<PAGE>
As filed with the Securities and Exchange Commission on September 20, 1999
Registration No. 333-
======================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
V.I. TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 2836 11-328476
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
155 Duryea Road
Melville, New York 11747
(516) 752-7314
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
John R. Barr
President and Chief Executive Officer
V.I. Technologies, Inc.
155 Duryea Road
Melville, New York 11747
(516) 752-7314
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
<TABLE>
<CAPTION>
copies to:
<S> <C> <C>
William T. Whelan, Esq. Dr. Samuel K. Ackerman Lynnette C. Fallon, Esq.
R. Mark Chamberlin, Esq. Pentose Pharmaceuticals, Inc. Palmer & Dodge, LLP
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. 45 Moulton Street One Beacon Street
One Financial Center Cambridge, MA 02138 Boston, MA 02108
Boston, MA 02111 (617) 864-4800 (617) 573-0100
(617) 542-6000
</TABLE>
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time of the merger of Pentose Pharmaceuticals, Inc. with and into the
Registrant as described in the Agreement and Plan of Merger and Reorganization
dated as of July 28, 1999.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, 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(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. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of each Class of Amount to be Offering Price Per Aggregate Offering Registration
Securities to be Registered Registered (1) Unit Price (2) Fee(3)
-------------- ----- --------- ------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value............. 6,705,686 N/A $3,935.54 $1.10
</TABLE>
(1) The maximum number of shares of V.I. Technologies, Inc. common stock
issuable in connection with the merger in exchange for shares of
Pentose Pharmaceuticals, Inc. common and preferred stock, based on (i)
the number of shares of V.I. Technologies, Inc. common stock
outstanding prior to the merger (13,016,920 shares, assuming, solely
for purposes of this calculation, the exercise prior to the closing of
the merger of outstanding options to purchase 566,000 shares of V.I.
Technologies, Inc. common stock, which is the number of outstanding
options having exercise prices per share equal to or lower than
$5.375, the closing price of V.I. Technologies, Inc. common stock on
August 27, 1999), and (ii) the agreed percentage of 34% of outstanding
V.I. Technologies, Inc. common stock post-merger to be issued in the
merger.
(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended,
and computed pursuant to Rule 457(f)(2), based on the sum of one-third
of the par value of the securities the Registrant will receive in the
merger due to the fact that Pentose Pharmaceuticals, Inc. has an
accumulated capital deficit, calculated as the sum of (a) $1,649.91,
which is one-third of (x) $0.001, the per share par value of the
Pentose Pharmaceuticals, Inc. common stock multiplied by (y)
4,949,736, the total number of shares of Pentose Pharmaceuticals, Inc.
common stock issued and outstanding as of September 10, 1999 and (b)
$1,500 which is one-third of (x) $0.001, the per share par value of
the Pentose Pharmaceuticals, Inc. Series A Preferred Stock multiplied
by (y) 4,500,000, the total number of shares of Pentose
Pharmaceuticals, Inc. Series A Preferred Stock issued and outstanding
as of September 10, 1999 and (c) $785.63, which is one-third of (x)
$0.001, the per share par value of Pentose Pharmaceuticals, Inc.
Series B Preferred Stock multiplied by (y) 2,356,903, the total number
of shares of Pentose Pharmaceuticals, Inc. Series B Preferred Stock
issued and outstanding as of September 10, 1999.
(3) This fee has been calculated pursuant to Section 6(b) of the
Securities Act of 1993, as amended, as .0278 of one percent of
$3,935.54.
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 Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
[PRELIMINARY DRAFT DATED SEPTEMBER 20, 1999, SUBJECT TO COMPLETION]
The information in this Joint Proxy Statement/Prospectus is not complete
and may be changed. We may not issue these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Joint Proxy Statement/Prospectus is not an offer to sell these securities and it
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
V.I. Technologies, Inc. Pentose Pharmaceuticals, Inc.
155 Duryea Road 45 Moulton Street
Melville, New York 11747 Cambridge, MA 02138
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
---------------------------------------------
The Boards of Directors of V.I. Technologies, Inc. ("VITEX") and Pentose
Pharmaceuticals, Inc. ("Pentose") have agreed to a merger in which VITEX will
acquire Pentose. We believe the combined company will be able to create
substantially more stockholder value than could be achieved by the companies
individually.
