<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1997
REGISTRATION NO. 333-38051
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CURAGEN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8731 06-1331400
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
555 LONG WHARF DRIVE, 11TH FLOOR
NEW HAVEN, CONNECTICUT 06511
(203) 401-3330
(203) 401-3333 FACSIMILE
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JONATHAN M. ROTHBERG, PH.D.
CHIEF EXECUTIVE OFFICER, PRESIDENT AND
CHAIRMAN OF THE BOARD
CURAGEN CORPORATION
555 LONG WHARF DRIVE, 11TH FLOOR
NEW HAVEN, CONNECTICUT 06511
(203) 401-3330
(203) 401-3333 FACSIMILE
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
JONATHAN L. KRAVETZ, ESQ. KEITH F. HIGGINS, ESQ.
STANFORD N. GOLDMAN, JR., ESQ. ROPES & GRAY
MINTZ, LEVIN, COHN, FERRIS, ONE INTERNATIONAL PLACE
GLOVSKY AND POPEO, P.C. BOSTON, MASSACHUSETTS 02110
ONE FINANCIAL CENTER (617) 951-7000
BOSTON, MASSACHUSETTS 02111 (617) 951-7050 FACSIMILE
(617) 542-6000
(617) 542-2241 FACSIMILE
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this 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, as amended (the "Securities Act"), 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, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration 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(d)
under the Securities Act, 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 WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued December 16, 1997
Shares
[Company Logo]
CuraGen Corporation
COMMON STOCK
----------
ALL OF THE SHARES OF COMMON STOCK ARE BEING SOLD BY CURAGEN CORPORATION
(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 PER SHARE WILL BE BETWEEN $
AND $ . SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE.
BIOGEN, INC. ("BIOGEN") AND GENENTECH, INC. ("GENENTECH"), TWO OF THE
COMPANY'S COLLABORATIVE PARTNERS AND EXISTING STOCKHOLDERS, HAVE AGREED
TO PURCHASE AN AGGREGATE OF $10,000,000 OF THE COMPANY'S COMMON
STOCK IN PRIVATE PLACEMENTS CONCURRENT WITH THIS OFFERING AT A
PRICE PER SHARE EQUAL TO THE PRICE TO PUBLIC BELOW. THE
SALE OF SUCH SHARES OF COMMON STOCK WILL NOT BE
REGISTERED IN THIS OFFERING. SEE "BUSINESS--
RESEARCH COLLABORATIONS."
----------
APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK FOR QUOTATION ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "CRGN."
----------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
----------
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.
----------
PRICE $ A SHARE
----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(3).................................... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering overallotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$ , $ and $ , respectively. See "Underwriters."
----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Ropes & Gray, counsel for the Underwriters. It is expected that delivery of
the Shares will be made on or about , 1997 at the office of Morgan Stanley
& Co. Incorporated, New York, N.Y., against payment therefor in immediately
available funds.
----------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
, 1997 BEAR, STEARNS & CO. INC.
<PAGE>
[GRAPHICAL DEPICTION OF THE COMPANY'S GENOMICS TECHNOLOGY PLATFORM]
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREBY
SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 8
Use of Proceeds..................... 21
Dividend Policy..................... 21
Capitalization...................... 22
Dilution............................ 23
Selected Financial Data............. 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 25
Business............................ 30
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management.......................... 52
Certain Transactions................ 59
Principal Stockholders.............. 61
Description of Capital Stock........ 63
Shares Eligible for Future Sale..... 68
Underwriters........................ 70
Legal Matters....................... 71
Experts............................. 71
Additional Information.............. 72
Glossary............................ 73
Index to Financial Statements....... F-1
</TABLE>
----------------
The Company intends to furnish to its stockholders annual reports containing
audited financial statements and an opinion thereon expressed by independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing interim financial information.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THIS OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
----------------
In this Prospectus, the terms the "Company" or "CuraGen" shall mean CuraGen
Corporation. The Company's corporate headquarters are located at 555 Long
Wharf Drive, New Haven, Connecticut 06511, and its telephone number is (203)
401-3330.
GeneScape(R) is a trademark of the Company which has been registered with
the United States Patent and Trademark Office. GeneCalling(TM),
PathCalling(TM), HitCalling(TM), CuraTools(TM), CuraShop(TM), QEA(TM),
MIM(TM), CombiGen(TM), OGI(TM), Niagara(TM), (Greek Mu)Niagara(TM),
MicroNiagara(TM) and NanoNiagara(TM) are trademarks or service marks of the
Company for which registration applications have been filed with the United
States Patent and Trademark Office. All other trademarks or trade names
referred to in this Prospectus are the property of their respective owners.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Risk Factors" and elsewhere in this Prospectus. A Glossary of technical
terms used in this Prospectus appears at page 73 of this Prospectus.
THE COMPANY
CuraGen Corporation ("CuraGen" or the "Company") is pioneering the systematic
application of genomics to accelerate the discovery and development of
therapeutic and agricultural products. CuraGen's fully-integrated genomics
technologies, processes and information systems are designed to rapidly
generate comprehensive information about gene expression, biological pathways
and the potential drugs that affect these pathways, each on a scale not
previously undertaken. The Company believes that it can overcome the
limitations of competing technologies, processes and databases and can condense
key steps in gene-based drug discovery and development.
The Company's drug discovery platform has three primary systems: the
GeneCalling system for comprehensive gene expression analysis and gene
discovery; the PathCalling system for discovery of the roles of genes and the
proteins they encode in biological pathways; and the HitCalling system for
identification of small molecule drug candidates. The GeneCalling, PathCalling
and HitCalling systems are designed to use proprietary technologies to overcome
current limitations of gene-based drug discovery. In contrast to other gene
expression methods used to identify disease-related genes that may not detect
previously undiscovered genes or genes expressed at low levels, GeneCalling has
been designed to measure 95% of the genes expressed in any cell, including
novel genes and those expressed at the level of a single copy per cell.
GeneCalling generates multiple fragments per gene for enhanced reproducibility,
precision and fault-tolerance. In order to validate proteins as drug targets,
the Company has designed PathCalling to replace cumbersome protein-by-protein
research methods with a process that tests simultaneously for interactions
between billions of combinations of proteins. PathCalling assembles these
interactions into a database of biological pathways to link a disease-related
protein with its biological role. HitCalling is being designed to screen
thousands of these proteins simultaneously against hundreds of thousands of
potential drugs, building a database of targets and drug candidates to
accelerate drug discovery. The Company has unified its GeneCalling and
PathCalling technologies, processes and databases under its GeneScape
bioinformatics operating system to integrate all aspects of process management,
data analysis and visualization. GeneScape provides an easy-to-use, web-based
interface to the Company's technology platform. Customers can access the
GeneScape interface via the internet, using any standard web-browser, such as
Netscape Navigator or Microsoft Internet Explorer. GeneScape's architecture
allows researchers interactive, remote access to the Company's genomics
databases and technologies to meet their individual discovery and development
needs. GeneScape also includes CuraTools, a full-featured bioinformatics
software suite for further gene and protein characterization.
CuraGen believes its technology platform will facilitate the discovery and
development of highly specific and effective drugs aimed at a variety of
complex diseases such as cardiovascular disease, stroke, cancer and metabolic
disorders. In addition, the Company believes its GeneCalling and PathCalling
systems are well-positioned to predict the efficacy and safety of drug
candidates currently in pharmaceutical development pipelines and to review the
performance and side effects of drugs already on the market. This
pharmacogenomics approach can aid in the development of more effective, safer
drugs and identify more appropriate patient populations.
4
<PAGE>
Each of the GeneCalling, PathCalling and HitCalling systems consists of a
proprietary enabling technology, a high-throughput, automated process using the
technology to generate information, and a database containing the information
generated. The GeneCalling and PathCalling systems are currently operational,
and the Company has already begun to populate the GeneCalling and PathCalling
databases from internal research programs and research collaborations, as well
as from publicly available databases. The HitCalling system is expected to be
operational in 1998 and incorporated into the Company's GeneScape operating
system at that time. The Company has designed the three systems as an
integrated platform to enable gene discovery, drug target validation and high-
throughput screening of drug candidates in a highly efficient and cost-
effective manner.
CuraGen's goal is to establish its fully-integrated technologies and
GeneScape operating system as the preferred platform for genomics and to
pursue, both internally and through collaborations, a broad portfolio of
research programs for drug discovery, drug development and pharmacogenomics.
During the next five years, the Company intends to analyze systematically the
genetic basis of many common diseases in order to identify potential
therapeutic proteins, targets and small molecule drug candidates. CuraGen is
marketing its genomics technology and information to pharmaceutical,
biotechnology and agricultural companies through research collaborations and
database subscriptions. Research collaborations will involve the application of
CuraGen's technologies to a collaborator's projects and will include support
services required to characterize gene and target discoveries. Database
subscriptions will provide subscribers with access to CuraGen's GeneCalling,
PathCalling and HitCalling databases. The Company believes these collaborations
and subscription arrangements will establish milestone and royalty-based
revenues from products emerging from the drug development programs of multiple
partners. The Company's databases are in early stages of development, however,
and there can be no assurance that the Company will succeed in commercializing
its databases or that collaborators or subscription partners will be successful
in using the Company's technologies and information to develop and
commercialize new drugs.
To date, CuraGen has entered into agreements with Pioneer Hi-Bred
International, Inc. ("Pioneer Hi-Bred"), Biogen and Genentech. In May 1997,
CuraGen and Pioneer Hi-Bred established a research collaboration agreement.
Pioneer Hi-Bred made a $7.5 million investment in the Company and, subject to
certain conditions, may fund up to $18.5 million in research at the Company to
use GeneCalling to identify genes responsible for agricultural seed product
performance. In October 1997, CuraGen and Biogen established a research
collaboration and database subscription arrangement to discover novel genes and
therapeutics. Biogen agreed to purchase $5 million of Common Stock (the "Biogen
Shares") in a private placement at the initial public offering price and to
provide a $10 million loan facility, convertible at CuraGen's option into
Common Stock. Biogen may, subject to certain conditions, provide up to $18.5
million in research funding and subscription payments under the agreement.
Biogen will provide milestone payments up to $18.5 million for each therapeutic
product that attains certain development and commercialization milestones and
will pay royalties based on future product sales. In November 1997, CuraGen and
Genentech established a research collaboration and database subscription
arrangement to discover novel genes and therapeutics. Genentech agreed to
purchase $5 million of Common Stock (the "Genentech Shares") in a private
placement at the initial public offering price and, subject to certain
conditions, may provide up to $26 million in the form of loan facility,
convertible at CuraGen's option into CuraGen Non-Voting Common Stock (subject
to certain limitations). Genentech may provide up to $24 million in research
funding and subscription payments under the agreement. Genentech will provide
milestone payments for each product that is developed under a license and
attains development and commercialization milestones and will pay royalties
based on future product sales.
CuraGen has also used its GeneCalling and PathCalling systems in its internal
programs in areas including cardiovascular disease, stroke, cancer and
metabolic disorders, has discovered over disease-related genes and has
filed patent applications relating to these discoveries.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...... shares
Common Stock to be outstanding after this
offering................................ shares(1)
Use of Proceeds.......................... The Company plans to use approxi-
mately $10 million of the net pro-
ceeds for capital expenditures and
$1,750,000 to redeem all of the Se-
ries B Preferred Stock. The balance
of the net proceeds will be used for
research and development, including
internal discovery programs, the
further development of its
GeneCalling, PathCalling and
HitCalling databases, and working
capital and general corporate pur-
poses. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol... CRGN
</TABLE>
- --------
(1) Based on 8,871,987 shares of Common Stock outstanding on September 30,
1997 and assuming the issuance of the Biogen Shares, the Genentech
Shares and shares of Common Stock to be issued to the University of
Florida Research Foundation, Inc. (the "University of Florida Shares") at
the assumed initial public offering price of $ per share. See Note 10
of Notes to Financial Statements. Excludes 1,598,884 and 1,583,866 shares
of Common Stock reserved for issuance upon the exercise of stock options
and warrants, respectively, outstanding on September 30, 1997, at weighted
average exercise prices of $3.75 and $4.12 per share, respectively. Also
excludes an aggregate of 65,000 shares of Common Stock issuable upon the
exercise of stock options granted to non-employee directors after
September 30, 1997, at the initial public offering price.
Unless otherwise indicated, all share and per share data in this Prospectus
have been adjusted to reflect: (i) the amendment and restatement of the
Company's Certificate of Incorporation (as amended and restated, the "Restated
Certificate"), to be filed and effective upon the closing of this offering, to,
among other things, (a) increase the number of authorized shares of Common
Stock from 25,000,000 shares to 50,000,000 shares, (b) decrease the number of
authorized shares of Preferred Stock from 7,500,000 to 5,000,000 shares and
(c) authorize 3,000,000 shares of Non-Voting Common Stock; (ii) the conversion
upon the closing of this offering of all outstanding shares of the Company's
Series A Convertible Preferred Stock, Series C Convertible Preferred Stock,
Series D Convertible Preferred Stock and Series E Convertible Preferred Stock
into an aggregate of 3,418,635 shares of Common Stock (the "Automatic
Conversion"); (iii) the redemption upon the closing of this offering of all of
the 175,000 outstanding shares of the Company's Series B Redeemable Preferred
Stock (the "Series B Preferred Stock"); (iv) the termination upon the closing
of this offering of certain redemption rights relating to 394,031 shares of
Redeemable Common Stock (the "Redeemable Common Stock") described in Note 6 of
Notes to Financial Statements; and (v) the issuance in private placements of
the Biogen Shares, the Genentech Shares and the University of
Florida Shares at the assumed initial public offering price of $ per share.
The information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. As used in this Prospectus, references to "Biogen"
include Biogen, Inc. and its wholly-owned subsidiary, Biotech Manufacturing
Limited.
6
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data set forth below should be read in conjunction
with, and are qualified by reference to, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's audited
financial statements and related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- -----------------------
1994 1995 1996(1) 1996 1997(2)
--------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 257,536 $ 1,581,175 $ 4,422,947 $3,101,322 $ 4,171,750
--------- ----------- ----------- ---------- -----------
Operating expenses:
Research and
development.......... 647,640 1,466,375 3,516,035 2,192,740 6,431,139
General and
administrative....... 525,671 961,815 1,140,325 666,803 2,071,435
--------- ----------- ----------- ---------- -----------
Total operating
expenses........... 1,173,311 2,428,190 4,656,360 2,859,543 8,502,574
--------- ----------- ----------- ---------- -----------
Income (loss) from
operations............. (915,775) (847,015) (233,413) 241,779 (4,330,824)
Other income (expenses),
net.................... (40,254) (93,729) (162,746) (118,588) 217,979
--------- ----------- ----------- ---------- -----------
Net income (loss)....... (956,029) (940,744) (396,159) 123,191 (4,112,845)
Preferred dividends..... -- -- (17,106) -- (51,318)
--------- ----------- ----------- ---------- -----------
Net income (loss)
attributable to common
stockholders........... ($956,029) ($940,744) ($413,265) $123,191 ($4,164,163)
========= =========== =========== ========== ===========
Pro forma net loss per
share attributable to
common stockholders....
=========== ===========
Pro forma weighted
average number of
shares of common stock
outstanding............
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
---------------------------
ACTUAL AS ADJUSTED(3)
----------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $20,781,115
Working capital..................................... 18,477,187
Total assets........................................ 26,944,446
Total long-term liabilities......................... 3,398,060
Redeemable Common Stock............................. 5,319,419
Series B Preferred Stock............................ 1,442,090
Accumulated deficit................................. (6,975,544)
Stockholders' equity................................ 15,060,353
</TABLE>
- --------
(1) During the year ended December 31, 1996, the Company completed its
development stage activities with the signing of its first collaborative
research agreement and commenced its planned principal operations.
(2) For an explanation of the calculation of pro forma weighted average number
of common shares outstanding, see Note 1 of Notes to Financial Statements.
(3) As adjusted to reflect the pro forma capitalization of the Company, giving
effect to the redemption of the 175,000 outstanding shares of Series B
Preferred Stock, the termination of certain redemption rights relating to
394,031 shares of Redeemable Common Stock and the sale of the shares of
Common Stock offered by the Company hereby, the Biogen Shares, the
Genentech Shares and the University of Florida Shares at an assumed initial
public offering price of $ per share and the receipt of the estimated
net proceeds therefrom.
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information
contained in this Prospectus, should be carefully considered in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby. This Prospectus contains forward-looking statements. For this purpose,
any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," "intends" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth below and elsewhere
in this Prospectus.
EARLY STAGE OF DEVELOPMENT; HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE
PROFITS
The Company has had a limited operating history and is at an early stage of
development. For the nine months ended September 30, 1997 and the years ended
December 31, 1996, 1995 and 1994, the Company had net losses attributable to
common stockholders of $4,164,163, $413,265, $940,744 and $956,029,
respectively, and as of September 30, 1997, the Company had an accumulated
deficit of $6,975,544. To date, a significant portion of the Company's revenue
has come from United States government grants. The development of the
Company's technologies, including the Company's expansion of its GeneCalling
and PathCalling database development efforts, together with the development of
its HitCalling database, will require substantial increases in expenditures
over the next several years. In addition, the Company expects to incur
substantial increases in expenditures in connection with its internal research
programs. As a result, the Company currently expects to incur operating losses
at least through 2000 and the Company may never achieve significant revenues
or profitability. The Company's ability to achieve significant revenues or
profitability will depend upon its ability to obtain research collaborators
and subscribers for its GeneCalling, PathCalling and HitCalling databases and
related products and services. The Company currently has three research
collaborations, two of which include database subscription arrangements, and
there can be no assurance that the Company will be able to obtain any
additional research collaborations or enter into any additional subscription
arrangements for such databases and related products and services.
There can be no assurance that the Company's technologies will continue to
be successfully developed, or that any therapeutic, agricultural or diagnostic
products discovered or developed through the utilization of such technologies
will prove to be commercially useful, meet applicable regulatory standards in
a timely manner or at all, successfully compete with other technologies and
products, avoid infringing the proprietary rights of others, be manufactured
in sufficient quantities or at reasonable costs or be marketed successfully.
The Company expects that it will be a number of years, if ever, before the
Company will recognize revenue from therapeutic, agricultural or diagnostic
product sales or royalties.
TECHNOLOGICAL UNCERTAINTY AND PRODUCT DEVELOPMENT RISK
The Company has developed and intends to continue to develop its
GeneCalling, PathCalling and HitCalling databases and related technology for
the identification of novel genes, biological pathways and drug candidates
useful for the discovery and development of therapeutic, agricultural and
diagnostic products. These technologies involve new and unproven approaches.
Failure to identify genes, biological pathways and drug candidates useful for
the discovery and development of therapeutic, agricultural and diagnostic
products could have a material adverse effect on the Company. The Company's
technology and development focus is primarily directed toward complex diseases
as well as agronomic traits. There is limited scientific understanding
generally relating to the role of genes in these diseases and traits, and few
products based on gene discoveries have been developed and commercialized.
Accordingly, even if the Company is successful in identifying genes,
biological pathways or drug candidates associated with specific diseases or in
identifying genes associated with certain agronomic traits, there can be no
assurance that these discoveries will lead to the development of therapeutic,
agricultural or diagnostic products. To date, the Company has not developed or
commercialized any such products based on its technological methods.
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In addition, the success of the Company's GeneCalling, PathCalling and
HitCalling databases and its related products and services will depend upon
the Company's ability to generate data concerning gene expression, biological
pathways and drug candidates using software tools. The Company's database
products are complex and sophisticated and could contain design defects or
software errors that are difficult to detect. There can be no assurance that
errors will not be found in the Company's current and future products, if any.
The Company's strategy of using a systematic analysis of the genome to
discover and develop novel therapeutic, agricultural and diagnostic products
is unproven. The Company's GeneCalling, PathCalling and HitCalling databases
and related products and services represent a business for which there is
little precedent. There can be no assurance that the Company's methods,
processes and related services will be accepted. To date, the Company has
entered into a research collaboration with Pioneer Hi-Bred and research
collaboration and database subscription arrangements with Biogen and
Genentech. There can be no assurance that the Company will be able to
establish any additional research collaborations or subscription arrangements.
The Company's ability to achieve and sustain profitability depends on
attracting additional collaborators and subscribers for its databases and
related products and services. In addition, the Company has limited experience
in providing software-based products or services. The specialized nature and
price of the Company's databases and related products and services are such
that there are a limited number of pharmaceutical, biotechnology and
agricultural companies that are potential customers for such products and
services. Additional factors that may affect demand for the Company's products
and services include the extent to which the Company's potential collaborators
and subscribers determine to conduct in-house gene research, the success of
competitors offering similar services at competitive prices, the ability of
the Company to service satisfactorily its collaborators and subscribers, the
extent to which the gene expression analyses, as well as the identification of
biological pathways, drug candidates and related information contained in the
Company's databases, are made public by or are the subject of patents issued
to others, and the emergence of technological innovations that are more
advanced than those used by and available to the Company.
The building of the Company's GeneCalling and PathCalling databases is still
in the early stages. In addition, the Company has not yet completed the
development of its CombiGen technology to enable it to conduct high-throughput
screening of protein targets, and has not yet started to populate its
HitCalling database. There can be no assurance that the Company will be able
to populate its GeneCalling and PathCalling databases in a timely manner or
develop its CombiGen technology or its HitCalling database successfully or
that, if completed or developed successfully, such technology or database will
be accepted by, or useful to, the Company's collaborators or subscribers.
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's comprehensive approach to developing therapeutic products
through the application of genomics has required it to establish a substantial
scientific infrastructure. The Company has used substantial amounts of cash to
date and expects capital and operating expenditures to increase over the next
several years as it expands its infrastructure and its research and
development activities, including the completion of its PathCalling database
and the development of its HitCalling database and CombiGen technology. The
Company's future capital requirements will depend on many factors, including
progress of its research programs, the number and breadth of these programs,
the ability of the Company to attract collaborators for or subscribers to its
products and services, achievement of milestones under the Company's existing
collaborations, the ability of the Company to establish and maintain
additional collaborations, and the progress of the Company's collaborators.
These factors also include the level of the Company's activities relating to
commercialization rights it has retained in its collaborations, competing
technological and market developments, the costs involved in enforcing patent
claims and other intellectual property rights and the costs and timing of
regulatory approvals. The Company expects that it will require significant
additional financing in the future, which it may seek to raise through public
or private equity offerings, debt financings or additional collaborations and
licensing arrangements. There can be no assurance that additional financing
will be available when needed, or, if available, that such financing will be
obtained on terms favorable to the Company or its stockholders. To the extent
that the Company raises additional capital by issuing equity securities,
ownership dilution to stockholders will result.
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To the extent that the Company raises additional funds through collaborations
and licensing arrangements, the Company may be required to relinquish rights
to certain of its technologies or product candidates, or to grant licenses on
terms that are not favorable to the Company, either of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event that adequate funds are not available, the
Company's business, financial condition and results of operations would be
materially, adversely affected. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
RELIANCE ON RESEARCH COLLABORATIONS
The Company's strategy for development and commercialization of therapeutic,
agricultural and diagnostic products based upon its discoveries depends upon
the formation of various research collaborations and licensing arrangements.
To date, the Company has three research collaborations. The Company and
Pioneer Hi-Bred have entered into a research collaboration, which Pioneer Hi-
Bred has the right to terminate at any time upon a breach by the Company and
on three months' written notice, at any time after November 1998, if the
Company has not identified any genes associated with certain traits of
interest to Pioneer Hi-Bred. In addition, Pioneer Hi-Bred has the right, at
any time after May 2000, to terminate the research program at its sole
discretion on three months' written notice. The Company and Biogen have
entered into a research collaboration that Biogen has the right, at any time
after October 1999, to terminate, at its sole discretion, on six months'
written notice. The Company and Genentech have also entered into a research
collaboration that Genentech has the right to terminate, at its sole
discretion, on one month's prior written notice (i) in May 1999 subject to its
payment of a termination fee or forgiveness of the portion of the loan
facility outstanding on such termination date and (ii) on or after November
2000. There can be no assurance that these collaborations will not be
terminated at such times or earlier upon a material breach by the Company. Any
such termination could have a material adverse effect on the Company's
business, financial condition and results of operation. There can be no
assurance that the Company will be able to maintain or expand existing
collaborations or establish additional research collaborations or licensing
arrangements necessary to develop and commercialize therapeutic, agricultural
or diagnostic products resulting from the Company's technology, that any such
collaborations or licensing arrangements will be on terms favorable to the
Company or that the current or any future collaborations or licensing
arrangements ultimately will be successful. Under the Company's current
strategy, and for the foreseeable future, the Company does not expect to
develop or market therapeutic, agricultural or diagnostic products on its own.
As a result, the Company will be dependent on collaborators for the
preclinical study and clinical development of therapeutics and for regulatory
approval, manufacturing and marketing of therapeutic, agricultural and
diagnostic products resulting from the application of the Company's
technology. The agreements with collaborators typically will allow them
significant discretion in electing whether to pursue such activities. The
Company cannot control the amount and timing of resources its collaborators
devote to the Company's programs or potential products. If any of the
Company's collaborators were to breach or terminate its agreement with the
Company or otherwise fail to conduct collaborative activities successfully and
in a timely manner, the preclinical or clinical development or
commercialization of product candidates or research programs would be delayed
or terminated. Any such delay or termination could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company has structured and intends to continue to structure the
agreements with its collaborators so that, after a period of initial
exclusivity and unless a collaborator elects to pay for an extended period of
exclusivity, the research data developed during the collaboration will become
available for subscribers to the Company's general databases. There can be no
assurance that any additional collaborators of the Company will agree to such
provisions. If the Company is unable to obtain rights to this data, it may
have to change its collaboration strategy and rely more heavily on its own
internal discovery programs to fill its subscription databases.
The Company intends to rely on its collaborators for significant funding in
support of its research efforts. If funding from one or more of its
collaborative programs were reduced or terminated, the Company would be
required to devote additional internal resources to product development, scale
back or terminate certain research development programs or seek alternative
collaborators. See "--Future Capital Requirements; Uncertainty of
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Additional Funding" and "Business--Research Collaborations." Disputes may arise
in the future with respect to the ownership of rights to any technology
developed with collaborators. These and other possible disagreements between
collaborators and the Company could lead to delays in the collaborative
research, development or commercialization of certain therapeutic, agricultural
or diagnostic products, or could require or result in litigation or arbitration
to resolve. Any such event could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION
The Company faces, and will continue to face, intense competition from
pharmaceutical, biotechnology and diagnostic companies, as well as academic and
research institutions and government agencies. The Company is subject to
significant competition from organizations that are pursuing technologies and
products that are the same as or similar to the Company's technology and
products. Many of the organizations competing with the Company have greater
capital resources, research and development staffs and facilities and marketing
capabilities than the Company. In addition, research in the field of genomics
generally is highly competitive. Competitors of the Company in the genomics
area include, among others, public companies such as Affymetrix, Inc., Human
Genome Sciences, Inc., Incyte Pharmaceuticals, Inc. and Millennium
Pharmaceuticals, Inc., as well as private companies and major pharmaceutical
companies. Universities and other research institutions, including those
receiving funding from the federally funded Human Genome Project, also compete
with the Company. The Company's future success will depend in large part on its
maintaining a competitive position in the genomics field. Rapid technological
development by the Company or others may result in products or technologies
becoming obsolete before the Company recovers the expenses it incurs in
connection with their development. Products offered by the Company could be
made obsolete by less expensive or more effective technologies. There can be no
assurance that the Company will be able to make the enhancements to its
technology necessary to compete successfully with newly emerging technologies.
See "Business--Competition."
A number of competitors are attempting to rapidly identify and patent genes
and gene fragments sequenced at random, typically without specific knowledge of
the function of such genes or gene fragments. The Company's competitors may
discover or characterize important genes or gene fragments in advance of the
Company, which events could have a material adverse effect on any related
disease research program of the Company. The Company expects competition to
intensify in genomics research as technical advances are made and become more
widely known. See "Business--Background" and "--Technology Platform."
PATENTS AND PROPRIETARY RIGHTS; THIRD PARTY RIGHTS
The Company's business and competitive position are dependent upon its
ability to protect its GeneCalling, PathCalling and HitCalling proprietary
databases, proprietary software and other proprietary methods and technology.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to obtain and use information that the Company regards as
proprietary. The Company relies on patent, trade secret and copyright law and
nondisclosure and other contractual arrangements to protect such proprietary
information. The Company has filed patent applications for its proprietary
methods and devices for gene expression analysis, and for discovery of
biological pathways and for drug screening for pharmaceutical product
development. As of September 30, 1997, the Company had 14 patent applications
pending covering its technology with the United States Patent and Trademark
Office (the "USPTO"), and had filed several corresponding international and
foreign patent applications. To date, no patents have been issued to the
Company with respect to its technology and there can be no assurance that any
patents will issue. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary information,
that such information will not be disclosed or that the Company can effectively
protect its rights to unpatented trade secrets or other proprietary
information.
The Company's commercial success will also depend in part on obtaining patent
protection on gene and protein discoveries for which it or its collaborators or
subscribers discover utility and on products, methods and services based on
such discoveries. The Company has applied for patent protection on novel
mutants of known genes and their uses, partial sequences of novel proteins and
their gene sequences and uses, and novel uses for
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previously identified genes discovered by third parties. The Company has
sought and intends to continue to seek patent protection for novel uses for
genes and proteins which may have been patented by third parties. In such
cases, the Company would need a license from the holder of the patent with
respect to such gene or protein in order to make, use or sell such gene or
protein for such use. There can be no assurance that the Company will be able
to acquire such licenses on commercially reasonable terms, if at all. The
Company's patent application filings that result from the identification of
genes associated with the cause or effect of a particular disease generally
seek to protect the genes and encoded proteins if these genes and encoded
proteins are, among other things, novel and non-obvious, as well as
therapeutic, diagnostic and drug screening methods and products, and other
subject matter based upon a gene and its indication. Where information is
discovered on the specific biological pathway in which the protein encoded by
the gene participates, the Company also seeks to protect the newly identified
protein complex as well as the methods for identifying intervention
strategies. Each application typically contains multiple genes discovered for
a particular disease system.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the
Company's pending patent applications will result in issued patents, that the
Company will develop additional proprietary technologies that are patentable,
that any patents issued to the Company or its collaborative customers will
provide a basis for commercially viable products or will provide the Company
with any competitive advantages or will not be challenged or circumvented or
invalidated by third parties, or that the patents of others will not have an
adverse effect on the ability of the Company to do business. In addition,
patent law relating to the scope of claims in the technology fields in which
the Company operates is still evolving. The degree of future protection for
the Company's proprietary rights is uncertain. Furthermore, there can be no
assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
issued to the Company, design around the patented technologies developed by
the Company. In addition, the Company could incur substantial costs in
litigation if it is required to defend itself in patent suits brought by third
parties or if it initiates such suits.
There can be no assurance that patents for the Company's products or methods
will be obtained, or that, if issued, such patents will provide substantial
protection or be of commercial benefit to the Company. The issuance of a
patent is not conclusive as to its validity or enforceability, nor does it
provide the patent holder with freedom to operate without infringing the
patent rights of others. A patent could be challenged by litigation and, if
the outcome of such litigation were adverse to the patent holder, competitors
could be free to use the subject matter covered by the patent, or the patent
holder may license the technology to others in settlement of such litigation.
The invalidation of key patents owned by or licensed to the Company or non-
approval of pending patent applications could increase competition, and result
in a material adverse effect on the Company's business, financial condition
and results of operations. In addition, there can be no assurance that any
application or exploitation of the Company's technology will not infringe
patents or proprietary rights of others or that licenses that might be
required as a result of such infringement for the Company's processes or
products would be available on commercially reasonable terms, if at all.
The Company cannot predict whether its or its competitors' patent
applications will result in the issuance of valid patents. Litigation, which
could result in substantial cost to the Company, may also be necessary to
enforce the Company's patent and proprietary rights and/or to determine the
scope and validity of others' proprietary rights. The Company may participate
in interference proceedings that may in the future be declared by the USPTO to
determine priority of invention, which could result in substantial cost to the
Company. There can be no assurance that the outcome of any such litigation or
interference proceedings will be favorable to the Company, that the Company
will be able to obtain licenses to technology that it may require or that, if
obtainable, such technology can be licensed at a reasonable cost.
The public availability of expressed sequence tags ("ESTs") or other
sequence information prior to the time the Company applies for patent
protection on a corresponding full-length or partial gene could adversely
affect the Company's ability to obtain patent protection with respect to such
gene or gene sequences. In addition,
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certain other groups are attempting to rapidly identify and characterize genes
through the use of gene expression analysis and other technologies. To the
extent any patents issue to other parties on such partial or full-length genes
or uses for such genes, the risk increases that the sale of potential
products, including therapeutics, or processes developed by the Company or its
collaborators may give rise to claims of patent infringement. Others may have
filed and in the future are likely to file patent applications covering genes
or gene products that are similar or identical to those of the Company. No
assurance can be given that any such patent application will not have priority
over patent applications filed by the Company. Any legal action against the
Company or its collaborators claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition
to subjecting the Company to potential liability for damages, require the
Company or its collaborators to obtain a license in order to continue to
manufacture or market the affected products and processes or could enjoin the
Company from continuing to manufacture or market the affected products and
processes. There can be no assurance that the Company or its collaborators
would prevail in any such action or that any license required under any such
patent would be made available on commercially acceptable terms, if at all.
The Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's managerial and financial resources.
There is substantial uncertainty concerning the extent to which supportive
data will be required for issuance of patents for human therapeutics. If data
additional to that available to the Company is required, the Company's ability
to obtain patent protection could be delayed or otherwise adversely affected.
Although the USPTO issued new utility guidelines in July 1995 that address the
requirements for demonstrating utility for biotechnology inventions,
particularly for inventions relating to human therapeutics, there can be no
assurance that the USPTO examiners will follow such guidelines or that the
USPTO's position will not change with respect to what is required to establish
utility for gene sequences and products and methods based on such sequences.
Furthermore, the enactment of the legislation implementing the General
Agreement on Tariffs and Trade has resulted in certain changes to United
States patent laws that became effective on June 8, 1995. Most notably, the
term of patent protection for patent applications filed on or after June 8,
1995 is no longer a period of seventeen years from the date of grant. The new
term of United States patents will commence on the date of issuance and
terminate twenty years from the earliest filing date in the United States to
which priority is claimed for the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years,
a twenty-year term from the claimed United States priority date may result in
a substantially shortened term of patent protection, which may adversely
affect the Company's patent position. If this change results in a shorter
period of patent coverage, the Company's business could be adversely affected
to the extent that the duration and level of the royalties it is entitled to
receive from its strategic partners is based on the existence of a valid
patent.
The Company also relies upon trade secret protection for some of its
confidential and proprietary information that is not subject matter for which
patent protection is being sought. The Company believes that it has developed
proprietary technology, processes and information systems for use in gene
expression and biological pathway discovery, as well as in the identification
of molecular targets for pharmaceutical development, including proprietary
biological protocols, instrumentation, robotics and automation, software and
an integrated bioinformatics system. In addition, the Company has developed a
database of proprietary gene expression patterns and biological pathways which
it updates on an ongoing basis and which can be accessed over the Internet.
The Company has taken security measures to protect its proprietary
technologies, processes, information systems and data and continues to explore
ways to enhance such security. There can be no assurance, however, that such
measures will provide adequate protection for the Company's trade secrets or
other proprietary information. While the Company requires employees, academic
collaborators and consultants to enter into confidentiality and/or non-
disclosure agreements where appropriate, there can be no assurance that
proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its trade
secrets. See "Business--Intellectual Property."
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UNCERTAINTIES RELATING TO COMMERCIALIZATION RIGHTS
In the Company's research collaborations, the Company will seek to retain
commercialization rights for the development and marketing of certain
pharmaceutical, agricultural and diagnostic products or services. There can be
no assurance that the Company will be successful in retaining such rights and
no such pharmaceutical, agricultural or diagnostic products or services have
been developed to date by the Company. The Company may seek to commercialize
any such retained rights, as well as any products developed in its internal
development programs, directly or through collaborations with others. To date,
the Company has not initiated significant activities with respect to the
exploitation of any of its retained commercialization rights or any products
developed in its internal development programs. The value of these rights and
products, if any, will be largely derived from the Company's gene expression,
biological pathway and drug screening efforts, the success of which is also
uncertain. See "--Technological Uncertainty and Product Development Risk."
Even if the Company identifies and characterizes relevant disease-related
genes, biological pathways and/or drug candidates, the commercialization of
retained rights and products developed internally requires, in addition to
capital resources, technological, product development, manufacturing,
regulatory, marketing and sales resources that the Company does not currently
possess. There can be no assurance that the Company will be able to develop or
obtain such resources. To the extent that the Company is required to rely on
third parties for these resources, failure to establish and maintain such
relationships could have a material adverse effect on the Company's ability to
realize value from its retained commercialization rights and products
developed internally. If the Company seeks to commercialize retained rights
and products developed internally through joint ventures or research
collaborations, it may be required to relinquish material rights on terms that
may not be favorable to the Company. No agreements concerning any such
arrangements currently exist, and there can be no assurance that the Company
will be able to enter into any such agreements on acceptable terms, if at all,
or that the Company will be able to realize any value from any retained
commercialization rights and products developed internally. See "Business--
CuraGen's Strategy" and "--Research Collaborations."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Prior to marketing, any new drug developed by the Company or its
collaborative customers must undergo an extensive regulatory approval process
in the United States and other countries. This regulatory process, which
includes preclinical and clinical studies, as well as post-marketing
surveillance to establish a compound's safety and efficacy, can take many
years and require the expenditure of substantial resources. Data obtained from
such studies are susceptible to varying interpretations that could delay,
limit or prevent regulatory approval. The rate of completion of clinical
trials is dependent upon, among other factors, the enrollment of patients.
Patient accrual is a function of many factors, including the size of the
patient population, the proximity of patients to clinical sites, the
eligibility criteria for the study and the existence of competitive clinical
trials. Delays in planned patient enrollment in clinical trials may result in
increased costs, program delays or both, which could have a material adverse
effect on the Company. Delays or rejections may also be encountered based upon
changes in United States Food and Drug Administration ("FDA") policies for
drug approval during the period of product development and FDA regulatory
review of each submitted new drug application ("NDA") in the case of new
pharmaceutical agents, or product license application ("PLA") in the case of
biologics. Similar delays also may be encountered in the regulatory approval
of any diagnostic product and in obtaining regulatory approvals in foreign
countries. Under current guidelines, proposals to conduct clinical research
involving gene therapy at institutions supported by the National Institutes of
Health ("NIH") must be approved by the Recombinant DNA Advisory Committee and
the NIH. There can be no assurance that regulatory approval will be obtained
for any drugs or diagnostic products developed by the Company or its
collaborative customers. Furthermore, regulatory approval may impose
limitations on the indicated use of a drug. Because certain of the products
likely to result from the Company's disease research programs involve the
application of new technologies and may be based upon a new therapeutic
approach, such products may be subject to substantial additional review by
various government regulatory authorities and, as a result, regulatory
approvals may be obtained more slowly than for products using more
conventional technologies.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may have adverse effects on the Company's
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business, financial condition and results of operations, including withdrawal
of the product from the market. Violations of regulatory requirements at any
stage, including preclinical studies and clinical trials, the approval process
or post-approval, may result in various adverse consequences to the Company,
including the FDA's delay in approval or refusal to approve a product,
withdrawal of an approved product from the market or the imposition of
criminal penalties against the manufacturer and NDA or PLA holder. The Company
has not submitted an investigational new drug application ("IND") for any
product candidate, and no product candidate has been approved for
commercialization in the United States or elsewhere. The Company intends to
rely primarily on its collaborators to file INDs and generally direct the
regulatory approval process. No assurance can be given that the Company or any
of its collaborators will be able to conduct clinical testing or obtain the
necessary approvals from the FDA or other regulatory authorities for any
products. Failure to obtain required governmental approvals will delay or
preclude the Company's collaborators from marketing drugs or diagnostic
products developed by the Company or limit the commercial use of such products
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's research and development activities involve the controlled use
of hazardous materials and chemicals. The Company is subject to federal, state
and local laws and regulations governing the use, storage, handling and
disposal of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by federal, state and local
laws and regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
liability could exceed the resources of the Company. See "Business--Government
Regulation."
ATTRACTION AND RETENTION OF KEY EMPLOYEES
The Company is highly dependent on the principal members of its management
and scientific staff, including Dr. Jonathan Rothberg, its Chief Executive
Officer, President and Chairman of the Board, Dr. Gregory Went, its Executive
Vice President. The loss of services of any of these personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has not entered into employment agreements
with Dr. Rothberg, Dr. Went or any of the other principal members of its
management and scientific staff that bind any of them to a specific term of
employment. The Company maintains key person life insurance on the lives of
each of Drs. Rothberg and Went in the amount of $2,000,000. The Company's
future success also will depend in part on the continued services of its key
scientific and management personnel and its ability to attract, hire and
retain additional personnel. There is intense competition for such qualified
personnel and there can be no assurance that the Company will be able to
continue to attract and retain such personnel. 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 "Management."
EXPANSION OF OPERATIONS; MANAGEMENT OF GROWTH
The Company has recently experienced significant growth in the number of its
employees, the extent of its genomics efforts and database development, its
research programs and collaborations and the scope of its operations. This
growth has placed, and may continue to place, a significant strain on the
Company's management and operations. The Company's ability to manage
effectively such growth will depend upon its ability to strengthen its
management team and its ability to attract and retain skilled employees. The
Company's success will also depend on the ability of its officers and key
employees to continue to implement and improve its operational, management
information and financial control systems and to expand, train and manage its
work force. In addition, the Company must continue to take steps to provide
resources to supports its collaborative customers and subscribers as their
numbers increase. The Company's inability to manage growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Employees" and "--Facilities."
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DEPENDENCE UPON LICENSED TECHNOLOGIES; GOVERNMENT RIGHTS TO FUNDED
TECHNOLOGIES
Certain components of the Company's technologies have been acquired or
licensed from third parties. Changes in such third party agreements, or
termination thereof, could materially adversely affect the Company's research
and development activities. There can be no assurance that the Company will be
able to acquire from third parties or develop new technologies, either alone
or with others. Failure to license or otherwise acquire necessary technologies
could have a material adverse effect on the Company's business, financial
condition and results of operation. In addition, certain of such licenses
impose an obligation on the Company to market the licensed technology to third
parties. A breach by the Company of any such license or other failure by the
Company to maintain rights to such technology could have a material adverse
effect on the Company's business, financial condition and results of
operation.
Under the Company's government grants and agreements, the government has a
statutory right to practice or have practiced and, under certain circumstances
(including inaction on the part of the Company or its licensees to achieve
practical application of the invention or a need to alleviate public health or
safety concerns not reasonably satisfied by the Company or its licensees), to
grant to other parties licenses under, any inventions first reduced to
practice under the government grants and agreements.
DEPENDENCE ON ACADEMIC COLLABORATORS AND SCIENTIFIC ADVISORS
The Company has relationships with collaborators and consultants at academic
and other institutions who conduct research at the Company's request. Such
collaborators and consultants are not employees of the Company. Substantially
all of the Company's collaborators and consultants are employed by employers
other than the Company and may have commitments to, or consulting or advisory
contracts with, other entities that may limit their availability to the
Company. As a result, the Company has limited control over their activities
and, except as otherwise required by its collaboration and consulting
agreements, can expect only limited amounts of their time to be dedicated to
the Company's activities. The Company's ability to discover genes and
biological pathways involved in human disease and commercialize products based
on those discoveries may depend in part on continued collaborations with
researchers at academic and other institutions. There can be no assurance that
the Company will be able to negotiate additional acceptable collaborations
with collaborators or consultants at academic and other institutions or that
its existing collaborations will be successful.
The Company's academic collaborators, consultants and scientific advisors
may have relationships with other commercial entities, some of which could
compete with the Company. The academic collaborators, consultants and
scientific advisors sign agreements which provide for confidentiality of the
Company's proprietary information and of the results of studies. There can be
no assurance that the Company will be able to maintain the confidentiality of
its technology and other confidential information in connection with every
academic collaboration or advisory arrangement, and any unauthorized
dissemination of the Company's confidential information could have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, there can be no assurance that any such collaborator,
consultant or advisor may not enter into an employment or consulting
arrangement with a competitor of the Company. See "Business--CuraGen Internal
Programs."
LENGTHY SALES CYCLE
The ability of the Company to obtain collaborators and subscribers for its
products and services depends in significant part upon the perception that
such products and services can help accelerate drug discovery and development
efforts. The sales cycle is typically lengthy due to the education effort that
is required as well as the need to effectively sell the benefits of the
Company's products and services to a variety of constituencies within
potential collaborators and subscribers, including research and development
personnel and key management. In addition, each subscription and collaboration
will involve the negotiation of agreements containing terms that may be unique
to each subscriber or collaborator. The Company may expend substantial funds
and management effort with no assurance that a database subscription or a
collaboration will result.
16
<PAGE>
VARIATION IN QUARTERLY OPERATING RESULTS
The Company's results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. The Company expects that losses will fluctuate from quarter to
quarter and the such fluctuations may be substantial. Quarterly operating
results can fluctuate as a result of a number of factors, including the
commencement, delay, cancellation or completion of contracts; the timing of
option, license and milestone payments under the Company's agreements; the mix
of services provided; the timing of start-up expenses for new services and
facilities; the timing and integration of acquisitions and changes in
regulations related to the products and services of the Company. The Company
believes that quarterly comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of
future performance. In addition, fluctuations in quarterly results could
affect the market price of the Common Stock in a manner unrelated to the
longer term operating performance of the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH COMMERCIALIZATION OF PROPRIETARY PRODUCTS
Although the Company is not currently developing any potential
pharmaceutical products, should the Company choose to do so, any such products
will require significant research and development and preclinical testing, and
will require extensive clinical testing prior to submission of any regulatory
application for commercial use. Such activities, if undertaken without the
collaboration of others, would require the expenditure of significant funds.
Such potential pharmaceutical products will be subject to the risks of failure
inherent in the development of pharmaceutical products based on new
technologies. These risks include the possibilities that such potential
pharmaceutical products will be found to be unsafe or ineffective or otherwise
fail to receive necessary regulatory clearances; that the products, if safe
and effective, will be difficult to manufacture on a large scale or
uneconomical to market; that proprietary rights of third parties will preclude
the Company or its partners from marketing such products; or that third
parties will market superior or equivalent products. As a result, there can be
no assurance that the Company's research and development activities will
result in any commercially viable products. Clinical trials or marketing of
any such potential pharmaceutical products may expose the Company to liability
claims from the use of such pharmaceutical products. There can be no assurance
that the Company will be able to obtain product liability insurance or, if
obtained, that sufficient coverage can be acquired at a reasonable cost. In
addition, should the Company choose to develop pharmaceutical products
internally, it will have to make significant investments in pharmaceutical
product development, marketing, sales and regulatory compliance resources, and
it will have to establish or contract for the manufacture of products under
the Good Manufacturing Practices of the FDA. There can be no assurance that
the Company will be able to develop or commercialize successfully any
potential pharmaceutical products. Any potential products developed by the
Company's licensees will be subject to the same risks. See "Business--
Government Regulation."
UNCERTAINTY OF PHARMACEUTICAL PRICING, REIMBURSEMENT AND RELATED MATTERS
The Company's business, financial condition and results of operations may be
materially adversely affected by the continuing efforts of government and
third party payors to contain or reduce the costs of health care through
various means. In certain foreign markets, pricing and profitability of
prescription pharmaceuticals are subject to government control. In the United
States, the Company expects that there will continue to be a number of federal
and state proposals to implement similar government control. In addition,
increasing emphasis on managed care in the United States will continue to put
pressure on the pricing of pharmaceutical and diagnostic products. Cost
control initiatives could decrease the price that the Company or any of its
subscribers and collaborators receives for any products in the future and may
have a material adverse effect on the Company's business, financial condition
and results of operations. Further, to the extent that cost control
initiatives have a material adverse effect on the Company's subscribers or
collaborators, the Company's ability to commercialize its products and to
realize royalties could be adversely affected.
The ability of the Company and any subscriber or collaborative customer to
commercialize pharmaceutical or diagnostic products may depend in part on the
extent to which reimbursement for the products will be
17
<PAGE>
available from government and health administration authorities, private
health insurers and other third party payors. Significant uncertainty exists
as to the reimbursement status of newly approved health care products. Third
party payors, including Medicare, increasingly are challenging the prices
charged for medical products and services. Government and other third party
payors are increasingly attempting to contain health care costs by limiting
both coverage and the level of reimbursement for new therapeutic products and
by refusing in some cases to provide coverage for uses of approved products
for disease indications for which the FDA has not granted labeling approval.
There can be no assurance that any third party insurance coverage will be
available to patients for any products discovered and developed by the Company
or its subscribers or collaborators. If adequate coverage and reimbursement
levels are not provided by government and other third party payors for the
Company's products, the market acceptance of these products may be reduced.
Any such reduction may have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.
RELIANCE ON UNITED STATES GOVERNMENT FUNDING
To date, the Company's primary source of revenue has been payments under
United States government grants. The government's obligation to make payments
under these grants is subject to annual appropriation by the United States
Congress. It is possible that Congress or the government agencies that
administer the Company's grants will determine to curtail or terminate these
programs. As a result of the Company's existing capital resources and the
expected proceeds of this offering, the Company does not anticipate relying to
a significant extent on United States government grants as a future source of
revenue. However, if the Company's strategy of pursuing strategic
collaborations and database subscriptions is unsuccessful, the failure of
Congress or governmental agencies to fund the Company's grants could have a
material adverse effect on the Company's business, financial condition and
results of operations.
CONTROL BY EXISTING STOCKHOLDERS
Following completion of this offering, the Company's directors, executive
officers and principal stockholders and certain of their affiliates will
beneficially own approximately % of the Common Stock. Accordingly, they
collectively will have the ability to determine the election of all of the
Company's directors and to determine the outcome of most corporate actions
requiring stockholder approval, including the merger of the Company with or
into another company, a sale of substantially all of the Company's assets and
amendments to the Company's Certificate of Incorporation. See "Principal
Stockholders."
POTENTIAL ADVERSE EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors is authorized to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the Company's
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue shares of Preferred Stock, such issuance, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. In addition, such Preferred Stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Restated Certificate provides for a classified Board of Directors
and members of the Board of Directors may be removed only for cause upon the
affirmative vote of holders of at least a majority of the shares of capital
stock of the Company entitled to vote. Furthermore, the Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law (the "DGCL"), which prohibits the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which such person first becomes an
"interested stockholder," unless the business combination is approved in a
prescribed manner. The application of these provisions could have the effect
of delaying or preventing a change of control of the Company. Certain other
provisions of the Restated Certificate could also have the effect of delaying
or preventing changes of control or management of the
18
<PAGE>
Company, which could adversely affect the market price of the Company's Common
Stock. See "Description of Capital Stock."
NO PRIOR TRADING MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock and there can be no assurance that an active public market for
the Common Stock 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
future market prices. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The trading price
of the Company's Common Stock could be subject to significant fluctuations in
response to announcements of results of research activities, technological
innovations or new commercial products by the Company or its competitors,
changes in government regulations, regulatory actions, changes in patent laws,
developments concerning proprietary rights, quarterly variations in operating
results, litigation or other events. The stock market has from time to time
experienced extreme price and volume fluctuations that have affected
particularly the market prices for biotechnology companies and that often have
been unrelated to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. See "Underwriters."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICE
Sales of Common Stock (including Common Stock issued upon the exercise of
outstanding options and warrants) in the public market after this offering
could materially adversely affect the market price of the Common Stock. These
sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company's management deems acceptable, or at all. Upon the completion of
this offering, the Company will have shares of Common Stock outstanding,
assuming no exercise of options or warrants after September 30, 1997 and
assuming no exercise of the Underwriters' overallotment option. Of these
outstanding shares of Common Stock, the shares sold in this offering will
be freely tradeable, without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), unless purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act. The
remaining 8,871,987 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act and were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. These
shares may be resold in the public market only if registered or pursuant to an
exemption from registration, such as Rule 144 under the Securities Act. All
officers, directors and certain holders of Common Stock owning, in the
aggregate, shares of Common Stock have agreed, pursuant to certain lock-up
agreements, that they will not offer, sell, contract to sell, grant any option
to sell, pledge, hypothecate or otherwise dispose of, directly or indirectly,
any shares of Common Stock owned by them, or that could be purchased by them
through the exercise of options or warrants to purchase Common Stock of the
Company, for a period of 180 days after the date of this Prospectus without
the prior written consent of Morgan Stanley & Co. Incorporated. Upon
expiration of the lock-up agreements, all shares of Common Stock currently
outstanding will be immediately eligible for resale, subject to the
requirements of Rule 144. Immediately following the completion of this
offering, holders of [3,418,635] shares of Common Stock and warrants to
purchase 388,005 shares of Common Stock will be entitled to certain
registration rights. The Company will also have the obligation to promptly
register for resale on Form S-3 any shares issued to Biogen and Genentech
pursuant to the conversion of their loan facilities. However, pursuant to the
lock-up agreements, no sale of such shares will be permitted for 180 days
after the date of this Prospectus without the prior written consent of Morgan
Stanley & Co. Incorporated. See "Shares Eligible for Future Sale" and
"Description of Capital Stock--Registration Rights." If such holders, by
exercising their demand rights, cause a large number of shares to be
registered and sold on the public market, such sales could have a material
adverse effect on the market price of the Company's Common Stock. The Company
intends to file a registration statement covering the shares of Common
Stock issued or reserved for issuance under its stock plans and, upon filing,
any shares subsequently issued under such plans will be eligible for sale in
the
19
<PAGE>
public market, subject to compliance with Rule 144 in the case of affiliates
of the Company. The Company is unable to predict the effect that sales may
have on the then prevailing market price of the Common Stock. See
"Management--Stock Option Plans," "Description of Capital Stock" and "Shares
Eligible for Future Sale."
DILUTION
Purchasers in this offering will experience immediate and substantial
dilution in the net tangible book value of the Common Stock from the initial
public offering price. Additional dilution is likely to occur upon exercise of
options and warrants granted by the Company. See "Dilution." The Company's
collaboration agreements with both Biogen and Genentech are structured such
that amounts borrowed by the Company from Biogen and Genentech are, at the
Company's option, convertible into shares of Common Stock and Non-Voting
Common Stock, respectively, based upon a formula that approximates the
prevailing market price of the Common Stock at the time of such conversion.
The Non-Voting Common Stock is convertible into Common Stock (i) at any time,
at Genentech's option, or (ii) upon the sale or the transfer of the Non-Voting
Common Stock to a non-affiliated third party. If the Company borrows money
under these agreements and converts or is forced to convert such amounts into
shares of Common Stock or Non-Voting Common Stock at a time when the market
price of the Common Stock is lower than the initial public offering price, the
Company's stockholders could experience substantial dilution. See "Business--
Research Collaborations."
ABSENCE OF DIVIDENDS
The Company has never paid dividends on its capital stock and does not
intend to pay any cash dividends on its Common Stock for the foreseeable
future. See "Dividend Policy."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby are estimated to be $ million
($ million if the Underwriters' overallotment option is exercised in full),
assuming an initial public offering price of $ per share (the midpoint of
the range set forth on the cover page of this Prospectus) and after deducting
the underwriting discounts and commissions and estimated offering expenses
payable by the Company.
The Company expects to use approximately $10 million of the net proceeds for
capital expenditures such as the expansion of research facilities, as well as
the purchase of additional laboratory automation equipment, production
equipment and computer equipment; and $1,750,000 (plus dividends of
approximately $200,000) to redeem, upon the closing of this offering, all of
the 175,000 outstanding shares of the Series B Preferred Stock. See
"Description of Capital Stock--Preferred Stock." The Company expects to use
the balance of the net proceeds for research and development, including
internal discovery programs, the further development of its GeneCalling,
PathCalling and HitCalling databases and working capital and general corporate
purposes. The amounts actually expended for each purpose, other than the
amount expended for the redemption of the Series B Preferred Stock, may vary
significantly depending upon numerous factors, including progress of the
Company's internal programs and research and development projects, the number
and breadth of these programs, achievement of milestones under collaborative
arrangements, the ability of the Company to establish and maintain research
collaborations and database subscriptions, and the progress of the development
efforts of the Company's collaborators and subscribers. These factors also
include the level of the Company's activities relating to commercialization of
rights it has retained in its collaborative arrangements, competing
technological and market developments, the costs involved in the defense,
prosecution and enforcement of patent claims and other intellectual property
rights and the costs and timing of regulatory approvals.
From time to time in the ordinary course of business, the Company evaluates
the acquisition of products, businesses and technologies that complement the
Company's business, for which a portion of the net proceeds may be used.
Currently, however, the Company does not have any understandings, commitments
or agreements with respect to any such acquisitions.
Pending use of the net proceeds for the above purposes, the Company intends
to invest such funds in short- term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
The Company has never paid dividends on its capital stock and does not plan
to pay any cash dividends on its Common Stock for the foreseeable future. The
Company currently intends to retain earnings, if any, to finance the
development of its business.
21
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1997, the actual
capitalization of the Company and the capitalization of the Company as
adjusted to reflect (i) the redemption of the 175,000 outstanding shares of
Series B Preferred Stock, (ii) the filing of the Restated Certificate, (iii)
the termination of certain redemption rights relating to 394,031 shares of
Redeemable Common Stock, (iv) the sale by the Company of the Biogen Shares,
the Genentech Shares and the University of Florida Shares, based upon an
assumed initial public offering price of $ , and application of the net
proceeds thereof, and (v) the sale by the Company of shares of Common
Stock offered hereby, based upon an assumed initial public offering price of
$ per share and after deducting underwriting discounts and commissions and
estimated offering expenses, and application of the estimated net proceeds
thereof. This table should be read in conjunction with the Company's audited
financial statements, including the notes thereto, which appear elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Obligations under capital leases, including current
portion.............................................. $ 4,315,808 $4,315,808
Other long-term liabilities........................... 194,869 194,869
----------- ----------
4,510,677 4,510,677
----------- ----------
Redeemable Common Stock(1)............................ 5,319,419 --
----------- ----------
Stockholders' equity(1)(2):
Preferred Stock, $0.01 par value; 7,500,000 shares
authorized, 175,000 shares issued and outstanding
actual; 5,000,000 shares authorized, no shares
issued and outstanding as adjusted................. 1,442,090
Common Stock, $0.01 par value; 25,000,000 shares
authorized, 8,477,956 shares issued and outstanding
actual; 50,000,000 shares authorized, shares
issued and outstanding as adjusted................. 84,779
Non-Voting Common Stock, $0.01 par value; no shares
authorized or issued and outstanding actual;
3,000,000 shares authorized, no shares issued and
outstanding as adjusted............................ 0
Additional paid-in capital.......................... 20,509,028
Accumulated deficit................................. (6,975,544)
----------- ----------
Total stockholders' equity......................... 15,060,353
----------- ----------
Total capitalization.............................. $24,890,449 $
=========== ==========
</TABLE>
- --------
(1) See Notes 1, 4 and 6 of Notes to Financial Statements.
(2) Excludes 1,598,884 and 1,583,866 shares of Common Stock reserved for
issuance upon the exercise of stock options and warrants, respectively,
outstanding on September 30, 1997, at weighted average exercise prices of
$3.75 and $4.12 per share, respectively. Also excludes an aggregate of
65,000 shares of Common Stock issuable upon the exercise of stock options
granted to non-employee directors after September 30, 1997, at the initial
public offering price.
22
<PAGE>
DILUTION
As of September 30, 1997, the pro forma net tangible book value per share of
Common Stock, assuming the redemption of the Series B Preferred Stock and the
termination of certain redemption rights relating to 394,031 shares of
Redeemable Common Stock, was $2.08. After giving effect to the sale by the
Company of (i) the Biogen Shares, the Genentech Shares and the University of
Florida Shares, based upon an assumed initial public offering price of $ ,
and application of the net proceeds thereof, and (ii) shares of Common
Stock offered hereby, based upon an assumed initial public offering price of $
per share and after deducting underwriting discounts and commissions and
estimated offering expenses, the pro forma net tangible book value of the
Company at September 30, 1997 would have been $ or $ per share,
representing an immediate $ per share dilution of new investors purchasing
shares in this offering. The following table illustrates such per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $
----
Pro forma net tangible book value per share before this
offering(1)................................................. $ 2.08
Increase per share attributable to new investors.............
-------
Pro forma net tangible book value per share after this
offering......................................................
----
Dilution per share to new investors(2)......................... $
====
</TABLE>
- --------
(1) Pro forma net tangible book value per share of Common Stock is determined
by dividing the Company's pro forma net tangible book value at September
30, 1997 of $18,420,850, by the pro forma number of shares of Common Stock
outstanding, in each case assuming the redemption of the Series B
Preferred Stock and the termination of certain redemption rights relating
to 394,031 shares of Redeemable Common Stock.
(2) Dilution per share to new investors is determined by subtracting pro forma
net tangible book value per share after this offering from the assumed
initial public offering price per share.
The following table sets forth on a pro forma basis as of September 30,
1997, assuming the redemption of the Series B Preferred Stock and the
termination of certain redemption rights relating to 394,031 shares of
Redeemable Common Stock, the number of shares of Common Stock purchased from
the Company, the total consideration paid and the average price per share paid
by existing stockholders and to be paid by new investors, based on an assumed
initial public offering price of $ per share and before deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
----------------- ------------------- -------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 8,871,987 % $24,687,635 % $2.78
New investors...............
--------- --- ----------- ---
Total..................... 100% $ 100%
========= === =========== ===
</TABLE>
The foregoing tables assume no exercise of any outstanding stock options or
warrants to purchase Common Stock. At September 30, 1997, there were
outstanding options and warrants to purchase 1,598,884 shares and 1,583,866
shares of Common Stock, respectively, at weighted average exercise prices of
$3.75 and $4.12 per share, respectively. The foregoing tables also exclude an
aggregate of 65,000 shares of Common Stock issuable upon the exercise of stock
options granted to non-employee directors after September 30, 1997, at the
initial pubic offering price. To the extent such options and warrants are
exercised, there will be further dilution to the new investors. See
"Capitalization," "Management--Stock Option Plans," "Description of Capital
Stock" and Note 6 of Notes to Financial Statements.
23
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for each of the three years in
the period ended December 31, 1996 are derived from the Company's balance
sheets as of December 31, 1995 and 1996 and the related audited statements of
operations, of stockholders' equity (deficiency) and of cash flows for the
three years ended December 31, 1994, 1995 and 1996 and notes thereto, which
appear elsewhere in this Prospectus, as audited by Deloitte & Touche LLP,
independent auditors. The selected financial data as of September 30, 1997 and
for the nine months ended September 30, 1996 and 1997 and notes thereto, which
appear elsewhere in this Prospectus, have been derived from the Company's
unaudited financial statements and include, in the opinion of management, all
normal recurring adjustments necessary for a fair presentation of the data for
such periods. The operating results for the nine months ended September 30,
1997 are not necessarily indicative of the results that may be expected for
the full year ending December 31, 1997. The selected financial data for the
years ended December 31, 1992 and 1993 have been derived from the Company's
unaudited financial statements, which have not been included in this
Prospectus. The selected financial data set forth below should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Company's audited financial statements and related notes appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996(1) 1996 1997(2)
-------- --------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Grant revenue.......... -- $ 21,903 $ 257,536 $1,581,175 $4,047,947 $2,901,322 $ 2,558,167
Collaboration revenue.. -- -- -- -- 375,000 200,000 1,613,583
-------- --------- ---------- ---------- ---------- ---------- -----------
Total revenue.......... -- 21,903 257,536 1,581,175 4,422,947 3,101,322 4,171,750
-------- --------- ---------- ---------- ---------- ---------- -----------
Operating expenses:
Research and
development........... -- 309,351 647,640 1,466,375 3,516,035 2,192,740 6,431,139
General and
administrative........ $ 12,281 250,729 525,671 961,815 1,140,325 666,803 2,071,435
-------- --------- ---------- ---------- ---------- ---------- -----------
Total operating
expenses.............. 12,281 560,080 1,173,311 2,428,190 4,656,360 2,859,543 8,502,574
-------- --------- ---------- ---------- ---------- ---------- -----------
Income (loss) from
operations............. (12,281) (538,177) (915,775) (847,015) (233,413) 241,779 (4,330,824)
-------- --------- ---------- ---------- ---------- ---------- -----------
Other income (expenses):
Interest income........ 366 2,786 20,544 12,306 20,848 2,587 525,021
Interest expense....... -- (22,484) (60,798) (106,035) (183,594) (121,175) (307,042)
-------- --------- ---------- ---------- ---------- ---------- -----------
Total other income
(expenses)............ 366 (19,698) (40,254) (93,729) (162,746) (118,588) 217,979
-------- --------- ---------- ---------- ---------- ---------- -----------
Net income (loss)....... (11,915) (557,875) (956,029) (940,744) (396,159) 123,191 (4,112,845)
Preferred dividends..... -- -- -- -- (17,106) -- (51,318)
-------- --------- ---------- ---------- ---------- ---------- -----------
Net income (loss)
attributable to common
stockholders........... ($11,915) ($557,875) ($956,029) ($940,744) ($413,265) $ 123,191 ($4,164,163)
======== ========= ========== ========== ========== ========== ===========
Net income (loss) per
share attributable to
common stockholders....
======== ========= ========== ========== ========== ========== ===========
Weighted average number
of shares of common
stock outstanding......
======== ========= ========== ========== ========== ========== ===========
Pro forma net loss per
share attributable to
common stockholders....
========== ===========
Pro forma weighted
average number of
shares of common stock
outstanding............
========== ===========
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
-------- --------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 14,579 $ 368,458 $ 276,890 $ 9,129 $3,298,642 $1,667,142 $20,781,115
Working capital
(deficiency)........... (14,421) 231,511 285,386 (625,015) 2,474,038 1,432,318 18,477,187
Total assets............ 18,108 722,898 795,161 1,006,816 5,653,391 3,711,396 26,944,446
Total long-term
liabilities............ -- 74,583 622,591 897,691 1,482,601 1,225,629 3,398,060
Redeemable Common
Stock.................. -- -- 731,250 914,063 1,142,579 1,083,894 5,319,419
Series B Preferred
Stock.................. -- -- -- -- 1,390,772 1,373,666 1,442,090
Accumulated deficit..... (11,892) (569,767) (1,525,796) (2,466,540) (2,862,699) (2,343,349) (6,975,544)
Stockholders' equity
(deficiency)........... (10,892) 528,233 (793,769) (1,772,107) 1,401,536 112,032 15,060,353
</TABLE>
- --------
(1) During the year ended December 31, 1996, the Company completed its
development stage activities with the signing of its first collaborative
research agreement and commenced its planned principal operations.
(2) For an explanation of the calculation of weighted average number of common
shares outstanding and pro forma weighted average number of common shares
outstanding, see Note 1 of Notes to Financial Statements.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under
the caption "Risk Factors," which could cause actual results to differ
materially from those indicated by such forward-looking statements.
OVERVIEW
The Company is a biotechnology company focusing on the application of
genomics to the systematic discovery of genes, biological pathways and drug
candidates in order to accelerate the discovery and development of the next
generation of therapeutic, agricultural and diagnostic products. The Company
was incorporated in November 1991 and, until March 1993, was engaged primarily
in organizational activities, research and development of the Company's
technology, grant preparation and obtaining financing. The Company has
incurred losses since inception, principally as a result of research and
development and general and administrative expenses in support of its
operations. As of September 30, 1997, CuraGen had an accumulated deficit of
$6,975,544. The Company anticipates incurring additional losses over at least
the next several years as it expands its internal and collaborative gene
discovery efforts, continues development of its technology and expands its
operations. The Company expects that losses will fluctuate from quarter to
quarter and that such fluctuations may be substantial.
In June 1996, the Company entered into a pilot collaborative agreement with
Genentech to evaluate the application of CuraGen's gene expression technology
to Genentech, pursuant to which the Company recorded $200,000. Based on its
successful pilot, in December 1996, the Company commenced an additional
collaborative agreement to provide research services to Genentech during 1997,
for a research fee of $667,000. For the nine months ended September 30, 1997,
the Company recorded revenues from Genentech of $500,250, or 12% of total
revenues. In connection with the execution of the pilot agreement, Genentech
made an equity investment in the Company of $1,800,000. See "Business--
Research Collaborations."
Effective June 1, 1997, the Company entered into a collaborative research
and development agreement with Pioneer Hi-Bred, whereby the Company is to
perform agricultural research that will be funded by Pioneer Hi-Bred. In
conjunction with the execution of this agreement, Pioneer Hi-Bred made an
equity investment of $7,500,000. In addition, Pioneer Hi-Bred agreed to pay
the Company a minimum annual fee of $2,500,000 based on an established number
of CuraGen employees devoted to Pioneer Hi-Bred research, with specified
funding increases after three years in order to avoid CuraGen's right to
terminate the agreement. For the nine months ended September 30, 1997, the
Company recorded revenues from Pioneer Hi-Bred of $833,333, or 20% of total
revenues. The agreement also includes provisions for payments based on
potential milestones, licensing of discoveries and royalties. See "Business--
Research Collaborations."
In October 1997, CuraGen and Biogen entered into a research collaboration
and database subscription arrangement to discover novel genes and
therapeutics. Under the terms of the agreement, Biogen agreed to invest $5
million in CuraGen to purchase the Biogen Shares at the initial public
offering price and to provide a $10 million interest-bearing loan facility. At
any time during the term of the agreement, the loan is convertible at
CuraGen's option into Common Stock based upon a formula that approximates its
prevailing market price. Biogen will additionally provide payments over five
years to support a research collaboration to generate project-specific
GeneCalling and PathCalling databases and for database subscription fees.
Payments could reach $18.5 million if the research collaboration and database
subscription arrangement both continue for the full five-year term. The
agreement also provides for payments based on exclusive licenses for
discoveries, potential milestones and royalties. See "Business--Research
Collaborations" and "Business--Database Subscriptions."
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In November 1997, CuraGen and Genentech entered into a research
collaboration and database subscription arrangement to discover novel genes
and therapeutics. Under the terms of the agreement, Genentech has agreed to
purchase $5 million of Common Stock in a private placement at the initial
public offering price. Genentech has also agreed to provide CuraGen with an
interest-bearing loan facility, which could in the aggregate reach $26 million
if the research program continues beyond its initial three year term. The loan
facility contains annual borrowing limits and the outstanding principal and
interest under the loan facility are payable five years from the date of the
agreement. Subject to certain limitations, during the term of the agreement,
and after the end of the first year, the drawn-down portion of the loan is
convertible at CuraGen's option into Non-Voting Common Stock based upon a
formula that approximates the prevailing market price of the Company's Common
Stock. If issued, the Non-Voting Common Stock is convertible into Common Stock
(i) at any time, at Genentech's option, or (ii) upon the sale or transfer of
the Non-Voting Common Stock to a non-affiliated third party. Genentech will
additionally provide funding of up to $24 million over five years if the
database subscription arrangement is not terminated and the Genentech
Agreement is extended by Genentech beyond the five-year term of the research
collaboration. The agreement also provides for payments based on licenses for
discoveries, potential milestones and royalties. See "Business--Research
Collaborations" and "Business--Database Subscriptions."
