................................................. $600,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act.
The Registrant's Second Amended and Restated Certificate of Incorporation
and Bylaws include provisions to (i) eliminate the personal liability of its
directors for monetary damages resulting from breaches of their fiduciary duty
to the extent permitted by Section 102(b)(7) of the General Corporation Law of
Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its
directors and executive officers to the fullest extent permitted by Section 145
of the Delaware Law, including circumstances in which indemnification is
otherwise discretionary. Pursuant to Section 145 of the Delaware Law, a
corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are or are threatened to be made, a party
by reason of their serving in such positions so long as they acted in good faith
and in a manner they reasonably believed to be in or not opposed to, the best
interests of the corporation and with respect to any criminal action, they had
no reasonable cause to believe their conduct was unlawful. The Registrant
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers. These provisions do not eliminate the
directors' duty of care, and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware Law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant, for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for acts or omissions that the director believes to
be contrary to the best interests of the Registrant or its stockholders, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to the
Registrant or its stockholders when the director was aware or should have been
aware of a risk of serious injury to the Registrant or its stockholders, for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Registrant or its
stockholders, for improper transactions between the director and the Registrant
and for improper distributions to stockholders and loans to directors and
officers. The provision also does not affect a director's responsibilities under
any other law, such as the federal securities law or state or federal
environmental laws.
II-1
<PAGE> 97
The Registrant has entered into indemnity agreements with each of its
directors and executive officers that require the Registrant to indemnify such
persons against any and all expenses (including attorneys' fees), witness fees,
damages, judgments, fines, settlements and other amounts incurred (including
expenses of a derivative action) in connection with any action, suit or
proceeding, whether actual or threatened, to which any such person may be made a
party by reason of the fact that such person is or was a director, an officer or
an employee of the Registrant or any of its affiliated enterprises, provided
that such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Registrant and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. The indemnification agreements also set forth certain
procedures that will apply in the event of a claim for indemnification
thereunder.
At present, there is no pending litigation or proceeding involving a
Director, officer or key employee of the Registrant as to which indemnification
is being sought nor is the Registrant aware of any threatened litigation that
may result in claims for indemnification by any officer or Director.
The Registrant has an insurance policy covering the officers and Directors
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1995, the Registrant has sold and issued the following
unregistered securities:
1. On July 1, 1995, the Company issued 3,750 shares of Common Stock,
valued at $0.56 per share, to the New England Medical Center in connection
with the execution of a license agreement.
2. On March 31, 1996, the Company issued a warrant to purchase $2.0
million worth of Common Stock to Tanabe, exercisable only in connection
with the initial public offering of the Company's Common Stock on Form S-1
at the same per share price of such offering.
3. On March 31, 1996, the Company sold 125,000 shares of Series D
Preferred Stock at a price of $1.00 per share. On September 9, 11 and 12,
1997, the Company sold an aggregate of 1,613,865 shares of Series E
Preferred Stock at a price of $7.64 per share and issued an additional
58,150 shares of Series D Preferred Stock for no additional consideration
as part of a purchase price adjustment with respect to its prior sale of
Series D Preferred Stock. On December 1, 1997, the Company sold 680,628
shares of Series F Preferred Stock at a price of $12.04 per share. Upon the
closing of this offering, the shares of Series D Preferred Stock, Series E
Preferred Stock and Series F Preferred Stock will automatically convert
into 194,243, 1,613,865 and 680,628 shares of Common Stock, respectively.
4. On October 19, 1996, the Company issued 2,500 shares of Common
Stock, valued at $0.56 per share, in connection with the execution of an
exclusive license agreement.
5. On November 22, 1996, the Company issued a warrant to purchase
62,500 shares of Series C-1 Preferred Stock to MMC/GATX Partnership No. 1
("MMC/GATX") at an exercise price of $8.40 per share. If such warrant is
exercised, the resulting shares of Series C-1 Preferred Stock would, upon
the closing of this offering, automatically convert into 62,500 shares of
Common Stock.
6. On December 2, 1996, the Company issued to MMC/GATX a Secured
Promissory Note in the principal amount of $3.0 million in connection with
a loan to the Company of the same amount. Such promissory note bears
interest at a rate of 13.6% annually.
7. On December 31, 1996, the Company issued 1,250 shares of Common
Stock, valued at $0.56 per share, in connection with an exclusive license
agreement.
II-2
<PAGE> 98
8. On December 8, 1997, the Company issued 5,000 shares of Common
Stock, valued at $1.12 per share, in connection with the execution of a
license agreement.
9. On December 31, 1997, the Company issued 625 shares of Common
Stock, valued at $14.40 per share, pursuant to a consulting agreement.
10. On January 14, 1998, the Company issued 1,250 shares of Common
Stock, valued at $1.12 per share, in connection with an exclusive license
agreement.
11. On March 8, 1998, the Company issued 6,248 shares of Common Stock,
valued at $1.12 per share, in connection with a license agreement.
12. As of March 31, 1998, the Company has granted options to purchase
an aggregate of 1,103,444 shares of its Common Stock to directors,
employees and consultants pursuant to its Prior Plans, and the Company has
issued an aggregate of 435,570 shares of its Common Stock upon the exercise
of stock options under its Prior Plans. The exercise price for such options
range from $0.08 to $1.12 per share.
The offers, sales and issuances of the above securities were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2) of
the Securities Act, and/or Regulation D promulgated thereunder, or Rule 701
promulgated under Section 3(b) of the Securities Act as transactions by an
issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such Rule
701. The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access, through employment or other relationships,
to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Articles of Incorporation effective prior to reincorporation
of the Company in Delaware.
3.2+ Bylaws effective prior to reincorporation of the Company in
Delaware.
3.3 Certificate of Incorporation of the Company's Delaware
subsidiary.
3.4 Form of Amended and Restated Certificate of Incorporation,
to be filed and become effective prior to the effectiveness
of this Registration Statement.
3.5 Form of Second Amended and Restated Certificate of
Incorporation, to be filed and become effective upon
completion of the offering.
3.6 Form of Bylaws to become effective prior to the
effectiveness of this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and
3.6.
4.2++ Form of Common Stock Certificate.
5.1++ Opinion of Cooley Godward LLP.
10.1+ Second Amended and Restated Voting Agreement, dated
September 8, 1994, entered into between the Registrant and
certain of its stockholders.
</TABLE>
II-3
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
10.2+ Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.3+ Registrant's 1998 Equity Incentive Plan.
10.4+ Form of Incentive and Nonstatutory Stock Option Agreements
under the 1998 Equity Incentive Plan.
10.5+ Registrant's Employee Stock Purchase Plan and related
offering document.
10.6+ Registrant's Non-Employee Directors' Stock Option Plan.
10.7+ Form of Nonstatutory Stock Option under Registrant's
Non-Employee Directors' Stock Option Plan.
10.8+ Registrant's Employees Retirement Investment Plan and Trust,
effective as of January 1, 1998.
10.9+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P., dated September 6, 1994.
10.10+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P., Second Ventures II, L.P. and USVP
Entrepreneur Partners II, L.P., dated September 8, 1994.
10.11+ Management Rights Letter delivered by the Registrant to
Oxford Bioscience Partners L.P., Oxford Bioscience Partners
(Bermuda) Limited Partnership and Oxford Bioscience Partners
(Adjunct) L.P., dated September 8, 1994.
10.12+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P. dated September 5, 1997.
10.13+ Amended and Restated Investors' Rights Agreement, dated
September 9, 1997, entered into between the Registrant and
certain of its stockholders.
10.14+ Amendment to the Amended and Restated Investors' Rights
Agreement dated November 25, 1997, entered into between the
Registrant and certain of its stockholders.
10.15+ Loan and Security Agreement, dated November 22, 1996,
entered into between the Registrant and MMC/GATX Partnership
No. 1.
10.16+ Warrant to Purchase 250,000 shares of Series C-1 Preferred
Stock, issued by the Registrant to MMC/GATX Partnership No.
1.
10.17+ Secured Promissory Note, dated December 2, 1996, issued by
the Registrant to MMC/ GATX Partnership No. 1.
10.18+ Series E Preferred Stock Purchase Agreement, dated September
9, 1997, between the Registrant and certain of its
stockholders.
10.19+ Series F Preferred Stock Purchase Agreement, dated November
25, 1997, between the Registrant and Ares-Serono S.A.
10.20+ Promissory Note, dated June 14, 1994, as amended, issued to
the Registrant by Alan J. Lewis.
10.21+ Security Agreement, dated June 14, 1994, entered into
between the Registrant to Alan J. Lewis.
10.22+ Employment letter agreement, dated December 8, 1993, between
the Registrant and Alan J. Lewis.
10.23+ Employment letter agreement, dated March 4, 1994, between
the Registrant and David W. Anderson.
10.24+ Employment letter agreement, dated August 18, 1994, between
the Registrant and Bradley B. Gordon.
</TABLE>
II-4
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
10.25+ Employment letter agreement, dated June 13, 1995, between
the Registrant and Carl F. Bobkoski.
10.26+ Consulting Agreement, dated April 1, 1996, between the
Registrant and John P. Walker.
10.27+ Lease, dated April 30, 1993, as amended, between the
Registrant and Sorrento Valley Business Park.
10.28+ Master Lease Agreement, dated July 8, 1993, between the
Registrant and E.I. Dupont de Nemours & Co.
10.29+ Master Equipment Lease, dated September 1, 1993, between the
Registrant and Phoenix Leasing Incorporated.
10.30+ Master Lease Agreement, dated January 1, 1998, between the
Registrant and Transamerica Business Credit Corporation.
10.31+ Lease, dated January 1, 1998, between the Registrant and
Sorrento Valley Business Park.
10.32+* Exclusive License Agreement, dated October 26, 1993, between
the Registrant and The Regents of the University of
California.
10.33+* First Amendment to Exclusive License Agreement, dated June
22, 1997, between the Registrant and The Regents of the
University of California.
10.34+* Second Amendment to Exclusive License Agreement, dated
February 2, 1998, between the Registrant and The Regents of
the University of California.
10.35+* Restricted Stock Purchase Agreement, dated October 26, 1993,
between the Registrant and the Regents of the University of
California.
10.36+* License Agreement, dated February 18, 1998, between the
Registrant and The Regents of the University of California.
10.37+* Restricted Stock Purchase Agreement, dated February 18,
1998, between the Registrant and The Regents of the
University of California.
10.38+* Collaborative Development and Licensing Agreement, dated
March 31, 1996, between the Registrant and Tanabe Seiyaku
Co., Ltd.
10.39+* Amendment to Collaborative Development and Licensing
Agreement, dated March 31, 1998, between the Registrant and
Tanabe Seiyaku Co., Ltd.
10.40+ Stock Purchase Agreement, dated March 31, 1996, between the
Registrant and Tanabe Seiyaku Co., Ltd.
10.41+* Agreement dated July 30, 1996, between the Registrant and
N.V. Organon.
10.42* First Amendment to Agreement, dated January 30, 1998,
between the Registrant and N.V. Organon.
10.43+* Research Collaboration Agreement, dated August 26, 1996, and
as amended on September 5, 1997, between the Registrant and
Roche Bioscience.
10.44+* Exclusive License Agreement, dated October 1996, between the
Registrant and the University of Massachusetts.
10.45+* Restricted Stock Purchase Agreement, dated October 31, 1996,
between the Registrant and the University of Massachusetts.
10.46+* License Agreement, dated October 28, 1997, between the
Registrant and the University of Massachusetts.
10.47+* Restricted Stock Purchase Agreement, dated December 7, 1997,
between the Registrant and the University of Massachusetts.
</TABLE>
II-5
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
10.48+* Research, Development and License Agreement, dated November
25, 1997, between the Registrant and Ares Trading S.A.
10.49+* Collaborative Research and License Agreement, dated December
26, 1997, between the Registrant and The DuPont Merck
Pharmaceutical Company.
10.50+* Stock Purchase Agreement dated December 26, 1997, between
the Registrant and The DuPont Merck Pharmaceutical Company.
10.51+* Collaboration Agreement, dated February 9, 1998, between the
Registrant and Nippon Kayaku Co., Ltd.
10.52+ Promissory Note, dated May 8, 1998, issued to the Registrant
by Alan J. Lewis.
11.1+ Computation of Net Loss per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2++ Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1+ Power of Attorney.
</TABLE>
- ------------------------------
* Confidential Treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
+ Previously filed.
++ To be filed by amendment.
(B) SCHEDULES.
All schedules are omitted because they are not required, are not applicable
or the information is included in the consolidated 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 provisions described in Item 14 of this Registration
Statement, or otherwise, the Registrant has been advised that in the opinion of
the 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:
(1) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange Act)
that is incorporated by reference in the registration statement 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.
(2) That, 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
II-6
<PAGE> 102
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.
(3) 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-7
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 1 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, County of San Diego, State of
California, on the 26th day of May 1998.
/s/ BRADLEY B. GORDON
By:
--------------------------------
Bradley B. Gordon
Vice President, Finance,
Chief Financial Officer and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief Executive Officer and May 26, 1998
- --------------------------------------------- Director (Principal Executive Officer)
Alan J. Lewis, Ph.D.
/s/ BRADLEY B. GORDON Vice President, Finance, Chief Financial May 26, 1998
- --------------------------------------------- Officer and Secretary (Principal
Bradley B. Gordon Financial and Accounting Officer)
* Chairman of the Board May 26, 1998
- ---------------------------------------------
John P. Walker
* Director May 26, 1998
- ---------------------------------------------
Brook H. Byers
* Director May 26, 1998
- ---------------------------------------------
Luke B. Evnin, Ph.D.
* Director May 26, 1998
- ---------------------------------------------
Harry F. Hixson, Ph.D.
* Director May 26, 1998
- ---------------------------------------------
Patrick F. Latterell
* Director May 26, 1998
- ---------------------------------------------
Arnold Oronsky, Ph.D.
</TABLE>
*By: /s/ BRADLEY B. GORDON
---------------------------
(Bradley B. Gordon)
(Attorney-in-fact)
II-8
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Articles of Incorporation effective prior to reincorporation
of the Company in Delaware.
3.2+ Bylaws effective prior to reincorporation of the Company in
Delaware.
3.3 Certificate of Incorporation of the Company's Delaware
subsidiary.
3.4 Form of Amended and Restated Certificate of Incorporation,
to be filed and become effective prior to the effectiveness
of this Registration Statement.
3.5 Form of Second Amended and Restated Certificate of
Incorporation, to be filed and become effective upon
completion of the offering.
3.6 Form of Bylaws to become effective prior to the
effectiveness of this Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and
3.6.
4.2++ Form of Common Stock Certificate.
5.1++ Opinion of Cooley Godward LLP.
10.1+ Second Amended and Restated Voting Agreement, dated
September 8, 1994, entered into between the Registrant and
certain of its stockholders.
10.2+ Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.3+ Registrant's 1998 Equity Incentive Plan.
10.4+ Form of Incentive and Nonstatutory Stock Option Agreements
under the 1998 Equity Incentive Plan.
10.5+ Registrant's Employee Stock Purchase Plan and related
offering document.
10.6+ Registrant's Non-Employee Directors' Stock Option Plan.
10.7+ Form of Nonstatutory Stock Option under Registrant's
Non-Employee Directors' Stock Option Plan.
10.8+ Registrant's Employees Retirement Investment Plan and Trust,
effective as of January 1, 1998.
10.9+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P., dated September 6, 1994.
10.10+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P., Second Ventures II, L.P. and USVP
Entrepreneur Partners II, L.P., dated September 8, 1994.
10.11+ Management Rights Letter delivered by the Registrant to
Oxford Bioscience Partners L.P., Oxford Bioscience Partners
(Bermuda) Limited Partnership and Oxford Bioscience Partners
(Adjunct) L.P., dated September 8, 1994.
10.12+ Management Rights Letter delivered by the Registrant to U.S.
Venture Partners IV, L.P. dated September 5, 1997.
10.13+ Amended and Restated Investors' Rights Agreement, dated
September 9, 1997, entered into between the Registrant and
certain of its stockholders.
10.14+ Amendment to the Amended and Restated Investors' Rights
Agreement dated November 25, 1997, entered into between the
Registrant and certain of its stockholders.
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.15+ Loan and Security Agreement, dated November 22, 1996,
entered into between the Registrant and MMC/GATX Partnership
No. 1.
10.16+ Warrant to Purchase 250,000 shares of Series C-1 Preferred
Stock, issued by the Registrant to MMC/GATX Partnership No.
1.
10.17+ Secured Promissory Note, dated December 2, 1996, issued by
the Registrant to MMC/ GATX Partnership No. 1.
10.18+ Series E Preferred Stock Purchase Agreement, dated September
9, 1997, between the Registrant and certain of its
stockholders.
10.19+ Series F Preferred Stock Purchase Agreement, dated November
25, 1997, between the Registrant and Ares-Serono S.A.
10.20+ Promissory Note, dated June 14, 1994, as amended, issued to
the Registrant by Alan J. Lewis.
10.21+ Security Agreement, dated June 14, 1994, entered into
between the Registrant to Alan J. Lewis.
10.22+ Employment letter agreement, dated December 8, 1993, between
the Registrant and Alan J. Lewis.
10.23+ Employment letter agreement, dated March 4, 1994, between
the Registrant and David W. Anderson.
10.24+ Employment letter agreement, dated August 18, 1994, between
the Registrant and Bradley B. Gordon.
10.25+ Employment letter agreement, dated June 13, 1995, between
the Registrant and Carl F. Bobkoski.