If the merger is completed, holders of Pentose common and preferred stock
will receive, for each Pentose share, approximately .5965 of a share of VITEX
common stock, estimated based upon the number of outstanding shares of VITEX
common stock and Pentose common and preferred stock as of the date hereof. VITEX
stockholders will continue to own their existing shares after the merger. VITEX
common stock is listed on the Nasdaq National Market under the symbol "VITX."
VITEX will issue, based on the estimated exchange ratio, approximately
6,414,110 shares of VITEX common stock to Pentose stockholders in the merger,
based on outstanding shares on September 1, 1999. These shares will represent
34% of the outstanding VITEX common stock after the merger. VITEX shares held by
VITEX stockholders before the merger will represent approximately 66% of the
outstanding VITEX shares after the merger.
We are asking stockholders of VITEX to approve the merger agreement, the
merger, the issuance of shares of VITEX common stock and related matters and to
approve the increase in the number of authorized shares of VITEX common stock.
We are asking stockholders of Pentose to approve the merger agreement and
the merger.
We cannot complete the merger unless stockholders of both companies approve
it. Approval of the other VITEX special meeting matters is not a condition of
the merger.
This Joint Proxy Statement/Prospectus provides you with detailed
information concerning VITEX and the merger. Please give all of the information
contained in the Joint Proxy Statement/Prospectus your careful attention. In
particular, you should carefully consider the discussion in the section entitled
"Risk Factors" beginning on page I-11 of this Joint Proxy Statement/Prospectus.
The dates, times and places of the meetings are:
For VITEX stockholders:
__________________, 1999
10:00 a.m., Eastern Time
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts
For Pentose stockholders:
__________________, 1999
10:00 a.m., Eastern Time
Palmer & Dodge LLP
One Beacon Street
Boston, Massachusetts
/s/ __________________ /s/ ______________________
John R. Barr Samuel K. Ackerman, M.D.
President and Chief Executive Officer President and Chief Executive
V.I. Technologies, Inc. Officer
Pentose Pharmaceuticals, Inc.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the VITEX stock to be issued under this Joint Proxy
Statement/Prospectus or determined if this Joint Proxy Statement/Prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
<PAGE>
Joint Proxy Statement/Prospectus dated _____________________, 1999 and
first mailed to stockholders on _______________, 1999.
[Note: Page for VITEX Booklet only.]
V.I. Technologies, Inc.
155 Duryea Road
Melville, New York 11747
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS OF V.I. TECHNOLOGIES, INC.
TO BE HELD ON ____________, 1999
To the Stockholders of V.I. Technologies, Inc.:
A special meeting of V.I. Technologies, Inc. ("VITEX") will be held on
__________________________, 1999, at 10:00 a.m., Eastern Time, at the offices of
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial Center,
Boston, Massachusetts for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger and Reorganization, dated as of July 28,
1999, by and among VITEX, Pentose Pharmaceuticals, Inc. ("Pentose"),
and certain stockholders of Pentose, and the merger, including the
issuance of up to 6,414,110 shares of VITEX common stock, as described
in the attached Joint Proxy Statement/Prospectus;
2. To adopt the 1999 Supplemental Stock Option Plan as described in the
attached Joint Proxy Statement/Prospectus;
3. To amend VITEX's Certificate of Incorporation to increase the number
of authorized shares of common stock, as described in the attached
Joint Proxy Statement/Prospectus;
4. To transact such other business as may properly come before the
meeting or any adjournment or postponement.
Only stockholders of record on Thursday, September 23, 1999 may vote at the
meeting. Only stockholders or their proxy holders and VITEX guests may attend
the meeting. A list of stockholders entitled to vote will be kept at the
offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial
Center, Boston, Massachusetts for ten days before the meeting.
Your vote is important. Whether or not you plan to attend the VITEX
meeting, please complete, date and return your proxy card in the enclosed
envelope promptly.
/s/ Thomas T. Higgins
-----------------
Thomas T. Higgins
Assistant Secretary
__________________, 1999
<PAGE>
[Note: Page for Pentose Booklet only.]
Pentose Pharmaceuticals, Inc.