In November 1997, CuraGen and the University of Florida Research Foundation,
Inc. entered into a stock purchase agreement. Under the terms of the
agreement, the University of Florida Research Foundation, Inc. agreed to
invest $1 million in CuraGen to purchase the University of Florida Shares at
the initial public offering price. The Company leases laboratory space from
the University of Florida Research Foundation, Inc.
The Company's revenue to date has primarily consisted of government grants
and ongoing payments for research and development under collaborative
agreements. Grant revenue is recognized as the related costs qualifying under
the terms of the grants are incurred. Revenue on collaborative agreements is
recognized based upon work performed or upon the attainment of certain
benchmarks specified in the related agreement. Payments under collaborative
agreements that are received in advance, and are in excess of amounts earned,
are classified as deferred revenue.
The Company anticipates that collaborations will become an increasingly
important element of its business strategy and future revenues. The Company
also expects that government grant revenues will decrease, both in actual
dollar amounts and as a percentage of revenues, during the remainder of 1997
and in future years. Therefore, the loss of revenues from existing
collaborations would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's ability to
generate revenue growth and become profitable is dependent, in part, on the
ability of the Company to enter into additional collaborative arrangements,
and on the ability of the Company and its collaborative partners to
successfully commercialize products incorporating, or based on, the Company's
technologies. There can be no assurance that the Company will be able to
maintain or expand existing collaborations, enter into future collaborations
to develop applications of its GeneCalling, PathCalling or HitCalling
technologies on terms satisfactory to the Company, if at all, or that any such
collaborative arrangements will be successful.
Failure of the Company to successfully develop and market additional
products over the next several years, or to realize existing product revenues,
would have a material adverse effect on the Company's business, financial
condition and results of operations. Royalties or other revenue generated from
commercial sales of products developed by using the Company's technologies are
not expected for at least several years, if at all.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenue for the nine months ended September 30, 1997 of $4,171,750
represented an increase of $1,070,428, or 35%, compared to $3,101,322 for the
first nine months of 1996. The increase was largely due to additional
collaboration revenue of $1,413,583 recorded in 1997, primarily under the
Company's arrangements with Pioneer Hi-Bred and Genentech. The collaboration
revenue increase was offset by a decrease in grant
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revenue during the first nine months of 1997 of $343,155, as the Company
changed its revenue focus from federal grants to research and development
collaborations. Interest income increased from $2,587 in the first nine months
of 1996 to $525,021 in the same period for 1997, primarily as a result of
interest received on funds from sales of the Company's preferred stock and
warrants, and from research collaborations.
Research and development expenses for the nine months ended September 30,
1997 were $6,431,139, an increase of $4,238,399 or 193%, compared to the same
period in 1996. The increase was primarily attributable to increased personnel
expenses as the Company hired additional research and development personnel,
increased purchases of laboratory supplies, increased equipment depreciation
and increased facilities expenses in connection with the expansion of the
Company's internal and collaborative research efforts. The Company expects
research and development expenses to increase as additional personnel are hired
and research and development facilities are expanded to accommodate the
Company's strategic collaborations and internal research.
General and administrative expenses for the first nine months of 1997, were
$2,071,435, an increase of $1,404,632 or 211%, compared to $666,803 for the
first nine months of 1996. The increase was primarily attributable to the
hiring of additional personnel, the expansion of facilities and the incurrence
of related depreciation expense as the Company increased its executive and
administrative staffing in anticipation of future revenue growth. Over the next
several years, the Company anticipates that increases in general and
administrative expenses will become more proportionate to percentage increases
in revenue and research and development expenses. Interest expense for the nine
months ended September 30, 1997 of $307,042 increased $185,867 or 153% compared
to $121,175 for the same period in 1996. This increase was due to additional
capital lease obligations during the nine months ended September 30, 1997, to
support research and development activities, primarily through equipment
acquisitions.
As of September 30, 1997, the Company had accumulated losses of $6,975,544
since inception and, therefore, has not paid any Federal income taxes.
Realization of deferred tax assets is dependent on future earnings, if any, the
timing and amount of which are uncertain. Accordingly, valuation allowances in
amounts equal to the deferred income tax assets have been established to
reflect these uncertainties in all periods presented. See Note 7 of Notes to
Financial Statements.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue for the year ended December 31, 1996 was $4,422,947, an increase of
$2,841,772 or 180%, over 1995. The increase was primarily due to $2,466,772 of
increased grant revenue as the Company achieved certain research objectives
under certain federal grants, and $375,000 of collaboration revenue recorded in
1996 of which $200,000 was associated with the Genentech arrangement. Interest
income increased by $8,542 to $20,848, or 69%, in 1996, from $12,306 in 1995,
primarily as a result of interest received on funds received from private
placements of the Company's preferred stock and warrants and from research
collaborations.
Research and development expenses for the year ended December 31, 1996, were
$3,516,035, an increase of $2,049,660, or 140%, over 1995. The increase was
primarily attributable to increased personnel expenses as the Company hired
additional research and development personnel, increased purchases of
laboratory supplies, increased equipment depreciation and increased facilities
expenses in connection with the expansion of the Company's internal and
collaborative research efforts.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Revenue for the year ended December 31, 1995 was $1,581,175, an increase of
$1,323,639 or 514%, compared to $257,536 in 1994. The increase was due entirely
to additional grant revenue as the Company was awarded several federal grants.
Interest income decreased to $12,306 in 1995, from $20,544 in 1994, as initial
funds received from private placements of securities were expended in support
of the Company's growth.
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Research and development expenses totaled $1,466,375 for the year ended
December 31, 1995, an increase of $818,735, or 126% compared to $647,640 for
1994. The increase was primarily attributable to increased personnel expenses
as the Company hired additional research and development personnel, increased
purchases of laboratory supplies, increased equipment depreciation and
increased facilities expenses in connection with the expansion of the
Company's internal research efforts.
General and administrative expenses for 1995 were $961,815, an increase of
$436,144 or 83%, compared to $525,671 for 1994, in support of the Company's
growth, grant revenue and research and development. Interest expense for the
year ended December 31, 1995 of $106,035 increased $45,237 or 74% compared to
$60,798 for 1994, as capital lease obligations increased to support additional
research and development activities. The remainder of the Company's interest
expense in 1995 and 1994 was the result of a note payable to a Connecticut
state agency, borrowed in February 1994, that remained outstanding through
December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $20,781,115 at September 30,
1997. The Company has financed its operations since inception primarily
through private placements of equity securities, government grants,
collaborative research and development agreements and capital leases. As of
September 30, 1997, the Company had recognized $10,455,311 of cumulative
sponsored research revenues from government grants and collaborative research
agreements. The sale by the Company of equity securities has provided the
Company with gross proceeds of approximately $26,500,000, including $7,500,000
from Pioneer Hi-Bred, $1,800,000 from Genentech and $1,000,000 from Biogen. To
date inflation has not had a material effect on the Company's business.
The Company's investing activities, other than purchases and sales of cash
equivalent securities, have consisted entirely of acquisitions of equipment
and expenditures for leasehold improvements. At September 30, 1997, the
Company's gross investment in equipment and leasehold improvements since
inception was $6,362,717. At September 30, 1997 equipment with a gross book
value of $5,199,783 secures the Company's equipment financing facility. The
Company had no material commitments for capital expenditures at September 30,
1997. However, the Company anticipates that the net proceeds from this
offering and its other sources of capital will enable it to increase capital
expenditures over the next several years to expand its facilities and purchase
additional equipment in support of additional collaborations and increased
internal research and development.
Net cash used in operating activities was $1,613,654 for the nine months
ended September 30, 1997, resulting primarily from the Company's net loss,
increased grants receivable balances and decreases in accrued expenses,
partially offset by increased accounts payable balances and deferred revenue.
The increase in deferred revenue on collaboration agreements during the nine
month period was due to the receipt of cash prior to completion of work to be
performed under the agreements. Net cash provided by operating activities was
$13,898 in 1996, compared to net cash used in operating activities of $222,029
in 1995 and $673,307 in 1994. The increase in net cash provided by operating
activities in 1996 compared to 1995 resulted from a decrease in the Company's
net loss, increases in accounts payable and accrued expenses, partially offset
by increases in grants receivable and accounts receivable, consistent with the
Company's growth in revenues. The decrease in net cash used in operating
activities in 1995 compared to 1994 was primarily due to increases in accrued
expenses and deferred revenue; partially offset by increases in grants
receivable.
As of September 30, 1997, the Company had net operating loss carryforwards
of approximately $6,200,000 to offset federal and state income taxes. If not
utilized, the federal and state net operating loss carryforwards will begin to
expire in 2008 and 1998, respectively. The Company also had research and
development tax credit carryforwards at September 30, 1997, estimated to be
approximately $1,293,000 for federal and state income tax purposes. An initial
public offering of the Company's securities will not result in any additional
limitation on the future utilization of these operating loss and tax credit
carryforwards.
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The Company expects its cash requirements will increase significantly in
future periods because of planned expansion of its operations and its
technology platform. The planned expansion will be in support of expected
growth in collaborative agreements, database subscriptions and internal
research and development programs. The Company believes that the net proceeds
from this offering, together with existing cash and cash equivalents, and
anticipated cash flows from its current collaboration agreements, will be
sufficient to support the Company's operations through at least 1999. The
Company's belief is based on its current operating plan, which could change in
the future and require additional funding sooner than anticipated. Even if the
Company has sufficient cash for its current operating plan, it may also seek
to raise additional capital because of favorable market conditions or other
strategic factors. The Company can offer no assurance that it will be able to
establish additional collaborations or retain existing collaborators, or that
such collaborations will produce sufficient revenues, which together with cash
and cash equivalents will be adequate to fund the Company's cash requirements.
Except for the loan facilities from Biogen and Genentech, the Company has no
credit facility or other sources of committed capital. Each of these loan
facilities was established in conjunction with the research collaboration and
database subscription arrangements entered into by the Company during the
fourth quarter of 1997. See "Business--Research Collaborations."
The Company's future capital requirements depend on numerous factors,
including: (i) the receipt of payments and the achievement of milestones under
existing and possible future collaborative agreements; (ii) the availability
of government research grant payments; (iii) the progress of internal research
and development projects; (iv) defense and enforcement of patent claims or
other intellectual property; (v) the purchase of additional capital equipment;
(vi) investments in complementary technologies; (vii) the development of
manufacturing, sales and marketing capabilities; and (viii) competing
technological and market demands.
The Company expects that it will require significant additional financing in
the future, which it may seek to raise, at any time, through public or private
equity offerings, debt financings or additional collaborations and licensing
arrangements. No assurance can be given that additional financing or
collaborations and licensing arrangements will be available when needed, or
that if available, such financing will be obtained on terms favorable to the
Company or its stockholders. If adequate funds are not available when needed,
the Company may have to curtail operations or attempt to raise funds on
unattractive terms. See "Risk Factors--Future Capital Requirements;
Uncertainty of Additional Funding."
RECENTLY ENACTED PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, Earnings Per Share, was
issued in March 1997, effective for periods ending after December 15, 1997.
Earlier application is not permitted. This pronouncement simplifies the
standards for computing earnings per share (EPS). When effective, this
statement will replace the presentation of primary EPS with presentation of
basic EPS and diluted EPS on the face of the Statement of Operations. For the
Company, basic and diluted EPS under this pronouncement would have equalled
reported EPS, as currently presented in the Company's Statement of Operations.
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, was issued in June 1997 and is effective for fiscal years beginning
after December 15, 1997. This pronouncement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The Company will adopt this
pronouncement in 1998 and does not expect its implementation will have a
material effect on the Company's financial statements as currently presented.
Statement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information, was also issued in June
1997 and is effective for fiscal periods beginning after December 15, 1997.
This pronouncement establishes the way in which publicly held business
enterprises report information about operating segments in annual financial
statements and interim reports to stockholders. As the Company operates in a
single business segment the implementation of this standard is not expected to
significantly impact the Company's financial statements as currently
presented.
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BUSINESS
CuraGen is pioneering the systematic application of genomics to accelerate
the discovery and development of therapeutic and agricultural products.
CuraGen's fully-integrated genomics technologies, processes and information
systems are designed to rapidly generate comprehensive information about gene
expression, biological pathways and the potential drugs that affect these
pathways, each on a scale not previously undertaken. The Company believes that
it can overcome the limitations of competing technologies, processes and
databases and can condense key steps in gene-based drug discovery and
development. CuraGen believes its technology platform will facilitate the
discovery and development of highly specific and effective drugs aimed at a
variety of complex diseases such as cardiovascular disease, stroke, cancer and
metabolic disorders.
The Company's drug discovery platform has three primary systems: the
GeneCalling system for comprehensive gene expression analysis and gene
discovery; the PathCalling system for discovery of the roles of genes and the
proteins they encode in biological pathways; and the HitCalling system for
identification of small molecule drug candidates. The Company has unified its
GeneCalling and PathCalling technologies, processes and databases under its
GeneScape bioinformatics operating system to integrate all aspects of process
management, data analysis and visualization. GeneScape provides an easy-to-use,
web-based interface to the Company's technology platform. Customers can access
the GeneScape interface via the internet, using any standard web-browser, such
as Netscape Navigator or Microsoft Internet Explorer. Genescape's architecture
allows researchers interactive, remote access to the Company's genomics
databases and technologies to meet their individual discovery and development
needs. GeneScape also includes CuraTools, a full-featured bioinformatics
software suite for further gene and protein characterization.
In addition to accelerating the discovery of new drug candidates, the Company
believes its GeneCalling and PathCalling systems are well-positioned to predict
the efficacy and safety of drug candidates currently in pharmaceutical
development pipelines and to review the performance and side effects of drugs
already on the market. This pharmacogenomics approach can aid in the
development of more effective, safer drugs and identify more appropriate
patient populations.
Each of the GeneCalling, PathCalling and HitCalling systems consists of a
proprietary enabling technology, a high-throughput, automated process using the
technology to generate information, and a database containing the information
generated. The GeneCalling and PathCalling systems are currently operational,
and the Company has already begun to populate the GeneCalling and PathCalling
databases from internal research programs and research collaborations, as well
as from publicly available databases. The HitCalling system is expected to be
operational in 1998 and incorporated into the Company's Genescape operating
system at that time. This database is expected to be available as a commercial
product in 1999. The Company has designed the three systems as an integrated
platform to enable gene discovery, drug target validation and high-throughput
screening of drug candidates in a highly efficient and cost-effective manner.
BACKGROUND
Successful treatment of disease is often limited by a lack of understanding
of its initiation and progression at the level of genes, proteins and
biological pathways. Technologies and processes that have been used
successfully in the past to discover treatments for diseases with relatively
simple causes have been less effective against complex diseases that arise
through a combination of multiple genetic and environmental factors.
Cardiovascular disease, cancer, stroke and metabolic disorders are examples of
prevalent complex diseases. Treating these complex diseases requires an
understanding of how the body uses its genetic information, how disruptions in
this information can lead to disease and, in turn, how drugs can arrest or
reverse disease progression. As scientific advances improve our understanding
of the genetic basis of disease, the Company believes that the methods the
pharmaceutical industry uses to develop new drugs will undergo a fundamental
transformation. Companies that can anticipate this transformation and develop
and apply new technologies may have a unique opportunity to develop the next
generation of therapeutic products for important complex diseases.
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In recent years, scientists have begun to analyze large portions of the
genetic information contained within the human genome. This discipline, termed
genomics, employs large-scale efforts catalyzed by the Human Genome Project.
By understanding the role of genes in the control and function of biological
pathways and cellular processes, scientists seek to understand more fully the
genetic basis of disease and develop more effective treatments. To date,
however, neither the pharmaceutical nor the agricultural industries have used
genomics extensively to develop new product opportunities. These industries
have used genomics to a limited extent for three primary reasons: technologies
have been inadequate; inefficient, non-automated discovery processes have
incompletely evaluated the influence of genetic and environmental factors; and
uniform information systems to drive the discovery process have been
unavailable.
Treatment of complex diseases remains a major technical challenge and will
require an integrated set of genomic technologies and processes. CuraGen
believes that knowledge of genes, proteins, biological pathways and their
interplay with the environment, together with information systems to use this
knowledge, will accelerate drug discovery and development. CuraGen has
developed its technologies, processes and information systems to provide this
knowledge and is applying its integrated platform towards the discovery and
development of the next generation of genomics-based therapeutic, diagnostic
and agricultural products.
GENES, PATHWAYS AND DISEASE
The GENOME is the complete set of genetic information within each cell of an
organism. The information in the genome is stored in chromosomes, which are
long molecules of DNA. Sections of DNA contain discrete units of hereditary
information called GENES, each of which contains a set of instructions for the
cell to produce a particular protein. In GENE EXPRESSION, the instructions
encoded in the DNA are used by a cell to make a protein molecule. Initially,
the genetic information in the DNA is copied to a complementary molecule
called messenger RNA (MRNA). The information in the mRNA is then translated
into a PROTEIN with a precise sequence of AMINO ACID building blocks which
determine its structure and function. Although all genes are present in all
cells, each cell normally expresses only those genes it needs for the specific
functions it performs. The level of mRNA expressed for each gene dictates its
activity and the number of protein molecules produced.
Proteins carry out the biological functions of cells through a series of
highly specific, organized cascades of interactions with other proteins, genes
and chemicals. These carefully regulated, complex networks of protein
interactions are termed BIOLOGICAL PATHWAYS. These pathways are generally
classified as metabolic pathways, responsible for cellular metabolism such as
the production of energy from glucose, and SIGNAL TRANSDUCTION PATHWAYS, which
use secreted proteins, cell-surface receptor proteins, and intracellular
proteins to allow cells to communicate, coordinate, and regulate their
activities. The activities of biological pathways have many levels of control
and redundancy, and thus can be affected by many genes within a pathway. In
addition to the effects of inherited genetic differences in the genome, a
biological pathway is also affected by the EXPRESSION LEVELS of its key genes
and proteins. Many of the genes at control points along a biological pathway
are expressed at levels as low as one mRNA molecule in 100,000. Therefore,
very small changes in the expression levels of these genes can produce
substantial changes in the operation of the biological pathways under their
control.
It is now recognized that essentially all stages of disease and its
progression are caused by a sequence of changes in the expression levels of
genes and the activities of specific proteins and pathways in affected cells.
Although some diseases are caused by defects in a single gene, many prevalent
diseases involve multiple genetic factors that either cause disease directly
or predispose an individual to disease in conjunction with environmental
factors. The genes and biological pathways involved in complex diseases,
however, remain largely uncharacterized. This lack of knowledge has limited
the development of drugs to treat these diseases.
GENE-BASED DRUG DISCOVERY AND DEVELOPMENT
Most treatments for disease rely on drugs that modify the activities of
biological pathways by interacting with proteins expressed by genes in the
affected cells and tissues. In the search for safer and more effective drugs
to treat a wider range of diseases, pharmaceutical companies have begun to
explore the application of genomics to gene-based drug discovery and
development.
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Modern gene-based drug discovery and development programs typically involve
the following steps: (i) GENE DISCOVERY, finding a disease-related gene; (ii)
TARGET IDENTIFICATION, ascertaining that the protein encoded by a disease-
related gene can potentially serve as a novel drug-discovery target; (iii)
TARGET VALIDATION, confirming that the potential target is at a control point
in a disease-related pathway and that a drug which interacts with the target
is expected to have a beneficial effect; (iv) ASSAY DEVELOPMENT, using the
target in a test that is designed to mimic aspects of the disease process; (v)
HIGH-THROUGHPUT SCREENING, using this assay to screen hundreds of thousands of
small organic compounds to identify compounds, or hits, which interact with
the target protein; and (vi) LEAD SELECTION AND OPTIMIZATION, identifying the
most promising hits as lead drug candidates according to expected efficacy,
safety and bioavailability. Typically, each step involves a laborious, time-
consuming process which must be completed before subsequent steps are
undertaken. In addition, several of the steps currently require highly skilled
personnel to perform non-automated, bench biology experiments on a single gene
or target at a time. Consequently, this has been a very costly and time-
consuming approach to drug discovery and development.
Gene Discovery. Gene discovery involves the identification of a gene related
to disease susceptibility, onset or progression. Although previous attempts to
identify disease-related genes have resulted in a better understanding of
certain diseases, they have discovered only a limited number of disease-
related genes and have led to relatively few new drugs due to limitations of
the technologies employed. The current methods for gene discovery include
genome sequencing, gene mapping, positional cloning and, more recently and
less widely used, gene expression.
GENOME SEQUENCING involves determining the sequence of large portions of
DNA. This technology identifies genes primarily at random, providing little
direct association of genes with disease. GENE MAPPING and POSITIONAL CLONING
are used together to identify disease-related genes. Gene mapping is a
laborious process that requires the extensive collection of tissue samples and
family histories in order to identify regions of the genome whose inheritance
correlates with the occurrence of disease. Positional cloning describes
efforts to find the gene within the region contributing to disease. Positional
cloning can take years to find the correct gene, is particularly difficult for
complex diseases, and has been limited in practice to identifying the genes
responsible for simple genetic disorders. Furthermore, gene mapping and
positional cloning do not directly identify additional proteins that are in
the same biological pathway as the disease-related gene and may be more
suitable targets for drugs.
GENE EXPRESSION methods are based upon comparisons of biological samples,
such as cells from human biopsies over the progression of a disease, to
identify genes whose expression levels correlate with the disease. The most
significant correlations involve genes that are expressed in disease-specific
tissues, change expression levels over the stages of a disease, and are
expressed at low levels consistent with the ability to regulate biological
pathways. In contrast to gene mapping and positional cloning, gene expression
can identify multiple disease-related genes. Even if these genes do not cause
disease directly, they are likely to encode proteins that participate in
disease-related biological pathways and can offer places to intervene in
disease progression. Some disease-related genes, such as secreted proteins,
can even serve directly as protein drugs.
CuraGen believes that gene expression methods will be the most efficient and
broadly applicable approach to identifying genes related to disease. To be
most useful, gene expression methods should be fault tolerant, measure the
expression levels for a majority of the expressed genes, including those
expressed at a single copy per cell, and be applicable to humans, animals,
plants and pathogens. Many current gene expression methods, however, face
significant limitations. Expression methods based on the repetitive sequencing
of small portions of mRNA molecules, termed expressed sequence tags (ESTS),
are inefficient. These methods cannot accurately measure genes expressed at
low levels and often miss genes that control important pathways.
Hybridization-based gene expression methods usually use portions of known
genes as probes to determine the expression levels of those genes in
biological samples. These methods are generally ineffective in discriminating
between genes with closely related sequences. Further, their application is
limited to the small set of known genes, often precluding their use for animal
models which are essential to human disease research. Methods such as
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differential display generate patterns of fragments from expressed mRNA
molecules, attempt to detect changes in these patterns, and then attempt to
identify the genes responsible for these changes. These methods can be
imprecise and inefficient in measuring gene expression levels, are especially
problematic when each gene generates at most one gene fragment, and can
require time-consuming steps to confirm which genes are responsible for
particular changes in the patterns.
Target Identification and Validation. After a disease-related gene has been
identified, the next step is to decide whether the protein it encodes can
serve as a target for a drug. Part of TARGET IDENTIFICATION is determining
whether the protein is related structurally to proteins that have served
successfully as targets, including receptors and other proteins in biological
pathways.
If a protein is not appropriate as a target, potential targets are then
sought among proteins in the same biological pathway as the disease-related
gene. Although other proteins in the same pathway can exhibit correlated
levels of gene expression, this information is often insufficient to sort
proteins into specific pathways or to show how proteins interact within a
pathway. Most research to understand biological pathways relies on non-
automated bench biology techniques able to identify only one protein at a
time. Despite the promise of this protein-by-protein approach, the associated
time, effort and expense have limited its use and, as a result, many
discoveries of disease-related genes have not led to suitable targets.
Once a protein target is identified, it must be validated in order to
provide evidence that it plays an important role in disease and that finding a
chemical compound that is active against it could lead to a drug. Alternative
techniques for TARGET VALIDATION can take months or years to complete because
it is not usually possible to view a given protein in the context of a
disease-related biological pathway.
Assay Development and High-Throughput Screening. Each validated target
usually requires the development of a specific assay or specialized
measurement technique to identify compounds that interact with it. Each assay
often requires months to develop. Potential drugs are identified by testing a
target against a chemical diversity library, usually comprising hundreds of
thousands of different small organic molecules, in HIGH-THROUGHPUT SCREENING.
Although screening a single target can be relatively rapid, screening multiple
targets can be time-consuming because most assays require that each target be
screened in a separate assay. The screening process often produces multiple
hits. To date, little progress has been made towards developing general assays
that do not require customization for each new disease-related gene and
validated target.
Drug Development. Hits that are suitable for development into potential
drugs are chosen for LEAD COMPOUND SELECTION AND OPTIMIZATION. Optimizing a
lead compound entails synthesizing and testing a series of closely related
organic compounds. The most promising leads are selected based on expected
efficacy, safety and bioavailability. This selection process typically does
not use detailed information of a candidate drug's MECHANISM OF ACTION, which
would show how a drug interacts with particular proteins and biological
pathways to achieve its desired therapeutic affect. The lack of information
often results in inaccurate predictions of efficacy and safety.
Following optimization, leads are entered into PRECLINICAL TRIALS to predict
their efficacy and safety based on animal testing. If preclinical trials are
promising, candidate drugs advance to CLINICAL TRIALS to determine their
efficacy and safety in human patients. Drug candidates have a high attrition
rate at this stage due to the lack of understanding of the mechanism of
action, poor predictions of efficacy and unexpected side effects. On average,
only one out of ten candidates that enter clinical trials gains FDA approval.
Failure at the later stages of drug development is especially significant as
it can account for half of the $360 million average cost to attain FDA
approval.
Pharmacogenomics. Even after a drug has been approved and marketed, there is
often limited knowledge of how it works. Consequently, many side effects are
observed only after use by a larger, more diverse population of patients who
may not have been adequately represented in the original trials, including
patients taking additional medications which can cause unanticipated adverse
effects. The study of the genes that determine the
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efficacy, pharmacology and toxicity of a drug is referred to as
PHARMACOGENOMICS. Unfortunately, previous technologies have lacked the ability
to show comprehensively what genes, proteins and biological pathways are
affected by a drug. This lack of information has led to failures and FDA
recalls of widely-prescribed drugs such as thalidomide and dexfenfluramine.
TECHNOLOGY INTEGRATION AND INFORMATION SYSTEMS
Biotechnology companies have attempted to overcome limitations in the gene-
based drug discovery by focusing on single, isolated technologies. Major
pharmaceutical firms have been left with the challenge to integrate these
disparate components into a cohesive discovery and development pipeline. This
has created a great need for sophisticated bioinformatics systems to manage
what is now a disjointed process.
CURAGEN'S APPROACH
CuraGen's integrated genomics technologies, processes and information
systems are designed to overcome significant technological limitations and
condense key steps in gene-based drug discovery and development. The Company
believes that its technology platform has the potential to rapidly generate
comprehensive information about gene expression, biological pathways and the
compounds affecting these pathways, each on a scale not previously undertaken.
CuraGen believes this will permit the comprehensive analysis of many diseases
and enable the discovery of disease-related genes, drug targets and potential
drugs.
[Graph showing the steps involved in both traditional gene-based drug discovery
and using CuraGen's approach to gene-based drug discovery]
CURAGEN'S APPROACH TO GENE-BASED DRUG DISCOVERY
GENE DISCOVERY (QEA AND GENECALLING)
CuraGen has developed its proprietary Quantitative Expression Analysis
("QEA") and GeneCalling technologies to overcome significant limitations of
existing gene discovery methods. QEA and GeneCalling enable the rapid, precise
measurement of substantially all of the differences in gene expression levels
between biological samples in order to discover disease-related genes. QEA and
GeneCalling are designed to detect genes
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expressed at the level of a single mRNA molecule per cell, to measure
comprehensively the expression levels of 95% of the genes expressed in any
species and to be integrated into an efficient, automated, high-throughput
process in order to rapidly generate large databases of gene expression
profiles. These technologies permit the Company to pursue research programs
for many disease systems, process many samples in parallel and potentially
discover and seek patent protection for commercially valuable disease-related
genes.
TARGET IDENTIFICATION AND VALIDATION (MIM AND PATHCALLING)
The Company has developed its proprietary Multiplexed Interaction Method
("MIM") and PathCalling technologies to reduce the time and cost of target
identification and validation. MIM is an automated, high-throughput process
that simultaneously tests for interactions between billions of combinations of
proteins. PathCalling is the Company's proprietary software and database that
assembles the protein-protein interactions discovered by the MIM system into
connected biological pathways. Although the PathCalling database is still at a
relatively early stage, the Company intends to continue to populate the
PathCalling database with as complete a set as possible of the protein-protein
interactions that constitute the pathways in humans and model organisms that
are relevant to disease. By identifying protein-protein interactions with MIM
and comparing them with pathways within the PathCalling database, the role of
these proteins within a given biological pathway can be elucidated and the
database further augmented. PathCalling is designed to permit disease-related
genes to be linked rapidly to specific biological pathways, providing valuable
biological context for gene discoveries and additional targets for therapeutic
intervention. The Company believes that its PathCalling database has the
potential to streamline target identification and validation into a single,
efficient, accelerated process. The Company further believes that the number
of pathway-related protein-protein interactions currently in its proprietary
PathCalling database is greater than the total number of interactions
previously described in the scientific literature.
ASSAY DEVELOPMENT AND HIGH-THROUGHPUT SCREENING (COMBIGEN AND HITCALLING)
The Company is developing its proprietary CombiGen technology and HitCalling
database and information system to accelerate the identification of hits by
screening protein targets in parallel against small molecule diversity
libraries. The Company has designed CombiGen to avoid any need to develop a
specialized assay for each new target. With the ability to screen thousands of
targets simultaneously, the Company believes that its automated, high-
throughput screening assays will have the potential to screen more
combinations of targets and compounds than any competing technology of which
it is aware. The Company believes that when development of the CombiGen
technology is completed this capacity will enable a new approach to drug
discovery. The Company intends to use CombiGen to screen every protein that it
discovers is involved in a protein-protein interaction, including proteins
both in disease-related pathways and in pathways not yet associated with
disease. The HitCalling database will store the identities of proteins and
hits. The Company anticipates that a newly-identified disease-related gene can
be linked into a pathway whose proteins have already been screened. The
identities of proteins and hits can then be retrieved from the HitCalling
database, reducing or eliminating the need for further target identification,
target validation, assay development or high-throughput screening and thereby
potentially accelerating a program by two to three years following the first
identification of a disease-related gene.
DRUG DEVELOPMENT AND PHARMACOGENOMICS (GENECALLING; PATHCALLING)
The Company believes that its GeneCalling and PathCalling technologies can
also be used to predict which drugs are more likely to succeed by analyzing
gene expression changes induced by drug treatment in humans and animal models
in preclinical and clinical trials. For drugs already on the market, the
Company has commenced generating GeneCalling databases with the objective of
selecting appropriate patient populations and accelerating the development of
an improved generation of drugs with fewer side effects. By providing a
precise correlation of gene expression levels and the activities of biological
pathways following treatment with specific drugs, the objective of the
Company's pharmacogenomics approach is to minimize the side effects of drugs,
to identify appropriate patient populations for existing drugs and to aid the
development of safer, more effective drugs.
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TECHNOLOGY INTEGRATION AND INFORMATION SYSTEMS (GENESCAPE)
The Company has integrated its GeneCalling, PathCalling and HitCalling
process and databases under its GeneScape BIOINFORMATICS operating system that
unifies all aspects of process management, data analysis and visualization.
CuraGen's goal is to establish its fully-integrated technology and the
GeneScape operating system as the preferred platform for genomics and to apply
its platform to accelerate drug discovery, drug development and
pharmacogenomics. GeneScape provides a standardized, web-based interface to
its technology platform, thereby allowing researchers remote access and
interactive capabilities from multiple sites to meet their individual
discovery and development needs. Once the HitCalling database is established,
the Company expects that all three databases will be interrelated. Thus,
researchers who discover a disease-related gene through GeneCalling have the
potential to locate the relevant biological pathways in the PathCalling
database and to use the HitCalling database to identify hits active against
proteins in this pathway.
CURAGEN'S STRATEGY
CuraGen's goal is to establish the first fully-integrated genomics business
providing comprehensive characterization of gene expression, biological
pathways and potential drugs for drug discovery and development. The Company
believes that its integrated approach can be the preferred alternative to
competitive methods employed today. In order to achieve this goal, the Company
will have to continue to add new information to its GeneCalling and
PathCalling databases, complete the development of its HitCalling system and
populate the HitCalling database. The key elements of the Company's strategy
are as follows:
Provide fully-integrated, innovative technologies to overcome limitations in
drug discovery and development. The Company believes that its integrated
genomics platform will provide enabling technologies at each of the three
critical levels of the genomics-based pharmaceutical development process:
identification of disease-related genes (gene discovery), elucidation of
biological pathways (target identification and validation) and identification
of compounds that interact with such pathways (assay development, high-
throughput screening, lead selection and optimization). These technologies
have the potential to advance the discovery and development of treatments for
complex diseases. The Company has designed these technologies to be (i)
applicable to a broad range of diseases; (ii) comprehensive in the analysis of
substantially all expressed genes, biological pathways and potential drugs;
(iii) standardized to enable the simultaneous processing of many combinations
of biological samples, proteins and drug candidates; (iv) integrated under a
single information system to facilitate the processing, analysis and use of
information generated from a variety of sources; and (v) readily used in
existing pharmaceutical development pipelines.
Apply its technology for drug discovery, drug development and
pharmacogenomics systematically to major diseases. The Company intends to
apply its technologies to address a wide range of diseases. CuraGen plans to
obtain biological samples from numerous models of disease (human tissue,
animal and cell-based models) in an effort to examine systematically the genes
and biological pathways involved in major diseases and to develop new drugs.
The Company believes that this broad-based approach will maximize its
opportunities to participate in the discovery and development of drugs either
alone or in collaboration with others. Through pharmacogenomics, the Company
believes it can help pharmaceutical companies develop more effective drugs
with fewer side effects by assessing the efficacy and safety of their
currently marketed drugs as well as drug candidates within their product
pipelines.
Generate revenue through research collaborations. The Company intends to
enter into research collaborations with pharmaceutical, biotechnology and
agricultural companies. The Company expects to receive revenues for applying
its proprietary technologies to a collaborator's own samples, for providing a
period of exclusivity for analyzing the data generated and from milestone and
royalty payments derived from licensed products. Data generated in
collaborations may become part of CuraGen's subscription databases. To date,
the Company has entered into collaborations with Pioneer Hi-Bred, Biogen and
Genentech.
Generate revenue through database subscriptions. The Company believes that
the information in its GeneCalling, PathCalling and HitCalling databases will
be a valuable resource for pharmaceutical and
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agricultural product development. The Company intends to generate revenue by
providing subscribers with fee-based, non-exclusive access to its databases
for defined periods. The Company expects that its research collaborators will
enter into subscriptions as they seek to access the additional information
available in the Company's databases. The Company's databases are in early
stages of development and there can be no assurance that the Company will
succeed in commercializing its databases. To date, the Company has entered
into database subscription arrangements with Biogen and Genentech.
Retain product rights to select internal research and drug discovery
programs. The Company intends to devote a substantial portion of its resources
to its internal research programs. The initial programs selected by the
Company are expected to focus on disease systems which, the Company believes,
have the potential to result in the discovery of novel proteins as drug
candidates or targets for drug discovery. The Company also expects that its
internal research programs will be an ongoing source of data for its
GeneCalling, PathCalling and HitCalling databases.
PRODUCTS AND SERVICES
CuraGen is marketing its genomics technology and information to the
pharmaceutical, biotechnology and agricultural industries through two
arrangements: research collaborations and subscriptions. RESEARCH
COLLABORATIONS currently involve the application of CuraGen's GeneCalling and
PathCalling technologies to a collaborator's projects, include those support
services required to characterize gene and target discoveries, and provide
ready integration with a collaborator's existing development pipeline. The
Company anticipates that collaborations will involve HitCalling when it
becomes available. DATABASE SUBSCRIPTIONS will provide subscribers with access
to CuraGen's GeneCalling, PathCalling and HitCalling databases. Both
arrangements will use the GeneScape operating system, the Company's web-based
software that manages the Company's processes, provides access to the
Company's databases and includes CuraTools, a full-featured bioinformatics
software suite.
QEA AND GENECALLING: GENE EXPRESSION SERVICES AND DATABASE
CuraGen developed its proprietary QEA and GeneCalling technology to overcome
significant limitations of competing gene discovery methods. QEA is the
Company's method for generating and analyzing gene expression profiles.
GeneCalling is the Company's information system and database that analyzes and
stores differences in these gene expression profiles to identify disease-
related genes. QEA and GeneCalling permit sensitive detection of genes that
can control biological pathways when expressed at very low levels, and unlike
EST-based methods, do not require repetitive sequencing to measure gene
expression. The Company's technology is comprehensive in detecting genes with
novel sequences and therefore applicable universally to humans, animals,
plants, and pathogens. In comparison, hybridization-based methods are
primarily limited to known genes and do not readily discriminate between many
genes which share related DNA sequences.
QEA and GeneCalling provide the ability to discover disease-related genes by
measuring expression levels and determining gene expression differences
between biological samples, such as diseased and normal human tissues. These
samples are usually processed within a month of receipt, and profiles of gene
expression levels are available immediately for inspection and analysis. The
Company's current capacity is 5,000 biological samples per year. The Company
detects multiple fragments for each gene in a sample and believes that it can
quantify accurately the expression levels of over 150 million gene fragments
per year. The Company believes that this capability exceeds the capacity of
competing technologies, can be up to 6,000 or more times faster than EST-based
methods for comprehensive expression profiling, and can observe a greater
number of genes than methods relying on the detection of a single fragment per
gene. Based upon its current capacity, the Company estimates that it could
conduct approximately 250 projects per year consisting of approximately 20
samples each. The Company believes this is sufficient to support five
collaborators while meeting the needs of the Company's internal programs. See
"--CuraGen Internal Programs." The Company has designed its processes to be
modular and scalable in order to accommodate increases in the number of
collaborations.
The Company's GeneCalling database stores data generated by QEA for
exclusive access for collaborations and internal programs. Through GeneScape,
researchers can access their projects and are able to select samples
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that have been processed by QEA and use GeneCalling to analyze expression
profiles to identify those genes that are specific to a disease. The Company
intends to structure its collaborations such that, after the period of
exclusivity has ended, data generated from samples using QEA revert to
CuraGen's GeneCalling subscription database which currently contains gene
expression data from normal human and animal tissues.
Using QEA and GeneCalling, CuraGen has developed an innovative approach for
gene discovery for inherited diseases: POSITIONAL EXPRESSION CLONING. By
combining its gene expression analysis with existing gene mapping techniques,
the Company can rapidly discover genes associated with inherited diseases by
identifying candidate genes that both show altered expression and map to the
chromosomal locations known to contain underlying disease genes. The Company
believes its positional expression cloning approach will be particularly
effective in identifying and characterizing susceptibility and protective
genes in many common complex diseases.
The Company believes that its technology for disease-related gene discovery
has significant advantages over genome sequencing, positional cloning and
competing gene expression technologies. CuraGen's methods permit the Company
to pursue research programs for many disease systems in parallel, with the
potential to identify rapidly a large number of commercially valuable disease-
related genes. As part of its internal programs, the Company seeks patent
protection for newly discovered disease-related genes and proteins, as well as
for novel uses of known genes and the proteins they encode. See "--
Intellectual Property" and "Risk Factors--Patents and Proprietary Rights;
Third-Party Rights."
MIM AND PATHCALLING: PATHWAY ANALYSIS SERVICES AND DATABASE
Once genes involved in a disease have been identified using GeneCalling, it
is important to be able to determine how the proteins they encode interact in
the complex pathways involved in the disease. Although a particular disease-
related protein might not be a potential protein drug or drug discovery
target, knowledge of the other proteins in the same pathway may lead to
promising protein drug or target candidates. CuraGen's MIM technology and
PathCalling database were developed to provide the link between disease-
related proteins and their biological pathways to aid in the identification
and validation of appropriate targets following the discovery of a disease-
related gene.
MIM consists of proprietary automated, high-throughput biological operations
that simultaneously test for interactions between billions of pairs of
proteins. By using MIM, CuraGen can routinely test 100,000 proteins against
100,000 other proteins, potentially identifying all interacting pairs.
PathCalling is the Company's proprietary software and database that assembles
protein-protein interactions discovered by the MIM system into connected
biological pathways, including pathways discovered previously by CuraGen or
previously described in the scientific literature. Although the PathCalling
database is still at a relatively early stage, the Company's objective is to
continue to build this database to contain as complete a set as possible of
the protein-protein interactions that constitute the pathways that are
relevant to disease. The PathCalling database permits the graphical display of
all pathways contained in the database involving any particular protein and
allows these pathways to be queried for information in much the same way gene
sequence databases are queried today. The Company believes that this will
facilitate the rapid linkage of disease-related genes to specific biological
pathways, providing the crucial biological context for gene discoveries, which
may lead to the identification of potential targets for therapeutic
intervention.
The Company seeks patent protection on the utility of specific proteins or
protein-protein interactions as drug targets based on information provided by
MIM and PathCalling, in addition to composition of matter claims based on the
sequences of novel and non-obvious proteins and the genes encoding them. There
can be no assurance, however, that such patents will be granted. See "--
Intellectual Property" and "Risk Factors--Patents and Proprietary Rights;
Third-Party Rights."
COMBIGEN AND HITCALLING: DRUG SCREENING SERVICES AND DATABASE
Traditionally, potential drugs have been screened against one target at a
time. Even with many of the advances in high-throughput screening, this
process remains inefficient, time-consuming and labor intensive. In
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an effort to overcome these shortcomings, CuraGen is developing its
proprietary CombiGen technology and HitCalling database to identify
simultaneously both novel targets and hits. These technologies are based upon
a combinatorial approach for screening libraries of potential protein targets
against libraries of potential drugs.
CombiGen is being developed to use a biological assay system that will
permit the parallel processing of hundreds of drug discovery targets in the
form of single proteins or protein-protein interactions in a single high-
throughput screening assay. CombiGen has been designed to work efficiently
with the proteins in biological pathways which were identified by PathCalling.
The Company has designed this technology to avoid any need to develop a
specialized assay for each new target. With the ability to screen targets in
parallel, the Company believes that its automated, high-throughput screening
assays have the potential to screen more combinations of targets and compounds
than any competing technology of which the Company is aware.
When CombiGen is operational, the Company intends to commence screening of
many of the proteins in its PathCalling database, both in disease-related
biological pathways and in pathways not yet associated with disease, to
generate its HitCalling database. In this new approach, the Company believes
that, when a disease-related gene is discovered, the HitCalling database may
accelerate drug discovery by displaying hits against other proteins in that
gene's pathway.
CuraGen expects that it will complete pilot studies of its CombiGen
technology and begin marketing HitCalling in 1998. The Company intends to
generate a database containing a large collection of hits against many of the
proteins in its PathCalling database. Where appropriate, the Company plans to
file patent applications to protect targets, small organic compounds and their
utilities. There can be no assurance, however, that the Company will
successfully complete the development of CombiGen and HitCalling, that the
Company will discover hits through the use of this technology, that patent
applications will be filed or that patents on such hits will be granted. See
"Risk Factors--New and Uncertain Business" and "--Patents and Proprietary
Rights; Third-Party Rights."
GENESCAPE OPERATING SYSTEM FOR GENOMICS
CuraGen designed its GeneScape bioinformatics software to meet the needs of
researchers for a single operating system which integrates research requests,
project management, database access and data analysis and visualization. The
Company's GeneScape web-based bioinformatics operating system provides the
user with a standardized, internet-enabled interface to its processes and
databases for GeneCalling, PathCalling and HitCalling. GeneScape operates on
any computer platform that supports a standard web browser. GeneScape is
designed to be modular and extendable to incorporate other processes.
GeneScape currently consists of three components: Discovery, Study Management,
and CuraTools.
Discovery. The Discovery component manages queries to the GeneCalling,
PathCalling and HitCalling databases. GeneScape provides data analysis and
visualization through a flexible, easy-to-use point-and-click interface
organized in three sections corresponding to GeneCalling, PathCalling, and
HitCalling. GeneScape provides the answers to queries in visual format,
organized according to preferences set by the end user: differential gene
expression; expression in particular samples, tissues, or disease stages;
participation in metabolic or signal transduction pathways; map position;
functional role; interactions with proteins or small molecules; or other
custom criteria. The Company believes that the ability to respond to direct
queries with the comprehensive analysis of gene expression and biological
pathways may make GeneScape a preferred platform for discovering disease-
related genes and drug discovery targets.
Study Management. CuraGen's collaborators can manage processes and resources
over the Internet to meet their individual research needs. Separate links on
the Study Management page provide direct, up-to-the-minute status reports for
projects, individual processes within projects, and resource allocation among
projects and processes. Study Management automates the operation of every
station in the QEA and MIM process and monitors quality control at each
processing step.
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CuraTools. The GeneScape operating system also includes CuraTools, an easy-
to-use, unified bioinformatics software package for DNA and protein sequence
analysis; sequence similarity to known genes, protein drugs and protein
targets; three-dimensional structure prediction; identification of proteins
participating in biological pathways; and custom literature searches.
CuraTools also provides users with access to publicly available sequence,
mapping and expression databases that the Company has imported, assembled, and
annotated for enhanced value. In addition, the Company has assembled
proprietary sequence and mapping databases for portions of the corn, mouse,
rat and human genomes. Collaborators can elect to have CuraGen link their own
proprietary or third-party sequence databases into GeneScape and CuraTools for
their own exclusive use.
CURASHOP
Through its CuraShop, the Company now offers its collaborators services that
will complement its proprietary GeneCalling, PathCalling, and HitCalling
technologies. CuraShop can provide high-throughput, efficient and essential
research services including confirmation of gene expression differences, gene
sequencing, delivery of full-length clones of genes, gene mapping and mutation
detection. These services and materials can all be requested, for a fee,
directly through GeneScape.
RESEARCH COLLABORATIONS
The Company's business strategy includes the establishment of research
collaborations with pharmaceutical, biotechnology and agricultural companies.
The Company anticipates that such collaborations will generally provide
revenues in the form of fees for the generation of gene expression and
biological pathway data from samples provided by a collaborator. The
collaborator will have the ability to control how resources are allocated to
generate GeneCalling and PathCalling databases and to perform additional
research services through GeneShop, including the sequencing of gene fragments
and the generation of full-length clones. Fees will also give each such
partner exclusive access for a defined period of time to the GeneCalling or
PathCalling databases containing the information produced in the
collaboration. The Company expects that collaborators will have the right to
license, for an up-front fee, discoveries arising from a collaboration,
including rights to novel genes, novel uses of previously identified genes,
and protein targets and hits. Collaborations may also include milestone
payments and royalty payments on sales of products developed using discoveries
made through the use of the Company's technology. After the period of
exclusivity expires, rights to genes and portions of the data not licensed by
the collaborator are expected to revert to CuraGen. The Company intends to
include this data in its expanding subscription databases.
The Company intends to seek collaborations that will be non-exclusive with
respect to a given field or disease indication, for example stroke or
cardiovascular disease, but exclusive for a specific period of time for
certain disease models, such as a research project using a mouse model for
stroke or cardiovascular disease. To date, the Company has entered into
collaborations with Pioneer Hi-Bred, Biogen and Genentech.
PIONEER HI-BRED
In May 1997, CuraGen and Pioneer Hi-Bred entered into a research
collaboration to identify genes responsible for agricultural seed product
performance, including crop yield, drought resistance and pest resistance (the
"Pioneer Agreement"). Pioneer Hi-Bred is a leader in the development of
genetically based agricultural crop seed products, with approximately 42% of
the North American corn seed market and a significant share of the market in
other major corn-growing areas of the world. Historically, Pioneer Hi-Bred has
developed new hybrid seed strains with favorable traits using traditional
cross breeding techniques with only limited knowledge of the genes responsible
for such traits. The Company believes that by applying QEA and GeneCalling
technologies, it will discover the genes responsible for these favorable
traits, thereby enabling Pioneer Hi-Bred to develop, faster and more
efficiently, new generations of seed products with superior traits.
Under the terms of the Pioneer Agreement, Pioneer Hi-Bred agreed to fund a
research program for up to five years in certain areas related to agricultural
crop seed research and product development, and the Company
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agreed not to collaborate with any other parties within such areas. The
agreement provides for minimum annual research payments of $2.5 million, with
specified funding increases after three years in order to avoid CuraGen's
right to terminate the agreement. If the research program continues for its
full five-year term, total research funding, including such increased research
payments, could reach $18.5 million. In connection with the collaboration,
Pioneer Hi-Bred made a $7.5 million equity investment in the Company.
Pioneer Hi-Bred has the right to terminate the research program at any time
upon a breach by the Company and on three months' written notice, at any time
after November 1998, if the Company has not identified any genes associated
with certain traits of interest to Pioneer Hi-Bred. In addition, Pioneer Hi-
Bred has the right, at any time after May 2000, to terminate the research
program at its sole discretion on three months' written notice.
The Pioneer Agreement provides Pioneer Hi-Bred with exclusive, worldwide,
royalty-bearing rights to develop and commercialize products based on gene
discoveries made in the collaboration in certain areas related to seed
products, non-seed plant products and agricultural chemicals. CuraGen will
receive specified royalties on the sale of seed products incorporating trait-
specific genes identified by CuraGen. Royalties with respect to non-seed plant
products and agricultural chemicals are to be negotiated. The Pioneer
Agreement provides the Company with a worldwide right to develop and
commercialize products in the fields of human healthcare, pharmaceuticals,
animal health and microbial applications based upon gene discoveries arising
from the collaboration.
The Company believes that this collaboration offers it significant discovery
benefits because Pioneer Hi-Bred has assembled one of the world's largest
collections of genetic materials, which contains a wide range of genes and
pathways responsible for important agricultural traits. Many of the genes and
pathways plant cells use to carry out biological processes have closely
related genes and pathways in human cells. CuraGen has retained all rights to
use the information gained in studies of plant genes for applications to the
Company's programs in human disease.
BIOGEN
In June 1997, CuraGen and Biogen entered into a stock purchase agreement,
pursuant to which Biogen made a $1 million equity investment in the Company in
anticipation of evaluating the application of CuraGen's technology to a
particular program of interest to Biogen.
The October 1997, CuraGen and Biogen entered into a research collaboration
and database subscription arrangement pursuant to a Research and Option
Agreement (the "Biogen Agreement"). Under the Biogen Agreement, CuraGen and
Biogen will collaborate in the discovery of novel therapeutics across a range
of Biogen-specified disease programs. The parties also expect to conduct
pharmacogenomic analysis of selected products and product candidates in
Biogen's portfolio. The collaboration will provide Biogen with access to
CuraGen's proprietary genomics platform, including the GeneScape
bioinformatics operating system in order to generate GeneCalling and
PathCalling databases from Biogen-specified disease systems. Biogen will also
gain non-exclusive access to CuraGen's GeneCalling and PathCalling
subscription databases.
Under the terms of the agreement, Biogen agreed to invest $5 million in
CuraGen to purchase Common Stock at the initial public offering price and to
provide a $10 million interest-bearing loan facility. Interest under the loan
facility is payable semi-annually. The loan is convertible at any time at
CuraGen's option into Common Stock based upon a formula that approximates its
prevailing market price, and the principal is payable at the earlier of five
years or one year after termination by Biogen of the Biogen Agreement. Biogen
will additionally provide payments over five years to support the research
collaboration and to gain non-exclusive access to CuraGen's GeneCalling and
PathCalling subscription databases. Payments could reach $18.5 million if the
research collaboration and database subscription payments both continue for
the full five-year term. Biogen has an exclusive right during specified
periods to evaluate discoveries arising from the collaboration and to license
such discoveries, some of which will require the payment of an additional fee.
During the period of exclusivity, for each discovery arising from the
collaboration, the Company is prohibited from undertaking substantially
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similar research projects with third parties. After the period of exclusivity
elapses, rights to genes not licensed to Biogen and rights to the data will
revert to CuraGen for inclusion in its subscription databases. For each
therapeutic product which is developed under an exclusive license and attains
certain development and commercialization milestones, Biogen will provide
milestone payments of up to $18.5 million. Biogen will also pay royalties
based on future product sales.
Biogen has the right to terminate the research collaboration upon any breach
by the Company of any material obligation under the Biogen Agreement or at its
sole discretion at any time after October 1999, on six months' written notice.
In addition, Biogen may terminate its subscription to the Company's
GeneCalling and PathCalling databases at any time upon three months' written
notice. Upon the closing of the offering, after purchase of Biogen Shares,
Biogen will be the beneficial owner of percent of the outstanding shares of
Common Stock. Biogen is entitled to certain registration rights with respect
to the shares of Common Stock issued pursuant to the Biogen Agreement. See
"Description of Capital Stock--Registration Rights."
GENENTECH
In June 1996 and December 1996, CuraGen and Genentech entered into
exploratory programs under certain agreements (the "1996 Genentech
Agreements") to evaluate the application of CuraGen's integrated genomics
technologies to selected internal programs at Genentech. The 1996 Genentech
Agreements are limited in scope and duration. Under the terms of the 1996
Genentech Agreements, CuraGen received a $1.8 million equity investment and
Genentech agreed to make research and development payments of $667,000 to
cover three separate exploratory programs. The 1996 Genentech Agreements call
for milestone payments and royalties on therapeutic product sales.
In November 1997, CuraGen and Genentech entered into a research
collaboration and database subscription arrangement pursuant to a Research and
Option Agreement (the "Genentech Agreement"). The Genentech Agreement
supersedes the 1996 Genentech Agreements with respect to project data
generated thereunder. Under the Genentech Agreement, CuraGen and Genentech
will collaborate in the discovery of novel therapeutics across a range of
Genentech-specified disease programs. The collaboration will provide Genentech
with access to CuraGen's proprietary genomics platform, including the
GeneScape bioinformatics operating system, in order to generate GeneCalling
and PathCalling databases. Genentech will also gain non-exclusive access to
CuraGen's GeneCalling and PathCalling databases. Genentech will provide
funding of up to $24 million over five years if the database subscription
arrangement is not terminated and the Genentech Agreement is extended by
Genentech beyond the five-year term of the research collaboration. Genentech
has an exclusive right during specified periods to evaluate discoveries
arising from the collaboration and to license such discoveries, some of which
require the payment of an additional fee. During the period of exclusivity,
for each discovery arising from the collaboration, the Company is prohibited
from undertaking substantially similar research projects with third parties.
After the period of exclusivity lapses, rights to genes not licensed to
Genentech and rights to the data will revert to CuraGen for inclusion in its
subscription databases. Genentech will provide milestone payments for each
product which is developed under a license and attains certain development and
commercialization milestones and will pay royalties based on future product
sales.
Under the terms of the Genentech Agreement, Genentech has agreed to purchase
$5 million of Common Stock in a private placement at the initial public
offering price. Genentech has also agreed to provide CuraGen with an interest-
bearing loan facility which could in the aggregate reach $26 million if the
research program continues beyond its initial three year term. The loan
facility contains annual borrowing limits and the outstanding principal and
interest under the loan facility are payable five years from the date of the
Genentech Agreement. Genentech may accelerate the payment of the outstanding
principal and interest in certain circumstances, including Genentech's
termination of the Genentech Agreement due to a breach by CuraGen or if
CuraGen's market capitalization is less than two times the outstanding
principal balance of the loan facility. After the end of the first year,
during the term of the Genentech Agreement, the then outstanding indebtedness
under the loan facility is convertible at CuraGen's option into Non-Voting
Common Stock based upon a formula that approximates the prevailing market
price of the Company's Common Stock. The Company's stock repayment option may
be limited under certain circumstances in the event that Genentech's ownership
of the Company's
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capital stock exceeds certain specified percentages. In addition, if
Genentech's ownership of the Company's capital stock exceeds 19.8%, then the
Company may be required to repurchase shares of Non-Voting Common Stock
previously issued to Genentech based upon a formula that approximates the
prevailing market price of the Company's Common Stock. If issued, the Non-
Voting Common Stock is convertible into Common Stock (i) at any time, at
Genentech's option, or (ii) upon the sale or transfer of the Non-Voting Common
Stock to a non-affiliated third party.
Genentech has the right to terminate the research collaboration, upon a
breach by the Company of any material obligation under the Genentech Agreement
or at its sole discretion, on one month's prior notice (i) in May 1999,
subject to its payment of a termination fee or forgiveness of the portion of
the loan facility outstanding on such termination date and (ii) on or after
November 2000. Upon the closing of the offering, after purchase of the
Genetech Shares, Genetech will be the beneficial owner of percent of the
outstanding shares of Common Stock. Genentech is entitled to certain
registration rights with respect to the shares of Common Stock and Non-Voting
Common Stock issued pursuant to the Genentech Agreement. See "Description of
Capital Stock--Registration Rights."
DATABASE SUBSCRIPTIONS
As part of its business strategy, the Company intends to offer subscriptions
which will provide users with non-exclusive access to its GeneCalling,
PathCalling and HitCalling databases through the GeneScape operating system.
The Company will also provide subscribers access to its CuraTools
bioinformatics software. The Company anticipates updating its databases
regularly with selected data generated from internal programs, as well as data
from collaborations which have reverted to the Company. The Company intends to
structure its arrangements to receive initial fees and periodic maintenance
fees for each subscription. In addition, the Company may receive license fees,
milestone payments and royalties in connection with the licensing or use of
proprietary information in its databases for the development of products.
Certain subscribers may also seek to take advantage of the full range of the
Company's GeneCalling, PathCalling, HitCalling and CuraShop services by
entering into collaborations with the Company. The Company's databases are in
the early stages of development and there can be no assurance that the Company
will succeed in commercializing its databases. To date, the Company has
entered into a subscription arrangement with Biogen as part of the Biogen
Agreement and with Genentech as part of the Genentech Agreement. See "--
Research Collaborations--Biogen" and "--Research Collaborations--Genentech."
CURAGEN INTERNAL PROGRAMS
The Company intends to use its integrated genomics technology platform to
pursue a broad portfolio of research programs that encompass drug discovery,
drug development and pharmacogenomics. During the next five years, the
Company's objective is to analyze systematically the genetic basis of many
common diseases as well as the mechanisms of action and adverse side effects
of many commonly prescribed drugs. CuraGen is focusing its efforts on programs
that address unmet medical needs and that the Company believes have the
potential to yield products that can be commercialized in a relatively short
time. In particular, the Company selects human diseases and animal models of
human disease based on their potential to yield protein drugs, to identify
novel targets for common diseases that lack effective treatments or to aid
rational development or marketing of existing drugs. At each stage, the
Company plans to reevaluate the relative merits of continuing such programs
through internal efforts or through research collaborations.
DISCOVERY PROGRAMS
The Company currently has programs in cardiovascular disease, including
hypertension and stroke; endocrine and metabolic disorders, including obesity,
diabetes and osteoporosis; autoimmune disorders including arthritis; cancer;
and infectious diseases. In its internal programs, CuraGen has discovered over
disease-related genes and has filed patent applications relating to
these discoveries.
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Certain of the genetic disease models selected by the Company are designed
to discover variations of genes that protect individuals from disease in
addition to finding mutations in genes that are involved in the
susceptibility, onset or progression of disease. The Company intends to
explore the potential of the proteins encoded by protective genes as protein
drugs. The Company has already identified gene variants that are potentially
protective in stroke. These gene variants were identified from animal models
using QEA and GeneCalling within months of project inception. The Company has
also discovered mutations in genes involved in diabetes and hypertension, one
of which the Company believes may be a suitable target for small molecule drug
development.
Cardiovascular Disease and Stroke. Cardiovascular diseases such as stroke
and atherosclerosis are the leading cause of death in the United States.
Treatments for these diseases have limited efficacy. Using GeneCalling and
PathCalling, CuraGen is analyzing genetic models of hypertension and ischemic
stroke to identify disease-related genes. This strategy has led to the
discovery of a secreted protein variant that appears to protect against stroke
and the discovery of a gene that may contribute to hypertension.
Endocrine and Metabolic Diseases. Within the field of endocrine and
metabolic diseases, CuraGen is analyzing a variety of genetic models including
obesity, type II diabetes, osteoporosis, osteoarthritis and gall stone
disease. The Company believes that its technology platform is well-suited to
identifying the genes and pathways involved in these diseases, which are known
to involve errors in signal transduction and the regulation of metabolic
pathways. To date, the Company has used QEA and GeneCalling to discover over
40 genes associated with these diseases and is using PathCalling in an attempt
to identify disease-related pathways and potential targets for drug discovery.
The Company believes that this information may also lead to the discovery of
protein drugs.
Autoimmunity, Arthritis and Allergy. Although diseases of the immune system,
such as systemic lupus erythematosus and rheumatoid arthritis, are among the
most common and chronic, existing drugs for autoimmune diseases have exhibited
limited efficacy and debilitating side effects. The Company has used QEA and
GeneCalling in nine different genetic models of systemic autoimmune disease to
identify disease-related genes. CuraGen is using MIM and PathCalling to
identify pathways which incorporate these genes.
Cancer. Cancer encompasses disease processes of almost every organ system
and involves the loss of control of multiple, diverse mechanisms of signal
transduction and pathway regulation. CuraGen is applying GeneCalling and
PathCalling to identify the genes and pathways involved in the early
development of cancer and its step-wise progression to metastatic disease.
CuraGen has analyzed a number of models of cancer and has identified pathways
incorporating proteins common to many of the models.
Infectious Diseases. The Company believes that its program for pathogenic
diseases offers advantages over alternative approaches that primarily aim at
sequencing pathogen genomes with little characterization of the role of
specific pathogen proteins in biological pathways. CuraGen's research,
however, uses MIM and PathCalling to identify protein-protein interactions,
including both pathogen-pathogen and pathogen-host interactions, and
biological pathways to provide this characterization, which is valuable for
target identification and validation. The Company anticipates discovering
novel pathways specific to unique human infectious agents, including viruses,
bacteria and parasites, that are important during resting, vegetative and
pathogenic states of infection. The Company believes its approach may
facilitate the development of diagnostic assays for infectious diseases and
improved vaccines and drugs. The Company has initiated a program for a
specific bacterial pathogen and has discovered novel protein-protein
interactions that tie into known pathways conferring pathogenicity.
DRUG DEVELOPMENT AND PHARMACOGENOMICS
The Company believes that the application of QEA and GeneCalling to identify
genes that are differentially expressed in response to treatment with drug
candidates and marketed drugs represents a significant commercial opportunity.
Using this approach, the tissues targeted by the drug, as well as the organs
that might exhibit side effects, including liver or kidney damage, can be
studied in animal models thought to be indicative of human response. The
Company believes that this information may help pharmaceutical companies
select and optimize
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drug candidates based on efficacy and reduced side effects. In addition to
reducing the time and cost of developing drugs, the Company believes that such
results may strengthen FDA applications. For drugs already on the market, an
understanding of the mechanism of action through pharmacogenomics can help
identify appropriate patient populations and lead to an improved generation of
drugs.
The Company has begun to analyze drugs whose commercial viability or
clinical indications are threatened either by a lack of understanding of
mechanism of action or by severe side effects. The Company's goal is to
generate GeneCalling databases to provide pharmacology and toxicology
information, to understand the mechanism of drug action, to identify patient
populations that are likely to respond favorably to a particular medication
and, potentially, to identify new indications or more optimal targets.
TECHNOLOGY PLATFORM
CuraGen's integrated genomics technologies, processes and information
systems are designed to rapidly generate extensive and precise information
about gene expression, biological pathways and the chemicals that affect these
pathways, each on a scale not previously undertaken. CuraGen's GeneCalling,
PathCalling and HitCalling and related core technologies have been integrated
under its GeneScape operating system. The Company has 14 patent applications
pending on its proprietary technologies. CuraGen intends to continue to pursue
a broad intellectual property position with respect to its GeneCalling,
PathCalling, HitCalling and related core technologies.
QEA AND GENECALLING: CURAGEN'S TECHNOLOGY FOR GENE DISCOVERY
CuraGen's QEA technology and GeneCalling database, accessed over the
Internet through GeneScape, serve as the basis of the Company's collaborations
with Pioneer Hi-Bred, Biogen and Genentech. The use of these technologies has
led to patent filings relating to over disease-related genes in internal
programs and research collaborations.
The QEA process starts with a biological sample from which mRNA molecules
are isolated. The gene expression information contained in the mRNA molecules
is copied back to DNA molecules, which are more chemically stable, to create a
pool of complementary DNA (CDNA). Each of 48 to 96 QEA reactions probes a
separate portion of the original cDNA pool with a unique pair of subsequences,
short stretches of bases. If a cDNA molecule contains both subsequences, it
produces a fluorescently-labeled gene fragment whose length is determined by
the number of bases between the subsequences as they occur in the gene. Each
QEA reaction produces approximately 200 different fragments. The QEA process
typically generates multiple fragments per gene to provide fault tolerance by
minimizing the possibility that a gene will not be detected.
The labeled fragments from each QEA reaction are loaded into individual
lanes of an electrophoresis gel and separated according to length. The
quantity of fragments of each length is determined by optical detection of the
fragment labels. The more copies of a given gene, the more fragments are
produced and the brighter the signal from that gene's fragments. The Company's
proprietary instrumentation and software has the sensitivity to detect
fragments at the level of 1 in 250,000, sufficient to detect a single mRNA
molecule per cell. The detection of 200 fragments in each lane contains
information on both the identities (from the lengths) and expression levels
(from the fluorescence intensities) of approximately 200 genes, as opposed to
alternative EST-sequencing approaches, where a single lane yields information
solely on the identity of a single gene. Analysis of 48 to 96 lanes from
different QEA reactions generates data for approximately 10,000 to 20,000
fluorescently labeled gene fragments. Gene fragment patterns are stored in the
Company's GeneCalling database.
After a sample has been processed by QEA to produce gene fragment patterns,
GeneCalling software uses the subsequence pair in a QEA reaction like an area
code, the fragment length like a phone number, and a database of known genes
like a phone book to identify the gene that generated each fragment. Fragments
which do not have any match in the database of known genes, and which
therefore may represent valuable novel genes, may also be observed. The
Company sequences just these unmatched fragments for inclusion in its
database.
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QEA and GeneCalling are designed to be sufficiently sensitive to detect
genes expressed at the level of a single mRNA per cell, comprehensive by
measuring the expression levels of 95% of the genes expressed in a cell, and
efficient in processing samples, generating gene expression profiles, and
identifying genes whose expression levels correlate with disease. The
Company's technology is able to detect genes with novel sequences and
therefore is applicable broadly to humans, animals, plants and pathogens. The
Company believes that QEA and GeneCalling provide advantages over other
technologies that analyze gene fragment patterns but lack fault tolerance,
specificity or the ability to look up gene identity in a database.
MIM AND PATHCALLING: CURAGEN'S TECHNOLOGY FOR TARGET IDENTIFICATION AND
VALIDATION
CuraGen's MIM technology and PathCalling database were developed to provide
a link between disease-related genes and the biological pathways in which the
proteins encoded by such genes interact. The Company believes that these
technologies, accessed over the Internet through GeneScape, will serve as a
significant component of the Company's research collaborations and
subscriptions. The use of these technologies in internal programs has led to
patent filings on proteins that participate in disease-related biological
pathways.
MIM uses genetically engineered cells to simultaneously test for
interactions between thousands of pairs of proteins. First, two cDNA libraries
are produced from the genes expressed in any biological sample, including
human tissues, animals or pathogens. Next, each cell in the MIM system is
engineered to contain a foreign protein encoded by a gene from one of the two
cDNA libraries. Each of these foreign proteins is connected to one half of an
essential activating protein that has been split in two and cannot function
unless reconstituted. Billions of these engineered cells are then fused,
simultaneously, to test for interactions between the majority of possible
combinations of foreign proteins from each library. If a cell contains two
foreign proteins which interact with each other, the essential activating
protein is reconstituted and permits the cell to live. Those cells that do not
contain interacting proteins die. The identities of the interacting proteins
in the surviving cells are then determined by sequencing the DNA encoding the
foreign proteins.
The Company believes its automated MIM technology is an advance over
technical approaches in which a single target protein is the same in all the
cells, while the second foreign protein is from a cDNA library. This approach
can identify only those proteins that interact with a single target protein of
interest. The Company has introduced proprietary advances that permit testing
of interactions using two protein libraries simultaneously, which eliminates
the need for a specific target protein and the protein-by-protein approach for
elucidating pathways. The Company believes that its proprietary advances in
biological methods and computer software also allow a significant reduction in
the error rate due to incorrect identification of protein-protein
interactions.
COMBIGEN AND HITCALLING: CURAGEN'S TECHNOLOGY FOR MULTIPLEXED HIGH-
THROUGHPUT SCREENING ASSAYS
The Company is developing its CombiGen technology and HitCalling database to
accelerate high-throughput screening of novel protein targets. The Company's
CombiGen technology is designed to employ cells that have been engineered to
express foreign protein targets. Many of these cells, each potentially
expressing unique targets, are then introduced into each well of an assay
plate. The engineered cells in each well are then exposed to a small molecule
from a chemical diversity library as part of an automated, high-throughput
screen. In most cases, the small molecule does not bind to any of the foreign
proteins and all the cells in a well die. If the small molecule does bind to a
foreign protein target in one of the cells, however, that cell lives. This
selection step allows the assay to be multiplexed for many protein targets in
parallel: thousands or millions of cells, each expressing different targets,
can be introduced at once and assayed against the same small molecule. Growth
in a well implies that the small molecule is active against one or more of the
foreign protein targets. The identity of the targets can then be determined by
sequencing DNA from the surviving cells. The identities of the protein targets
and hits will be stored in the HitCalling database.
CombiGen technology leverages CuraGen's expertise with MIM technology and is
directly applicable to proteins discovered by MIM and PathCalling to
participate in protein-protein interactions. CombiGen also permits screening
of protein targets discovered through methods other than MIM.
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CORE TECHNOLOGY DEVELOPMENT
The Company has historically reduced its reliance on equity financing for
developing its GeneCalling, PathCalling, HitCalling and related core
technologies by competing successfully for federal grants. Granting agencies
have included the National Cancer Institute (NCI) and the National Human
Genome Research Institute (NHGRI) of the National Institutes of Health (NIH)
and the National Institute of Standards and Technology (NIST) of the United
States Department of Commerce through its Advanced Technology Program (ATP).