10.26+ Consulting Agreement, dated April 1, 1996, between the
Registrant and John P. Walker.
10.27+ Lease, dated April 30, 1993, as amended, between the
Registrant and Sorrento Valley Business Park.
10.28+ Master Lease Agreement, dated July 8, 1993, between the
Registrant and E.I. Dupont de Nemours & Co.
10.29+ Master Equipment Lease, dated September 1, 1993, between the
Registrant and Phoenix Leasing Incorporated.
10.30+ Master Lease Agreement, dated January 1, 1998, between the
Registrant and Transamerica Business Credit Corporation.
10.31+ Lease, dated January 1, 1998, between the Registrant and
Sorrento Valley Business Park.
10.32+* Exclusive License Agreement, dated October 26, 1993, between
the Registrant and The Regents of the University of
California.
10.33+* First Amendment to Exclusive License Agreement, dated June
22, 1997, between the Registrant and The Regents of the
University of California.
10.34+* Second Amendment to Exclusive License Agreement, dated
February 2, 1998, between the Registrant and The Regents of
the University of California.
10.35+* Restricted Stock Purchase Agreement, dated October 26, 1993,
between the Registrant and the Regents of the University of
California.
10.36+* License Agreement, dated February 18, 1998, between the
Registrant and The Regents of the University of California.
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.37+* Restricted Stock Purchase Agreement, dated February 18,
1998, between the Registrant and The Regents of the
University of California.
10.38+* Collaborative Development and Licensing Agreement, dated
March 31, 1996, between the Registrant and Tanabe Seiyaku
Co., Ltd.
10.39+* Amendment to Collaborative Development and Licensing
Agreement, dated March 31, 1998, between the Registrant and
Tanabe Seiyaku Co., Ltd.
10.40+ Stock Purchase Agreement, dated March 31, 1996, between the
Registrant and Tanabe Seiyaku Co., Ltd.
10.41+* Agreement dated July 30, 1996, between the Registrant and
N.V. Organon.
10.42* First Amendment to Agreement, dated January 30, 1998,
between the Registrant and N.V. Organon.
10.43+* Research Collaboration Agreement, dated August 26, 1996, and
as amended on September 5, 1997, between the Registrant and
Roche Bioscience.
10.44+* Exclusive License Agreement, dated October 1996, between the
Registrant and the University of Massachusetts.
10.45+* Restricted Stock Purchase Agreement, dated October 31, 1996,
between the Registrant and the University of Massachusetts.
10.46+* License Agreement, dated October 28, 1997, between the
Registrant and the University of Massachusetts.
10.47+* Restricted Stock Purchase Agreement, dated December 7, 1997,
between the Registrant and the University of Massachusetts.
10.48+* Research, Development and License Agreement, dated November
25, 1997, between the Registrant and Ares Trading S.A.
10.49+* Collaborative Research and License Agreement, dated December
26, 1997, between the Registrant and The DuPont Merck
Pharmaceutical Company.
10.50+* Stock Purchase Agreement dated December 26, 1997, between
the Registrant and The DuPont Merck Pharmaceutical Company.
10.51+* Collaboration Agreement, dated February 9, 1998, between the
Registrant and Nippon Kayaku Co., Ltd.
10.52+ Promissory Note, dated May 8, 1998, issued to the Registrant
by Alan J. Lewis.
11.1+ Computation of Net Loss per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2++ Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1+ Power of Attorney.
</TABLE>
- ------------------------------
* Confidential Treatment has been requested with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the Securities
and Exchange Commission.
+ Previously filed.
++ To be filed by amendment.
<PAGE> 1
Exhibit 1.1
SIGNAL PHARMACEUTICALS, INC.
2,500,000 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
_________, 1998
HAMBRECHT & QUIST LLC
BANCAMERICA ROBERTSON STEPHENS
LEHMAN BROTHERS INC.
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Signal Pharmaceuticals, Inc., a Delaware corporation (herein
called the "Company"), proposes to issue and sell up to 2,500,000 shares of its
authorized but unissued Common Stock, $0.001 par value (herein called the
"Common Stock") (said 2,500,000 shares of Common Stock being herein called the
"Underwritten Stock"). The Company proposes to grant to the Underwriters (as
hereinafter defined) an option to purchase up to 375,000 additional shares of
Common Stock (herein called the "Option Stock" and with the Underwritten Stock,
herein collectively called the "Stock"). The Common Stock is more fully
described in the Registration Statement and the Prospectus hereinafter
mentioned.
The Company hereby confirms the agreements made with respect to
the purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the "Underwriters", which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the
Securities and Exchange Commission (herein called the "Commission") a
registration statement on Form S-1 (No. 333-52901), including the related
preliminary prospectus, for the registration under the Securities Act of 1933,
as amended (herein called the "Securities Act"), of the Stock. Copies of such
registration statement and of each amendment thereto, if any, including the
related preliminary prospectus (meeting the requirements of Rule 430A of the
rules and regulations of the Commission) heretofore filed by the Company with
the Commission have been delivered to you.
- --------
(1) Plus an option to purchase from the Company up to 375,000 additional
shares to cover over-allotments.
<PAGE> 2
The term Registration Statement as used in this agreement shall
mean such registration statement, including all exhibits and financial
statements, all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, in the form in which it became
effective, and any registration statement filed pursuant to Rule 462(b) of the
rules and regulations of the Commission with respect to the Stock (herein called
a Rule 462(b) registration statement), and, in the event of any amendment
thereto after the effective date of such registration statement (herein called
the Effective Date), shall also mean (from and after the effectiveness of such
amendment) such registration statement as so amended (including any Rule 462(b)
registration statement). The term Prospectus as used in this Agreement shall
mean the prospectus relating to the Stock first filed with the Commission
pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as
included in the Registration Statement) and, in the event of any supplement or
amendment to such prospectus after the Effective Date, shall also mean (from and
after the filing with the Commission of such supplement or the effectiveness of
such amendment) such prospectus as so supplemented or amended. The term
Preliminary Prospectus as used in this Agreement shall mean each preliminary
prospectus included in such registration statement prior to the time it becomes
effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants as follows:
(a) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has full corporate power and authority to own or lease its
properties and to conduct its business as described in the Registration
Statement and the Prospectus and as being conducted, and is duly qualified as a
foreign corporation and in good standing in all jurisdictions in which the
character of the property owned or leased or the nature of the business
transacted by it makes qualification necessary, except where the failure to be
so qualified would not have a material adverse effect on the business,
properties, operation, condition (financial or other), results of operations or
prospects of the Company (herein called a "Material Adverse Effect").
(b) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable and conform to the description thereof contained in the
Prospectus.
(c) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding obligation,
enforceable in accordance with its terms, except as such enforcement may be
limited by applicable laws relating to bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights generally
or by general equitable principles.
2
<PAGE> 3
(d) The execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company is a
party or by which the Company is bound or to which any of the property or assets
of the Company is subject, except for breaches or violations as would not have a
Material Adverse Effect, nor will such actions result in any violation of the
provisions of any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
properties or assets, except for violations as would not have a Material Adverse
Effect, nor will such actions result in any violation of the provisions of the
charter or bylaws of the Company; and except for the registration of the Stock
under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as have been obtained or may be required under
the Securities Exchange Act of 1934, as amended (herein called the "Exchange
Act") and applicable state or foreign securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby.
(e) There are no contracts, agreements or understandings between
the Company and any person holding securities of the Company granting such
person (A) the right (other than rights which have been waived or satisfied) to
require the Company to include such securities in the securities registered
pursuant to the Registration Statement, or (B) additional registration rights as
a result of the filing of the Registration Statement. No preemptive rights or
rights of first refusal or co-sale exist with respect to the Stock or the
transactions contemplated by this Agreement, other than such as have been waived
in writing prior to the date hereof.
(f) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the business, properties, management, prospects,
condition (financial or other), stockholders' equity or results of operations of
the Company, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of business, the
Company has not entered into any material transaction not referred to in the
Registration Statement and the Prospectus.
(g) The Registration Statement and the Prospectus comply, and on
the Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material respects,
with the provisions of the Securities Act and the rules and regulations of the
Commission thereunder (the "Rules and Regulations"); on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on the
Effective Date, the Prospectus did not and, on the Closing Date and any later
date on which Option Stock is to be purchased, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this
3
<PAGE> 4
subparagraph (g) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in conformity
with written information furnished to the Company by or on behalf of the
Underwriters specifically for use in the Registration Statement or the
Prospectus.
(h) The Stock has been duly and validly authorized and, when
issued and sold to the Underwriters as provided herein, will be duly and validly
issued, fully paid and nonassessable; and the Stock conforms to the description
thereof in the Prospectus. No further approval or authority of the stockholders
or the Board of Directors of the Company will be required for the issuance and
sale of the Stock as contemplated herein.
(i) Prior to the Closing Date the Stock to be issued and sold by
the Company will be approved for inclusion on The Nasdaq National Market upon
official notice of issuance.
(j) The Company has not sustained, since the date of the latest
audited financial statements included in the Prospectus, any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since such date, there has not been any
material change in the capital stock or, except in the ordinary course of
business, long-term debt of the Company, or any material adverse change, or any
development involving a prospective material adverse change, in or affecting the
business, properties, management, prospects, condition (financial or other),
stockholders' equity or results of operations of the Company, otherwise than as
set forth or contemplated in the Prospectus.
(k) The audited financial statements of the Company, together
with the related notes and supporting schedules, and the unaudited financial
statements, filed as part of the Registration Statement or included in the
Prospectus, fairly present the financial condition and results of operations of
the Company at the dates and for the periods indicated, in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved. The unaudited financial statements (including
related notes) filed as part of the Registration Statement or included in the
Prospectus include all adjustments, consisting of normal recurring adjustments,
that the Company considers necessary for a fair presentation of the financial
position and results of operations for these periods (except for the footnotes
and more detailed information with respect to the three-month numbers announced
and noted in the Registration Statement). The selected and summary financial and
statistical data included in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with the
audited financial statements presented therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(l) Ernst & Young LLP, who has audited the financial statements
of the Company, together with the related schedules and notes, as of December
31, 1997 and for each of the years in the three (3) years ended December 31,
1997, whose report appears in the Registration Statement and in the Prospectus
and who have delivered the Original Letter referred to in Section 9(h) hereof,
are independent public accountants as required by and within the meaning of the
Securities Act and the Rules and Regulations.
4
<PAGE> 5
(m) All real property and buildings held under lease by the
Company are held by it under valid, subsisting and, to the best of the Company's
knowledge, enforceable leases, with such exceptions as are not material and do
not interfere with the use made and proposed to be made of such property and
buildings by the Company.
(n) The Company carries, or is covered by, insurance in such
amounts and covering such risks as is reasonably adequate for the conduct of its
business and the value of its properties.
(o) Except as disclosed in the Prospectus, the Company (A) to its
knowledge after diligent investigation for the purposes hereof, owns, or
possesses adequate rights to use, all patents, patent rights, inventions, trade
secrets, know-how, proprietary techniques, including processes and substances,
trademarks, service marks, trade names and copyrights described or referred to
in the Prospectus or owned or used by it or which are necessary for the conduct
of its business as currently conducted and as proposed in the Prospectus to be
conducted in the future, except for any failure to own or possess any such
rights as would not individually or in the aggregate have a Material Adverse
Effect, and (B) has no reason to believe, and is not aware of any claim, that
the conduct of its business conflicts or will conflict with any such rights of
others which conflict or claim is or may be material to the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company.
(p) Except as described in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a party or of which any
property or assets of the Company is the subject which, if determined adversely
to the Company, might have a Material Adverse Effect, and, to the Company's
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(q) There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described in the Prospectus or filed as exhibits to the Registration
Statement or incorporated therein by reference as permitted by the Rules and
Regulations.
(r) No relationship, direct or indirect, exists between or among
the Company on the one hand, and the directors, officers, stockholders,
collaboration partners, joint venturers, licensees, licensors, consultants,
customers or suppliers of the Company on the other hand, which is required to be
described in the Prospectus which is not so described.
(s) No labor disturbance by the employees of the Company exists
or, to the knowledge of the Company, is imminent which might be expected to have
a Material Adverse Effect.
(t) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has paid
all taxes due thereon, and no tax deficiency has been determined adversely to
the Company which will have (nor does the Company have any knowledge of any tax
deficiency which, if determined adversely to the Company, might have) a Material
Adverse Effect.
5
<PAGE> 6
(u) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be disclosed in
the Prospectus, the Company has not (i) issued or granted any securities, other
than option grants and exercises and stock purchases pursuant to the Company's
stock option and employee stock purchase plans in the ordinary course of
business or pursuant to the exercise of warrants in the ordinary course of
business, (ii) incurred any liability or obligation, direct or contingent, other
than liabilities and obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary course of
business or (iv) declared or paid any dividend on its capital stock.
(v) The Company (i) makes and keeps accurate books and records
and (ii) maintains internal accounting controls which provide reasonable
assurance that (A) transactions are executed in accordance with management's
authorization, (B) transactions are recorded as necessary to permit preparation
of its financial statements and to maintain accountability for its assets, (C)
access to its assets is permitted only in accordance with management's
authorization and (D) the reported accountability for its assets is compared
with existing assets at reasonable intervals.
(w) The Company (i) is not in violation of its charter or bylaws,
(ii) is not in default in any material respect, and no event has occurred which,
with notice or lapse of time or both, would constitute such a default, in the
due performance or observance of any term, covenant or condition contained in
any license agreement, collaboration agreement, material indenture, mortgage,
deed of trust, loan agreement or other material agreement or instrument to which
it is a party or by which it is bound or to which any of its properties or
assets is subject, other than as would not cause a Material Adverse Effect (and,
to its knowledge, no other party to any such agreement is in default thereof and
no event has occurred which, with notice, lapse of time or both, would
constitute such a default), or (iii) is not in violation in any material respect
of any law, ordinance, governmental rule, regulation or court decree to which it
or its property or assets may be subject and the Company has not failed to
obtain any material license, permit, certificate, franchise or other
governmental authorization or permit necessary to the ownership of its property
or to the conduct of its business, other than as would not cause a Material
Adverse Effect.
(x) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company (or, to the
knowledge of the Company, any of its predecessors in interest) at, upon or from
any of the property now or previously owned or leased by the Company in
violation of any applicable law, ordinance, rule, regulation, order, judgment,
decree or permit or which would require remedial action under any applicable
law, ordinance, rule, regulation, order, judgment, decree or permit, except for
any violation or remedial action which would not have, or could not be
reasonably likely to have, singularly or in the aggregate with all such
violations and remedial actions, a Material Adverse Effect; there has been no
material spill, discharge, leak, emission, injection, escape, dumping or release
of any kind onto such property or into the environment surrounding such property
of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous
substances due to or caused by the Company or with respect to which the Company
has knowledge, except for any such spill, discharge, leak, emission, injection,
escape, dumping or release which would not have or would
6
<PAGE> 7
not be reasonably likely to have, singularly or in the aggregate with all such
spills, discharges, leaks, emissions, injections, escapes, dumpings and
releases, a Material Adverse Effect; and the terms "hazardous wastes", "toxic
wastes", "hazardous substances" and "medical wastes" shall have the meanings
specified in any applicable local, state, federal and foreign laws or
regulations with respect to environmental protection.
(y) The Company is not an "investment company" within the meaning
of such term under the United States Investment Company Act of 1940 and the
rules and regulations of the Commission thereunder.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell shares of the Underwritten Stock to the several Underwriters and
each of the Underwriters agrees to purchase from the Company the respective
aggregate number of shares of Underwritten Stock set forth opposite its name in
Schedule I. The price at which such shares of Underwritten Stock shall be sold
by the Company and purchased by the several Underwriters shall be $___ per share
[IPO PRICE LESS DISCOUNT]. In making this Agreement, each Underwriter is
contracting severally and not jointly; except as provided in paragraphs (b) and
(c) of this Section 3, the agreement of each Underwriter is to purchase only the
respective number of shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail
or refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters (the identity of which are subject to the Company's approval,
which shall not be unreasonably withheld) to purchase, in such proportions as
may be agreed upon between you and such purchasing Underwriter or Underwriters
and upon the terms herein set forth, all or any part of the shares of the Stock
which such defaulting Underwriter or Underwriters agreed to purchase. If the
non-defaulting Underwriters fail so to make such arrangements with respect to
all such shares and portion, the number of shares of the Stock which each
non-defaulting Underwriter is otherwise obligated to purchase under this
Agreement shall be automatically increased on a pro rata basis to absorb the
remaining shares and portion which the defaulting Underwriter or Underwriters
agreed to purchase; provided, however, that the non-defaulting Underwriters
shall not be obligated to purchase the shares and portion which the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of such
shares of the Stock exceeds 10% of the total number of shares of the Stock which
all Underwriters agreed to purchase hereunder. If the total number of shares of
the Stock which the defaulting Underwriter or Underwriters agreed to purchase
shall not be purchased or absorbed in accordance with the two preceding
sentences, the Company shall have the right, within the 24 hours next succeeding
the 24-hour period above referred to, to make arrangements with other
underwriters or purchasers satisfactory to you for purchase of such shares and
portion on the terms herein set forth. In any such case, either you or the
Company shall have the right to postpone the Closing Date
7
<PAGE> 8
determined as provided in Section 5 hereof for not more than seven business days
after the date originally fixed as the Closing Date pursuant to said Section 5
in order that any necessary changes in the Registration Statement, the
Prospectus, this Agreement or any other documents or arrangements may be made.
If neither the non-defaulting Underwriters nor the Company shall make
arrangements within the 24-hour periods stated above for the purchase of all the
shares of the Stock which the defaulting Underwriter or Underwriters agreed to
purchase hereunder, this Agreement shall be terminated without further act or
deed and without any liability on the part of the Company to any non-defaulting
Underwriter and without any liability on the part of any non-defaulting
Underwriter to the Company. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to all of the shares in the aggregate of the Option Stock from
the Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters
of the Stock to be purchased by them shall be as set forth in the Prospectus.
The Underwriters may from time to time change the public offering price after
the closing of the initial public offering and increase or decrease the
concessions and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front
cover page of the Prospectus and any Preliminary Prospectus and under
"Underwriting" in the Registration Statement, any Preliminary Prospectus and the
Prospectus relating to the Stock filed by the Company (insofar as such
information relates to the Underwriters) constitutes the only information
furnished by the Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of
the respective Underwriters represent and warrant to the Company that the
statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten
Stock and the Option Stock (if the option granted by Section 3(c) hereof shall
have been exercised not later
8
<PAGE> 9
than 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date), and payment therefor, shall be made at the office of Cooley
Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California 92121, at
7:00 a.m., San Francisco time, on the fourth business day after the date of this
Agreement, or at such time on such other day, not later than seven full business
days after such fourth business day, as shall be agreed upon in writing by the
Company and you. The date and hour of such delivery and payment (which may be
postponed as provided in Section 3(b) hereof) are herein called the "Closing
Date."
(b) If the option granted by Section 3(c) hereof shall be
exercised after 7:00 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of certificates for the shares of Option
Stock, and payment therefor, shall be made at the office of Cooley Godward LLP,
4365 Executive Drive, Suite 1100, San Diego, California 92121, at 7:00 a.m., San
Francisco time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be
made to the Company or its order by wire transfer of immediately available funds
or one or more certified or official bank check or checks in same day funds.
Such payment shall be made upon delivery of certificates for the Stock to you
for the respective accounts of the several Underwriters against receipt therefor
signed by you. Certificates for the Stock to be delivered to you shall be
registered in such name or names and shall be in such denominations as you may
request at least one business day before the Closing Date, in the case of
Underwritten Stock, and at least one business day prior to the purchase thereof,
in the case of the Option Stock. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at the offices of Lewco
Securities Corporation, 2 Broadway, New York, New York 10004 on the business day
prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New
York time, on the business day preceding the date of purchase. If the
Representatives so elect, delivery of the Shares purchased from the Company may
be made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check or wire shall not have
been received by you on the Closing Date or any later date on which Option Stock
is purchased for the account of such Underwriter. Any such payment by you shall
not relieve such Underwriter from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants
and agrees as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information previously
omitted at the time of effectiveness of the Registration Statement in reliance
on Rule 430A and (ii) not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been advised
and furnished with a copy or to which you shall have reasonably objected in
writing or which is not in compliance with the Securities Act or the Rules and
Regulations.
(b) The Company will promptly notify each Underwriter in the
event of (i) the request by the Commission for amendment of the Registration
Statement or for supplement to
9
<PAGE> 10
the Prospectus or for any additional information, (ii) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement, (iii) the institution or notice of intended institution of any action
or proceeding for that purpose, (iv) the receipt by the Company of any
notification with respect to the suspension of the qualification of the Stock
for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver
to you a signed copy of the Registration Statement as originally filed and of
each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto) and will also deliver to you, for
distribution to the Underwriters, a sufficient number of additional conformed
copies of each of the foregoing (but without exhibits) so that one copy of each
may be distributed to each Underwriter, (ii) as promptly as possible deliver to
you and send to the several Underwriters, at such office or offices as you may
designate, as many copies of the Prospectus as you may reasonably request, and
(iii) thereafter from time to time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, likewise send to
the Underwriters as many additional copies of the Prospectus and as many copies
of any supplement to the Prospectus and of any amended prospectus, filed by the
Company with the Commission, as you may reasonably request for the purposes
contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the initial
public offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters, such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable Rules and
Regulations for such period.
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(e) Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in
the qualification of the Stock for offer and sale under the securities or blue
sky laws of such jurisdictions as you may designate and, during the period in
which a prospectus is required by law to be delivered by an Underwriter or
dealer, in keeping such qualifications in good standing under said securities or
blue sky laws; provided, however, that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified. The Company
will, from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
Stock.
(g) During a period of five years commencing with the date
hereof, the Company will furnish to you, and to each Underwriter who may so
request in writing, copies of all periodic and special reports furnished to
stockholders of the Company and of all information, documents and reports filed
with the Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay all costs and expenses incident to
the performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. of the
Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the
furnishing to the Underwriters of copies of any Preliminary Prospectus and of
the several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the printing of this Agreement and related documents delivered
to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including
counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their counsel in
qualifying the Stock under state securities or blue sky laws and in the review
of the offering by the National Association of Securities Dealers.
(k) The Company hereby agrees that, without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will
not, for a period of 180 days following the commencement of the public offering
of the Stock by the Underwriters, directly or indirectly, (i) sell, offer,
contract to sell, make any short sale, pledge, sell any option
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<PAGE> 12
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock or (ii) enter
into any swap or other agreement that transfers, in whole or in part, any of the
economic consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing sentence
shall not apply to (A) the Stock to be sold to the Underwriters pursuant to this
Agreement, (B) shares of Common Stock issued by the Company under the stock
option and stock purchase plans of the Company (the "Plans"), including shares
of Common Stock issued upon the exercise of options granted under the Plans, or
upon the exercise of warrants outstanding as of the date hereof, all as
described in footnote (___) to the table under the caption "Capitalization" in
the Preliminary Prospectus, (C) options to purchase Common Stock granted under
the Company's 1998 Equity Incentive Plan, (D) shares of Common Stock to be
issued to The DuPont Merck Pharmaceutical in accordance with the Stock Purchase
Agreement dated December 26, 1997, and (E) shares of Common Stock issued by the
Company in connection with additional collaborative arrangements or license
agreements similar to those described in the Prospectus, provided, however, that
in each of (A) through (E), the Company shall cause the person to whom such
securities are issued to enter into an agreement restricting the transfer of any
securities held by such holder for a period of 180 days from the commencement of
the public offering of the Stock without the prior written consent of Hambrecht
& Quist LLC.
(l) The Company agrees to use its best efforts to cause all
directors, officers and securityholders to agree that, without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or
entity will not, for a period of 180 days following the commencement of the
public offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, contract to sell, lend, make any short sale, pledge, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock or (ii) enter
into any swap or other agreement that transfers, in whole or in part, any of the
economic consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
(m) If at any time during the 271-day period after the
Registration Statement becomes effective any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price for the Stock has been or is likely to be materially
affected (regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
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(n) Prior to the Effective Date, to apply for the listing of the
Stock on The Nasdaq National Market and to use its best efforts to complete that
listing, subject only to official notice of issuance, prior to the Closing Date.
(o) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus.
(p) The Company is familiar with the Investment Company Act of
1940, as amended, and has in the past conducted its affairs, and will in the
future conduct its affairs, in such a manner to ensure that the Company was not
and will not be an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder.
(q) The Company will complete, prior to the consummation of the
sale of the Stock, (i) the Company's reincorporation under Delaware law and (ii)
the 4-for-1 reverse stock split to be effected concurrently therewith.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, or the common law or otherwise, and
the Company agrees to reimburse each such Underwriter and controlling person for
any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company contained in this paragraph (a)
shall not apply to any such losses, claims,
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<PAGE> 14
damages, liabilities or expenses if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of any Underwriter
for use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto and (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the benefit of
any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration Statement
on his own behalf or pursuant to a power of attorney, each of its directors,
each other Underwriter and each person (including each partner or officer
thereof) who controls the Company or any such other Underwriter within the
meaning of Section 15 of the Securities Act, from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Securities Act,
the Exchange Act, or the common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, if such statement or omission was made in reliance upon
and in conformity with information furnished as herein stated or otherwise
furnished in writing to the Company by or on behalf of such indemnifying
Underwriter for use in the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto. Notwithstanding the provisions of this
paragraph 7(b), no Underwriter shall be liable for any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. The
indemnity agreement of each Underwriter contained in this paragraph (b) shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a)
and (b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
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<PAGE> 15
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding against,
or investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt of the
Notice by giving written notice (herein called the Notice of Defense) to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering
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<PAGE> 16
of the Stock or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each indemnifying party in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, or actions in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Underwriters shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the Stock received by the Company and the total underwriting
discount received by the Underwriters, as set forth in the table on the cover
page of the Prospectus, bear to the aggregate public offering price of the
Stock. Relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by each indemnifying party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service
of a summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 7).
(e) The Company will not, without the prior written consent of
each Underwriter, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not such Underwriter
or any person who controls such Underwriter within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
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8. TERMINATION. This Agreement may be terminated by you at any
time prior to the Closing Date by giving written notice to the Company if after
the date of this Agreement trading in the Common Stock shall have been
suspended, or if there shall have occurred (i) the engagement in hostilities or
an escalation of major hostilities by the United States or the declaration of
war or a national emergency by the United States on or after the date hereof,
(ii) any outbreak of hostilities or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, calamity, crisis or change in economic or political conditions in the
financial markets of the United States would, in the Underwriters' reasonable
judgment, make the offering or delivery of the Stock impracticable, (iii)
suspension of trading in securities generally or a material adverse decline in
value of securities generally on the New York Stock Exchange, the American Stock
Exchange, The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially and adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 8, there shall be no
liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the Stock shall be subject to
the accuracy, as of the date hereof and the Closing Date and any later date on
which Option Stock is to be purchased, as the case may be, of the
representations and warranties of the Company herein, to the performance by the
Company of all its obligations to be performed hereunder at or prior to the
Closing Date or any later date on which Option Stock is to be purchased, as the
case may be, and to the following further conditions:
(a) The Registration Statement and Prospectus shall have been
timely filed with the Commission in accordance with Section 5(a) and shall have
become effective as of the date hereof; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the Prospectus or
otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to the Closing Date or any later date on which Option Stock
is to be purchased that the Registration Statement or the Prospectus or any
amendment or supplement thereto contains an
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<PAGE> 18
untrue statement of a fact which, in the opinion of Brobeck, Phleger & Harrison
LLP, counsel for the Underwriters, is material or omits to state a fact which,
in the opinion of such counsel, is material and is required to be stated therein
or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the Registration
Statement, the Prospectus and the certificates representing the Stock, and the
registration, authorization, issue, sale and delivery of the Stock, and all
other legal matters relating to this Agreement and the transactions contemplated
hereby, shall be, on or prior to the Closing Date or any later date on which
Option Stock is to be purchased, reasonably satisfactory to Brobeck, Phleger &
Harrison LLP, counsel for the Underwriters, and the Company shall have furnished
to such counsel all documents and information that they may have reasonably
requested to enable them to pass upon such matters.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct in all material respects and neither the Registration Statement nor the
Prospectus omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not misleading,
(ii) since the Effective Date, no event has occurred which should have been set
forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment, (iii) since the respective dates as of
which information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, business prospects,
properties, condition (financial or other) or results of operations of the
Company, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business, the
Company has not entered into any material transaction not referred to in the
Registration Statement in the form in which it originally became effective and
the Prospectus contained therein, (iv) the Company does not have any material
contingent obligations which are not disclosed in the Registration Statement and
the Prospectus, (v) there are not any pending or known threatened legal
proceedings to which the Company is a party or of which property of the Company
is the subject which are material and which are not disclosed in the
Registration Statement and the Prospectus, (vi) there are not any franchises,
contracts, leases or other documents which are required to be filed as exhibits
to the Registration Statement which have not been filed as required, (vii) the
representations and warranties of the Company herein are true and correct in all
material respects as of the Closing Date or any later date on which Option Stock
is to be purchased, as the case may be, and (viii) there has not been any
material change in the market for securities in general or in political,
financial or economic conditions from those reasonably foreseeable so as to
render it impracticable in your reasonable judgment to make a public offering of
the Stock, or a material adverse change in market levels for securities in
general (or those of companies in particular) or financial or economic
conditions which render it inadvisable to proceed.
(e) You shall have received from Cooley Godward LLP, counsel for
the Company, an opinion, addressed to the Underwriters and dated the Closing
Date, in form and substance reasonably satisfactory to the Representatives
covering the matters set forth in Annex A hereto, and if Option Stock is
purchased at any date after the Closing Date, such counsel will
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<PAGE> 19
provide an additional opinion, addressed to the Underwriters and dated such
later date, confirming that the statements expressed as of the Closing Date in
such opinion remain valid as of such later date.
(f) You shall have received from Seed and Berry LLP, patent
counsel for the Company, an opinion, addressed to the Underwriters and dated the
Closing Date, in form and substance reasonably satisfactory to the
Representatives covering the matters set forth in Annex B hereto, and if Option
Stock is purchased at any date after the Closing Date, such counsel will provide
an additional opinion, addressed to the Underwriters and dated such later date,
confirming that the statements expressed as of the Closing Date in such opinion
remain valid as of such later date.
(g) You shall have received from Brobeck, Phleger & Harrison LLP,
counsel for the Underwriters, an opinion, dated the Closing Date and any later
date on which Option Stock is to be purchased, with respect to the sufficiency
of all such corporate proceedings and other legal matters relating to this
Agreement and the transactions contemplated hereby as you may reasonably
require, and the Company shall have furnished to such counsel such documents as
they may have requested for the purpose of enabling them to pass upon such
matters.
(h) You shall have received from Ernst & Young LLP a letter, in
form and substance satisfactory to the Representatives, addressed to or for the
use of the Underwriters and dated as of the date hereof (the "Original Letter")
(i) confirming that they are independent certified public accountants with
respect to the Company within the meaning of the Securities Act and the
applicable published Rules and Regulations and (ii) stating, as of the date
hereof (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date hereof), the
conclusions and findings of such firm with respect to the financial information
and other matters ordinarily covered by accountants' "comfort letters" to
underwriters in connection with registered public offerings.
(i) With respect to the Original Letter, the Company shall have
furnished to the Representatives a letter (the "Bring-Down Letter") of such
accountants, addressed to the Underwriters and dated the Closing Date and any
later date on which Option Stock is to be purchased (i) confirming that they are
independent public accountants within the meaning of the Securities Act and the
applicable Rules and Regulations, (ii) confirming, as of the date of the
Bring-Down Letter (or, with respect to matters involving changes or developments
since the respective dates as of which specified financial information is given
in the Prospectus, as of a date not more than five days prior to the date of the
Bring-Down Letter), the conclusions and findings of such firm with respect to
the financial information and other matters covered by the Original Letter, and
(iii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter which are necessary to reflect any
changes in the facts described in the Original Letter since the date of the
Original Letter or to reflect the availability of more recent financial
statements, data or information. The Original Letter and the Bring-Down Letter
shall not disclose any change, or any development involving a prospective
change, in or affecting the condition (financial or otherwise), earnings,
operations, properties, business or business prospects of the Company which, in
your sole judgment, makes it impractical or
19
<PAGE> 20
inadvisable to proceed with the public offering of the Stock or the purchase of
the Option Stock as contemplated by the Prospectus.
In addition, you shall have received from Ernst & Young
LLP a letter stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's financial statements as of and at
December 31, 1997, did not disclose any weakness in internal controls that they
considered to be material weaknesses.
(j) You shall have received on the Closing Date and on any later
date on which Option Stock is purchased, a certificate of the Company dated the
Closing Date or such later date, as the case may be, and signed by the President
and the Chief Financial Officer of the Company, stating that:
(i) The representations, warranties and agreements of the
Company in this Agreement are true and correct in all material
respects as if made on and as of the Closing Date and any later
date on which the Option Stock is to be purchased, as the case
may be; the Company has complied with all the agreements
contained herein and satisfied all the conditions on its part to
be performed or satisfied at or prior to the Closing Date or any
later date on which Option Stock is to be purchased, as the case
may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or are pending or threatened
under the Securities Act;
(iii) When the Registration Statement became effective and
at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus, and
any amendments or supplements thereto, contained all material
information required to be included therein by the Securities Act
and the Rules and Regulations and in all material respects
conformed to the requirements of the Securities Act and the Rules
and Regulations, the Registration Statement, and any amendment or
supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, the Prospectus, and any amendment or
supplement thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and,
since the effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and
Prospectus, there has not been (a) any material adverse change in
the business, business prospects, properties, condition
(financial or other) or results of operations of the Company, (b)
any transaction
20
<PAGE> 21
that is material to the Company, except transactions entered into
in the ordinary course of business, (c) any obligation, direct or
contingent, incurred by the Company that is material to the
Company, except obligations incurred in the ordinary course of
business, (d) any change in the capital stock or, except in the
ordinary course of business, outstanding indebtedness of the
Company that is material to the Company, (e) any dividend or
distribution of any kind declared, paid or made on the capital
stock of the Company, or (f) any loss or damage (whether or not
insured) to the property of the Company which has been sustained
or will have been sustained which has a material adverse effect
on the business, business prospects, properties, condition
(financial or other) or results of operations of the Company.
(k) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company) as to the accuracy of the
representations and warranties of the Company herein, as to the performance by
the Company of their respective obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder.
(l) You shall have been furnished evidence in usual written form
from the appropriate authorities of the several jurisdictions, or other evidence
satisfactory to you, of the qualification referred to in paragraph (f) of
Section 6 hereof.