The Company believes that these multiple awards, in particular the receipt of
three separate ATP awards in a highly competitive selection process, attest to
CuraGen's excellence in developing and applying innovative, commercially
valuable technology.
Bioinformatics. CuraGen's GeneScape operating system provides web-based
access to its technologies, processes and databases; full capabilities for
project management and discovery queries over the Internet or at a client's
site; and use of CuraTools, a full-featured suite of bioinformatics software.
GeneScape uses JAVA and C programs to interact with an underlying Oracle
database. The Company plans to continue development of GeneScape as a modular,
cross-platform system able to serve as a standardized operating system for
multiple genomic-based technologies.
Instrumentation. CuraGen has conducted extensive technology research and
development for the analysis of DNA fragments, which the Company considers to
be an important unit operation for genomics. The Company believes that there
is strategic value in developing in-house, proprietary technology and
instrumentation that offers higher performance than commercially-available DNA
electrophoresis and hybridization platforms.
The Company has developed its Niagara DNA analysis device to operate in
conjunction with QEA and GeneCalling. The Company believes that Niagara is
faster, more sensitive and flexible, and offers better resolution of closely-
spaced gene fragments than commercially available instruments. In addition,
the Company has developed its proprietary Open Genome Initiative ("OGI")
software for signal processing and data analysis in conjunction with its
Niagara device. OGI software is integrated with the GeneScape operating
system, but is also capable of stand-alone operation or for use with
commercially available DNA analysis instruments.
CuraGen is developing an upgrade path for the Niagara instrument that
includes MicroNiagara, combining features of slab-gel and capillary
electrophoresis, and NanoNiagara, a micromachined separation chip that uses a
non-electrophoretic, liquid-phase mechanism for DNA separation. The Company
believes that these advanced programs will help maintain its competitive
advantage in the separation, detection and analysis of DNA.
COMPETITION
The Company faces, and will continue to face, intense competition from
pharmaceutical, biotechnology and diagnostic companies, as well as academic
and research institutions and government agencies. The Company is subject to
significant competition from organizations that are pursuing technologies and
products that are the same as or similar to the Company's technology and
products. Many of the organizations competing with the Company have greater
capital resources, research and development staffs and facilities and
marketing capabilities than the Company. In addition, research in the field of
genomics generally is highly competitive. Competitors of the Company in the
genomics area include, among others, public companies such as Affymetrix,
Inc., Human Genome Sciences, Inc., Incyte Pharmaceuticals, Inc. and Millennium
Pharmaceuticals, Inc., as well as private companies and major pharmaceutical
companies. Universities and other research institutions, including those
receiving funding from the federally funded Human Genome Project, also compete
with the Company. The Company's future success will depend in large part on
its maintaining a competitive position in the genomics field. Rapid
technological development by the Company or others may result in products or
technologies becoming obsolete before the Company recovers the expenses it
incurs in connection with their development. Products offered by the Company
could be made obsolete by less expensive or more effective technologies. There
can be no assurance that the Company will be able to make the enhancements to
its technology necessary to compete successfully with newly emerging
technologies. See "Business--Competition."
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A number of competitors are attempting to identify and patent genes and gene
fragments sequenced at random, typically without specific knowledge of the
function of such genes or gene fragments. The Company's competitors may
discover, characterize or develop important genes or gene fragments in advance
of the Company, which could have a material adverse effect on any related
disease research program of the Company. The Company expects competition to
intensify in genomics research as technical advances are made and become more
widely known. See "Risk Factors--Competition."
INTELLECTUAL PROPERTY
The Company's business and competitive position are dependent upon its
ability to protect its GeneCalling, PathCalling and HitCalling proprietary
technologies, processes, databases and information systems. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to obtain and use information that the Company regards as proprietary.
The Company relies on patent, trade secret and copyright law and nondisclosure
and other contractual arrangements to protect such proprietary information.
The Company has filed patent applications for its proprietary methods and
devices for gene expression analysis, for discovery of biological pathways and
for drug screening for pharmaceutical product development. As of September 30,
1997, the Company had 14 patent applications pending, with the United States
Patent and Trademark Office ("USPTO"), covering its technology and had filed
several corresponding international and foreign patent applications. To date,
no patents have been issued to the Company with respect to such technology and
there can be no assurance that any patents will issue. There can be no
assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's proprietary information, that such information will not be disclosed
or that the Company can effectively protect its rights to unpatented trade
secrets or other proprietary information.
The Company's commercial success will also depend in part on obtaining
patent protection on gene and protein target discoveries for which it or its
collaborators or subscribers discover utility and on products, methods and
services based on such discoveries. The Company has applied for patent
protection for novel mutants of known genes and their uses, partial sequences
of novel proteins and their gene sequences and uses, and novel uses for
previously identified genes discovered by third parties. The Company has
sought and intends to continue to seek patent protection for novel uses for
genes and proteins which may have been patented by third parties. In such
cases, the Company would need a license from the holder of the patent with
respect to such gene or protein in order to make, use or sell such gene or
protein for such use. There can be no assurance that the Company will be able
to acquire such licenses on commercially reasonable terms, if at all. The
Company's patent application filings that result from the identification of
genes associated with the cause or effect of a particular disease generally
seek to protect the genes and encoded proteins if these genes and encoded
proteins are, among other things, novel and non-obvious, as well as
therapeutic, diagnostic and drug screening methods and products, and other
subject matter based upon a gene and its indication. Where information is
discovered on the specific biological pathway in which the protein encoded by
the gene participates, the Company also seeks to protect the newly identified
protein complex as well as the methods for identifying intervention
strategies. Each application typically contains multiple genes discovered for
a particular disease system.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the
Company's pending patent applications will result in issued patents, that the
Company will develop additional proprietary technologies that are patentable,
that any patents issued to the Company or its collaborative customers will
provide a basis for commercially viable products or will provide the Company
with any competitive advantages or will not be challenged or circumvented or
invalidated by third parties, or that the patents of others will not have an
adverse effect on the ability of the Company to do business. In addition,
patent law relating to the scope of claims in the technology fields in which
the Company operates is still evolving. The degree of future protection for
the Company's proprietary rights is uncertain. Furthermore, there can be no
assurance that others will not independently develop similar or alternative
technologies, duplicate any of the Company's technologies, or, if patents are
issued to the Company, design around the patented technologies developed by
the Company. In addition, the Company could incur substantial costs in
litigation if it is required to defend itself in patent suits brought by third
parties or if it initiates such suits.
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There can be no assurance that patents for the Company's products or methods
will be obtained, or that, if issued, such patents will provide substantial
protection or be of commercial benefit to the Company. The issuance of a
patent is not conclusive as to its validity or enforceability, nor does it
provide the patent holder with freedom to operate without infringing the
patent rights of others. A patent could be challenged by litigation and, if
the outcome of such litigation were adverse to the patent holder, competitors
could be free to use the subject matter covered by the patent, or the patent
holder may license the technology to others in settlement of such litigation.
The invalidation of key patents owned by or licensed to the Company or non-
approval of pending patent applications could increase competition, and result
in a material adverse effect on the Company's business, financial condition
and results of operations. In addition, there can be no assurance that any
application or exploitation of the Company's technology will not infringe
patents or proprietary rights of others or that licenses that might be
required as a result of such infringement for the Company's processes or
products would be available on commercially reasonable terms, if at all.
The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which
could result in substantial cost to the Company, may also be necessary to
enforce the Company's patent and proprietary rights and/or to determine the
scope and validity of others' proprietary rights. The Company may participate
in interference proceedings that may in the future be declared by the USPTO to
determine priority of invention, which could result in substantial cost to the
Company. There can be no assurance that the outcome of any such litigation or
interference proceedings will be favorable to the Company or that the Company
will be able to obtain licenses to technology that it may require or that, if
obtainable, such technology can be licensed at a reasonable cost.
The public availability of ESTs or other sequence information prior to the
time the Company applies for patent protection on a corresponding full-length
or partial gene could adversely affect the Company's ability to obtain patent
protection with respect to such gene or gene sequences. In addition, certain
other groups are attempting to rapidly identify and characterize genes through
the use of gene expression analysis and other technologies. To the extent any
patents issue to other parties on such partial or full-length genes or uses
for such genes, the risk increases that the sale of potential products,
including therapeutics, or processes developed by the Company or its
collaborators may give rise to claims of patent infringement. Others may have
filed and in the future are likely to file patent applications covering genes
or gene products that are similar or identical to those of the Company. No
assurance can be given that any such patent application will not have priority
over patent applications filed by the Company. Any legal action against the
Company or its collaborators claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition
to subjecting the Company to potential liability for damages, require the
Company or its collaborators to obtain a license in order to continue to
manufacture or market the affected products and processes or could enjoin the
Company from continuing to manufacture or market the affected products and
processes. There can be no assurance that the Company or its collaborators
would prevail in any such action or that any license required under any such
patent would be made available on commercially acceptable terms, if at all.
The Company believes that there may be significant litigation in the industry
regarding patent and other intellectual property rights. If the Company
becomes involved in such litigation, it could consume a substantial portion of
the Company's managerial and financial resources. Under the Company's
government grants and contracts, the federal government has a nonexclusive,
nontransferable, paid-up license to practice or have practiced for or on
behalf of the United States, throughout the world and, under certain
circumstances, to grant to other parties licenses under, any inventions
conceived or first actually reduced to practice under the government grants
and contracts.
There is substantial uncertainty concerning the extent to which supportive
data will be required for issuance of patents for human therapeutics. If data
additional to that available to the Company is required, the Company's ability
to obtain patent protection could be delayed or otherwise adversely affected.
Although the USPTO issued new utility guidelines in July 1995 that address the
requirements for demonstrating utility for biotechnology inventions,
particularly for inventions relating to human therapeutics, there can be no
assurance that USPTO examiners will follow such guidelines or that the USPTO's
position will not change with respect to what is required to establish utility
for gene sequences and products and methods based on such sequences.
Furthermore, the enactment of the legislation implementing the General
Agreement on Tariffs and Trade has resulted in certain
49
<PAGE>
changes to United States patent laws that became effective on June 8, 1995.
Most notably, the term of patent protection for patent applications filed on
or after June 8, 1995 is no longer a period of seventeen years from the date
of grant. The new term of United States patents will commence on the date of
issuance and terminate twenty years from the earliest filing date in the
United States to which priority is claimed for the application. Because the
time from filing to issuance of biotechnology patent applications is often
more than three years, a twenty-year term from the claimed United States
priority date may result in a substantially shortened term of patent
protection, which may adversely impact the Company's patent position. If this
change results in a shorter period of patent coverage, the Company's business
could be adversely affected to the extent that the duration and level of the
royalties it is entitled to receive from its strategic partners is based on
the existence of a valid patent.
The Company also relies upon trade secret protection for some of its
confidential and proprietary information that is not subject matter for which
patent protection is being sought. The Company believes that it has developed
proprietary technology, processes and information systems for use in gene
expression and biological pathway discovery, as well as in the identification
of molecular targets for pharmaceutical development, including proprietary
biological protocols, instrumentation, robotics and automation, software and
an integrated bioinformatics system. In addition, the Company has developed a
database of proprietary gene expression patterns and biological pathways which
it updates on an ongoing basis and which can be accessed over the Internet.
The Company has taken security measures to protect its proprietary
technologies, processes, information systems and data and continues to explore
ways to enhance such security. There can be no assurance, however, that such
measures will provide adequate protection for the Company's trade secrets or
other proprietary information. While the Company requires employees, academic
collaborators and consultants to enter into confidentiality and/or non-
disclosure agreements where appropriate, there can be no assurance that
proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its trade
secrets. See "Risk Factors--Patents and Proprietary Rights; Third Party
Rights."
GOVERNMENT REGULATION
Prior to marketing, any new drug developed by the Company or its
collaborative customers must undergo an extensive regulatory approval process
in the United States and other countries. This regulatory process, which
includes preclinical and clinical studies, as well as post-marketing
surveillance to establish a compound's safety and efficacy, can take many
years and require the expenditure of substantial resources. Generally, in
order to gain FDA approval, a company first must conduct preclinical studies
in the laboratory and in animal models to gain preliminary information on a
compound's efficacy and to identify any safety problems. The results of these
studies are submitted as part of an IND that the FDA must review before human
clinical trials of an investigational drug can start. In order to
commercialize any products, the Company or its collaborative customer will be
required to sponsor and file INDs and will be responsible for initiating and
overseeing the clinical studies to demonstrate the safety and efficacy that
are necessary to obtain FDA approval of any such products. Clinical trials are
normally done in three phases and generally take two to five years, but may
take longer to complete. After completion of clinical trials of a new product,
FDA regulatory authority marketing approval must be obtained. If the product
is classified as a new drug, the Company or its collaborative customer will be
required to file an NDA and receive approval before commercial marketing of
the drug. If the product is characterized as a biologic, both a PLA and an
Establishment License Application ("ELA") will be required prior to commercial
marketing. The testing and approval processes require substantial time and
effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. NDAs and PLAs submitted to the FDA can take several
years to obtain approval. For marketing outside the United States, the Company
will also be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for pharmaceutical products. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country. Delays or
rejections may also be encountered based upon changes in FDA policies for drug
approval during the period of product development and FDA regulatory review of
each submitted NDA in the case of new pharmaceutical agents, or PLA in the
case of biologics. Similar delays also
50
<PAGE>
may be encountered in the regulatory approval of any diagnostic product and in
obtaining regulatory approvals in foreign countries. Under current guidelines,
proposals to conduct clinical research involving gene therapy at institutions
supported by the NIH must be approved by the Recombinant DNA Advisory Committee
and the NIH. There can be no assurance that regulatory approval will be
obtained for any drugs or diagnostic products developed by the Company or its
collaborative customers. Furthermore, regulatory approval may impose
limitations on the indicated use of a drug. Because certain of the products
likely to result from the Company's disease research programs involve the
application of new technologies and may be based upon a new therapeutic
approach, such products may be subject to substantial additional review by
various government regulatory authorities and, as a result, regulatory
approvals may be obtained more slowly than for products using more conventional
technologies.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may have adverse effects on the Company's business,
financial condition and results of operations, including withdrawal of the
product from the market. Violations of regulatory requirements at any stage,
including preclinical studies and clinical trials, the approval process or
post-approval, may result in various adverse consequences to the Company,
including the FDA's delay in approval or refusal to approve a product,
withdrawal of an approved product from the market or the imposition of criminal
penalties against the manufacturer and NDA or PLA holder. The Company has not
submitted an IND for any product candidate, and no product candidate has been
approved for commercialization in the United States or elsewhere. The Company
intends to rely primarily on its collaborators to file INDs and generally
direct the regulatory approval process. No assurance can be given that the
Company or any of its collaborators will be able to conduct clinical testing or
obtain the necessary approvals from the FDA or other regulatory authorities for
any products. Failure to obtain required governmental approvals will delay or
preclude the Company's collaborators from marketing drugs or diagnostic
products developed by the Company or limit the commercial use of such products
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive materials. The
Company is subject to federal, state and local laws and regulations governing
the use, storage, handling and disposal of such materials and certain waste
products. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by
federal, state and local laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result and any liability could exceed the resources of the
Company. See "Risk Factors--Government Regulation; No Assurance of Regulatory
Approval."
EMPLOYEES
At September 30, 1997, the Company had 150 full-time equivalent employees, of
whom 70 held Ph.D. or other doctoral degrees and 12 others held masters or
other post-graduate degrees. The employee group includes engineers, physicians,
molecular biologists, chemists and computer scientists. The Company intends to
expand its number of full-time equivalent employees and affiliates prior to the
end of 1997. The Company believes that its relations with its employees are
good. None of the Company's employees is represented by a union.
FACILITIES
CuraGen's principal administrative offices are located in New Haven,
Connecticut in a 31,000 square foot leased facility. The Company also leases an
8,000 square foot technology development laboratory at its original site in
Branford, Connecticut, and a 4,000 square foot facility in Alachua, Florida.
The Company also supports scientists at the University of California at
Berkeley MicroFabrication laboratory. CuraGen believes that its facilities are
adequate for the Company's operations and that suitable additional space will
be available in New Haven, Branford and Alachua as needed.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
51
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, their ages as of
December 1, 1997, and their positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Jonathan M. Rothberg, Ph.D. (3)...... 34 Chief Executive Officer, President
and Chairman of the Board
Gregory T. Went, Ph.D. (2)........... 34 Executive Vice President and
Director
David M. Wurzer, C.P.A............... 39 Executive Vice President, Treasurer
and Chief Financial Officer
Elizabeth A. Whayland, C.P.A......... 37 Director of Financial Management and
Secretary
Peter A. Fuller, Ph.D................ 43 Vice President, Business Development
Stephen F. Kingsmore, M.B., Ch.B..... 37 Vice President, Research
Richard H. Booth, C.P.A., C.L.U., 50
Ch.F.C. (3)(4)...................... Director
Vincent T. DeVita, Jr., M.D. (2)(5).. 62 Director
Robert E. Patricelli, J.D. (1)(5).... 57 Director
James L. Vincent (1)(4).............. 57 Director
</TABLE>
- --------
(1)Class I Director
(2)Class II Director
(3)Class III Director
(4)Member of the Compensation Committee.
(5)Member of the Audit Committee.
Jonathan M. Rothberg, Ph.D. has served as Chief Executive Officer, President
and Chairman of the Board of Directors of the Company since its formation in
1991. From May 1991 to March 1993, he served as a Postdoctoral Fellow at the
Howard Hughes Medical Institute's Boyer Center for Molecular Medicine. Dr.
Rothberg received his B.S. in Chemical Engineering from Carnegie Mellon
University and his M.S., M. Phil. and Ph.D. in Biology from Yale University.
Gregory T. Went, Ph.D. has served as Executive Vice President of the Company
since February 1997 and as a Director of the Company since October 1997. From
September 1994 until February 1997, Dr. Went served as Vice President,
Business Development of the Company. From the Company's formation until
September 1994, Dr. Went served as Director of Structural Biology. Dr. Went
received his B.S. in Chemical Engineering from Carnegie Mellon University and
his Ph.D. in Chemical Engineering from the University of California, Berkeley.
David M. Wurzer, C.P.A. has served as Executive Vice President, Treasurer
and Chief Financial Officer of the Company since September 1997. From January
1991 to September 1997, Mr. Wurzer served as Senior Vice President and Chief
Financial Officer and in other senior managerial positions for Value Health,
Inc., a managed health care provider. Mr. Wurzer received his B.B.A. from the
University of Notre Dame.
Elizabeth A. Whayland, C.P.A. has served as Director of Financial Management
since November 1994 and as Secretary of the Company since September 1997. From
July 1982 to November 1994, Ms. Whayland served as a Senior Manager and in
other staff and management positions with Deloitte & Touche. Ms. Whayland
received her B.A. from Grove City College and her M.S.T. from the University
of Hartford.
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<PAGE>
Peter A. Fuller, Ph.D. has served as Vice President, Business Development of
the Company since October 1997. From September 1983 to October 1997, Dr.
Fuller served as Director, Technology Identification & Assessment, Director,
Technology Access, Director, Technology Acquisition Group and Soybean Research
Station Manager for Pioneer Hi-Bred, a leading supplier of agricultural
genetics. Dr. Fuller received his B.S. from California State University and
his M.S. and Ph.D. from the University of Nebraska.
Stephen F. Kingsmore, M.B., Ch.B. has served as Vice President, Research of
the Company since October 1997. From July 1994 to October 1997, Dr. Kingsmore
served as Assistant Professor at the University of Florida in its Department
of Medicine, Division of Rheumatology and Clinical Immunology and at its
Center for Mammalian Genetics. He also served as an Affiliate Assistant
Professor at the University of Florida in its Department of Pathology and
Laboratory Medicine from July 1994 to October 1997, and in its Department of
Molecular Genetics and Microbiology from August 1996 to October 1997. From
March 1988 to July 1994, he served in the positions of Postdoctoral Fellow,
Intern, Resident and Fellow, Rheumatology at Duke University. Dr. Kingsmore
received his M.B. and his Ch.B. from Queen's University, Belfast, United
Kingdom.
Richard H. Booth, C.P.A., C.L.U., Ch.F.C. has served as a Director of the
Company since October 1997. Currently, he serves as Executive Vice President,
Corporate Strategic Development of Phoenix Home Life Mutual Insurance Company,
a position he has held since October 1994. He also currently serves as a
director of Phoenix Duff & Phelps Corporation, HSB Group, Inc., Aberdeen Asset
Management, PLC and Mechanics Savings Bank. From August 1994 to September
1994, Mr. Booth served as a consultant for Phoenix Home Life Mutual Insurance
Company. From February 1991 to June 1994, he served as President, Chief
Operating Officer and as a director of The Travelers Corporation, a
diversified financial services company. Mr. Booth received his B.S. and his
M.S.P.A. from the University of Hartford.
Vincent T. DeVita, Jr., M.D. has served as a Director of the Company since
September 1995. Currently, he serves as a director of Imclone Systems, Inc.
and is Director of the Yale University Comprehensive Cancer Center, a position
he has held since July 1993. From September 1988 to July 1993, Dr. DeVita
served as Physician-in-Chief of the Memorial Sloane-Kettering Cancer Center.
From July 1980 to August 1988, he served as Director of the National Cancer
Institute. Dr. DeVita received his B.S. from the College of William and Mary
and his M.D. from the George Washington University School of Medicine.
Robert E. Patricelli, J.D. has served as a Director of the Company since
October 1997. Currently, he serves as the President and Chief Executive
Officer of Patient Centered Health Care, Inc., a women's health services
company, a position he has held since August 1997. He also currently serves as
a director of Northeast Utilities, Inc. and Hartford Life, Inc. From May 1987
to August 1997, he served as Chairman, President and Chief Executive Officer
of Value Health, Inc. Mr. Patricelli received his B.A. from Wesleyan
University and his J.D. from Harvard Law School.
James L. Vincent has served as a Director of the Company since October 1997.
Currently, he serves as Chairman of the Board of Directors of Biogen, a
position he has held since October 1985. From October 1985 until February
1997, Mr. Vincent served as Chief Executive Officer of Biogen. He also served
as Chief Operating Officer and President of Biogen from April 1988 until
February 1994. Prior to that he served as Group Vice President of Allied
Corporation (now AlliedSignal, Inc.), an advanced technology and manufacturing
company, and as President of Allied Health and Scientific Products Company, a
subsidiary of Allied Corporation, a manufacturer of a variety of products used
in the healthcare industry, from 1982 to 1985. He also served as Executive
Vice President, Chief Operating Officer and as a director of Abbott
Laboratories, Inc., a pharmaceutical company. Mr. Vincent received his B.S.
from Duke University and his M.B.A. from Wharton Graduate Business School,
University of Pennsylvania.
The Board of Directors of the Company is divided into three classes as
nearly equal in number as possible. Each year the stockholders will elect the
members of one of the three classes to a three-year term of office. Messrs.
Patricelli and Vincent serve in the class whose term expires in 1998; Drs.
Went and DeVita serve in the class whose term expires in 1999; and Dr.
Rothberg and Mr. Booth serve in the class whose term expires in 2000.
53
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors established a Compensation Committee and an Audit
Committee in October 1997. The Audit Committee oversees the engagement of the
Company's independent accountants, reviews the annual financial statements and
the scope of annual audits and considers matters relating to accounting policy
and internal controls. The Compensation Committee reviews, approves and makes
recommendations to the Board of Directors concerning the Company's
compensation policies, practices and procedures for its executive officers.
The Compensation Committee also administers the Company's 1997 Employee,
Director and Consultant Stock Plan (the "1997 Stock Plan") and the 1993 Stock
Option and Incentive Award Plan (the "1993 Stock Plan"). See "--Stock Option
Plans."
SCIENTIFIC ADVISORY BOARD
In 1995, the Company established a Scientific Advisory Board to assist the
Company in its research and development activities. The Scientific Advisory
Board is comprised of several distinguished scientists from outside the
Company who have significant accomplishments in areas of science and
technology that are important to the Company's future. The following
individuals are the current members of the Scientific Advisory Board:
MEDICAL/MOLECULAR BIOLOGY
Richard P. Lifton, M.D., Ph.D. serves as Chairman of the Company's
Scientific Advisory Board. Dr. Lifton is Professor of Medicine, Genetics,
Molecular Biophysics and Biochemistry at the Yale University School of
Medicine where he also serves as Director of the Programs in Molecular
Genetics and Cardiovascular Genetics. He also serves as Director of the Yale
University Specialized Center of Research in Hypertension and as investigator
of the Howard Hughes Medical Institute. Dr. Lifton received his B.A. from
Dartmouth College and his M.D. and Ph.D. from Stanford University.
Jose Costa, M.D. is Director of Anatomical Pathology and Vice-Chairman of
Pathology at the Yale University School of Medicine, Deputy Director of the
Yale University Comprehensive Cancer Center and Chief of Yale University's
Program for Critical Technologies in Breast Oncology. Dr. Costa received his
B.A. from Lycee Francais College International, Barcelona, Spain and his M.D.
from the University of Barcelona Medical School.
Pietro De Camilli, M.D. is Chairman and Professor of the Department of Cell
Biology at the Yale University School of Medicine where he also serves as a
member of the Executive Committee of the Yale University Diabetes
Endocrinology Research Center. He is an investigator of the Howard Hughes
Medical Institute and is a member of the National Advisory Committee of the
Pew Scholars Program in the BioMedical Sciences. Dr. De Camilli received his
M.D. from the University of Milano, Italy and carried out postdoctoral studies
at the Yale University School of Medicine.
BIOINFORMATICS
Daniel Seligson, Ph.D. has held various senior management positions in the
Technology and Manufacturing Group at Intel Corporation and currently serves
at Intel as Manager of 300mm Process Equipment Development. Dr. Seligson
received his B.S. from the Massachusetts Institute of Technology and his Ph.D.
from the University of California, Berkeley.
Lincoln D. Stein, M.D., Ph.D. has served as a consultant to the Company
since September 1997. From December 1995 to July 1997, Dr. Stein was Director
of Informatics Core at the Massachusetts Institute of Technology Whitehead
Institute. Dr. Stein received his B.A. from The Johns Hopkins University and
his M.D. and Ph.D. from Harvard Medical School.
TECHNOLOGY AND AUTOMATION
Harold G. Craighead, Ph.D. is Professor of Applied and Engineering Physics
at Cornell University. From January 1988 to June 1995, he served as Director
of the Cornell University Nanofabrication Facility. Dr. Craighead received his
B.S. from the University of Maryland and his Ph.D. from Cornell University.
54
<PAGE>
Lynn W. Jelinski, Ph.D. is Director of both the Office of Economic
Development and the Center for Advanced Technology in Biotechnology as well as
a Professor of Engineering at Cornell University. Dr. Jelinski received her
B.S. from Duke University and her Ph.D. from the University of Hawaii.
Each of the Scientific Advisory Board members is employed by an employer
other than the Company or is self-employed and may have commitments to, or
consulting or advisory contracts with, other entities that may conflict or
compete with his or her obligations to the Company. Generally, members of the
Scientific Advisory Board are not expected to devote a substantial portion of
their time to Company matters.
COMPENSATION OF DIRECTORS AND SCIENTIFIC ADVISORS
Non-employee directors are reimbursed for travel costs and other out-of-
pocket expenses incurred in attending each directors' meeting and committee
meeting. Non-employee directors receive no directors' fees but are eligible to
receive automatic grants of non-qualified stock options under the 1997 Stock
Plan. Under the 1997 Stock Plan, each non-employee director, upon first being
elected or appointed to the Board of Directors, receives an option to purchase
20,000 shares of Common Stock, which will vest one-third immediately and one-
third each on the first and second anniversaries of the grant date. Any non-
employee director who joined the Board of Directors prior to the adoption of
the 1997 Stock Plan received an option to purchase 5,000 shares of Common
Stock, which will also vest one-third immediately and one-third each on the
first and second anniversaries of the grant date. Upon joining the Board of
Directors in September 1995, Dr. DeVita was granted an option to purchase
15,000 shares of Common Stock under the 1993 Stock Plan. Additionally, the
1997 Stock Plan provides for an annual grant of an immediately exercisable
option to purchase 5,000 shares of Common Stock to each continuing non-
employee director following each annual meeting of stockholders commencing
with the 1998 annual meeting. All automatic option grants to non-employee
directors will have a term of ten years and an exercise price equal to the
fair market value of the Common Stock on the date of grant. Pursuant to the
foregoing provisions of the 1997 Stock Plan, Dr. DeVita and Messrs. Booth,
Patricelli and Vincent have been granted options to purchase 5,000, 20,000,
20,000, and 20,000 shares of Common Stock, respectively, at the initial public
offering price. See "--Stock Option Plans."
Each member of the Scientific Advisory Board is paid a stipend of $1,000 per
day, plus expenses for each day of service. In addition, members have received
options to purchase shares of the Common Stock. These options were granted at
various exercise prices and are exercisable at various dates through May 2007.
Members of the Scientific Advisory Board may receive additional option grants
from time to time.
In May 1997, the Company entered into a Scientific Advisory Board Agreement
with Richard P. Lifton, M.D. Ph.D. (the "SAB Agreement"). The SAB Agreement
provides for Dr. Lifton to be retained as chairman of the Company's Scientific
Advisory Board and as a consultant to the Company in the field of genomics.
Dr. Lifton will not be required to spend more than 24 days each year providing
services pursuant to the SAB Agreement. The initial term of the SAB Agreement
is for a period of three years and can be extended for
one-year periods. Either party may, however, terminate the SAB Agreement, with
or without cause, by giving at least thirty days prior written notice to the
other party.
During the term of the SAB Agreement, and for a period of six months
following the termination of the SAB Agreement, Dr. Lifton will not directly
or indirectly be a founder of, serve as a member of the scientific board of,
or act as an officer or employee of, or, without written permission of the
Company, consult for any entity that provides biotechnology services or
products or otherwise assists an entity or person in developing, producing,
marketing or selling any biotechnology product or service. Dr. Lifton, may,
however, continue to perform services and research on behalf of the Howard
Hughes Medical Institute or Yale University School of Medicine. If the Company
terminates the SAB Agreement without cause, the foregoing restrictions do not
apply.
Pursuant to the SAB Agreement, Dr. Lifton will receive a consulting fee of
$1,000 for each day of services provided to the Company, as well as
reimbursement for all reasonable and necessary expenses incurred in connection
with his consulting services. Dr. Lifton has also received a stock option to
purchase 86,250 shares of Common Stock at an exercise price of $4.10 per
share.
55
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation. The following table presents certain information
concerning compensation paid or accrued for services rendered to the Company
in all capacities during the year ended December 31, 1996, for the chief
executive officer and the other most highly compensated executive officers of
the Company earning greater than $100,000 in the year ended December 31, 1996
(the "Named Executive Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- -------- ----- ------------
<S> <C> <C> <C>
Jonathan M. Rothberg, Ph.D. ..................... $125,000(1) $-- $--
Chief Executive Officer
</TABLE>
- --------
(1) From the Company's inception through September 30, 1996, Dr. Rothberg
indefinitely deferred the payment of his salary on an interest-free basis.
Accordingly, $93,750 of Dr. Rothberg's salary for the year ended December
31, 1996 has been deferred and $308,125 of Dr. Rothberg's salary has been
deferred in the aggregate.
Option Grants. There were no options granted by the Company during the year
ended December 31, 1996 to the Named Executive Officer.
Option Exercises and Year-End Option Values. The Named Executive Officer did
not exercise any options during 1996 and did not hold any stock options at
December 31, 1996.
EMPLOYMENT ARRANGEMENTS
The Company has entered into letter agreements (collectively, the
"Employment Letters") with the following executive officers: Dr. Went, Mr.
Wurzer, Dr. Fuller and Dr. Kingsmore in February 1997, July 1997, August 1997,
and August 1997, respectively. The Employment Letters do not specify a term of
employment. Pursuant to the Employment Letters, Drs. Went and Kingsmore and
Mr. Wurzer receive base salaries of $125,000 and Dr. Fuller receives a base
salary of $115,000. Each Employment Letter also provides for a bonus, which
the Board of Directors may, in its discretion, award from time to time. The
Company has agreed that, upon the closing of this offering, the Board of
Directors will review Dr. Went's, Mr. Wurzer's, Dr. Fuller's and Dr.
Kingsmore's compensation and provide an enhanced compensation package to each
employee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Booth and Vincent, both non-employee directors, constitute the
Company's Compensation Committee. No executive officer of the Company will
serve 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.
STOCK OPTION PLANS
1997 Stock Plan. The Company's 1997 Stock Plan was approved by the Company's
Board of Directors and stockholders in October 1997. The 1997 Stock Plan
provides for the issuance of stock options and stock grants ("Stock Rights")
to employees, directors and consultants of the Company. A total of 1,500,000
shares of Common Stock have been reserved for issuance under the 1997 Stock
Plan. Options to purchase 65,000 shares of Common Stock have been granted
under the 1997 Stock Plan. The 1997 Stock Plan is administered by the
Compensation Committee of the Board of Directors. The Compensation Committee
has the authority to administer the provisions of the 1997 Stock Plan and to
determine the persons to whom Stock Rights will be granted, the number of
shares to be covered by each Stock Right and the terms and conditions upon
which a Stock Right may be granted.
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<PAGE>
Stock grants under the 1997 Stock Plan will be subject to such terms and
conditions as the Compensation Committee deems to be appropriate and in the
best interest of the Company. These terms may include conditions relating to
the right of the Company to reacquire the shares subject to the stock grant,
including the time and events upon which such rights shall accrue, and the
purchase price of the shares.
Options granted under the 1997 Stock Plan may be either (i) options intended
to qualify as "incentive stock options" under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or (ii) non-qualified stock
options. The exercise price of options granted under the 1997 Stock Plan will
be determined by the Compensation Committee, provided that, in the case of
incentive stock options, the price will not be less than 100% of the fair
market value of the Common Stock on the date of grant, or not less than 110%
of the fair market value of the Common Stock on the date of grant if the
optionee holds 10% or more of the voting stock of the Company. The 1997 Stock
Plan also provides for the automatic grant of non-qualified options to non-
employee directors of the Company. See "--Compensation of Directors and
Scientific Advisors." An incentive stock option granted under the 1997 Stock
Plan may be exercised after the termination of the optionholder's employment
with the Company (other than by reason of death, disability or termination for
"cause" as defined in the 1997 Stock Plan), to the extent exercisable on the
date of termination, at any time prior to the earlier of the option's
specified expiration date or 90 days after such termination. The Compensation
Committee may specify the termination or cancellation provisions applicable to
a non-qualified stock option. In the event of the optionholder's death or
disability, both incentive stock options and non-qualified stock options
generally may be exercised, to the extent exercisable on the date of death or
disability, by the optionholder or the optionholder's survivors at any time
prior to the earlier of the option's specified expiration date or one year
from the date of death or disability. Generally, in the event of the
optionholder's termination for cause, all outstanding and unexercised options
are forfeited.
If the Company is to be consolidated with or acquired by another entity in a
merger, sale of all or substantially all of the Company's assets or otherwise
(an "Acquisition"), the Compensation Committee or the board of directors of
any entity assuming the obligations of the Company under the Plan shall, as to
outstanding options under the plan, either (i) make appropriate provision for
the continuation of such options by substituting, on an equitable basis, for
the shares then subject to such options, the consideration payable with
respect to the outstanding shares of Common Stock in connection with an
Acquisition or securities of the successor or acquiring entity; or (ii) upon
written notice to the optionholders, provide that all options must be
exercised (either to the extent then exercisable or, at the discretion of the
Compensation Committee, all options being made fully exercisable for purposes
of such transaction) within a specified number of days of the date of such
notice, at the end of which period the options shall terminate; or (iii)
terminate all options in exchange for a cash payment equal to the excess of
the fair market value of the shares subject to each such option (either to the
extent then exercisable or, at the discretion of the Compensation Committee,
all options being made fully exercisable for purposes of such transaction)
over the exercise price thereof.
1993 Stock Plan. The Company's 1993 Stock Plan was approved by the Company's
Board of Directors and stockholders in December 1993 and subsequently amended
by the Board of Directors in May 1997. The 1993 Stock Plan provides for the
issuance of stock options and stock awards to employees and consultants of the
Company and members of the Company's Board of Directors and Scientific
Advisory Board. Of the 1,500,000 shares of Common Stock which were reserved
for issuance under the 1993 Stock Plan, options to purchase 1,028,884 shares
have been granted and are outstanding at September 30, 1997. The Company does
not intend to grant any additional options or awards under the 1993 Stock
Plan.
Upon termination of service to the Company (other than by reason of death,
disability or termination for "cause" as defined in the 1993 Stock Plan) an
option granted under the 1993 Stock Plan is generally exercisable, to the
extent exercisable on the date of termination, for up to three months
following termination. In the event of the optionholder's death or disability,
options generally may be exercised, to the extent exercisable on the date of
death or disability, by the optionholder or the optionholder's survivors for
up to one year from the date of death or disability. In the event of the
optionholder's termination for cause, all outstanding and unexercised options
are forfeited.
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<PAGE>
If the Company is to be consolidated with or merged into another entity
(such that the Company is not the surviving entity), or upon a sale of all or
substantially all of the Company's assets or otherwise (a "Change in
Control"), the Compensation Committee or the board of directors of any entity
assuming the obligations of the Company under the plan shall, as to
outstanding options, either (i) make appropriate provision for the
continuation of such options by substituting, on an equitable basis, the
shares then subject to such options for the consideration payable with respect
to the outstanding shares of Common Stock in connection with a Change in
Control or securities of the successor or acquiring entity; or (ii) upon
written notice to the optionholders, provide that all options must be
exercised (to the extent then exercisable) within a specified number of days
of the date of such notice, at the end of which period the options shall
terminate; or (iii) terminate all options in exchange for a cash payment equal
to the excess of the fair market value of the shares subject to each such
option (to the extent then exercisable) over the exercise price thereof.
Additional Options. In addition to the options granted under the 1993 Stock
Plan, the Company has granted options to purchase an aggregate of 570,000
shares of Common Stock pursuant to individual agreements with Company
employees and consultants. These options incorporate the provisions of the
1993 Stock Plan to the extent such provisions are not inconsistent with the
terms of those options.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The DGCL authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The Restated
Certificate limits the liability of directors of the Company to the Company or
its stockholders to the fullest extent permitted by Delaware law. See
"Description of Capital Stock--Delaware Law and Certain Charter and Bylaw
Provisions."
The Restated Certificate provides mandatory indemnification rights to any
officer or director of the Company who, by reason of the fact that he or she
is an officer or director of the Company, is involved in a legal proceeding of
any nature. Such indemnification rights include reimbursement for expenses
incurred by such officer or director in advance of the final disposition of
such proceeding in accordance with the applicable provisions of the DGCL.
There is no pending litigation or proceeding involving a director, officer,
employee or agent of the Company in which indemnification by the Company will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that may result in a claim for such indemnification.
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CERTAIN TRANSACTIONS
Since January 1, 1994, there has not been nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or
is to be a party in which the amount involved exceeded or exceeds $60,000 and
in which any director, executive officer, holder of more than 5% of the Common
Stock of the Company or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material interest
other than the transactions described below.
In 1993, seven members of Dr. Rothberg's family, including Henry M. Rothberg
and Lillian R. Rothberg, who are Dr. Rothberg's parents and five percent
beneficial stockholders of the Company, and Michael J. Rothberg who is Dr.
Rothberg's brother and a five percent beneficial stockholder of the Company,
loaned $898,000 to the Company. On December 30, 1993, the notes evidencing
these loans were canceled in exchange for 898,000 shares of Common Stock and
two-year warrants to purchase 1,122,500 shares of Common Stock at an exercise
price of $1.00 per share. In 1995, the Company modified these warrants to
extend their terms from two years to seven years.
In June 1996 and December 1996, the Company and Genentech, a five percent
beneficial stockholder of the Company, entered into exploratory programs to
evaluate the application of Curagen's integrated genomics technologies to
selected internal programs at Genentech. In connection with the December 1996
exploratory program, the Company raised gross proceeds of approximately
$1,800,000 by completing a private placement of 307,167 shares of Series A
Preferred Stock (the "Series A Preferred Stock") with Genentech at a price of
approximately $5.86 per share. In November 1997, the Company and Genentech
entered into the Genentech Agreement. Pursuant to the Agreement, Genentech
agreed to purchase the Genentech Shares and to provide an interest-bearing
loan facility to the Company. See "--Business--Research Collaborations" for a
description of the exploratory programs and the Genentech Agreement.
In September 1996, October 1996 and January 1997, the Company received
subscriptions of $1,600,000, $50,000 and $100,000, respectively, from five
investors. In March 1997, the Company issued 175,000 shares of Series B
Preferred Stock to these five investors at a price of $10.00 per share in a
private placement. In connection with this private placement, the Company
issued five-year warrants to purchase 358,361 shares of Common Stock at an
exercise price of $5.86 per share. Henry and Lillian Rothberg purchased 60,000
shares of such Series B Preferred Stock and were issued warrants to purchase
122,866 shares of Common Stock. Hemroc II Trust, a trust of which Michael J.
Rothberg is a co-trustee, purchased 10,000 shares of Series B Preferred Stock
and was issued warrants to purchase 20,478 shares of Common Stock. Gianpiero
Molinari, the brother-in-law of Dr. Rothberg and Michael J. Rothberg and the
son-in-law of Henry and Lillian Rothberg, purchased 5,000 shares of the Series
B Preferred Stock and was issued warrants to purchase 10,239 shares of Common
Stock.
In March 1997, the Company raised gross proceeds of $11,787,202 by
completing a private placement of 2,011,468 shares of Series C Convertible
Preferred Stock (the "Series C Preferred Stock") with eleven investors at a
price of $5.86 per share. In connection with this private placement, the
Company also issued three-year warrants to purchase 366,894 shares of Common
Stock at an exercise price of $9.00 per share to two investors who purchased
1,706,485 and 127,986 shares of Series C Preferred Stock, respectively. Henry
and Lillian Rothberg purchased 34,130 shares of the Series C Preferred Stock.
Quantum Industrial Partners LDC, a five percent beneficial stockholder of the
Company, purchased 1,706,485 shares of the Series C Preferred Stock and was
issued warrants to purchase 341,297 shares of Common Stock.
In May 1997, Pioneer became a five percent beneficial stockholder of the
Company, through the purchase of 1,000,000 shares of Series D Convertible
Preferred Stock (the "Series D Preferred Stock") at a price of $7.50 per
share. The Company and Pioneer also entered into a Collaborative Research and
License Agreement related to the discovery and development of genes associated
with plant growth and development. See "Business--Research Collaborations" for
a description of this Agreement.
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In June 1997, the Company raised gross proceeds of approximately $1,000,000
by completing a private placement of 100,000 shares of Series E Convertible
Preferred Stock to Biogen at a price of $10.00 per share. In October 1997, the
Company and Biogen entered into the Biogen Agreement. Pursuant to the Biogen
Agreement, Biogen agreed to purchase the Biogen Shares and to provide a $10
million loan facility to the Company. See "--Business--Research
Collaborations" for a description of the Biogen Agreement. James L. Vincent, a
Director of the Company, currently serves as Chairman of the Board of Biogen.
Upon the closing of this offering, all of the Company's 175,000 outstanding
shares of Series B Preferred Stock will be redeemed by the Company. In
addition, upon the closing of this offering, as part of the Automatic
Conversion, all of the Series A Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock will convert into Common
Stock on a one for one basis. Genentech and Biogen, along with the holders of
the Series C Preferred Stock and the Series D Preferred Stock, have been
granted registration rights. See "Description of Capital Stock--Registration
Rights" for a description of these rights.
From September 1993 to July 1997, Michael J. Rothberg arranged a number of
capital leases and purchases of equipment and supplies on behalf of the
Company. The Company believes that these capital leases and purchases were on
terms at least as favorable as would have been available from a third party.
As compensation for these services, the Company granted stock options to
Michael J. Rothberg as follows: in November 1994, an immediately exercisable
stock option to purchase 15,000 shares of Common Stock at a price of $2.23 per
share; and in March 1996, a stock option to purchase 35,800 shares of Common
Stock at a price of $3.00 per share, which vests over a six-year period from
the date of grant. Both options expire ten years from the date of grant.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of Common Stock as of December 1, 1997, by
(i) each person known to the Company to be the beneficial owner of more than
5% of its outstanding shares of Common Stock, (ii) each director of the
Company, (iii) each executive officer named in the Summary Compensation Table
and (iv) all directors and executive officers of the Company as a group.
Except as otherwise indicated, the persons or entities listed below have sole
voting and investment power with respect to all shares of Common Stock owned
by them.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1)(2)
---------------- ------------------ ------------------------
<S> <C> <C>
Jonathan M. Rothberg, Ph.D. (3).. 3,592,000 40.5%
c/o CuraGen Corporation
555 Long Wharf Drive, 11th Floor
New Haven, CT 06511
Quantum Industrial Partners LDC
(4)............................. 2,047,782 22.2%
Kaya Flamboyan
Willemstad, Curacao
Netherlands Antilles
Pioneer Hi-Bred International,
Inc............................. 1,000,000 11.3%
700 Capital Square
400 Locust Street
Des Moines, IA 50309
Henry M. Rothberg (5)............ 944,496 10.3%
c/o Law Offices of Marshal D.
Gibson, P.C.
152 Temple Street
New Haven, CT 06510
Lillian R. Rothberg (6).......... 944,496 10.3%
c/o Law Offices of Marshal D.
Gibson, P.C.
152 Temple Street
New Haven, CT 06510
Michael J. Rothberg (7).......... 544,388 6.0%
c/o Law Offices of Marshal D.
Gibson, P.C.
152 Temple Street
New Haven, CT 06510
Genentech, Inc. (8).............. [307,167] [ ]%
460 Point San Bruno Blvd.
South San Francisco, CA 94080
Gregory T. Went, Ph.D. (9)....... 218,000 2.4%
Vincent T. DeVita, Jr., M.D.
(10)............................ 16,666 *
Richard H. Booth, C.P.A., C.L.U.,
Ch.F.C. (11).................... 28,731 *
Robert E. Patricelli, J.D. (12).. 6,666 *
James L. Vincent (13)............ 6,666 *
All directors and executive
officers as a group (10 persons)
(14)............................ 3,938,229 42.8%
</TABLE>
- --------
*Less than 1%.
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(1) Shares of Common Stock that an individual or group has the right to
acquire within 60 days of December 1, 1997, pursuant to the exercise of
options or warrants or pursuant to stock purchase agreements are deemed
to be outstanding for the purposes of computing the percentage ownership
of such individual or group, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person shown
in the table.
(2) Percentage of ownership is based on 8,871,987 shares of Common Stock
outstanding on December 1, 1997.
(3) Includes 500,000 shares of Common Stock held by a limited partnership of
which Dr. Rothberg is the sole general partner.
(4) Includes 341,297 shares of Common Stock subject to currently exercisable
warrants. Each of Mr. George Soros and Mr. Stanley Druckenmiller, as a
result of various contractual arrangements, may be deemed to be the
beneficial owner of shares of Common Stock held for the account of
Quantum Industrial Partners LDC.
(5) Consists of 634,130 shares of Common Stock and 310,366 shares of Common
Stock subject to currently exercisable warrants, all held by Grand Hemroc
Limited Partnership of which Henry M. Rothberg is a co-general partner
with his wife, Lillian R. Rothberg.
(6) Consists of 634,130 shares of Common Stock and 310,366 shares of Common
Stock subject to currently exercisable warrants described in footnote 5
above, all held by Grand Hemroc Limited Partnership of which Lillian R.
Rothberg is a co-general partner with her husband, Henry M. Rothberg.
(7) Includes (i) 108,750 shares of Common Stock subject to currently
exercisable warrants, (ii) 22,160 shares of Common Stock subject to
currently exercisable options, (iii) 6,000 shares of Common Stock held by
his wife, Judith Rothberg and (iv) 100,000 shares of Common Stock and
145,478 shares of Common Stock subject to currently exercisable warrants,
all held by Hemroc Trust II of which Michael J. Rothberg is a co-trustee
with his sister, Celia Rothberg Meadow. Mr. Rothberg disclaims beneficial
ownership of the shares of Common Stock held by his wife.
(8) Includes the Genentech Shares to be purchased by Genentech in a
private placement concurrent with this offering.
(9) Consists of 218,000 shares of Common Stock subject to currently
exercisable options of which 10,500 shares are held by trusts for the
benefit of Dr. Went's wife and children. Dr. Went's wife is a co-trustee
of the trusts, and Dr. Went disclaims beneficial ownership of such 10,500
shares. Does not include an additional 192,000 shares subject to options
which are not currently exercisable.
(10) Consists of 16,666 shares of Common Stock subject to currently
exercisable options.
(11) Includes 5,000 shares of Common Stock subject to currently exercisable
warrants and 6,666 shares of Common Stock subject to currently
exercisable options.
(12) Consists of 6,666 shares of Common Stock subject to currently exercisable
options.
(13) Consists of 6,666 shares of Common Stock subject to currently exercisable
options.
(14) Includes 10,000 shares of Common Stock subject to currently exercisable
options held by Peter A. Fuller, 20,000 shares of Common Stock subject to
currently exercisable options held by Stephen F. Kingsmore, 19,500 shares
of Common Stock subject to currently exercisable options held by
Elizabeth A. Whayland, and 20,000 shares of Common Stock subject to
currently exercisable options held by David M. Wurzer. See also footnotes
3 and 9 through 13 above.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value of $.01 per share ("Common Stock"), 5,000,000 shares
of preferred stock, par value of $.01 per share ("Preferred Stock") and
3,000,000 shares of non-voting common stock, par value of $.01 per share (the
"Non-Voting Common Stock"). Upon completion of this offering, there will be
shares of Common Stock and no shares of Preferred Stock or Non-Voting
Common Stock outstanding. As of December 1, 1997, there were 8,871,987 shares
of Common Stock outstanding, held of record by 31 stockholders. In addition,
as of December 1, 1997, there were outstanding options to purchase 1,663,884
shares of Common Stock and warrants to purchase 1,583,866 shares of Common
Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to the
rights and preferences of the holders of any outstanding Preferred Stock, the
holders of Common Stock are entitled to receive ratably such dividends as are
declared by the Board of Directors out of funds legally available therefor,
except that (i) no cash dividends shall be declared and paid on the Common
Stock unless at the same time an equal cash dividend is declared and paid, per
share, on the Non-Voting Common Stock, and (ii) no dividend of property
(including capital stock of the Company) shall be declared and paid on the
Common Stock unless a dividend of an equal amount of the same property has
also been declared and paid, per share, on the Non-Voting Common Stock. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, holders of Common Stock and Non-Voting Common Stock have the
right (together as one class) to a ratable portion of assets remaining after
the payment of all debts and other liabilities, subject to the liquidation
preferences of the holders of any outstanding Preferred Stock. Holders of
Common Stock have neither preemptive rights nor rights to convert their Common
Stock into any other securities and are not subject to future calls or
assessments by the Company. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are,
and the shares offered hereby upon issuance and sale will be, fully paid and
non-assessable. The rights, preferences and privileges of the holders of
Common Stock are subject to, and may be adversely affected by, the rights of
the holders of shares of Preferred Stock that the Company may designate and
issue in the future.
Upon the closing of this offering, certain redemption rights relating to
394,031 shares of Redeemable Common Stock will terminate. See Note 6 of Notes
to Financial Statements for a description of the Redeemable Common Stock.
NON-VOTING COMMON STOCK
Except as provided under the Delaware General Corporation Law, the holders
of the Non-Voting Common Stock are not entitled to vote on any matters
submitted to a vote of stockholders. Subject to the rights and preferences of
the holders of any outstanding Preferred Stock, the holders of Non-Voting
Common Stock are entitled to receive ratably such dividends as are declared by
the Board of Directors out of funds legally available therefor, except that
(i) no cash dividends shall be declared and paid on the Non-Voting Common
Stock unless at the same time an equal cash dividend is declared and paid, per
share, on the Common Stock, and (ii) no dividend of property (including
capital stock of the Company) shall be declared and paid on the Non-Voting
Common Stock unless a dividend of an equal amount of the same property has
also been declared and paid, per share, on the Common Stock. See "Dividend
Policy." In the event of a liquidation, dissolution or winding up of the
Company, holders of Non-Voting Common Stock and Common Stock have the right
(together as one class) to a ratable portion of assets remaining after the
payment of all debts and other liabilities, subject to the liquidation
preferences of the holders of any outstanding Preferred Stock. Holders of Non-
Voting Common Stock have the right, at any time, to convert each share of Non-
Voting Common Stock into shares of Common Stock at the rate of one share of
Common Stock for each share of Non-Voting Common Stock. In addition, upon the
transfer of beneficial ownership of any shares of Non-Voting Common Stock,
such shares shall be automatically converted into shares of Common Stock at
the rate of one share of Common Stock for each share of Non-Voting
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<PAGE>
Common Stock. This automatic conversion shall not apply if such transfer is
made to (i) a majority-owned subsidiary of Genentech, (ii) a corporation of
which Genentech is a wholly owned subsidiary ("Genentech Parent") or (iii) a
wholly owned subsidiary of Genentech Parent; except that if such transfer is
made to a wholly owned subsidiary of Genentech or Genentech Parent and such
wholly owned subsidiary ceases to be a wholly owned subsidiary of Genentech or
Genentech Parent, then such shares shall be automatically converted into
shares of Common Stock at the rate of one share of Common Stock for each share
of Non-Voting Common Stock. Holders of Non-Voting Common Stock do not have
preemptive rights and are not subject to future calls or assessments by the
Company. There are no redemption or sinking fund provisions applicable to the
Non-Voting Common Stock. The rights, preferences and privileges of the holders
of Non-Voting Common Stock are subject to, and may be adversely affected by,
the rights of the holders of shares of Preferred Stock that the Company may
designate and issue in the future.
PREFERRED STOCK
Upon the closing of this offering, all of the outstanding shares of the
Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock"), Series C Convertible Preferred Stock (the "Series C Preferred
Stock"), Series D Convertible Preferred Stock (the "Series D Preferred Stock")
and Series E Convertible Preferred Stock (the "Series E Preferred Stock") will
be converted into 3,418,635 shares of Common Stock pursuant to the Automatic
Conversion. In addition, all of the outstanding shares of Series B Preferred
Stock will be redeemed. The Preferred Stock so converted and redeemed will be
retired and may not be reissued. See Notes 5 and 6 of Notes to Financial
Statements for a description of the Preferred Stock. The Board of Directors is
authorized, subject to certain limitations prescribed by Delaware law, without
further action by the stockholders, to issue shares of Preferred Stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of
shares constituting any series or the designation of such series. The Company
believes that the power to issue Preferred Stock will provide flexibility in
connection with possible corporate transactions. The issuance of Preferred
Stock, however, could adversely affect the voting power of holders of Common
Stock and restrict their rights to receive payments upon liquidation. It could
also have the effect of delaying, deferring 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 December 1, 1997, there were outstanding warrants to purchase
1,583,866 shares of Common Stock held by 16 investors. Such warrants have
expiration dates ranging from 2000 to 2002 and have a weighted average
exercise price of $4.12 per share. The number of shares for which the warrants
are exercisable is subject to adjustment for stock splits, combinations or
dividends and reclassifications, exchanges or substitutions.
REGISTRATION RIGHTS
Following this offering, the holders of 3,318,635 shares of Common Stock and
of warrants to purchase a total of 366,894 shares of Common Stock will have
certain rights to cause the Company to register those shares under the
Securities Act at any time after the first anniversary of the closing date of
this offering. These holders formerly held the Series A Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock that was converted into
Common Stock in the Automatic Conversion. After the first anniversary of the
closing date of this offering, the Company may be required to effect up to two
registrations requested by the former holders of the Series A Preferred Stock,
two registrations requested by the persons who formerly held the Series C
Preferred Stock and who hold the warrants to purchase 366,894 shares of Common
Stock and two registrations requested by the former holder of the Series D
Preferred Stock. In addition, following this offering, Biogen and the
foregoing holders will have certain rights to cause the Company to register
the 3,685,529 shares, plus an additional [100,000] shares, on Form S-3 under
the Securities Act at any time after the first anniversary of the
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<PAGE>
closing date of this offering. There is no limit to the number of Form S-3
registrations that the Company may be required to effect. Stockholders with
registration rights who are not part of an initial registration demand are
entitled to notice of such registration and are entitled to include shares of
Common Stock therein. These registration rights are subject to certain
conditions and limitations, including (i) the right, under certain
circumstances, of the underwriters of an offering to limit the number of
shares included in such registration and (ii) the right of the Company to
delay the filing of a registration statement for not more than 180 days after
receiving the registration demand. The Company will also have the obligation
to register on Form S-3 any shares issued to Biogen and Genentech pursuant to
the conversion of their loan facilities.
In addition, if the Company proposes to register any of its equity
securities under the Securities Act, whether or not for sale for its own
account, other than in connection with a Company employee benefit plan, the
foregoing holders of [3,418,635] shares of Common Stock and warrants to
purchase 366,894 shares of Common Stock, along with the holder of warrants to
purchase 21,111 shares of Common Stock, are entitled to notice of such
registration and are entitled to include their Common Stock therein. These
rights are subject to certain conditions and limitations, including the right
of the underwriters of an offering to limit the number of shares included in
such registration under certain circumstances and the right of the Company to
delay or withdraw any such registration.
All expenses incurred in connection with such registrations (other than
underwriters' discounts and commissions and stock transfer fees or expenses)
and the fees and expenses of a single counsel to the selling stockholders will
be borne by the Company. The right of any holder to demand or be included in
any registration terminates on the date on which such holder may sell all
shares of Common Stock held by such holder under Rule 144 of the Securities
Act.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Upon the consummation of this offering made hereby, the Company will be
subject to the provisions of Section 203 of the DGCL, an anti-takeover law. In
general, Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is, or the
transaction in which the person became an interested stockholder was, approved
in a prescribed manner or another prescribed exception applies. For purposes
of Section 203, a "business combination" is defined broadly to include a
merger, asset sale or other transaction resulting in a financial benefit to
the interested stockholder, and subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns
(or within three years prior, did own) 15% or more of the corporation's voting
stock.
The Board of Directors of the Company is divided into three classes as
nearly equal in number as possible. Each year the stockholders will elect the
members of one of the three classes to a three year term of office. Messrs.
Patricelli and Vincent serve in the class whose term expires in 1998; Drs.
Went and DeVita serve in the class whose term expires in 1999; and Dr.
Rothberg and Mr. Booth serve in the class whose term expires in 2000. All
directors elected to the Company's classified Board of Directors will serve
until the election and qualification of their successors or their earlier
resignation or removal. The Board of Directors is authorized to create new
directorships and to fill such positions so created and is permitted to
specify the class to which such new position is assigned, and the person
filling such position would serve for the term applicable to that class. The
Board of Directors (or its remaining members, even though less than a quorum)
is also empowered to fill vacancies on the Board of Directors occurring for
any reason for the remainder of the term of the class of Directors in which
the vacancy occurred. Members of the Board of Directors may only be removed
for cause. These provisions are likely to increase the time required for
stockholders to change the composition of the Board
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of Directors. For example, in general, at least two annual meetings will be
necessary for stockholders to effect a change in a majority of the members of
the Board of Directors.
The Company's Amended and Restated Bylaws (the "Restated Bylaws"), provide
that, for nominations to the Board of Directors or for other business to be
properly brought by a stockholder before a meeting of stockholders, the
stockholder must first have given timely notice thereof in writing to the
Secretary of the Company. To be timely, a stockholder's notice generally must
be delivered not less than sixty days nor more than ninety days prior to the
annual meeting. If the meeting is not an annual meeting, the notice must
generally be delivered not more than ninety days prior to the special meeting
and not later than the later of sixty days prior to the special meeting or ten
days following the day on which public announcement of the meeting is first
made by the Company. Only such business shall be conducted at a special
meeting of stockholders as is brought before the meeting pursuant to the
Company's notice of meeting. The notice by a stockholder must contain, among
other things, certain information about the stockholder delivering the notice
and, as applicable, background information about the nominee or a description
of the proposed business to be brought before the meeting.
The Restated Certificate also requires 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 a consent
in writing. Special meetings may be called only by the Board of Directors of
the Company pursuant to a resolution adopted by a majority of the total number
of directors authorized.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless the corporation's certificate
of incorporation or bylaws, as the case may be, requires a greater percentage.
The Restated Certificate requires the affirmative vote of the holders of at
least 70% of the outstanding voting stock of the Company to amend or repeal
any of the provisions discussed in this section entitled "Delaware Law and
Certain Charter and Bylaw Provisions" or to reduce the number of authorized
shares of Common Stock and Preferred Stock. Such 70% vote is also required for
any amendment to or repeal of the Restated Bylaws by the stockholders. The
Restated Bylaws may also be amended or repealed by a majority vote of the
Board of Directors. Such 70% stockholder vote would be in addition to any
separate class vote that might in the future be required pursuant to the terms
of any Preferred Stock that might then be outstanding.
The provisions of the Restated Certificate and Restated Bylaws discussed
above could make more difficult or discourage a proxy contest or other change
in the management of the Company or the acquisition or attempted acquisition
of control by a holder of a substantial block of the Company's stock. It is
possible that such provisions could make it more difficult to accomplish, or
could deter, transactions which stockholders may otherwise consider to be in
their best interests.
As permitted by the DGCL, the Restated Certificate provides that Directors
of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of their fiduciary duties as
Directors, except for liability (i) for any breach of their duty of loyalty to
the Company and its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for unlawful payments of dividends or unlawful stock repurchases or
redemptions, as provided in Section 174 or successor provisions of the DGCL or
(iv) for any transaction from which the Director derives an improper personal
benefit.
The Restated Certificate and Restated Bylaws provide that the Company shall
indemnify its Directors and officers to the fullest extent permitted by
Delaware law (except in some circumstances, with respect to suits initiated by
the Director or officer) and advance expenses to such Directors or officers to
defend any action for which rights of indemnification are provided. In
addition, the Restated Certificate and Restated Bylaws also permit the Company
to grant such rights to its employees and agents. The Restated Bylaws also
provide that the Company may enter into indemnification agreements with its
Directors and officers and purchase insurance on behalf of any person whom it
is required or permitted to indemnify. The Company believes that these
provisions
66
<PAGE>
will assist the Company in attracting and retaining qualified individuals to
serve as Directors, officers and employees.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be American Stock
Transfer & Trust Company. The transfer agent's telephone number is (212) 936-
5100.
67
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no market for the Common Stock of the
Company. The Company can make no prediction as to the effect, if any, that
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of the Common Stock in the public market, or the perception that such sales
may occur, could adversely affect prevailing market prices. See "Risk
Factors--Shares Eligible for Future Sale."
Upon completion of this offering, the Company expects to have shares of
Common Stock outstanding (excluding 1,663,884 and 1,583,866 shares reserved
for issuance upon the exercise of outstanding stock options and warrants,
respectively) ( shares of Common Stock outstanding if the Underwriters'
over-allotment option is exercised in full). Of these shares, the shares
offered hereby will be freely tradable without restrictions or further
registration under the Securities Act, except for any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act, which will be subject to the resale limitations imposed by
Rule 144, as described below.
All of the remaining [8,871,987] shares of Common Stock outstanding will be
"restricted securities" within the meaning of Rule 144 and may not be resold
in the absence of registration under the Securities Act, or pursuant to
exemptions from such registration including, among others, the exemption
provided by Rule 144 under the Securities Act. Of the restricted securities,
[1,121,606] shares are eligible for sale in the public market immediately
after this offering pursuant to Rule 144(k) under the Securities Act. A total
of [6,650,381] additional restricted securities will be eligible for sale in
the public market in accordance with Rule 144 under the Securities Act
beginning 90 days after the date of this Prospectus. Taking into consideration
the effect of the lock-up agreements described below and the provisions of
Rules 144 and 144(k), restricted shares will be eligible for sale in the
public market immediately after this offering, restricted shares
(excluding and shares issuable upon the exercise of outstanding stock
options and warrants, respectively) will be eligible for sale beginning 90
days after the date of this Prospectus, and the remaining restricted shares
will be eligible for sale upon the expiration of the lock-up agreements 180
days after the date of this Prospectus, subject to the provisions of Rule 144
under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are required to
be aggregated) whose restricted securities have been outstanding for at least
one year, including a person who may be deemed an "affiliate" of the Company,
may only sell a number of shares within any three-month period which does not
exceed the greater of (i) one percent of the then outstanding shares of the
Company's Common Stock (approximately shares after this offering) or (ii)
the average weekly trading volume in the Company's Common Stock in the four
calendar weeks immediately preceding such sale. Sales under Rule 144 are also
subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. A person who is
not an affiliate of the issuer, has not been an affiliate within three months
prior to the sale and has owned the restricted securities for at least two
years is entitled to sell such shares under Rule 144(k) without regard to any
of the limitations described above.
Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company prior to the
date of this Prospectus will also be eligible for sale in the public market
pursuant to Rule 701 under the Securities Act. In general, Rule 701 permits
resales of shares issued pursuant to certain compensatory benefit plans and
contracts, commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended, in
reliance upon Rule 144, but without compliance with certain restrictions of
Rule 144, including the holding period requirements. As of November 1, 1997,
the Company has granted options covering 1,663,884 shares of Common Stock
which have not been exercised and which become exercisable at various times in
the future. Any shares of Common Stock issued upon the exercise of these
options will be eligible for sale pursuant to Rule 701.
68
<PAGE>
The executive officers and directors and certain other existing stockholders
of the Company, who beneficially own in the aggregate shares of Common
Stock and options to purchase shares of Common Stock, have agreed that
they will not, without the prior written consent of Morgan Stanley & Co.
Incorporated (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the 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, for a period of 180 days after the date of the Prospectus.
Upon completion of this offering, the holders of [3,418,635] shares of
Common Stock and warrants to purchase 388,005 shares of Common Stock are
entitled to certain rights with respect to the registration of such shares
under the Securities Act. The Company will also have the obligation to
promptly register for resale on Form S-3 any shares issued to Biogen and
Genentech pursuant to the conversion of their loan facilities. See
"Description of Capital Stock--Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by affiliates) immediately upon the effectiveness of such
registration. All of the Company's executive officers and directors and
certain other existing stockholders who beneficially own in the aggregate
shares of Common Stock and options to purchase shares of Common Stock have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated, they will not, for a period of 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security exercisable for
Common Stock.
69
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters"), for whom Morgan Stanley & Co. Incorporated, Lehman
Brothers Inc. and Bear, Stearns & Co. Inc. are serving as Representatives (the
"Representatives"), have severally agreed to purchase, and the Company has
agreed to sell to the Underwriters, severally, the respective number of shares
of Common Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...............................
Lehman Brothers Inc. ...........................................
Bear, Stearns & Co. Inc.........................................
---
Total.........................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all the shares of Common Stock offered hereby (other than
those covered by the overallotment option described below) if any such shares
are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price which represents a
concession not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain other dealers.
After the initial offering of the shares of Common Stock, the offering price
and other selling terms may from time to time be varied by the Underwriters.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of the Prospectus, to purchase up to additional shares of
Common Stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise
such option to purchase solely for the purpose of covering overallotments, if
any, made in connection with the offering of the shares of Common Stock
offered hereby. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock offered by the Underwriters hereby.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all of the Company's executive officers and directors
and certain other existing stockholders, who beneficially own in the aggregate
shares of Common Stock and options to purchase shares of Common Stock,
have agreed not to sell or otherwise dispose of Common Stock or convertible
securities of the Company for up to 180 days after the date of this Prospectus
without the prior written consent of Morgan Stanley & Co. Incorporated. The
Company has agreed in the Underwriting Agreement that it will not, directly or
indirectly, without the prior written consent of Morgan Stanley & Co.
Incorporated, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of any shares of Common Stock
or any securities convertible into or exchangeable for Common Stock, for a
period of 180 days after the date of this Prospectus, except under certain
circumstances.
In March 1997, Frederick Frank, Vice Chairman of Lehman Brothers, purchased
100,000 shares of Series B Preferred Stock for a purchase price of $10.00 per
share, or an aggregate of $1,000,000. Upon the closing of this offering, all
of Mr. Frank's 100,000 shares of Series B Preferred Stock will be redeemed by
the Company. In addition, Mr. Frank received a warrant to purchase 204,778
shares of Common Stock at $5.86 per share.
70
<PAGE>
At the request of the Company, the Underwriters have reserved for sale at
the initial public offering price up to shares offered hereby for
officers, directors, employees and certain other persons associated with the
Company. The number of shares available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same basis as the other shares offered hereby.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales in excess of five percent of the total number of
shares of Common Stock offered hereby to accounts over which they exercise
discretionary authority.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
Application has been made to list the Common Stock for quotation on the
Nasdaq National Market under the symbol "CRGN."
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover overallotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the Common Stock in the offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may cease any of these activities at any time.
PRICE OF THE OFFERING
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
negotiations between the Company and the Representatives of the Underwriters.
Among the factors considered in determining the initial public offering price
will be the future prospects of the Company and its industry in general; net
revenue, earnings and certain other financial and operating information of the
Company in recent periods; and certain ratios, market prices of securities and
certain financial operating information of companies engaged in activities
similar to those of the Company. The estimated initial public offering price
range set forth on the cover page of this Prospectus is subject to change as a
result of market conditions or other factors.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial
Center, Boston, Massachusetts 02111 and for the Underwriters by Ropes & Gray,
One International Place, Boston, Massachusetts 02110. Members of Mintz, Levin,
Cohn, Ferris, Glovsky and Popeo, P.C. own an aggregate of 20,486 shares of
Common Stock and warrants to purchase 15,000 shares of Common Stock.
EXPERTS
The financial statements of CuraGen Corporation included in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein. These financial statements have been included
herein in reliance upon the report of said firm given upon their authority as
experts in accounting and auditing.
71
<PAGE>
The statements in this Prospectus under the captions "Risk Factors--Patents
and Proprietary Rights; Third-Party Rights" and "Business--Intellectual
Property" relating to United States patent matters have been passed upon by
Pennie & Edmonds LLP, 1155 Avenue of the Americas, New York, New York 10036,
patent counsel to the Company. Members of Pennie & Edmonds LLP own an
aggregate of 42,673 shares of Common Stock.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 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 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, reference is made to such
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents or provisions of any documents
referred to herein are not necessarily complete, and in each instance where a
copy of the document has been filed as an exhibit to the Registration
Statement, reference is made to the exhibit so filed. The Registration
Statement may be inspected without charge at the office of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the Registration
Statement may be obtained from the Commission at prescribed rates from the
Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. 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 site on the Internet's World Wide Web, located 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>
GLOSSARY
Base The four chemical building blocks, represented
by the letters A, C, G and T, that compose DNA.
Bioinformatics Computer software to assist in the acquisition
and analysis of information relating to genes,
proteins, biological pathways and drugs.
Chromosome The physical structures in cells containing
large stretches of DNA (hundreds of millions of
bases) and the information for thousands of
genes.