(m) Prior to the Closing Date, the Stock to be issued and sold by
the Company shall have been approved for inclusion on The Nasdaq National Market
and the Company's registration statement pursuant to Section 12(g) of the
Exchange Act shall have been declared effective by the Commission.
(n) On or prior to the Closing Date, you shall have received,
from all officers, directors and securityholders, agreements, in form reasonably
satisfactory to Hambrecht & Quist LLC, stating that without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, such person or
entity will not, for a period of 180 days following the commencement of the
public offering of the Stock by the Underwriters, directly or indirectly, (i)
sell, offer, lend, contract to sell, make any short sale, pledge, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock or (ii) enter
into any swap or other agreement that transfers, in whole or in part, any of the
economic consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise.
(o) The Company shall have completed, prior to the consummation
of the sale of the Stock, (i) the Company's reincorporation under Delaware law
and (ii) the 4-for-1 reverse stock split to be effected concurrently therewith.
All the agreements, opinions, certificates and letters mentioned
above or elsewhere in this Agreement shall be deemed to be in compliance with
the provisions hereof only
21
<PAGE> 22
if Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, shall be
satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall
not be fulfilled, this Agreement may be terminated by you by giving written
notice to the Company. Any such termination shall be without liability of the
Company to the Underwriters and without liability of the Underwriters to the
Company; provided, however, that (i) in the event of such termination, the
Company agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein, to fulfill any of the conditions herein, or to
comply with any provision hereof other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters severally upon demand
for all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the
transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation
of the Company to deliver the Stock shall be subject to the conditions that (a)
the Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10
shall not be fulfilled, this Agreement may be terminated by the Company by
giving notice to you. Any such termination shall be without liability of the
Company to the Underwriters and without liability of the Underwriters to the
Company; provided, however, that in the event of any such termination the
Company agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement
shall inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 7 hereof, the several parties (in addition
to the Company and the several Underwriters) indemnified under the provisions of
said Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
22
<PAGE> 23
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing and, if to the Underwriters, shall
be mailed or delivered to Hambrecht & Quist LLC, One Bush Street, San Francisco,
California 94104, with a copy to Brobeck, Phleger & Harrison LLP, Two
Embarcadero Place, 2200 Geng Road, Palo Alto, California 94303, Attention: J.
Stephan Dolezalek, Esq.; and if to the Company, shall be mailed or delivered to
it at its office, Attention: Alan J. Lewis, Ph.D., with a copy to Cooley Godward
LLP, 4365 Executive Drive, Suite 1100, San Diego, California 92121, Attention:
Frederick T. Muto, Esq.
14. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any investigation made
by or on behalf of any Underwriter or controlling person thereof, or by or on
behalf of the Company or their respective directors or officers, and (c)
delivery and payment for the Stock under this Agreement; provided, however, that
if this Agreement is terminated prior to the Closing Date, the provisions of
paragraphs (k) and (l) of Section 6 hereof shall be of no further force or
effect.
This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of California, without respect to the conflicts of
law provisions thereof.
[remainder of page intentionally blank]
23
<PAGE> 24
Please sign and return to the Company the enclosed duplicates of
this letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
SIGNAL PHARMACEUTICALS, INC.
By:
Alan J. Lewis, Ph.D.
President and Chief Executive Officer
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
BANCAMERICA ROBERTSON STEPHENS
LEHMAN BROTHERS INC.
By Hambrecht & Quist LLC
By_____________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
24
<PAGE> 25
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Shares to be
Underwriters Purchased
- ------------ ------------
<S> <C>
Hambrecht & Quist LLC..............................................
BancAmerica Robertson Stephens ....................................
Lehman Brothers Inc................................................
---------
TOTAL ..................................................... 2,500,000
</TABLE>
<PAGE> 26
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF
COOLEY GODWARD LLP, COUNSEL FOR THE COMPANY
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, to the best of such counsel's knowledge, is duly qualified as
a foreign corporation and in good standing in each state of the United States of
America in which its ownership or leasing of property requires such
qualification (except where the failure to be so qualified would not have a
material adverse effect on the business, properties, financial condition or
results of operations of the Company), and has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement;
(ii) To the best of such counsel's knowledge, the Company does
not own or control, directly or indirectly, any corporation, association or
other entity.
(iii) The Stock to be issued by the Company pursuant to the terms
of the Underwriting Agreement has been duly authorized and, upon issuance and
delivery against payment therefor in accordance with the terms thereof, will be
duly and validly issued and fully paid and nonassessable, and no preemptive
rights of, or rights of refusal in favor of, any third party, including any
stockholders of the Company exist with respect to the Stock, or the issue and
sale thereof, pursuant to the Certificate of Incorporation or Bylaws of the
Company and, to the best of such counsel's knowledge, there are no contractual
preemptive rights that have not been waived, or rights of first refusal or
rights of co-sale which exist with respect to the issue and sale of the Stock;
(iv) The Company has the corporate power and authority to enter
into the Underwriting Agreement and to issue, sell and deliver to the
Underwriters the Stock to be issued and sold by it thereunder;
(v) The Underwriting Agreement and the transactions contemplated
thereby have been duly authorized by all necessary corporate action on the part
of the Company and the Underwriting Agreement has been duly executed and
delivered by the Company and is a valid and binding agreement of the Company,
enforceable in accordance with its terms, except as limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles or the
availability of equitable remedies; provided that such counsel need not express
any opinion with respect to the indemnification or contribution provisions
thereof;
(vi) The Registration Statement has become effective under the
Securities Act and to our knowledge no stop order suspending the effectiveness
of the Registration Statement or
<PAGE> 27
suspending or preventing the use of the Prospectus has been issued and no
proceedings for that purpose have been instituted or are pending, threatened or
contemplated by the Commission;
(vii) The Registration Statement and the Prospectus (other than
the financial statements (including supporting schedules), other financial data
and statistical data derived therefrom as to which such counsel need express no
opinion), as of the effective date of the Registration Statement, complied as to
form in all material respects with the requirements of the Securities Act and
the applicable rules and regulations promulgated thereunder;
(viii) The authorized, issued and outstanding capital stock of
the Company was and is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein; the issued and outstanding
shares of capital stock of the Company have been duly and validly issued and are
fully paid and nonassessable, and have not been issued in violation of or
subject to any preemptive right or, to the best of such counsel's knowledge,
co-sale right, registration right, right of first refusal or other similar
right; except as disclosed in or specifically contemplated by the Registration
Statement and the Prospectus, to the best of such counsel's knowledge, there are
no outstanding options, warrants or other rights calling for the issuance of,
and no commitments, plans or arrangements to issue, any shares of capital stock
of the Company or any security convertible into or exchangeable for capital
stock of the Company and all outstanding shares of Preferred Stock of the
Company have been duly and validly converted into Common Stock of the Company;
(ix) The information required to be set forth in the Registration
Statement in answer to Items 9 (Description of Securities) and 10 (Interest of
Counsel) (insofar as it relates to such counsel) and, to the best of such
counsel's knowledge, in Items 11(c) (Legal Proceedings), 11(n) (Certain
Relationships and Related Transactions) of Form S-1 is accurately set forth
therein to the extent required under the Securities Act and the applicable Rules
and Regulations or no response is required with respect to such Items, and, the
description of the Company's stock option plans, the options granted and which
may be granted thereunder, and the Company's employee stock purchase plans set
forth in the Prospectus accurately presents the information required to be shown
with respect to said plans and options to the extent required by the Securities
Act and the applicable Rules and Regulations; and the form of certificate
evidencing the Common Stock and filed as an exhibit to the Registration
Statement complies with Delaware law;
(x) The descriptions in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of the Delaware General
Corporation Law and under the captions "Management -- Executive Officers,
Directors and Key Employees," "Management -- Limitation on Directors' and
Executive Officers' Liability and Indemnification," "Description of Capital
Stock" and Item 14 (Indemnification of Directors and Officers), as applicable,
are accurate in all material respects and present the information required to be
presented by the Securities Act and the applicable Rules and Regulations;
<PAGE> 28
(xi) Such counsel does not know of any agreement, license,
franchise, contract, lease, document or legal or government action, suit or
proceeding, pending or overtly threatened, which in the opinion of such counsel
is of a character required to be described or referred to in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described or referred to therein or filed as required by
the Securities Act and the applicable Rules and Regulations;
(xii) The performance of this Agreement and the consummation of
the transactions herein contemplated will not (a) result in any violation of the
Company's charter or bylaws or (b) result in a material breach or violation of
any of the terms and provisions of, or constitute a default under, any bond,
debenture, note or other evidence of indebtedness, or any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company is a party or by which its
properties are bound and which is filed as an exhibit to the Registration
Statement, or any applicable statute, rule or regulation, other than state
securities or blue sky laws, or any order, writ or decree known to such counsel
of any court, government or governmental agency or body having jurisdiction over
the Company or any of its properties or operations;
(xiv) The Company is not presently (a) in material violation of
its charter or bylaws, (b) in material breach of any applicable statute, rule or
regulation or any order, writ or decree of any court or governmental agency or
body having jurisdiction over the Company or any of its properties or
operations, or (c) in breach of or default with respect to any material
provision of any material agreement, mortgage, license, lease or other
instrument to which the Company is a party or by which any of its properties are
bound, except for such default or breach as would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations or
business of the Company;
(xv) Except as set forth in the Registration Statement and
Prospectus, to the best of such counsel's knowledge, no holders of Common Stock
or other securities of the Company have registration rights with respect to
securities of the Company and, except as set forth in the Registration Statement
and Prospectus, all holders of securities of the Company having such rights to
registration of such shares of Common Stock or other securities, because of the
filing of the Registration Statement by the Company have, with respect to the
offering contemplated thereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent to file
the Registration Statement or have included securities in the Registration
Statement pursuant to the exercise of and in full satisfaction of such rights;
(xvi) No consent, approval, authorization or order of or
qualification with any court or governmental agency or body having jurisdiction
over the Company or any of its properties or operations is required for the
consummation of the transactions contemplated in the Underwriting Agreement,
except such as have been obtained under the Securities Act and such as may be
required under state securities or blue sky laws in connection with the purchase
and distribution of the Stock by the Underwriters; and
<PAGE> 29
(xvii) The Stock issued and sold by the Company has been duly
approved for inclusion on the Nasdaq National Market upon official notice of
issuance.
(xviii)Such counsel has participated in conferences with
officials and other representatives of the Company, the Representatives,
Underwriters' Counsel and the independent certified public accountants of the
Company, at which such conferences the contents of the Registration Statement
and Prospectus and related matters were discussed, and, while such counsel has
not independently verified and is not passing upon the accuracy, completeness or
fairness of the Registration Statement or Prospectus, on the basis of the
foregoing, no facts have come to such counsel's attention that have caused
such counsel to believe that the Registration Statement (except as to the
financial statements and schedules, other financial data and statistical data
derived therefrom contained or incorporated by reference therein, as to which
such counsel need not express any opinion or belief) at the Effective Date
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus (except as to the financial statements
and schedules, other financial data and statistical data derived therefrom
contained or incorporated by reference therein, as to which such counsel need
not express any opinion or belief) as of its date or at the Closing Date (or any
later date on which Option Stock is purchased), contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading;
--------------------------------------------
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States or of the State of California
or the General Corporation Law of the State of Delaware, upon opinions of local
counsel satisfactory in form and scope to counsel for the Underwriters, in which
case their opinion is to state that they are so relying, and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion. Copies
of any opinions so relied upon shall be delivered to the Representatives and to
counsel for the Underwriters and the foregoing opinion shall also state that
counsel knows of no reason the Underwriters are not entitled to rely upon the
opinions of such local counsel.
<PAGE> 30
ANNEX B
FORM OF OPINION OF
SEED AND BERRY LLP,
PATENT COUNSEL FOR THE COMPANY
Such counsel are familiar with the technology used by the Company
in its business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:
It is the opinion of this firm that statements under the captions
"Risk Factors - Dependence on Patents and Proprietary Rights" and "Business -
Patents and Proprietary Rights" in the Prospectus, to the extent that such
statements relate solely to and constitute a description or summary of the legal
matters, documents or proceedings relating to the Representation and to the
extent such legal matters, documents or proceedings have been disclosed to us
during the course of the Representation, are accurate and complete statements,
and nothing has come to our attention that causes us to believe that the
above-described portions of the Prospectus contain any untrue statement or
omission of a material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, and when read in conjunction with the remainder of the Prospectus,
not misleading.
In addition, it is the opinion of the firm that:
(a) based solely upon a review of matters which counsel has been engaged
to provide direct substantive attention, this firm has no reason to believe
that there are any legal or governmental proceedings pending relating to patent
rights, trade secrets, trademarks, or service marks of the Company, and to the
best of such counsel's knowledge no proceedings are threatened by governmental
authorities or others;
(b) based solely upon a review of matters which counsel has been engaged
to provide direct substantive attention, this firm has no reason to believe that
the Company is infringing or otherwise violating any patents, including the
allowed patent referred to above, trade secrets, trademarks, or service marks
of others, and to the best of such counsel's knowledge there are no
infringements by others of any of the Company's patents, trade secrets,
trademarks, or service marks, which in the judgment of such counsel could
affect materially the use thereof by the Company; and
(c) based solely upon a review of matters which counsel has been engaged
to provide direct substantive attention, this firm has no reason to believe that
the Company does not own or possess adequate licenses or other rights to (i) use
all material patents, patent applications, trademarks, trade secrets, service
marks or other proprietary information or materials described in the Prospectus
and, (ii) conduct the business now being or proposed to be conducted by the
Company as described in the Prospectus.
SEED and BERRY LLP
<PAGE> 1
Exhibit 3.3
CERTIFICATE OF INCORPORATION
OF
SIGNAL PHARMACEUTICALS, INC.
The undersigned, a natural person (the "Sole Incorporator"), for the
purpose of organizing a corporation to conduct the business and promote the
purposes hereinafter stated, under the provisions and subject to the
requirements of the laws of the State of Delaware hereby certifies that:
I.
The name of this corporation is Signal Pharmaceuticals, Inc.
II.
The address of the registered office of the corporation in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the
name of the registered agent of the corporation in the State of Delaware at such
address is National Registered Agents, Inc.
III.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
1.
<PAGE> 2
IV.
A. CLASSES OF STOCK. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the corporation is authorized to issue is
Thirty One Million One Hundred Thirteen Thousand Four Hundred Eighty Five
(31,113,485) shares, each having a par value of one-tenth of one cent ($.001).
Twenty Five Million (25,000,000) shares shall be Common Stock, $.001 par value,
and Six Million One Hundred Thirteen Thousand Four Hundred Eighty Five
(6,113,485) shares shall be Preferred Stock, $.001 par value.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A.
1. The management of the business and the conduct of the affairs
of the corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
directors shall be elected at each annual meeting of stockholders for a term of
one year. Each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal. No decrease in the number
of directors constituting the Board of Directors shall shorten the term of any
incumbent director.
2.
<PAGE> 3
3. Subject to the rights of the holders of any series of
Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all the then-outstanding shares of the Voting Stock.
4. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
B.
1. Subject to paragraph (h) of Section 42 of the Bylaws, the
Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote
of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of the Voting Stock. The Board of Directors
shall also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the
corporation except by written consent to the extent provided for in the Bylaws
or at an annual or special meeting of stockholders called in accordance with the
Bylaws.
4. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
VI.
A. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any 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) under Section 174 of the Delaware General Corporation
Law, or (iv) for any
3.
<PAGE> 4
transaction from which the director derived an improper personal benefit. If the
Delaware General Corporation Law is amended after approval by the stockholders
of this Article to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B. of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal sections V, VI
and VII.
VIII.
The name and the mailing address of the Sole Incorporator is as follows:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
---- ---------------
<S> <C>
Kelly A. Nelle Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121-2128
</TABLE>
IN WITNESS WHEREOF, this Certificate has been subscribed this ____ day of May,
1998 by the undersigned who affirms that the statements made herein are true and
correct.
-------------------------------
KELLY A. NELLE
Sole Incorporator
4.
<PAGE> 1
Exhibit 3.4
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
SIGNAL PHARMACEUTICALS, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, hereby
certifies as follows:
1. The name of the corporation is Signal Pharmaceuticals, Inc.
2. The corporation's original Certificate of Incorporation was filed
with the Secretary of State on _________________, 1998.
3. The Amended and Restated Certificate of Incorporation of this
corporation, in the form attached hereto as Exhibit A, has been duly adopted by
the Board of Directors and by the stockholders of the corporation in accordance
with Sections 228, 242 and 245 of the General Corporation Law of the State of
Delaware.
4. The Amended and Restated Certificate of Incorporation so adopted
reads in full as set forth in Exhibit A attached hereto and hereby incorporated
by reference.
IN WITNESS WHEREOF, Signal Pharmaceuticals, Inc. has caused this Amended
and Restated Certificate of Incorporation to be signed by its President and
Chief Executive Officer and attested to by its Chief Financial Officer and
Secretary this ____ day of ____________, 1998.
-------------------------------
Alan J. Lewis
President and Chief Executive Officer
ATTEST:
- -------------------------------
Bradley B. Gordon
Chief Financial Officer and Secretary
1.
<PAGE> 2
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SIGNAL PHARMACEUTICALS, INC.
I.
The name of this corporation is SIGNAL PHARMACEUTICALS, INC.
II.
The address of the registered office of the corporation in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the
name of the registered agent of the corporation in the State of Delaware at such
address is National Registered Agents, Inc.