DNA The molecule that encodes genetic information
through the sequence of four constituent bases.
DNA Sequence The precise order of bases for a DNA fragment,
a gene, a chromosome or an entire genome.
Fluorescent Label A molecule attached to a gene fragment that
emits light when stimulated by a laser. The
emitted light is detected to measure the
quantity of labeled gene fragments.
Gel Electrophoresis A laboratory process using a gel matrix and an
electric field to determine the size (in number
of bases) of a DNA molecule.
Gene The fundamental unit of heredity. A gene is a
specific sequence of bases (usually thousands
to tens of thousands of bases) located in a
specific location on a particular chromosome.
Genes are transcribed to produce multiple
molecules of mRNA which are then translated to
produce multiple copies of a specific protein.
Gene Expression The process used by a cell to determine which
proteins to produce. The number of copies of a
particular protein produced by a cell is
determined primarily by the number of copies of
the mRNA which encodes it.
Gene Expression Analysis The process of correlating the expression
levels of individual genes (in terms of the
number of copies of mRNA present for a gene)
with cellular behavior as a cause or result of
disease, in response to drug treatment, or over
time.
Gene Fragment A physical piece of a gene (in a test tube or
electrophoresis gel) containing on the order of
50 to 500 bases.
Gene Mapping Determining the position of a gene (or gene
fragment) on a chromosome.
Genome All the bases in all the genes on all the
chromosomes of a species. The human genome
contains over 3 billion bases.
Genomics The comprehensive study of all genes and their
function in biological pathways.
73
<PAGE>
Hybridization Determining the sequence of bases in a gene
fragment by measuring its ability to pair with
trial complementary gene fragments.
mRNA A messenger molecule that serves as the
intermediate between the stretch of DNA that
contains a gene and the final protein that the
gene encodes.
Mutation A change (usually deleterious, but in some
cases protective) in the DNA of a gene.
Mutations can be inherited.
Pathways Networks of protein interactions used to carry
out biological functions including metabolism
and signal transduction.
Pharmacogenomics The study of genes and biological pathways to
predict the efficacy and safety of drug
candidates, review the performance and safety
of marketed drugs and identify appropriate
patient populations.
Protein A molecule composed of amino acids arranged in
a sequence determined by a gene. The types and
numbers of proteins produced by a cell are
determined by the expression levels of
individual genes. Proteins are required for the
structure, function and regulation of the
body's cells, tissues, and organs. Each protein
has a unique function and can act in biological
pathways.
Quantitative Expression
Analysis CuraGen's technology that measures the
expression levels of the different mRNA
molecules present in a cell.
Sequencing The process of determining the identity and
precise order of all the bases in a piece (or
fragment) of DNA.
Signal Transduction One of the processes through which cells
communicate. In a typical signal transduction
pathway, a signal in the form of a protein is
secreted from one cell and binds to a cell-
surface receptor on another cell. The signal is
transduced by downstream pathways in the second
cell to affect its gene expression and the
activities of its biological pathways.
Subsequence A small number of bases (4 to 8) of fixed
sequence used to tag longer stretches of DNA
that constitute a gene. ATCGATC is an example
of a subsequence of 7 bases.
Subsequence Pair A pair of subsequences that are used to tag
genes. The existence of both subsequences
within a gene, together with the distance in
bases between the pair, serves in GeneCalling
like an area code plus a phone number to
identify a gene uniquely.
74
<PAGE>
CURAGEN CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets, December 31, 1995 and 1996 and September 30, 1997
(unaudited).............................................................. F-3
Statements of Operations for the Years Ended December 31, 1994, 1995 and
1996 and for the Nine Months Ended September 30, 1996 and 1997
(unaudited).............................................................. F-4
Statements of Changes in Stockholders' Equity (Deficiency) for the Years
Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended
September 30, 1997 (unaudited)........................................... F-5
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and
1996 and for the Nine Months Ended September 30, 1996 and 1997
(unaudited).............................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
CuraGen Corporation
New Haven, Connecticut
We have audited the accompanying balance sheets of CuraGen Corporation (the
"Company") as of December 31, 1995 and 1996, and the related statements of
operations, changes in stockholders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December
31, 1995 and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
The Company was in the development stage at December 31, 1995; during the
year ended December 31, 1996, the Company completed its development
activities, with the signing of its first collaborative research agreement,
and commenced its planned principal operations.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
September 12, 1997
F-2
<PAGE>
CURAGEN CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 9,129 $ 3,298,642 $ 20,781,115
Grants receivable............................... 205,456 466,089 544,478
Accounts receivable............................. -- 200,000 --
Stock subscriptions receivable.................. 100,000 100,000 --
Other current assets............................ 15,086 13,031 3,800
Prepaid expenses................................ 12,483 22,951 314,408
----------- ----------- ------------
Total current assets.......................... 342,154 4,100,713 21,643,801
----------- ----------- ------------
Property and equipment, net...................... 635,172 1,471,496 4,959,731
----------- ----------- ------------
Other assets:
Notes receivable--related parties............... -- -- 100,000
Deferred real estate commissions, net........... -- -- 62,953
Deferred financing costs, net................... 14,526 11,670 --
Organization costs, net......................... 4,000 2,000 500
Deposits........................................ 10,964 67,512 177,461
----------- ----------- ------------
Total other assets............................ 29,490 81,182 340,914
----------- ----------- ------------
Total assets................................ $ 1,006,816 $ 5,653,391 $ 26,944,446
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable................................ $ 40,540 $ 351,997 $ 778,662
Accrued payroll--related party.................. 214,375 308,125 308,125
Accrued expenses................................ 300,293 574,630 297,210
Deferred revenue................................ 265,079 -- 670,000
Current portion of obligations under capital
leases......................................... 129,636 391,923 1,112,617
Deferred rent................................... 17,246 -- --
----------- ----------- ------------
Total current liabilities..................... 967,169 1,626,675 3,166,614
----------- ----------- ------------
Long-term liabilities:
Deferred rent................................... -- -- 173,869
Note payable.................................... 487,242 509,425 --
Interest payable................................ 145,183 221,014 21,000
Obligations under capital leases, net of current
portion........................................ 265,266 752,162 3,203,191
----------- ----------- ------------
Total long-term liabilities................... 897,691 1,482,601 3,398,060
----------- ----------- ------------
Commitments and contingencies
Redeemable common stock.......................... 914,063 1,142,579 5,319,419
----------- ----------- ------------
Stockholders' equity (deficiency):
Preferred stock:
Series A Preferred.............................. -- 1,800,000 --
Series B Preferred.............................. -- 1,390,772 1,442,090
Common stock; $.01 par value, issued and
outstanding shares 4,919,575 at December 31,
1995, 5,019,575 at December 31, 1996, and
8,477,956 at September 30, 1997 (unaudited).... 49,196 50,196 84,779
Additional paid-in capital...................... 645,237 1,023,267 20,509,028
Accumulated deficit............................. (2,466,540) (2,862,699) (6,975,544)
----------- ----------- ------------
Total stockholders' equity (deficiency)....... (1,772,107) 1,401,536 15,060,353
----------- ----------- ------------
Total liabilities and stockholders' equity
(deficiency)............................... $ 1,006,816 $ 5,653,391 $ 26,944,446
=========== =========== ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
CURAGEN CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Grant revenue.......... $ 257,536 $1,581,175 $4,047,947 $2,901,322 $2,558,167
Collaboration revenue.. -- -- 375,000 200,000 1,613,583
---------- ---------- ---------- ---------- -----------
Total revenue.......... 257,536 1,581,175 4,422,947 3,101,322 4,171,750
---------- ---------- ---------- ---------- -----------
Operating expenses:
Research and
development........... 647,640 1,466,375 3,516,035 2,192,740 6,431,139
General and
administrative........ 525,671 961,815 1,140,325 666,803 2,071,435
---------- ---------- ---------- ---------- -----------
Total operating
expenses.............. 1,173,311 2,428,190 4,656,360 2,859,543 8,502,574
---------- ---------- ---------- ---------- -----------
Income (loss) from
operations............. (915,775) (847,015) (233,413) 241,779 (4,330,824)
---------- ---------- ---------- ---------- -----------
Other income (expenses):
Interest income........ 20,544 12,306 20,848 2,587 525,021
Interest expense....... (60,798) (106,035) (183,594) (121,175) (307,042)
---------- ---------- ---------- ---------- -----------
Total other income
(expenses)............ (40,254) (93,729) (162,746) (118,588) 217,979
---------- ---------- ---------- ---------- -----------
Net income (loss)....... (956,029) (940,744) (396,159) 123,191 (4,112,845)
Preferred dividends..... -- -- (17,106) -- (51,318)
---------- ---------- ---------- ---------- -----------
Net income (loss)
attributable to common
stockholders........... $ (956,029) $ (940,744) $ (413,265) $ 123,191 ($4,164,163)
========== ========== ========== ========== ===========
Net income (loss) per
share attributable to
common stockholders.... $ (0.18) $ (0.17) $ (0.07) $ 0.02 $ (0.50)
========== ========== ========== ========== ===========
Weighted average number
of shares of common
stock outstanding...... 5,458,381 5,692,211 5,874,198 5,865,522 8,334,036
========== ========== ========== ========== ===========
Pro forma net loss per
share attributable to
common stockholders.... $ (0.07) $ (0.50)
========== ===========
Pro forma weighted
average number of
shares of common stock
outstanding............ 5,876,723 8,334,036
========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
CURAGEN CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON
NUMBER STOCK NUMBER ADDITIONAL
OF ($.01 PAR OF PREFERRED PAID-IN ACCUMULATED
SHARES VALUE) SHARES STOCK CAPITAL DEFICIT TOTAL
--------- --------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1994......... 4,590,000 $45,900 -- -- $ 1,052,100 $ (569,767) $ 528,233
Exercise of common stock
warrants............... 210,000 2,100 -- -- 207,900 -- 210,000
Adjustment of redeemable
common stock........... -- -- -- -- (575,973) -- (575,973)
Net loss................ -- -- -- -- -- (956,029) (956,029)
--------- ------- ---------- ------------ ----------- ----------- -----------
DECEMBER 31, 1994....... 4,800,000 48,000 -- -- 684,027 (1,525,796) (793,769)
Issuance of common
stock.................. 19,575 196 -- -- 45,023 -- 45,219
Exercise of common stock
warrants............... 100,000 1,000 -- -- 99,000 -- 100,000
Adjustment of redeemable
common stock........... -- -- -- -- (182,813) -- (182,813)
Net loss................ -- -- -- -- -- (940,744) (940,744)
--------- ------- ---------- ------------ ----------- ----------- -----------
DECEMBER 31, 1995....... 4,919,575 49,196 -- -- 645,237 (2,466,540) (1,772,107)
Exercise of common stock
warrants............... 100,000 1,000 -- -- 151,000 -- 152,000
Issuance of preferred
stock-- Series A....... -- -- 307,167 $ 1,800,000 -- -- 1,800,000
Issuance of preferred
stock with warrants--
Series B............... -- -- 175,000 1,373,666 376,334 -- 1,750,000
Issuance of options to
non-employees.......... -- -- -- -- 96,318 -- 96,318
Preferred stock
dividends.............. -- -- -- 17,106 (17,106) -- --
Adjustment of redeemable
common stock........... -- -- -- -- (228,516) -- (228,516)
Net loss................ -- -- -- -- -- (396,159) (396,159)
--------- ------- ---------- ------------ ----------- ----------- -----------
DECEMBER 31, 1996....... 5,019,575 50,196 482,167 3,190,772 1,023,267 (2,862,699) 1,401,536
Unaudited:
Issuance of common
stock................. 39,746 397 -- -- 162,561 -- 162,958
Issuance of preferred
stock with warrants--
Series C.............. -- -- 2,011,468 11,787,202 -- -- 11,787,202
Issuance of preferred
stock-- Series D...... -- -- 1,000,000 7,500,000 -- -- 7,500,000
Issuance of preferred
stock-- Series E...... -- -- 100,000 1,000,001 -- -- 1,000,001
Issuance of options ... -- -- -- -- 616,374 -- 616,374
Issuance of warrants--
capital lease
obligations........... -- -- -- -- 59,520 -- 59,520
Preferred stock
dividends............. -- -- -- 51,318 (51,318) -- --
Adjustment of
redeemable common
stock................. -- -- -- -- (3,354,393) -- (3,354,393)
Adjustment to reflect
automatic conversion
of preferred stock.... 3,418,635 34,186 (3,418,635) (22,087,203) 22,053,017 -- --
Net loss............... -- -- -- -- -- (4,112,845) (4,112,845)
--------- ------- ---------- ------------ ----------- ----------- -----------
SEPTEMBER 30, 1997
(UNAUDITED)............ 8,477,956 $84,779 175,000 $ 1,442,090 $20,509,028 $(6,975,544) $15,060,353
========= ======= ========== ============ =========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
CURAGEN CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- --------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)..... $(956,029) $(940,744) $ (396,159) $ 123,191 $(4,112,845)
Adjustments to
reconcile net income
(loss) to net cash
(used in) provided by
operating activities:
Depreciation and
amortization......... 127,632 223,626 366,283 274,712 822,692
Non-monetary
compensation......... -- -- 96,318 94,288 616,374
Changes in assets and
liabilities:
Grants receivable.... -- (205,456) (260,633) (387,302) (78,389)
Accounts receivable.. -- -- (200,000) (200,000) 200,000
Other current
assets.............. -- (15,086) 2,055 14,086 9,231
Prepaid expenses..... 100 (8,448) (10,468) 1,224 (70,324)
Payment of deferred
real estate
commissions......... -- -- -- -- (68,949)
Deposits............. 99 (6,082) (56,548) (43,895) (109,949)
Accounts payable..... (9,679) 24,727 311,457 94,933 426,665
Accrued payroll--
related party....... 75,000 105,000 93,750 93,750 --
Accrued expenses..... 2,156 300,293 274,337 154,829 (114,462)
Deferred revenue..... -- 265,079 (265,079) (265,079) 670,000
Deferred rent........ 35,497 (37,204) (17,246) 17,246 173,869
Interest payable..... 51,917 72,266 75,831 51,848 22,433
--------- --------- ---------- ---------- -----------
Net cash (used in)
provided by
operating
activities......... (673,307) (222,029) 13,898 23,831 (1,613,654)
--------- --------- ---------- ---------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisitions of
property and
equipment............ (77,148) (170,471) (248,033) (79,643) (1,415,390)
Loans to related
parties.............. -- -- -- -- (100,000)
--------- --------- ---------- ---------- -----------
Net cash used in
investing
activities......... (77,148) (170,471) (248,033) (79,643) (1,515,390)
--------- --------- ---------- ---------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Payment of deferred
financing costs...... (20,000) -- -- -- --
Payments on capital
lease obligations.... (21,113) (85,261) (178,352) (113,175) (535,760)
Proceeds from issuance
of notes/loan
payable.............. 600,000 -- 175,000 175,000 --
Payment of loan
payable.............. -- -- (175,000) -- --
Proceeds from issuance
of common stock...... 100,000 210,000 252,000 152,000 --
Proceeds from issuance
of preferred stock... -- -- 3,450,000 1,500,000 20,387,203
Proceeds from sale-
leaseback of fixed
assets............... -- -- -- -- 981,207
Payments of stock
issuance costs....... -- -- -- -- (221,133)
--------- --------- ---------- ---------- -----------
Net cash provided by
financing
activities......... 658,887 124,739 3,523,648 1,713,825 20,611,517
--------- --------- ---------- ---------- -----------
Net (decrease) increase
in cash and cash
equivalents........... (91,568) (267,761) 3,289,513 1,658,013 17,482,473
Cash and cash
equivalents, beginning
of year............... 368,458 276,890 9,129 9,129 3,298,642
--------- --------- ---------- ---------- -----------
Cash and cash
equivalents, end of
period................ $ 276,890 $ 9,129 $3,298,642 $1,667,142 $20,781,115
========= ========= ========== ========== ===========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid......... $ 8,881 $ 33,770 $ 107,763 $ 69,326 $ 284,609
NONCASH FINANCING
TRANSACTIONS:
Reduction of note and
related interest
payable upon exercise
of common stock
warrants............. $ -- $ -- $ -- $ -- $ 822,447
Reduction of accrued
expenses upon
issuance of common
stock................ -- 45,219 -- -- 162,958
Obligations under
capital leases....... 64,180 385,314 979,096 459,116 3,767,003
Common stock
subscription
receivable........... 210,000 100,000 -- -- --
Preferred stock
subscription
receivable........... -- -- 100,000 250,000 --
Adjustment of
redeemable common
stock................ 575,973 182,813 228,516 58,685 4,176,840
</TABLE>
See notes to financial statements.
F-6
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--CuraGen Corporation ("CuraGen" or the "Company") is a
biotechnology company focusing on the application of genomics to systematic
discovery of genes, biological pathways and drug candidates in order to
accelerate the discovery and development of the next generation of
therapeutic, diagnostic and agricultural products. The Company was
incorporated in November 1991 and, until March 1993 (inception), was engaged
principally in organizational activities, grant and patent preparation and
obtaining financing. In March 1993, the Company began construction of
approximately 8,000 square feet of custom laboratory and office space in a
leased facility in Branford, Connecticut, and opened its laboratories in July
1993. In March 1997, the Company expanded its custom laboratory and office
space into a 26,000 square foot leased facility in New Haven, Connecticut (see
Note 3).
The Company was in the development stage at December 31, 1995; during the
year ended December 31, 1996, the Company completed its development
activities, with the signing of its first collaborative research agreement,
and commenced its planned principal operations.
Interim Financial Statements--The unaudited financial statements as of
September 30, 1997 and for the nine months ended September 30, 1996 and 1997
and related note information have been prepared on a basis consistent with the
audited financial statements, and in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the results of the interim periods. The results for the
nine months ended September 30, 1997 are not necessarily indicative of the
results to be expected for the entire year.
Revenue Recognition--The Company has entered into collaborative research
agreements which provide for the partial or complete funding of specified
projects in exchange for access to and certain rights in the resultant data
discovered under the related project. Revenue is recognized based upon work
performed or upon the attainment of certain benchmarks specified in the
related agreements (see Note 5). Grant revenue is recognized as related costs
qualifying under the terms of the grants are incurred. Grant revenue is
derived solely from federal and Connecticut agencies (see Note 8). Deferred
revenue arising from payments received from grants and collaborative
agreements is recognized as income when earned.
Cash and Cash Equivalents--The Company considers investments readily
convertible to cash and amounts with a maturity of three months or less at the
date of purchase to be cash equivalents.
Property and Equipment--Property and equipment are recorded at cost.
Equipment under capital leases is recorded at the lower of the net present
value of the minimum lease payments required over the term of the lease or the
fair value of the assets at the inception of the lease. Additions, renewals
and betterments that significantly extend the life of an asset are
capitalized. Minor replacements, maintenance and repairs are charged to
operations as incurred. Equipment is depreciated over the estimated useful
lives of the related assets, ranging from three to seven years, using the
straight-line method. Equipment under capital leases is amortized over the
shorter of the estimated useful life or the terms of the lease, using the
straight-line method. Leasehold improvements are amortized over the term of
the lease, using the straight-line method. When assets are retired or
otherwise disposed of, the assets and related accumulated depreciation or
amortization are eliminated from the accounts and any resulting gain or loss
is reflected in income. For income tax purposes, depreciation is computed
using various accelerated methods and, in some cases, different useful lives
than those used for financial reporting purposes.
Deferred Real Estate Commissions--Deferred real estate commissions were paid
in January 1997 in connection with the signing of the operating lease in New
Haven, Connecticut (see Note 3). These costs are
F-7
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
amortized over the remaining life of the lease as of the date of occupancy,
sixty-nine months, using the straight-line method. Accumulated amortization
aggregated $5,996 as of September 30, 1997 (unaudited).
Deferred Financing Costs--Deferred financing costs are amortized over the
life of the loan, eighty-four months, using the straight-line method.
Accumulated amortization aggregated $5,474, $8,330 and $0 as of December 31,
1995 and 1996 and September 30, 1997 (unaudited), respectively. Related
amortization expense was $2,618 for 1994 and $2,856 for 1995 and 1996.
In April 1997, the Company's note payable was converted into common stock
(see Notes 4 and 6) and as a result the related deferred financing costs were
written off. Amortization expense for the nine months ended September 30, 1996
and 1997 (unaudited) was $2,142 and $11,670, respectively.
Organization Costs--Organization costs are amortized over sixty months,
using the straight-line method. Accumulated amortization was $6,000, $8,000
and $9,500 as of December 31, 1995 and 1996 and September 30, 1997
(unaudited), respectively. Related amortization expense was $2,000 for 1994,
1995 and 1996 and $1,500 for the nine months ended September 30, 1996 and 1997
(unaudited).
Patent Application Costs--Costs incurred in filing for patents are charged
to operations, until such time as it is determined that the filing will be
successful. When it becomes evident with reasonable certainty that an
application will be successful, the costs incurred in filing for patents will
begin to be capitalized. Capitalized costs related to successful patent
applications will be amortized over a period not to exceed twenty years or the
remaining life of the patent, whichever is shorter, using the straight-line
method. As of December 31, 1994, 1995 and 1996 and September 30, 1997
(unaudited), since all patent applications remain in process and no patents
have been issued, all patent application costs have been charged to
operations.
Research and Development Costs--Research and development costs are charged
to operations as incurred.
Stock-Based Compensation--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), which was effective
for the Company beginning January 1, 1996. SFAS 123 requires expanded
disclosures of stock-based compensation arrangements with employees and non-
employees and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instruments awarded to
employees. Companies are permitted to continue to apply Accounting Principles
Board ("APB") No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instruments awarded. The Company will continue
to apply APB No. 25 to its stock-based compensation awards to employees. For
equity instruments awarded to non-employees, the Company records the
transactions based upon the consideration received for such awards or the fair
value of the equity instruments issued, whichever is more reliably measurable.
The Company recorded stock-based compensation expense attributable to non-
employees totaling $96,318, $94,288 and $277,247 for the year ended December
31, 1996 and the nine months ended September 30, 1996 and 1997 (unaudited),
respectively. In addition, the Company recorded stock-based compensation
expense for options issued to employees of $339,127 for the nine months ended
September 30, 1997 (unaudited).
Income Taxes--Income taxes are provided for as required under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). This Statement requires the use of the asset and liability method in
determining the tax effect on future years of the "temporary differences"
between the tax basis of assets and liabilities and their financial reporting
amounts.
Fair Value of Financial Instruments--Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
("SFAS 107"), requires the disclosure of fair value information for certain
assets and liabilities, whether or not recorded in the balance sheets, for
which it is practicable to estimate
F-8
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
that value. The Company has the following financial instruments: cash,
receivables, accounts payable and accrued expenses, and certain long-term
liabilities including a note payable. Additionally, the Company has redeemable
common stock (see Note 6). The Company considers the carrying amount of these
items, excluding the note payable and the redeemable common stock, to
approximate fair value. In addition, it was not practicable to estimate the
fair value of the note payable due to a lack of availability of similar
instruments for comparative purposes.
Net Loss Per Share Attributable to Common Stockholders--Net loss per share
attributable to common stockholders is based on the weighted average number of
shares outstanding for each of the periods presented using the treasury stock
method. Pursuant to the rules of the Securities and Exchange Commission, all
options and warrants granted at prices less than the initial public offering
price during the twelve months preceding the offering date have been included
as common stock equivalents in the calculation of weighted average shares
outstanding for all periods presented.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), was issued in February 1997, and is effective for periods ending
after December 15, 1997. Earlier application is not permitted. SFAS 128
simplifies the standards for computing earnings per share ("EPS") and makes
them comparable to international standards for computing EPS. When effective,
this statement will replace the presentation of primary EPS with the
presentation of basic EPS and will require a dual presentation of basic EPS
and diluted EPS on the face of the Statements of Operations. For the Company,
basic and diluted EPS under SFAS 128 would have equaled the reported EPS for
the years ended December 31, 1994, 1995 and 1996 and for the nine month
periods ended September 30, 1996 and 1997 (unaudited).
Pro Forma Net Loss Per Share Attributable to Common Stockholders--At
December 31, 1996 and September 30, 1997 (unaudited), pro forma net loss per
share attributable to common stockholders and the pro forma weighted average
number of shares of common stock outstanding have been presented in the
statement of operations assuming the Series A, Series C, Series D and Series E
Preferred Stock (see Note 6) was converted to common stock upon issuance.
Conversion of Preferred Stock--The accompanying financial statements
retroactively reflect the conversion of all outstanding shares of Series A, C,
D and E Preferred Stock (Convertible Preferred Stock) to Common Stock on a one
for one basis. The above conversion has been presented since the Company
amended its Certificate of Incorporation in December 1997 to provide that the
Series A, C, D and E Preferred Stock will be automatically converted into
shares of Common Stock upon the closing of a firm committment underwritten
public offering of the Company's Common Stock prior to February 28, 1998,
regardless of the offering price and the net proceeds raised (unaudited). The
amendment to the Certificate of Incorporation eliminated the conditions to
conversion described in Note 6 to the financial statements.
Recently Enacted Pronouncements--Statements of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), and No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), were issued in June 1997.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. It requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as the
other financial statements. Comprehensive income is defined as "the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources." It includes all changes in
equity during a period, except those resulting from investments by owners and
distributions to owners. This statement is effective for fiscal years
beginning after December 15, 1997.
F-9
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SFAS 131 establishes the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997.
As the Company does not have changes in equity other than from investments
by owners and distributions to owners and operates in a single segment the
implementation of both of these standards is not expected to have a material
effect on the Company.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Laboratory equipment..................... $169,589 $ 351,251 $ 505,649
Leased equipment......................... 505,246 1,432,780 5,199,783
Leasehold improvements................... 169,706 205,998 305,788
Office equipment......................... 141,423 171,501 351,497
-------- ---------- ----------
Total property and equipment........... 985,964 2,161,530 6,362,717
Less accumulated depreciation and
amortization............................ 350,792 690,034 1,402,986
-------- ---------- ----------
Total property and equipment, net...... $635,172 $1,471,496 $4,959,731
======== ========== ==========
</TABLE>
3. LEASES
Capital Leases
In April 1997, the Company signed a lease-financing commitment to receive
$4,000,000 to purchase equipment and expand its facilities. The lease
commitment, which expires on March 15, 1998, provides for a payment term of 48
months per individual lease schedule. In addition, the commitment provides for
the issuance to the lessor of two warrants (the "First Warrant" and the
"Second Warrant") to purchase shares of the Company's common stock. The First
Warrant was issued in April 1997 and entitles the lessor to purchase 11,111
shares of common stock at an exercise price of $9.00 per share. The Second
Warrant was issued when the Company's aggregate equipment cost under the
agreement exceeded $2,000,000. The aggregate exercise price for the shares
represented by the Second Warrant is $100,000, and the per share exercise
price is $10.00 per share. The value ascribed to the warrants was $59,521.
The Company has also entered into other capital lease agreements to finance
the purchase of equipment. Leased equipment under all such agreements
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Leased equipment........................... $505,246 $1,432,780 $5,199,783
Less accumulated amortization.............. 116,827 338,879 945,355
-------- ---------- ----------
Leased equipment, net...................... $388,419 $1,093,901 $4,254,428
======== ========== ==========
</TABLE>
F-10
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company financed assets with costs of $64,180, $385,314, and $979,096
for the years ended December 31, 1994, 1995, and 1996, respectively, and
$459,116 and $3,767,003 for the nine months ended September 30, 1996 and 1997
(unaudited). These arrangements have terms of three to five years with
interest rates ranging primarily from 8% to 22%. At the end of the respective
lease terms, the Company has the right to either return the equipment to the
lessor or purchase the equipment at between $1 and 10% of the fair market
value of the equipment.
The future minimum lease payments under capital lease obligations were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Within 1 year................................... $ 547,296 $1,613,398
Within 1 to 2 years............................. 502,137 1,451,646
Within 2 to 3 years............................. 245,971 1,155,424
Within 3 to 4 years............................. 96,933 1,292,562
Within 4 to 5 years............................. 53,946 83,369
---------- ----------
Total minimum lease payments.................... 1,446,283 5,596,399
Less amounts representing interest.............. 302,198 1,221,070
---------- ----------
Present value of future minimum lease payments.. 1,144,085 4,375,329
Less current portion of obligations............. 391,923 1,112,617
---------- ----------
Obligations under capital leases, net of current
portion........................................ $ 752,162 $3,262,712
========== ==========
</TABLE>
Operating Leases
On December 27, 1996, the Company entered into a six-year lease agreement
for 26,000 square feet to house its principal administrative and research
facilities at 555 Long Wharf Drive, New Haven, Connecticut. The lease allows
for two five-year extensions and an option to lease an additional 26,000
square feet.
The future minimum rental payments for the operating lease are as follows as
of December 31, 1996:
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1997.............................................................. $ 131,330
1998.............................................................. 469,505
1999.............................................................. 538,453
2000.............................................................. 538,453
2001.............................................................. 538,453
2002.............................................................. 538,453
----------
Total........................................................... $2,754,647
==========
</TABLE>
The Company also leases its research facilities in Branford, Connecticut,
under a lease agreement expiring in May 1998. During 1996, the Company
exercised an option to extend the term of the operating lease for one
additional two-year term expiring in May 1998. In addition, the Company has an
option to extend the term of the operating lease for one subsequent one-year
term. The future minimum rental payments for this operating lease as of
December 31, 1996 are $100,914 and $42,048 due in fiscal years 1997 and 1998,
respectively. Total rent expense under all operating leases for 1994, 1995 and
1996 was approximately $35,500, $44,000 and
F-11
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$77,200, respectively. In addition, rent expense for the nine months ended
September 30, 1996 and 1997 (unaudited) totaled $51,974 and $328,048,
respectively. There were no significant operating leases entered into during
the nine months ended September 30, 1997 (unaudited).
4. NOTE PAYABLE
In February 1994, the Company borrowed $600,000 (the "CII Note") from
Connecticut Innovations, Incorporated ("CII"), a Connecticut state agency. The
CII Note bears interest at the rate of 10% per annum, and is secured by
certain technology and intellectual property of the Company. The principal
balance is payable on January 10, 2001. In connection with the CII Note, the
Company issued 102,156 shares of common stock to CII (the "CII Stock") and a
stock subscription warrant (the "CII Warrant") to purchase 291,875 shares of
common stock at an aggregate price equal to CII's Note's original principal
balance ($600,000) plus unpaid interest. Both the CII Stock and the CII
Warrants were valued at $155,277 and were recorded as original issue discount.
Such discount was being amortized over eighty-four months, the term of the
loan. The discount was fully amortized upon repayment of the note as discussed
below. In April 1997, the CII Warrant was exercised and CII received 291,875
shares of common stock of the Company for consideration of $822,447, which
represented full payment of the CII Note totaling $600,000 and unpaid interest
of $222,447.
5. COLLABORATIONS
Genentech, Inc.
In June 1996, the Company entered into a Pilot Research Services and
Evaluation Agreement with Genentech, Inc. pursuant to which the Company
performed certain research services for a $200,000 fee. The pilot
collaboration was superseded by the Evaluation Agreement, signed and effective
December 27, 1996, pursuant to which the Company is performing additional
research services during 1997 for a research fee of $667,000 payable in four
equal installments of $166,750. The Company completed the research within four
months of the receipt of tissue samples from Genentech as required by the
Evaluation Agreement and recorded the first three installments amounting to
$500,250 as revenue, which represented 12% of total revenues for the nine
months ended September 30, 1997 (unaudited). The final installment of $166,750
will be recorded as revenue when the Company completes its final report on the
research services performed. The entire accounts receivable balance at
December 31, 1996 was due from Genentech. In connection with the execution of
the Evaluation Agreement, Genentech made an equity investment of $1,800,000 in
the form of 307,167 shares of Series A Convertible Preferred Stock (see Note
6).
Pioneer Hi-Bred International, Inc.
Effective June 1, 1997, the Company entered into a Collaborative Research
and License Agreement with Pioneer Hi-Bred whereby the Company is to perform
research which will be funded by Pioneer Hi-Bred. In conjunction with the
execution of this agreement Pioneer Hi-Bred made an equity investment of
$7,500,000 in the form of 1,000,000 shares of Series D Convertible Preferred
Stock (see Note 6). In addition, Pioneer Hi-Bred will pay the Company $2.5
million per year, for each of three years, in quarterly installments due in
advance, on or before the first day of each calendar quarter, with the first
and last payments prorated. Pioneer Hi-Bred has the right to terminate the
research program at any time upon a breach by the Company and on three months'
written notice at any time after November 1998, if the Company has not
identified any genes associated with certain traits of interest to Pioneer Hi-
Bred. In addition, Pioneer Hi-Bred has the right, at any time after May 2000,
to terminate the research program at its sole discretion on three months'
written notice. The Company may terminate the research program after the third
anniversary of the effective date unless Pioneer Hi-Bred increases annual
research funding for the fourth and fifth years to at least $5.0 million per
year, plus a contractually provided inflation adjustment.
F-12
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The $2.5 million per year fee is based upon an established number of CuraGen
employees whom will be devoted to the Pioneer Hi-Bred research. In accordance
with the Company's revenue recognition policy as described in Note 1, revenue
has been recorded based upon work performed. For the nine months ended
September 30, 1997 (unaudited), the Company has recorded revenue of $833,333,
which represents 20% of total revenue, related to this agreement. In addition,
$625,000 (unaudited) has been received from Pioneer Hi-Bred for which the
related services have not been performed and, therefore, such amount is
recorded as deferred revenue at September 30, 1997.
6. STOCKHOLDERS' EQUITY (DEFICIENCY)
Authorized Capital Stock and Stock Split
In December 1993, the Board of Directors of the Company (i) increased the
authorized shares of common stock of the Company to 20,000,000 shares, (ii)
authorized a class of 3,000,000 shares of serial preferred stock, and (iii)
approved a 34,820 for 1 common stock split. In June 1997, the Board of
Directors of the Company, upon stockholder approval, increased the authorized
shares of common stock of the Company to 25,000,000 and increased the
authorized number of shares of serial preferred stock to 7,500,000.
At December 31, 1996, the Company had reserved 1,329,375 shares of common
stock for issuance pursuant to the 1993 Warrants, the Incentive Warrant and
the CII Warrant and 1,500,000 shares of common stock for issuance pursuant to
the Stock Option and Incentive Award Plan discussed below. At September 30,
1997 (unaudited), the Company has reserved 1,583,666 shares of common stock
pursuant to outstanding warrants and 1,500,000 shares of common stock for
issuance pursuant to the Stock Option and Incentive Award Plan.
Common Stock and Warrants to Purchase Common Stock
During 1993, eight persons advanced an aggregate of $1,008,000 (the "1993
Debt") to the Company to fund certain start-up expenses incurred by, and to
provide certain working capital for, the Company. On December 30, 1993, the
Company converted the 1993 Debt into 1,008,000 shares of common stock, and
issued warrants (the "1993 Warrants") to such persons to purchase an aggregate
of 1,122,500 shares of common stock, at an exercise price of $1.00 per share.
The 1993 Warrants expire on various dates through December 1, 2000. In
December 1994, four 1993 Warrants to purchase an aggregate of 210,000 shares
of common stock were exercised for consideration of $210,000. In December
1995, two 1993 Warrants to purchase an aggregate of 100,000 shares of common
stock were exercised for $100,000. The proceeds were received in January 1996.
In December 1993, the Company entered into an agreement, concluded in March
1994, with a scientific advisor to issue for consideration of $100,000 (i)
100,000 shares of common stock, and (ii) a warrant (the "Investor Warrant") to
purchase 125,000 shares of common stock, at an exercise price of $1.52 per
share. In March 1996, the Investor Warrant to purchase 100,000 shares of
common stock was exercised for consideration of $152,000. The remainder of the
Investor Warrant expired in March 1996.
During February 1994, in connection with the CII Note (see Note 4), the
Company issued 102,156 shares of common stock to CII (the "CII Stock") and a
stock subscription warrant (the "CII Warrant") to purchase 291,875 shares of
common stock at an aggregate price equal to the CII Note's original principal
balance ($600,000) plus any unpaid interest. Both the CII Stock and CII
Warrants were valued at $155,277. In April 1997, the CII Warrant was exercised
and CII received 291,875 shares of common stock of the Company for
consideration of $822,447, which represented full payment of the CII note
totaling $600,000 and unpaid interest of $222,447. The Company has the right
to purchase (the "Call Right") the CII Stock and the CII Warrant from CII (i)
after June 30, 1996, for the greater of (a) the fair market value of the CII
Stock and the CII Warrant or (b) $600,000 plus a compounded annual rate of
return of 30%, if certain levels of capital are raised, or (ii) after
F-13
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
February 10, 1999, for the greater of (a) the fair market value of the CII
Stock and the CII Warrant, or (b) $600,000, plus a compounded annual rate of
return from the date of the note of 25%. Further, CII has the right to sell
(the "Put Right") the CII Stock and the CII Warrant to the Company (i) at any
time until February 10, 2004, in the event that the Company failed to maintain
a Connecticut presence, for the greater of (a) the fair market or book value
of the CII Stock and the CII Warrant, or (b) $600,000, plus a compounded
annual rate of return from the date of the note of 40%, or (ii) at any time in
the event that the Company violates certain covenants or a default occurs
under the CII documents, or at any time after February 10, 1999, for the
greater of (a) the fair market value of the CII Stock and the CII Warrant or
(b) $600,000, plus a compounded annual rate of return from the date of the
note of 25%. Given the redemption features in place, the Company has
classified the stock as redeemable common stock in the balance sheet. The
carrying value of the redeemable common stock has been adjusted through
charges to additional paid-in capital to amounts approximating the redemption
value pursuant to the Put Right.
In March 1997, the Company also issued shares of 17,073 and 22,673 for a
total value of $70,000 and $92,958, respectively, for the settlement of
outstanding accrued expense balances with two separate entities.
Stock Options
In December 1993, the Company adopted a Stock Option and Incentive Award
Plan (the "Option Plan"), which enables the Company to grant non-qualified and
incentive stock options to purchase up to 1,500,000 shares of common stock to
officers, directors, advisors, employees, and affiliates of the Company. At
December 31, 1996, under the Option Plan, the Company had 541,550 options
outstanding and an additional 958,450 available for grant. At September 30,
1997 (unaudited), the Company had 1,027,217 options outstanding under the
Option Plan and an additional 471,116 available for grant. In addition to the
stock options granted under the Option Plan, the Company has granted 456,000
and 570,000 non-qualified stock options at December 31, 1996 and September 30,
1997 (unaudited), respectively, which are not part of a specific plan. No
stock options have been exercised.
A summary of all stock option activity during the years ended December 31,
1994, 1995 and 1996 and the nine months ended September 30, 1997 (unaudited)
is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding January 1, 1994........................ 223,000 $1.00
Granted.......................................... 107,500 1.68
Canceled or lapsed............................... (9,000) 1.52
---------
Outstanding December 31, 1994...................... 321,500 1.21
Granted.......................................... 452,000 2.00
Canceled or lapsed............................... (32,500) 1.00
---------
Outstanding December 31, 1995...................... 741,000 1.70
Granted.......................................... 269,550 3.16
Canceled or lapsed............................... (13,000) 3.00
---------
Outstanding December 31, 1996...................... 997,550 2.08
Granted (unaudited).............................. 632,583 6.33
Canceled or lapsed (unaudited)................... (32,916) 3.28
---------
Outstanding September 30, 1997 (unaudited)......... 1,597,217 3.75
=========
Exercisable December 31, 1994...................... 193,083 1.19
=========
Exercisable December 31, 1995...................... 282,450 1.30
=========
Exercisable December 31, 1996...................... 408,832 1.58
=========
Exercisable September 30, 1997 (unaudited)......... 698,711 2.36
=========
</TABLE>
F-14
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options at December
31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE WEIGHTED
RANGE OF OPTIONS CONTRACTUAL AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE
--------------- ----------- -------------- --------------
<S> <C> <C> <C>
$1.00--$2.50 736,000 8 years $1.70
3.00--4.10 261,550 9.5 years 3.16
-------
997,550 8.5 years 2.08
=======
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE
RANGE OF OPTIONS OF OPTIONS
EXERCISE PRICES EXERCISABLE EXERCISABLE
--------------- ----------- --------------
<S> <C> <C>
$1.00--$2.50 406,166 $1.58
3.00--4.10 2,666 3.00
-------
408,832 1.58
=======
</TABLE>
Had compensation cost for the Company's stock option plans been determined
in accordance with the minimum value method for non-public companies as
prescribed under SFAS 123, the Company's net loss attributable to common
stockholders and net loss per share attributable to common stockholders would
have approximated the pro forma amounts shown below for each of the years
ended December 31, 1995 and 1996 and nine months ended September 30, 1997
(unaudited):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ---------------------
1995 1996 1997
------------------ ------------------ ---------------------
AS AS AS
REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA
-------- --------- -------- --------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net loss attributable to
common stockholders.... $940,744 $974,239 $413,265 $492,540 $4,164,163 $4,481,458
Net loss per share
attributable to common
stockholders........... $ 0.17 $ 0.17 $ 0.07 $ 0.08 $ 0.50 $ 0.54
</TABLE>
The assumptions utilized by the Company in deriving the pro forma amounts
are as follows: 1) 0% dividend yield, 2) .1% expected volatility, 3) risk-free
interest rate of approximately 6%, and 4) expected life of the options of 10
years. The weighted average grant date fair value of options granted during
the years ended December 31, 1995 and 1996 and the nine months ended September
30, 1997 (unaudited) was approximately $0.58 per share, $0.81 per share, and
$6.00 per share, respectively.
Preferred Stock
The Company received aggregate consideration of $1,750,000 from five
investors as subscriptions for the purchase of 175,000 shares of Series B
Redeemable Preferred Stock. In September 1996, October 1996 and January 1997,
the Company received proceeds of $1,600,000, $50,000 and $100,000,
respectively. The Series B Preferred Stock is non-convertible and accrues
dividends at the prime rate. Dividends are payable when declared by the board
of directors. Dividends in arrears at December 31, 1996 and September 30, 1997
(unaudited) were $36,094 and $145,469, respectively. At any time the Company
may redeem the Series B Preferred Stock for an aggregate purchase price of
$1,750,000 plus accrued dividends and dividends in arrears.
F-15
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
If the Company enters into certain qualified equity financings subsequent to
the Series B issuance, as defined in the agreement, the Company will be
required, if requested by all of the holders of the Series B Preferred Stock,
to redeem such shares at an aggregate redemption price of $1,750,000 plus
accrued dividends and dividends in arrears. Such terms have not been met at
September 30, 1997 (unaudited). In addition, holders of the Series B Preferred
Stock received 5 year warrants to purchase an aggregate of 358,361 shares of
Common Stock at $5.86 per share, which warrants expire on March 27, 2002. Such
warrants were valued at $376,334. The value of such warrants is being accreted
over the warrant period and such accretion is classified as preferred
dividends. For the year ended December 31, 1996 and nine months ended
September 30, 1997 (unaudited) such accretion amounted to $17,106 and $51,318,
respectively. At September 30, 1997 (unaudited) the Series B Preferred Stock
has a liquidation preference of $1,895,469.
In December 1996, in connection with the Genentech Evaluation Agreement (see
Note 5), Genentech, Inc. purchased 307,167 shares of Series A Preferred Stock
for $1,800,000, or $5.86 per share. At any time the holders of such stock may
convert their shares to common stock on a 1 for 1 basis. The Series A
Preferred Stock is automatically convertible to common stock on a 1 for 1
basis upon the closing of a firm commitment underwritten public offering of
the Company's common stock subject to the offering price being at least $12.00
per share and net proceeds raised of at least $10,000,000. The Series A
Preferred Stock has a liquidation preference of $1,800,000.
In March 1997, the Company issued 2,011,468 shares of convertible Series C
Preferred Stock for an aggregate purchase price of $11,787,202. At any time
the holders of such stock may convert their shares to common stock on a 1 for
1 basis. The Series C Preferred Stock is automatically convertible to common
stock on a 1 for 1 basis upon the closing of a firm commitment underwritten
public offering of the Company's common stock subject to the offering price
being at least $12.00 per share and net proceeds raised of at least
$10,000,000. In addition, three year warrants were issued to certain
purchasers of the Series C Preferred Stock to purchase an aggregate of 366,894
shares of Common Stock at an exercise price of $9.00 per share. Such warrants
were valued at $0 upon issuance. The Series C Preferred Stock has a
liquidation preference of $11,787,202.
In May 1997, as a result of the Pioneer Hi-Bred Agreement (see Note 5), the
Company issued 1,000,000 shares of Series D Convertible Preferred Stock, for
an aggregate purchase price of $7,500,000. At any time the holders of such
stock may convert their shares to common stock on a 1 for 1 basis. The Series
D Preferred Stock is automatically convertible to common stock on a 1 for 1
basis upon the closing of a firm commitment underwritten public offering of
the Company's common stock subject to the offering price being at least $12.00
per share and net proceeds raised of at least $10,000,000. The Series D
Preferred Stock has a liquidation preference of $7,500,000.
In June 1997, the Company issued 100,000 shares of Series E Convertible
Preferred Stock for an aggregate purchase price of $1,000,001. At any time the
holders of such stock may convert their shares to common stock on a 1 for 1
basis. The Series E Preferred Stock is automatically convertible to common
stock on a 1 for 1 basis upon the closing of a firm commitment underwritten
public offering of the Company's common stock subject to the offering price
being at least $12.00 per share and net proceeds raised of at least
$10,000,000. The Series E Preferred Stock has a liquidation preference of
$1,000,001.
F-16
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
The net deferred tax assets consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Total deferred tax assets............ $ 1,229,000 $ 1,689,000 $ 3,820,000
Valuation allowance.................. (1,229,000) (1,689,000) (3,820,000)
----------- ----------- -----------
Total.............................. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The deferred tax assets are primarily a result of the federal and
Connecticut net operating loss carryforwards and timing differences relating
to accrued payroll and depreciation and amortization. As the Company has no
prior earnings history, a valuation allowance has been established due to the
Company's uncertainty in its ability to benefit from the federal and
Connecticut net operating loss carryforwards. The change in the valuation
allowance was $375,000, $623,000, $460,000, and $2,131,000 for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997
(unaudited), respectively.
At December 31, 1996 and September 30, 1997 (unaudited), the Company has
federal and Connecticut net operating loss carryforwards for income tax
purposes of approximately $2,299,000 and $ 5,786,000, respectively. Federal
and Connecticut net operating loss carryforwards expire beginning in 2008 and
1998, respectively. The Company also has federal and Connecticut research and
development tax credit carryforwards of approximately $191,000 and $387,000,
respectively at December 31, 1996 and $456,000 and $837,000, respectively at
September 30, 1997 (unaudited).
8. GRANTS
The Company has received federal grants for specific purposes that are
subject to review and audit by the grantor agencies. Such audits could lead to
requests for reimbursement by the grantor agency for any expenditures
disallowed under the terms of the grant. Additionally, any noncompliance with
the terms of the grant could lead to loss of current or future awards.
During 1995, the Company received two grants from CII in the amounts of
$450,000 and $237,500. The Company could be required to repay 100% of these
amounts if (i) the Company breaches and fails to cure a material covenant,
(ii) a material representation or warranty of the Company becomes untrue and
is not cured, (iii) the Company becomes bankrupt or insolvent or liquidates
its assets, or (iv) the Company is required to repay the federal grants to
which the CII grants relate. In addition, the Company could be required to
repay up to 200% of the amounts of the CII grants if the Company ceases to
have a "Connecticut presence," prior to December 31, 2004, as defined in the
grants.
In March 1997, the Company was awarded by the Advanced Technology Program
("ATP") of the U.S. Department of Commerce's National Institute of Standards
and Technology a grant in the amount of $2,000,000, payable over a period of
two years, through March 1999. This is the Company's third such grant from the
ATP.
9. RELATED PARTIES
The Chief Executive Officer of the Company has elected to defer payment of a
portion of his salary to future periods on an interest free basis. This amount
has been recorded as accrued payroll--related party as of December 31, 1995
and 1996, and September 30, 1997 (unaudited).
In March 1997, the Company loaned one of its officers $50,000. The term of
the note receivable--related party is 4 years and the note bears interest at
8% per annum. The note will automatically be forgiven upon
F-17
<PAGE>
CURAGEN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
consummation of an initial public offering if certain net proceed amounts are
received by the Company, as defined in the agreement.
In September 1997, the Company agreed to loan one of its officers $50,000
(unaudited) with a term of 17 months bearing interest at 8% per annum. If this
officer remains an employee through the maturity date, the loan will be
extended contingent upon continued employment. This note will be forgiven if
such officer remains an employee through September 2001.
10. SUBSEQUENT EVENTS (UNAUDITED)
In October 1997, the Company entered into an agreement with CII whereby,
among other things, the Call Right and Put Right with respect to the CII
Stock, as defined in Note 6, will be terminated when the Company's Form S-1
Registration Statement becomes effective.
In October 1997, CuraGen and Biogen entered into a research collaboration
and database subscription arrangement to discover novel genes and
therapeutics. Under the terms of the agreement, Biogen agreed to invest $5
million in CuraGen to purchase common stock of the Company at the initial
public offering price and to provide a $10 million interest-bearing loan
facility. At any time during the term of the agreement, the loan is
convertible at CuraGen's option into Common Stock based upon a formula that
approximates its prevailing market price. Biogen will additionally provide
payments over five years to support a research collaboration to generate
project-specific GeneCalling and PathCalling databases from Biogen-specified
disease systems and to gain non-exclusive access to CuraGen's GeneCalling and
PathCalling subscription databases. Payments could reach $18.5 million if the
research collaboration and database subscription arrangement both continue for
the full five-year term. Biogen has an option to acquire exclusive licenses to
certain discoveries arising from the collaboration.
In November 1997, CuraGen and Genentech entered into a research
collaboration and database subscription arrangement to discover novel genes
and therapeutics. Under the terms of the agreement, Genentech has agreed to
purchase $5 million of Common Stock in a private placement at the initial
public offering price. Genetech has also agreed to provide CuraGen with an
interest-bearing loan facility which could in the aggregate reach $26 million
if the research program continues beyond its initial three year term. The loan
facility contains annual borrowing limits and the outstanding principal and
interest under the loan facility are payable five years from the date of the
agreement. Subject to certain limitations, during the term of the agreement,
and after the end of the first year, the drawn-down portion of the loan is
convertible at CuraGen's option into CuraGen Non-Voting Common Stock based
upon a formula that approximates the prevailing market price of the Company's
Common Stock. If issued, the Non-Voting Common Stock is convertible, at
Genentech's option, into Common Stock (i) at any time, at Genentech's option
or (ii) upon the sale or transfer of the Non-Voting Common Stock to a non-
affiliated party. Genentech will additionally provide funding of up to $24
million over five years if the database subscription arrangement is not
terminated and the Genentech Agreement is extended by Genentech beyond the
five-year term of the research collaboration. Genentech has an option to
acquire licenses to certain discoveries arising from the collaboration.
In November 1997, CuraGen and the University of Florida Research Foundation,
Inc. entered into a stock purchase agreement. Under the terms of the
agreement, the University of Florida Research Foundation, Inc. agreed to
invest $1 million in CuraGen to purchase Common Stock at the initial public
offering price. The Company leases laboratory space from the University of
Florida Research Foundation, Inc.
In December 1997, the Company amended its Certificate of Incorporation to
provide that the Series A, C, D and E Preferred Stock, as described in Note 6,
will be automatically converted into shares of Common Stock upon the closing
of a firm commitment underwritten public offering of the Company's Common
Stock prior to February 28, 1998, regardless of the offering price and the net
proceeds raised.
* * * * * *
F-18
<PAGE>
[ADD COMPANY'S LOGO FOR OUTSIDE BACK COVER PAGE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Common Stock being registered. All amounts are estimated except the
registration fee.
<TABLE>
<S> <C>
Commission Registration Fee........................................ $
NASD filing fee....................................................
Nasdaq National Market listing fee.................................
Printing and engraving expenses....................................
Legal fees and expenses............................................
Accounting fees and expenses.......................................
Blue sky fees and expenses (including legal fees)..................
Transfer agent and registrar fees and expenses.....................
Miscellaneous......................................................
-----
TOTAL............................................................ $
=====
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The amendment and restatement of the Company's Certificate of Incorporation
(the "Restated Certificate") provides that the Company shall indemnify to the
fullest extent authorized by the Delaware General Corporation Law ("DGCL"),
each person who is involved in any litigation or other proceeding because such
person is or was a director or officer of the Company or is or was serving as
an officer or director of another entity at the request of the Company,
against all expense, loss or liability reasonably incurred or suffered in
connection therewith. The Restated Certificate provides that the right to
indemnification includes the right to be paid expenses incurred in defending
any proceeding in advance of its final disposition; provided, however, that
such advance payment will only be made upon delivery to the Company of an
undertaking, by or on behalf of the director or officer, to repay all amounts
so advanced if it is ultimately determined that such director is not entitled
to indemnification. If the Company does not pay a proper claim for
indemnification in full within 60 days after a written claim for such
indemnification is received by the Company, the Restated Certificate and
Restated Bylaws authorize the claimant to bring an action against the Company
and prescribe what constitutes a defense to such action.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding brought by reason
of the fact that such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he or
she had no reason to believe his or her conduct was unlawful. In a derivative
action, (i.e., one brought by or on behalf of the corporation),
indemnification may be made only for expenses, actually and reasonably
incurred by any director or officer in connection with the defense or
settlement of such an action or suit, if such person acted in good faith and
in a manner that he reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged to be liable to the corporation, unless
and only to the extent that the court in which the action or suit was brought
shall determine that the defendant is fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
Pursuant to Section 102(b)(7) of the DGCL, Article Tenth of the Restated
Certificate eliminates the liability of a director or the corporation or its
stockholders for monetary damages for such breach of fiduciary duty as a
director, except for liabilities arising (i) from any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) from acts or
omissions not in good faith or which involve intentional misconduct or a
knowing
II-1
<PAGE>
violation of law, (iii) under Section 174 of the DGCL, or (iv) from any
transaction from which the director derived an improper personal benefit.
The Company has obtained primary and excess insurance policies insuring the
directors and officers of the Company against certain liabilities that they
may incur in their capacity as directors and officers. Under such policies,
the insurers, on behalf of the Company, may also pay amounts for which the
Company has granted indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement
and persons who control the Company, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this Registration Statement, the
Company has sold the following securities that were not registered under the
Securities Act.
(a) Issuances of Capital Stock.
On February 14, 1995, the Company sold an aggregate of 210,000 shares of its
Common Stock to five investors at $1.00 per share in exchange for payments of
an aggregate of $210,000 by such investors upon the exercise of warrants to
purchase Common Stock.
On May 9, 1995, the Company issued an aggregate of 19,575 shares of its
Common Stock to two investors in exchange for financial advisory services
rendered by such investors to the Company having a value of $45,218.75.
On December 29, 1995, the Company sold an aggregate of 100,000 shares of its
Common Stock to two investors at $1.00 per share in exchange for payments of
an aggregate of $100,000 by such investors upon the exercise of warrants to
purchase Common Stock.
On March 30, 1996, the Company sold 100,000 shares of its Common Stock to
one investor at $1.52 per share in exchange for payment of $152,000 by such
investor upon the exercise of a warrant to purchase Common Stock.
On December 27, 1996, the Company sold 307,167 shares of its Series A
Convertible Preferred Stock at a purchase price of $5.86 per share to
Genentech, Inc. in a private placement for $1,800,000.
In March 1997, the Company issued 17,073 and 22,673 shares of its Common
Stock to Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. and Pennie &
Edmonds LLP, respectively, at $4.10 per share in exchange for legal services
rendered on behalf of the Company and having an aggregate value of
$162,958.60.
On March 27, 1997, the Company sold an aggregate of 175,000 shares of its
Series B Redeemable Preferred Stock at a purchase price of $10.00 per share to
five investors in a private placement for $1,750,000 in cash. In connection
with this private placement, the Company issued five-year warrants to purchase
358,361 shares of Common Stock at an exercise price of $5.86 per share.
On March 27, 1997, the Company sold an aggregate of 2,011,468 shares of its
Series C Convertible Preferred Stock at a purchase price of $5.86 per share to
eleven investors in a private placement for $11,787,202.48. In connection with
this private placement, the Company also issued three-year warrants to
purchase 366,894 shares of Common Stock at an exercise price of $9.00 per
share to two investors who each purchased 1,706,485 and 127,986 shares of
Series C Convertible Preferred Stock, respectively.
On April 10, 1997, the Company sold 291,875 shares of its Common Stock to
Connecticut Innovations Incorporated in exchange for the cancellation of a
$600,000 principal amount promissory note (plus accrued interest thereon) upon
the exercise of a warrant to purchase Common Stock.
II-2
<PAGE>
On May 16, 1997, the Company sold 1,000,000 shares of its Series D
Convertible Preferred Stock at a purchase price of $7.50 per share to Pioneer
Hi-Bred International, Inc. in a private placement for $7,500,000.
On June 25, 1997, the Company sold 100,000 shares of its Series E
Convertible Preferred Stock at a purchase price of $10.00 per share to Biogen,
Inc. in a private placement for $1,000,000.
In October 1997, the Company agreed to sell $5,000,000 of its Common Stock
to Biogen, Inc. in a private placement concurrent with this offering at a
price per share equal to the price per share at which the Common Stock is sold
in this Offering.
In November 1997, the Company agreed to sell $5,000,000 of its Common Stock
to Genentech, Inc. in a private placement concurrent with this offering at a
price per share equal to the price per share at which the Common Stock is sold
in this Offering.
In November 1997, the Company agreed to sell $1,000,000 of its Common Stock
to the University of Florida Research Foundation, Inc. in a private placement
concurrent with this offering at a price per share equal to the price per
share at which the Common Stock is sold in this Offering.
(b) Certain Grants and Exercises of Stock Options.
Pursuant to the 1993 Stock Option and Incentive Award Plan (the "1993 Stock
Plan"), as of December 1, 1997 the Company has granted options to purchase an
aggregate of 1,028,884 shares of Common Stock, of which options to purchase an
aggregate of 344,961 shares of Common Stock are exercisable at a weighted
average exercise price of $3.43 per share. As of December 1, 1997, no options
pursuant to the foregoing have been exercised.
Pursuant to the 1997 Employee, Director and Consultant Stock Plan (the "1997
Stock Plan"), the Company has granted options to purchase an aggregate of
65,000 shares of Common Stock at a price per share equal to the initial public
offering price, of which options to purchase an aggregate of 21,331 shares of
Common Stock are exercisable. As of December 1, 1997, no options pursuant to
the foregoing have been exercised.
In addition to the options granted under the 1993 Stock Plan and the 1997
Stock Plan, as of December 1, 1997 the Company has issued options to purchase
an aggregate of 570,000 shares of Common Stock pursuant to individual
agreements with Company employees and consultants, of which options to
purchase an aggregate of 345,750 shares of Common Stock are exercisable at a
weighted average exercise price of $1.31 per share. As of December 1, 1997, no
options pursuant to the foregoing have been exercised.
No underwriters were involved in the foregoing offers and sales of
securities. Such offers and sales were made in reliance upon an exemption from
the registration provisions of the Securities Act set forth in Section 4(2)
thereof relative to sales by an issuer not involving any public offering or
the rules and regulations thereunder, or, in the case of options to purchase
Common Stock, Rule 701 under the Securities Act. All of the foregoing
securities are deemed restricted securities for purposes of the Securities
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement
@3.1 Amended and Restated Certificate of Incorporation of the Registrant
3.2 Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant and Certificate of Amendment of Certificate of
Designation, Preferences, and Rights of Series E Preferred Stock of
the Registrant.
*3.3 Form of Amended and Restated Certificate of Incorporation of the
Registrant
@3.4 Amended and Restated Bylaws of the Registrant
*3.5 Form of Amended and Restated Bylaws of the Registrant
4.1 Article Fourth of the Amended and Restated Certificate of
Incorporation of the Registrant (see Exhibit 3.1)
*4.2 Form of Common Stock Certificate
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with
respect to the legality of the securities being registered
@10.1 Lease Agreement (New Haven), dated December 23, 1996, between the
Registrant and Fusco Harbour Associates, LLC
@10.2 Standard Form of Office Lease, as amended (Branford), dated February
11, 1993 and April 26, 1996, between the Registrant and Branford
Office Venture
@10.3 Sid Martin Biotechnology Development Institute Incubator License
Agreement, dated July 15, 1997, between the Registrant and the
University of Florida Research Foundation, Inc.
*10.4 1997 Employee, Director and Consultant Stock Plan
@10.5 1993 Stock Option and Incentive Award Plan
@10.6 Amendment to 1993 Stock Option and Incentive Plan, dated May 12, 1997
@10.7 Employment Letter, dated February 20, 1997, between the Registrant and
Gregory T. Went, Ph.D.
@10.8 Employment Letter, dated July 18, 1997, between the Registrant and
David M. Wurzer
@10.9 Employment Letter, dated August 21, 1997, between the Registrant and
Peter A. Fuller, Ph.D.
@10.10 Employment Letter, dated August 22, 1997, between the Registrant and
Stephen F. Kingsmore, M.B., Ch.B.
@+10.11 Option and Exclusive License Agreement, dated October 4, 1996, between
the Registrant and Wisconsin Alumni Research Foundation
@+10.12 Standard Non-Exclusive License Agreement--Brumley, dated July 1, 1996,
between the Registrant and Wisconsin Alumni Research Foundation
@+10.13 Collaborative Research and License Agreement, dated May 16, 1997,
between the Registrant and Pioneer Hi-Bred International, Inc.
@+10.14 Research and Option Agreement, dated October 1, 1997, between the
Registrant and Biogen, Inc.
+10.15 Research and Option Agreement, dated November 20, 1997, between the
Registrant and Genentech, Inc.
@+10.16 Notice of Grant Award and Grant Application to Department of Health
and Human Services for Automated Sequencing System for Human Genome
Project, dated March 25, 1995
@10.17 ATP Agreement for Integrated Microfabricated DNA Analysis Device for
Diagnosis of Complex Genetic Disorders, dated February , 1995
@10.18 ATP Agreement for Molecular Recognition Technology for Precise Design
of Protein-Specific Drugs, dated March 2, 1995
@10.19 ATP Agreement for Programmable Nanoscale Engines for Molecular
Separation, dated May 6, 1997
@11.1 Schedule of Computation of Net Loss Per Share
@21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
(included in Exhibit 5.1)
23.3 Consent of Pennie & Edmonds LLP
@24.1 Power of Attorney of Messrs. Went, Wurzer and DeVita
@24.2 Power of Attorney of Messrs. Booth, Patricelli and Vincent
27.1 Financial Data Schedule
</TABLE>
- --------
@ Previously filed.
* To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
(b) Financial Statement Schedules
All schedules are omitted because they are not required, are not applicable
or the information is included in the financial statements or notes thereto.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding), is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes 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.
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.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF BOSTON, MASSACHUSETTS ON THIS 16TH DAY OF DECEMBER, 1997.
CuraGen Corporation (Registrant)
/s/ Jonathan M. Rothberg
By: _________________________________
JONATHAN M. ROTHBERGCHIEF
EXECUTIVE OFFICER, PRESIDENT
ANDCHAIRMAN OF THE BOARD
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Jonathan M. Rothberg Chief Executive
- ------------------------------------- Officer, President December 16,
JONATHAN M. ROTHBERG and Chairman of the 1997
Board (principal
executive officer)
* Executive Vice
- ------------------------------------- President and a December 16,
GREGORY T. WENT Director 1997
* Executive Vice
- ------------------------------------- President, December 16,
DAVID M. WURZER Treasurer and Chief 1997
Financial Officer
(principal
financial and
accounting officer)
* Director
- ------------------------------------- December 16,
VINCENT T. DEVITA, M.D. 1997
Director
* December 16,
- ------------------------------------- 1997
RICHARD H. BOOTH
Director
* December 16,
- ------------------------------------- 1997
ROBERT E. PATRICELLI
Director
* December 16,
- ------------------------------------- 1997
JAMES L. VINCENT
II-6
<PAGE>
*By executing his name hereto, Jonathan M. Rothberg is signing this document
on behalf of the persons indicated above pursuant to powers of attorney duly
executed by such persons and filed with the Securities and Exchange
Commission.
By: /s/ Jonathan M. Rothberg
----------------------------------
JONATHAN M. ROTHBERG
(ATTORNEY-IN-FACT)
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement
@3.1 Amended and Restated Certificate of Incorporation of the
Registrant
3.2 Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant and Certificate of Amendment of Certificate of
Designation, Preferences, and Rights of Series E Preferred Stock
of the Registrant.
*3.3 Form of Amended and Restated Certificate of Incorporation of the
Registrant
@3.4 Amended and Restated Bylaws of the Registrant
*3.5 Form of Amended and Restated Bylaws of the Registrant
4.1 Article Fourth of the Amended and Restated Certificate of
Incorporation of the Registrant (see Exhibit 3.1)
*4.2 Form of Common Stock Certificate
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
with respect to the legality of the securities being registered
@10.1 Lease Agreement (New Haven), dated December 23, 1996, between the
Registrant and Fusco Harbour Associates, LLC
@10.2 Standard Form of Office Lease, as amended (Branford), dated
February 11, 1993 and April 26, 1996, between the Registrant and
Branford Office Venture
@10.3 Sid Martin Biotechnology Development Institute Incubator License
Agreement, dated July 15, 1997, between the Registrant and the
University of Florida Research Foundation, Inc.
*10.4 1997 Employee, Director and Consultant Stock Plan
@10.5 1993 Stock Option and Incentive Award Plan
@10.6 Amendment to 1993 Stock Option and Incentive Plan, dated May 12,
1997
@10.7 Employment Letter, dated February 20, 1997, between the Registrant
and Gregory T. Went, Ph.D.
@10.8 Employment Letter, dated July 18, 1997, between the Registrant and
David M. Wurzer
@10.9 Employment Letter, dated August 21, 1997, between the Registrant
and Peter A. Fuller, Ph.D.
@10.10 Employment Letter, dated August 22, 1997, between the Registrant
and Stephen F. Kingsmore, M.B., Ch.B.
@+10.11 Option and Exclusive License Agreement, dated October 4, 1996,
between the Registrant and Wisconsin Alumni Research Foundation
@+10.12 Standard Non-Exclusive License Agreement--Brumley, dated July 1,
1996, between the Registrant and Wisconsin Alumni Research
Foundation
@+10.13 Collaborative Research and License Agreement, dated May 16, 1997,
between the Registrant and Pioneer Hi-Bred International, Inc.
@+10.14 Research and Option Agreement, dated October 1, 1997, between the
Registrant and Biogen, Inc.
+10.15 Research and Option Agreement, dated November 20, 1997, between
the Registrant and Genentech, Inc.
@+10.16 Notice of Grant Award and Grant Application to Department of
Health and Human Services for Automated Sequencing System for
Human Genome Project, dated March 25, 1995
@10.17 ATP Agreement for Integrated Microfabricated DNA Analysis Device
for Diagnosis of Complex Genetic Disorders, dated February , 1995
@10.18 ATP Agreement for Molecular Recognition Technology for Precise
Design of Protein-Specific Drugs, dated March 2, 1995
@10.19 ATP Agreement for Programmable Nanoscale Engines for Molecular
Separation, dated May 6, 1997
@11.1 Schedule of Computation of Net Loss Per Share
@21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
(included in Exhibit 5.1)
23.3 Consent of Pennie & Edmonds LLP
@24.1 Power of Attorney of Messrs. Went, Wurzer and DeVita
@24.2 Power of Attorney of Messrs. Booth, Patricelli and Vincent
27.1 Financial Data Schedule
</TABLE>
- --------
@ Previously filed.
* To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CURAGEN CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Company") is
CuraGen Corporation.
2. The certificate of incorporation of the Company filed with the
Delaware Secretary of State on November 22, 1991 is hereby amended as
follows: (i) Section 5(b) to Exhibit A of the Restated Certificate is
deleted in its entirety and the new Section 5(b), attached hereto as
Exhibit X, is inserted in its place; (ii) Section 5(b) to Exhibit C of
---------
the Restated Certificate is deleted in its entirety and the new
Section 5(b), attached hereto as Exhibit Y, is inserted in its place;
---------
and (iii) Section 5(b) to Exhibit D of the Restated Certificate is
deleted in its entirety and the new Section 5(b), attached hereto as
Exhibit Z, is inserted in its place.
---------
3. The amendment of the certificate of incorporation herein certified was
duly adopted in accordance with the applicable provisions of Sections
242 and 228 of the General Corporation Law of the State of Delaware.
In lieu of a meeting and vote of the stockholders, the holders of the
necessary number of shares of the Corporation's capital stock have
given written consent to said amendment in accordance with the
provisions of Section 228 of the General Corporation Law of the State
of Delaware, and said written consent was filed with the Corporation
and notice thereof has been given to those stockholders who have not
consented in writing.
Signed this 11th day of December, 1997.
CURAGEN CORPORATION
By: /s/ Jonathan M. Rothberg
--------------------------------------
Jonathan M. Rothberg, Ph.D.
Chief Executive Officer, President
and Chairman of the Board
<PAGE>
EXHIBIT X
---------
(b) Automatic Conversion. (i) All outstanding shares of Series A
--------------------
Preferred Stock shall be deemed automatically converted into such number of
shares of Common Stock as are determined in accordance with Section 5(a) hereof
immediately upon the closing of a firm commitment underwritten public offering
of the Common Stock of the Company pursuant to a registration statement filed
with and declared effective on or before February 28, 1998 by the Securities and
Exchange Commission under the Securities Act of 1933, as amended, other than a
registration statement relating solely to a transaction under Rule 145 under
such Act (or any successor thereto), or an employee benefit plan of the Company,
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent.
(ii) All outstanding shares of Series A Preferred Stock shall be deemed
automatically converted into such number of shares of Common Stock as are
determined in accordance with Section 5(a) hereof immediately upon the closing
of a firm commitment underwritten public offering of the Common Stock of the
Company pursuant to a registration statement filed with and declared effective
after February 28, 1998 by the Securities and Exchange Commission under the
Securities Act of 1933, as amended, other than a registration statement relating
solely to a transaction under Rule 145 under such Act (or any successor
thereto), or an employee benefit plan of the Company, at a public offering price
(prior to underwriting discounts and expenses) of $12.00 per share of Common
Stock (as adjusted for any stock dividends, combinations or splits with respect
to such shares), in which the aggregate proceeds to the Company shall be at
least $10,000,000 (after deductions for underwriting discounts, other related
compensation and expenses relating to issuances, including, without limitation,
fees of the Company's counsel), without any further action by the holders of
such shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent.