III.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. CLASSES OF STOCK. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the corporation is authorized to issue is
Thirty One Million One Hundred Thirteen Thousand Four Hundred Eighty Five
(31,113,485) shares, each having a par value of one-tenth of one cent ($.001).
Twenty Five Million (25,000,000) shares shall be Common Stock, $.001 par value,
and Six Million One Hundred Thirteen Thousand Four Hundred Eighty Five
(6,113,485) shares shall be Preferred Stock, $.001 par value.
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The
Preferred Stock authorized by this Certificate of Incorporation may be issued
from time to time in series. The rights, preferences, privileges, and
restrictions granted to and imposed on the Series A Preferred Stock, which
series shall consist of 656,723 shares, the Series B Preferred Stock, which
series shall consist of 718,750 shares, the Series C Preferred Stock, which
series shall consist of 2,197,858 shares, the Series C-1 Preferred Stock, which
series shall consist of 62,500 shares, the Series D Preferred Stock, which
series shall consist of 183,151 shares, the Series E Preferred Stock, which
series shall consist of 1,613,874 shares, and the Series F Preferred Stock,
which series shall consist of 680,629 shares, are set forth below in this
Article IV(B).
1. DIVIDEND PROVISIONS. Subject to the rights of series of
Preferred Stock which may from time to time come into existence, the holders of
shares of Series A Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock, the Series C-1 Preferred Stock, the Series D Preferred Stock,
the Series E Preferred Stock and the Series F Preferred Stock shall be entitled
to receive dividends, out of any assets legally available therefor, prior and in
<PAGE> 3
preference to any declaration or payment of any dividend (payable other than in
Common Stock or other securities and rights convertible into or entitling the
holder thereof to receive, directly or indirectly, additional shares of Common
Stock of the corporation, including pursuant to an event causing the Conversion
Price of the Series A, Series B, Series C, Series C-1, Series D, Series E or
Series F Preferred Stock to be adjusted pursuant to Section 4(d)(i) hereof) on
the Common Stock of the corporation, at the rate of $0.32, $0.384, $0.448,
$0.672, $1.28, $0.6112 and $0.9638, respectively, per share per annum, payable
when, as and if declared by the Board of Directors. Such dividends shall not be
cumulative.
After payment of the dividend preference referred to above, outstanding
shares of Series A, Series B, Series C, Series C-1, Series D, Series E and
Series F Preferred Stock shall participate with shares of Common Stock as to any
additional declaration or payment of any dividend (payable other than in Common
Stock or other securities and rights convertible into or entitling the holder
thereof to receive, directly or indirectly, additional shares of Common Stock of
the corporation including pursuant to an event causing the Conversion Price of
the Series A, Series B, Series C, Series C-1, Series D, Series E or Series F
Preferred Stock to be adjusted pursuant to Section 4(d)(i) hereof), with the
outstanding shares of Series A, Series B, Series C, Series C-1, Series D, Series
E and Series F Preferred Stock participating as though they had all been
converted into Common Stock.
2. LIQUIDATION PREFERENCE.
a. In the event of any liquidation, dissolution or winding up of
the corporation, either voluntary or involuntary, subject to the rights of
series of Preferred Stock which may from time to time come into existence, the
holders of Series A, Series B, Series C, Series C-1, Series D, Series E and
Series F Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the corporation to the holders of
the Common Stock by reason of their ownership thereof, an amount per share equal
to the sum of (i) $4.00 for each outstanding share of Series A Preferred Stock
(the "Original Series A Issue Price") and (ii) $4.80 for each outstanding share
of Series B Preferred Stock (the "Original Series B Issue Price") and (iii)
$5.60 for each outstanding share of Series C Preferred Stock (the "Original
Series C Issue Price") and (iv) $8.40 for each outstanding share of Series C-1
Preferred Stock (the "Original Series C-1 Issue Price") and (v) $10.92 for each
outstanding share of Series D Preferred Stock (the "Original Series D Issue
Price") and (vi) $7.64 for each outstanding share of Series E Preferred Stock
(the "Original Series E Issue Price") and (vii) $12.04768 for each outstanding
share of Series F Preferred Stock (the "Original Series F Issue Price") and
(viii) an amount equal to declared but unpaid dividends on such share(s). If
upon the occurrence of such event, the assets and funds thus distributed among
the holders of the Series A, Series B, Series C, Series C-1, Series D, Series E
and Series F Preferred Stock shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amounts, then, subject to the rights
of series of Preferred Stock which may from time to time come into existence,
the entire assets and funds of the corporation legally available for
distribution shall be distributed ratably among the holders of the Series A,
Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock
in proportion to the aggregate liquidation preferences of the respective series,
and ratably among the holders of each series in proportion to the amount of
stock in such series owned by each such holder.
2.
<PAGE> 4
b. Upon completion of the distribution required by subparagraph
(a) of this Section 2 and any other distribution which may be required with
respect to series of Preferred Stock which may from time to time come into
existence, if assets remain in this corporation, the holder of each share of
Common Stock shall be entitled to receive an amount equal to $0.40 per share.
c. Upon the completion of the distribution required by
subparagraphs (a) and (b) of this Section 2, the remaining assets of the
corporation available for distribution to stockholders shall be distributed
among the holders of Series A, Series B, Series C, Series C-1, Series D, Series
E and Series F Preferred Stock and Common Stock pro rata based on the number of
shares of Common Stock held by each (assuming conversion of all such Series A,
Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock)
until, with respect to the holders of Series A, Series B, Series C, Series C-1,
Series D, Series E and Series F Preferred Stock, such holders shall have
received an aggregate of $20.00 per share (including amounts paid pursuant to
subsection (a) of this Section 2); thereafter, if assets remain in this
corporation, the holders of the Common Stock of this corporation shall receive
all of the remaining assets of this corporation pro rata based on the number of
shares of Common Stock held by each.
d.
(i) For purposes of this Section 2, a liquidation,
dissolution or winding up of this corporation shall be deemed to be occasioned
by, or to include, (A) the acquisition of the corporation by another entity by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation but, excluding any
merger effected exclusively for the purpose of changing the domicile of the
corporation); or (B) a sale of all or substantially all of the assets of the
corporation; unless the corporation's stockholders of record as constituted
immediately prior to such acquisition or sale will, immediately after such
acquisition or sale (by virtue of securities issued as consideration for the
corporation's acquisition or sale or otherwise) hold at least 50% of the voting
power of the surviving or acquiring entity.
(ii) In any of such events, if the consideration received
by the corporation is other than cash its value will be deemed its fair market
value. Any securities shall be valued as follows:
A. Securities not subject to investment letter or
other similar restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or
through Nasdaq National Market, the value shall be deemed to be the average of
the closing prices of the securities on such exchange over the thirty-day period
ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty-day period ending three (3) days prior
to the closing; and
3.
<PAGE> 5
(3) If there is no active public market, the
value shall be the fair market value thereof, as mutually determined by the
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
B. The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by the corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
such Preferred Stock.
(iii) In the event the requirements of this Subsection
2(d) are not complied with, this corporation shall forthwith either:
A. cause such closing to be postponed until such time
as the requirements of this Section 2 have been complied with; or
B. cancel such transaction, in which event the
rights, preferences and privileges of the holders of the Series A, Series B,
Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in subsection
2(d)(iv) hereof.
(iv) The corporation shall give each holder of record of
Series A, Series B, Series C, Series C-1, Series D, Series E and Series F
Preferred Stock written notice of such impending transaction not later than
twenty (20) days prior to the stockholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this Section 2, and the corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after the corporation has given the first notice
provided for herein or sooner than ten (10) days after the corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of holders of a majority of
each series of Preferred Stock.
3. REDEMPTION. The Series A, Series B, Series C, Series C-1, Series D,
Series E and Series F Preferred Stock are not redeemable.
4. CONVERSION. The holders of the Series A, Series B, Series C, Series
C-1, Series D, Series E and Series F Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
a. RIGHT TO CONVERT.
(i) Each share of Series A, Series B, Series C, Series
C-1, Series D, Series E and Series F Preferred Stock shall be convertible, at
the option of the holder
4.
<PAGE> 6
thereof, at any time after the date of issuance of such share, at the office of
the corporation or any transfer agent for the Preferred Stock, into such number
of fully paid and nonassessable shares of Common Stock as is determined by
dividing the Original Series A Issue Price, the Original Series B Issue Price,
the Original Series C Issue Price, the Original Series C-1 Issue Price, the
Original Series D Issue Price, the Original Series E Issue Price or the Original
Series F Issue Price, respectively, by the Conversion Price at the time in
effect for such share. The initial "Conversion Price" per share for shares of
Series A shall be the Original Series A Issue Price, the initial "Conversion
Price" per share for shares of Series B Preferred Stock shall be the Original
Series B Issue Price, the initial "Conversion Price" for shares of Series C
shall be the Original Series C Issue Price, the initial "Conversion Price" for
shares of Series C-1 shall be the Original Series C-1 Issue Price, the initial
"Conversion Price" for shares of Series D shall be the Original Series D Issue
Price, the initial "Conversion Price" for shares of Series E shall be the
Original Series E Issue Price and the initial "Conversion Price" for shares of
Series F shall be the Original Series F Issue Price; provided, however, that the
Conversion Price for the Series A, Series B, Series C, Series C-1, Series D,
Series E and Series F Preferred Stock shall be subject to adjustment as set
forth in this Section 4.
(ii) Each share of Series A, Series B, Series C, Series
C-1, Series D, Series E and Series F Preferred Stock shall automatically be
converted into shares of Common Stock at the Conversion Price at the time in
effect for such Preferred Stock immediately upon the earlier of (A) the
consummation of the sale of the corporation's Common Stock in a bona fide, firm
commitment underwriting pursuant to a registration statement under the
Securities Act of 1933, as amended, the public offering price of which is not
less than $20.00 per share (adjusted to reflect subsequent stock dividends,
stock splits or recapitalizations) with aggregate gross proceeds to the Company
in excess of $15,000,000; (B) the date upon which the corporation obtains the
consent of the holders of at least 75% of the then outstanding shares of
Preferred Stock, to the conversion of their shares; (C) as to each of the Series
A, the Series B, the Series C, the Series C-1, the Series D, the Series E and
Series F Preferred Stock, the date upon which there are less than 25,000 shares
of such series of Preferred Stock then outstanding (such number to be adjusted
to reflect subsequent stock dividends, stock splits, combinations or
recapitalizations); or (D) as to the Series D Preferred Stock, ten (10) days
after written notice to all holders of the Series D Preferred Stock of the
occurrence of a material breach by Tanabe Seiyaku Co., Ltd., a Japanese
corporation ("Tanabe"), of that certain Stock Purchase Agreement dated as of
March 31, 1996 between the Company and Tanabe (the "Tanabe Agreement"), which
breach has not been cured by Tanabe pursuant to the terms of the Tanabe
Agreement.
b. MECHANICS OF CONVERSION. Before any holder of Series A, Series
B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock shall be
entitled to convert the same into shares of Common Stock, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
corporation or of any transfer agent for the Preferred Stock, and shall give
written notice by mail, postage prepaid, to the corporation at its principal
corporate office, of the election to convert the same and shall state therein
the name or names in which the certificate or certificates for shares of Common
Stock are to be issued; provided, however, that in the event of an automatic
conversion in connection with an underwritten offering of securities registered
pursuant to the Securities Act of 1933, as amended, the outstanding shares of
Preferred Stock shall be converted automatically without any further action by
the holders of such shares and whether or not the certificates representing such
shares are
5.
<PAGE> 7
surrendered to the corporation or its transfer agent; and provided further that
the corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon conversion unless the certificates
evidencing such shares of Preferred Stock are either delivered to the
corporation or its transfer agent as provided above, or the holder notifies the
corporation or its transfer agent that such certificates have been lost, stolen
or destroyed and executes an agreement satisfactory to the corporation to
indemnify the corporation from any loss incurred by it in connection with such
certificates. The corporation shall, as soon as practicable thereafter, issue
and deliver at such office to such holder of Preferred Stock, or to the nominee
or nominees of such holder, a certificate or certificates for the number of
shares of Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date. If the
conversion is in connection with an underwritten offering of securities
registered pursuant to the Securities Act of 1933, as amended, the conversion
will, unless otherwise designated by the holder tendering Series A, Series B,
Series C, Series C-1, Series D, Series E or Series F Preferred Stock for
conversion, be conditioned upon the closing of the sale of securities pursuant
to such offering, and the person(s) entitled to receive the Common Stock
issuable upon such conversion of such Preferred Stock shall not be deemed to
have converted such Preferred Stock until immediately prior to the closing of
such sale of securities.
c. SALE OF SHARES BELOW CONVERSION PRICE.
(i) If at any time or from time to time after the date
when the first shares of Series E Preferred Stock are issued (the "Original
Issue Date"), the Company issues or sells, or is deemed by the express
provisions of this subsection (c) to have issued or sold, Additional Shares of
Common Stock (as defined in subsection (c)(iv) below)), other than as a dividend
or other distribution on any class of stock as provided in Section 4(d) below
for an Effective Price (as defined in subsection (c)(iv) below) less than the
then effective Conversion Price for the Series A, Series B, Series C, Series C-1
or Series E Preferred Stock, respectively, or the then effective Series F
Anti-Dilution Price for the Series F Preferred Stock, then and in each such
case: (1) the then existing Conversion Price for the Series A, Series B, Series
C, Series C-1 and Series E Preferred Stock, as applicable, and the then existing
Series F Anti-Dilution Price, as applicable, shall be reduced, as of the opening
of business on the date of such issue or sale, to a price determined by
multiplying the then existing Conversion Price or Series F Anti-Dilution Price,
as applicable, by a fraction (i) the numerator of which shall be (A) the number
of shares of Common Stock deemed outstanding (as defined below) immediately
prior to such issue or sale, plus (B) the number of shares of Common Stock which
the aggregate consideration received (as defined in subsection (c)(ii)) by the
Company for the total number of Additional Shares of Common Stock so issued
would purchase at such Conversion Price or Series F Anti-Dilution Price, and
(ii) the denominator of which shall be the number of shares of Common Stock
deemed outstanding (as defined below) immediately prior to such issue or sale
plus the total number of Additional Shares of Common Stock so issued; and (2)
the then existing Conversion Price for the Series F Preferred Stock, as
applicable, shall be reduced, as of the opening of business on the date of such
issue or sale, to a price determined by subtracting from the then existing
Conversion Price the difference between the Series F Anti-Dilution Price in
effect immediately prior to the
6.
<PAGE> 8
issuance of the Additional Shares of Common Stock and the Series F Anti-Dilution
Price in effect immediately after the issuance of the Additional Shares of
Common Stock. For the purposes of the preceding sentence, the number of shares
of Common Stock deemed to be outstanding as of a given date shall be the sum of
(A) the number of shares of Common Stock actually outstanding, (B) the number of
shares of Common Stock into which the then outstanding shares of the Series A,
Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock
could be converted if fully converted on the day immediately preceding the given
date, and (C) the number of shares of Common Stock which could be obtained
through the exercise or conversion of all other rights, options and convertible
securities on the day immediately preceding the given date. For purposes of this
Section 4(c), the original Series F Anti-Dilution Price shall be $7.64.
(ii) For the purpose of making any adjustment required
under this Section 4(c), the consideration received by the Company for any issue
or sale of securities shall (A) to the extent it consists of cash, be computed
at the net amount of cash received by the Company after deduction of any
underwriting or similar commissions, compensation or concessions paid or allowed
by the Company in connection with such issue or sale but without deduction of
any expenses payable by the Company, (B) to the extent it consists of property
other than cash, be computed at the fair value of that property as determined in
good faith by the Board of Directors, and (C) if Additional Shares of Common
Stock, Convertible Securities (as defined in subsection (c)(iii) below) or
rights or options to purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the Company for a consideration which covers both,
be computed as the portion of the consideration so received that may be
reasonably determined in good faith by the Board of Directors to be allocable to
such Additional Shares of Common Stock, Convertible Securities or rights or
options.
(iii) For the purpose of the adjustment required under
this Section 4(c), if the Company issues or sells any rights or options for the
purchase of, or stock or other securities convertible into, Additional Shares of
Common Stock (such convertible stock or securities being herein referred to as
"Convertible Securities") and if the Effective Price of such Additional Shares
of Common Stock is less than the Conversion Price or Series F Anti-Dilution
Price, as applicable, in each case the Company shall be deemed to have issued at
the time of the issuance of such rights or options or Convertible Securities the
maximum number of Additional Shares of Common Stock issuable upon exercise or
conversion thereof and to have received as consideration for the issuance of
such shares an amount equal to the total amount of the consideration, if any,
received by the Company for the issuance of such rights or options or
Convertible Securities, plus, in the case of such rights or options, the minimum
amounts of consideration, if any, payable to the Company upon the exercise of
such rights or options, plus, in the case of Convertible Securities, the minimum
amounts of consideration, if any, payable to the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion thereof; provided that if in the case of
Convertible Securities the minimum amounts of such consideration cannot be
ascertained, but are a function of antidilution or similar protective clauses,
the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses; provided further that if the
minimum amount of consideration payable to the Company upon the exercise or
conversion of rights, options or Convertible Securities is reduced over time or
on the occurrence or non-
7.