(iii) Upon such conversion, the holders of certificates representing shares
of Series A Preferred Stock shall, upon notice from the Company, surrender such
certificates at the principal office of the Company or its transfer agent for
the Common Stock. As soon as practicable thereafter, there shall be issued and
delivered to such holder a certificate or certificates for the number of shares
of Common Stock into which the shares of Series A Preferred Stock represented by
the certificate so surrendered were converted. The Company shall not be
obligated to issue such certificates unless certificates evidencing the shares
of Series A Preferred Stock so converted are either delivered to the Company or
any such transfer agent, or the holder notifies the Company that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. All rights with respect to the Series A Preferred
Stock so converted (other than the right to receive declared but unpaid
dividends), including, but not limited to, the right to vote shares of Series A
Preferred Stock, will terminate as of the date of their automatic conversion.
2
<PAGE>
EXHIBIT Y
---------
(b) Automatic Conversion. (i) All outstanding shares of Series C
--------------------
Preferred Stock shall be deemed automatically converted into such number of
shares of Common Stock as are determined in accordance with Section 5(a) hereof
immediately upon the closing of a firm commitment underwritten public offering
of the Common Stock of the Company pursuant to a registration statement filed
with and declared effective on or before February 28, 1998 by the Securities and
Exchange Commission under the Securities Act of 1933, as amended, other than a
registration statement relating solely to a transaction under Rule 145 under
such Act (or any successor thereto), or an employee benefit plan of the Company,
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent.
(ii) All outstanding shares of Series C Preferred Stock shall be deemed
automatically converted into such number of shares of Common Stock as are
determined in accordance with Section 5(a) hereof immediately upon the closing
of a firm commitment underwritten public offering of the Common Stock of the
Company pursuant to a registration statement filed with and declared effective
after February 28, 1998 by the Securities and Exchange Commission under the
Securities Act of 1933, as amended, other than a registration statement relating
solely to a transaction under Rule 145 under such Act (or any successor
thereto), or an employee benefit plan of the Company, at a public offering price
(prior to underwriting discounts and expenses) of $12.00 per share of Common
Stock (as adjusted for any stock dividends, combinations or splits with respect
to such shares), in which the aggregate proceeds to the Company shall be at
least $10,000,000 (after deductions for underwriting discounts, other related
compensation and expenses relating to issuances, including, without limitation,
fees of the Company's counsel), without any further action by the holders of
such shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent.
(iii) Upon such conversion, the holders of certificates representing
shares of Series C Preferred Stock shall, upon notice from the Company,
surrender such certificates at the principal office of the Company or its
transfer agent for the Common Stock. As soon as practicable thereafter, there
shall be issued and delivered to such holder a certificate or certificates for
the number of shares of Common Stock into which the shares of Series C Preferred
Stock represented by the certificate so surrendered were converted. The Company
shall not be obligated to issue such certificates unless certificates evidencing
the shares of Series C Preferred Stock so converted are either delivered to the
Company or any such transfer agent, or the holder notifies the Company that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. All rights with respect to the Series C Preferred
Stock so converted (other than the right to receive declared but unpaid
dividends), including, but not limited to, the right to vote shares of Series C
Preferred Stock, will terminate as of the date of their automatic conversion.
3
<PAGE>
EXHIBIT Z
---------
(b) Automatic Conversion. (i) All outstanding shares of Series D
--------------------
Preferred Stock shall be deemed automatically converted into such number of
shares of Common Stock as are determined in accordance with Section 5(a) hereof
immediately upon the closing of a firm commitment underwritten public offering
of the Common Stock of the Company pursuant to a registration statement filed
with and declared effective on or before February 28, 1998 by the Securities and
Exchange Commission under the Securities Act of 1933, as amended, other than a
registration statement relating solely to a transaction under Rule 145 under
such Act (or any successor thereto), or an employee benefit plan of the Company,
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent.
(ii) All outstanding shares of Series D Preferred Stock shall be deemed
automatically converted into such number of shares of Common Stock as are
determined in accordance with Section 5(a) hereof immediately upon the closing
of a firm commitment underwritten public offering of the Common Stock of the
Company pursuant to a registration statement filed with and declared effective
after February 28, 1998 by the Securities and Exchange Commission under the
Securities Act of 1933, as amended, other than a registration statement relating
solely to a transaction under Rule 145 under such Act (or any successor
thereto), or an employee benefit plan of the Company, at a public offering price
(prior to underwriting discounts and expenses) of $12.00 per share of Common
Stock (as adjusted for any stock dividends, combinations or splits with respect
to such shares), in which the aggregate proceeds to the Company shall be at
least $10,000,000 (after deductions for underwriting discounts, other related
compensation and expenses relating to issuances, including, without limitation,
fees of the Company's counsel), without any further action by the holders of
such shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent.
(iii) Upon such conversion, the holders of certificates representing shares
of Series D Preferred Stock shall, upon notice from the Company, surrender such
certificates at the principal office of the Company or its transfer agent for
the Common Stock. As soon as practicable thereafter, there shall be issued and
delivered to such holder a certificate or certificates for the number of shares
of Common Stock into which the shares of Series D Preferred Stock represented by
the certificate so surrendered were converted. The Company shall not be
obligated to issue such certificates unless certificates evidencing the shares
of Series D Preferred Stock so converted are either delivered to the Company or
any such transfer agent, or the holder notifies the Company that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. All rights with respect to the Series D Preferred
Stock so converted (other than the right to receive declared but unpaid
dividends), including, but not limited to, the right to vote shares of Series D
Preferred Stock, will terminate as of the date of their automatic conversion.
4
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATION, PREFERENCES, AND
RIGHTS OF SERIES E PREFERRED STOCK
OF
CURAGEN CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Company") is
CuraGen Corporation.
2. The Certificate of Designation, Preferences and Rights of Series E
Preferred Stock of the Company, filed with the Delaware Secretary of
State on June 25, 1997, is hereby amended by deleting in its entirety
Section 5(b) thereof and substituting the following new Section 5(b)
in lieu thereof:
"(b) Automatic Conversion. (i) All outstanding shares of
--------------------
Series E Preferred Stock shall be deemed automatically converted into
such number of shares of Common Stock as are determined in accordance
with Section 5(a) hereof immediately upon the closing of a firm
commitment underwritten public offering of the Common Stock of the
Company pursuant to a registration statement filed with and declared
effective on or before February 28, 1998 by the Securities and
Exchange Commission under the Securities Act of 1933, as amended,
other than a registration statement relating solely to a transaction
under Rule 145 under such Act (or any successor thereto), or an
employee benefit plan of the Company, without any further action by
the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Company or its
transfer agent.
(ii) All outstanding shares of Series E Preferred Stock shall be
deemed automatically converted into such number of shares of Common
Stock as are determined in accordance with Section 5(a) hereof
immediately upon the closing of a firm commitment underwritten public
offering of the Common Stock of the Company pursuant to a registration
statement filed with and declared effective after February 28, 1998 by
the Securities and Exchange Commission under the Securities Act of
1933, as amended, other than a registration statement relating solely
to a transaction under Rule 145 under such Act (or any successor
thereto), or an employee benefit plan of the Company, at a public
offering price (prior to underwriting discounts and expenses) of
$12.00 per share of Common Stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares), in which the
aggregate proceeds to the Company shall be at least $10,000,000 (after
deductions for underwriting discounts, other related compensation and
expenses relating to issuances, including, without limitation, fees of
the Company's counsel), without any further action by the holders of
such shares and whether or not the certificates representing such
shares are surrendered to the Company or its transfer agent.
(iii) Upon such conversion, the holders of certificates
representing shares of Series E Preferred Stock shall, upon notice
from the Company, surrender such certificates at the principal office
of the Company or its transfer agent for the Common Stock. As soon as
practicable thereafter, there shall be issued and delivered to such
holder a certificate or certificates for the number of shares of
Common Stock into which the shares of Series E Preferred Stock
represented by the
<PAGE>
certificate so surrendered were converted. The Company shall not be
obligated to issue such certificates unless certificates evidencing
the shares of Series E Preferred Stock so converted are either
delivered to the Company or any such transfer agent, or the holder
notifies the Company that such certificates have been lost, stolen or
destroyed and executes an agreement satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection
therewith. All rights with respect to the Series E Preferred Stock so
converted (other than the right to receive declared but unpaid
dividends), including, but not limited to, the right to vote shares of
Series E Preferred Stock, will terminate as of the date of their
automatic conversion."
3. The Amendment of the Certificate of Designation herein certified was
duly adopted in accordance with the applicable provisions of Sections
242 and 228 of the General Corporation Law of the State of Delaware.
In lieu of a meeting and vote of the stockholders, the holders of the
necessary number of shares of the Corporation's capital stock have
given written consent to said amendment in accordance with the
provisions of Section 228 of the General Corporation Law of the State
of Delaware, and said written consent was filed with the Corporation
and notice thereof has been given to those stockholders who have not
consented in writing.
Signed this 11th day of December, 1997.
CURAGEN CORPORATION
By: /s/ Jonathan M. Rothberg
-----------------------------------
Jonathan M. Rothberg, Ph.D.
Chief Executive Officer, President
and Chairman of the Board
-2-
<PAGE>
EXHIBIT 10.15
CuraGen Corporation has omitted from this Exhibit 10.15 portions of the
Agreement for which CuraGen Corporation has requested confidential treatment
from the Securities and Exchange commission. The portions of the Agreement for
which confidential treatment has been requested are marked with X's in brackets
and such confidential portions have been filed separately with the Securities
and Exchange Commission.
Execution Copy
RESEARCH AND OPTION AGREEMENT
This Research and Option Agreement ("Agreement") is made effective as of
November 20, 1997 ("Effective Date") by and between GENENTECH, INC., a Delaware
corporation having its principal business office at 1 DNA Way, South San
Francisco, CA 94080 ("GENENTECH"), and CURAGEN CORPORATION, a Delaware
corporation with its principal place of business at 555 Long Wharf Drive, 11th
Floor, New Haven, Connecticut 06511 ("CURAGEN"). GENENTECH and CURAGEN are each
hereafter referred to individually as a "Party" and together as the "Parties".
WHEREAS, GENENTECH desires to have access to CURAGEN's genomics
technologies (including GeneScape(R), QEA/GeneCalling, MIM/PathCalling and all
additional services provided by CURAGEN) and to have CURAGEN apply such
technologies to certain GENENTECH Proprietary Material in order to expedite the
discovery of information which may lead to the development of novel
pharmaceutical products;
WHEREAS, GENENTECH and CURAGEN have previously collaborated on genomics
projects pursuant to the terms of that certain Research Services and Evaluation
Agreement dated June 12, 1996 and that certain Research and License Agreement
dated December 27, 1996 (together, the "Collaboration Agreements");
WHEREAS, GENENTECH and CURAGEN wish to initiate the performance of certain
additional research by GENENTECH and CURAGEN;
WHEREAS, GENENTECH wishes to obtain an option to evaluate and license the
inventions obtained or made by GENENTECH and/or CURAGEN in the performance of
the previous Collaboration Agreements and the performance of the research
pursuant to this Agreement, as well as an option to evaluate and license certain
other inventions of CURAGEN;
<PAGE>
WHEREAS, CURAGEN wishes to retain rights to data and inventions made by
GENENTECH and CURAGEN hereunder and not licensed by GENENTECH;
WHEREAS, GENENTECH wishes to make an equity investment in CURAGEN Common
Stock in the amount of Five Million Dollars ($5,000,000), such investment to be
made in a private placement contemporaneously with the initial public offering
of CURAGEN's Common Stock;
WHEREAS, GENENTECH will also agree to loan CURAGEN up to Twenty-Six Million
Dollars ($26,000,000) on the terms and conditions as set forth herein; and
WHEREAS, GENENTECH and CURAGEN therefore agree to undertake the foregoing,
all under the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and for other good and valuable consideration, the receipt and adequacy of which
is hereby acknowledged, the Parties hereby agrees as follows:
1. DEFINITIONS
Whenever used in the Agreement with an initial capital letter, the terms
defined in this Section 1 shall have the meanings specified.
1.1 "AFFILIATE" shall mean any corporation, firm, limited liability
company, partnership or other entity which directly or indirectly controls or is
controlled by or is under common control with a Party to this Agreement.
"Control" means ownership, directly or through one or more Affiliates, of fifty
percent (50%) or more of the shares of stock entitled to vote for the election
of directors, in the case of a corporation, or fifty percent (50%) or more of
the equity interests in the case of any other type of legal entity, status as a
general partner in any partnership, or any other arrangement whereby a party
controls or has the right to control the Board of Directors or equivalent
governing body of a corporation or other entity.
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<PAGE>
1.2 "CLONE" shall mean a segment of DNA representing a whole or partial
gene whose sequence or utility is determined from the analysis of one or more
Data Sets or from the Extended Research during the term of this Agreement.
1.3 "CURAGEN BACKGROUND INVENTIONS" shall mean all patent rights and
know-how of CURAGEN, other than those relating primarily to Inventions, which
CURAGEN has the right to license and which would be infringed by the activities
of GENENTECH permitted by this Agreement or by the development, manufacture,
use, sale or importation of a Licensed Product by GENENTECH; provided, however,
that CURAGEN Background Inventions shall expressly exclude (i) any patent rights
or know-how relating to Clones not licensed by GENENTECH pursuant to an executed
License Agreement and (ii) any patent rights or know-how arising from any
CURAGEN collaboration with a third party, except to the extent permitted
thereby.
1.4 "CURAGEN DATA" shall mean all information obtained by CURAGEN from
the processing of specified CURAGEN samples, including QC data, QEA/GeneCalling
data, MIM/PathCalling data, sequence data and any other information obtained or
generated by CURAGEN in the performance of a discrete CURAGEN Project outside
the performance of the Research Program.
1.5 "CURAGEN DATA SET" shall mean all CURAGEN Data resulting from a
discrete CURAGEN Project that CURAGEN can make exclusively available to
GENENTECH.
1.6 "CURAGEN PROJECT" shall mean a particular project undertaken by
CURAGEN on its own outside the Research Program to process and analyze a
specified set of samples which do not contain GENENTECH Proprietary Material,
and as to which CURAGEN is free to grant rights to GENENTECH hereunder.
1.7 "CURAGEN PROJECT INVENTION" shall mean any discovery, invention,
know-how or trade secret conceived or made by employees of CURAGEN in the
performance of a CURAGEN Project that results in CURAGEN Data that becomes part
of an Exclusive Data Set, that is based on, incorporates or makes material use
of the corresponding CURAGEN Data.
1.8 "CURAGEN PROJECT PATENT RIGHTS" shall mean Patent Rights containing a
claim or claims covering CURAGEN Project Inventions. CURAGEN Project Patent
Rights shall
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<PAGE>
also include Patent Rights containing a claim or claims covering CURAGEN Project
Inventions exclusively licensed in by CURAGEN, with the right to sublicense, now
or in the future.
1.9 "CURAGEN PROJECT PROPRIETARY MATERIAL" shall mean all substances
made by CURAGEN in the performance of CURAGEN Projects, including mRNA pools.
CURAGEN Project Proprietary Material shall include, without limitation, QEA
fragments, MIM constructs and materials derived or constructed from QEA
fragments and MIM constructs, including, without limitation, fragment and full
length cDNA clones made by CURAGEN in the performance of a CURAGEN Project.
1.10 "CURAGEN ROYALTY PRODUCT" shall have the meaning set forth in Section
7.7.
1.11 "DATA SET," which may be either a Project Data Set or a CURAGEN Data
Set, shall mean all Project Data resulting from a discrete Research Project or
all CURAGEN Data resulting from a discrete CURAGEN Project, respectively.
1.12 "EXCLUSIVE DATA SET" shall mean any Project Data Set during the
corresponding Exclusive Evaluation Period as provided in Section 2.4.1 or any
CURAGEN Data Set during the corresponding Exclusive Evaluation Period as
provided in Section 2.5.2.
1.13 "EXCLUSIVE EVALUATION PERIOD" shall have the meaning set forth in
Section 2.4.1 or 2.5.2.
1.14 "EXTENDED RESEARCH" shall mean the research undertaken by CURAGEN
pursuant to Sections 2.4.1, 2.5.2 and/or 7.1.3 hereof.
1.15 "EXTENDED RESEARCH DATA" shall mean all information and results
obtained by CURAGEN from its performance of Extended Research.
1.16 "EXTENDED RESEARCH INVENTIONS" shall mean any discovery, invention,
know-how or trade secret conceived or made by employees of CURAGEN in the
performance of Extended Research, other than such discoveries, inventions, know-
how or trade secrets that are deemed to be defined as Research Project
Inventions pursuant to the terms of this Agreement or an executed License
Agreement.
1.17 "EXTENDED RESEARCH PATENT RIGHTS" shall mean all rights and interests
in and to issued patents and pending patent applications in any country,
including, but not limited to, all provisional applications, substitutions,
continuations, continuations-in-part (solely to the extent that the claims of
such continuations-in-part cover Extended Research Inventions), divisions, and
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<PAGE>
renewals thereof, all letters patent granted thereon, and all reissues,
reexaminations and extensions thereof, whether owned now or hereafter, solely or
jointly by CURAGEN, and wherein at least one claim of such patent right covers
an Extended Research Invention.
1.18 "FTE" shall mean the equivalent of a full year of effort on a full
time basis of a researcher possessing skills and experience necessary to carry
out applicable tasks under the Research Program.
1.19 "GENENTECH PROPRIETARY MATERIAL" shall mean substances made by
GENENTECH or provided by GENENTECH to CURAGEN in the performance of the Research
Program, including without limitation (a) tissue samples provided by GENENTECH
to CURAGEN and (b) the nucleic acids and other substances actually contained in
such tissue samples, and (c) full length genes cloned by GENENTECH.
1.20 "GENESCAPE(R)" shall mean the web-based software and database product
for accessing and storing Data Sets generated through the application of
CURAGEN's QEA/GeneCalling and MIM/PathCalling technologies.
1.21 "INVENTION" shall mean either a CURAGEN Project Invention or a
Research Project Invention.
1.22 "KNOW-HOW INFORMATION" shall have the meaning set forth in Section
2.1.4(c).
1.23 "KNOW-HOW INFORMATION PRODUCT" shall have the meaning set forth in
Section 2.1.4(c).
1.24 "LICENSED CLONE" shall mean any Clone licensed by GENENTECH pursuant
to an executed License Agreement.
1.25 "LICENSED PRODUCT", as to each Clone, shall mean:
[XXXXX]
[XXXXX]
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[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
1.26 "LICENSE AGREEMENT" shall mean a license agreement in the form of
Appendix C attached hereto executed by the Parties upon exercise of any Option
- ----------
pursuant to Section 7.
1.27 "MIM/PATHCALLING" shall mean the technology employed by CURAGEN for
identifying protein-protein interactions from libraries of cDNAs.
1.28 "NET SALES" shall mean [XXXXX]
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<PAGE>
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
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<PAGE>
[XXXXX]
1.29 "OPTIONED CLONE" shall have the meaning set forth in Section 7.1.
1.30 "OPTION PERIOD" shall have the meaning set forth in Section 7.3.
1.31 "PATENT COORDINATORS" shall mean a patent attorney or patent agent
representing CURAGEN and a patent attorney or patent agent representing
GENENTECH, as further described in Section 6.2.
1.32 "PATENT RIGHTS" means the rights and interests in and to issued
patents and pending patent applications in any country, including, but not
limited to, all provisional applications, substitutions, continuations,
continuations-in-part (solely to the extent claims of such continuations-in-part
cover Inventions) , divisions, and renewals, all letters patent granted thereon,
and all reissues, reexaminations and extensions thereof, whether owned now or
hereafter, solely or jointly by a Party, wherein at least one claim of such
patent right covers an Invention.
1.33 "PREVIOUSLY COMMITTED CLONE" shall mean any Clone which, at the
relevant time under Section 7.1.1, (a) is subject to a license or an option
previously granted by CURAGEN to any third party, or (b) a third party
collaborator of CURAGEN or subscriber to CURAGEN's GeneCalling or PathCalling
database has requested CURAGEN to full-length clone such Clone or has itself
commenced full-length cloning of such Clone and notified
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<PAGE>
CURAGEN thereof, and provided that such third party still retains evaluation,
option or license rights to such Clone pursuant to the terms of a written
agreement with CURAGEN.
1.34 "PRIME RATE" shall mean the prime rate of interest as reported by
Citibank, N.A. In the event that Citibank, N.A. ceases to report such a rate,
the term "Prime Rate" shall mean the generally prevailing base corporate lending
rate of Fleet National Bank.
1.35 "PROJECT DATA" shall mean all information obtained by CURAGEN from the
processing of GENENTECH Proprietary Material in a particular Research Project,
including QC data, QEA/GeneCalling data, MIM/PathCalling data, sequence data and
any other information obtained or generated by CURAGEN in the performance of
each Research Project in the Research Program.
1.36 "PROJECT DATA SET" shall mean all Project Data resulting from a
discrete Research Project.
1.37 "QEA/GENECALLING" shall mean the software, database and other
technologies employed by CURAGEN for tagging and identifying the expression
level of specific gene fragments within a cDNA pool.
1.38 "RESEARCH COMMITTEE" or "RC" shall have the meaning set forth in
Section 2.2.1.
1.39 "RESEARCH PLAN" shall mean the written description of the Research
Program to be performed by CURAGEN and GENENTECH under this Agreement, as
further described in Section 2.1.3. The Research Plan may specify one or more
independent Research Projects.
1.40 "RESEARCH PROJECT" shall mean a particular project to process and
analyze a specified set of samples approved pursuant to Section 2.1.3. Each
individual Research Project shall involve the analysis of [XXXXX] samples,
unless otherwise agreed by the Parties.
1.41 "RESEARCH PROJECT INVENTION" shall mean any discovery, invention,
know-how or trade secret conceived or made (a) by employees of CURAGEN or
GENENTECH or jointly by employees of both in the performance of the Research
Program, (b) by GENENTECH employees in performing the specific following
activities utilizing any Data Set: (i) QEA and MIM data analysis, confirmation
of QEA or MIM data, fragment cloning and sequencing of a Clone, and (ii) full-
length cloning of a Clone, or (c) any discovery, invention, know-how or trade
secret deemed to be a Research Project Invention pursuant to the terms of this
Agreement or an
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<PAGE>
executed License Agreement. Research Project Inventions shall not include
inventions conceived or made solely by GENENTECH outside of the Research Program
except as specifically set forth in (b) above.
1.42 "RESEARCH PROJECT PATENT RIGHTS" shall mean Patent Rights containing a
claim or claims covering Research Project Inventions.
1.43 "RESEARCH PROJECT PROPRIETARY MATERIAL" shall mean all substances made
by CURAGEN in the performance of the Research Program other than mRNA pools
extracted from GENENTECH Proprietary Material. Research Project Proprietary
Material shall include, without limitation, QEA fragments, MIM constructs and
materials derived or constructed from QEA fragments and MIM constructs,
including, without limitation, fragment and full length cDNA clones made by
CURAGEN in the performance of a Research Project.
1.44 "RESEARCH PROGRAM" shall mean the Research Projects to be performed by
CURAGEN and GENENTECH under this Agreement as described in the Research Plan and
amendments thereto.
1.45 "RESEARCH TERM" shall have the meaning set forth in Section 2.3.1.
1.46 "RETAINED GENE" shall have the meaning set forth in Section 7.7.
1.47 "TERM" shall have the meaning set forth in Section 8.1.
1.48 "TERRITORY" shall mean the world.
1.49 "VALID CLAIM(S)" shall mean an unexpired claim of any issued patent
within Patent Rights which has not been finally declared invalid or
unenforceable by a patent office or by a court or other body of competent
jurisdiction in any unappealed or unappealable decision and which has not been
lost through an interference or opposition proceeding.
2. RESEARCH PROGRAM
2.1 IMPLEMENTATION OF RESEARCH PROGRAM.
----------------------------------
2.1.1 Basic Provisions of Program.
---------------------------
(a) The objective of the Research Program will be to generate Project
Data Sets by performing Research Projects utilizing GENENTECH
Proprietary Material. CURAGEN and GENENTECH shall each use
commercially reasonable efforts to
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<PAGE>
perform such tasks as are set forth in the Research Plan, including
the provision of such facilities, samples and materials (including
GENENTECH Proprietary Material), equipment and consultants as each
deems necessary to the achievement of such Research Plan. In carrying
out the Research Program, CURAGEN shall devote an average of at least
[XXXXX] FTEs per year to the Research Program over its five year
duration (the "Staffing Level") unless GENENTECH and CURAGEN have
agreed on an increase in the Staffing Level as provided in (b) below.
(b) GENENTECH may request an increase in the Staffing Level of up to
[XXXXX] additional FTEs per year to be devoted to the Research
Program, subject to the agreement of CURAGEN. CURAGEN will use
commercially reasonable efforts to increase the staffing level if
mutually agreed as promptly as practical. Once the Staffing Level is
increased, it may not be decreased [XXXXX] without the consent of
CURAGEN, which consent may be withheld at CURAGEN's sole discretion.
2.1.2 Collaborative Efforts and Reports.
---------------------------------
(a) The Parties agree that the successful execution of the Research
Program will require the collaborative use of both Parties' areas of
expertise. Each Party shall keep the RC fully informed about the
status of the portions of the Research Program they respectively
perform including, without limitation, summaries of their direct uses
of the Project Data itself for so long as GENENTECH shall have an
option to license such Project Data hereunder. CURAGEN shall promptly
provide GENENTECH with a description of Project Data Sets from
completed Research Projects. All information provided hereunder will
be treated as Confidential Information of the disclosing Party
pursuant to the provisions of Article 4.
(b) Scientists at CURAGEN and GENENTECH shall cooperate in the performance
of the Research Program and, subject to any confidentiality
obligations to third parties, shall exchange information and materials
as necessary to carry out the Research Program, subject to the
provisions of Section 4. Each Party will attempt
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<PAGE>
to accommodate any reasonable request of the other Party to send or
receive personnel for purposes of collaborating or exchanging
information under the Research Program. Such visits and/or access will
have defined purposes and be scheduled in advance.
(c) CURAGEN will give written notice to GENENTECH and the RC promptly upon
completion of the Project Data Set from each Research Project.
"Completion" of a Project Data Set shall occur upon generation of all
completed QEA/GeneCalling data or MIM/PathCalling data from a Research
Project as contemplated by the Research Plan. Provision of access to
such data shall be promptly provided to GENENTECH through the
GeneScape(R) database.
(d) CURAGEN shall set up and maintain, throughout the Research Term, a
secure partition of its GeneScape(R) database and software for the
exclusive use of GENENTECH and CURAGEN solely for the purpose of
identifying genes from Exclusive Data Sets, and shall provide online
E-mail and telephone help during normal business hours in the use
thereof to GENENTECH. CURAGEN and GENENTECH shall jointly set up and
maintain a secure connection to said partition of the GeneScape(R)
database and software in order to give GENENTECH on-line access
thereto.
(e) GENENTECH will also receive, at its request, access to CURAGEN's
QEA/GeneCalling and MIM/PathCalling subscription databases and to
GeneTools pursuant to one or more subscription agreements to be
executed by the Parties with terms substantially as described in
Appendix E hereto. [XXXXX] Such subscription
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<PAGE>
agreements may be terminated by GENENTECH at any time, without
affecting the Research Program, either in their entirety or with
respect to any database at GENENTECH's sole discretion upon three (3)
months prior written notice. GENENTECH shall have no rights to use the
GeneScape(R) database and software except as expressly set forth
herein or in an executed database subscription agreement.
(f) If, after receiving access to any Data Set under the terms of this
Agreement, GENENTECH becomes aware that analysis of such Data Set has
led GENENTECH to file a patent application on, or to full-length
sequence, any Clone whose sequence or utility was identified from such
Data Set, GENENTECH shall promptly notify the RC of such patent filing
or sequencing. Any full-length Clone sequenced by GENENTECH after the
identification of such Clone from a Data Set shall be a Research
Project Invention, unless at the time of such sequencing, such full-
length sequence: (i) is in the public domain, (ii) is in the
possession of GENENTECH (as can be documented by written or computer
records), or (iii) is independently developed by GENENTECH (as can be
documented by written or computer records). If CURAGEN becomes aware
that analysis of a Data Set during GENENTECH's Exclusive Evaluation
Period pertaining to such Data Set has led CURAGEN to file a patent
application on, or to full-length sequence, any Clone whose sequence
or utility was identified from such Data Set, CURAGEN shall promptly
notify the RC of such patent filing or sequencing, and any full-length
Clone sequenced by CURAGEN after the identification of such Clone from
a Data Set shall be deemed a Research Project Invention, unless at the
time of such sequencing, such full-length sequence: (i) is in the
public domain, (ii) is in the possession of CURAGEN (as can be
documented by written or computer records), or (iii) is independently
developed by CURAGEN (as can be documented by written or computer
records).
2.1.3 Research Plans.
--------------
The Research Plan for the [XXXXX] of the Research Program shall be agreed
upon by the Parties within [XXXXX] of the Effective Date and shall include the
initial
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<PAGE>
Research Projects and plans to implement the installation of access to the
GeneScape(R) database and software for GENENTECH. Every [XXXXX] during the
Research Term or at any time on request of either GENENTECH or CURAGEN, the
Research Plan shall be updated by CURAGEN and GENENTECH to cover the next
[XXXXX] and shall be approved by the RC no later than thirty (30) days before
the end of each semi-annual period. The Research Plan shall set forth specific
Research Projects for the period covered by the Research Plan. For each Research
Project, the Research Plan will be deemed to include the following activities:
[XXXXX] GENENTECH shall not perform the activities specified in (i)-(iii) above
except as part of the Research Program, or as permitted in Section 2.4.3, in an
executed License Agreement, or in a subscription agreement. During any Exclusive
Evaluation Period for a Data Set, CURAGEN shall not utilize such Data Set in
performing the activities specified in (i)-(iii) except as part of the Research
Program. The RC will consider adjustments in the Research Plan at any time upon
the request of GENENTECH or CURAGEN. Notwithstanding the foregoing, no project
shall become a Research Project without the express consent of both GENENTECH
and CURAGEN; provided, however, that CURAGEN shall consent to any reasonable
proposed Research Project which is not substantially similar to a project that
is ongoing, planned internally solely by CURAGEN, the subject of active
negotiation with a third party or subject to a prior commitment to a third
party, all the above as evidenced by written or computer records, and which
would not violate a prior restriction under an agreement with a third party.
During the Research Term, once a Research Project becomes part of the Research
Plan, such Research Project will not be discontinued (unless such
discontinuation is approved by the RC) regardless of any other negotiations or
commitments with third parties.
2.1.4 Exclusivity.
-----------
(a) CURAGEN agrees that, commencing upon inclusion of a Research Project
in the Research Plan, and continuing through the duration of any
subsequent Exclusive Evaluation Period, CURAGEN shall not undertake to
perform a substantially similar research project with any third party.
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(b) CURAGEN agrees that during any Exclusive Evaluation Period, CURAGEN
will not grant access to any Exclusive Data Set to any other party and
that during any Option Period, CURAGEN shall not grant to any third
party rights to any Optioned Clone or to any Licensed Products related
to such Optioned Clone. In addition, CURAGEN shall not, during any
Exclusive Evaluation Period, grant a third party any rights to option
or to license a Clone contained in the corresponding Exclusive Data
Set (i) which GENENTECH has requested CURAGEN to full-length clone or
(ii) for which GENENTECH has commenced full-length cloning and
notified CURAGEN thereof, or to option or license Licensed Products
relating to such a Clone. Notwithstanding the provisions of Article 4,
upon the expiration of any Exclusive Evaluation Period for any
Exclusive Data Set, CURAGEN shall have the right, at its sole option,
to make such Data Set and, subject to the provisions of Section 2.4.4,
reasonable descriptions of the data contained therein available to
third parties or to put the Data Set and such descriptions in the
subscription portion of the GeneScape(R) database. CURAGEN may perform
research or collaborate with third parties and grant to third parties
the right to exploit the results of any such research or
collaborations without restriction other than as expressly provided in
this Agreement or in an executed License Agreement.
(c) CURAGEN acknowledges that during the Research Program GENENTECH may
obtain useful proprietary information from Research Projects, Project
Data, CURAGEN Projects, CURAGEN Data and CURAGEN's databases and other
information which is not covered by a Valid Claim of a Research
Project Patent Right or a CURAGEN Project Patent Right (collectively,
"Know-How Information"). Without limitation, Know-How Information may
include identification of pathways involved in diseases or protein-
protein interactions involved in diseases, which involvement was not
previously known by GENENTECH. GENENTECH shall have a right to use
Know-How Information for all purposes and CURAGEN hereby grants
GENENTECH a nonexclusive, worldwide, sublicensable license to use
Know-How Information for such
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purposes. In the event that GENENTECH or a Sublicensee develops a
product which is not covered by a Valid Claim of a Research Project
Patent Right, a Valid Claim of a CURAGEN Project Patent Right or a
Valid Claim of an Extended Research Patent Right and is not licensed
to GENENTECH under a License Agreement or an executed subscription
agreement, and which was discovered by GENENTECH or a Sublicensee
based directly and materially on its use of such Know-How Information
(a "Know-How Information Product"), GENENTECH shall pay to CURAGEN a
[XXXXX] on Net Sales of such Know-How Information Product. Without
limitation, GENENTECH's development of a product which has the
intended biological activity of modifying the outcome of a pathway by
binding to a protein or inhibiting protein function and such pathway
was directly identified in a Research Project, such product would be a
Know-How Information Product subject to the [XXXXX] set forth
above, provided that such pathway identification makes a direct and
material contribution to the development of such product.
Notwithstanding the above, the obligation above to pay a [XXXXX] to
CURAGEN on Net Sales of Know-How Information Products shall not apply
to GENENTECH if, at the time of receipt by GENENTECH from CURAGEN and
first use by GENENTECH in the discovery of such Know-How Information
Product, such Know-How Information: (i) was in the public domain; (ii)
was known to, or in the possession or control of, GENENTECH (as
demonstrated by its written or computer records); (iii) had already
been obtained by GENENTECH from sources independent of CURAGEN; or
(iv) was developed by GENENTECH independently of such Know-How
Information (as can be demonstrated by written or computer records).
The right contained in this paragraph does not include any license
under any patent claims owned or controlled in whole or in part by
CURAGEN.
(d) GENENTECH agrees that, until any such information is in the public
domain other than as a result of a disclosure by GENENTECH in
violation of this Agreement, an executed subscription agreement or an
executed License
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Agreement, or until GENENTECH discovers or obtains such information
independently of CURAGEN without use of CURAGEN Data Sets or
Inventions or knowledge thereof, GENENTECH will only utilize Project
Data, CURAGEN Data, CURAGEN Project Proprietary Material, Research
Project Proprietary Material, Inventions or Patent Rights as expressly
provided herein or in an executed License Agreement or executed
subscription agreement. CURAGEN agrees that CURAGEN will not utilize
any GENENTECH Proprietary Material, Project Data, Research Project
Proprietary Material, Research Project Inventions or Research Project
Patent Rights other than as expressly provided herein.
(e) Royalty payments due pursuant to subsection (c) above shall be made to
CURAGEN in United States Dollars quarterly within sixty (60) days
following the end of each calendar quarter for which royalties are
due. Each royalty payment shall be accompanied by a report
summarizing the total Net Sales for each Know-How Information Product
during the relevant three-month period and the calculation of
royalties, if any, due thereon pursuant to this Section 2.1.4. All
royalties shall be payable in full in the United States in United
States Dollars, regardless of the countries in which sales are made.
For the purpose of computing Net Sales for Know-How Information
Products sold in a currency other than United States dollars, such
currency shall be converted into United States dollars at the exchange
rate for buying U.S. dollars set forth in The Wall Street Journal for
-----------------------
the last business day of the calendar quarter.
(f) GENENTECH shall pay royalties with respect to each Know-How
Information Product on a country by country basis for a period of
[XXXXX] from the first commercial sale of such Know-How Information
Product in such country. Following such period, GENENTECH shall have a
fully paid-up, irrevocable license in such country to make, have made,
use, have used, sell, have sold, offer for sale, import and have
imported such Know-How Information Product in such country.
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(g) OVERDUE ROYALTIES. Royalties not paid within the time period set
-----------------
forth in this Section 2.1.4 shall bear interest at [XXXXX] accruing
monthly, from the due date until paid in full.
(h) RECORDS RETENTION. AUDITS. GENENTECH shall keep for [XXXXX] from the
date of each payment of royalties complete and accurate records of
sales by GENENTECH of each Know-How Information Product in sufficient
detail to allow the accruing royalties to be determined accurately.
CURAGEN shall have the right for a period of [XXXXX] after receiving
any report or statement with respect to royalties due and payable to
appoint an independent certified public accountant reasonably
acceptable to GENENTECH to inspect the relevant records of GENENTECH
to verify such report or statement. GENENTECH shall make its records
available for inspection by such independent certified public
accountant during regular business hours at such place or places where
such records are customarily kept, upon reasonable notice from
CURAGEN, solely to verify the accuracy of the reports and payments.
Such inspection right shall not be exercised more than once in any
calendar year nor more than once with respect to sales of any Know-How
Information Product in any given payment period. CURAGEN agrees to
hold in strict confidence all information concerning royalty payments
and reports, and all information learned in the course of any audit or
inspection, except to the extent necessary for CURAGEN to reveal such
information in order to enforce its rights under this Agreement or if
disclosure is required by law, regulation or judicial order. The
results of each inspection, if any, shall be binding on both Parties.
CURAGEN shall pay for such inspections, except that in the event there
is any upward adjustment in aggregate royalties payable for any year
shown by such inspection of more than [XXXXX] of the amount paid,
GENENTECH shall pay for such inspection.
2.1.5 Research License. CURAGEN hereby grants to GENENTECH a non-
----------------
exclusive license under CURAGEN Background Inventions and CURAGEN's interest in
any Inventions solely during the Term hereof and to the extent necessary to
allow GENENTECH to perform its
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obligations under the Research Program and to exercise the rights granted
herein, including without limitation, the evaluation hereunder of Research
Project Data, CURAGEN Data and Clones.
2.1.6 Software License. Any access granted to the GeneScape(R) database
----------------
and software hereunder, or any components thereof, is granted according to the
following terms:
The GeneScape(R) database, software and display screens are protected by
copyright, patent, trade secret and other intellectual property laws. CURAGEN
hereby grants to GENENTECH and its employees a non-exclusive non-transferable
license to access the GeneScape(R) database and software solely for the purposes
of and during the Term of this Agreement. GENENTECH shall access Project Data
Sets and CURAGEN Data Sets only through the GeneScape(R) database and software
provided by CURAGEN. GENENTECH shall not copy the GeneScape(R) database,
software or display screens except as occurs during the normal course of
CURAGEN-provided access. In particular, GENENTECH will not retain such normal
copies for a time not reasonably related to CURAGEN-provided access. GENENTECH
shall not reverse engineer, decompile, or disassemble the GeneScape(R) software
or display screens. The GeneScape(R) database and software embody trade secrets
of CURAGEN that are considered Confidential Information of CURAGEN and subject
to the provisions of Article 6 hereof.
2.2 RESEARCH COMMITTEE.
------------------
2.2.1 Establishment and Functions of the RC.
-------------------------------------
(a) CURAGEN and GENENTECH shall establish a "Research Committee" (the
"RC"). The RC will act on behalf of the two companies and will be
responsible for the planning and monitoring of the Research Program.
In particular, the activities of the RC shall include reviewing
progress in the Research Program and recommending necessary
adjustments to the Research Program, including any Research Project
substitutions deemed desirable based on results and on GENENTECH's
commercial interest, as the research and development progresses.
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(b) In planning and monitoring the Research Program, the RC shall assign
tasks and responsibilities taking into account each Party's respective
specific capabilities and expertise in order in particular to avoid
duplication and enhance efficiency and synergies. The RC shall also
monitor the assignment of CURAGEN employees to the Research Program
and the allocation of such CURAGEN employees to specific Research
Projects.
2.2.2 RC Membership.
-------------
CURAGEN and GENENTECH each shall appoint, in their sole discretion, three
(3) members to the RC, which shall include a Co-Chair to be designated by
GENENTECH and a Co-Chair to be designated by CURAGEN. Substitutes or alternates
for the Co-Chairs or other RC members may be appointed at any time by notice in
writing to the other Party. The Parties may mutually agree to change the size
of the RC as long as there shall be an equal number of representatives of each
party on the RC. The initial Co-Chairs and other RC members shall be designated
by the parties upon execution of this Agreement. CURAGEN shall appoint a
Project Coordinator, who shall be reasonably satisfactory to GENENTECH, to serve
as the principal CURAGEN liaison with GENENTECH for the Research Program. Such
Project Coordinator will be one of CURAGEN's members of the RC.
2.2.3 Meetings.
--------
The RC shall meet once a year in New Haven, Connecticut, and once a year in
South San Francisco, California unless the Parties agree otherwise. Any
additional meetings shall be held at places and on dates selected by the Co-
Chairs of the RC. The RC shall also conduct two meetings a year by conference
call, or as otherwise agreed by the RC members. In addition, the RC may act
without a formal meeting by a written memorandum signed by the Co-Chairs of the
RC. Whenever any action by the RC is called for hereunder during a time period
in which the RC is not scheduled to meet, the Co-Chairs of the RC shall cause
the RC to take the action in the requested time period by calling a special
meeting, conference call or by action without a meeting. Subject to the
obligations set forth in Section 4, representatives of each Party, in addition
to the members of the RC, may attend RC meetings at the invitation of either
Party with the prior approval of the other Party, which shall not be
unreasonably withheld.
2.2.4 Minutes.
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The RC shall keep accurate minutes of its deliberations which record all
proposed decisions and all actions recommended or taken. Drafts of the minutes
shall be delivered to the Co-Chairs of the RC within twenty (20) days after the
meeting. The Party hosting the meeting shall be responsible for the preparation
and circulation of the draft minutes. Draft minutes shall be edited by the Co-
Chairs and shall be issued in final form only with their approval and agreement
as evidenced by their signatures on the minutes.
2.2.5 Quorum; Voting; Decisions.
-------------------------
At each RC meeting, at least two (2) member(s) appointed by each Party
present in person or by telephone shall constitute a quorum and decisions shall
be made by majority vote. Each RC member shall have one vote on all matters
before the RC, provided that the member or members of each Party present at an
RC meeting shall have the authority to cast the votes of any of such Party's
members on the RC who are absent from the meeting. Notwithstanding the
foregoing, the objective of the Parties to this Agreement is that decisions of
the RC shall be made by consensus. However, except as otherwise set forth
herein, in the event that the RC is unable to resolve any matter before it as
set forth above, such matter shall be resolved by GENENTECH, taking into
reasonable consideration the best interests of both GENENTECH and CURAGEN.
Notwithstanding the foregoing, no project shall become a Research Project
without the express consent of both GENENTECH and CURAGEN; provided, however,
that CURAGEN shall consent to any reasonable proposed Research Project which is
not substantially similar to a project that is ongoing, planned internally
solely by CURAGEN, the subject of active negotiation with a third party or
subject to a prior commitment to a third party, all the above as evidenced by
written or computer records, and which would not violate a prior restriction
under an agreement with a third party.
2.2.6 Expenses.
--------
CURAGEN and GENENTECH shall each bear all expenses of their respective RC
members related to their participation on the RC and attendance at RC meetings.
2.2.7 Record Keeping.
--------------
Throughout the Term of this Agreement the Parties will maintain a list of
Research Projects and start dates and completion dates thereof, Exclusive Data
Sets, Exclusive Evaluation
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Periods and extensions thereof, Option Periods and extensions thereof and
Optioned Clones. Such task shall be performed by the RC unless otherwise
mutually agreed by the Parties.
2.3 RESEARCH TERM.
-------------
2.3.1 Term of the Research Program.
----------------------------
The Research Program shall expire five (5) years after the Effective Date
unless extended as provided below or unless earlier terminated by either Party
by virtue of termination of the Research Program or this Agreement pursuant to
the provisions of Sections 2.3.3 or 2.3.4 and/or Article 8 (the "Research
Term").
2.3.2 Extension of the Research Program.
---------------------------------
The Research Term may be extended upon prior [XXXXX] written notice by
mutual agreement of the Parties on terms to be agreed upon between the Parties.
2.3.3 Termination of the Research Program.
-----------------------------------
(a) GENENTECH may terminate the Research Program at its sole discretion
effective upon the 18 month anniversary of the Effective Date by
giving written notice to CURAGEN within one (1) month prior to such
date and by: (i) paying CURAGEN up to [XXXXX] in cash within thirty
(30) days of giving CURAGEN such written notice of termination
and/or (ii) forgiving up to [XXXXX] of any outstanding balance under
the Loan pursuant to a written instrument delivered to CURAGEN
within thirty (30) days of giving CURAGEN such written notice of
termination, in any combination of (i) and (ii) such that the
combined payment and forgiveness amounts total [XXXXX]. In the event
that, as of one month following such termination date (the "Section
2.3.3(a) Balance Date"), the outstanding balance under the Loan is
less than [XXXXX] GENENTECH will forgive the amount of such
outstanding balance and may, in lieu of or in addition to paying
cash as specified in (i) above, elect to pay the balance of the
[XXXXX] by transferring back to CURAGEN within [XXXXX] of the
Section 2.3.3(a) Balance Date, shares of CURAGEN stock received by
GENENTECH pursuant to the terms of the Note at the value (as
determined
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pursuant to the terms of the Note) as of the Section 2.3.3(a)
Balance Date in an amount necessary to bring the combined
forgiveness, cash payment and payment in stock amounts to a total of
[XXXXX]. Any such early termination of the Research Program shall
automatically terminate any ongoing Exclusive Evaluation Periods
hereunder. In addition, all but [XXXXX] existing on the effective
date of such termination shall be terminated and GENENTECH may elect
which [XXXXX] shall survive upon notice given to CURAGEN prior to
termination. All of GENENTECH's rights under this Agreement with
respect to such [XXXXX] shall be unaffected by any such termination
and any License Agreement executed prior to any such termination
shall survive such termination.
(b) Provided that GENENTECH has elected to proceed under Section
2.3.4(a)(iii) on the third anniversary of the Effective Date,
GENENTECH may terminate the Research Program at its sole discretion
at any time after the third anniversary of the Effective Date upon
three (3) months prior written notice to CURAGEN. Any such early
termination of the Research Program shall not affect GENENTECH's
rights under any Exclusive Evaluation Periods or any Option Periods
then ongoing, any License Agreement executed between the Parties
prior to such termination or any Options that have been exercised
prior to such termination for which the License Agreement has not
yet been executed; provided, however, that any surviving Exclusive
Evaluation Periods shall not be extendible pursuant to Section
2.4.2.
2.3.4 Rights at Third and Fifth Anniversary
-------------------------------------
(a) Upon the third anniversary of the Effective Date, unless previously
terminated, GENENTECH shall have three choices for how to proceed
with respect to continuation or termination of the Research Program
and/or this Agreement:
(i) GENENTECH may, by written notice given within thirty (30) days
prior to such third anniversary date, terminate the Research
Program and this Agreement and all licenses granted pursuant to
any executed License
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Agreement and all Exclusive Evaluation Periods and Options
granted pursuant to this Agreement. No payment will be due
CURAGEN.
(ii) GENENTECH may terminate the Research Program by written notice
given within thirty (30) days prior to such third anniversary
date, but if GENENTECH: (x) pays CURAGEN up to [XXXXX] in
cash within 30 days of the third anniversary date and/or (y)
forgives up to [XXXXX] of any outstanding balance under the
Loan (as defined in Section 3.2 below) pursuant to a written
instrument delivered to CURAGEN within 30 days of such third
anniversary date, in any combination of (x) and (y) such that
the combined payment and forgiveness amounts total [XXXXX],
then GENENTECH's termination of the Research Program shall not
affect GENENTECH's rights under any Exclusive Evaluation
Periods or any Option Periods then ongoing, any License
Agreement executed between the Parties prior to such
termination, or any Options that have been exercised by
GENENTECH prior to such termination for which the License
Agreement has not yet been executed; provided, however, that
any such Exclusive Evaluation Periods shall not be extendible
pursuant to Section 2.4.2. In the event that, as of one month
following such termination date (the "Section 2.3.4(a)(ii)
Balance Date"), the outstanding balance under the Loan is less
than [XXXXX], GENENTECH will forgive the amount of such
outstanding balance and may, in lieu of or in addition to
paying cash as specified in (x) above, elect to pay the balance
of the [XXXXX] by transferring back to CURAGEN within [XXXXX]
[XXXXX] of the Section 2.3.4(a)(ii) Balance Date, shares of
CURAGEN stock received by GENENTECH pursuant to the terms of
the Note at the value (as determined pursuant to the terms of
the Note) as of the Section 2.3.4(a)(ii) Balance Date in an
amount necessary to bring the combined forgiveness, cash
payment and payment in stock amounts to a total of [XXXXX].
All provisions of this Agreement governing such Exclusive
Evaluation
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Periods, Option Periods, Options and related license rights
shall continue in full force and effect.
(iii) GENENTECH may continue with the Research Program and this
Agreement in their entirety and retain its rights in any
Exclusive Evaluation Periods and any Option Periods then
ongoing, any License Agreement executed between the parties
prior to such termination and any Options that have been
exercised by GENENTECH prior to such early termination for
which the License Agreement has not yet been executed. Under
this choice, GENENTECH shall: (x) pay CURAGEN up to [XXXXX]
in cash within 30 days of the third anniversary date and/or
(y) forgive up to [XXXXX] of any outstanding balance under
the Loan pursuant to a written instrument delivered to CURAGEN
within 30 days of such third anniversary date, in any
combination of (x) and (y) such that the combined payment and
forgiveness amounts total [XXXXX]. In the event that, as of
one month following such termination date (the "Section
2.3.4(a)(iii) Balance Date"), the outstanding balance under
the Loan is less than [XXXXX], GENENTECH will forgive the
amount of such outstanding balance and may, in lieu of or in
addition to paying cash as specified in (x) above, elect to
pay the balance of the [XXXXX] by transferring back to
CURAGEN within [XXXXX] of the Section 2.3.4(a)(iii)
Balance Date, shares of CURAGEN stock received by GENENTECH
pursuant to the terms of the Note at the value (as determined
pursuant to the terms of the Note) as of the Section
2.3.4(a)(iii) Balance Date in an amount necessary to bring the
combined forgiveness, cash payment and payment in stock
amounts to a total of [XXXXX]. Under this Section
2.3.4(a)(iii) only, the maximum principal amount on the Loan
shall increase to [XXXXX] as described in Section 3.2(a).
(b) In the event that the Research Program does not terminate as set
forth in Section 2.3.3 or Section 2.3.4(a)(i) or (ii), upon the
fifth anniversary of the Effective Date,
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the Research Program, this Agreement and all licenses to any
Licensed Clones optioned pursuant to Section 7.1 from an Exclusive
Data Set which was completed after the third anniversary of the
Effective Date and all licenses to any Licensed Clones licensed to
GENENTECH without an Option from any such Exclusive Data Set
completed after the third anniversary of the Effective Date, shall
terminate as of such fifth anniversary date unless GENENTECH: (i)
pays CURAGEN up to an additional [XXXXX] in cash within thirty (30)
days of such fifth anniversary date and/or (ii) forgives up to an
additional [XXXXX] of any outstanding balance under the Loan
pursuant to a written instrument delivered to CURAGEN within thirty
(30) days of such fifth anniversary date, in any combination of (i)
and (ii) such that the combined payment and forgiveness amounts
total an additional [XXXXX]. In the event that, as of such
termination date, the outstanding balance under the Loan is less
than [XXXXX], GENENTECH will forgive the amount of such outstanding
balance and may, in lieu of or in addition to paying cash as
specified in (i) above, elect to pay the balance of the [XXXXX] by
transferring back to CURAGEN within [XXXXX] of such termination
date, shares of CURAGEN stock received by GENENTECH pursuant to the
terms of the Note at the value (as determined pursuant to the terms
of the Note) as of such termination date in an amount necessary to
bring the combined forgiveness, cash payment and payment in stock
amounts to a total of [XXXXX]. Such termination shall not affect
GENENTECH's rights under any Exclusive Evaluation Period, Option
Period or License Agreement then ongoing which relates to a Data Set
completed prior to the third anniversary of the Effective Date, and
all provisions of this Agreement governing such Exclusive Evaluation
Periods, Option Periods, Options and related license rights shall
continue in full force and effect.
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2.3.5 Effect of Termination.
---------------------
(a) Upon any termination of the Research Program pursuant to Section
2.3.3 or 2.3.4, GENENTECH shall grant to CURAGEN a license as set
forth in Section 7.5 under GENENTECH's rights in Research Project
Patent Rights and Research Project Inventions to the extent not
previously granted to CURAGEN or not expressly retained by GENENTECH
pursuant to the terms of Sections 2.3.3 or 2.3.4 of this Agreement.
[XXXXX]
(b) Any termination of the Research Program under Section 2.3.3 or
Section 2.3.4 shall be without prejudice to the rights of either
Party against the other, then accruing or otherwise accrued under
this Agreement and upon any such termination, all remaining
GENENTECH Proprietary Material provided to CURAGEN under this
Agreement shall be returned to GENENTECH or destroyed, except as
provided in Section 7.5, and all remaining CURAGEN Project
Proprietary Material and Research Project Proprietary Material
provided to GENENTECH under this Agreement shall be returned to
CURAGEN or destroyed, except for any CURAGEN Project Proprietary
Material or Research Project Proprietary Material licensed pursuant
to an executed License Agreement or which is the subject of a
surviving Evaluation Period or Option.
2.4 PROJECT DATA EVALUATIONS.
------------------------
2.4.1 Exclusive Access. From the time at which a Research Project is
----------------
begun and continuing through a [XXXXX] which shall commence at the beginning of
the calendar quarter following the calendar quarter in which delivery of a
proper notice of a complete Project Data Set is made pursuant to Section
2.1.2(c) and access to such complete Project Data Set is given to GENENTECH (the
"Exclusive Evaluation Period"), GENENTECH shall have the right
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to use all Project Data, Research Project Inventions and Research Project
Material related to such Research Project to evaluate Clones and the proteins
encoded thereby and derived therefrom for potential licensing. During each
Exclusive Evaluation Period, CURAGEN (a) shall not use such Project Data Set
(which, during such Exclusive Evaluation Period shall be an Exclusive Data Set)
and related Research Project Proprietary Material for any purpose other than
conducting the Research Program hereunder and (b) shall keep such Project Data
Set and related Research Project Inventions and Research Project Proprietary
Material confidential and will not disclose or transfer the Project Data Set, or
related Research Project Inventions and Research Project Proprietary Material to
third parties by publication or otherwise, without the prior written consent of
GENENTECH. Notwithstanding the foregoing, CURAGEN shall have the right during
such Exclusive Evaluation Period to use, but not to transfer to third parties
(except pursuant to an agreement with a third party who has identified such
Clone independently of the Project Data), all Clones or the proteins derived
therefrom, outside of the Research Program as part of CURAGEN's libraries for
internal, general, non-directed research purposes (including, without
limitation, full length cloning, expression analysis, protein-protein
interactions and drug screening). For example, but without limitation, inclusion
of the Clone together with other clones in research to determine multiple
protein-protein interactions, or inclusion of the Clone together with other
clones in a screen against one or more molecules to determine inhibition would
be "non-directed" research, whereas activities associated with choosing a
specific Clone and conducting research to elucidate the biological activity of
such Clone (e.g., generating antibodies to the Clone, testing the Clone or
protein encoded thereby in preclinical models, enriching libraries with such
Clone to purposefully look for proteins which bind to such Clone) would be
considered "directed" research and CURAGEN shall not be permitted to perform
such activities under this Section 2.4.1. CURAGEN shall keep GENENTECH
reasonably informed of the results of any such research and patent applications
and patents relating to such research on a confidential and timely basis in
order to allow GENENTECH to make informed decisions regarding the exercise of
its option and license rights hereunder. All inventions conceived or made during
such research which relate to the Clone, the proteins derived therefrom
(including antibodies), homologs or mutants with substantially the same
biological activity as such Clone, or uses thereof, shall be deemed Research
Project Inventions subject to GENENTECH's option
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rights for such Clone under Article 7. All other inventions from such research
shall be Extended Research Inventions and GENENTECH will have rights to such
Extended Research Inventions and Extended Research Patent Rights resulting
therefrom as provided in Article 7 hereof and in Section 2.3 of the License
Agreement attached hereto as Appendix C.
2.4.2 Extensions. GENENTECH may elect to extend the Exclusive Evaluation
----------
Period for any Project Data Set that has become an Exclusive Data Set, and all
rights thereunder, for an additional [XXXXX] by giving written notice to CURAGEN
and making a payment of [XXXXX] to CURAGEN prior to expiration of the initial
Exclusive Evaluation Period for such Project Data Set. An Exclusive Evaluation
Period will be automatically extended for up to [XXXXX] in order to allow the
completion of any reasonable requests for confirmation of data made by GENENTECH
during the primary [XXXXX] of such Exclusive Evaluation Period.
2.4.3 Non-exclusive Access. Following the expiration of the
--------------------
Exclusive Evaluation Period for a Project Data Set, GENENTECH shall continue to
have non-exclusive access to such Project Data Set solely through the
GeneScape(R) database and solely for the purpose of identifying Clones of
interest to GENENTECH in such Data Set, or to the extent otherwise set forth in
an executed subscription agreement. However, the preceding restriction shall
not apply to any information which becomes part of the public domain other than
as a result of a disclosure by GENENTECH in violation of this Agreement, an
executed License Agreement or an executed subscription agreement.
2.4.4. Data Annotations. Upon the expiration of the Exclusive Evaluation
----------------
Period for each Project Data Set, CURAGEN shall furnish to GENENTECH reasonable
descriptions of the Project Data Set to be included as annotations in the
GeneScape(R) database with the Project Data Set. GENENTECH shall have a period
of [XXXXX] to review such descriptions and advise CURAGEN of reasonable
objections. CURAGEN shall not include in the GeneScape(R) database any
descriptions, or portions thereof, to which GENENTECH reasonably objects.
CURAGEN shall not include any Confidential Information of GENENTECH (as defined
in Section 4.1 below) in any annotation.
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2.5 CURAGEN PROJECTS.
----------------
2.5.1 Access. GENENTECH shall have the option, for such reasonable period
------
or periods as CURAGEN may specify, to review specified proprietary CURAGEN Data
Sets and related CURAGEN Project Inventions, which are offered by CURAGEN in its
sole discretion to GENENTECH for review and to request exclusive access thereto.
Such option shall be exercisable as set forth in Section 2.5.2 below.
2.5.2 Exclusive Evaluation Option. Subject to any rights which CURAGEN
---------------------------
may grant or have granted to third parties, GENENTECH may request at any time
during the time period specified by CURAGEN (as described in Section 2.5.1) that
it receive exclusive access to any CURAGEN Data Set offered to GENENTECH
pursuant to Section 2.5.1. Such exclusive access to such CURAGEN Data Set shall
be granted to GENENTECH for an Exclusive Evaluation Period of [XXXXX] commencing
upon CURAGEN's receipt of written notice from GENENTECH and payment of an
exclusive evaluation fee of [XXXXX], unless GENENTECH is notified by CURAGEN at
any time prior to CURAGEN's receipt of GENENTECH's written notice that exclusive
access to such CURAGEN Data Set is no longer available as a result of CURAGEN's
agreements with third parties existing at the time of the request. During each
Exclusive Evaluation Period, CURAGEN (a) shall not use such CURAGEN Data Set
(which, during such Exclusive Evaluation Period shall be an Exclusive Data Set)
and related CURAGEN Project Proprietary Material for any purpose other than
conducting the Research Program hereunder and (b) shall keep such CURAGEN Data
Set and related CURAGEN Project Inventions and CURAGEN Project Proprietary
Material confidential and will not disclose or transfer the CURAGEN Data Set, or
related CURAGEN Project Inventions and CURAGEN Project Proprietary Material to
third parties by publication or otherwise, without the prior written consent of
GENENTECH. Notwithstanding the foregoing, CURAGEN shall have the right during
such Exclusive Evaluation Period to use, but not transfer to third parties
(except pursuant to an agreement with a third party who has identified such
Clone independently of the CURAGEN Data) all Clones or the proteins derived
therefrom, outside of the Research Program as part of CURAGEN's libraries for
internal, general, non-directed research purposes (including, without
limitation, full length cloning, protein-protein interactions and drug
screening). For example, but without limitation, inclusion of the Clone together
with other clones in research to
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determine multiple protein-protein interactions, or inclusion of the Clone
together with other clones in a screen against one or more molecules to
determine inhibition would be "non-directed" research, whereas activities
associated with choosing a specific Clone and conducting research to elucidate
the biological activity of such Clone (e.g., generating antibodies to the Clone,
testing the Clone or protein encoded thereby in preclinical models, enriching
libraries with such Clone to purposefully look for proteins which bind to such
Clone) would be considered "directed" research and CURAGEN shall not be
permitted to perform such activities under this Section 2.5.2. Such research
shall be Extended Research, and GENENTECH shall have rights to such Extended
Research and Extended Research Inventions and Extended Research Patent Rights
resulting therefrom as provided in Article 7 hereof and in Section 2.3 of the
License Agreement attached hereto as Appendix C. CURAGEN shall keep GENENTECH
----------
reasonably informed of the results of any such Extended Research and Extended
Research Patent Rights on a confidential and timely basis in order to allow
GENENTECH to make informed decisions regarding the exercise of its option and
license rights hereunder.
2.5.3 Extensions. GENENTECH may elect to extend the Exclusive Evaluation
----------
Period for any CURAGEN Data Set for an additional [XXXXX] by giving written
notice to CURAGEN and making a second payment of [XXXXX] to CURAGEN prior to
expiration of the initial Exclusive Evaluation Period for such CURAGEN Data Set.
An Exclusive Evaluation Period will be automatically extended for up to [XXXXX]
in order to allow the completion of any reasonable requests for confirmation of
data made by GENENTECH during the primary [XXXXX] period of such Exclusive
Evaluation Period. Following the expiration of the Exclusive Evaluation Period
for a CURAGEN Data Set, GENENTECH shall have no access to or right to use such
CURAGEN Data Set, other than as expressly permitted in an executed License
Agreement.
2.6 DATA FROM PREVIOUS PROJECTS. Pursuant to the Collaboration
---------------------------
Agreements, CURAGEN has generated the data sets listed on Appendix D hereto and
----------
has provided such data sets to GENENTECH. Notwithstanding any other provision
of the Collaboration Agreements between the Parties, such data sets shall be
deemed Project Data Sets for all purposes hereunder and shall be deemed
completed as of the date indicated for each data set on Appendix D. GENENTECH
----------
shall have exclusive access to all such Project Data Sets for Exclusive
Evaluation
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Periods commencing on such indicated completion dates and continuing as provided
in Section 2.4, and shall have evaluation and option rights as otherwise
provided for Project Data Sets herein.
3. FINANCIAL TERMS
3.1 EQUITY INVESTMENT. GENENTECH agrees to make an equity investment in
-----------------
CURAGEN in the amount of Five Million Dollars ($5,000,000), such investment to
be made in a transaction exempt from registration under the Securities Act of
1933 pursuant to the terms of a stock purchase agreement in substantially the
form of Appendix F hereto.
3.2 LOAN COMMITMENT. As partial consideration for rights granted
---------------
hereunder, GENENTECH hereby commits to the following:
(a) GENENTECH shall, subject to the terms set forth below, make funds
available to CURAGEN for general corporate purposes in the form of a
loan or loans to CURAGEN in an amount up to Twenty-One Million Dollars
($21,000,000.00) (the "Loan"). Unless this Agreement or the Research
Program has been terminated for any reason (except that in the event
of termination pursuant to Section 2.3.3(a) or 2.3.4(a), CURAGEN shall
be permitted to continue to draw down the Loan for a period of thirty
(30) days following any such notice of termination under Section
2.3.3(a) or Section 2.3.4(a)), and subject to the drawdown limits
discussed below, CURAGEN may, in such amounts and at such times as
CURAGEN, in its sole discretion, may determine, draw down the balance
of the Loan over a period of five (5) Loan Years (as defined below)
following the Effective Date. For the purposes of this section, a
"Loan Year" commences on the Effective Date or an anniversary thereof
and terminates twelve months later. GENENTECH shall not be obligated
to advance more than Nine Million Dollars ($9,000,000) in the first
Loan Year, or more than a total Sixteen Million Dollars ($16,000,000)
in the first two Loan Years or to advance any funds under the Loan at
any time during which an Event of Default (as defined in the Note) has
occurred and is continuing under the Note (defined below).
[XXXXX]
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[XXXXX] GENENTECH's obligation to advance any funds under the Loan
shall terminate upon the earlier to occur of (i) the last day of the
fifth Loan Year, (ii) CURAGEN's receipt of notice of termination or
the expiration of the Research Program or this Agreement, or (iii)
termination or the expiration of the Research Program or this
Agreement, except that in the event of termination pursuant to Section
2.3.3(a) or 2.3.4(a), CURAGEN shall be permitted to continue to draw
down the Loan for a period of thirty (30) days following notice of
such termination under Section 2.3.3(a) or Section 2.3.4(a).
Notwithstanding the foregoing, if GENENTECH has elected to continue
this Agreement pursuant to Section 2.3.4(a)(iii), the maximum
principal amount of the Loan will be increased to a total of Twenty-
Six Million Dollars ($26,000,000.00), and CURAGEN may thereafter draw
down the balance of such principal amount subject to the conditions
described above.
(b) On the Effective Date, CURAGEN shall execute and deliver to GENENTECH
an unsecured note, substantially in the form set forth in Appendix B
----------
attached hereto and made a part hereof (the "Note"), evidencing the
Loan. The schedule attached to the Note shall be revised each time
any amount is drawn down under the Loan and each time any amount is
repaid.
(c) In the event that CURAGEN makes any repayment hereunder in CURAGEN
Convertible Non-Voting Common Stock and CURAGEN is eligible to file a
registration statement on Form S-3 (or successor short form) at the
time of repayment, then within [XXXX] of the repayment date, CURAGEN
shall file a registration statement on Form S-3 covering the resale by
GENENTECH of the shares issuable upon conversion of any shares of
Convertible Non-Voting Common Stock so delivered to GENENTECH.
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3.3 ADDITIONAL RESEARCH FUNDING.
---------------------------
In partial consideration of the work to be done by CURAGEN in the Research
Program, GENENTECH will pay CURAGEN non-refundable research payments of [XXXXX]
[XXXXX] in the Staffing Level above [XXXXX] FTEs. Such payments will be made
quarterly in advance, commencing on the first day of any calendar quarter in
which the Staffing Level is to increase above [XXXXX], and on or before the
first day of each calendar quarter thereafter. [XXXXX] In the event that the
Staffing Level is to change during any calendar quarter, such payment shall be
pro-rated accordingly, if necessary, based on the above-specified level of
funding per FTE. GENENTECH will fund its own activities under the Research
Program.
3.4 ADDITIONAL ADVANCE.
------------------
Notwithstanding the provisions of Section 3.2(a), in the event that, during
the term of the Loan, CURAGEN completes a public offering of shares of CURAGEN
Common Stock after any portion of the Note has been converted to CURAGEN Series
F Preferred Stock (the "Conversion Shares") pursuant to Section 6 of the Note,
GENENTECH shall, upon the written request of CURAGEN received within thirty (30)
days of such event (the "Redemption Notice"), advance to CURAGEN, under the
terms of the Note and Section 3.2(a) hereof, the aggregate Redemption Price (as
defined in the Certificate of Designation for the Series F Preferred Stock) of
the Conversion Shares (the "Redemption Amount"). CURAGEN shall use the
Redemption Amount received from GENENTECH solely for the purpose of repurchasing
the Conversion Shares from GENENTECH. CURAGEN shall repurchase the Conversion
Shares, and GENENTECH shall sell and deliver the Conversion Shares to CURAGEN,
for a price equal to the Redemption Amount contemporaneously with the advance of
the Redemption Amount.
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4. TREATMENT OF CONFIDENTIAL INFORMATION
4.1 CONFIDENTIAL INFORMATION. During the course of the Research Program,
------------------------
or in discussions concerning Exclusive Data Sets, each Party may disclose to the
other proprietary technical, research and business information, including but
not limited to information contained in Data Sets (which Data Set information
shall be deemed Confidential Information of CURAGEN), (collectively,
"Confidential Information"). For a period of [XXXXX] after the receipt of any
such Confidential Information, except as expressly permitted hereunder, the
receiving Party shall keep confidential all such Confidential Information of the
other Party and will not disclose such Confidential Information of the other
Party to third parties by publication or otherwise. Each Party further agrees
not to use Confidential Information of the other Party for any purpose other
than conducting or evaluating research hereunder, evaluating and analyzing Data
Sets or exercising any rights granted to it or reserved by it under this
Agreement. Notwithstanding the foregoing, it is understood and agreed that the
receiving Party's obligations of confidentiality and nonuse herein shall not
apply to any information which:
(a) is, at the time of disclosure by the disclosing Party hereunder, or
thereafter becomes, a part of the public domain or publicly known or
available through no fault or negligence of the receiving Party or any
of its Affiliates; or
(b) was otherwise in the receiving Party's lawful possession prior to
disclosure by the disclosing Party, as demonstrated by the receiving
Party's written records; or
(c) is lawfully disclosed to the receiving Party on a non-confidential
basis by a third party who is not in violation of an obligation of
confidentiality to the disclosing Party relative to such information.
Each Party may disclose the other Party's Confidential Information to the extent
reasonably necessary to comply with applicable government law or regulations,
provided that prompt notice of any such disclosure shall be given to the other
Party. Information disclosed other than in written or electronic form shall be
subject to the terms of this Section 4.1 only if confirmed in
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writing to other Party within thirty (30) days of initial disclosure and
specifying with particularity that Confidential Information disclosed other than
in written form which is subject to the provisions of this Section 4.1.
4.2 PUBLICATIONS. It is expected that each Party may wish to publish the
-------------
results of the research under this Agreement. In order to safeguard intellectual
property rights, the Party wishing to publish or otherwise publicly disclose the
results of its research hereunder shall first submit a draft of the proposed
manuscripts to the RC for each Party's review, comment and consideration of
appropriate patent action at least [XXXXX] prior to any submission for
publication or other public disclosure. Within [XXXXX] of receipt of the
prepublication materials, the RC will advise the Party seeking publication as to
whether a patent application will be prepared and filed or whether trade secret
protection should be pursued and, if so, the RC will, in cooperation with both
parties, determine the appropriate timing and content of any such publications.
CURAGEN shall have the right to reasonably withhold consent for publications
based primarily upon CURAGEN Projects. CURAGEN shall also have the right to
reasonably withhold consent for publication of QEA/GeneCalling or
MIM/PathCalling data. Each Party shall have the right to reasonably withhold
consent for publication of its own Confidential Information provided to the
other Party hereunder. Consent to all other publications regarding Clones shall
be governed by the RC as indicated above in this Section.