<PAGE> 9
occurrence of specified events other than by reason of antidilution adjustments,
the Effective Price shall be recalculated using the figure to which such minimum
amount of consideration is reduced; provided further that if the minimum amount
of consideration payable to the Company upon the exercise or conversion of such
rights, options or Convertible Securities is subsequently increased, the
Effective Price shall be again recalculated using the increased minimum amount
of consideration payable to the Company upon the exercise or conversion of such
rights, options or Convertible Securities. No further adjustment of the
Conversion Price or Series F Anti-Dilution Price, as adjusted upon the issuance
of such rights, options or Convertible Securities, shall be made as a result of
the actual issuance of Additional Shares of Common Stock on the exercise of any
such rights or options or the conversion of any such Convertible Securities. If
any such rights or options or the conversion privilege represented by any such
Convertible Securities shall expire without having been exercised, the
Conversion Price and Series F Anti-Dilution Price, as adjusted upon the issuance
of such rights, options or Convertible Securities, shall be readjusted to the
Conversion Price and Series F Anti-Dilution Price which would have been in
effect had an adjustment been made on the basis that the only Additional Shares
of Common Stock so issued were the Additional Shares of Common Stock, if any,
actually issued or sold on the exercise of such rights or options or rights of
conversion of such Convertible Securities, and such Additional Shares of Common
Stock, if any, were issued or sold for the consideration actually received by
the Company upon such exercise, plus the consideration, if any, actually
received by the Company for the granting of all such rights or options, whether
or not exercised, plus the consideration received for issuing or selling the
Convertible Securities actually converted, plus the consideration, if any,
actually received by the Company (other than by cancellation of liabilities or
obligations evidenced by such Convertible Securities) on the conversion of such
Convertible Securities, provided that such readjustment shall not apply to prior
conversions of the Series A, Series B, Series C, Series C-1, Series E or Series
F Preferred Stock.
(iv) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the Company or deemed to be issued pursuant to
this Section 4(c), whether or not subsequently reacquired or retired by the
Company other than (A) shares of Common Stock issued upon conversion of the
Series A, Series B, Series C, Series C-1, Series D, Series E or Series F
Preferred Stock; (B) shares of Common Stock and/or options, warrants or other
Common Stock purchase rights and the Common Stock issued pursuant to such
options, warrants or other rights (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like) after the Original Issue
Date to employees, officers or directors of, or consultants or advisors to the
Company or any subsidiary pursuant to stock purchase or stock option plans or
other arrangements that are approved by the Board; and (C) shares of Common
Stock issued pursuant to the exercise of options, warrants or convertible
securities outstanding as of the Original Issue Date. The "Effective Price" of
Additional Shares of Common Stock shall mean the quotient determined by dividing
the total number of Additional Shares of Common Stock issued or sold, or deemed
to have been issued or sold by the Company under this Section 4(c), into the
aggregate consideration received, or deemed to have been received by the Company
for such issue under this Section 4(c), for such Additional Shares of Common
Stock.
d. CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR STOCK
DIVIDENDS AND STOCK SPLITS. The Conversion Price of the Series A, Series B,
Series C, Series C-1, Series D, Series E and Series F Preferred Stock shall be
subject to adjustment from time to time as follows:
8.
<PAGE> 10
(i) In the event the corporation should at any time or
from time to time after the date when the first shares of Series A, Series B,
Series C, Series C-1, Series D, Series E or Series F Preferred Stock,
respectively, are issued (the "Purchase Date" with respect to each such series)
fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in additional
shares of Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock (hereinafter referred to as "Common Stock Equivalents")
without payment of any consideration by such holder for the additional shares of
Common Stock or the Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then, as of such
record date (or the date of such dividend distribution, split or subdivision if
no record date is fixed), the Conversion Price of the Series A, Series B, Series
C, Series C-1, Series D, Series E or Series F Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be increased in proportion to such
increase in the aggregate number of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents.
(ii) If the number of shares of Common Stock outstanding
at any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for the Series A, Series B, Series C, Series
C-1, Series D, Series E and Series F Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be decreased in proportion to such decrease in
outstanding shares.
e. OTHER DISTRIBUTIONS. In the event the corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the corporation or other persons, assets or other
property or options or rights not referred to in Subsection 4(d)(i) (excluding
any dividends described in Section 1), then, in each such case for the purpose
of this subsection 4(e), the holders of the Series A, Series B, Series C, Series
C-1, Series D, Series E and Series F Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the holders of
the number of shares of Common Stock of the corporation into which their shares
of Series A, Series B, Series C, Series C-1, Series D, Series E and Series F
Preferred Stock are convertible as of the record date fixed for the
determination of the holders of Common Stock of the corporation entitled to
receive such distribution.
f. RECAPITALIZATIONS. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4) provision shall be made so that the holders of the Series A,
Series B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock
shall thereafter be entitled to receive upon conversion of the Series A, Series
B, Series C, Series C-1, Series D, Series E and Series F Preferred Stock,
respectively, the number of shares of stock or other securities or property of
the corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the
9.
<PAGE> 11
provisions of this Section 4 with respect to the rights of the holders of the
Series A, Series B, Series C, Series C-1, Series D, Series E and Series F
Preferred Stock after the recapitalization to the end that the provisions of
this Section 4 (including adjustment of the Conversion Price then in effect and
the number of shares purchasable upon conversion of the Series A, Series B,
Series C, Series C-1, Series D, Series E and Series F Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable.
g. NO IMPAIRMENT. The corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
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 4 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 Preferred Stock against impairment.
h. NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon conversion
of the Series A, Series B, Series C, Series C-1, Series D, Series E or Series F
Preferred Stock, and the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share. Such rounding shall be based on the total
number of shares of Series A, Series B, Series C, Series C-1, Series D, Series E
and Series F Preferred Stock the holder is at the time converting into Common
Stock and the number of shares of Common Stock issuable upon such aggregate
conversion.
(ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of Series A, Series B, Series C, Series
C-1, Series D, Series E or Series F Preferred Stock pursuant to this Section 4,
the corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A, Series B, Series C, Series C-1, Series D, Series E or Series
F 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, Series B, Series C, Series C-1, Series D, Series E or Series F
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (A) such adjustment and readjustment, (B) the
Conversion Price at the time in effect, and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of Series A, Series B, Series C, Series
C-1, Series D, Series E or Series F Preferred Stock.
i. NOTICES OF RECORD DATE. In the event of any taking by the
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the corporation shall mail to each
holder of Series A, Series B, Series C, Series C 1, Series D, Series E and
Series F Preferred Stock, at least 20 days prior to the date specified therein,
a notice specifying the date on which any such record
10.
<PAGE> 12
is to be taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
j. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series A, Series B, Series C, Series C-1, Series D, Series E and
Series F Preferred Stock such number of its shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all outstanding shares of
the Series A, Series B, Series C, Series C-1, Series D, Series E and Series F
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A, Series B, Series C, Series C-1, Series D,
Series E and Series F Preferred Stock, in addition to such other remedies as
shall be available to the holders of such Preferred Stock, the corporation will
take such corporate action as may, in the opinion of its counsel, be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including without limitation,
using its best efforts to obtain the requisite stockholder approval of any
necessary amendment to this Certificate of Incorporation.
k. NOTICES. Any notice required by the provisions of this Section
4 to be given to the holders of shares of Series A, Series B, Series C, Series
C-1, Series D, Series E and Series F Preferred Stock shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at the address for such holder appearing on the books of the
corporation.
5. VOTING RIGHTS. Except as otherwise required by applicable law or by
Section 6 hereof, and so long as at least One Million Two Hundred Fifty Thousand
(1,250,000) shares of Series A, Series B, Series C, Series C-1, Series E and
Series F Preferred Stock are outstanding, the holders of the Series A, Series B,
Series C, Series C-1, Series E and Series F Preferred Stock voting together
shall vote as a separate class to elect four (4) directors to the Board of
Directors at each annual meeting of stockholders. In voting on all other matters
and in all other cases the holder of each share of Series A, Series B, Series C,
Series C-1, Series D, Series E or Series F Preferred Stock shall have the right
to one vote for each share of Common Stock into which such series of Preferred
Stock could then be converted (with any fractional share determined on an
aggregate conversion basis being rounded to the nearest whole share), and with
respect to such vote, such holder shall have full voting rights and powers equal
to the voting rights and powers of the holders of Common Stock, and shall be
entitled, notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the bylaws of the corporation, and shall be entitled
to vote, together with holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote.
6. PROTECTIVE PROVISIONS.
a. Notwithstanding anything to the contrary in the foregoing
provisions, and provided that at least 250,000 shares of Series A, Series B,
Series C, Series C-1, Series D, Series E or Series F Preferred Stock in the
aggregate remain outstanding then this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series A,
Series B,
11.
<PAGE> 13
Series C, Series C-1, Series D, Series E and Series F Preferred Stock, voting
together as one class:
(i) sell, convey, or otherwise dispose of or encumber all
or substantially all of its property or business or merge into or consolidate
with any other corporation (other than a wholly-owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than 50%
of the voting power of the corporation is disposed of; or
(ii) effect a dissolution or liquidation of the
corporation;
or
(iii) do any act or thing which would result in taxation
to the holders of shares of Preferred Stock under Section 305 of the Internal
Revenue Code of 1986, as amended (or any comparable provision of the Internal
Revenue Code as hereinafter from time to time amended); or
(iv) increase the authorized number of shares of Preferred
Stock or Series A, Series B, Series C, Series C-1, Series D, Series E or Series
F Preferred Stock; or
(v) create (by new authorization, reclassification,
recapitalization, designation or otherwise) any class or series or issue any
previously unissued series, class or series of stock or any other securities
convertible into equity securities of the corporation having a preference over,
or being on a parity with, the Series A, Series B, Series C, Series C-1, Series
D, Series E or Series F Preferred Stock; or
(vi) redeem, purchase or otherwise acquire (or pay into or
set aside for a sinking fund for such purpose) any share or shares of Common
Stock; provided, however, that this restriction shall not apply to the
repurchase of shares of Common Stock from employees, officers, directors,
consultants or other persons performing services for the Company or any
subsidiary pursuant to agreements under which the Company has the option to
repurchase such shares at cost or at cost upon the occurrence of certain events,
such as the termination of employment or service; or
(vii) amend the corporation's certificate of incorporation
or bylaws; or
(viii) amend this Section 6.
b. Subject to the rights of series of Preferred Stock which may
from time to time come into existence, so long as any shares of any series of
Preferred Stock are outstanding (an "Existing Series"), this corporation shall
not, without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of at least a majority of the then outstanding
shares of each Existing Series, alter or change the rights, preferences or
privileges of the outstanding shares of any Existing Series;
12.
<PAGE> 14
c. Notwithstanding anything to the contrary in the foregoing
provisions, and provided that at least 125,000 shares of Series E Preferred
Stock remain outstanding, this corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of a
majority of the then outstanding shares of Series E Preferred Stock, voting
together as a single class, other than pursuant to a Qualifying Financing (as
defined below) (i) increase the authorized number of shares of Preferred Stock
or Series A, Series B, Series C, Series C-1, Series D, Series E or Series F
Preferred Stock, or (ii) create (by new authorization, reclassification,
recapitalization, designation or otherwise) any class or series or issue any
previously unissued series, class or series of stock or any other securities
convertible into equity securities of the corporation having a preference over,
or being on a parity with, the Series E Preferred Stock. For purposes of this
subparagraph either of the following shall be deemed to be a "Qualifying
Financing:" (i) any sale by the corporation of any of its equity securities to
an investor or investors where the primary purpose of such sale by the
corporation is other than to raise capital, or (ii) any sale by the corporation
of any of its equity securities at a price per share of at least $8.40
(appropriately adjusted for any stock split, dividend, combination or other
recapitalization), so long as such securities do not have a preference over or
are not senior to the Series E Preferred Stock.
7. STATUS OF CONVERTED STOCK. In the event any shares of Series A,
Series B, Series C, Series C-1, Series D, Series E or Series F Preferred Stock
shall be converted pursuant to Section 4 hereof, the shares so converted shall
be canceled and shall not be reissuable by the corporation. The Certificate of
Incorporation of the corporation shall be appropriately amended to effect the
corresponding reduction in the corporation's authorized capital stock.
C. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding up
of the corporation, the assets of the corporation shall be distributed to the
holders of the Common Stock as provided in Section 2 of subsection (B) of this
Article IV hereof.
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holders of the Common Stock voting as a class
shall have the right to elect one (1) director to the Board of Directors at the
annual meeting of stockholders. Except as set forth in this Section 4 of
subsection (C) of this Article IV and in Section 5 of subsection (B) of this
Article IV, all other directors shall be elected by the holders of the Preferred
Stock and Common Stock voting together on an as-converted basis. In voting on
all other matters and in all other cases, the holder of each share of Common
Stock shall have the right to one vote. In addition, such holder shall be
entitled to notice of any stockholders' meeting in accordance with the Bylaws of
the corporation, and shall be entitled to vote upon such matters and in such
manner as may be provided by law.
13.
<PAGE> 15
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A.
1. The management of the business and the conduct of the affairs
of the corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
following the closing of the initial public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the "1933
Act"), covering the offer and sale of Common Stock to the public (the "Initial
Public Offering"), the directors shall be divided into three classes designated
as Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Section, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
3. Subject to the rights of the holders of any series of
Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all the then-outstanding shares of the Voting Stock.
4. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of
14.
<PAGE> 16
directors, shall, unless the Board of Directors determines by resolution that
any such vacancies or newly created directorships shall be filled by the
stockholders, except as otherwise provided by law, be filled only by the
affirmative vote of a majority of the directors then in office, even though less
than a quorum of the Board of Directors, and not by the stockholders. Any
director elected in accordance with the preceding sentence shall hold office for
the remainder of the full term of the director for which the vacancy was created
or occurred and until such director's successor shall have been elected and
qualified.
B.
1. Subject to paragraph (h) of Section 42 of the Bylaws, the
Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote
of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of the Voting Stock. The Board of Directors
shall also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the
corporation except by written consent to the extent provided for in the Bylaws
or at an annual or special meeting of stockholders called in accordance with the
Bylaws; and following the closing of the Initial Public Offering no action shall
be taken by the stockholders by written consent.
4. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
VI.
A. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any 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) under 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 amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by
15.
<PAGE> 17
statute, except as provided in Section VII.B., and all rights conferred upon the
stockholders herein are granted subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any document relating thereto filed with the Delaware
Secretary of State, the affirmative vote of the holders of at least sixty-six
and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock, voting together as a single class,
shall be required to alter, amend or repeal Articles V, VI, and VII.
16.
<PAGE> 1
Exhibit 3.5
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
SIGNAL PHARMACEUTICALS, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, hereby
certifies as follows:
1. The name of the corporation is Signal Pharmaceuticals, Inc.
2. The corporation's original Certificate of Incorporation was filed
with the Secretary of State on _________________, 1998.
3. The Second Amended and Restated Certificate of Incorporation of this
corporation, in the form attached hereto as Exhibit A, has been duly adopted by
the Board of Directors and by the stockholders of the corporation in accordance
with Sections 228, 242 and 245 of the General Corporation Law of the State of
Delaware.
4. The Second Amended and Restated Certificate of Incorporation so
adopted reads in full as set forth in Exhibit A attached hereto and hereby
incorporated by reference.
IN WITNESS WHEREOF, Signal Pharmaceuticals, Inc. has caused this Second
Amended and Restated Certificate of Incorporation to be signed by its President
and Chief Executive Officer and attested to by its Chief Financial Officer and
Secretary this ____ day of ____________, 1998.
-------------------------------
Alan J. Lewis
President and Chief Executive Officer
ATTEST:
- -------------------------------
Bradley B. Gordon
Chief Financial Officer and Secretary
<PAGE> 2
EXHIBIT A
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
SIGNAL PHARMACEUTICALS, INC.
I.
The name of this corporation is SIGNAL PHARMACEUTICALS, INC.
II.
The address of the registered office of the corporation in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the
name of the registered agent of the corporation in the State of Delaware at such
address is National Registered Agents, Inc.
III.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is thirty million
(30,000,000) shares. Twenty-five million (25,000,000) shares shall be Common
Stock, each having a par value of one-tenth of one cent ($.001). Five million
(5,000,000) shares shall be Preferred Stock, each having a par value of
one-tenth of one cent ($.001).
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any
<PAGE> 3
such series or any of them; and to increase or decrease the number of shares of
any series subsequent to the issuance of shares of that series, but not below
the number of shares of such series then outstanding. In case the number of
shares of any series shall be decreased in accordance with the foregoing
sentence, the shares constituting such decrease shall resume the status that
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.
V.
For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A.
1. The management of the business and the conduct of the affairs
of the corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
following the closing of the initial public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the "1933
Act"), covering the offer and sale of Common Stock to the public (the "Initial
Public Offering"), the directors shall be divided into three classes designated
as Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the Closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full-term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Article, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or
2.
<PAGE> 4
removal. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
3. Subject to the rights of the holders of any series of
Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all the then-outstanding shares of the Voting Stock.
4. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.
B.
1. Subject to paragraph (h) of Section 42 of the Bylaws, the
Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote
of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of the Voting Stock. The Board of Directors
shall also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the corporation need not be elected by
written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the
corporation except by written consent to the extent provided for in the Bylaws
or at an annual or special meeting of stockholders called in accordance with the
Bylaws; and following the closing of the Initial Public Offering no action shall
be taken by the stockholders by written consent.
4. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the
3.
<PAGE> 5
stockholders of the corporation shall be given in the manner provided in the
Bylaws of the corporation.
VI.
A. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any 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) under 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 amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in Section VII.B., and
all rights conferred upon the stockholders herein are granted subject to this
reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI,
and VII.
4.