4.3 PRESS RELEASE AND REGULATORY FILINGS. The Parties shall mutually
-------------------------------------
agree on a press release announcing the execution of this Agreement and on any
confidential treatment request to be filed with the Securities and Exchange
Commission with respect to this Agreement. Once any such written statement is
approved for disclosure by both Parties, either Party may make subsequent public
disclosures of the contents of such statement without the further approval of
the other Party. Neither Party shall make any disclosure of the terms of this
Agreement except as required by applicable law or as set forth above without the
prior written consent of the other Party.
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5. INTELLECTUAL PROPERTY RIGHTS
5.1 GENENTECH PROPRIETARY MATERIAL. mRNA pools extracted by CURAGEN from
------------------------------
a GENENTECH Proprietary Material in the performance of the Research Program and
full-length genes cloned by GENENTECH using any Clone shall be GENENTECH
Proprietary Material. All other substances made by CURAGEN in the performance
of the Research Program shall be Research Project Proprietary Material and all
other substances made by GENENTECH shall be GENENTECH Proprietary Material.
Except as provided in Section 7.5 or in an executed License Agreement, GENENTECH
Proprietary Material shall remain the property of GENENTECH, and CURAGEN shall
use such GENENTECH Proprietary Material only for the purpose of conducting the
Research Program hereunder or as otherwise permitted herein, and shall not
transfer GENENTECH Proprietary Material to any other person or entity.
5.2 CURAGEN PROJECT PROPRIETARY MATERIAL AND RESEARCH PROJECT PROPRIETARY
---------------------------------------------------------------------
MATERIAL.
- --------
(a) CURAGEN Project Proprietary Material shall remain the property of
CURAGEN and GENENTECH shall use such CURAGEN Project Proprietary
Material only for purposes relating to performance of the Research
Program, evaluation of the CURAGEN Data, the exercise of the option
provided in Section 7.1, or pursuant to the terms of an executed
License Agreement. GENENTECH shall not transfer CURAGEN Project
Proprietary Material to any other person or entity except in
connection with rights granted to GENENTECH pursuant to an executed
License Agreement. CURAGEN shall not transfer to any third party or
otherwise use CURAGEN Project Proprietary Material during an Exclusive
Evaluation Period or Option Period except as otherwise permitted
herein.
(b) Research Project Proprietary Material shall remain the property of
CURAGEN and GENENTECH shall use such Research Project Proprietary
Material only for purposes relating to performance of the Research
Program, evaluation of the Project Data, the exercise of the option
provided in Section 7.1, or pursuant to the terms of an executed
License Agreement. GENENTECH shall not transfer
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Research Project Proprietary Material to any other person or entity
except in connection with rights granted to GENENTECH pursuant to an
executed License Agreement. CURAGEN shall not transfer to any third
party or otherwise use Research Project Proprietary Material during an
Exclusive Evaluation Period or Option Period except as otherwise
permitted herein.
5.3 INVENTIONS. Each Party shall promptly disclose to the other Party all
-----------
Inventions. During the term of any Exclusive Evaluation Period or relevant
Option Period, CURAGEN shall not use Research Project Inventions, Project Data,
CURAGEN Project Inventions or CURAGEN Data to support patent filings made by
CURAGEN outside the Research Program without GENENTECH's express prior written
consent. GENENTECH shall not at any time use Research Project Inventions,
Project Data, CURAGEN Project Inventions or CURAGEN Data to support patent
filings made by GENENTECH outside the Research Program except to the extent that
such filings relate to Licensed Clones or corresponding Licensed Products.
Except as set forth in Sections 5.1 and 5.2, (i) all Research Project
Inventions, and Research Project Patent Rights shall be owned jointly by CURAGEN
and GENENTECH; and (ii) all CURAGEN Project Inventions and CURAGEN Project
Patent Rights shall be owned by CURAGEN. Inventorship of Patent Rights shall be
agreed upon in good faith by the Parties prior to the filing of each new patent
application in accordance with applicable law. The rights and interests of
CURAGEN and GENENTECH in Inventions shall be subject to the provisions of
Article 7.
6. PROVISIONS CONCERNING THE FILING, PROSECUTION AND
MAINTENANCE OF PATENT RIGHTS
6.1 APPLICABILITY. The provisions of this Section 6 shall be applicable
-------------
to all Inventions and Patent Rights unless and until (i) they become subject to
a License Agreement, whereupon the License Agreement will govern the rights of
the parties with respect to the subject matter thereof, or (ii) the relevant
Research Project is completed and the relevant Exclusive Evaluation Period
expires and the relevant Option Period, if any, expires, whereupon this Section
6 shall cease to apply with respect to Inventions and Patent Rights relating to
such Research Project or License Agreement.
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6.2 PATENT FILING.
-------------
(a) CURAGEN shall have the responsibility to prepare, file, prosecute,
obtain and maintain U.S. and foreign patent applications and patents
on Inventions at its sole expense. Initial patent filings shall be
made in the form of a regular CFR Rule 1.51 U.S. Priority patent
application or a provisional application, as determined by the Patent
Coordinators. The Patent Coordinators for each Party will be
designated by such Party from time to time. Patent applications will
be perfected by making, as soon as available, an ATCC deposit of at
least such Clone(s) as reasonably agreed by the Patent Coordinators,
and by making any subsequent application filings necessary to perfect
U.S. or foreign priority patent rights in the countries of Europe that
are members of the European Patent Organization, Japan, Canada, Mexico
and at least such other countries as mutually agreed by the Parties.
GENENTECH agrees to provide reasonable and timely assistance and
cooperation to CURAGEN to facilitate such filing, prosecution and
maintenance, including without limitation, the execution of
appropriate powers of attorney. CURAGEN agrees that any such
preparation, filing, prosecution and maintenance shall be conducted
diligently and in a timely fashion. GENENTECH shall be kept fully
informed by CURAGEN of the progress of all patent filings and
prosecution hereunder and shall be provided with copies of all
material documents pertaining thereto including, without limitation,
information regarding inventorship, sequences and sequence listings,
serial numbers, filing dates, foreign filing licenses and copies of
patent applications, until the end of the Exclusive Evaluation Period,
and for any Invention which becomes subject to an Option, until the
end of the Option Period. GENENTECH shall be given the opportunity,
whenever practical, to review and comment in advance on any patent
filings or other correspondence with the patent office during such
periods and CURAGEN shall use reasonable efforts to incorporate any
comments provided by GENENTECH. CURAGEN shall pursue its priority to
claims on Inventions by filing all necessary interferences and
opposition papers, motions and the like.
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Any proposed interference settlement agreement relating to Inventions
subject to potential Option by GENENTECH hereunder will be reviewed by
the RC.
(b) If CURAGEN is unable to file patent applications as set forth in
Section 6.2(a) on a timely basis despite diligent efforts concerning
Inventions made regarding Clones where the majority of the sequencing
of such Clones has taken place at GENENTECH, GENENTECH shall have the
option to prepare, file, prosecute, obtain and maintain patent
applications and patents on Inventions in the same manner as described
in Section 6.2(a) above at any time for any such Inventions by giving
written notice thereof to GENENTECH. Following the receipt of such
notice and the election of such option by GENENTECH, GENENTECH shall
have the right to prepare, file, prosecute, obtain and maintain the
patent application(s) and patent(s) identified in the notice, at its
sole expense, on behalf of the owner of the Invention, subject to the
rights granted herein, until the end of the Exclusive Evaluation
Period, and for any Invention which becomes subject to an Option,
until the end of the Option Period. CURAGEN shall be given the
opportunity to review and comment in advance on any patent filings or
other correspondence with the patent office during such periods and
GENENTECH shall use reasonable efforts to incorporate any comments
provided by CURAGEN.
(c) The Parties shall mutually agree before permitting any patent
application or patent within Patent Rights to lapse as well as before
authorizing any amendment to any patent application or patent within
Patent Rights that would irrevocably limit the lawful scope of the
Patent Rights, until the end of the Exclusive Evaluation Period, and
for any Invention which becomes subject to an option, until the end of
the Option Period.
(d) No Party shall have any obligation under this Agreement to pay any
fees or costs: (i) for bringing a lawsuit or other action to enforce
any of the Patent Rights against an actual or suspected infringement
or (ii) for any other Party to obtain for its own benefit independent
business or legal advice concerning any of the Patent Rights.
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6.3 NOTICE OF INFRINGEMENT. If either Party learns of any infringement
----------------------
or threatened infringement by a third party of the patents within Patent Rights,
such Party shall promptly notify the other Party and shall provide such other
Party with available evidence of such infringement.
6.4 INFRINGEMENT. CURAGEN shall have all rights, at its own expense, to
------------
bring suit (or other appropriate legal action) against any actual or suspected
infringement of the Patent Rights except as may be provided in a License
Agreement executed by the Parties.
6.5 COOPERATION. Each Party shall execute all papers and perform such
-----------
other acts as may be reasonably required to file and prosecute any patent
applications as provided in Section 6.2 and to maintain any infringement suit
brought in accordance with Section 6.4 above (including giving legal consent for
bringing such suit, and agreeing to be named as a plaintiff or otherwise joined
in such suit), and at its option and expense, may be represented in such suit by
counsel of its choice.
7. OPTION TO GENENTECH
7.1 OPTION GRANT.
------------
7.1.1 Option. Subject to rights third parties have obtained by virtue of
------
access to other CURAGEN Data Sets, data sets resulting from written agreements
between CURAGEN and third parties, or the subscription portion of the
GeneScape(R) database prior to GENENTECH's election, CURAGEN hereby grants to
GENENTECH the right to elect an exclusive option (the "Option") to license all
Inventions and know-how relating to any Clone whose sequence or utility is
determined in whole or in part by GENENTECH or CURAGEN from the use of an
Exclusive Data Set or which is identified by GENENTECH pursuant to the rights
granted in Section 2.4.3, and which is not a Previously Committed Clone. Such
Option shall give GENENTECH the right to obtain, at GENENTECH's sole discretion
and as further described in the License Agreement, either (a) subject to the
rights reserved by CURAGEN in Section 7.1.3 hereof, an exclusive license to the
Clone specified in GENENTECH's notice of exercise (the "Optioned Clone") and to
all Research Project Patent Rights, CURAGEN Project Patent Rights, Inventions,
Extended Research Inventions, Extended Research Patent Rights and know-how to
the extent that they relate to such Optioned Clone or Licensed Products related
to such Optioned
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Clone, to develop, make, have made, use, have used, sell, offer for sale, have
sold, import and have imported any and all products, in the Territory, for any
and all human uses; (b) a non-exclusive license to the Optioned Clone under all
Research Project Patent Rights, CURAGEN Project Patent Rights, Inventions and
know-how, to the extent that they relate to such Optioned Clone, solely for use
of the Optioned Clone or the protein encoded thereby as a reagent for
discovering or developing Licensed Products and to develop, make, have made,
use, have used, sell, offer for sale, have sold, import and have imported
Licensed Products; or (c) subject to the rights reserved by CURAGEN in Section
7.1.3 hereof, an exclusive license to all Research Project Patent Rights,
CURAGEN Project Patent Rights, Inventions, Extended Research Inventions,
Extended Research Patent Rights and know-how to the extent that they relate to a
"known" Optioned Clone or Licensed Products related to such Optioned Clone, to
develop, make, have made, use, have used, sell, offer for sale, have sold,
import and have imported any and all products, in the Territory, for any and all
human uses. Such Option shall be exercisable at any time during the Option
Period specified in Section 7.3. If any Previously Committed Clone is or becomes
available for licensing by GENENTECH on an exclusive or non-exclusive basis,
CURAGEN shall so notify GENENTECH and GENENTECH shall have the right to obtain
an option to license any available rights on the terms set forth in the form of
License Agreement attached hereto as Appendix C.
7.1.2 Option Election.
---------------
Such Option shall be elected by GENENTECH by giving written notice to
CURAGEN within the Exclusive Evaluation Period for such Exclusive Data Set,
which shall specify in detail the Optioned Clone to be included within the terms
of any such Option and which shall be accompanied by the payment of any Option
Fee as specified in Section 7.2. Each Optioned Clone, and the term of the
corresponding Option Period, shall be listed on Appendix A hereto from time to
----------
time. Notwithstanding the foregoing, GENENTECH may request such an Option from
Project Data Sets after expiration of the Exclusive Evaluation Period, which
Option shall be granted by CURAGEN upon payment of the Option Fee specified in
Section 7.2, unless prohibited by written agreements with third parties.
7.1.3 Reservation of Rights. Notwithstanding the foregoing, during any
---------------------
Option Period, CURAGEN shall retain for itself the right to use, but not to
transfer to third parties (except
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pursuant to an agreement with a third party who has identified such Optioned
Clone independently of the related Data Set) the Optioned Clone or the protein
derived therefrom outside of the Research Program as part of CURAGEN's libraries
for internal, general, non-directed research purposes (including, without
limitation, full length cloning, expression analysis, protein-protein
interactions and drug screening). For example, but without limitation, inclusion
of the Clone together with other clones in research to determine multiple
protein-protein interactions, or inclusion of the Clone together with other
clones in a screen against one or more molecules to determine inhibition would
be "non-directed" research, whereas activities associated with choosing a
specific Clone and conducting research to elucidate the biological activity of
such Clone (e.g., generating antibodies to the Clone, testing the Clone or
protein encoded thereby in preclinical models, enriching libraries with such
Clone to purposefully look for proteins which bind to such Clone) would be
considered "directed" research and CURAGEN shall not be permitted to perform
such activities under this Section 7.1.3. All inventions conceived or made
during such research which relate to any Clone whose sequence or utility is
determined from the analysis of a Project Data Set, the proteins derived
therefrom (including antibodies), homologs or mutants with substantially the
same biological activity as such Clone, or uses thereof, shall be deemed
Research Project Inventions if licensed by GENENTECH. All other inventions from
such research shall be Extended Research Inventions and GENENTECH will have
rights to such Extended Research Inventions and Extended Research Patent Rights
resulting therefrom as provided in this Article 7 and in Section 2.3 of the
License Agreement attached hereto as Appendix C. CURAGEN shall keep GENENTECH
reasonably informed of the results of any such research using an Optioned Clone
and patent applications and patents relating to such research on a timely basis
in order to allow GENENTECH to make informed decisions regarding the exercise of
its option and license rights hereunder.
7.2 OPTION FEE. An Option Fee of [XXXXX] per Optioned Clone shall be due
----------
upon the election of an Option with respect to any Clone from any Exclusive Data
Set; provided, however, that [XXXXX]
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7.3 OPTION PERIOD. Each Option shall remain in effect for a period of
-------------
[XXXXX] from receipt by CURAGEN of GENENTECH's written notice of its election of
such Option and payment of any required Option Fee (the "Option Period");
provided, however, that any Option Period may be extended for one additional
[XXXXX] period upon payment by GENENTECH of an additional [XXXXX] per Optioned
Clone.
7.4 OPTION EXERCISE. During each Option Period, upon notice to CURAGEN
---------------
and upon payment of the corresponding license fee, GENENTECH shall have the
right to receive a license to the Optioned Clone under the terms and conditions
set forth in an executed License Agreement and CURAGEN shall grant such license
to GENENTECH. The license fee for a license described in Section 7.1.1, clause
(a) shall be [XXXXX] and the license fee for a license described in Section
7.1.1, clause (b) or (c), shall be [XXXXX]. The License Agreement shall be
executed in substantially the form attached hereto upon exercise of the first
Option and shall be amended from time to time in accordance with the terms
hereof and thereof as additional Options are exercised.
7.5 REVERSION OF RIGHTS. CURAGEN shall retain all rights to all Project
-------------------
Data, CURAGEN Data, Extended Research Data, CURAGEN Project Proprietary
Material, Research Project Proprietary Material, Inventions, Extended Research
Inventions, Patent Rights and Extended Research Patent Rights not expressly
granted to GENENTECH hereunder. Upon expiration of any Exclusive Evaluation
Period for any Research Project or CURAGEN Project CURAGEN shall recover and
retain, with respect to Clones whose sequence or utility was determined from
such project and that are not optioned by GENENTECH, all of CURAGEN's rights to
the corresponding Exclusive Data Set, Extended Research Data, CURAGEN Project
Proprietary Material or Research Project Proprietary Material and corresponding
Inventions, Extended Research Inventions, Patent Rights and Extended Research
Patent rights thereon, other than such rights granted to GENENTECH as provided
in Sections 2.1.4(c), 2.4.3 or 7.1.2 or, with respect to Optioned Clones,
Section 2.1.5. In the event that upon the expiration of any Option Period any
corresponding Option has not been exercised by GENENTECH, all of CURAGEN's
rights in the corresponding Optioned Clone and related Project Data, CURAGEN
Data, Extended Research Data, CURAGEN Project Proprietary Material, Research
Project Proprietary Material, Inventions, Extended Research Inventions, Patent
Rights and Extended Research Patent Rights
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thereon shall revert to CURAGEN, other than such rights granted to GENENTECH as
provided in Sections 2.1.4(c), 2.4.3 or 7.1.2, or with respect to Optioned
Clones, Section 2.1.5. Notwithstanding the foregoing, nothing contained in this
Section 7.5 shall be deemed to limit any rights of GENENTECH expressly provided
in an executed License Agreement. In addition, GENENTECH shall (a) upon the
expiration of each Exclusive Evaluation Period, without any further action on
its part, be deemed to have granted to CURAGEN an exclusive (except for uses by
GENENTECH permitted in Sections 2.1.4(c), 2.4.3 and 7.1.2) license, with the
right to sublicense, for all purposes under GENENTECH's rights in Research
Project Inventions and Research Project Patent Rights relating to any Clone
whose sequence or utility was determined in whole or in part from the use of the
corresponding Data Set and which is not the subject of any Option or License
Agreement and (b) upon the expiration of each Option Period, without any further
action on its part, be deemed to have granted to CURAGEN a license as set forth
in (a) above with respect to each Optioned Clone for which an Option has not
been exercised. Such licenses from GENENTECH to CURAGEN shall be [XXXX]. Upon
the request of CURAGEN, GENENTECH shall provide to CURAGEN available GENENTECH
Proprietary Material which is a full-length gene cloned by GENENTECH using any
Clone described in (a) above and which is not contained in a proprietary vector.
For the avoidance of doubt, CURAGEN shall have no rights to any patents or
patent applications of GENENTECH which relate to inventions (including
inventions related to Clones) made outside the Research Program and CURAGEN
shall only have exclusive rights to Research Project Inventions and Research
Project Patent Rights as expressly provided herein.
7.6 NO OTHER RIGHTS. No rights to Data Sets or Clones under Patent
---------------
Rights, Inventions, Extended Research Patent Rights or Extended Research
Inventions are granted to GENENTECH hereunder except as expressly set forth
herein or in an executed License Agreement. CURAGEN shall receive no rights to
Data Sets or Clones under GENENTECH's interests in Research Project Patent
Rights or Research Project Inventions except as expressly set forth herein or in
an executed License Agreement.
7.7 [XXXX].
------
[XXXX].
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[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
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[XXXX]
[XXXX]
[XXXX]
[XXXX]
[XXXX]
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[XXXX]
[XXXX]
[XXXX]
[XXXX]
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[XXXX]
8. TERM AND TERMINATION
8.1 TERM. The term of this Agreement shall be for the duration of the
----
Research Term plus the length of all surviving Exclusive Evaluation Periods and
any permitted extensions thereof and the length of all surviving Option Periods
and any permitted extensions thereof or until the date on which GENENTECH no
longer has access to Project Data Sets hereunder, whichever is later (the
"Term").
8.2 TERMINATION.
-----------
(a) This Agreement, the Research Program, and the rights granted herein
may be terminated by either Party upon any breach by the other Party
of any material obligation or condition, effective fifteen (15) days
after giving written notice to the other Party of such termination in
the case of a payment breach and sixty (60) days after giving written
notice to the other Party of such termination in the case
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of any other breach, which notice shall describe such breach in
reasonable detail. The foregoing notwithstanding, if the default or
breach is cured or shown to be non-existent within the aforesaid
fifteen (15) or sixty (60) day period, the notice shall be deemed
automatically withdrawn and of no effect.
(b) If either Party files for protection under bankruptcy laws, makes an
assignment for the benefit of creditors, appoints or suffers
appointment of a receiver or trustee over its property, files a
petition under any bankruptcy or insolvency act or has any such
petition filed against it which is not discharged within sixty (60)
days of the filing thereof, then the other party may terminate the
Research Program and this Agreement effective upon giving written
notice to such Party.
8.3 TERMINATION AFTER INJUNCTION. In addition to the rights set forth in
----------------------------
Section 8.2, GENENTECH may terminate the Research Program effective thirty (30)
days after giving written notice to CURAGEN in the event that a final non-
appealable injunction is entered against CURAGEN by a court of competent
jurisdiction the effect of which is to enjoin CURAGEN from utilizing its
proprietary genomics technologies such that it is substantially unable to
perform the Research Program. Any such termination shall not affect GENENTECH's
rights hereunder with respect to any Exclusive Evaluation Period or Option
Period then ongoing, or any License Agreement executed by the Parties prior to
such termination. Upon any such termination the Note shall become due in
accordance with its terms.
8.4 ADDITIONAL EFFECTS OF TERMINATION.
---------------------------------
(a) Upon termination of this Agreement by a Party pursuant to Section
8.2(a) due to a payment breach by the other Party with respect to
payments due on a specific product pursuant to Section 2.1.4(c) and
(e) or Section 7.7. hereof (but not any other breach), all relevant
rights and licenses granted by such terminating Party to the breaching
Party under such Section regarding the specific product shall
immediately and automatically terminate and revert to the terminating
Party, subject to the breaching Party's right to sell any remaining
quantities of product remaining in its inventories as of the date of
termination.
(b) Upon termination of this Agreement by a Party pursuant to Section
8.2(a) due to a breach other than a payment breach covered by Section
8.4(a), the Research
50
<PAGE>
Program shall end. If CURAGEN is the terminating Party, all Exclusive
Evaluation Periods and all Option Periods shall terminate, but all
License Agreements previously executed shall continue. If GENENTECH is
the terminating Party, all of GENENTECH's rights under Exclusive
Evaluation Periods, Option Periods and License Agreements then ongoing
shall continue in accordance with their terms, and the Note shall
become due in accordance with its terms.
(c) Documentation. At the request of the terminating Party, the breaching
-------------
Party shall execute and deliver such bills of sale, assignments and
licenses and other documents as may be necessary to fully vest in the
non-breaching Party all right, title and interest to which it is
entitled as aforesaid pursuant to this Section 8.4.
(d) Payment Obligations. The breaching Party shall have no obligation to
-------------------
make any payment to the terminating Party that has not accrued prior
to the effective date of such termination except for royalties on
remaining inventory, but shall remain liable for all obligations
accruing prior to termination.
8.5 REMEDIES. If either Party shall fail to perform or observe or
--------
otherwise breaches any of its material obligations under this Agreement, in
addition to any right to terminate this Agreement, the non-defaulting Party may
elect to obtain other relief and remedies available under law.
8.6 SURVIVING PROVISIONS. Notwithstanding any provision herein to the
--------------------
contrary, the rights and obligations set forth in Sections 2.1.6, 2.3.5, 3.2,
3.4, Articles 4, 5, and 6, and Sections 7.5, 8.4 and 8.6, and Article 9 hereof,
as well as any rights and obligations otherwise accrued, shall survive the
expiration of the Term or any termination of this Agreement. In addition, the
rights and obligations set forth in Sections 2.1.4 (c)-(h) and Section 7.7 shall
survive the expiration or termination of this Agreement, unless otherwise
terminated as specified in Section 8.4 above, and the rights and obligations
with respect to ongoing Exclusive Evaluation Periods and Option Periods shall
survive as described elsewhere in this Agreement.
51
<PAGE>
9. MISCELLANEOUS
9.1 CURAGEN REPRESENTATIONS AND COVENANTS. CURAGEN represents and
-------------------------------------
warrants that: (a) the execution and delivery of this Agreement and the
performance of the transactions contemplated hereby have been duly authorized by
all appropriate CURAGEN corporate action; (b) CURAGEN is under no obligation
which is inconsistent with this Agreement; (c) CURAGEN employees are
contractually bound to assign all rights in inventions and know-how arising from
their employment to CURAGEN; (d) there are no adverse proceedings claims or
actions pending, or to the best of CURAGEN's knowledge, threatened relating to
CURAGEN's genomics technologies, including without limitation, GeneScape,
QEA/GeneCalling, MIM/PathCalling and all additional services to be provided by
CURAGEN to GENENTECH hereunder, and at the time of disclosure and access thereof
to GENENTECH, to the best of CURAGEN's knowledge, CURAGEN shall have the full
right and legal capacity to disclose and provide access to such CURAGEN genomics
technologies to GENENTECH and to itself use such technologies to perform its
obligations under this Agreement without violating the rights of third parties;
and (e) CURAGEN has the full right and legal capacity to grant the rights to
GENENTECH pursuant to Article 7 without violating the rights of any third party.
CURAGEN covenants that it will not enter into any agreement with any third party
that is inconsistent with the terms of this Agreement. Subject to CURAGEN's
obligation not to enter into any agreement that is inconsistent with the terms
of this Agreement, CURAGEN shall use commercially reasonable efforts to obtain,
at its sole cost, any rights, licenses, approvals or permissions related to its
genomics technology and know-how that are required, now or in the future, to
carry out its obligations to conduct the Research Projects hereunder and to
provide its services and genomics technologies to GENENTECH hereunder and to
grant GENENTECH the intellectual property rights under Article 7 above. Nothing
in this Agreement shall be interpreted as obligating either Party to
commercialize technology made hereunder or to perform any additional work beyond
that set forth in the Research Plan.
9.2 GENENTECH REPRESENTATIONS. GENENTECH represents and warrants that:
-------------------------
(a) the execution and delivery of this Agreement and the performance of the
transactions contemplated hereby have been duly authorized by all appropriate
GENENTECH corporate
52
<PAGE>
action; (b) GENENTECH is under no obligation which is inconsistent with this
Agreement, and (c) GENENTECH has the full right and legal capacity to grant the
rights to CURAGEN pursuant to Article 7 without violating the rights of any
third party. Nothing in this Agreement shall be interpreted as obligating either
Party to commercialize technology made hereunder or to perform any additional
work beyond that set forth in the Research Plan.
9.3 NO WARRANTIES.
-------------
(a) Nothing in this Agreement is or shall be construed as:
(i) a warranty or representation by CURAGEN or GENENTECH as to
the validity or scope of any application or patent within
the Patent Rights;
(ii) a warranty or representation that anything made, used, sold
or otherwise disposed of under any license granted pursuant
to this Agreement is or will be free from infringement of
patents, copyrights, and other rights of third parties.
(b) Except as expressly set forth in this Agreement, NEITHER PARTY MAKES
ANY REPRESENTATIONS OR EXTENDS ANY WARRANTIES OF ANY KIND, EITHER
EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF NON-
INFRINGEMENT OF ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS, OR
ANY OTHER EXPRESS OR IMPLIED WARRANTIES.
9.4 LIABILITY. NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR
---------
OTHERWISE, NEITHER PARTY WILL BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF
THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL
OR EQUITABLE THEORY FOR (I) ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE
DAMAGES OR LOST PROFITS OR (II) COST OF PROCUREMENT OF SUBSTITUTE GOODS,
TECHNOLOGY OR SERVICES.
9.5 NOTICES. Any notices, requests, deliveries, approvals or consents
-------
required or permitted to be given under this Agreement to GENENTECH or CURAGEN
shall be in writing
53
<PAGE>
and shall be personally delivered or sent by telecopy (with written confirmation
to follow via United States first class mail), overnight courier providing
evidence of receipt or certified mail, return receipt requested, postage
prepaid, in each case to the respective address specified below (or to such
address as may be specified in writing to the other Party hereto):
CURAGEN: 555 Long Wharf, 11th Floor
New Haven, CT 06511
Attn: Vice President, Business Development
Telecopy: (203) 401-3333
GENENTECH: 1 DNA Way
South San Francisco, CA 94080
Attn: Corporate Secretary
Telecopy: (650) 952-9881
Such notices shall be deemed to have been sufficiently given on: (a) the
date sent if delivered in person or transmitted by telecopy, (b) the next
business day after dispatch in the case of overnight courier or (c) five (5)
business days after deposit in the U.S. mail in the case of certified mail.
9.6 GOVERNING LAW. This Agreement will be construed, interpreted and
-------------
applied in accordance with the laws of the State of New York (excluding its body
of law controlling conflicts of law).
9.7 LIMITATIONS. Except as set forth elsewhere in this Agreement, neither
-----------
Party grants to the other Party any right or license to any of its intellectual
property.
9.8 ENTIRE AGREEMENT. This is the entire Agreement between the Parties
----------------
with respect to the subject matter hereof and supersedes all prior agreements
between the Parties with respect to the subject matter hereof. No modification
shall be effective unless in writing with specific reference to this Agreement
and signed by the Parties.
9.9 WAIVER. The terms or conditions of this Agreement may be waived only
------
by a written instrument executed by the Party waiving compliance. The failure
of either Party at any time or times to require performance of any provision
hereof shall in no manner affect its rights at a later time to enforce the same.
No waiver by either Party of any condition or term shall be deemed as a
continuing waiver of such condition or term or of another condition or term.
54
<PAGE>
9.10 HEADINGS. Section and subsection headings are inserted for
--------
convenience of reference only and do not form part of this Agreement.
9.11 ASSIGNMENT. This Agreement may not be assigned by either Party
----------
without the consent of the other, except that each Party may, without such
consent, assign this Agreement and the rights, obligations and interests of such
Party, in whole or in part, to any of its wholly-owned subsidiaries, to any
purchaser of all or substantially all of its assets in the line of business to
which this Agreement pertains, or of all of its capital stock, or to any
successor corporation resulting from any merger or consolidation of such Party
with or into such corporation.
9.12 FORCE MAJEURE. Neither Party shall be liable for failure of or delay
-------------
in performing obligations set forth in this Agreement, and neither shall be
deemed in breach of its obligations, if such failure or delay is due to natural
disasters or any causes beyond the reasonable control of such Party. In event
of such force majeure, the Party affected thereby shall use reasonable efforts
to cure or overcome the same and resume performance of its obligations
hereunder.
9.13 CONSTRUCTION. The Parties hereto acknowledge and agree that: (i)
------------
each Party and its counsel reviewed and negotiated the terms and provisions of
this Agreement and have contributed to its revision; (ii) the rule of
construction to the effect that any ambiguities are resolved against the
drafting Party shall not be employed in the interpretation of this Agreement;
and (iii) the terms and provisions of this Agreement shall be construed fairly
as to all Parties hereto and not in a favor of or against any Party, regardless
of which Party was generally responsible for the preparation of this Agreement.
9.14 SEVERABILITY. If any provision(s) of this Agreement are or become
------------
invalid, are ruled illegal by any court of competent jurisdiction or are deemed
unenforceable under then current applicable law from time to time in effect
during the Term hereof, it is the intention of the Parties that the remainder of
this Agreement shall not be affected thereby provided that a Party's rights
under this Agreement are not materially affected. The Parties hereto covenant
and agree to renegotiate any such term, covenant or application thereof in good
faith in order to provide a reasonably acceptable alternative to the term,
covenant or condition of this Agreement or the application thereof that is
invalid, illegal or unenforceable, it being the intent of the Parties that the
basic purposes of this Agreement are to be effectuated.
55
<PAGE>
9.15 STATUS. Nothing in this Agreement is intended or shall be deemed to
------
constitute a partner, agency, employer-employee, or joint venture relationship
between the Parties.
9.16 INDEMNIFICATION.
---------------
(a) GENENTECH shall indemnify, defend and hold harmless CURAGEN, its
Affiliates and their respective directors, officers, employees, and
agents and their respective successors, heirs and assigns (the
"CURAGEN Indemnitees"), against any liability, damage, loss or expense
(including reasonable attorneys' fees and expenses of litigation)
incurred by or imposed upon the CURAGEN Indemnitees, or any of them,
in connection with any claims, suits, actions, demands or judgments
("Claims") of third parties, for personal injury and product liability
matters (except in cases where such Claims result from a willful
material breach of this Agreement or the gross negligence or willful
misconduct on the part of a CURAGEN Indemnitee or are the subject
matter of CURAGEN's indemnification of GENENTECH as set forth in
Section 9.16(b)) arising out of the performance of the Research
Program by GENENTECH or arising out of or relating to any actions of
GENENTECH or any Affiliate, licensee, sublicensee, distributor agent
of GENENTECH in the development, testing, production, manufacture,
promotion, import, sale or use by any person of any Know-How
Information Product manufactured or sold by GENENTECH or by an
Affiliate, licensee, sublicensee, distributor or agent of GENENTECH.
(b) CURAGEN shall indemnify, defend and hold harmless GENENTECH, its
Affiliates and their respective directors, officers, employees, and
agents and their respective successors, heirs and assigns (the
"GENENTECH Indemnitees"), against any liability, damage, loss or
expense (including reasonable attorneys' fees and expenses of
litigation) incurred by or imposed upon the GENENTECH Indemnitees, or
any of them, in connection with any Claims of third parties, for
personal injury matters and product liability matters (except to the
extent such Claims result from a material breach of this Agreement or
the gross negligence or willful misconduct on the part of GENENTECH or
are the subject matter of GENENTECH's indemnification of CURAGEN as
set forth in Section 9.16(a))
56
<PAGE>
arising out of the performance of the Research Program by CURAGEN or
arising out of or relating to any actions of CURAGEN or any Affiliate,
licensee, sublicensee, distributor agent of CURAGEN in the
development, testing, production, manufacture, promotion, import, sale
or use by any person of any product manufactured or sold by CURAGEN or
by an Affiliate, licensee, sublicensee, distributor or agent of
CURAGEN.
(c) GENENTECH's obligation to indemnify, defend and hold the CURAGEN
Indemnitees harmless pursuant to Section 9.16(a), and CURAGEN's
obligation to indemnify, defend and hold the GENENTECH Indemnitees
harmless pursuant to Section 9.16(b), are conditioned on the
indemnified Party: (i) providing written notice to the indemnifying
Party of any Claim arising out of the indemnified activities promptly
after the indemnified Party has knowledge of such Claim, (ii)
permitting the indemnifying Party to assume, at its discretion, sole
and full control of the investigation, preparation, defense, trial and
settlement in connection with such Claim, (iii) assisting and
cooperating with the indemnifying Party, at the indemnifying Party's
reasonable expense, in the investigation of, preparation for and
defense of any such Claim, and (iv) not compromising, negotiating or
settling such Claim without the indemnifying Party's prior written
consent.
9.17 COUNTERPARTS.
------------
This Agreement may be executed in any number of counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an original,
and all of which counterparts, taken together, shall constitute one and the same
instrument.
57
<PAGE>
IN WITNESS WHEREOF, the Parties have this Agreement to be by their duly
authorized representation in two (2) originals.
GENENTECH, INC. CURAGEN CORPORATION
By: /s/ By: /s/
--------------------------- ---------------------------------
Title: _______________________ Title: EXECUTIVE VICE PRESIDENT
------------------------------
58
<PAGE>
APPENDIX A
----------
OPTIONED CLONES
59
<PAGE>
APPENDIX B
----------
NOTE
60
<PAGE>
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH IT IS CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE STATE SECURITIES LAWS AND NEITHER MAY BE TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS SUCH SECURITIES HAVE BEEN REGISTERED UNDER THE ACT AND SUCH
LAWS OR REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED AND
AN OPINION OF COUNSEL SATISFACTORY TO THE BORROWER IS FURNISHED TO THE BORROWER
TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
PROMISSORY NOTE
UP TO $26,000,000.00 __________, 1997
FOR VALUE RECEIVED, the undersigned, CURAGEN CORPORATION (the "Borrower"),
having an address of 555 Long Wharf Drive, 11th Floor, New Haven, Connecticut
06511, hereby promises to pay to GENENTECH, INC. (the "Lender"), having an
address at 1 DNA Way, South San Francisco, CA 94080 , the principal sum of up
to
TWENTY SIX MILLION DOLLARS ($26,000,000)
or such lesser sum which may from time to time be advanced pursuant to the terms
of the section of the Research and Option Agreement dated November 20, 1997
between the Borrower and the Lender (the "Agreement") entitled "Section 3.2-Loan
Commitment", together with interest thereon in accordance with the terms hereof.
Capitalized terms used herein and not defined herein have the meanings assigned
to them in the Agreement.
<PAGE>
1. Payments
--------
(a) The Borrower shall pay the accrued interest and principal balance
of this Note, which represents the Loan, in full within [XXXXX]
of the last day of the fifth Loan Year (the "Maturity Date"),
subject to the extension of the Maturity Date pursuant to Section
1(c) below.
(b) This Note may be prepaid by the Borrower at any time, subject to
Section 1(c) below, without premium or penalty.
(c) Payments made pursuant to paragraph (a) or (b) shall be paid in
cash, or, at any time after the last day of the first Loan Year,
at the option of Borrower, subject to Section 7 of this Note, in
shares of Convertible Non-Voting Common Stock, $.01 par value per
share (the "Non-Voting Common Stock"), of the Borrower, valued at
the then Fair Market Value of CuraGen Common Stock (as defined
below) having the rights, preferences and privileges set forth in
the form of the Restated Certificate of Incorporation attached
hereto as Exhibit 1. The Borrower may prepay any amounts due
---------
under this Note, upon written notice to the Lender specifying the
prepayment date, in shares of Non-Voting Common Stock at any time
after the last day of the first Loan Year as long as the Lender's
Beneficial Ownership (as defined below) is less than 10% prior to
such prepayment. In the event that the Borrower proposes a
prepayment by issuing shares of Non-Voting Common Stock under
this Note at a time when the Lender's Beneficial Ownership is
equal to or exceeds 10%, the Lender may request in writing that
the Borrower refrain from issuing
-2-
Confidential Treatment Requested
<PAGE>
additional shares of Non-Voting Common Stock until the earliest
to occur of (i) two (2) years from the date of the issuance which
caused the Lender's Beneficial Ownership to be equal to or exceed
10% (the "Additional Issuance Date"), (ii) the date which is
thirty (30) days from the date on which Lender's Beneficial
Ownership falls below 10% and (iii) the Maturity Date; provided,
that, in the event that the Additional Issuance Date occurs after
the last day of the third Loan Year and prior to the Maturity
Date, then the Lender may, at its option, extend the Maturity
Date to a date two (2) years from the Additional Issuance Date.
As used in this Note (i) the term "Beneficial Ownership" shall
have the meaning set forth in Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "1934 Act") and (ii) the term "Fair
Market Value of CuraGen Common Stock" shall mean the average of
the closing prices of the Borrower's Common Stock as reported by
the Nasdaq Stock Market or, if not traded on the Nasdaq Stock
Market, by such other principal securities exchange on which the
Borrower's shares of Common Stock are traded, as applicable, over
the 20 trading days preceding the date on which a payment is made
by issuance of Non-Voting Common Stock. Notwithstanding the
foregoing, at any time prior to the date on which CuraGen Common
Stock is first registered under the 1934 Act, any payments made
pursuant to paragraph (a) or (b) above shall be paid in cash, or
at the option of the Borrower, in shares of a new series of
Preferred Stock, $.01 par value per share (the "Preferred
Stock"), of the Borrower having substantially the same rights,
preferences and privileges as the Borrower's Series A Preferred
Stock (other than with respect to (i) the applicable conversion
rate, (ii) those certain adjustments to the
-3-
<PAGE>
applicable conversion rate set forth in Section 5(c)(ii) of
Exhibit A of the Restated Certificate of Incorporation of the
Borrower dated June 24, 1997 and (iii) voting rights), valued at
the price at which the Borrower sold shares of Preferred Stock in
the round of equity financing immediately preceding such
prepayment date raising in excess of $3,000,000 from investors
not involved in a collaborative relationship with the Borrower
(the "Preferred Stock Value"). Delivery of any shares of Non-
Voting Common Stock or Preferred Stock shall take place no later
than five (5) days after the repayment date and shall be subject
to execution by the parties of an agreement containing customary
representations and provisions to comply with Federal and state
securities laws, as mutually agreed by the parties.
2. Interest
--------
Interest shall accrue on the outstanding principal balance hereunder at a
rate per annum equal to [XXXXX]. As used herein, the term [XXXXX]. The
applicable rate of interest for this Note shall be adjusted quarterly according
to [XXXXX]. Interest shall accrue and be compounded quarterly commencing on the
three-month anniversary of the date of the first advance under the Loan and
shall continue to accrue and be compounded every calendar quarter thereafter
until all amounts due hereunder have been paid in full.
-4-
Confidential Treatment Requested
<PAGE>
3. Recording of Advances, Repayments and Conversions
-------------------------------------------------
The advances described in the Agreement and made by the Lender to the
Borrower, and all repayments made on the account of principal hereof and all
conversions of the principal hereof and accrued interest hereon into shares of
the Borrower's capital stock shall be recorded by the Lender on the Schedule
attached hereto which is a part of this Note; provided, however, that the
failure of the Lender so to record on this Note (or any error in recording on
this Note) shall not affect the Borrower's obligations hereunder.
4. Subordination
-------------
This Note shall be subordinated to [XXXXX]
5. Acceleration and Conversion if Borrower is Public
-------------------------------------------------
If at any time after the date that CuraGen Common Stock is first registered
under the 1934 Act, the Market Capitalization of the Borrower is, [XXXXX], the
Borrower shall promptly give written notice (to be delivered by hand or
facsimile transmission) of such occurrence to the Lender. The Lender may, at its
option exercisable at any time within fifteen (15) business days of the receipt
of such notice from the
-5-
Confidential Treatment Requested
<PAGE>
Borrower (the "Acceleration Option"), declare all amounts owed hereunder
immediately due and payable by giving the Borrower written notice of such
declaration. Within fifteen (15) days of the Borrower's receipt of the Lender's
notice of exercise of the Acceleration Option, the Borrower shall make repayment
in full of the outstanding principal balance and accrued interest of this Note
in cash, or, at the option of the Borrower and subject to Section 7 of this
Note, in shares of Non-Voting Common Stock valued at the then Fair Market Value
of CuraGen Common Stock. For purposes hereof, (i) the Borrower's "Market
Capitalization" shall be equal to an amount determined by multiplying the number
of shares of the Borrower's Common Stock and Non-Voting Common Stock outstanding
on any Trading Day by the average of the closing prices of the Borrower's Common
Stock as reported by the Nasdaq Stock Market or, if not traded on the Nasdaq
Stock Market, by such other principal securities exchange on which shares are
traded, as applicable, over the twenty (20) trading days preceding such date;
and (ii) "Trading Days" shall mean days when trading is available on the Nasdaq
Stock Market or on the principal securities exchange on which the Borrower's
Common Stock may be traded.
If the Borrower does not repay this Note in full upon exercise by the
Lender of the Acceleration Option in accordance with the preceding paragraph,
the entire unpaid principal amount of the Note and all unpaid accrued interest
hereon shall automatically be converted into shares of Non-Voting Common Stock
on the sixteenth day after Borrower's receipt of notice of the exercise by the
Lender of the Acceleration Option (such date, the "Automatic Conversion Date"),
subject to Section 7 of this Note. Notwithstanding the foregoing limitation,
Lender reserves the right to convert the remaining loan balance into shares of
Non-Voting Common Stock in excess of the 19.8% limitation provided in Section 7
of this Note. The number of shares of Non-Voting Common Stock into which this
Note shall be converted shall be determined by dividing the sum of the aggregate
unpaid principal amount of this Note and the unpaid accrued
-6-
<PAGE>
interest hereon on the Automatic Conversion Date by the Fair Market Value of
CuraGen Common Stock on the Automatic Conversion Date.
If this Note is automatically converted as provided above, written notice
thereof shall be delivered by the Borrower to the Lender, which notice shall
specify the Automatic Conversion Date, the Fair Market Value of CuraGen Common
Stock on the Automatic Conversion Date, the unpaid principal amount of and
unpaid accrued interest on the Note converted and, if such conversion is of the
Note in full, calling upon such Lender to surrender to the Borrower, in the
manner and at the place designated, the originally-executed Note. Upon any such
conversion of this Note in full, the Lender shall surrender this Note, duly
endorsed, at the principal executive office of the Borrower. At its expense, the
Borrower shall, as soon as practicable thereafter, issue and deliver to the
Lender at such principal office a certificate or certificates for the number of
shares of Non-Voting Common Stock to which the Lender shall be entitled upon
such conversion. Any conversion of this Note hereunder shall be deemed to have
been made at the close of business, California time, on the applicable
Conversion Date, and at and after such time the Lender shall be treated for all
purposes as the record holder of such shares of Non-Voting Common Stock.
Upon payment of this Note in full, the Borrower shall be forever released
from all its obligations and liabilities under this Note.
The Borrower shall at all times reserve and keep available for issuance out
of its authorized but unissued shares of Non-Voting Common Stock such number of
shares as shall from time to time be sufficient to effect the conversion of the
Note into shares of Non-Voting Common Stock, and if such reserve shall not be
sufficient to effect the conversion of the entire outstanding principal amount
of and accrued interest on this Note, without limitation of such other remedies
as shall be available to the Lender, the Borrower will use commercially
reasonable efforts to take such corporate actions as may, in the opinion of its
counsel, be
-7-
<PAGE>
necessary to increase its authorized but unissued shares of Non-Voting Common
Stock. In addition, the Borrower shall at all times reserve and keep available
for issuance out of its authorized but unissued shares of Common Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of the shares of Non-Voting Common Stock into Common
Stock, and if such reserve shall not be sufficient to effect the conversion of
the shares of Non-Voting Common Stock, without limitation of such other remedies
as shall be available to the Lender, the Borrower will use its commercially
reasonable efforts to take such corporate actions as may, in the opinion of
counsel, be necessary to increase its authorized but not outstanding shares of
Common Stock to such number of shares as shall be sufficient for such purposes.
6. Conversion to Preferred Stock if Borrower is not Public
-------------------------------------------------------
If at any time prior to the date on which CuraGen's Common Stock is first
registered under the 1934 Act, the ratio (the "Ratio") of [XXXXX] then (A) the
Borrower shall promptly provide written notice thereof to the Lender and (B)
subject to Section 7 of this Note, the Lender may, by written notice to the
Borrower (the "Series F Conversion Notice"), convert that portion of the
indebtedness represented by this Note into shares of Series F Non-Voting
Convertible Preferred Stock, $.01 par value per share (the "Series F Preferred
Stock"), of the Borrower as may be necessary to increase the Ratio to [XXXXX]
at a conversion price equal to one (1) share of Series F Preferred Stock
-8-
Confidential Treatment Requested
<PAGE>
for each $100 of outstanding principal and accrued interest surrendered for
conversion. The Series F Preferred Stock shall have the rights, preferences and
privileges as set forth in the form of Certificate of Designation attached
hereto as Exhibit 2.
---------
Upon any such conversion of this Note in full, the Lender shall surrender
this Note, duly endorsed, at the principal executive office of the Borrower. At
its expense, the Borrower shall, as soon as practicable thereafter, issue and
deliver to the Lender at such principal office a certificate or certificates for
the number of shares of Series F Preferred Stock to which the Lender shall be
entitled upon such full or partial conversion. Any conversion of this Note under
this Section 6 shall be deemed to have been made at the close of business,
California time, on the Series F Conversion Date (as defined below), and at and
after such times the Lender shall be treated for all purposes as the record
holder of such shares of Series F Preferred Stock. As used herein, the term
"Series F Conversion Date" shall mean the date on which the Certificate of
Designation establishing the Series F Preferred Stock has been accepted for
filing by the Delaware Secretary of State.
The Borrower shall at all times after the Series F Conversion Date reserve
and keep available for issuance out of its authorized but unissued shares of
Series F Preferred Stock such number of shares of Series F Preferred Stock as
shall be sufficient to effect the conversion of the Note into shares of Series F
Preferred Stock, and if at any time such reserve shall not be sufficient to
effect the conversion of the entire outstanding principal amount of, and accrued
interest on, this Note, without limitation of such other remedies as shall be
available to the Lender, the Borrower will use commercially reasonable efforts
to take such corporate actions as may, in the opinion of counsel, be necessary
to increase its authorized but unissued shares of Series F Preferred Stock. The
Borrower shall at all times after the Series F Conversion Date reserve and keep
available for issuance out of its authorized but unissued shares of Common Stock
such number of shares as shall from time to time be sufficient to effect the
conversion of
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<PAGE>
the outstanding shares of Series F Preferred Stock into shares of Common Stock,
and if such reserve shall not be sufficient to effect the conversion of the
aggregate number of shares of Series F Preferred Stock then outstanding plus
accrued dividends thereon, without limitation of such other remedies as shall be
available to the Lender, the Borrower will use commercially reasonable efforts
to take such corporate actions as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock.
7. Limitation on Conversion of Principal and Interest
--------------------------------------------------
If the payment or conversion of any indebtedness represented by this Note
into shares of Non-Voting Common Stock, Preferred Stock or Series F Preferred
Stock would cause the Lender's Percentage Interest (as defined below) to exceed
19.8%, the Lender may, by written notice to the Borrower, require the Borrower
to make that portion of such conversion or payment in cash as is necessary to
reduce the Lender's Percentage Interest to less than 19.8%. If, at any time
during the term of this Note, the Lender's Percentage Interest (as defined
below) exceeds 19.8%, the Lender may, upon written notice to the Borrower,
require the Borrower to repurchase that number of shares of Non-Voting Common
Stock, Preferred Stock or Series F Preferred Stock, at the Borrower's option, as
is necessary to maintain the Lender's Percentage Interest at less than 19.8%.
The price of such repurchase shall be equal to (i) the Fair Market Value of
CuraGen Common Stock, with respect to a repurchase of Non-Voting Common Stock,
(ii) the Preferred Stock Value with respect to a repurchase of Preferred Stock
or (iii) $100 per share with respect to a repurchase of Series F Preferred
Stock. As used herein the term "Lender's Percentage Interest" shall mean the
result obtained by dividing (i) the aggregate amount of shares
of the capital stock of the Borrower held by the Lender with present voting
privileges plus the aggregate amount of shares of Non-Voting Common Stock held
by the Lender by (ii) the
-10-
<PAGE>
aggregate amount of then outstanding shares of the capital stock of the Borrower
whose holders have present voting privileges plus the aggregate amount of then
outstanding shares of Non-Voting Common Stock held by holders other than the
Lender.
8. Adjustments in Event of Reclassification or Reorganization
----------------------------------------------------------
In the event the Borrower reclassifies its Common Stock or consolidates
with or merges into another person or otherwise reorganizes its capital
structure or conveys or transfers all or substantially all of its assets (each,
a "Reorganization Event"), then and in each such event, the shares of Non-Voting
Common Stock, Preferred Stock or Series F Preferred Stock issued under this Note
shall be convertible into the kind and amount of shares of stock and other
securities and property that were receivable by a holder of Common Stock upon
such Reorganization Event.
9. Events of Default
-----------------
Subject to Section 4 hereof, the Lender may declare the entire unpaid
principal amount of, and all accrued but unpaid interest on, this Note,
immediately due and payable, effective upon written notice to the Borrower, if
any of the following events shall occur (individually an "Event of Default"):
(i) Payment of Note. Default in the payment of this Note when due.
---------------
(ii) Bankruptcy, Insolvency, etc. Commenced by the Borrower. If the
------------------------------------------------------
Borrower:
-11-
<PAGE>
(a) shall commence any proceeding in bankruptcy or seek
reorganization, arrangement, readjustment of its debts, dissolution,
liquidation, winding-up, composition or any other relief under the
United States Bankruptcy Act, as amended, or under any other
insolvency, reorganization, liquidation, dissolution, arrangement,
composition, readjustment of debt or any other similar act or law, of
any jurisdiction, domestic or foreign, now or hereafter existing;
(b) shall admit its inability to pay its debts as they mature
in any petition or pleading in connection with any such proceeding;
(c) shall apply for, or, in writing, consent to or acquiesce
in, an appointment of a receiver, conservator, trustee or similar
officer for it or for all or substantially all of its assets;
(d) shall make a general assignment for the benefit of
creditors; or
(e) shall admit in writing its inability to pay its debts as
they mature.
(iii) Bankruptcy, Insolvency, etc. Commenced Against the Borrower.
-----------------------------------------------------------
If any proceedings are commenced or any other action is taken
against the Borrower in bankruptcy or seeking reorganization,
arrangement, readjustment of its debts, dissolution,
liquidation, winding-up, composition or any other relief under
the United States Bankruptcy Act, as amended, or under any
other insolvency, reorganization, liquidation, dissolution,
arrangement, composition, readjustment of debt or any other
-12-
<PAGE>
similar act or law, of any jurisdiction, domestic or foreign,
now or hereafter existing, or a receiver, conservator, trustee
or similar officer for the Borrower or for all or substantially
all of its assets is appointed; and in each such case, such
event continues for sixty (60) days undismissed, unbounded and
undischarged.
(iv) Certain Terminations of the Agreement. Termination of the
-------------------------------------
Agreement by the Lender in accordance with Section 8.2(a) or
Section 8.3 of the Agreement.
10. Any notice required or permitted under this Note shall be given in
writing and in accordance with Section 9.5 of the Agreement.
11. If any action at law or in equity is necessary to enforce or interpret
the terms of this Note, the prevailing party shall be entitled to reasonable
attorneys' fees, costs and necessary disbursements to any other relief to which
such party may be entitled.
12. The Borrower hereby waives presentment, demand, protest or notice of
any kind in connection with this Note. No failure on the part of the Lender in
exercising any right or remedy hereunder, and no single, partial or delayed
exercise by the Lender of any right or remedy shall preclude the full and timely
exercise by the Lender at any time of any right or remedy of the Lender
hereunder without notice. No course of dealing or other conduct, no oral
agreement or representation made by the Lender or usage of trade shall operate
as a waiver of any right or remedy of the Lender. This Note and the Agreement
contain the entire agreement between the parties with respect to the subject
matter hereof, and supersedes every course of
-13-
<PAGE>
dealing, other conduct, oral agreement or representation previously made by the
Lender. In the event that any court of competent jurisdiction shall determine
that any provision, or portion thereof, contained in this Note shall be
unenforceable in any respect, then such provision shall be deemed limited to the
extent that such court deems it enforceable, and the remaining provisions of
this Note shall nevertheless remain in full force and effect.
13. None of the terms or provisions of this Note may be excluded,
modified, or amended except by a written instrument duly executed on behalf of
both the Borrower and the Lender expressly referring hereto and setting forth
the provision so excluded, modified or amended. No waiver or forbearance of any
of the rights and remedies of the Lender hereunder shall be effective unless
made specifically in a writing signed by the Lender, and any such waiver or
forbearance shall be effective only in the specific instance and for the
specific purpose for which given.
14. This Note is the "Note" referred to in the Agreement and is entitled
to all of the rights and benefits referred to therein.
15. This Note is delivered to the Lender at its principal office in South
San Francisco, California, shall be governed by, and construed and enforced in
accordance with, the laws of the state of California, without regard to its
principles of conflicts of laws.
-14-
<PAGE>
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by its
duly authorized officer as of the date first above written.
Witness: CURAGEN CORPORATION
_________________________________ by:________________________________
(Signature)
___________________________________
(Print or type name)
its:_______________________________
(Title or Capacity)
-15-
<PAGE>
SCHEDULE TO PROMISSORY NOTE
DATED ___________, 1997
FROM CURAGEN CORPORATION
TO GENENTECH, INC.
IN THE AMOUNT OF UP TO $26,000,000
Amount Amount Amount CuraGen Genentech
Date Drawn Repaid Converted Acknowledgement Acknowledgement
- ---- ----- ------ --------- --------------- ---------------
-16-
<PAGE>
EXHIBIT 1
---------
RESTATED
CERTIFICATE OF INCORPORATION
OF
CURAGEN CORPORATION
Adopted in accordance with the
provisions of Sections 242 and 245
of the General Corporation Law of the State of Delaware
-------------------------------------------------------
CuraGen Corporation, a Delaware corporation, hereby certifies as follows:
1. The name of the corporation is CuraGen Corporation. The date of the
filing of its original Certificate of Incorporation with the Secretary of State
of the State of Delaware was November 22, 1991.
2. This Restated Certificate of Incorporation amends and restates the
provisions of the Certificate of Incorporation of said corporation and was duly
adopted pursuant to resolutions adopted by the Board of Directors and
Stockholders of the corporation in accordance with the provisions of Sections
242 and 245 of the General Corporation Law of the State of Delaware (the
"Delaware General Corporation Law"). In lieu of a meeting and vote of the
Stockholders, the holders of the necessary number of shares of the corporation's
capital stock have given written consent to said amendment and restatement in
accordance with the provisions of Section 228 of the Delaware General
Corporation Law, and said written consent was filed with the corporation and
notice thereof has been given to those Stockholders who have not consented in
writing.
3. The text of the Certificate of Incorporation is hereby amended and
restated to read in its entirety as follows:
FIRST: The name of the corporation is CuraGen Corporation (the
"Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1013 Centre Road, City of Wilmington, County of New Castle;
and the name of the registered agent of the Corporation in the State of Delaware
is The Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity or carry on any business for which corporations may be organized under
the Delaware General Corporation Law or any successor statue.
FOURTH:
A. Designation and Number of Shares.
--------------------------------
The total number of shares of all classes of stock which the Corporation
shall have the authority to issue is 58,000,000 shares, consisting of 50,000,000
shares of common stock, par value $.01 per share (the "Common Stock"), 3,000,000
shares of non-voting common stock, par value $.01 per share (the "Non-Voting
Common Stock"), and 5,000,000 shares of Preferred Stock, par value $.01 per
share (the "Preferred Stock").
<PAGE>
Each share of common stock, par value $.01 per share, of the Corporation
issued and outstanding at the time and date that this Restated Certificate of
Incorporation becomes effective (the "Effective Time") is hereby reclassified
and changed, without any action on the part of the holders of any such common
stock or on the part of the Corporation, into one share of fully paid and
nonassessable Common Stock, and each person holding of record any shares of such
common stock issued and outstanding at the Effective Time shall be entitled to
receive, upon the surrender of certificates evidencing such shares to the
Corporation, one or more certificates to evidence the number of shares of Common
Stock into which such shares of common stock have been reclassified.
A statement of the designations of the different classes of stock of the
Corporation and of the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, and of the authority conferred upon the
Board of Directors to fix by resolution or resolutions any of the foregoing in
connection with the creation of one or more series of Preferred Stock and the
limitation of variations between or among such series, is set forth below in
this Article FOURTH.
B. Preferred Stock
---------------
1. Shares of Preferred Stock may be issued in one or more series at
such time or times and for such consideration as the Board of Directors may
determine. All shares of any one series shall be of equal rank and identical in
all respects.
2. Authority is hereby expressly granted to the Board of Directors to
fix from time to time, by resolution or resolutions providing for the
establishment and/or issuance of any series of Preferred Stock, the designation
of such series and the powers, preferences and rights of the shares of such
series, and the qualifications, limitations or restrictions thereof, including,
without limitation, the following:
(a) The distinctive designation and number of shares comprising such
series, which number may (except where otherwise provided by the Board of
Directors in creating such series) be increased or decreased (but not below
the number of shares then outstanding) from time to time by action of the
Board of Directors;
(b) The rate of dividends, if any, on the shares of that series,
whether dividends shall be (i) non-cumulative, (ii) cumulative to the
extent earned or (iii) cumulative (and, if cumulative, from which date or
dates), whether dividends shall be payable in cash, property or rights, or
in shares of the Corporation's capital stock, and the relative rights of
priority, if any, of payment of dividends on shares of that series over
shares of any other series or class;
(c) Whether the shares of that series shall be redeemable and, if so,
the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share
payable in case of redemption (which amount may vary under different
conditions and at different redemption dates) or the property or rights,
including securities of any other corporation, payable in case of
redemption;
(d) Whether the series shall have a sinking fund for the redemption
or purchase of shares of that series and, if so, the terms and amounts
payable into such sinking fund;
(e) The rights to which the holders of the shares of that series
shall be entitled in the event of the voluntary or involuntary liquidation,
dissolution or winding-up of the
2
<PAGE>
Corporation, and the relative rights of priority, if any, of payment of
shares of that series in any such event;
(f) Whether the shares of that series shall be convertible into or
exchangeable for shares of stock of any other class or any other series
and, if so, the terms and conditions of such conversion or exchange,
including the rate or rates of conversion or exchange, the date or dates
upon or after which they shall be convertible or exchangeable, the period
or periods during which they shall be convertible or exchangeable, the
event or events upon or after which they shall be convertible or
exchangeable or at whose option they shall be convertible or exchangeable,
and the method (if any) of adjusting the rates of conversion or exchange in
the event of a stock split, stock dividend, combination of shares or
similar event;
(g) Whether the issuance of any additional shares of such series, or
of any shares of any other series, shall be subject to restrictions as to
issuance, or as to the powers, preferences or rights of any such additional
shares of such series or shares of such other series;
(h) Whether or not the shares of that series shall have voting
rights, the extent of such voting rights on specified matters or on all
matters, the number of votes to which the holder of a share of such series
shall be entitled in respect of such share, whether such series shall vote
generally with the Common Stock on all matters or (either generally or upon
the occurrence of specified circumstances) shall vote separately as a class
or with other series of Preferred Stock; and
(i) Any other preferences, privileges and powers and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions of such series, as the Board of Directors may
deem advisable and as shall not be inconsistent with the provisions of this
Restated Certificate of Incorporation and to the full extent now or
hereafter permitted by the Delaware General Corporation Law.
C. Common Stock and Non-Voting Common Stock.
----------------------------------------
The Common Stock and the Non-Voting Common Stock shall be identical in all
respects and shall have equal rights and privileges, except as otherwise
expressly provided herein. The relative powers, preferences, rights,
qualifications, limitations and restrictions of the shares of the Common Stock
and the Non-Voting Common Stock are as follows:
1. Dividends. The holders of record of Common Stock and the Non-Voting
---------
Common Stock shall be entitled to receive, when, if and as declared by the Board
of Directors, such dividends of cash, property or stock of the Corporation as
the Board of Directors shall from time to time declare, subject to the following
rights and restrictions and the rights and restrictions set forth in paragraph
(C)(2) of this Article FOURTH:
(a) No cash dividends shall be declared and paid on the Common Stock
unless at the same time an equal cash dividend is declared and paid, per
share, on the Non-Voting Common Stock. No cash dividends shall be declared
and paid on the Non-Voting Common Stock unless at the same time an equal
cash dividend is declared and paid, per share, on the Common Stock.
3
<PAGE>
(b) No dividend of property (including capital stock of the
Corporation) shall be declared and paid on the Common Stock unless a
dividend of an equal amount of the same property has also been declared and
paid, per share, on the Non-Voting Common Stock. No dividend of property
(including capital stock of the Corporation) shall be declared and paid on
the Non-Voting Common Stock unless a dividend of an equal amount of the
same property has also been declared and paid, per share, on the Common
Stock.
2. Stock Subdivisions and Combinations. The Corporation shall not
-----------------------------------
subdivide or combine shares Common Stock by stock split, stock dividend,
reclassification, reorganization or otherwise without at the same time making a
proportionate subdivision or combination of the Non-Voting Common Stock. The
Corporation shall not subdivide or combine shares of Non-Voting Common Stock by
stock split, stock dividend, reclassification, reorganization or otherwise
without at the same time making a proportionate subdivision or combination of
the Common Stock.
3. Liquidation. In the event of any liquidation, dissolution or
-----------
winding up of the Corporation, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the Corporation
and the amounts to which the holders of any Preferred Stock shall be entitled,
the holders of Common Stock and Non-Voting Common Stock shall be entitled
(together as one class) to share ratably in the remaining assets of the
Corporation.
4. Voting. The holders of the Common Stock are entitled to one vote
------
for each share held. Except as provided under the Delaware General Corporation
Law, the holders of the Non-Voting Common Stock are not entitled to vote. There
shall be no cumulative voting.
5. Conversion of Non-Voting Common Stock.
--------------------------------------
(a) Optional Conversion. Each share of Non-Voting Common Stock shall
be convertible, at the option of the holder thereof, at any time and from
time to time, into shares of Common Stock at the rate of one share of
Common Stock for each share of Non-Voting Common Stock by surrendering the
certificate or certificates for such shares of Non-Voting Common Stock,
together with written notice that such holder elects to convert all or any
portion of the shares of Non-Voting Common Stock represented by such
certificate or certificates, to the office of the transfer agent (which
shall be the principal office of the Corporation if it serves as its own
transfer agent). Such notice shall state the names of the nominees, if any,
in which such holder wishes the certificate or certificates for the shares
of Common Stock to be issued. The date of receipt of such certificates and
notice by the transfer agent (or by the Corporation if it serves as its own
transfer agent) shall be the conversion date. The Corporation shall, as
soon as practicable after such conversion date, issue and deliver at such
office to such holder of Non-Voting Common Stock, or to its nominees, a
certificate or certificates for the number of shares of Common Stock to
which such holder shall be entitled, together with cash in lieu of any
fraction of a share.
(b) Automatic Conversion. (i) Except as provided in paragraph
--------------------
5(b)(ii), upon the transfer of beneficial ownership of any shares of Non-
Voting Common Stock, such shares shall automatically, with no further
action being required by any party to such transfer or otherwise, be
converted into shares of Common Stock at the rate of one share of Common
Stock for each share of Non-Voting Common Stock.
(ii) The provisions of paragraph 5(b)(i) shall not apply, and Non-
Voting Common Stock shall be issued to a transferee of Non-Voting Common
Stock upon the transfer of
4
<PAGE>
beneficial ownership of any shares thereof, if such transfer is made to (i)
a majority- owned subsidiary of Genentech, Inc., a Delaware corporation
("Genentech"), (ii) a corporation ("Genentech Parent") of which Genentech
is a wholly owned subsidiary or (iii) a wholly owned subsidiary of
Genentech Parent (in any such case, a "qualifying transfer"); provided that
--------
if such transfer is made to a wholly owned subsidiary of Genentech or of
Genentech Parent, as the case may be, and such wholly owned subsidiary
ceases to be a wholly owned subsidiary of Genentech or of Genentech Parent,
as the case may be, then such shares shall automatically, with no further
action being required by any party, be converted into shares of Common
Stock at the rate of one share of Common Stock for each share of Non-Voting
Common Stock. Upon any qualifying transfer, the transferor shall provide
written certification to the transfer agent for the Common Stock and Non-
Voting Common Stock of such facts which constitute such transfer as a
"qualifying transfer" and, absent prima facie evidence that such
certification is false, the Corporation or any transfer agent shall accept
such certification as being correct and shall not be required to conduct
any investigation with respect thereto.
(c) The Corporation shall reserve and keep available out of its
authorized but unissued Common Stock such number of shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Non-Voting Common Stock.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Restated
Certificate of Incorporation or the By-Laws of the Corporation as in effect from
time to time, the directors are hereby empowered to exercise all such powers and
do all such acts and things as may be exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written ballot
unless the By-Laws so provide.
C. Any action required or permitted to be taken by the stockholders of the
Corporation may be effected only at a duly called annual or special meeting of
stockholders of the Corporation and not by written consent.
SEVENTH: A. Subject to the rights of the holders of shares of any series
of Preferred Stock then outstanding to elect additional directors under
specified circumstances, the number of directors shall be fixed from time to
time exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the Board of Directors.
B. On or prior to the Effective Time, the Board of Directors of the
Corporation shall divide the directors into three classes, as nearly equal in
number as reasonably possible, with the term of office of the first class to
expire at the 1998 annual meeting of stockholders or any special meeting in lieu
thereof, the term of office of the second class to expire at the 1999 annual
meeting of stockholders or any special meeting in lieu thereof, and the term of
office of the third class to expire
5
<PAGE>
at the 2000 annual meeting of stockholders or any special meeting in lieu
thereof. At each annual meeting of stockholders or special meeting in lieu
thereof following such initial classification, directors elected to succeed
those directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders or special meeting
in lieu thereof after their election and until their successors are duly elected
and qualified.
C. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office even though less than a quorum, or by a sole remaining director.
In the event of any increase or decrease in the authorized number of directors,
(i) each director then serving as such shall nevertheless continue as a director
of the class of which he is a member until the expiration of his current term or
his prior death, retirement, removal or resignation and (ii) the newly created
or eliminated directorships resulting from such increase or decrease shall if
reasonably possible be apportioned by the Board of Directors among the three
classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent reasonably possible,
consistent with the foregoing rule, any newly created directorships shall be
added to those classes whose terms of office are to expire at the latest dates
following such allocation and newly eliminated directorships shall be subtracted
from those classes whose terms of office are to expire at the earliest dates
following such allocation, unless otherwise provided for from time to time by
resolution adopted by a majority of the directors then in office, although less
than a quorum. In the event of a vacancy in the Board of Directors, the
remaining directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
D. 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 By-
Laws of the Corporation.
E. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any director, or the entire Board of Directors, may be removed
from office at any time only for cause. A director may be removed for cause only
after a reasonable notice and opportunity to be heard before the body proposing
to remove him.
EIGHTH: The Board of Directors is expressly empowered to adopt, amend or
repeal By-Laws of the Corporation. Any adoption, amendment or repeal of the By-
Laws of the Corporation by the Board of Directors shall require the approval of
a majority of the Board of Directors. The stockholders shall also have power to
adopt, amend or repeal the By-Laws of the Corporation; provided, that, in
--------
addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Restated Certificate of Incorporation,
the affirmative vote of the holders of at least seventy percent (70%) of the
voting power of all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required for the stockholders to adopt,
amend or repeal any provision of the By-Laws of the Corporation.
NINTH: A. To the fullest extent permitted by the Delaware General
Corporation Law as the same now exists or may hereafter be amended, the
Corporation shall indemnify, and advance expenses to, its directors, officers
and any person who is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise, if such person was or is
made a party to or is
6
<PAGE>
threatened to be made a party to or is otherwise involved (including, without
limitation, as a witness) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director or officer of the Corporation or is or was serving
at the request of the Corporation as a director, officer, trustee, employee or
agent of another corporation, or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan;
provided, that except with respect to proceedings to enforce rights to
- --------
indemnification or as is otherwise required by law, the By-Laws of the
Corporation may provide that the Corporation shall not be required to indemnify,
and advance expenses to, any director, officer or other person in connection
with a proceeding (or part thereof) initiated by such director, officer or other
person, unless such proceeding (or part thereof) was authorized by the Board of
Directors. The Corporation, by action of its Board of Directors, may provide
indemnification or advance expenses to employees and other agents of the
Corporation or other persons only on such terms and conditions and to the extent
determined by the Board of Directors in its sole and absolute discretion.
B. The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article NINTH shall not be deemed exclusive of any other
rights to which a person seeking indemnification or advancement of expenses may
be entitled under any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person's official capacity and
as to action in another capacity while holding such office.