<PAGE> 1
Exhibit 3.6
BYLAWS
OF
SIGNAL PHARMACEUTICALS, INC.
(A DELAWARE CORPORATION)
<PAGE> 2
<TABLE>
<S> <C>
ARTICLE I OFFICES .............................................. 1
Section 1. Registered Office ........................... 1
Section 2. Other Offices ............................... 1
ARTICLE II CORPORATE SEAL ...................................... 1
Section 3. Corporate Seal .............................. 1
ARTICLE III STOCKHOLDERS' MEETINGS ............................. 1
Section 4. Place Of Meetings ........................... 1
Section 5. Annual Meetings ............................. 2
Section 6. Special Meetings ............................ 4
Section 7. Notice Of Meetings .......................... 4
Section 8. Quorum ...................................... 5
Section 9. Adjournment And Notice Of Adjourned Meetings 5
Section 10. Voting Rights .............................. 6
Section 11. Joint Owners Of Stock ...................... 6
Section 12. List Of Stockholders ....................... 6
Section 13. Action Without Meeting ..................... 7
Section 14. Organization ............................... 7
ARTICLE IV DIRECTORS ........................................... 8
Section 15. Number And Term Of Office .................. 8
Section 16. Powers ..................................... 8
Section 17. Classes Of Directors ....................... 8
Section 18. Vacancies .................................. 9
Section 19. Resignation ................................ 10
Section 20. Meetings ................................... 10
(a) Annual Meetings ............................. 10
(b) Regular Meetings ............................ 10
(c) Special Meetings ............................ 11
(d) Telephone Meetings .......................... 11
(e) Notice Of Meetings .......................... 11
</TABLE>
i.
<PAGE> 3
<TABLE>
<S> <C>
(f) Waiver Of Notice ............................ 11
Section 21. Quorum And Voting .......................... 11
Section 22. Action Without Meeting ..................... 12
Section 23. Fees And Compensation ...................... 12
Section 24. Committees ................................. 12
(a) Executive Committee ......................... 12
(b) Other Committees ............................ 13
(c) Term ........................................ 13
(d) Meetings .................................... 13
Section 25. Organization ............................... 14
ARTICLE V OFFICERS ............................................. 14
Section 26. Officers Designated ........................ 14
Section 27. Tenure And Duties Of Officers .............. 14
(a) General ..................................... 14
(b) Duties Of Chairman Of The Board Of Directors 14
(c) Duties Of President ......................... 15
(d) Duties Of Vice Presidents ................... 15
(e) Duties Of Secretary ......................... 15
(f) Duties Of Chief Financial Officer ........... 15
Section 28. Delegation Of Authority .................... 16
Section 29. Resignations ............................... 16
Section 30. Removal .................................... 16
ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF
SECURITIES OWNED BY THE CORPORATION ................. 17
Section 31. Execution Of Corporate Instruments ......... 17
Section 32. Voting Of Securities Owned By The
Corporation ................................ 17
ARTICLE VII SHARES OF STOCK .................................... 18
Section 33. Form And Execution Of Certificates ......... 18
Section 34. Lost Certificates .......................... 18
Section 35. Transfers .................................. 19
</TABLE>
ii.
<PAGE> 4
<TABLE>
<S> <C>
Section 36. Fixing Record Dates ........................ 19
Section 37. Registered Stockholders .................... 20
ARTICLE VIII OTHER SECURITIES OF THE CORPORATION ............... 20
Section 38. Execution Of Other Securities .............. 20
ARTICLE IX DIVIDENDS ........................................... 21
Section 39. Declaration Of Dividends ................... 21
Section 40. Dividend Reserve ........................... 21
ARTICLE X FISCAL YEAR .......................................... 21
Section 41. Fiscal Year ................................ 21
ARTICLE XI INDEMNIFICATION ..................................... 22
Section 42. Indemnification Of Directors, Executive
Officers, Other Officers, Employees
And Other Agents ........................... 22
(a) Directors And Executive Officers ............ 22
(b) Other Officers, Employees and Other Agents .. 22
(c) Expenses .................................... 22
(d) Enforcement ................................. 23
(e) Non-Exclusivity Of Rights ................... 24
(f) Survival Of Rights .......................... 24
(g) Insurance ................................... 24
(h) Amendments .................................. 24
(i) Saving Clause ............................... 24
(j) Certain Definitions ......................... 24
ARTICLE XII NOTICES ............................................ 25
Section 43. Notices .................................... 25
(a) Notice To Stockholders ...................... 25
(b) Notice To Directors ......................... 26
(c) Address Unknown ............................. 26
(d) Affidavit Of Mailing ........................ 26
(e) Time Notices Deemed Given ................... 26
(f) Methods Of Notice ........................... 26
</TABLE>
iii.
<PAGE> 5
<TABLE>
<S> <C>
(g) Failure To Receive Notice ................... 26
(h) Notice To Person With Whom
Communication Is Unlawful ................... 26
(i) Notice To Person With Undeliverable
Address ..................................... 27
ARTICLE XIII AMENDMENTS ........................................ 27
Section 44. Amendments ................................. 27
ARTICLE XIV LOANS TO OFFICERS .................................. 27
Section 45. Loans To Officers .......................... 27
</TABLE>
iv.
<PAGE> 6
BYLAWS
OF
SIGNAL PHARMACEUTICALS, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the corporation
in the State of Delaware shall be in the City of Dover, County of Kent.
SECTION 2. OTHER OFFICES. The corporation shall also have and maintain
an office or principal place of business at 5555 Oberlin Drive, San Diego,
California 92121, or at such other place as may be fixed by the Board of
Directors, and may also have offices at such other places, both within and
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
1.
<PAGE> 7
SECTION 5. ANNUAL MEETINGS.
(a) The annual meeting of the stockholders of the corporation,
for the purpose of election of directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as may be
designated from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be: (A) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (B) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (C) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given timely
notice thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or, in the event
public announcement of the date of such annual meeting is first made by the
corporation fewer than seventy (70) days prior to the date of such annual
meeting, the close of business on the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made by the
corporation. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, (iv) any material interest of
the stockholder in such business and (v) any other information that is required
to be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as
a proponent to a stockholder proposal. Notwithstanding the foregoing, in order
to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
2.
<PAGE> 8
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this paragraph (b). The chairman of the annual meeting shall, if the
facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this paragraph (b), and, if he should so determine, he shall so declare at the
meeting that any such business not properly brought before the meeting shall not
be transacted.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation in accordance with
the provisions of paragraph (b) of this Section 5. Such stockholder's notice
shall set forth (i) as to each person, if any, whom the stockholder proposes to
nominate for election or re-election as a director: (A) the name, age, business
address and residence address of such person, (B) the principal occupation or
employment of such person, (C) the class and number of shares of the corporation
which are beneficially owned by such person, (D) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nominations are to be made by the stockholder, and (E) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the 1934 Act (including without limitation such
person's written consent to being named in the proxy statement, if any, as a
nominee and to serving as a director if elected); and (ii) as to such
stockholder giving notice, the information required to be provided pursuant to
paragraph (b) of this Section 5. At the request of the Board of Directors, any
person nominated by a stockholder for election as a director shall furnish to
the Secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. Except as
may be required pursuant to the Certificate of Incorporation, no person shall be
eligible for election as a director of the corporation unless nominated in
accordance with the procedures set forth in this paragraph (c). The chairman of
the meeting shall, if the facts warrant, determine and declare at the meeting
that a nomination was not made in accordance with the procedures prescribed by
these Bylaws, and if he should so determine, he shall so declare at the meeting,
and the defective nomination shall be disregarded.
3.
<PAGE> 9
(d) For purposes of this Section 5, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
SECTION 6. SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may
be called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption) or (iv) by the holders of shares entitled to cast not
less than fifty percent (50%) of the votes at the meeting, and shall be held at
such place, on such date, and at such time as the Board of Directors, shall fix.
At any time or times that the corporation is subject to Section 2115(b) of the
California General Corporation Law ("CGCL"), stockholders holding five percent
(5%) or more of the outstanding shares shall have the right to call a special
meeting of stockholders as set forth in Section 18(c) herein.
(b) If a special meeting is called by any person or persons other
than the Board of Directors, the request shall be in writing, specifying the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief Executive
Officer, or the Secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon determination of
the time and place of the meeting, the officer receiving the request shall cause
notice to be given to the stockholders entitled to vote, in accordance with the
provisions of Section 7 of these Bylaws. If the notice is not given within sixty
(60) days after the receipt of the request, the person or persons requesting the
meeting may set the time and place of the meeting and give the notice. Nothing
contained in this paragraph (b) shall be construed as limiting, fixing, or
affecting the time when a meeting of stockholders called by action of the Board
of Directors may be held.
SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and
4.
<PAGE> 10
hour and purpose or purposes of the meeting. Notice of the time, place and
purpose of any meeting of stockholders may be waived in writing, signed by the
person entitled to notice thereof, either before or after such meeting, and will
be waived by any stockholder by his attendance thereat in person or by proxy,
except when the stockholder attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Any stockholder so
waiving notice of such meeting shall be bound by the proceedings of any such
meeting in all respects as if due notice thereof had been given.
SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by proxy duly authorized, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a quorum,
any meeting of stockholders may be adjourned, from time to time, either by the
chairman of the meeting or by vote of the holders of a majority of the shares
represented thereat, but no other business shall be transacted at such meeting.
The stockholders present at a duly called or convened meeting, at which a quorum
is present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
action taken by the holders of a majority of the vote cast, excluding
abstentions, at any meeting at which a quorum is present shall be valid and
binding upon the corporation; provided, however, that, except as set forth in
Section 17 herein, directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Where a separate vote by a class or classes
or series is required, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of such class or classes or series, present in person or represented by
proxy, shall constitute a quorum entitled to take action with respect to that
vote on that matter and, except where otherwise provided by the statute or by
the Certificate of Incorporation or these Bylaws, the affirmative vote of the
majority (plurality, in the case of the election of directors) of the votes
cast, including abstentions, by the holders of shares of such class or classes
or series shall be the act of such class or classes or series.
SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If
5.
<PAGE> 11
the adjournment is for more than thirty (30) days or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.
SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the Delaware General Corporation Law, Section 217(b). If
the instrument filed with the Secretary shows that any such tenancy is held in
unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.
6.
<PAGE> 12
SECTION 13. ACTION WITHOUT MEETING.
(a) Unless otherwise provided in the Certificate of
Incorporation, any action required by statute to be taken at any annual or
special meeting of the stockholders, or any action which may be taken at any
annual or special meeting of the stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
(b) Every written consent shall bear the date of signature of
each stockholder who signs the consent, and no written consent shall be
effective to take the corporate action referred to therein unless, within sixty
(60) days of the earliest dated consent delivered to the corporation in the
manner herein required, written consents signed by a sufficient number of
stockholders to take action are delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business or
an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
(c) Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing. If the action which is consented
to is such as would have required the filing of a certificate under any section
of the Delaware General Corporation Law if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written consent has been given as provided in Section
228 of the Delaware General Corporation Law.
(d) Notwithstanding the foregoing, no such action by written
consent may be taken following the closing of the initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock
of the corporation (the "Initial Public Offering").
SECTION 14. ORGANIZATION.
(a) At every meeting of stockholders, the Chairman of the Board
of Directors, or, if a Chairman has not been appointed or is absent, the
President, or, if the President is absent, a chairman of the meeting chosen by a
majority in interest of the
7.
<PAGE> 13
stockholders entitled to vote, present in person or by proxy, shall act as
chairman. The Secretary, or, in his absence, an Assistant Secretary directed to
do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled
to make such rules or regulations for the conduct of meetings of stockholders as
it shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to stockholders of
record of the corporation and their duly authorized and constituted proxies and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of stockholders shall not be required to
be held in accordance with rules of parliamentary procedure.
ARTICLE IV
DIRECTORS
SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed in accordance with the Certificate
of Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws. No reduction of the authorized number of
directors shall have the effect of removing any director before the director's
term of office expires.
SECTION 16. POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders
of any series of Preferred Stock to elect additional directors under specified
circumstances, following the closing of the Initial Public Offering, the
directors shall be divided into
8.
<PAGE> 14
three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors. At the first annual meeting of
stockholders following the closing of the Initial Public Offering, the term of
office of the Class I directors shall expire and Class I directors shall be
elected for a full term of three years. At the second annual meeting of
stockholders following the closing of the Initial Public Offering, the term of
office of the Class II directors shall expire and Class II directors shall be
elected for a full term of three years. At the third annual meeting of
stockholders following the closing of the Initial Public Offering, the term of
office of the Class III directors shall expire and Class III directors shall be
elected for a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Section, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
SECTION 18. VACANCIES.
(a) Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A vacancy
in the Board of Directors shall be deemed to exist under this Bylaw in the case
of the death, removal or resignation of any director.
(b) If at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Delaware Court of Chancery may, upon application of any stockholder holding at
least ten percent (10%) of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in offices as
aforesaid, which election shall be governed by Section 211 of the Delaware
General Corporation Law.
9.
<PAGE> 15
(c) At any time or times that the corporation is subject to
Section 2115(b) of the CGCL, if, after the filling of any vacancy by the
directors then in office who have been elected by stockholders shall constitute
less than a majority of the directors then in office, then
(i) Any holder or holders of an aggregate of five percent
(5%) or more of the total number of shares at the time outstanding having the
right to vote for those directors may call a special meeting of stockholders; or
(ii) The Superior Court of the proper county shall, upon
application of such stockholder or stockholders, summarily order a special
meeting of stockholders, to be held to elect the entire board, all in accordance
with Section 305(c) of the CGCL. The term of office of any director shall
terminate upon that election of a successor.
SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When one
or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
SECTION 20. MEETINGS.
(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
at the place where such meeting is held. No notice of an annual meeting of the
Board of Directors shall be necessary and such meeting shall be held for the
purpose of electing officers and transacting such other business as may lawfully
come before it.
(b) REGULAR MEETINGS. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been designated by resolution of the Board of Directors or
the written consent of all directors.
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(c) SPECIAL MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, special meetings of the Board of Directors may be
held at any time and place within or without the State of Delaware whenever
called by the Chairman of the Board, the President or any two of the directors.
(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or
of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
(e) NOTICE OF MEETINGS. Notice of the time and place of all
special meetings of the Board of Directors shall be orally or in writing, by
telephone, facsimile, telegraph or telex, during normal business hours, at least
twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
(f) WAIVER OF NOTICE. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either before
or after the meeting, each of the directors not present shall sign a written
waiver of notice. All such waivers shall be filed with the corporate records or
made a part of the minutes of the meeting.
SECTION 21. QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Section 42 hereof, for which a quorum shall be one-third of the exact number of
directors fixed from time to time in accordance with the Certificate of
Incorporation, a quorum of the Board of Directors shall consist of a majority of
the exact number of directors fixed from time to time by the Board of Directors
in accordance with the Certificate of Incorporation; provided, however, at any
meeting whether a quorum be present or otherwise, a majority of the directors
present may adjourn from time to time until the time fixed for the next regular
meeting of the Board of Directors, without notice other than by announcement at
the meeting.
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(b) At each meeting of the Board of Directors at which a quorum
is present, all questions and business shall be determined by the affirmative
vote of a majority of the directors present, unless a different vote be required
by law, the Certificate of Incorporation or these Bylaws.
SECTION 22. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 23. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
SECTION 24. COMMITTEES.
(a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution
passed by a majority of the whole Board of Directors appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and provided in the
resolution of the Board of Directors shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, including without limitation the power or authority
to declare a dividend, to authorize the issuance of stock and to adopt a
certificate of ownership and merger, and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation or fix the number of shares of any series of stock or authorize the
increase or decrease of the shares of any series), adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the corporation's property and assets,
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recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation.
(b) OTHER COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall such committee have the powers denied to the Executive Committee
in these Bylaws.
(c) TERM. Each member of a committee of the Board of Directors
shall serve a term on the committee coexistent with such member's term on the
Board of Directors. The Board of Directors, subject to the provisions of
subsections (a) or (b) of this Bylaw may at any time increase or decrease the
number of members of a committee or terminate the existence of a committee. The
membership of a committee member shall terminate on the date of his death or
voluntary resignation from the committee or from the Board of Directors. The
Board of Directors may at any time for any reason remove any individual
committee member and the Board of Directors may fill any committee vacancy
created by death, resignation, removal or increase in the number of members of
the committee. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee, and, in addition, in the absence or
disqualification of any member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member.
(d) MEETINGS. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 24 shall be held at such times and places as
are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings of
any such committee may be held at any place which has been determined from time
to time by such committee, and may be called by any director who is a member of
such committee, upon written notice to the members of such committee of the time
and place of such special meeting given in the manner provided for the giving of
written notice to members of the Board of Directors of the time and place of
special meetings of the Board of Directors. Notice of any special meeting of any
committee may be waived in writing at any time before or after the meeting and
will be waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to
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the transaction of any business because the meeting is not lawfully called or
convened. A majority of the authorized number of members of any such committee
shall constitute a quorum for the transaction of business, and the act of a
majority of those present at any meeting at which a quorum is present shall be
the act of such committee.
SECTION 25. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in his absence, an Assistant Secretary directed to do so by
the President, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
SECTION 26. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the President, one or more Vice
Presidents, the Secretary, the Chief Financial Officer, the Treasurer, the
Controller, all of whom shall be elected at the annual organizational meeting of
the Board of Directors. The Board of Directors may also appoint one or more
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such
other officers and agents with such powers and duties as it shall deem
necessary. The Board of Directors may assign such additional titles to one or
more of the officers as it shall deem appropriate. Any one person may hold any
number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the officers
of the corporation shall be fixed by or in the manner designated by the Board of
Directors.