C. The Corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, trustee, employee or agent of another corporation, or of a
partnership, joint venture, trust or other enterprise, against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such, whether or not the Corporation
would have the power to indemnify such person against such liability under this
Article NINTH.
D. The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article NINTH shall, unless otherwise specified when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person. The indemnification and rights to
advancement of expenses that may have been provided to an employee or agent of
the Corporation by action of the Board of Directors, pursuant to the last
sentence of paragraph 1 of this Article NINTH, shall, unless otherwise specified
when authorized or ratified, continue as to a person who has ceased to be an
employee or agent of the Corporation and shall inure to the benefit of the
heirs, executors and administrators of such person, after the time such person
has ceased to be an employee or agent of the Corporation, only on such terms and
conditions and to the extent determined by the Board of Directors in its sole
discretion. No repeal or amendment of this Article NINTH shall adversely affect
any rights of any person pursuant to this Article NINTH which existed at the
time of such repeal or amendment with respect to acts or omissions occurring
prior to such repeal or amendment.
TENTH: No director shall be personally liable to the Corporation or its
stockholders for any monetary damages for breaches of fiduciary duty as a
director, notwithstanding any provision of law imposing such liability; provided
that this provision shall not eliminate or limit the liability of a director, to
the extent that such liability is imposed by applicable law, (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
7
<PAGE>
Section 174 or successor provisions of the Delaware General Corporation Law; or
(iv) for any transaction from which the director derived an improper personal
benefit. This provision shall not eliminate or limit the liability of a director
for any act or omission if such elimination or limitation is prohibited by the
Delaware General Corporation Law. No amendment to or repeal of this provision
shall apply to or have any effect on the liability or alleged liability of any
director for or with respect to any acts or omissions of such director occurring
prior to such amendment or repeal. If the Delaware General Corporation Law is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended.
ELEVENTH: The Corporation reserves the right to amend or repeal any
provision contained in this Restated Certificate of Incorporation in the manner
prescribed by the Delaware General Corporation Law and all rights conferred upon
stockholders are granted subject to this reservation; provided that, in addition
--------
to the vote of the holders of any class or series of stock of the Corporation
required by law or by this Restated Certificate of Incorporation, the
affirmative vote of the holders of shares of voting stock of the Corporation
representing at least seventy percent (70%) of the voting power of all of the
then outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to (i) reduce or eliminate the number of authorized shares of Common
Stock or Non-Voting Common Stock or the number of authorized shares of Preferred
Stock set forth in Article FOURTH or (ii) amend or repeal, or adopt any
provision inconsistent with, Articles SIXTH, SEVENTH, EIGHTH, NINTH, TENTH, and
this Article ELEVENTH of this Amended and Restated Certificate of Incorporation.
TWELFTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of the Delaware General Corporation Law or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of the Delaware General
Corporation Law, order a meeting of the creditors or class of creditors, and/or
of the stockholders or class of stockholders of this Corporation, as the case
may be, to be summoned in such manner as the said court directs. If a majority
in number representing three-fourths (3/4) in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
[THIS SPACE INTENTIONALLY LEFT BLANK]
8
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by its Chairman of the Board of Directors, President and Chief Executive
Officer this _______ day of __________ 1997.
CURAGEN CORPORATION
By:_________________________________________
Jonathan M. Rothberg, Ph.D.
Its Chairman of the Board, President
and Chief Executive Officer
9
<PAGE>
EXHIBIT 2
---------
CERTIFICATE OF DESIGNATION, PREFERENCES, AND RIGHTS OF
SERIES F NON-VOTING CONVERTIBLE PREFERRED STOCK
OF
CURAGEN CORPORATION
CURAGEN CORPORATION, a Delaware corporation (the "Company"), DOES HEREBY
CERTIFY:
That, pursuant to authority conferred on the Board of Directors of the
Company by the Certificate of Incorporation of the Company and pursuant to the
provisions of Section 151 of Title 8 of the Delaware Code, said Board of
Directors, by the affirmative vote of at least a majority of its members,
adopted a resolution providing for the powers, designation, preferences and
relative, participating, optional or other rights, and qualifications,
limitations or restrictions thereof, of __________ (____________) shares of the
Company's Preferred Stock, par value $.01 per share, which resolution is as
follows:
"RESOLVED: That pursuant to the authority granted to and vested in
--------
the Board of Directors of this Company in accordance with the
provisions of its Restated Certificate of Incorporation, as
amended, the Board of Directors hereby designates a series of
Preferred Stock of the Company, par value $.01 per share (the
"Preferred Stock"), consisting of _________ (______________)
shares of the authorized, unissued Preferred Stock of the
Company, as the Series F Non-Voting Convertible Preferred Stock
(the "Series F Preferred"), and hereby fixes such designation
and number of shares, and the powers, preferences and relative,
participating, optional or other rights, and qualifications,
limitations and restrictions thereof, as set forth below, and
that the officers of the Company, and each acting singly, are
hereby authorized, empowered and directed to execute and file
with the Secretary of State of the State of Delaware a
Certificate of Designation, Preferences and Rights of Series F
Non-Voting Convertible Preferred Stock, as the officer or
officers shall deem necessary and advisable to carry out the
purposes of this resolution."
Series F Preferred. The powers, preferences, and relative, participating,
------------------
optional or other rights, and qualifications, limitations and restrictions
thereof, with respect to the Series F Preferred, par value $.01 per share, are
as follows:
1. Designation and Amount. The shares of such series shall be designated
----------------------
as "Series F Non-Voting Convertible Preferred Stock" (the "Series F Preferred"),
and the number of shares constituting the Series F Preferred shall be
__________________(____________).
<PAGE>
2. Dividends. Subject to the provisions of law and this Certificate of
---------
Incorporation, the holders of shares of Series F Preferred shall be entitled to
receive, out of funds legally available therefor, in preference to the holders
of Series A Convertible Preferred Stock (the "Series A Preferred"), Series B
Redeemable Preferred Stock (the "Series B Preferred"), Series C Convertible
Preferred Stock (the "Series C Preferred"), Series D Convertible Preferred Stock
(the "Series D Preferred") and Series E Preferred Stock (the "Series E
Preferred"), and any other class or series of the capital stock of the Company
ranking junior to the Series F Preferred Stock as to the payment of dividends,
quarterly dividends equal to the Series F Dividend Rate (as hereinafter
defined), payable when and as declared by the Board of Directors, and, whether
or not declared, with respect to liquidation under Section 4(a), conversion
under Section 5(a) or redemption under Section 6(a). Such dividends shall accrue
and be cumulative from the date of issuance of each share of Series F Preferred
Stock, whether or not declared. As used herein, the term "Series F Dividend
Rate" shall mean that dividend rate as is equal to (i) the prime rate of
interest as reported from time to time by Citibank, N.A. (or, if Citibank, N.A.
ceases to report such rate, the generally prevailing base lending rate of Fleet
National Bank) (ii) plus one percent (1%).
3. Voting Rights. Except as otherwise provided by the Delaware General
-------------
Corporation Law, the holders of shares of Series F Preferred shall not be
entitled to vote in, or to receive notice of, any meeting of the stockholders of
the Company.
4. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) In the event of the voluntary or involuntary liquidation, dissolution
or winding up of the Company, or in the event of its insolvency, before any
distribution or payment is made to any holders of any shares of the Common Stock
or any other class or series of capital stock of the Company designated to be
junior to the Series A Preferred, the Series B Preferred, the Series C
Preferred, the Series D Preferred, the Series E Preferred and the Series F
Preferred and subject to the liquidation rights and preferences of any class or
series of capital stock of the Company designated to be senior to, or on parity
with, the Series A Preferred, the Series B Preferred, the Series C Preferred,
the Series D Preferred the Series E Preferred and the Series F Preferred, the
holders of outstanding shares of the Series A Preferred, the Series B Preferred,
the Series C Preferred, the Series D Preferred, the Series E Preferred and the
Series F Preferred shall be entitled to have set apart for them, or to be paid
first out of the assets of the Company available for distribution to holders of
the Company's capital stock of all classes, an amount in cash equal to (i) $5.86
per share of Series A Preferred and Series C Preferred, plus all declared but
unpaid dividends, (ii) $10.00 per share of Series B Preferred, plus all accrued
but unpaid dividends, whether or not declared, on the Series B Preferred, (iii)
$7.50 per share of Series D Preferred, plus all declared but unpaid dividends,
(iv) $10.00 per share of the Series E Preferred, plus all accrued but unpaid
dividends, whether or not declared and (v) $100.00 per share of the Series F
Preferred, plus all accrued but unpaid dividends, whether or not declared (and
in all instances specified in (i), (ii), (iii), (iv) and (v) subject to
equitable adjustment in the event of any stock dividend, stock split,
2
<PAGE>
combination reorganization, recapitalization or other similar event affecting
such shares). If, upon any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the assets of the Company available for distribution
to stockholders shall be insufficient to set aside for or to pay such amounts to
the holders of shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, the Series E Preferred and Series F Preferred the
total amount of the Company's assets which is available to be paid to
stockholders of the Company shall be distributed ratably among the holders of
the Series A Preferred, the Series B Preferred, the Series C Preferred, the
Series D Preferred, the Series E Preferred and the Series F Preferred in
proportion to their preferential liquidation amounts as specified above, subject
to the liquidation rights and preferences of any other class or series of
capital stock of the Company designated to be senior to, or on a parity with,
the Series A Preferred, the Series B Preferred, the Series C Preferred, the
Series D Preferred, the Series E Preferred and the Series F Preferred, and no
distribution shall be made to or set apart for the holders of Common Stock or
any other class or series of capital stock of the Company which at such time is
junior to the Series A Preferred, the Series B Preferred, the Series C
Preferred, the Series D Preferred, the Series E Preferred and the Series F
Preferred as to liquidation rights and preferences. If the assets of the Company
available for distribution to stockholders exceed such amounts, the balance of
such assets shall be paid to or set aside for payment ratably among the holders
of any class or series of capital stock of the Company designated to be junior
to the Series A Preferred, the Series B Preferred, the Series C Preferred, the
Series D Preferred, the Series E Preferred and the Series F Preferred in
accordance with their relative rights and preferences, and thereafter, to the
holders of Common Stock.
(b) The merger or consolidation of the Company into or with another
corporation, or the sale or other conveyance of all or substantially all of the
assets of the Company to another entity, shall be deemed, at the option of any
holder of shares of Series F Preferred, a liquidation, dissolution or winding up
of the Company for purposes of this Section 4 as to such holder.
5. Conversion.
----------
(a) Subject to the terms and conditions of this Section 5, at any time
after the issuance of the Series F Preferred, the holder of each share of Series
F Preferred shall have the right, at such holder's option, to convert any such
shares of Series F Preferred into such number of fully paid and non-assessable
shares of Common Stock of the Company as is determined by dividing the Series F
Issue Price (as defined below) by the Conversion Price (as defined below). Such
option to convert shares of Series F Preferred into shares of Common Stock may
be exercised as to all or any portion of such shares of Series F Preferred by,
and only by, giving written notice to the Company at its principal office that
the holder elects to convert a stated number of shares of Series F Preferred
into Common Stock and by surrendering for such purpose to the Company at its
principal office the certificate representing such shares of Series F Preferred,
duly endorsed or accompanied by proper instruments to evidence the conversion
election. At the time of such surrender, the persons exercising such option to
convert shall be deemed to be the holders of the shares of Common Stock issuable
upon such conversion, notwithstanding that the stock transfer books of the
Company may
3
<PAGE>
then be closed or that certificates representing such shares of Common Stock
shall not then be actually delivered to such person. All rights with respect to
the Series F Preferred so converted (other than the right to receive declared or
accrued (whether or not declared) but unpaid dividends thereon which may, at the
option of the Company, be paid in additional shares of Common Stock) will then
terminate. As promptly as practicable after the receipt of the written notice
referred to in the preceding paragraph and surrender of the certificate or
certificates for the share or shares of Series F Preferred to be converted, the
Company shall issue and deliver, or cause to be issued and delivered, to the
holder of the shares being converted, a certificate or certificates registered
in the holder's name or designee, for the number of whole shares of Common Stock
issuable upon the conversion of such share or shares of Series F Preferred. In
case the number of shares of Series F Preferred represented by the certificate
or certificates surrendered for conversion pursuant to this Section 5 exceeds
the number of shares converted, the Company shall, upon such conversion, execute
and deliver to the holder at the expense of the Company a new certificate or
certificates for the number of shares of Series F Preferred represented by the
certificate or certificates surrendered which are not to be converted. As used
herein, the "Series F Issue Price" shall mean $100 per share and the term
"Conversion Price" shall mean the fair market value of the shares of Common
Stock of the Company at the time of conversion, determined as follows: if the
shares of Common Stock are traded on the Nasdaq Stock Market the average of the
closing prices as reported by the Nasdaq Stock Market or, if not traded on the
Nasdaq Stock Market, by such other principal securities exchange on which the
shares are traded, as applicable, over the twenty (20) days preceding the date
on which conversion will be made or, if not traded on any other exchange, the
price per share which the Company could obtain from a willing buyer for shares
of Common Stock sold by the Company, as determined in good faith by the Board of
Directors of the Company.
(b) Capital Reorganization, Merger or Sale of Assets. If at any time or
------------------------------------------------
from time to time there shall be a capital reorganization of the Common Stock or
a consolidation or merger of the Company, or a sale of all or substantially all
of the assets of the Company (a "Reorganization"), then, as a part of and as a
condition to such Reorganization, provision shall be made so that the holders of
shares of the Series F Preferred shall thereafter be entitled to receive upon
conversion of the shares of the Series F Preferred the same kind and amount of
stock or other securities or property (including cash) of the Company, or of the
successor corporation resulting from such Reorganization, to which such holder
would have been entitled if such holder had converted its shares of the Series F
Preferred immediately prior to the effective time of such Reorganization. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section 5 to the end that the provisions of this Section 5
(including adjustment of the Conversion Price then in effect and the number of
shares of Common Stock or other securities issuable upon conversion of the
shares of the Series F Preferred) shall be applicable after such Reorganization
in as nearly equivalent manner as may be reasonably practicable. In the case of
a transaction to which both this Subsection 5(b) and Subsection 4(b) hereof
apply, the holders of at least a majority of the outstanding shares of the
Series F Preferred upon the occurrence of a Reorganization shall have the option
to elect treatment either under this Subsection 5(b) or under Subsection 4(b)
hereof, notice of which election shall be given in writing to the Company not
less than fifteen (15) business days
4
<PAGE>
prior to the effective date of such Reorganization or not less than fifteen (15)
days after the Company has given notice to the holders of the Series F Preferred
Stock of such Reorganization, whichever is later. If no such election is timely
made, the provisions of Subsection 4(b) and not of this Subsection 5(b) shall
apply.
(c) Certain Provisions Regarding Conversion.
---------------------------------------
(i) No Fractional Shares. The number of shares of Common Stock issuable
--------------------
upon conversion of any shares of Series F Preferred shall be rounded to the
nearest whole number, and no fractional shares of Common Stock, and no payment
in lieu thereof, shall be issued upon any such conversion.
(ii) Common Stock Reserved. The Company shall at all times reserve and
---------------------
keep available out of its authorized but unissued Common Stock the full number
of shares of Common Stock deliverable upon the conversion of all then
outstanding shares of Series F Preferred.
(iii) Status of Converted or Unissued Series F Preferred. Shares of Series
--------------------------------------------------
F Preferred that have been issued and reacquired in any manner, including upon
conversion of such shares, shall (upon compliance with any applicable provisions
of the laws of the State of Delaware) have the status of authorized and unissued
shares of the Company's Preferred Stock, par value $.01 per share, undesignated
as to series and may be redesignated and reissued as part of any series of the
Preferred Stock.
(iv) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of the number of shares receivable pursuant to this
Section 5, the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series F Preferred a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Company shall, upon the written request at any time of any holder of
Series F Preferred, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, and (ii) 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 each series of Series F
Preferred.
6. (a) Redemption. The Company may, at any time after the date of
----------
its Initial Public Offering (as defined below) redeem from each holder of Series
F Preferred, at a price equal to the Series F Issue Price, plus any accrued but
unpaid dividends thereon, whether or not declared (the "Redemption Price"), one
hundred percent (100%) of the shares of Series F Preferred held by such holder
on such date. The Company will provide each holder of Series F Preferred with a
written request setting forth its desire to redeem shares of Series F Preferred.
Upon issuance of any such redemption request, the Company will become obligated
to redeem at the time of redemption specified therein (the "Redemption Date")
all shares of Series F Preferred specified therein. In case
5
<PAGE>
less than all shares of Series F Preferred represented by any certificate are
redeemed in any redemption pursuant to this Section 6, a new certificate will be
issued representing the unredeemed shares of Series F Preferred without cost to
the holder thereof. As used herein, the term "Initial Public Offering" shall
mean a firm commitment underwritten public offering of the Common Stock of the
Company pursuant to a registration statement filed with and declared effective
by the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
(b) Status of Redeemed Shares. Unless there shall have been a default
-------------------------
in payment of the Redemption Price, no shares of redeemed Series F Preferred
shall be entitled to any dividends accrued after the Redemption Date, and on
such Redemption Date all rights of the holder of such redeemed shares as a
stockholder of the Company by reason of the ownership of such shares will cease,
except the right to receive the Redemption Price of such shares, without
interest, plus any declared or accrued (whether or not declared) unpaid
dividends accruing prior to the Redemption Date upon presentation and surrender
of the certificate representing such shares, and such redeemed shares will not
from and after such Redemption Date be deemed to be outstanding.
7. No Impairment. The Company shall not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but shall at all
times in good faith assist in the carrying out of all the provisions of this
Certificate of Designation and in the taking of all such action as may be
necessary or appropriate in order to protect the rights and preferences of the
holders of Series F Preferred against impairment in accordance with this
Certificate of Designation and the Delaware General Corporation Law.
8. Certain Amendments to the Company's Certificate of Incorporation.
----------------------------------------------------------------
So long as any shares of Series F Preferred Stock shall be outstanding, the
Company shall not, without first obtaining the affirmative vote or written
consent of the holders of a majority of the outstanding shares of Series F
Preferred Stock, voting separately as a class, amend or repeal any provision of,
or add any provision to, the Company's Certificate of Incorporation, including
any amendment, repeal or addition to the Company's Certificate or Incorporation
effected through a merger, if such action would adversely affect or change the
preferences, rights, privileges or powers of the Series F Preferred Stock, or
increase or decrease (other than by conversion) the total number of authorized
shares of Series F Preferred Stock.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of Designation
to be signed by its President and Chief Executive Officer this ____day of ____,
____.
CURAGEN CORPORATION
By:________________________________
Jonathan M. Rothberg, Ph.D.
President and Chief
Executive Officer
7
<PAGE>
APPENDIX C
----------
FORM OF LICENSE AGREEMENT
<PAGE>
LICENSE AGREEMENT
This License Agreement ("Agreement") is made effective as of
_______________ ("Effective Date") by and between GENENTECH, INC., a Delaware
corporation having its principal business office at 1 DNA Way, South San
Francisco, CA 94080 ("GENENTECH"), and CURAGEN CORPORATION, a Delaware
corporation with its principal place of business at 555 Long Wharf Drive, 11th
Floor, New Haven, Connecticut 06511 ("CURAGEN"). GENENTECH and CURAGEN are each
hereafter referred to individually as a "Party" and together as the "Parties".
WHEREAS, GENENTECH wishes to obtain a license to certain inventions made or
owned by CURAGEN as provided in that certain Research and Option Agreement
between the Parties hereto dated as of November 20, 1997 which is attached
hereto (the "Research Agreement");
WHEREAS, CURAGEN has agreed to provide such license under the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and for other good and valuable consideration, the receipt and adequacy of which
is hereby acknowledged, the Parties hereby agrees as follows:
1. DEFINITIONS
Whenever used in the Agreement with an initial capital letter, the terms
defined in this Section 1 shall have the meanings specified.
1.1 "AFFILIATE" shall mean any corporation, firm, limited liability
company, partnership or other entity which directly or indirectly controls or is
controlled by or is under common control with a Party to this Agreement.
"Control" means ownership, directly or through one or more Affiliates, of fifty
percent (50%) or more of the shares of stock entitled to vote for
<PAGE>
the election of directors, in the case of a corporation, or fifty percent (50%)
or more of the equity interests in the case of any other type of legal entity,
status as a general partner in any partnership, or any other arrangement whereby
a Party controls or has the right to control the Board of Directors or
equivalent governing body of a corporation or other entity.
1.2 "CLONE" shall mean a segment of DNA representing a whole or partial
gene whose sequence or utility is determined from the analysis of one or more
Data Sets or from the Extended Research during the Term of the Research
Agreement.
1.3 "CURAGEN BACKGROUND INVENTIONS" shall mean all patent rights and know-
how of CURAGEN, other than those relating primarily to Inventions, which CURAGEN
has the right to license and which would be infringed by, or is reasonably
necessary for, the development, manufacture, use, sale or importation of any
product developed by GENENTECH pursuant to the licenses granted hereunder;
provided, however, that CURAGEN Background Inventions shall expressly exclude:
(i) any patent rights and know-how relating to Clones not licensed by GENENTECH
pursuant to this Agreement and (ii) any patent rights or know-how arising from
any CURAGEN collaboration with a third party, except to the extent permitted
thereby.
1.4 "CURAGEN DATA" shall mean, with respect to a Licensed Clone, all
information pertaining to such Licensed Clone obtained from the processing of
specified CURAGEN samples, including QC data. QEA/GeneCalling data,
MIM/PathCalling data, sequence data and any other information obtained or
generated by CURAGEN in the performance of the CURAGEN Project relating to such
Licensed Clone.
1.5 "CURAGEN DATA SET" shall mean all CURAGEN Data resulting from a
discrete CURAGEN Project that CURAGEN can make exclusively available to
GENENTECH.
1.6 "CURAGEN PROJECT" shall mean a particular project undertaken by
CURAGEN on its own outside the Research Program to process and analyze a
specified set of samples which do not contain GENENTECH Proprietary Material,
and as to which CURAGEN is free to grant rights to GENENTECH hereunder.
2
<PAGE>
1.7 "CURAGEN PROJECT INVENTION" shall mean any discovery, invention, know-
how or trade secret conceived or made by employees of CURAGEN (i) in the
performance of a CURAGEN Project that results in CURAGEN Data that becomes part
of an Exclusive Data Set, that is based on, incorporates or makes material use
of the corresponding CURAGEN Data or (ii) relating to a Lead generated outside
of the Extended Research.
1.8 "CURAGEN PROJECT PATENT RIGHTS" shall mean Patent Rights containing a
claim or claims covering CURAGEN Project Inventions. CURAGEN Project Patent
Rights shall also include Patent Rights containing a claim or claims covering
CURAGEN Project Inventions exclusively licensed in by CURAGEN, with the right to
sublicense, now or in the future.
1.9 "CURAGEN PROJECT PROPRIETARY MATERIAL" shall mean, with respect to a
Licensed Clone, all substances made by CURAGEN in the performance of the CURAGEN
Project relating to such Licensed Clone, including mRNA pools. CURAGEN Project
Proprietary Material shall include, without limitation, QEA fragments, MIM
constructs and materials derived or constructed from QEA fragments and MIM
constructs, including, without limitation, fragment and full length cDNA clones
made by CURAGEN.
1.10 "DATA SET," which may be either a Project Data Set or a CURAGEN Data
Set, with respect to a Licensed Clone, shall mean all Project Data resulting
from the discrete Research Project relating to the Licensed Clone or all CURAGEN
Data resulting from the discrete CURAGEN Project relating to the Licensed Clone,
respectively.
1.11 "EXCLUSIVE DATA SET" shall mean any Project Data Set during the
corresponding Exclusive Evaluation Period as provided in Section 2.4 of the
Research Agreement or any CURAGEN Data Set during the corresponding Exclusive
Evaluation Period as provided in Section 2.5.2 of the Research Agreement.
1.12 "EXCLUSIVE EVALUATION PERIOD" shall have the meaning set forth in
Section 2.4 or 2.5.2 of the Research Agreement.
1.13 "EXTENDED LICENSE PATENT RIGHTS" shall have the meaning set forth in
Section 2.3.
3
<PAGE>
1.14 "EXTENDED RESEARCH" shall mean, as to each Licensed Clone, the
research undertaken by CURAGEN before or after the Effective Date hereof
pursuant to Sections 2.4.1, 2.5.2 and/or 7.1.3 of the Research Agreement
relating to or using such Licensed Clone.
1.15 "EXTENDED RESEARCH DATA" shall mean all information and results
obtained by CURAGEN from its performance of Extended Research.
1.16 "EXTENDED RESEARCH INVENTIONS" shall mean any discovery, invention,
know-how or trade secret conceived or made by employees of CURAGEN in the
performance of Extended Research, other than such discoveries, inventions,
know-how or trade secrets that are deemed to be defined as Research Project
Inventions pursuant to the terms of the Research Agreement or this Agreement.
1.17 "EXTENDED RESEARCH PATENT RIGHTS" shall mean all rights and interests
in and to issued patents and pending patent applications in any country,
including, but not limited to, all provisional applications, substitutions,
continuations, continuations-in-part (solely to the extent that the claims of
such continuations-in-part cover Extended Research Inventions), divisions, and
renewals thereof, all letters patent granted thereon, and all reissues,
reexaminations and extensions thereof, whether owned now or hereafter solely or
jointly by CURAGEN, and wherein at least one claim of such patent right covers
an Extended Research Invention, and including, without limitation, those
Extended Research Patent Rights listed on Schedule I attached hereto.
1.18 "GENESCAPE"(R) shall mean the web-based software and database product
for accessing and storing Data Sets generated through the application of
CURAGEN's QEA/GeneCalling and MIM/PathCalling.
1.19 "INVENTION," as to each Licensed Clone, shall mean CURAGEN Project
Inventions and Research Project Inventions relating to the Licensed Clone.
1.20 "KNOW- HOW" shall mean: (a) as to each Licensed Clone, all unpatented
Project Data, Research Project Inventions, CURAGEN Data and CURAGEN Project
Inventions relating to such Licensed Clone; (b) as to each Lead, all unpatented
information, inventions, discoveries
4
<PAGE>
and trade secrets relating to the Lead; and (c) as to Extended Research using a
Licensed Clone, all unpatented Extended Research Data and all Extended Research
Inventions relating thereto.
1.21 "LEAD" shall mean, as to each Licensed Clone, a small molecule which
was discovered or developed to bind to a protein or inhibit protein function,
and which was developed directly and materially from the use of a Licensed Clone
or the protein encoded thereby by CURAGEN outside of the Research Program prior
to the point in time at which the Clone became a Licensed Clone, including,
without limitation, in the course of the Extended Research.
1.22 "LICENSED CLONE" shall have the meaning set forth in Section 2.1.
1.23 "LICENSED PRODUCT," as to each Licensed Clone, shall mean:
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
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[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
1.24 "MIM/PATHCALLING" shall mean the technology employed by CURAGEN for
identifying protein-protein interactions from libraries of cDNAs.
1.25 "NET SALES" shall mean [XXXXX]
[XXXXX]
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[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
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[XXXXX]
1.26 "OPTIONED CLONE" shall have the meaning set forth in Section 7.1 of
the Research Agreement.
1.27 "PATENT COORDINATORS" shall mean a patent attorney or patent agent
representing CURAGEN and a patent attorney or patent agent representing
GENENTECH, as further described in Section 5.1.
1.28 "PATENT RIGHTS" shall mean, as to each Licensed Clone, all rights and
interests in and to issued patents and pending patent applications in any
country, including, but not limited to, all provisional applications,
substitutions, continuations, continuations-in-part (solely to the extent that
the claims of such continuations-in-part cover Research Project Inventions or
CURAGEN Project Inventions), divisions, and renewals thereof, all letters patent
granted thereon, and all reissues, reexaminations and extensions thereof,
whether owned now or hereafter, solely or jointly by a Party, and wherein at
least one claim of such patent right covers an Invention, and including, without
limitation, those Patent Rights listed on Schedule I attached hereto.
1.29 "PRIME RATE" shall mean the prime rate of interest as reported by
Citibank, N.A. In the event that Citibank, N.A. ceases to report such a rate,
the term "Prime Rate" shall mean the generally prevailing base corporate lending
rate of Fleet National Bank.
1.30 "PROJECT DATA" shall mean all information obtained from the processing
of GENENTECH Proprietary Material in a particular Research Project, including QC
data, expression data, sequence data and any other information obtained or
generated by CURAGEN in the performance of the Research Project relating to such
Licensed Clone.
1.31 "PROJECT DATA SET" shall mean all Project Data resulting from a
discrete Research Project.
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1.32 "QEA/GENECALLING" shall mean the technology employed by CURAGEN for
tagging and identifying the expression level of specific gene fragments within a
cDNA pool.
1.33 "RESEARCH PROGRAM" shall mean the Research Projects to be performed by
CURAGEN and GENENTECH under the Research Agreement.
1.34 "RESEARCH PROJECT" shall mean a particular project to process and
analyze a specified set of samples under the Research Agreement.
1.35 "RESEARCH PROJECT INVENTION" shall mean any discovery, invention,
know-how or trade secret conceived or made: (a) by employees of CURAGEN or
GENENTECH or jointly by employees of both in the performance of the Research
Program, (b) by GENENTECH employees in performing the following specific
activities utilizing any Data Set: (i) QEA or MIM data analysis, confirmation
of QEA or MIM data, fragment cloning and sequencing of a Clone, and (ii) full-
length cloning of a Clone, or (c) any discovery, invention, know-how or trade
secret deemed to be a Research Project Invention pursuant to the terms of the
Research Agreement or this Agreement. Research Project Inventions shall not
include inventions conceived or made solely by GENENTECH outside of the Research
Program, except as specifically set forth in (b) above.
1.36 "RESEARCH PROJECT PATENT RIGHTS" shall mean Patent Rights containing a
claim or claims covering Research Project Inventions.
1.37 "RESEARCH PROJECT PROPRIETARY MATERIAL" shall mean, with respect to a
Licensed Clone, all substances made by CURAGEN in the performance of the
Research Project relating to such Licensed Clone other than mRNA pools extracted
from GENENTECH Proprietary Material. Research Project Proprietary Material
shall include, without limitation, QEA fragments, MIM constructs and materials
derived or constructed from QEA fragments and MIM constructs, including, without
limitation, fragment and full length cDNA clones made by CURAGEN.
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1.38 "SUBLICENSEE" shall mean any non-Affiliate third party sublicensed by
GENENTECH under the license granted to GENENTECH hereunder, to make, have made,
use, have used, offer to sell, sell, have sold, import or have imported any
Licensed Product.
1.39 "TERM" shall have the meaning set forth in Section 3.10.
1.40 "TERRITORY" shall mean the world.
1.41 "VALID CLAIM(S)" shall mean an unexpired claim of any issued patent
within Patent Rights or Extended License Patent Rights which has not been
finally declared invalid or unenforceable by a patent office or by a court or
other body of competent jurisdiction in any unappealed or unappealable decision
and which has not been lost through an interference or opposition proceeding.
2. LICENSE GRANT
2.1 LICENSE GRANT. Upon exercise of an Option pursuant to Section 7.4 of
-------------
the Research Agreement for any Optioned Clone, GENENTECH shall elect one of the
types of licenses set forth below. The Parties shall indicate such election and
complete the information for such Optioned Clone on Schedule I attached hereto
and incorporated herein, and sign such Schedule I. Such Optioned Clone shall
thereafter be deemed a Licensed Clone. With respect to the license types set
forth in (a) and (b) below, GENENTECH shall also indicate on Schedule I its
election , if any, to obtain an exclusive license hereunder to CURAGEN's rights
and interests in any Lead relating to such Licensed Clone.
(a) For each Licensed Clone and corresponding Lead(s) listed on Schedule I
for which this Section 2.1(a) exclusive license is elected, subject to
the rights reserved to CURAGEN in Section 2.5 below, CURAGEN hereby
grants to GENENTECH an exclusive license (even as to CURAGEN) in the
Territory, to develop, make, have made, use, have used, sell, have
sold, offer for sale, import and have imported any and all products
for any and all human uses, under: (x) all Patent
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Rights, Inventions, Know-How, CURAGEN Project Proprietary Material and
Research Project Proprietary Material that pertain to such Licensed
Clone, related Licensed Products and the uses thereof, including but
not limited to Patent Rights claiming whole or partial sequences or
utility; and (y) all Patent Rights and Know-How of CURAGEN which
CURAGEN has the right to license to GENENTECH relating to Leads
discovered or developed using such Licensed Clone or the protein
encoded thereby as a target, and which GENENTECH has elected to
license. Such license shall be for the Term specified in Section 3.10,
unless terminated as set forth in this Agreement.
(b) For each Licensed Clone and corresponding Lead(s) listed on Schedule I
for which this Section 2.1(b) exclusive license is elected and which
were "known" by third parties prior to the exercise of the
corresponding Option as determined pursuant to subsection (d) below,
subject to the rights reserved to CURAGEN in Section 2.5 below,
CURAGEN hereby grants to GENENTECH an exclusive license (even as to
CURAGEN) in the Territory, to develop, make, have made, use, have
used, sell, have sold, offer for sale, import and have imported any
and all products for any and all human uses, under: (x) all Patent
Rights, Inventions, Know-How, CURAGEN Project Proprietary Material and
Research Project Proprietary Material that pertain to such Licensed
Clone, related Licensed Products and the uses thereof, including but
not limited to Patent Rights claiming whole or partial sequences or
utility; and (y) all Patent Rights and Know-How of CURAGEN which
CURAGEN has the right to license to GENENTECH relating to Leads
discovered or developed using the Licensed Clone or the protein
encoded thereby as a target, and which GENENTECH has elected to
license. Such license shall be for the Term specified in Section
3.10, unless terminated as set forth in this Agreement.
(c) For each Licensed Clone listed on Schedule I for which this Section
2.1(c) non-exclusive license is elected and for Licensed Products
related to such Licensed Clone that are discovered or developed by
GENENTECH, CURAGEN hereby
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grants to GENENTECH a non-exclusive license in the Territory to use
such Licensed Clone or the protein encoded thereby as a reagent for
discovering or developing Licensed Products and to develop, make, have
made, use, have used, sell, have sold, offer for sale, import and have
imported Licensed Products for any and all human uses, under all
Patent Rights, Inventions, Know-How, Research Project Proprietary
Materials and CURAGEN Project Proprietary Materials pertaining to such
Licensed Clone, related Licensed Products and the uses thereof,
including but not limited to Patent Rights claiming whole or partial
sequences or utility. Such license shall be for the Term specified in
Section 3.10, unless terminated as set forth in this Agreement.
(d) The Parties shall mutually agree in good faith on whether any Licensed
Clone is "known" by third parties prior to the exercise of an Option,
based primarily on the availability of whole or substantially whole
coding domains substantially the same as such Licensed Clone in
publicly available literature, patent applications or databases or on
knowledge of such information by GENENTECH as evidenced by written or
computer records. Licensed Clones which are "known" only as a result
of either a previous Research Project or a CURAGEN Project from which
GENENTECH received access to an Exclusive Data Set from which the
Licensed Clone was optioned, and are not "known" to third parties or
to GENENTECH other than through any public disclosure of research
results related to such Research Project or CURAGEN Project, shall not
be deemed "known" for the purposes hereof.
2.2 NON-EXCLUSIVE LICENSE. CURAGEN hereby grants to GENENTECH a non-
---------------------
exclusive license, coterminous with each license grant in Section 2.1, under
CURAGEN Background Inventions solely to the extent necessary to allow GENENTECH
to practice the license granted in Section 2.1 and for no other purpose.
2.3 EXTENDED LICENSE. Any license granted to GENENTECH under Section
----------------
2.1(a) or (b) shall also include, with respect to each Licensed Clone and
corresponding Lead(s) listed on
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Schedule I, an exclusive license under the know-how, patents and patent
applications set forth below to the extent CURAGEN has the right to grant such
license (an "Extended License"); provided, however, that GENENTECH may elect, at
its sole discretion, not to accept a license under any Extended License Patent
Rights (as defined below), such election to be made within sixty (60) days of
the license grant to the corresponding Licensed Clone, or within sixty (60) days
of CURAGEN's notice to GENENTECH of the filing of any patent application within
Extended License Patent Rights for patent applications filed after execution of
this Agreement with respect to the relevant Licensed Clone:
(a) Any patents or patent applications (including all provisional
applications, substitutions, continuations, continuations-in-part, divisions and
renewals thereof, all letters patent granted thereon, and all reissues,
reexaminations and extensions thereof) owned by CURAGEN that result from any
activities other than the Research Program (x) that are not Extended Research
Patent Rights and do not arise from CURAGEN's exercise of its rights under
Section 2.5 hereof but claim any Licensed Product relating to such Licensed
Clone, provided that CURAGEN is not utilizing the invention or inventions
claimed in such patent or application in a preclinical or clinical development
project being actively planned or conducted by CURAGEN (alone or in
collaboration with any third party) on the date such Licensed Clone was optioned
by GENENTECH pursuant to the Research Agreement as evidenced by written or
computer records; or (y) that are Extended Research Patent Rights arising from
the use of such Licensed Clone ((x) and (y) collectively, the "Extended License
Patent Rights"); and
(b) Know-How as described in Section 1.20(c).
2.4 DUE DILIGENCE. GENENTECH agrees to use commercially reasonable
-------------
efforts in pursuing research and development of at least one Licensed Product
based upon each Licensed Clone in a manner similar to other products in research
and development at GENENTECH at a similar development stage and of similar
commercial value. If GENENTECH ceases to use such commercially reasonable
efforts for a commercially unreasonable period of time with respect to at least
one Licensed Product for any Licensed Clone, CURAGEN shall have the right to
terminate the license granted to GENENTECH hereunder with respect to such
Licensed Clone
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only, provided that: (a) CURAGEN refunds to GENENTECH on the effective date of
such termination all licensing and milestone payments which have previously been
paid to CURAGEN hereunder for such Licensed Clone and (b) that CURAGEN pays to
GENENTECH royalties on Net Sales of Licensed Products based upon such Licensed
Clone that are sold by CURAGEN, its Affiliates and its sublicensees under the
same royalty rates and terms as are set forth in Section 7.7 of the Research
Agreement. Such termination by CURAGEN shall be effective sixty (60) days after
giving GENENTECH written notice of such termination, describing the lack of
diligence and shall have the consequences set forth in Section 6.2. The
foregoing notwithstanding, if such breach of diligence is shown to be non-
existent within the aforesaid sixty (60) day period, CURAGEN'S notice shall be
deemed automatically withdrawn and of no effect.
2.5 RESERVATION OF RIGHTS. Notwithstanding anything in this Agreement to
---------------------
the contrary, CURAGEN hereby retains for itself the right to use each Licensed
Clone and the protein encoded thereby for CURAGEN's internal, general, non-
directed, research purposes (including, without limitation, full-length cloning,
expression analysis, protein-protein interactions and drug screening). For
example, but without limitation, inclusion of the Licensed Clone together with
other clones in research to determine multiple protein-protein interactions, or
inclusion of the Licensed Clone together with other clones in a screen against
one or more molecules to determine inhibition would be "non-directed" research,
whereas activities associated with choosing a specific Licensed Clone and
working to elucidate the biological activity of such Licensed Clone (e.g.,
generating antibodies to the Licensed Clone, testing the Licensed Clone or
protein encoded thereby in preclinical models, enriching libraries with such
Licensed Clone to purposefully look for proteins which bind to such Licensed
Clone) would be considered "directed" research and CURAGEN would not be
permitted to perform such activities under this Section 2.5. CURAGEN shall
promptly report to GENENTECH a summary of all such research results. Any
inventions conceived or made during such research which relate to the sequence
or utility of the Licensed Clone, the proteins derived therefrom (including
antibodies), homologs and mutants with substantially the same biological
activity as such Licensed Clone or protein, or antibodies or small molecules
which interact with such Licensed
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Clone or protein or homolog or mutant thereof, shall be deemed Research Project
Inventions and shall be subject to the licenses granted pursuant to Section
2.1(a) or (b) hereof, without payment of any additional license or option fee by
GENENTECH. With respect to all other inventions resulting from such research, in
the event that such Licensed Clone is subject to an exclusive license hereunder,
CURAGEN shall, prior to disclosure to any other party, offer all such inventions
and related research results to GENENTECH as a CURAGEN Project pursuant to the
provisions of Section 2.5 of the Research Agreement for an initial Exclusive
Evaluation Period of ninety (90) days, which shall be granted to GENENTECH upon
its request at no additional fee. Extensions of such Exclusive Evaluation
Period, Options, extensions of Options and the exercise of Options shall be
governed by Section 2.5 and Article 7 of the Research Agreement. Notwithstanding
any other provisions of this Agreement or the Research Agreement, any such
inventions which are ultimately licensed by GENENTECH after exercise of the
above-granted rights pursuant to Section 2.5 and Article 7 of the Research
Agreement relating to research performed under Section 2.5 of this Agreement
shall be deemed Research Project Inventions for all purposes under this License
Agreement, including, without limitation, the determination of royalties.
2.6 SUBLICENSES. GENENTECH shall have the right to grant sublicenses to
-----------
all or any portion of its rights under any license granted herein to any
Affiliate or Sublicensee, provided, however, that GENENTECH shall remain
obligated to ensure payment of royalty and milestone obligations as set forth in
Article 3.
3. CONSIDERATION
3.1 LICENSE FEES. Upon exercise of an Option pursuant to Section 7.1.2 of
------------
the Research Agreement for any Optioned Clone and execution of Schedule I by the
Parties with respect to such Optioned Clone and corresponding Lead(s), GENENTECH
shall pay to CURAGEN a license fee as set forth below:
LICENSE TYPE $ (THOUSANDS)
------------ -------------
[XXXXX]
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[XXXXX]
[XXXXX]
3.2 MILESTONE PAYMENTS FOR THERAPEUTIC OR PROPHYLACTIC PRODUCTS.
-----------------------------------------------------------
3.2.1 Milestone Payments under Exclusive License. GENENTECH shall
------------------------------------------
make the following milestone payments to CURAGEN for each therapeutic or
prophylactic Licensed Product covered by an exclusive license under Section
2.1(a):
(a) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee files the first Investigational New Drug
application (or foreign equivalent) with the FDA (or equivalent
foreign regulatory agency) for the Licensed Product ("IND");
(b) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee commences the first Phase III or Phase II/III
clinical trial in any country for the Licensed Product;
(c) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee submits the first Biologics License
Application, Product License Application, New Drug Application or
other application for approval to sell the Licensed Product to the FDA
(or equivalent foreign regulatory agency) for the Licensed Product;
(d) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee receives FDA approval of the Licensed Product
for commercial sale in the United States;
(e) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee first receives all required regulatory
approval to commence sales of the Licensed Product in Germany, France,
Italy, Spain, the United Kingdom or Japan; and
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(f) [XXXXX] within forty-five (45) days following the end of the first
calendar year in which Net Sales of such Licensed Product exceed
[XXXXX].
3.2.2 Milestone Payments under Exclusive License. GENENTECH shall
------------------------------------------
make the following milestone payments to CURAGEN for each therapeutic or
prophylactic Licensed Product covered by an exclusive license under Section
2.1(b) but only in the event that a therapeutic or prophylactic use for such
Licensed Product is a Research Project Invention, a Curagen Research Project
Invention or an Extended Research Invention licensed hereunder:
(a) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee files the first Investigational New Drug
application (or foreign equivalent) with the FDA (or equivalent
foreign regulatory agency) for the Licensed Product for a use covered
by the exclusive licenses granted herein ("IND");
(b) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee commences the first Phase III or Phase II/III
clinical trial in any country for the Licensed Product for a use
covered by the exclusive licenses granted herein;
(c) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee submits the first Biologics License
Application, Product License Application, New Drug Application or
other application for approval to sell the Licensed Product to the FDA
(or equivalent foreign regulatory agency) for the Licensed Product for
a use covered by the exclusive licenses granted herein;
(d) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee receives FDA approval of the Licensed Product
for commercial sale for a use covered by the exclusive licenses
granted herein;
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(e) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee first receives approval to commence sales of
the Licensed Product for a use covered by the exclusive licenses
granted herein in Germany, France, Italy, Spain, the United Kingdom or
Japan; and
(f) [XXXXX] within forty-five (45) days following the end of the first
calendar year in which Net Sales of such Licensed Product for a use
covered by the exclusive licenses granted herein exceed [XXXXX].
3.2.3 Milestone Payments under Non-exclusive License. GENENTECH
----------------------------------------------
shall make the following milestone payments to CURAGEN for each therapeutic or
prophylactic Licensed Product covered by a non-exclusive license under Section
2.1(c):
(a) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee files the first Investigational New Drug
application (or foreign equivalent) with the FDA (or equivalent
foreign regulatory agency) for the Licensed Product ("IND");
(b) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee commences the first Phase III or Phase II/III
clinical trial in any country for the Licensed Product;
(c) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee submits the first Biologics License
Application, Product License Application, NDA or other application for
approval to sell the Licensed Product to the FDA (or equivalent
foreign regulatory agency) for the Licensed Product;
(d) [XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee receives FDA (or equivalent foreign
regulatory agency) approval of the Licensed Product for commercial
sale; and
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(e) [XXXXX] within thirty (30) days following the end of the first
calendar year in which Net Sales of such Licensed Product exceed
[XXXXX].
3.3 MILESTONE PAYMENTS FOR DIAGNOSTIC PRODUCTS. GENENTECH shall make the
------------------------------------------
following milestone payment to CURAGEN for each Licensed Product described in
Subsection (h) of the definition of Licensed Products covered by an exclusive
license under Section 2.1(a) or 2.1(b):
[XXXXX] within thirty (30) days following the date GENENTECH or an
Affiliate or Sublicensee receives FDA (or equivalent foreign
regulatory agency) approval of the Licensed Product for commercial
sale.
3.4 ROYALTIES ON LICENSED PRODUCTS LICENSED EXCLUSIVELY TO GENENTECH AND
--------------------------------------------------------------------
COVERED SOLELY BY RESEARCH PROJECT PATENT RIGHTS. GENENTECH shall pay to
- ------------------------------------------------
CURAGEN a royalty on Net Sales of Licensed Products in those countries where the
manufacture, use, importation or sale of such Licensed Product by a third party
(i) would infringe a Valid Claim of a Research Project Patent Right and (ii)
would not infringe a Valid Claim of an Extended License Patent Right or a
CURAGEN Project Patent Right, as follows:
[XXXXX]
[XXXXX]
[XXXXX]
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(d) Royalties due to CURAGEN pursuant to subsections (a), (b) and (c)
above for a given Licensed Product may be reduced by [XXXXX] of any
royalties paid to third parties by GENENTECH, its Affiliates or
Sublicensees on net sales of such Licensed Product that are required
in order to allow GENENTECH, its Affiliates or Sublicensees to
manufacture, use or sell such Licensed Product; provided, however,
that such reductions shall in no event reduce the royalty for such
Licensed Product payable pursuant to such subsection by more than
[XXXXX].
3.5 ROYALTIES ON LICENSED PRODUCTS LICENSED EXCLUSIVELY TO GENENTECH AND
--------------------------------------------------------------------
COVERED BY RESEARCH PROJECT PATENT RIGHTS AND CURAGEN PROJECT PATENT RIGHTS OR
- ------------------------------------------------------------------------------
EXTENDED LICENSE PATENT RIGHTS. GENENTECH shall pay to CURAGEN a royalty on Net
- ------------------------------
Sales of Licensed Products in those countries where the manufacture, use,
importation or sale of such Licensed Product by a third party (i) would infringe
a Valid Claim of a Research Project Patent Right and (ii) would infringe a Valid
Claim of an Extended License Patent Right or a CURAGEN Project Patent Right, as
follows:
(a) If the Licensed Product is as described in subsections (a)-(c) or (e)
of the definition of Licensed Product, the royalty rate on Net Sales
of such Licensed Product shall be as follows:
[XXXXX]
[XXXXX]
[XXXXX]
(b) If the Licensed Product is as described in subsections (d) or (f) of
the definition of Licensed Product, or is a product as described in
subsection (g) of the definition of Licensed Product and is not
discovered from material use of a Lead by GENENTECH, its Affiliates or
Sublicensees, the royalty rate on Net Sales of such Licensed Product
shall be:
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[XXXXX]
[XXXXX]
[XXXXX]
(c) If the Licensed Product is as described in subsection (g) of the
definition of Licensed Product and is discovered from the material use
by GENENTECH, its Affiliates or Sublicensees of a Lead identified by
CURAGEN and provided to GENENTECH pursuant to an exclusive license
granted pursuant to the provisions of Section 2.1(a) or (b), the
royalty rate on Net Sales of such Licensed Product shall be:
[XXXXX]
[XXXXX]
[XXXXX]
(d) If the Licensed Product is as described in subsections (h) or (i) of
the definition of Licensed Product, the royalty rate on Net Sales of
such Licensed Product shall be [XXXXX].
(e) Royalties due to CURAGEN pursuant to subsections (a), (b) , (c) and
(d) above for a given Licensed Product may be reduced by [XXXXX] of
any royalties paid to third parties by GENENTECH, its Affiliates or
Sublicensees on net sales of such Licensed Product that are required
in order to allow GENENTECH, its Affiliates or Sublicensees to
manufacture, use or sell such Licensed Product; provided, however,
that such reductions shall in no event reduce the royalty for such
Licensed Product payable pursuant to such subsection by more than
[XXXXX].
3.6 ROYALTIES ON LICENSED PRODUCTS LICENSED EXCLUSIVELY TO GENENTECH AND
--------------------------------------------------------------------
COVERED SOLELY BY CURAGEN PROJECT PATENT RIGHTS OR EXTENDED LICENSE PATENT
- ---------------------------------------------------------------------------
RIGHTS. GENENTECH shall pay to CURAGEN a royalty on Net Sales of Licensed
- ------
Products in those
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countries where the manufacture, use, importation or sale of such Licensed
Product by a third party (i) would not infringe a Valid Claim of a Research
Project Patent Right and (ii) would infringe a Valid Claim of an Extended
License Patent Right or a CURAGEN Project Patent Right, as follows:
(a) If the Licensed Product is as described in subsections (a)-(c) or (e)
of the definition of Licensed Product, the royalty rate on Net Sales
of such Licensed Product shall be as follows:
[XXXXX]
[XXXXX]
[XXXXX]
(b) If the Licensed Product is as described in subsections (d) or (f) of
the definition of Licensed Product, or is a product as described in
subsection (g) of the definition of Licensed Product and is not
discovered from material use of a Lead by GENENTECH, its Affiliates or
Sublicensees, the royalty rate on Net Sales of such Licensed Product
shall be:
[XXXXX]
[XXXXX]
[XXXXX]
(c) If the Licensed Product is as described in subsection (g) of the
definition of Licensed Product and is discovered from material use by
GENENTECH, its Affiliates or Sublicensees of a Lead identified by
CURAGEN and provided to GENENTECH pursuant to an exclusive license
granted pursuant to the provisions of Section 2.1(a) or (b), the
royalty rate on Net Sales of such Licensed Product shall be:
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[XXXXX]
[XXXXX]
[XXXXX]
(d) If the Licensed Product is as described in subsections (h) or (i) of
the definition of Licensed Product, the royalty rate on Net Sales of
such Licensed Product shall be [XXXXX].
(e) Royalties due to CURAGEN pursuant to subsections (a), (b), (c) and (d)
above for a given Licensed Product may be reduced by [XXXXX] of any
royalties paid to third parties by GENENTECH, its Affiliates or
Sublicensees on net sales of such Licensed Product that are required
in order to allow GENENTECH, its Affiliates or Sublicensees to
manufacture, use or sell such Licensed Product; provided, however,
that such reductions shall in no event reduce the royalty for such
Licensed Product payable pursuant to such subsection by more than
[XXXXX].
3.7 LICENSED PRODUCTS NON EXCLUSIVELY LICENSED TO GENENTECH OR EXCLUSIVELY
----------------------------------------------------------------------
LICENSED BUT NOT COVERED BY PATENT RIGHTS OR EXTENDED LICENSE PATENT RIGHTS.
- ----------------------------------------------------------------------------
For Licensed Products that are discovered under a license to GENENTECH pursuant
to Section 2.1(c) above, or that are licensed exclusively to GENENTECH hereunder
and are made, used or sold by GENENTECH, its Affiliates or Sublicensees, where
the manufacture, use, importation or sale of such Licensed Product by a third
party would not infringe a Valid Claim of any Patent Right or Extended License
Patent Right, GENENTECH shall pay to CURAGEN a royalty on Net Sales as follows:
(a) For Licensed Products as described in subsections (a)-(c) or (e) of
the definition of Licensed Product, the royalty rate on Net Sales of
such Licensed Product shall be [XXXXX].
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(b) For Licensed Products as described in subsections (d) or (f) of the
definition of Licensed Product or as described in subsection (g) of
the definition of Licensed Product which are not discovered from
material use of a Lead by GENENTECH, its Affiliates or Sublicensees,
the royalty rate on Net Sales of such Licensed Product shall be
[XXXXX].
(c) For Licensed Products as described in subsection (g) of the definition
of Licensed Product which are discovered from material use by
GENENTECH, its Affiliates or Sublicensees of a Lead, the royalty rate
on Net Sales of such Licensed Products shall be [XXXXX].
(d) For Licensed Products as described in subsections (h) or (i) of the
definition of Licensed Product, the royalty rate on Net Sales of such
Licensed Products shall be [XXXXX].
(e) Royalties due to CURAGEN pursuant to subsections (a), (b) , (c),
and (d) above for a given Licensed Product may be reduced by [XXXXX]
of any royalties paid to third parties by GENENTECH, its Affiliates or
Sublicensees on net sales of such Licensed Product that are required
in order to allow GENENTECH, its Affiliates or Sublicensees to
manufacture, use or sell such Licensed Product; provided, however,
that such reductions shall in no event reduce the royalty for such
Licensed Product payable pursuant to such subsection by more than
[XXXXX].
3.8 ONE ROYALTY. Only one royalty, calculated at the highest applicable
-----------
royalty rate hereunder, shall be payable to CURAGEN hereunder for each sale of a
Licensed Product, regardless of the number of patents, patent applications or
Valid Claims directed to or covering such Licensed Product.
3.9 PAYMENT TERMS.
-------------
(a) Royalty payments shall be made to CURAGEN in United States Dollars
quarterly within sixty (60) days following the end of each calendar
quarter for which
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royalties are due. Each royalty payment shall be accompanied by a
report summarizing the total Net Sales for each Licensed Product
during the relevant three-month period and the calculation of
royalties, if any, due thereon pursuant to this Article 3.
(b) All royalties shall be payable in full in the United States in United
States Dollars, regardless of the countries in which sales are made.
For the purpose of computing Net Sales for Licensed Products sold in a
currency other than United States dollars, such currency shall be
converted into United States dollars at the exchange rate for buying
U.S. dollars set forth in The Wall Street Journal for the last
-----------------------
business day of the calendar quarter.
3.10 ROYALTY TERM. GENENTECH shall pay royalties with respect to each
------------
Licensed Product on a country-by-country basis until [XXXXX]. The term of each
license under this Agreement (the "Term") shall commence upon execution of
Schedule I with respect thereto, and shall continue as long as any royalties are
due hereunder for Licensed Products under such license. Following such period,
unless the license pertaining to such Licensed Product has previously been
terminated, GENENTECH shall have a fully paid-up, irrevocable license in such
country under the Patent Rights, Extended License Patent Rights, Inventions,
Know-How and CURAGEN Background Inventions relating to the relevant Licensed
Clone, to make, have made, use, have used, sell, have sold, offer for sale,
import and have imported such Licensed Product in such country.
3.11 OVERDUE ROYALTIES. Royalties not paid within the time period set
-----------------
forth in this Article 3 shall bear interest at [XXXXX], accruing monthly, from
the due date until paid in full.
3.12 RECORDS RETENTION. AUDITS. GENENTECH, its Affiliates and
--------------------------
Sublicensees shall keep for [XXXXX] from the date of each payment of royalties
complete and accurate records
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of sales by GENENTECH and its Affiliates and Sublicensees of each Licensed
Product in sufficient detail to allow the accruing royalties to be determined
accurately. CURAGEN shall have the right for a period of [XXXXX] after receiving
any report or statement with respect to royalties due and payable to appoint an
independent certified public accountant reasonably acceptable to GENENTECH to
inspect the relevant records of GENENTECH and its Affiliates and Sublicensees to
verify such report or statement. GENENTECH and its Affiliates and Sublicensees
shall each make its records available for inspection by such independent
certified public accountant during regular business hours at such place or
places where such records are customarily kept, upon reasonable notice from
CURAGEN, solely to verify the accuracy of the reports and payments. Such
inspection right shall not be exercised more than once in any calendar year nor
more than once with respect to sales of any Licensed Product in any given
payment period. CURAGEN agrees to hold in strict confidence all information
concerning royalty payments and reports, and all information learned in the
course of any audit or inspection, except to the extent necessary for CURAGEN to
reveal such information in order to enforce its rights under this Agreement or
if disclosure is required by law, regulation or judicial order. The results of
each inspection, if any, shall be binding on both Parties. CURAGEN shall pay for
such inspections, except that in the event there is any upward adjustment in
aggregate royalties payable for any year shown by such inspection of more than
[XXXXX] of the amount paid, GENENTECH shall pay for such inspection.
4. TREATMENT OF CONFIDENTIAL INFORMATION
4.1 CONFIDENTIAL INFORMATION. During the Term of this Agreement, each
------------------------
Party may disclose to the other proprietary technical, research and business
information (collectively, "Confidential Information"). For a period of [XXXXX]
after the receipt of any such Confidential Information, the receiving Party
shall keep confidential all such Confidential Information of the other Party and
will not disclose such Confidential Information of the other Party to third
parties by publication or otherwise. Each Party further agrees not to use
Confidential Information of the other Party for any purpose other than
exercising any rights granted to it or reserved by it under this Agreement.
Notwithstanding the foregoing, it is
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understood and agreed that the receiving Party's obligations of confidentiality
and nonuse herein shall not apply to any information which:
(a) is, at the time of disclosure by the disclosing Party hereunder, or
thereafter becomes, a part of the public domain or publicly known or
available through no fault or negligence of the receiving Party or any
of its Affiliates; or
(b) was otherwise in the receiving Party's lawful possession prior to
disclosure by the disclosing Party, as demonstrated by the receiving
Party's written records; or
(c) is lawfully disclosed to the receiving Party on a non-confidential
basis by a third party who is not in violation of an obligation of
confidentiality to the disclosing Party relative to such information.
Each Party may disclose the other Party's Confidential Information to the extent
reasonably necessary to comply with applicable government laws or regulations,
provided that prompt notice of any such disclosure shall be given to the other
Party.
Information disclosed other than in written or electronic form shall be
subject to the terms of this Section 4.1 only if confirmed in writing to other
Party within thirty (30) days of initial disclosure and specifying with
particularity that Confidential Information disclosed other than in written form
which is subject to the provisions of this Section 4.1.
4.2 PRESS RELEASE AND REGULATORY FILINGS. The Parties shall mutually
-------------------------------------
agree on a press release announcing the execution of this Agreement and on any
confidential treatment request to be filed with the Securities and Exchange
Commission with respect to this Agreement. Neither Party shall make any
disclosure of the terms of this Agreement except as required by applicable law
or as set forth above without the prior written consent of the other Party.
Once any written statement is approved for disclosure by both Parties, either
Party may make subsequent public disclosures of the contents of such statement
without the further approval of the other Party.
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<PAGE>
5. PROVISIONS CONCERNING THE FILING, PROSECUTION AND
MAINTENANCE OF PATENT RIGHTS
5.1 PATENT FILING. During the Term of this Agreement, with respect to any
-------------
Patent Rights, Extended Patent Rights, Inventions or Extended Research
Inventions licensed hereunder:
(a) Upon granting an exclusive license to GENENTECH hereunder for a
Licensed Clone, Lead(s), Extended Research Invention or Extended
License Patent Right, CURAGEN and GENENTECH shall file requests for
CFR Rule 1.60 continuation patent applications in order to create
patent rights relating solely to Licensed Clones, Leads, Extended
Research Inventions and Extended License Patent Rights which are
exclusively licensed hereunder and not to other Clones or inventions.
CURAGEN shall cause such actions to be taken unless the Parties
reasonably agree that such actions are not feasible or desirable.
(b) GENENTECH shall have the right to prepare, file, prosecute, obtain and
maintain, at its expense, all Patent Rights and Extended License
Patent Rights relating solely to Licensed Clones or Licensed Products
relating to Licensed Clones or Leads which are exclusively licensed
hereunder. Initial patent filings shall be made in the form of a
regular CFR Rule 1.51 U.S. Priority patent application or a
provisional application, as determined by the Patent Coordinators. The
Patent Coordinators for each Party will be designated by such Party
from time to time. Patent applications will be perfected by making, as
soon as available, an ATCC deposit of Licensed Clone(s) and making any
subsequent application filings necessary to perfect U.S. or foreign
priority patent rights in the countries of Europe that are members of
the European Patent Organization, Japan, Canada, Mexico and at least
such other countries as mutually agreed by the Parties. CURAGEN agrees
to provide reasonable assistance and cooperation to GENENTECH to
facilitate such filing, prosecution and maintenance including, without
limitation, the execution of appropriate powers of attorney. GENENTECH
agrees that any such preparation, filing, prosecution and
28
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maintenance shall be conducted diligently and in a timely fashion and
that CURAGEN shall be kept reasonably informed of the progress
thereof. Upon request GENENTECH will provide copies of the following
documents to CURAGEN: information regarding inventorship, sequences
and sequence listings, serial numbers, filing dates, foreign filing
licenses, copies of patent applications and official correspondence
with the patent office. CURAGEN shall, whenever practical, be given
the opportunity to review and comment in advance on any patent filings
or other correspondence with the patent office during such periods and
GENENTECH shall use reasonable efforts to incorporate any comments
provided by CURAGEN. GENENTECH shall, if warranted in its commercially
reasonable judgment, pursue its priority to claims on Inventions by
filing all necessary interferences and opposition papers, motions and
the like. GENENTECH shall conduct any interference proceeding in good
faith, applying its commercially reasonable efforts to prevail
therein. CURAGEN shall be given the opportunity to review and comment
upon any proposed settlement of an interference relating to Patent
Rights or Extended Patent Rights subject to license hereunder.
GENENTECH will consider CURAGEN's comments in good faith, but shall
have the right to enter into a good faith settlement of the
interference.
(c) Except as provided in (b) above, CURAGEN shall have the responsibility
to prepare, file, prosecute, obtain and maintain patent applications
and patents on Inventions and Extended Research Inventions licensed
hereunder, relating to the Licensed Clones and Leads which are
licensed hereunder at its sole expense. GENENTECH agrees to provide
reasonable assistance and cooperation to CURAGEN to facilitate such
filing, prosecution and maintenance. CURAGEN agrees that any such
preparation, filing, prosecution and maintenance shall be conducted as
outlined in subsection (b) above and shall be conducted with
reasonable diligence and that GENENTECH shall be kept fully informed
of the progress thereof and provided with copies of all material
documents pertaining thereto during the term of this Agreement.
GENENTECH shall, whenever
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<PAGE>
possible, be given the opportunity to review and comment in advance on
any patent filings or other correspondence with the patent office
during such periods and CURAGEN shall consider incorporating any
comments provided by GENENTECH in good faith.
(d) The Parties shall mutually agree before permitting any patent
application or patent within Patent Rights or Extended License Patent
Rights exclusively licensed hereunder to lapse as well as before
authorizing any amendment to any patent application or patent within
such Patent Rights or Extended License Patent Rights that would
irrevocably limit the lawful scope of the Patent Rights or Extended
License Patent Rights.
(e) Before GENENTECH elects to abandon its right to prepare, file,
prosecute, obtain and maintain patent applications and patents as
described in Section 5.1(b), it shall give at least thirty (30) days
prior written notice thereof to CURAGEN. Such notice shall
specifically identify the patent application(s) and/or patent(s) for
which GENENTECH wishes to relinquish such right. Following the receipt
of such notice, CURAGEN shall have the right to prepare, file,
prosecute, obtain and maintain the patent application(s) and patent(s)
identified in the notice, at its sole expense, and any such patents
and patent applications shall be removed from operation of this
Agreement. In addition, GENENTECH shall be deemed without any further
action to have granted to CURAGEN an exclusive, worldwide license
(including the right to grant sublicenses), under GENENTECH's
ownership interest in any such patents and applications to develop,
have developed, make, have made, use, have used, offer for sale, sell,
have sold, import and have imported any and all products in all fields
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX.
(f) No Party shall have any obligation under this Agreement to pay any
fees or costs: (i) for bringing a lawsuit or other action to enforce
any of the Patent Rights or Extended License Patent Rights against an
actual or suspected infringement or (ii)
Confidential Treatment Requested
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for any other Party to obtain for its own benefit independent business
or legal advice concerning any of the Patent Rights or Extended
License Patent Rights.
5.2 NOTICE OF INFRINGEMENT. If, during the Term of this Agreement or the
----------------------
term of any license hereunder, either Party learns of any infringement by a
third party of the patents within Patent Rights or Extended License Patent
Rights exclusively licensed hereunder, such Party shall promptly notify the
other Party and shall provide such other Party with available evidence of such
infringement.
5.3 INFRINGEMENT.
------------
(a) GENENTECH shall have the first right (but not the obligation), at its
own expense, to take appropriate action to enforce Patent Rights or
Extended License Patent Rights licensed exclusively to GENENTECH
hereunder in the event of any actual or suspected infringement of such
rights. GENENTECH may, in its sole judgment, institute suit against
any such infringer or alleged infringer and control and defend and
settle such suit in a manner consistent with the terms and provisions
hereof. If GENENTECH has not commenced reasonable action to enforce
such Patent Rights and Extended License Patent Rights, in the case of
significant infringement, or has ceased to pursue such action within
one hundred twenty (120) days after written notice from CURAGEN of the
infringement, which notice includes all of CURAGEN's then available
supporting evidence and a request by CURAGEN that action should be
taken against such alleged infringer, CURAGEN shall have the right
(but not the obligation), at its own expense, to bring suit against
such infringement. Any amount recovered, whether by judgment or
settlement, shall first be applied to reimburse the costs and expenses
(including attorneys' fees) of the Party bringing suit, and then to
reimburse the costs and expenses (including attorneys' fees), if any,
of the other Party and then to reimburse CURAGEN for any royalties
withheld by GENENTECH as provided in Section 5.3(b) below, which shall
be paid with interest as specified in Section 3.11. [XXXXX]
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[XXXXX]
(b) In the event that GENENTECH brings any suit in any country as
permitted in Section 5.3(a) above with respect to a Material
Infringement as defined in (c) below, GENENTECH shall be entitled to
reduce royalties payable to CURAGEN hereunder with respect to Licensed
Products substantially similar to the product alleged to be infringing
the Patent Right(s) or Extended License Patent Right(s) which are the
subject of the suit in such country and for so long as a Material
Infringement exists, by [XXXXX] of the amounts otherwise due hereunder
with respect to such Licensed Products in such country.
(c) For purposes of this Section 5.3, a Material Infringement shall be
deemed to exist with respect to a Licensed Product on a country-by-
country basis when sales by a third party of allegedly infringing
products in such country reach a level of [XXXXX] or more of the
combined sales of such allegedly infringing product(s) and sales of
the Licensed Product in such country.
5.4 COOPERATION. Each Party shall execute all papers and perform such
-----------
other acts as may be reasonably required to cooperate with the Party bringing
any infringement suit brought in accordance with Section 5.3 above (including
giving legal consent for bringing such suit, and agreeing to be named as a
plaintiff or otherwise joined in such suit), and at its option and expense, may
be represented in such suit by counsel of its choice.
6. TERM AND TERMINATION
6.1. TERMINATION PROVISIONS.
----------------------
The Term of any license hereunder shall be as specified in Section 3.10,
unless terminated as set forth below:
(a) Any license hereunder with respect to any Licensed Clone and the
related Leads, Extended Research Inventions or Extended License Patent
Rights, may be
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terminated by either Party upon any material breach by the other Party
of any material obligation or condition of such license, effective
thirty (30) days after giving written notice to the breaching Party of
such termination in the case of a payment breach and sixty (60) days
after giving written notice to the breaching Party of such termination
in the case of any other breach, which notice shall describe such
breach in reasonable detail; provided, however, that a breach of
Section 2.4 shall only give rise to the termination rights specified
therein. The foregoing notwithstanding, if the default or breach is
cured or shown to be non-existent within the aforesaid [XXXXX] day
period, the notice shall be deemed automatically withdrawn and of no
effect.
(b) If either Party files for protection under bankruptcy laws, makes an
assignment for the benefit of creditors, appoints or suffers
appointment of a receiver or trustee over its property, files a
petition under any bankruptcy or insolvency act or has any such
petition filed against it which is not discharged within sixty (60)
days of the filing thereof, then the other Party may terminate this
Agreement by notice to such Party.
(c) The licenses granted hereunder with respect to certain Licensed Clones
shall terminate as specified in Section 2.3.4 of the Research
Agreement without any requirement of further action by CURAGEN
hereunder.
6.2 EFFECT OF TERMINATION.
---------------------
(a) Upon termination of a license or licenses granted hereunder by CURAGEN
pursuant to Section 6.1(a), (b) or (c) or under Section 2.4 with
respect to any Licensed Clone, all relevant rights to such Licensed
Clone and the related Leads, Extended Research Inventions and Extended
License Patent Rights included in any such license(s) granted by
CURAGEN to GENENTECH hereunder under which GENENTECH is in breach
shall immediately and automatically revert to CURAGEN, subject to
GENENTECH's right to sell any remaining quantities of Licensed Product
remaining in its inventories as of the date of termination. All
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remaining license rights granted to GENENTECH hereunder shall remain
in full force and effect. GENENTECH shall promptly transfer to
CURAGEN such Licensed Clones, Data Sets and CURAGEN Proprietary
Material in its possession without retaining any copies thereof, as
well as any full-length sequence data of such Licensed Clone(s). In
addition, upon any termination pursuant to Section 6.1(a) or (c) or
Section 2.4, GENENTECH shall be deemed without any further action to
have granted to CURAGEN an exclusive, worldwide, license (including
the right to grant sublicenses), under GENENTECH's ownership interest
in any Research Project Inventions and Research Project Patent Rights
covering or related to the relevant Licensed Clone(s) for which
GENENTECH's license rights have been terminated to develop, have
developed, make, have made, use, have used, offer for sale, sell, have
sold, import and have imported any and all products in all fields with
royalties payable only as set forth in Section 7.7 of the Research
Agreement.
(b) Documentation. At the request of CURAGEN, GENENTECH shall execute and
-------------
deliver such bills of sale, assignments and licenses and other
documents as may be necessary to fully vest in CURAGEN all right,
title and interest to which it is entitled as aforesaid pursuant to
this Section 6.2.
(c) Payment Obligations. GENENTECH shall have no obligation to make any
-------------------
milestone or royalty payment to CURAGEN that has not accrued prior to
the effective date of any termination, except for royalties due on
sales of remaining inventory, but shall remain liable for all
obligations accruing prior to termination.
(d) In the event of a material breach by CURAGEN of any material
obligation or condition under this Agreement relating to any license
hereunder with respect to any Licensed Clone, in lieu of terminating
this Agreement as provided in Section 6.1(a), GENENTECH may, effective
sixty (60) days after giving written notice to CURAGEN, which notice
shall describe such breach in reasonable detail, elect to maintain the
license to the Licensed Clone to which the breach relates with a
[XXXXX]
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[XXXXX] reduction in the royalties otherwise due hereunder with
respect to Licensed Products relating to such Licensed Clone. The
foregoing notwithstanding, if the material breach is cured or shown to
be non-existent within the aforesaid sixty (60) day period, such
notice and election shall be deemed automatically withdrawn and of no
effect.
6.3 OTHER TERMINATION BY GENENTECH. GENENTECH may terminate this
-------------------------------
Agreement, or any license or licenses granted hereunder with respect to any
Licensed Clone(s), Lead(s) or Extended Research Inventions or Extended License
Patent Rights, and the related rights and obligations hereunder, in its sole
discretion at any time by giving written notice thereof to CURAGEN. Such
termination shall be effective fifteen (15) days following the date such notice
is received by CURAGEN and shall have all consequences as set forth in Section
6.2 above, but only with respect to such Licensed Clone or Lead, as if this
Agreement had been terminated pursuant to Section 6.1(a).
6.4 REMEDIES. If either Party shall fail to perform or observe or
---------
otherwise breaches any of its material obligations under this Agreement, in
addition to any right to terminate this Agreement, the non-defaulting Party may
elect to obtain other relief and remedies available under law.
6.5 SURVIVING PROVISIONS. Notwithstanding any provision herein to the
---------------------
contrary, the rights and obligations set forth in Sections 3.9, 3.11 and 3.12,
Article 4, Sections 6.2 and 6.4, and Article 7 hereof, as well as any rights and
obligations otherwise accrued, shall survive the expiration or termination of
this Agreement.
7. MISCELLANEOUS
7.1 CURAGEN REPRESENTATIONS. CURAGEN represents and warrants that: (a)
-----------------------
the execution and delivery of this Agreement and the performance of the
transactions contemplated hereby have been duly authorized by all appropriate
CURAGEN corporate action; (b) CURAGEN is under no obligation which is
inconsistent with this Agreement; and (c)
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CURAGEN has the full right and legal capacity to grant the rights to GENENTECH
pursuant to Article 2 above without violating the rights of any third party.
7.2 GENENTECH REPRESENTATIONS. GENENTECH represents and warrants that:
-------------------------
(a) the execution and delivery of this Agreement and the performance of the
transactions contemplated hereby have been duly authorized by all appropriate
GENENTECH corporate action; and (b) GENENTECH is under no obligation which is
inconsistent with this Agreement.
7.3 NO WARRANTIES.
-------------
(a) Nothing in this Agreement is or shall be construed as:
(i) a warranty or representation by CURAGEN or GENENTECH as to the
validity or scope of any application or patent within the Patent
Rights;
(ii) a warranty or representation that anything made, used, sold or
otherwise disposed of under any license granted in this Agreement
is or will be free from infringement of patents, copyrights, and
other rights of third parties.
(b) Except as expressly set forth in this Agreement, NEITHER PARTY MAKES
ANY REPRESENTATIONS OR EXTENDS ANY WARRANTIES OF ANY KIND, EITHER
EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE
DEVELOPMENT, MANUFACTURE, SALE, IMPORTATION OR USE OF THE LICENSED
PRODUCT(S) WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR
OTHER RIGHTS, OR ANY OTHER EXPRESS OR IMPLIED WARRANTIES.
7.4 LIABILITY. NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR
---------
OTHERWISE, NEITHER PARTY WILL BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF
THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL
OR EQUITABLE THEORY FOR (I) ANY
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INDIRECT, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOST PROFITS OR (II)
COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES
7.5 NOTICES. Any notices, requests, deliveries, approvals or consents
-------
required or permitted to be given under this Agreement to GENENTECH or CURAGEN
shall be in writing and shall be personally delivered or sent by telecopy (with
written confirmation to follow via United States first class mail), overnight
courier providing evidence of receipt or certified mail, return receipt
requested, postage prepaid, in each case to the respective address specified
below (or to such address as may be specified in writing to the other Party
hereto):
CURAGEN: 555 Long Wharf, 11th Floor
New Haven, CT 06511
Attn: Vice President, Business Development
Telecopy: (203) 401-3333
GENENTECH: 1 DNA Way
South San Francisco, CA 94080
Attn: Corporate Secretary
Telecopy: (650) 952-9881
Such notices shall be deemed to have been sufficiently given on: (a) the
date sent if delivered in person or transmitted by telecopy, (b) the next
business day after dispatch in the case of overnight courier or (c) five (5)
business days after deposit in the U.S. mail in the case of certified mail.
7.6 GOVERNING LAW. This Agreement will be construed, interpreted and
-------------
applied in accordance with the laws of the State of New York (excluding its body
of law controlling conflicts of law).
7.7 LIMITATIONS. Except as set forth elsewhere in this Agreement, neither
-----------
Party grants to the other Party any right or license to any of its intellectual
property.
7.8 ENTIRE AGREEMENT. This is the entire Agreement between the Parties
----------------
with respect to the subject matter herein. No modification shall be effective
unless in writing and signed by the Parties.
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7.9 WAIVER. The terms or conditions of this Agreement may be waived only
------
by a written instrument executed by the Party waiving compliance. The failure
of either Party at any time or times to require performance of any provision
hereof shall in no manner affect its rights at a later time to enforce the same.
No waiver by either Party of any condition or term shall be deemed as a
continuing waiver of such condition or term or of another condition or term.
7.10 HEADINGS. Section and subsection headings are inserted for
--------
convenience of reference only and do not form part of this Agreement.
7.11 ASSIGNMENT. This Agreement may not be assigned by either Party
----------
without the consent of the other, except that each Party may, without such
consent, assign this Agreement and the rights, obligations and interests of such
Party, in whole or in part, to any of its wholly-owned subsidiaries, to any
purchaser of all or substantially all of its assets in the line of business to
which this Agreement pertains, or of all of its capital stock, or to any
successor corporation resulting from any merger or consolidation of such Party
with or into such corporation.
7.12 FORCE MAJEURE. Neither Party shall be liable for failure of or delay
-------------
in performing obligations set forth in this Agreement, and neither shall be
deemed in breach of its obligations, if such failure or delay is due to natural
disasters or any causes beyond the reasonable control of such Party. In event
of such force majeure, the Party affected thereby shall use reasonable efforts
to cure or overcome the same and resume performance of its obligations
hereunder.
7.13 CONSTRUCTION. The Parties hereto acknowledge and agree that: (i)
------------
each Party and its counsel reviewed and negotiated the terms and provisions of
this Agreement and have contributed to its revision; (ii) the rule of
construction to the effect that any ambiguities are resolved against the
drafting Party shall not be employed in the interpretation of this Agreement;
and (iii) the terms and provisions of this Agreement shall be construed fairly
as to all Parties hereto and not in a favor of or against any Party, regardless
of which Party was generally responsible for the preparation of this Agreement.
7.14 SEVERABILITY. If any provision(s) of this Agreement are or become
------------
invalid, are ruled illegal by any court of competent jurisdiction or are deemed
unenforceable under then
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current applicable law from time to time in effect during the Term hereof, it is
the intention of the Parties that the remainder of this Agreement shall not be
affected thereby provided that a Party's rights under this Agreement are not
materially affected. The Parties hereto covenant and agree to renegotiate any
such term, covenant or application thereof in good faith in order to provide a
reasonably acceptable alternative to the term, covenant or condition of this
Agreement or the application thereof that is invalid, illegal or unenforceable,
it being the intent of the Parties that the basic purposes of this Agreement are
to be effectuated.
7.15 STATUS. Nothing in this Agreement is intended or shall be deemed to
------
constitute a partner, agency, employer-employee, or joint venture relationship
between the Parties.
7.16 INDEMNIFICATION.
---------------
(a) GENENTECH shall indemnify, defend and hold harmless CURAGEN, its
Affiliates and their respective directors, officers, employees, and agents and
their respective successors, heirs and assigns (the "CURAGEN Indemnitees"),
against any liability, damage, loss or expense (including reasonable attorneys'
fees and expenses of litigation) incurred by or imposed upon the CURAGEN
Indemnitees, or any of them, in connection with any claims, suits, actions,
demands or judgments ("Claims") of third parties for personal injury and product
liability matters (except in cases where such Claims result from a willful
material breach of this Agreement or the gross negligence or willful misconduct
on the part of a CURAGEN Indemnitee) arising out of or relating to any actions
of GENENTECH or any Affiliate, licensee, sublicensee, distributor or agent of
GENENTECH in the development, testing, production, manufacture, promotion,
import, sale or use by any person of any Licensed Product manufactured or sold
by GENENTECH or by an Affiliate, licensee, sublicensee, distributor or agent of
GENENTECH.
(b) GENENTECH's obligation to indemnify, defend and hold the CURAGEN
Indemnitees harmless pursuant to Section 9.16(a) are conditioned on the
indemnified Party: (i) providing written notice to the indemnifying Party of
any Claim arising out of the indemnified activities promptly after the
indemnified Party has knowledge of such Claim, (ii) permitting the indemnifying
Party to assume, at its discretion, sole and full control of the investigation,
39
<PAGE>
preparation, defense, trial and settlement in connection with such Claim, (iii)
assisting and cooperating with the indemnifying Party, at the indemnifying
Party's reasonable expense, in the investigation of, preparation for and defense
of any such Claim, and (iv) not compromising, negotiating or settling such Claim
without the indemnifying Party's prior written consent.
7.17 COUNTERPARTS.
------------
This Agreement may be executed in any number of counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an original,
and all of which counterparts, taken together, shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their duly authorized representative in two (2) originals.
GENENTECH, INC. CURAGEN CORPORATION
By: ______________________________ By: ______________________________
Title: ___________________________ Title: ___________________________
40
<PAGE>
SCHEDULE I
(To be completed for each Licensed Clone)
LICENSED CLONE:
- ---------------
TYPE OF LICENSE:
- ----------------
PROJECT DATA SET
- ----------------
OR
- --
CURAGEN DATA SET
- ----------------
PERTAINING TO LICENSED CLONE:
- -----------------------------
CURAGEN PROPRIETARY
- -------------------
MATERIAL PERTAINING TO
- ----------------------
LICENSED CLONE:
- ---------------
CURAGEN PATENT RIGHTS
- ---------------------
PERTAINING TO LICENSED CLONE:
- -----------------------------
RIGHTS UNDER
- ------------
EXTENDED LICENSE:
- -----------------
Signed this ______ day of __________________, _____
CURAGEN CORPORATION
By: ______________________________________
Name:
Title:
GENENTECH, INC.
By: ______________________________________
Name:
Title:
41
<PAGE>
APPENDIX D
----------
EXISTING DATA SETS
[XXXXX]
[XXXXX]
[XXXXX]
[XXXXX]
Confidential Treatment Requested
<PAGE>
APPENDIX E
----------
TERMS OF SUBSCRIPTION AGREEMENTS
QEA/Gene Calling
- ----------------
Subscriber will receive secure access to CURAGEN's QEA/GeneCalling subscription
database through the GeneScape( data base and software. Access will be provided
for up to [XXXXX] users on equipment to be provided by Subscriber.
CURAGEN will support and maintain the software provided for such access and will
use commercially reasonable efforts to update and maintain the database and to
keep it reasonably available for use.
Options and Licenses to clones identified using the database shall be provided
on terms substantially similar to those contained in this Agreement and the
License Agreement.
MIM/Path Calling
- ----------------
Subscriber will receive access to the MIM/PathCalling database through the
GeneScape(R) data base and software. Access will be provided for up to [XXXXX]
users on equipment to be provided by Subscriber.
CURAGEN will support and maintain the software provided for such access and will
use commercially reasonable efforts to update and maintain the database and to
keep it reasonably available for use.
Options and Licenses to clones identified using the database shall be provided
on terms substantially similar to those contained in this Agreement and the
License Agreement.
GeneTools
- ---------
Pursuant to any subscription agreement as described above Subscriber will also
receive secure access to the GeneTools database through the GeneScape(R)
software. Access will be provided for up to [XXXXX] users on equipment to be
provided by Subscriber.
Confidential Treatment Requested
<PAGE>
APPENDIX F
----------
STOCK PURCHASE AGREEMENT
<PAGE>
CURAGEN CORPORATION
STOCK PURCHASE AGREEMENT
DATED AS OF ____________, 1997
<PAGE>
CURAGEN CORPORATION
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is dated as of ___________, 1997 by and between CURAGEN
CORPORATION (the "Company"), a Delaware corporation with principal offices at
555 Long Wharf Drive, 11/th/ Floor, New Haven, CT, 06511 and Genentech, Inc.
(the "Purchaser"), a Delaware corporation with principal offices at 1 DNA Way,
South San Francisco, CA 94080.
WHEREAS the Company wishes to obtain equity financing and the Purchaser is
willing, on the terms and conditions contained in this Agreement, to purchase
Shares of the Company.
IN CONSIDERATION of the mutual covenants contained in this Agreement, the
parties agree as follows:
SECTION 1. Authorization of Sale of the Shares. The Company has authorized
------------------------------------
the sale to the Purchaser of that number of shares (the "Shares") of the Common
Stock, $.01 par value per share (the "Common Stock"), of the Company, as is
equal to the quotient obtained by dividing $5,000,000 by the Offering Price (as
defined below).
SECTION 2. Agreement to Sell and Purchase Shares. At the Closing (as
--------------------------------------
defined in Section 3), the Company will sell to the Purchaser, and the Purchaser
will buy from the Company, upon the terms and conditions hereinafter set forth,
the Shares, at a purchase price per Share equal to the Offering Price for an
aggregate purchase price of $5,000,000 (the "Purchase Price"). As used herein,
the term "Offering Price" shall mean the price per share of the shares of Common
Stock sold to the public in connection with the closing by the Company of its
initial public offering (the "Public Offering Closing") pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act").
SECTION 3. Closings.
--------
3.1 Delivery of the Shares at the Closing. The completion of the
--------------------------------------
purchase and sale of the Shares being purchased and sold pursuant to this
Agreement (the "Closing") shall occur at the offices of Mintz, Levin, Cohn,
Ferris, Glovsky and Popeo, P.C., One Financial Center, Boston, Massachusetts
02111 contemporaneously with the Public Offering Closing (the "Closing
<PAGE>
Date"), or such other time and place as shall be agreed to by the Company and
the Purchaser. At the Closing, the Purchaser shall pay to the Company an amount
in cash or by wire transfer equal to the Purchase Price and the Company shall
deliver to the Purchaser one or more stock certificates representing the Shares
purchased by the Purchaser, each such certificate to be registered in the name
of the Purchaser. The Company's obligation to close the transaction shall be
subject to the following conditions, any of which may be waived by the Company:
(a) receipt by the Company of a certified or official bank check or checks or
wire transfer of funds in the full amount of the Purchase Price for the Shares
being purchased hereunder; (b) execution and delivery by the Purchaser of the
Registration Rights Agreement substantially in the form attached as Exhibit 1
---------
(the "Registration Rights Agreement"); and (c) the accuracy of the
representations and warranties made by the Purchaser and the fulfillment of
those undertakings of the Purchaser to be fulfilled prior to the Closing. The
Purchaser's obligation to close the transaction shall be subject to the
fulfillment of the following conditions: (a) the occurrence of the Public
Offering Closing, (b) the execution and delivery by the Company of the
Registration Rights Agreement; (c) the receipt by the Purchaser of an opinion of
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel to the Company, in
form and substance reasonably satisfactory to the Purchaser; (d) the receipt by
the Purchaser of a certificate, signed by the Secretary of the Company, in the
form attached hereto as Exhibit 2, (e) the receipt by the Purchaser, of a
---------
certificate, dated as of the Closing Date, as to the good standing of the
Company in the state of Delaware, (f) the receipt by the Purchaser of a stock
certificate, representing the Shares, and (g) the accuracy of the
representations and warranties made by the Company herein as of the Closing as
though such representations and warranties had been made on and as of Closing
and the fulfillment of those undertakings of the Company to be fulfilled prior
to Closing, and Purchaser's receipt of a certificate executed by the Senior Vice
President of the Company in the form attached hereto as Exhibit 3 certifying as
---------
to the same. This Agreement and the Registration Rights Agreement are
collectively referred to herein as the "Transaction Documents".
3.2. Delivery of Preferred Shares at Subsequent Closing. In the event
---------------------------------------------------
that the Public Offering Closing does not occur on or before May 30, 1999, then
the Company may, at its option, sell to the Purchaser, and the Purchaser will
buy from the Company, on or before June 30, 1999 (the "Subsequent Closing
Date"), upon the terms and conditions hereinafter set forth, that number of
Preferred Shares (as defined below) of the Company as is equal to the quotient
obtained
2
<PAGE>
by dividing $5,000,000 by the Private Placement Price (as defined below). As
used herein (i) the term "Preferred Shares" shall mean the shares of a new
series of Preferred Stock, $.01 par value per share (the "Preferred Stock"),
having substantially the same rights, preferences and privileges as the
Company's Series A Preferred Stock (other than with respect to (i) the
applicable conversion rate and (ii) those certain adjustments to the applicable
conversion rate set forth in Section 5(c)(ii) of Exhibit A of the Restated
Certificate of Incorporation of the Company dated June 24, 1997) and (ii) the
term "Private Placement Price" shall mean a price per share based upon the price
per share at which the Company sold shares of Preferred Stock in the round of
equity financing immediately preceding the Subsequent Closing Date raising in
excess of $3,000,000 from investors not involved in a collaborative relationship
with the Company. At the Subsequent Closing, the Purchaser shall pay to the
Company an amount in cash or by wire transfer equal to the Private Placement
Price and the Company shall deliver to the Purchaser one or more stock
certificates representing the Preferred Shares purchased by the Purchaser, each
such certificate to be registered in the name of the Purchaser. The Company's
obligation to close the transaction shall be subject to the following
conditions, any of which may be waived by the Company: (a) receipt by the
Company of a certified or official bank check or checks or wire transfer of
funds in the full amount of the Private Placement Price for the Preferred Shares
being purchased hereunder; (b) execution and delivery by the Purchaser of an
amendment to that certain Amended and Restated Registration Rights Agreement
dated as of March 27, 1997, as amended May 16, 1997 (the "Registration Rights
Amendment"); and (c) the accuracy of the representations and warranties made by
the Purchaser as of the Subsequent Closing Date and the fulfillment of those
undertakings of the Purchaser to be fulfilled prior to the Subsequent Closing.
The Purchaser's obligation to close the transaction shall be subject to the
fulfillment of the following conditions: (a) the execution and delivery by the
Company of the Registration Rights Amendment; (b) the receipt by the Purchaser
of an opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel to
the Company, in form and substance reasonably satisfactory to the Purchaser; (c)
the receipt by the Purchaser of a certificate, signed by the Secretary of the
Company, in the form attached hereto as Exhibit 2; (d) the receipt by the
---------
Purchaser, of a certificate, dated as of the Subsequent Closing Date, as to the
good standing of the Company in the state of Delaware; (e) the receipt by the
Purchaser of a stock certificate, representing the Preferred Shares; and (f) the
accuracy of the representations and warranties made by the Company herein as of
the Subsequent Closing as though such representations and warranties had been
made on and as of Subsequent Closing and the fulfillment of those undertakings
of the
3
<PAGE>
Company to be fulfilled prior to the Subsequent Closing, and Purchaser's receipt
of a certificate executed by the Senior Vice President of the Company in the
form attached hereto as Exhibit 3 certifying as to the same. Except as otherwise
---------
provided herein, any such sale of Preferred Shares shall be upon the same terms
and conditions as those contained herein for the Shares; provided that all
references in this Agreement to the "Closing" and the "Closing Date" shall mean
and refer to the "Subsequent Closing" and the "Subsequent Closing Date"; all
references in this Agreement (other than in Sections 1, 2 and 3) to the "Shares"
shall mean and refer to the "Preferred Shares" and all references to the
"Transaction Documents" in this Agreement shall mean and refer to this Agreement
and the Registration Rights Amendment.
SECTION 4. Representations, Warranties and Covenants of the Company. As
---------------------------------------------------------
used herein, "best knowledge" shall mean and include a) actual knowledge of any
officers or directors of the Company and b) that knowledge which a prudent
businessperson would have obtained in the management of his or her business
using due inquiry. The Company hereby represents and warrants to, and covenants
with, the Purchaser as follows:
4.1. Organization. The Company is duly organized, validly existing
-------------
and in good standing under the laws of the State of Delaware. The Company has
full corporate power and authority to own, operate and occupy its properties and
to conduct its business as presently conducted and is registered or qualified to
do business and in good standing in each jurisdiction in which it owns or leases
property or transacts business and where the failure to be so qualified would
have a material adverse effect upon the business, financial condition,
properties or operations of the Company. The Company owns and holds all of the
outstanding capital stock of Genescape, Inc. No other person has any rights to
acquire any interest (equity or otherwise) in Genescape, Inc. As of the date
hereof, Genescape has conducted no business or other activities (other than
activities related to its inception) and holds no assets. Other than Genescape,
Inc., the Company does not own, directly or indirectly, any interest in any
corporation, association, or other entity. The Company is not a participant in
any joint venture, partnership or similar arrangement. The Company has delivered
to the Purchaser an accurate and complete copy of its Certificate of
Incorporation and all Amendments thereto, including without limitation, all
Certificates of Designation filed with the Secretary of State of Delaware.
4.2. Due Authorization. The Company has all requisite corporate power
------------------
and authority to execute, deliver and perform its obligations under the
Transaction Documents, and the
4
<PAGE>
Transaction Documents have been duly authorized and validly executed and
delivered by the Company and constitute legal, valid and binding agreements of
the Company enforceable against the Company in accordance with their terms.
4.3. Non-Contravention. The execution and delivery of the Transaction
------------------
Documents, the issuance and sale of the Shares to be sold by the Company
hereunder, the fulfillment of the terms of the Transaction Documents and the
consummation of the transactions contemplated by the Transaction Documents will
not conflict with or constitute a violation of, or default or give rise to any
benefits or an acceleration of any rights of any third party (with the passage
of time or otherwise) under, any material agreement or instrument to which the
Company is a party or by which it is bound or the charter, by-laws or other
organizational documents of the Company nor result in the creation or imposition
of any lien, encumbrance, claim, security interest or restriction whatsoever
upon any of the material properties or assets of the Company or an acceleration
of indebtedness pursuant to any obligation, agreement or condition contained in
any material bond, debenture, note or any other evidence of indebtedness or any
material indenture, mortgage, deed of trust or any other agreement or instrument
to which the Company is a party or by which it is bound or to which any of the
property or assets of the Company is subject, nor conflict with, or result in a
violation of, any law, administrative regulation, ordinance or order of any
court or governmental agency, arbitration panel or authority applicable to the
Company. No consent, approval, authorization or other order of, or registration,
qualification or filing with, any regulatory body, administrative agency, or
other governmental body is required for the valid issuance and sale of the
Shares to be sold pursuant to the Agreement, other than such as have been or
will be made or obtained.
4.4. Capitalization. As of the date hereof, the Company has the total
---------------
authorized capitalization described on Schedule 4.4 attached hereto. The Shares
------------
to be sold pursuant to this Agreement have been duly authorized, and when issued
and paid for in accordance with the terms of this Agreement will be validly
issued, fully paid and non-assessable and free of restrictions on transfer,
other than restrictions on their transfer under the Transaction Documents and
under applicable state and federal securities laws. The outstanding shares of
capital stock of the Company have been duly and validly issued and are fully
paid and non-assessable. Except as set forth on Schedule 4.4, no options,
------------
warrants, puts, calls, commitments, convertible exchangeable securities, or
similar rights for issuance of new or additional securities exist with respect
to the Company.
5
<PAGE>
Schedule 4.4 contains a true and complete list of each stockholder,
- ------------
warrantholder and optionholder of the Company as of the date hereof.
4.5 Contracts and Other Commitments. Except as disclosed on Schedule
-------------------------------- --------
4.5 the Company does not have any contract, agreement, lease, commitment, or
- ---
proposed transaction, written or oral, absolute or contingent, other than (i)
contracts for the purchase of goods, supplies and services that were entered
into in the ordinary course of business and that do not involve individually
more than $200,000, (ii) sales contracts entered into in the ordinary course of
business, and (iii) contracts terminable at will by the Company on no more than
thirty (30) days' notice without cost or liability to the Company and that do
not involve any employment or consulting arrangement and are not material to the
conduct of the Company's business. For the purpose of this paragraph, employment
and consulting contracts and contracts with labor unions, and license agreements
and any other agreements relating to the acquisition or disposition of the
Company's technology (other than standard end-user license agreements) shall not
be considered to be contracts entered into in the ordinary course of business.
4.6 Related-Party Transactions. No employee, officer, or director of
---------------------------
the Company or member of his or her immediate family is indebted to the Company,
nor is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them, except that the Company is obligated to pay
approximately $21,000 in interest that accrued on promissory notes issued in
1993 to members of the Rothberg family, which notes were converted into Common
Stock at the end of 1993. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers, or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. To the best of the Company's knowledge, no officer or director
or any member of their immediate families is, directly or indirectly, interested
in any material contract with the Company.
4.7 Registration Rights. Except as provided in the Registration
--------------------
Rights Agreement dated as of June 25, 1997 by and between the Company and a
certain stockholder, the Amended and Restated Registration Rights Agreement
dated as of March 27, 1997, by and among the Company and certain stockholders of
the Company, as amended, and as provided to Connecticut Innovations,
6
<PAGE>
Incorporated and the holders of warrants to purchase 11,111 shares of Common
Stock in separate agreements, the Company is not obligated to register under the
Securities Act any of its presently outstanding securities or any of its
securities that may be subsequently issued.
4.8 Permits. The Company has all franchises, permits, licenses, and
--------
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted. The Company is not
in default in any material respect under any of such franchises, permits,
licenses or other similar authority.
4.9 Compliance With Other Instruments. The Company is not in
----------------------------------
violation or default in any material respect of any provision of its Certificate
of Incorporation or Bylaws or in any material respect of any provision of any
mortgage, indenture, agreement, instrument, or contract to which it is a party
or by which it is bound or, to the best of its knowledge, of any federal or
state judgment, order, writ, decree, statute, rule, or regulation applicable to
the Company. The execution, delivery, and performance by the Company of the
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby will not result in any such violation or be in material
conflict with or constitute, with or without the passage of time or giving of
notice, either a material default under any such provision or an event that
results in the creation of any material lien, charge, or encumbrance upon any
assets of the Company or the suspension, revocation, impairment, forfeiture, or
non-renewal of any material permit, license, authorization, or approval
applicable to the Company, its business or operations, or any of its assets or
properties.
4.10 Litigation. There is no action, suit, proceeding, or
-----------
investigation, to the best of the Company's knowledge, pending or currently
threatened against the Company that questions the validity of the Transaction
Documents or the right of the Company to enter into such agreements, or to
consummate the transactions contemplated hereby or thereby, or that might
result, either individually or in the aggregate, in any material adverse change
in the assets, business, properties, prospects, or financial condition of the
Company, or in any material change in the current equity ownership of the
Company. The foregoing includes, without limitation, any action, suit,
proceeding, or investigation pending or currently threatened involving the prior
employment of any of the Company's employees, their use in connection with the
Company's business of any information or techniques allegedly proprietary to any
of their former employers, their obligations under any agreements with prior
employers, or negotiations by the Company with potential backers
7
<PAGE>
of, or investors in, the Company or its proposed business. The Company is not a
party to, or to the best of its knowledge, named in any order, writ, injunction,
judgment, or decree of any court, government agency, or instrumentality. There
is no action, suit, or proceeding by the Company currently pending or that the
Company currently intends to initiate.
4.11 Offering. Subject in part to the truth and accuracy of the
---------
Purchaser's representations set forth in Section 5.1 of this Agreement, the
offer, sale and issuance of the Shares as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act, and neither the
Company nor any authorized agent acting on its behalf will take any action
hereafter that would cause the loss of such exemption.
4.12 Title to Property and Assets; Leases. The Company owns no real
-------------------------------------
estate and leases facilities in Branford, Connecticut, New Haven, Connecticut
and Alachua, Florida. Except (i) as reflected in the Financial Statements (as
defined in paragraph 4.13), (ii) for liens for current taxes not yet delinquent,
(iii) for liens imposed by law and incurred in the ordinary course of business
for obligations not past due to carriers, warehousemen, laborers, materialmen
and the like, (iv) for liens in respect of pledges or deposits under workers'
compensation laws or similar legislation or (v) for minor defects in title, none
of which, individually or in the aggregate, materially interferes with the use
of such property, the Company owns its property and assets free and clear of all
mortgages, liens, claims, and encumbrances. With respect to the property and
assets it leases, the Company is in compliance with such leases and, to the best
of its knowledge, holds a valid leasehold interest free of any liens, claims, or
encumbrances, subject to clauses (i)-(v) above.
4.13 Financial Statements and Preliminary Financial Statements. The
----------------------------------------------------------
Company has delivered to the Purchaser its audited financial statements (balance
sheet and profit and loss statement, statement of stockholders' equity and
statement of cash flows including notes thereto) at December 31, 1994, 1995 and
1996 for the fiscal years then ended and its unaudited financial statements for
the nine-month period ended September 30, 1997 (the "Financial Statements"). The
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated and with each other. The Financial Statements fairly present the
financial condition and operating results of the Company as of the dates, and
for the periods, indicated therein. Except as set forth in the Financial
Statements, the Company has no material liabilities, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business
subsequent to September 30, 1997 and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
8
<PAGE>
generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually do not exceed $125,000, and in
the aggregate do not exceed $800,000, other than commitments set forth on
Schedule 4.13 . Except as disclosed in the Financial Statements, the Company is
- -------------
not a guarantor or indemnitor of any indebtedness of any other person, firm, or
corporation. The Company maintains and will continue to maintain a standard
system of accounting established and administered in accordance with generally
accepted accounting principles.
4.14 Changes. To the best of the Company's knowledge, since September
--------
30, 1997, there has not been:
a) any change in the assets, liabilities, financial condition, business
prospects or operating results of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business that
have not been, in the aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting the business, properties, prospects, or
financial condition of the Company (as such business is presently conducted and
as it is proposed to be conducted);
(c) any waiver or compromise by the Company of a valuable right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim, or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the business, properties, prospects, or
financial condition of the Company (as such business is presently conducted and
as it is proposed to be conducted);
(e) any material change to a material contract or arrangement by which the
Company or any of its assets is bound or subject;
(f) any material change in any compensation arrangement or agreement with
any employee, officer, director or stockholder;
(g) any sale, assignment, or transfer of any patents, trademarks,
copyrights, trade secrets, or other intangible assets;
(h) any resignation or termination of employment of any key officer of the
Company; and the Company, to the best of its knowledge, does not know of the
impending resignation of termination of employment of any such officer;
(i) receipt of notice that there has been a loss of, or material order
cancellation by, any major customer of the Company;
9
<PAGE>
(j) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(k) any loans or guarantees made by the Company to or for the benefit of
its employees, officers, or directors, or any members of their immediate
families, other than travel advances and other advances made in the ordinary
course of its business;
(l) any declaration, setting aside, or payment or other distribution in
respect of any of the Company's capital stock, or any direct or indirect
redemption, purchase, or other acquisition of any of such stock by the Company;
(m) to the best of the Company's knowledge, any other event or condition of
any character that might materially and adversely affect the business,
properties, prospects, or financial condition of the Company (as such business
is presently conducted and as it is proposed to be conducted); or
(n) any agreement or commitment by the Company to do any of the things
described in this paragraph 4.14.
4.15 Patents and Trademarks. The Company owns or possesses sufficient
-----------------------
legal rights to all patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, and proprietary rights and processes
presently used by the Company in its business (the "CuraGen Intellectual
Property Rights"). To the best knowledge of the Company, the CuraGen
Intellectual Property Rights are the only intellectual property rights necessary
for its business as now conducted and as proposed to be conducted and, to the
best knowledge of the Company, do not conflict with, or infringe the rights of
others. The Company has provided to Purchaser a complete list of patents and
pending patent applications of the Company. Except for agreements with its own
employees or consultants, substantially in the form referenced in paragraph 4.18
below, there are no outstanding options, licenses, or agreements of any kind
relating to the foregoing, nor is the Company bound by or a party to any
options, licenses, or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information, and proprietary rights and processes of any other person or entity.
The Company has not received any communications alleging that the Company has
violated or, by conducting its business as proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights, trade secrets, or
other proprietary rights or processes of any other person or entity. The Company
is not aware that any of its employees is obligated under any contract
(including licenses, covenants, or commitments of any nature) or other
agreement, or subject to any judgment, decree, or order of any court or
administrative agency, that would interfere with the use
10
<PAGE>
of such employee's best efforts to promote the interests of the Company or that
would conflict with the Company's business as proposed to be conducted. Neither
the execution nor delivery of this Agreement, nor the carrying on of the
Company's business by the employees of the Company, nor the conduct of the
Company's business as proposed, will, to the best of the Company's knowledge,
conflict with or result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant, or instrument under which
any of such employees is now obligated. The Company does not believe it is or
will be necessary to use any inventions of any of its employees (or persons it
currently intends to hire) made prior to their employment by the Company.
4.16 Manufacturing and Marketing Rights. The Company has not granted
-----------------------------------
rights to manufacture, produce, assemble, license, market, or sell its products
to any other person or entity and is not bound by any agreement that affects the
Company's exclusive right to develop, manufacture, assemble, distribute, market,
or sell its products.
4.17 Employees: Employee Compensation. To the best of the Company's
---------------------------------
knowledge, there is no strike, or labor dispute or union organization activities
pending or threatened between it and its employees. None of the Company's
employees belongs to any union or collective bargaining unit. To the best of
its knowledge, the Company has complied in all material respects with all
applicable state and federal equal opportunity and other laws related to
employment. To the best of the Company's knowledge, no employee of the Company
is or will be in violation of any judgment, decree, or order, or any term of any
employment contract, patent disclosure agreement, or other contract or agreement
relating to the relationship of any such employee with the Company, or any other
party because of the nature of the business conducted or to be conducted by the
Company or to the use by the employee of his best efforts with respect to such
business. The Company is not a party to or bound by any currently effective
employment contract, deferred compensation agreement, bonus plan, incentive
plan, profit sharing plan, retirement agreement, or other employee compensation
agreement. The Company is not aware that any officer or key employee, or that
any group of key employees, intends to terminate their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. Subject to general principles related to
wrongful termination of employees, the employment of each officer and employee
of the Company is terminable at the will of the Company.
11
<PAGE>
4.18 Proprietary Information and Inventions Agreements. Each employee
--------------------------------------------------
and officer of the Company has executed an Employee Confidential Information and
Invention Agreement substantially in the form or forms which have been delivered
to counsel for the Purchaser. Each scientific consultant of the Company has
executed a confidentiality agreement with the Company.
4.19 Tax Returns, Payments, and Elections. The Company has filed all
-------------------------------------
tax returns and reports as required by law. These returns and reports are true
and correct in all material respects. The Company has paid all taxes and other
assessments due, except those contested by it in good faith. The provision for
taxes of the Company as shown in the Financial Statements is adequate for taxes
due or accrued as of the date thereof. The Company has not elected pursuant to
the Internal Revenue Code of 1986, as amended ("Code"), to be treated as an S
corporation or a collapsible corporation pursuant to Section 1362(a) or Section
341(f) of the Code, nor has it made any other elections pursuant to the Code
(other than elections that relate solely to methods of accounting, depreciation,
or amortization) that would have a material effect on the business, properties,
prospects, or financial condition of the Company. The Company has never had any
tax deficiency proposed or assessed against it and has not executed any waiver
of any statute of limitations on the assessments or collection of any tax or
governmental charge. None of the Company's federal income tax returns and none
of its state income or franchise tax or sales or use tax returns has ever been
audited by governmental authorities. Since the date of the Financial Statements,
the Company has made adequate provisions on its books of account for all taxes,
assessments, and governmental charges with respect to its business, properties,
and operations for such period. The Company has withheld or collected from each
payment made to each of its employees, the amount of all taxes, including, but
not limited to, federal income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositories.
4.20 Insurance. The Company has in full force and effect fire and
----------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed. The Company has in full force and effect
term life insurance, payable to the Company, on the lives of each of Jonathan M.
Rothberg and Gregory T.Went in the amount of $1,000,000 each. The Company has in
full
12
<PAGE>
force and effect products liability and errors and omissions insurance in
amounts customary for companies similarly situated.
4.21 Environmental and Safety Laws. To the best of its knowledge, the
------------------------------
Company is not in violation of any applicable statute, law, or regulation
relating to the environment or occupational health and safety, and to the best
of its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law, or regulation.
4.22 Investigation. It shall be no defense to an action for breach of
--------------
this Agreement that the Purchaser or its agents have (or have not) made
investigations into the affairs of the Company or that the Company could not
have known of the misrepresentation or breach of warranty.
4.23 Disclosure. To the best of the Company's knowledge, neither this
-----------
Agreement nor any other written statements or certificates made or delivered in
connection herewith contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements herein or therein not
misleading.
SECTION 5. Representations, Warranties and Covenants of the Purchaser.
-----------------------------------------------------------
5.1. The Purchaser represents and warrants to, and covenants with,
the Company, as of the date hereof and as of the Closing Date, that: (i) the
Purchaser is an "accredited investor" as defined in Regulation D under the
United States Securities Act of 1933, as amended (the "Securities Act"); and
also is knowledgeable and experienced in making investments in private placement
transactions such as the purchase of the Shares; (ii) the Purchaser is acquiring
the Shares set forth above for its own account for investment and with no
present intention of distributing any of such Shares except pursuant to an
effective registration statement under the Securities Act covering the sale, and
no arrangement or understanding exists with any other person regarding the
distribution of any of such Shares; (iii) the Purchaser will not, directly or
indirectly, voluntarily offer, sell, pledge, transfer or otherwise dispose of
(or solicit any offers to buy, purchase or otherwise acquire or take a pledge
of) any of the Shares except (a) in the event of an effective registration
statement under the Securities Act, (b) upon delivery of an opinion of counsel
(which shall be in form and substance reasonably satisfactory to the Company)
that such registration is not required, (c) in connection with a sale, transfer
or other disposition made pursuant to Section 144 of the Securities Act or (d)
to a wholly owned subsidiary of the Purchaser, in the case of (a), (c) and (d)
above, no opinion of counsel shall be required; and (iv) the Purchaser has had
an opportunity to
13
<PAGE>
ask questions and receive answers from the management of the Company regarding
the Company, its business and the offering of the Shares.
5.2. The Purchaser further represents and warrants to, and covenants
with, the Company that (i) the Purchaser has full right, power, authority and
capacity to enter into the Transaction Documents and to consummate the
transactions contemplated hereby and has taken all necessary action to authorize
the execution, delivery and performance of the Transaction Documents, and (ii)
upon the execution and delivery of the Transaction Documents, such Transaction
Documents shall constitute valid and binding obligations of the Purchaser
enforceable in accordance with their terms.
5.3. The Purchaser acknowledges and understands that the Purchaser
must bear the economic risk of its investment in the Shares for an indefinite
period of time because the Shares have not been registered under the Securities
Act and, therefore, cannot be sold unless subsequently registered under the
Securities Act or an exemption from such registration is available. The
certificates representing the Shares issued to Purchaser will bear a legend in
substantially the following form:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"). SUCH SECURITIES MAY NOT BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF, IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR AN
OPINION OF COUNSEL (WHICH SHALL BE IN FORM AND SUBSTANCE REASONABLY
SATISFACTORY TO THE COMPANY) REASONABLY SATISFACTORY TO THE COMPANY
(WHICH MAY BE THE PURCHASER'S IN-HOUSE COUNSEL), THAT SUCH
REGISTRATION IS NOT REQUIRED, UNLESS SUCH SALE, TRANSFER OR OTHER
DISPOSITION IS MADE PURSUANT TO RULE 144 OF THE SECURITIES ACT, IN
WHICH CASE SUCH SALE, TRANSFER OR OTHER DISPOSITION MAY BE MADE AND NO
OPINION OF COUNSEL SHALL BE REQUIRED, OR EXCEPT AS OTHERWISE PERMITTED
UNDER A CERTAIN COMMON STOCK PURCHASE AGREEMENT DATED NOVEMBER __ 1997
BETWEEN THE COMPANY
14
<PAGE>
AND THE ORIGINAL HOLDER, A COPY OF WHICH IS AVAILABLE UPON REQUEST
FROM THE COMPANY FOR INSPECTION.
The Company agrees to remove such legend from the certificates representing the
Shares issued to Purchaser at such time as such Shares may be legally sold under
Rule 144 (or any successor rule) without registration under the Securities Act,
at the request of the Purchaser and upon receipt from the Purchaser of an
opinion, which shall be in form and substance reasonably satisfactory to the
Company, of counsel reasonably satisfactory to the Company (which may be the
Purchaser's in-house counsel), that such legend may be removed.
The Purchaser agrees that any sale, transfer, pledge, hypothecation or
other disposition of the Shares shall be made in compliance with such legend.
SECTION 6. Survival of Representations, Warranties and Agreements.
-------------------------------------------------------
Notwithstanding any investigation made by any party to this Agreement, all
covenants, agreements, representations and warranties made by the Company and
the Purchaser herein shall survive the execution of this Agreement, the delivery
to the Purchaser of the Shares being purchased, and the payment therefor.
SECTION 7. No Fee. The parties hereto hereby represent that there are no
-------
brokers or finders entitled to compensation in connection with the transactions
contemplated hereby.
SECTION 8. Notices. All notices, requests, consents and other
--------
communications hereunder shall be in writing, shall be addressed to the
receiving party's address set forth below or to such other address as a party
may designate by notice hereunder, and shall be either (i) delivered by hand,
(ii) made by telex, telecopy or facsimile transmission, (iii) sent by overnight
courier, or (iv) sent by registered or certified mail, return receipt requested,
postage prepaid:
(a) if to the Company, to:
CuraGen Corporation
555 Long Wharf Drive, 11/th/ Floor
New Haven, CT 06511
Attention: Vice President of Business Development
with a copy to:
Jeffrey M. Wiesen, Esq.
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02110
15
<PAGE>
(b) if to the Purchaser, to:
Genentech, Inc.
1 DNA Way
South San Francisco, CA 94080
Attn: Corporate Secretary
All notices, requests, consents and other communications hereunder shall be
deemed to have been given either (i) if by hand, at the time of the delivery
thereof to the receiving party at the address of such party set forth above,
(ii) if made by telex, telecopy or facsimile transmission, at the time that
receipt thereof has been acknowledged by electronic confirmation or otherwise,
(iii) if sent by overnight courier, on the next business day following the day
such notice is delivered to the courier service, or (iv) if sent by registered
or certified mail, on the 5th business day following the day such mailing is
made.
SECTION 9. Changes. Any term of this Agreement may be amended or
--------
compliance therewith waived only with the written consent of both parties
hereto.
SECTION 10. Assignment. The rights and obligations under this Agreement
-----------
may not be assigned by either party hereto without the prior written consent of
the other party.
SECTION 11. Benefit. All statements, representations, warranties,
--------
covenants and agreements in this Agreement shall be binding on the parties
hereto and shall inure to the benefit of the respective successors and permitted
assigns of each party hereto. Nothing in this Agreement shall be construed to
create any rights or obligations except among the parties hereto, and no person
or entity shall be regarded as a third-party beneficiary of this Agreement.
SECTION 12. Expenses. Each of the parties hereto shall pay its own fees
---------
and expenses (including the fees of any attorneys, accountants, appraisers or
others engaged by such party) in connection with this Agreement and the
transactions contemplated hereby whether or not the transactions contemplated
hereby are consummated.
SECTION 13. No Waiver; Cumulative Remedies. No failure or delay on the
-------------------------------
part of any party to this Agreement in exercising any right, power or remedy
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude
16
<PAGE>
any other or further exercise thereof or the exercise of any other right, power
or remedy hereunder. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 14. Headings. The headings of the various sections of this
---------
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement.
SECTION 15. Transfer Taxes. CuraGen will reimburse the Purchaser for any
---------------
transfer taxes incurred in connection with the issuance of the Shares.
SECTION 16. Severability. In case any provision contained in this
-------------
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
SECTION 17. Governing Law. This Agreement shall be governed by and
--------------
construed in accordance with (a) the internal laws of the State of Delaware
without giving effect to principles of conflicts of law, and (b) United States
federal law.
SECTION 18. Counterparts. This Agreement may be executed in counterparts,
-------------
each of which shall constitute an original, but all of which, when taken
together, shall constitute but one instrument, and shall become effective when
one or more counterparts have been signed by each party hereto and delivered to
the other parties.
SECTION 19. Further Assurances. From and after the date of this Agreement,
-------------------
upon the request of the Purchaser or the Company, the Company and the Purchaser
shall execute and deliver such instruments, documents and other writings as may
be reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement and the Shares.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the __day of ________, 1997.
GENENTECH, INC.
By:_____________________________________
Name:
Title:
CURAGEN CORPORATION
By:____________________________________
Name:
Title:
18
<PAGE>
EXHIBIT 1
---------
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of ______________, by and among CuraGen Corporation, a Delaware
corporation (the "Company") with principal offices at 555 Long Wharf Drive, 11th
Floor, New Haven, CT 06511 and Genentech, Inc., a Delaware corporation (the
"Stockholder") with principal offices at 1 DNA Way, South San Francisco, CA
94080.
RECITALS
WHEREAS, the Company has issued to the Stockholder _____________ shares of
its Common Stock, $.01 par value per share (the "Common Stock"), pursuant to a
Stock Purchase Agreement dated as of even date herewith (the "Purchase
Agreement"); and
WHEREAS, the Stockholder has agreed to advance to the Company a loan in the
aggregate principal amount of up to $26,000,000 which loan is evidenced by a
Promissory Note, dated ________________, (the "Note") and which may be repaid,
at the Company's option, in shares of Non-Voting Common Stock or which, under
certain circumstances, may be converted to shares of Series F Preferred Stock;
and
WHEREAS, among the conditions to the consummation of the transactions
contemplated by the Purchase Agreement is the execution and delivery of a
Registration Rights Agreement providing for the registration rights described
herein.
NOW THEREFORE, in consideration of the foregoing and the mutual promises
herein contained the parties agree as follows:
AGREEMENT
1. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS
1.1 CERTAIN DEFINITIONS
-------------------
As used in this Agreement, the following terms shall have the meanings set
forth below:
(a) "Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
(b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
<PAGE>
(c) "Holder" shall mean the Stockholder and any transferee to whom the
registration rights conferred by this Agreement have been transferred in
compliance with Section 1.2 and Section 1.8 hereof.
(d) "Non Voting Common Stock" shall the shares of Non-Voting Common Stock
$.01 par value per share, of the Company issued to the Stockholder pursuant to
the terms of the Note.
(e) "Registrable Securities" shall mean (i) shares of Common Stock, (ii)
shares of Common Stock issued or issuable upon conversion of the Non-Voting
Common Stock or Series F Preferred Stock, and (iii) any shares of Common Stock
issued as a dividend or other distribution with respect to or in exchange for or
in replacement of the shares referenced in (i) or (ii) above; provided however,
that Registrable Securities shall not include any shares of Common Stock (i)
which have previously been registered or which have been sold to the public, or
which have been sold in a private transaction in which the transferor's rights
under this Agreement are not assigned, or (ii) with respect to which the
registration rights under this Agreement have terminated under Section 1.15 of
this Agreement.
(f) The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the declaration or ordering of the
effectiveness of such registration statement.
(g) "Registration Expenses" shall mean all expenses incurred in effecting
any registration pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and expenses of any regular or special audits incident to or required by any
such registration, but shall not include Selling Expenses.
(h) "Restricted Securities" shall mean any Registrable Securities required
to bear the legends set forth in Section 1.2(b) hereof.
(i) "Rule 144" shall mean Rule 144 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(j) "Rule 145" shall mean Rule 145 as promulgated by the Commission under
the Securities Act as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
(k) "Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar successor federal statute and the rules and regulations thereunder,
all as the same shall be in effect from time to time.
(l) "Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the sale of Registrable
Securities and fees
2
<PAGE>
and disbursements of counsel for any Holder (other than the fees and
disbursements of counsel included in Registration Expenses).
(m) "Series F Preferred Stock" shall mean shares of the Series F Non-Voting
Convertible Preferred Stock, $.01 par value per share, of the Company issued to
the Stockholder pursuant to the terms of the Note.
1.2 RESTRICTIONS ON TRANSFER
------------------------
(a) Each Holder agrees not to make any disposition of all or any portion of
the Registrable Securities unless and until (i) there is then in effect a
registration statement under the Securities Act covering such proposed
disposition and such disposition is made in accordance with such registration
statement, (ii) the transferee has agreed in writing for the benefit of the
Company prior to such transfer, and as a condition thereof, delivers to the
Company a written instrument by which such transferee agrees to be bound by this
Section 1.2, provided and to the extent such Section is then applicable, and (A)
such Holder shall have notified the Company of the proposed disposition and
shall have furnished the Company with a detailed statement of the circumstances
surrounding the proposed disposition, and (B) if requested by the Company, such
Holder shall have furnished the Company with an opinion of counsel, reasonably
satisfactory to the Company, that such disposition will not require registration
of such shares under the Securities Act or (iii) the disposition is made
pursuant to Rule 144. It is agreed that the Company will not require opinions
of counsel for transactions made pursuant to Rule 144.
Notwithstanding the provisions of 1.2(i), (ii) and (iii) above, no such
registration statement or opinion of counsel shall be necessary for a transfer
by a Holder which is (A) a partnership to its partners or retired partners (who
retire after the date hereof) in accordance with partnership interests, of (B)
to the Holder's family member or trust for the benefit of an individual Holder,
provided such transfer is without consideration and the transferee will be
subject to the terms of this Section 1.2 to the same extent as if he were an
original Holder hereunder.
(b) Each certificate representing Registrable Securities shall (unless
otherwise permitted by the provisions of this Agreement) be stamped or otherwise
imprinted with legends substantially similar to the following (in addition to
any legend required under applicable state securities laws):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). SUCH
SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER SAID ACT OR AN OPINION OF COUNSEL (WHICH SHALL BE IN FORM AND SUBSTANCE
REASONABLY SATISFACTORY TO THE COMPANY) REASONABLY SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATION IS NOT REQUIRED, UNLESS SUCH SALE,
3
<PAGE>
TRANSFER OR OTHER DISPOSITION IS MADE PURSUANT TO RULE 144 OF THE SECURITIES
ACT, IN WHICH CASE NO OPINION OF COUNSEL SHALL BE REQUIRED, OR EXCEPT AS
OTHERWISE PERMITTED UNDER A CERTAIN STOCK PURCHASE AGREEMENT DATED NOVEMBER__,
1997 AMONG THE COMPANY, THE ORIGINAL HOLDER AND OTHERS, A COPY OF WHICH IS
AVAILABLE UPON REQUEST FROM THE COMPANY FOR INSPECTION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE REGISTRATION
RIGHTS AGREEMENT DATED NOVEMBER__, 1997, AS AMENDED, A COPY OF WHICH IS
AVAILABLE FOR INSPECTION AT THE OFFICES OF THE COMPANY OR MAY BE AVAILABLE UPON
REQUEST.
(c) The Company shall be obligated to reissue promptly unlegended
Registrable Securities at the request of any Holder thereof if the Holder shall
have obtained an opinion of counsel (which counsel may be counsel to the
Company) reasonably acceptable to the Company to the effect that the Registrable
Securities proposed to be disposed of may lawfully be so disposed of without
registration, qualification or legend.
(d) Any legend endorsed on any Registrable Securities pursuant to
applicable state securities laws and any stop-transfer instructions with respect
to any Registrable Securities shall be removed upon receipt by the Company of an
order of the appropriate blue sky authority authorizing such removal.
1.3 REGISTRATION ON FORM S-3
------------------------
(a) After the effective date of the Company's initial public offering (the
"Offering Effective Date"), the Company shall use its best efforts to qualify
for registration on Form S-3 or any comparable or successor form or forms.
After the Company has qualified for the use of Form S-3, the Holder of
Registrable Securities shall have the right, at any time on or after the first
anniversary of the Offering Effective Date, to request registrations on Form S-3
(such request shall be in writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended methods of disposition
of such shares by such Holder); provided, however, that the Company shall not be
-------- -------
obligated to effect any such registration if (i) the Holder, together with the
holders of any other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such other securities
(if any) on Form S-3 at an aggregate price to the public of less than $500,000;
(ii) in a given twelve-month period, the Company has effected two (2) such
registrations, (iii) it is to be effected more than ten (10) years after the
Offering Effective Date; or (iv) the Company shall have furnished to such Holder
a certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be materially
detrimental to the Company for such registration statement to be filed in the
near future and that it has, therefore, determined to defer the filing of such
registration statement, in which case the Company shall have the right to defer
such filing for a period of not more than one hundred eighty (180) days after
receipt of the request of the Holder; provided, that the Company shall not defer
--------
its obligation in this manner more than once in any twelve-month period.
4
<PAGE>
(b) The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 1.3:
(i) In any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in
effecting such registration, qualification or compliance, unless the
Company is already subject to service in such jurisdiction and except
as may be required by the Securities Act;
(ii) After the Company has initiated ten (10) such registrations
for the Holder pursuant to this Section 1.3 (counting for these
purposes only registrations which have been declared or ordered
effective and pursuant to which securities have been sold and
registrations which have been withdrawn by the Holder as to which the
Holder have not elected to bear the Registration Expenses pursuant to
Section 1.5 hereof and would, absent such election, have been required
to bear such expenses);
(iii) During the period starting with the date sixty (60) days
prior to the Company's good faith estimate of the date of filing of and
ending on a date one hundred eighty (180) days after the effective date
of, a Company-initiated registration, including a demand registration
initiated by the Company on behalf of any holder of demand registration
rights; provided that the Company is actively employing in good faith
all reasonable efforts to cause such registration statement to become
effective; or
(iv) If the Company shall have effected a registration pursuant
to Section 1.3(a) within one hundred eighty (180) days preceding the
Company's receipt of the Holder's request.
(c) Subject to the foregoing, upon delivery by the Holder of the notice
described in Section 1.3(a) above, the Company shall (i) promptly give written
notice of the proposed registration to all other Holders (if any) and (ii) as
soon as practicable, use its best efforts to effect such registration
(including, without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws and
appropriate compliance with the Securities Act) as would permit or facilitate
the sale and distribution of all or such portion of such Registrable Securities
as are specified in such request, together with all or such portion of the
Registrable Securities of any other Holder joining in such request as are
specified in a written request received by the Company within twenty (20) days
after such written notice from the Company is mailed or delivered. The
registration statement filed pursuant to the request of the Holder may, subject
to the provisions of Sections 1.3(b) and 1.10 hereof, include other securities
of the Company with respect to which registration rights have been granted, and
may include securities of the Company being sold for the account of the Company.
5
<PAGE>
(d) All Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to Section 1.3 hereof shall be borne by the
Company.
(e) If the registration requested pursuant to Section 1.3 is underwritten,
the rights of the Holder to registration pursuant to Section 1.3 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. The Holder may elect to include in such underwriting
all or a part of its Registrable Securities. Notwithstanding the foregoing, the
Company shall not be obligated to register the Registrable Securities of any
Holder who fails promptly to provide to the Company such information as the
Company may reasonably request at the time to enable the Company to comply with
applicable laws or regulations or to facilitate preparation of the registration
statement.
(f) If the Company shall request inclusion in any registration pursuant to
Section 1.3 of securities being sold for its own account, or if other persons
shall request inclusion in any registration pursuant to Section 1.3, the Holder
shall offer to include such securities in the underwriting and may condition
such offer on their acceptance of the further applicable provisions of this
Section 1 (including Section 1.10). The Company shall (together with the Holder
and other persons proposing to distribute their securities through such
underwriting) enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters. Notwithstanding any other
provision of this Section 1.3, if the representative of the underwriters advises
the Holder in writing that marketing factors require a limitation on the number
of shares to be underwritten, the number of shares to be included in the
underwriting or registration shall be allocated as set forth in Section 1.10
hereof. If a person who has requested inclusion in such registration as
provided above does not agree to the terms of any such underwriting, such person
shall be excluded therefrom by written notice from the Company, the underwriter
or the Holder. Any Registrable Securities or other securities excluded shall
also be withdrawn from such registration. If shares are so withdrawn from the
registration and if the number of shares to be included in such registration was
previously reduced as a result of marketing factors pursuant to this Section
1.3(f), then the Company shall offer to all persons who have retained rights to
include securities in the registration the right to include additional
securities in the registration in an aggregate amount equal to the number of
shares so withdrawn, with such shares to be allocated among such persons
requesting additional inclusion in accordance with Section 1.10.
1.4 REGISTRATION PROCEDURES
-----------------------
In the case of each registration effected by the Company pursuant to
Section 1.3, the Company will keep each Holder advised in writing as to the
initiation of each registration and as to the completion thereof. At its
expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one hundred eighty
(180) days or until the Holder has completed the distribution described in the
registration statement relating thereto, whichever first occurs; provided,
--------
however, that such 180-day period shall be extended, if necessary, to keep the
- -------
registration statement effective until all such Registrable Securities are
6
<PAGE>
sold, provided that Rule 145, or any successor rule under the Securities Act,
permits an offering on a continuous or delayed basis, and provided further that
applicable rules under the Securities Act governing the obligation to file a
post-effective amendment permit, in lieu of filing a post-effective amendment
that (I) includes any prospectus required by Section 10(a)(3) of the Securities
Act or (II) reflects facts or events representing a material or fundamental
change in the information set forth in the registration statement, the
incorporation by reference of information required to be included in (I) and
(II) above to be contained in periodic reports filed pursuant to Section 13 or
15(d) of the Exchange Act in the registration statement;
(b) Prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as the
Holder from time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that as thereafter delivered
to the purchasers of such shares such prospectus shall not include an 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 or
incomplete in the light of the circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant hereunder to
be listed on each securities exchange on which similar securities issued by the
Company are then listed;
(f) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant to such registration statement and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration; and
(g) Otherwise use its best efforts to comply with all applicable rules and
regulations of the Commission, and make available to its security holders, as
soon as reasonably practicable an earnings statement covering the period of at
least twelve months, but not more than eighteen months, beginning with the first
month after the effective date of the Registration Statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the Securities Act.
7
<PAGE>
1.5 INDEMNIFICATION
---------------
(a) The Company will indemnify each Holder, each of its officers, directors
and partners, legal counsel and accountants and each person controlling such
Holder within the meaning of Section 15 of the Securities Act, with respect to
which registration, qualification, or compliance has been effected pursuant to
this Section 1, and each underwriter, if any, and each person who controls
within the meaning of Section 15 of the Securities Act any underwriter, against
all expenses, claims, losses, damages, and liabilities (or actions, proceedings,
or settlements in respect thereof) arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
prospectus, offering circular, or other document (including any related
registration statement, notification, or the like) incident to any such
registration, qualification, or compliance or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification, or compliance, and will
reimburse each such Holder, each of its officers, directors, partners, legal
counsel, and accountants and each person controlling such Holder, each such
underwriter, and each person who controls any such underwriter for any legal and
any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by such Holder or underwriter specifically for use in the preparation
thereof. It is agreed that the indemnity agreement contained in this Section
1.5(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Company (which consent shall not be unreasonably withheld).
(b) Each Holder will, if Registrable Securities held by him are included in
the securities as to which such registration, qualification, or compliance is
being effected, indemnify the Company, each of its directors, officers, legal
counsel, and accountants and each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, each other such Holder, and each of their officers, directors,
and partners, and each person controlling such Holder, against all expenses,
claims, losses, damages and liabilities (or actions, proceedings, or settlements
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular, or other document (including any related registration statement,
notification, or the like) incident to any such registration, qualification, or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company and such Holder,
directors, officers, partners, legal counsel, and accountants, persons,
underwriters, or control persons for any legal or any other expenses reasonably
incurred in connection with investigating and defending or settling any such
claim, loss, damage, liability, or action, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or
8
<PAGE>
alleged omission) is made in such registration statement, prospectus, offering
circular, or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder specifically for use in the
preparation thereof; provided, however, that the obligations of such Holder
hereunder shall not apply to amounts paid in settlement of any such claims,
losses, damages, or liabilities (or actions in respect thereof) if such
settlement is effected without the consent of such Holder (which consent shall
not be unreasonably withheld); and provided that in no event shall any indemnity
under this Section 1.5 exceed the net proceeds from the offering received by
such Holder.
(c) Each party entitled to indemnification under this Section 1.5 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 1.5 to the extent such
failure is not prejudicial. No Indemnifying Party in the defense of any such
claim or litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof, the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation and no Indemnified Party shall consent to entry of
any judgment or settle such claim or litigation without the prior written
consent of the Indemnifying Party. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.5 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu to indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense, as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into in
9
<PAGE>
connection with the underwritten public offering are in conflict with the
foregoing provisions, the provisions in the underwriting agreement shall
control.
1.6 INFORMATION BY HOLDER
---------------------
Each Holder of Registrable Securities shall furnish to the Company such
information regarding such Holder and the distribution proposed by such Holder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification, or compliance
referred to in this Section 1, except to the extent that the furnishing of such
information would violate any law or any contractual arrangement. The Company
shall not be obligated to register the Registrable Securities of any Holder who
fails promptly to provide to the Company such information as the Company may
reasonably request at the time to enable the Company to comply with applicable
laws or regulations or to facilitate preparation of the registration statement,
including any information that the Holder fails to provide on the basis that
such information would violate any law or any contractual arrangement.
1.7 RULE 144 REPORTING
------------------
With a view to making available the benefits of certain rules and
regulations of the Commission that may permit the sale of the Restricted
Securities to the public without registration, the Company agrees to use its
best efforts to:
(a) Make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the Securities Act, at
all times from and after ninety (90) days following the effective date of the
first registration under the Securities Act filed by the Company for an offering
of its securities to the general public;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements;
(c) So long as a Holder owns any Restricted Securities, furnish to the
Holder forthwith upon written request a written statement by the Company as to
its compliance with the reporting requirements of Rule 144 (at any time from and
after ninety (90) days following the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration.
10
<PAGE>
1.8 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS
---------------------------------------------
The rights to cause the Company to register securities granted to a Holder
by the Company under this Section 1 may be transferred or assigned by a Holder
only to a transferee or assignee of not less than 50,000 shares of Registrable
Securities (as presently constituted and subject to subsequent adjustments for
stock splits, stock dividends, reverse stock splits, and the like), provided
that the Company is given written notice at the time of said transfer or
assignment stating the name and address of the transferee or assignee and
identifying the securities with respect to which such registration rights are
being transferred or assigned, and, provided further, that the transferee or
assignee of such rights assumes the obligations of such Holder under this
Section 1 and prior to such transfer, as a condition thereof, delivers to the
Company a written instrument by which such transferee agrees to be bound by this
Agreement.
1.9 "MARKET STAND-OFF" AGREEMENT
----------------------------
If requested by the Company and an underwriter of Common Stock (or other
securities) of the Company, a stockholder shall not sell or otherwise transfer
or dispose of any Common Stock (or other securities) of the Company held by such
stockholder (other than those included in the registration) during the one
hundred eighty (180) day period following the effective date of a registration
statement of the Company filed under the Securities Act, provided that:
(a) if the stockholder is not an "affiliate" (as defined under Rule 144) of
the Company nor does it hold beneficially or of record 10% or more of the
outstanding equity securities of the Company at the time a registration
statement is filed, then such agreement shall only apply to the first such
registration statement of the Company, including securities to be sold on its
behalf to the public in an underwritten offering; and
(b) all officers and directors of the Company enter into similar
agreements.
The obligations described in this Section 1.9 shall not apply to a
registration relating solely to employee benefit plans on Form S-8 or similar
forms that may be promulgated in the future, or a registration relating solely
to a Commission Rule 145 transaction on Form S-4 or similar forms that may be
promulgated in the future. The Company may impose stop-transfer instructions
with respect to the shares (or securities) subject to the foregoing restriction
until the end of said one hundred eighty (180) day period.
1.10 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS.
---------------------------------------------
From and after the date of this Agreement, the Company shall not, without
the prior written consent of the Holders of a majority of the outstanding
Registrable Securities, enter into any agreement with any holder or prospective
holder of any securities of the Company which would allow such holder or
prospective holder to include such securities in any registration filed under
Section 1.3 hereof, unless under the terms of such agreement, such holder or
prospective holder may include such securities in any such registration only to
the extent that the inclusion of
11
<PAGE>
such securities will not reduce the amount of the Registrable Securities of the
Holders which are included.
1.11 ALLOCATION OF REGISTRATION OPPORTUNITIES
----------------------------------------
In any circumstance in which all of the Registrable Securities and other
shares of Common Stock of the Company (including shares of Common Stock issued
or issuable upon conversion of shares of any currently unissued series of
Preferred Stock of the Company) with registration rights (the "Other Shares")
requested to be included in a registration on behalf of the Holder or other
selling stockholders cannot be so included as a result of limitations of the
aggregate number of shares of Registrable Securities and Other Shares that may
be so included, the number of shares of Registrable Securities and Other Shares
that may be so included shall be allocated among the Holders requesting
inclusion of shares pro rata on the basis of the number of shares of Registrable
Securities and that would be held by such Holders, assuming conversion, that
such Holders had requested to be included in the registration.
No Holder shall have any right to take any action to restrain, enjoin, or
otherwise delay any registration as the result of any controversy that might
arise with respect to the interpretation or implementation of this Section 1.
1.12 TERMINATION OF REGISTRATION RIGHTS
----------------------------------
The right of any Holder to request registration or inclusion in any
registration pursuant to Section 1.3 shall terminate on such date after the
Offering Effective Date as all shares of Registrable Securities held or entitled
to be held upon conversion by such Holder may immediately be sold under Rule 144
during any ninety (90) day period.
2. MISCELLANEOUS
2.1 GOVERNING LAW
-------------
This Agreement shall be governed in all respects by the laws of the State
of Delaware, as if entered into by and between Delaware residents exclusively
for performance entirely within Delaware, and excluding that body of laws
pertaining to conflicts of laws.
2.2 SUCCESSORS AND ASSIGNS
----------------------
Except as otherwise expressly provided herein, the provisions hereof shall
inure to the benefit of and be binding upon the successors, assigns, heirs,
executors and administrators of the parties hereto.
2.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER
-----------------------------------
This Agreement (including the Exhibits hereto) constitutes the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
12
<PAGE>
This Agreement supersedes any and all prior understandings as to the subject
matter of this Agreement. Neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated, except by a written instrument signed
by the Company and the Holders of at least fifty percent (50%) of the
Registrable Securities. Any such amendment, waiver, discharge or termination
shall be binding on all the Holders, but in no event shall the obligation of any
Holder hereunder be materially increased, except upon the written consent of
such Holder.
2.4 NOTICES, ETC.
-------------
All notices and other communications required or permitted hereunder shall
be in writing and shall be mailed by United States first class mail, postage
prepaid, or delivered personally by hand or nationally recognized courier
addressed (a) if to the Stockholder, at the address set forth on the first page
of this Agreement, or at such other address as such holder or permitted assignee
shall have furnished to the Company in writing, or (b) if to the Company, at 555
Long Wharf Drive, 11th Floor, New Haven CT 06511, or at such other address as
the Company shall have furnished to each holder in writing. All such notices and
other written communications shall be effective on the date of mailing or
delivery.
2.5 DELAYS OR OMISSIONS
-------------------
No delay or omission to exercise any right, power or remedy accruing to any
Holder, upon any breach or default of the Company under this Agreement shall
impair any such right, power or remedy of such Holder nor shall it be construed
to be a waiver of any such breach or default, or an acquiescence therein, or of
or in any similar breach or default thereafter occurring; nor shall any waiver
of any single breach or default be deemed a waiver of any other breach or
default therefore or thereafter occurring. Any waiver, permit, consent or
approval of any kind or character on the part of any Holder of any breach or
default under this Agreement or any waiver on the part of any Holder of any
provisions or conditions of this Agreement must be made in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
Holder, shall be cumulative and not alternative.
2.6 RIGHTS; SEPARABILITY
--------------------
Unless otherwise expressly provided herein, a Holder's rights hereunder are
several rights, not rights jointly held with any of the other Holders. In case
any provision of the Agreement shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
2.7 CONFIDENTIAL INFORMATION
------------------------
Each Holder acknowledges that the information received by them pursuant
hereto may be confidential and for its use only, and it will not use such
confidential information in violation of the Exchange Act or reproduce, disclose
or disseminate such information to any other person (other than its employees or
agents having a need to know the contents of such information, and
13
<PAGE>
its attorneys), except in connection with the exercise of rights under this
Agreement, unless the Company has made such information available to the public
generally or such Holder is required to disclose such information by a
governmental body.
2.8 TITLES AND SUBTITLES
--------------------
The titles of the paragraphs and subparagraphs of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.
2.9 COUNTERPARTS
------------
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights
Agreement effective as of the day and year first above written.
CURAGEN CORPORATION
By _____________________________
Name:
Title:
GENENTECH, INC.
By _____________________________
Name:
Title:
14
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to the Registration Statement
of CuraGen Corporation on Form S-1 of our report dated September 12, 1997,
appearing in the Prospectus, which is part of this Registration Statement. We
also consent to the reference to us under the headings "Experts" and "Selected
Financial Data" in such Prospectus.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Hartford, Connecticut
December 16, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF PENNIE & EDMONDS LLP
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-1 and related Prospectus of CuraGen
Corporation.
/s/ Pennie & Edmonds LLP
PENNIE & EDMONDS LLP
New York, New York
December 16, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CURAGEN
CORPORATION SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 20,781,115
<SECURITIES> 0
<RECEIVABLES> 544,478
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,643,801
<PP&E> 6,362,717
<DEPRECIATION> (1,402,986)
<TOTAL-ASSETS> 26,944,446
<CURRENT-LIABILITIES> 3,166,614
<BONDS> 0
0
1,442,090
<COMMON> 84,779
<OTHER-SE> 13,533,484
<TOTAL-LIABILITY-AND-EQUITY> 26,944,446
<SALES> 0
<TOTAL-REVENUES> 4,171,750
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,431,139
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 307,042
<INCOME-PRETAX> (4,112,845)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,112,845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (4,112,845)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> (.50)
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