SECTION 27. TENURE AND DUTIES OF OFFICERS.
(a) GENERAL. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duly elected
and qualified, unless sooner removed. Any officer elected or appointed by the
Board of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.
(b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of
the Board of Directors, when present, shall preside at all meetings of the
stockholders and the Board of Directors. The Chairman of the Board of Directors
shall perform other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. If there is
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no President, then the Chairman of the Board of Directors shall also serve as
the Chief Executive Officer of the corporation and shall have the powers and
duties prescribed in paragraph (c) of this Section 27.
(c) DUTIES OF PRESIDENT. The President shall preside at all
meetings of the stockholders and at all meetings of the Board of Directors,
unless the Chairman of the Board of Directors has been appointed and is present.
Unless some other officer has been elected Chief Executive Officer of the
corporation, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
corporation. The President shall perform other duties commonly incident to his
office and shall also perform such other duties and have such other powers as
the Board of Directors shall designate from time to time.
(d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and
perform the duties of the President in the absence or disability of the
President or whenever the office of President is vacant. The Vice Presidents
shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors
or the President shall designate from time to time.
(e) DUTIES OF SECRETARY. The Secretary shall attend all meetings
of the stockholders and of the Board of Directors and shall record all acts and
proceedings thereof in the minute book of the corporation. The Secretary shall
give notice in conformity with these Bylaws of all meetings of the stockholders
and of all meetings of the Board of Directors and any committee thereof
requiring notice. The Secretary shall perform all other duties given him in
these Bylaws and other duties commonly incident to his office and shall also
perform such other duties and have such other powers as the Board of Directors
shall designate from time to time. The President may direct any Assistant
Secretary to assume and perform the duties of the Secretary in the absence or
disability of the Secretary, and each Assistant Secretary shall perform other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board of Directors or the President shall
designate from time to time.
(f) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall keep or cause to be kept the books of account of the corporation
in a thorough and proper manner and shall render statements of the financial
affairs of the corporation in such form and as often as required by the Board of
Directors or the President. The Chief Financial Officer, subject to the order of
the Board of Directors, shall have the custody of all funds and securities of
the corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors or the President shall designate from
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time to time. The President may direct the Treasurer or any Assistant Treasurer,
or the Controller or any Assistant Controller, to the extent such officers have
been designated by the Board of Directors, to assume and perform the duties of
the Chief Financial Officer in the absence or disability of the Chief Financial
Officer, and each Treasurer and Assistant Treasurer and each Controller and
Assistant Controller shall perform other duties commonly incident to his office
and shall also perform such other duties and have such other powers as the Board
of Directors or the President shall designate from time to time.
SECTION 28. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.
SECTION 29. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 30. REMOVAL. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
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ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY
THE CORPORATION
SECTION 31. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, or the President or any Vice President, and by the
Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All
other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositories on funds to
the credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 32. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
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ARTICLE VII
SHARES OF STOCK
SECTION 33. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, or the President
or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by him
in the corporation. Any or all of the signatures on the certificate may be
facsimiles. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue. Each certificate shall state
upon the face or back thereof, in full or in summary, all of the powers,
designations, preferences, and rights, and the limitations or restrictions of
the shares authorized to be issued or shall, except as otherwise required by
law, set forth on the face or back a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative, participating, optional, or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Within a reasonable time after
the issuance or transfer of uncertificated stock, the corporation shall send to
the registered owner thereof a written notice containing the information
required to be set forth or stated on certificates pursuant to this section or
otherwise required by law or with respect to this section a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
SECTION 34. LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against
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any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen, or destroyed.
SECTION 35. TRANSFERS.
(a) Transfers of record of shares of stock of the corporation
shall be made only upon its books by the holders thereof, in person or by
attorney duly authorized, and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform
any agreement with any number of stockholders of any one or more classes of
stock of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the General Corporation Law of Delaware.
SECTION 36. FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however
that the Board of Directors may fix a new record date for the adjourned meeting.
(b) Prior to the Initial Public Offering, in order that the
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than 10 days after the date upon which the resolution fixing
the record date is adopted by the Board of Directors. Any stockholder of record
seeking to have the stockholders authorize or take corporate action by written
consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. The Board of Directors shall promptly, but in
all events within 10 days after the date on which such a request is received,
adopt a resolution fixing the record date. If
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no record date has been fixed by the Board of Directors within 10 days of the
date on which such a request is received, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is required by
applicable law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
corporation by delivery to its registered office in the State of Delaware, its
principal place of business or an officer or agent of the corporation having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
(c) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
SECTION 37. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
SECTION 38. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 33), may be signed by the Chairman of the Board of
Directors, the President or any Vice President, or such other person as may be
authorized by the Board of Directors, and the corporate seal impressed thereon
or a facsimile of such seal imprinted thereon and attested by the signature of
the Secretary or an Assistant Secretary, or the Chief Financial
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Officer or Treasurer or an Assistant Treasurer; provided, however, that where
any such bond, debenture or other corporate security shall be authenticated by
the manual signature, or where permissible facsimile signature, of a trustee
under an indenture pursuant to which such bond, debenture or other corporate
security shall be issued, the signatures of the persons signing and attesting
the corporate seal on such bond, debenture or other corporate security may be
the imprinted facsimile of the signatures of such persons. Interest coupons
appertaining to any such bond, debenture or other corporate security,
authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an
Assistant Treasurer of the corporation or such other person as may be authorized
by the Board of Directors, or bear imprinted thereon the facsimile signature of
such person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall appear
thereon or on any such interest coupon, shall have ceased to be such officer
before the bond, debenture or other corporate security so signed or attested
shall have been delivered, such bond, debenture or other corporate security
nevertheless may be adopted by the corporation and issued and delivered as
though the person who signed the same or whose facsimile signature shall have
been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
SECTION 39. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.
SECTION 40. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
SECTION 41. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
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ARTICLE XI
INDEMNIFICATION
SECTION 42. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law; provided, however, that the corporation may modify the extent
of such indemnification by individual contracts with its directors and executive
officers; and, provided, further, that the corporation shall not be required to
indemnify any director in connection with any proceeding (or part thereof)
initiated by such person unless (i) such indemnification is expressly required
to be made by law, (ii) the proceeding was authorized by the Board of Directors
of the corporation, (iii) such indemnification is provided by the corporation,
in its sole discretion, pursuant to the powers vested in the corporation under
the Delaware General Corporation Law or (iv) such indemnification is required to
be made under subsection (d).
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.
(c) EXPENSES. The corporation shall advance to any 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 a director or executive
officer, of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefor, all expenses
incurred by any director or executive officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a
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determination is reasonably and promptly made (i) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to the
proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, that the facts known to the decision-making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in or
not opposed to the best interests of the corporation.
(d) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors and
executive officers under this Bylaw shall be deemed to be contractual rights and
be effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this Bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. In connection with any claim for indemnification, the
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under the
Delaware General Corporation Law for the corporation to indemnify the claimant
for the amount claimed. In connection with any claim by an executive officer of
the corporation (except in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
executive officer is or was a director of the corporation) for advances, the
corporation shall be entitled to raise a defense as to any such action clear and
convincing evidence that such person acted in bad faith or in a manner that such
person did not believe to be in or not opposed to the best interests of the
corporation, or with respect to any criminal action or proceeding that such
person acted without reasonable cause to believe that his conduct was lawful.
Neither the failure of the corporation (including its Board of Directors,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the corporation (including its Board of Directors, independent
legal counsel or its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that claimant has not met the applicable standard of conduct. In any suit
brought by a director or executive officer to enforce a right to indemnification
or to an advancement of expenses hereunder, the burden of proving that the
director or executive officer is not entitled to be indemnified, or to such
advancement of expenses, under this Article XI or otherwise shall be on the
corporation.
23.
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(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person
by this Bylaw shall not be exclusive of any other right which such person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is specifically
authorized to enter into individual contracts with any or all of its directors,
officers, employees or agents respecting indemnification and advances, to the
fullest extent not prohibited by the Delaware General Corporation Law.
(f) SURVIVAL OF RIGHTS. The rights conferred on any person by
this Bylaw shall continue as to a person who has ceased to be a director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.
(h) AMENDMENTS. Any repeal or modification of this Bylaw shall
only be prospective and shall not affect the rights under this Bylaw in effect
at the time of the alleged occurrence of any action or omission to act that is
the cause of any proceeding against any agent of the corporation.
(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law.
(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:
(i) The term "proceeding" shall be broadly construed and
shall include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(ii) The term "expenses" shall be broadly construed and
shall include, without limitation, court costs, attorneys' fees, witness fees,
fines, amounts paid in settlement or judgment and any other costs and expenses
of any nature or kind incurred in connection with any proceeding.
24.
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(iii) The term the "corporation" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, and employees or agents, so that any person
who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(iv) References to a "director," "executive officer,"
"officer," "employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.
(v) References to "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and references to
"serving at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan shall
be deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Bylaw.
ARTICLE XII
NOTICES
SECTION 43. NOTICES.
(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of
these Bylaws, notice is required to be given to any stockholder, it shall be
given in writing, timely and duly deposited in the United States mail, postage
prepaid, and addressed to his last known post office address as shown by the
stock record of the corporation or its transfer agent.
25.
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(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such director.
(c) ADDRESS UNKNOWN. If no address of a stockholder or Director
be known, notice may be sent to the office of the corporation required to be
maintained pursuant to Section 2 hereof.
(d) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a
duly authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.
(e) TIME NOTICES DEEMED GIVEN. All notices given by mail, as
above provided, shall be deemed to have been given as at the time of mailing,
and all notices given by facsimile, telex or telegram shall be deemed to have
been given as of the sending time recorded at time of transmission.
(f) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.
(g) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.
(h) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of Incorporation or Bylaws of the corporation, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such person.
Any action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action
26.
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taken by the corporation is such as to require the filing of a certificate under
any provision of the Delaware General Corporation Law, the certificate shall
state, if such is the fact and if notice is required, that notice was given to
all persons entitled to receive notice except such persons with whom
communication is unlawful.
(i) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice
is required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of the
taking of action by written consent without a meeting to such person during the
period between such two consecutive annual meetings, or (ii) all, and at least
two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.
ARTICLE XIII
AMENDMENTS
SECTION 44. AMENDMENTS. Subject to paragraph (h) of Section 42 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the
voting power of all of the then-outstanding shares of the Voting Stock. The
Board of Directors shall also have the power to adopt, amend, or repeal Bylaws.
ARTICLE XIV
LOANS TO OFFICERS
SECTION 45. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance may
be with or without interest and may be
27.
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unsecured, or secured in such manner as the Board of Directors shall approve,
including, without limitation, a pledge of shares of stock of the corporation.
Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of
guaranty or warranty of the corporation at common law or under any statute.
28.
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*** Text Omitted and Filed Separately
Confidential Treatment Requested
Under 17 C.F.R. Sections 200.80,
200.83 and 230.406.
EXHIBIT 10.42
FIRST AMENDMENT TO AGREEMENT
THIS FIRST AMENDMENT (the "First Amendment") to the Agreement by and
between N.V. ORGANON, Molenstraat 110, P.O. Box 20, 5340 BH Oss, the Netherlands
(hereinafter referred to as "Organon"), and SIGNAL PHARMACEUTICALS, INC., 5555
Oberlin Drive, San Diego, California 92121, USA (hereinafter referred to as
"Signal"), dated as of July 30, 1996 (the "Agreement") is entered into as of
March 17, 1998 (the "First Amendment Date"). Capitalized terms used but not
otherwise defined in this First Amendment shall have the meanings given such
terms in the Agreement.
RECITALS
WHEREAS, Organon and Signal entered into the Agreement to collaborate in
the discovery and development of new assays for the targets selected as provided
in the Agreement; and
WHEREAS, Organon and Signal wish to amend the Agreement in the manner
set forth in this First Amendment and otherwise to provide for certain
agreements by the parties as set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, the parties hereto agree as follows:
1. AMENDMENT AND RESTATEMENT OF SECTION 3. The first and second paragraphs of
Section 3 of the Agreement are hereby amended and restated in their entirety as
follows:
"3. TARGET RESEARCH.
The Target Research shall commence upon the Effective Date and
shall continue for three years thereafter, extendible for up to two
additional years under substantially the same FTE funding and other
terms as are set forth herein, with mutual consent. If the milestone
described in Exhibit B is not met within [***] after the First Amendment
Date, Organon at its sole discretion may forthwith terminate the Target
Research by written notice effective as of the [***]. If the milestone
described in Exhibit C is not met within [***] after the First Amendment
Date, Organon at its sole discretion may terminate the Target Research
effective as of the end of the [***] following the First Amendment Date.
For purposes of this Agreement, the "Research Term" shall be the period
from the Effective Date until the Target Research expires or is
terminated pursuant to this Article 3. Under the Target Research
1.
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<PAGE> 2
Signal shall use reasonable efforts to deliver up to [***] Research
Assays to Organon.
If Organon elects to terminate the Target Research (a) as of the
[***] as provided above or (b) prior to receiving the [***] and paying
the first milestone under Section 3.2.1(a), whichever is earlier, then
this Agreement and all licenses granted hereunder shall terminate,
except that the provisions listed in Section 9.3(b) shall survive.
Otherwise, this Agreement shall survive termination or expiration of the
Target Research."
2. AMENDMENT AND RESTATEMENT OF SECTION 3.4. Section 3.4 of the Agreement is
hereby amended and restated in its entirety as follows:
"3.4. LICENSES AND OPTION RIGHTS
3.4.1. Subject to the terms and conditions of this
Agreement, Signal hereby grants to Organon a worldwide, non-exclusive
license, during the Research Term only, under the Signal Technology
within the Target Research Field to conduct research in accordance with
the Research Plan.
3.4.2. Subject to the terms and conditions of this
Agreement, Signal hereby grants to Organon a worldwide, exclusive
(except as to Signal) license to use any cell lines which are developed
in the conduct of the Target Research (whether solely by Signal or
jointly by the parties) for Organon's internal research purposes during
the term of this Agreement. Notwithstanding any other provision of this
Agreement, Organon shall not have the right to sublicense the rights
granted under this Section 3.4.2 to any third party without the prior
written consent of Signal, which consent may be given or withheld in
Signal's sole discretion; provided, however, that Organon may, without
Signal's prior written consent, sublicense such rights to an Affiliate
of Organon that is controlled by Organon. The parties hereby acknowledge
that Signal retains the right to use the cell lines licensed hereunder
for any purpose.
3.4.3. Subject to the terms of this Agreement, Signal
hereby grants to Organon a worldwide, exclusive license, for the period
following the end of the Research Term until this Agreement expires or
is terminated, to use the Signal Compounds and under the Research Assay
Patents, Gene/gen product Patents and Compound Patents to research,
develop, make, have made, use and sell Organon Products; provided,
however, that any compound from any source that is useful for the [***]
shall be specifically excluded from
2.
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<PAGE> 3
the scope of the foregoing license. If, however, a compound has been
selected in the Target Research Field that potentially is [***], the
parties shall negotiate in good faith, together with any of Signal's
licensee(s) in such field, a possible extension of the foregoing license
with regard to such compound.
3.4.4. Subject to the terms of this Agreement, Signal
hereby grants to Organon a worldwide, non-exclusive license, for the
period following the end of the Research Term until this Agreement
expires or is terminated, to use the Signal Technology and Signal
Technology Patents for any purpose in the Target Research Field.
3.4.5. Except as set forth in Section 3.4.2 above, Organon
shall have the right to grant sublicenses under its exclusive license
rights, with the prior written consent of Signal, not to be unreasonably
withheld; provided that such consent shall not be required for
sublicenses to Organon's Affiliates."
3. AMENDMENT AND RESTATEMENT OF RESEARCH PLAN. The Research Plan is hereby
amended and restated in its entirety as attached hereto.
4. AMENDMENT AND RESTATEMENT OF EXHIBIT B. Exhibit B of the Agreement is hereby
amended and restated in its entirety as attached hereto.
5. FULL FORCE AND EFFECT. Except as specifically amended by this First
Amendment, the terms and conditions of the Agreement shall remain in full force
and effect.
6. GOVERNING LAW. This First Amendment shall be governed by and construed in
accordance with the laws of the State of Delaware.
7. COUNTERPARTS. This First Amendment may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.
***Confidential Treatment Requested
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this First Amendment on
the day and year first written above.
N.V. ORGANON SIGNAL PHARMACEUTICALS, INC.
By: [SIG] By: [SIG]
-------------------------- --------------------------
Title: Managing Director R&D Title: E.V.P.
----------------------- -----------------------
By: [SIG]
--------------------------
Title: Director Research
-----------------------
<PAGE> 5
ORGANON-SIGNAL RESEARCH OUTLINE
[***]
***Confidential Treatment Requested
<PAGE> 6
ORGANON-SIGNAL RESEARCH OUTLINE
CONFIDENTIAL
================================================================================
EXHIBIT B
Project Goals
[***]
***Confidential Treatment Requested
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated January 16, 1998,
except for Note 7, as to which the date is May 5, 1998, in Amendment No. 1 to
the Registration Statement (Form S-1 No. 333-52901) and related Prospectus of
Signal Pharmaceuticals, Inc. for the registration of its common stock.
/s/ ERNST & YOUNG LLP
San Diego, California
May 26, 1998