45 Moulton Street
Cambridge, MA 02138
NOTICE OF SPECIAL MEETING OF PENTOSE PHARMACEUTICALS, INC.
TO BE HELD ON ____________, 1999
To the Stockholders of Pentose Pharmaceuticals, Inc.:
The special meeting of stockholders of Pentose Pharmaceuticals, Inc.
("Pentose") will be held on ______________________, 1999, at 10:00 a.m., Eastern
Time, at the offices of Palmer & Dodge LLP, One Beacon Street, Boston,
Massachusetts, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the Agreement
and Plan of Merger and Reorganization, dated as of July 28, 1999, among
Pentose, V.I. Technologies, Inc. and certain stockholders of Pentose,
and the merger, as described in the attached Joint Proxy
Statement/Prospectus; and
2. To transact such other business as may properly come before the meeting
or any adjournment or postponement.
Holders of record of Pentose common stock and of Pentose preferred stock at
the close of business on __________________, 1999 will be entitled to vote at
the Pentose meeting or any adjournment or postponement. A list of stockholders
entitled to vote will be kept at Pentose Pharmaceuticals, Inc., 45 Moulton
Street, Cambridge, MA 02138, for ten days before the meeting.
Please do not send any certificates for your stock at this time.
/s/ Lynnette C. Fallon
------------------
Lynnette C. Fallon
Secretary
__________________, 1999
Your vote is important. Whether or not you plan to attend the Pentose meeting,
please complete, date and return your proxy in the enclosed envelope promptly.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
CHAPTER ONE--THE MERGER.................................................................................................I-1
QUESTIONS AND ANSWERS ABOUT THE MERGER.........................................................................I-1
SUMMARY........................................................................................................I-2
The Companies.........................................................................................I-2
Reasons for the Merger................................................................................I-2
Merger Recommendations to Stockholders................................................................I-2
The Merger............................................................................................I-2
Other VITEX Special Meeting Matters...................................................................I-5
Other Pentose Special Meeting Matters.................................................................I-5
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA...............................................................I-6
How We Prepared the Financial Statements..............................................................I-6
Accounting Treatment..................................................................................I-6
Merger-Related Expenses...............................................................................I-6
Integration-Related Expenses..........................................................................I-6
Periods Covered.......................................................................................I-6
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA...............................................................I-7
Selected Historical and Pro Forma Financial Data of VITEX.............................................I-7
Selected Historical Financial Data of Pentose.........................................................I-9
Comparative Per Share Data...........................................................................I-10
RISK FACTORS..................................................................................................I-11
Risks Relating to the Merger.........................................................................I-11
Risks Relating to VITEX and Pentose as a Combined Company............................................I-12
FORWARD LOOKING STATEMENTS....................................................................................I-17
THE MERGER TRANSACTION........................................................................................I-18
General..............................................................................................I-18
Background of the Merger.............................................................................I-19
Joint Reasons for the Merger.........................................................................I-20
VITEX's Senior Management Team.......................................................................I-21
Factors Considered by, and Recommendation of, the VITEX Board........................................I-21
Factors Considered by, and Recommendation of, the Pentose Board......................................I-22
Accounting Treatment.................................................................................I-24
Material Federal Income Tax Consequences of the Merger...............................................I-24
Regulatory Approvals.................................................................................I-25
Appraisal Rights.....................................................................................I-25
Federal Securities Laws Consequences; Stock Transfer Restriction Agreements..........................I-25
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION...................................................I-26
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS...................................................I-27
OPINION OF FINANCIAL ADVISOR..................................................................................I-33
EXISTING RELATIONSHIP BETWEEN VITEX AND PENTOSE...............................................................I-37
INTERESTS OF CERTAIN PERSONS IN THE MERGER....................................................................I-38
Ampersand Ventures...................................................................................I-38
Board of Directors and Management....................................................................I-38
Indemnification; Directors' and Officers' Insurance..................................................I-39
Incentive Compensation and Stock Ownership Plans.....................................................I-39
Other Agreements.....................................................................................I-39
TRANSACTIONS BETWEEN VITEX AND ITS DIRECTORS, OFFICERS OR PRINCIPAL SHAREHOLDERS..............................I-40
THE MERGER AGREEMENT..........................................................................................I-41
Structure of the Merger..............................................................................I-41
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Timing of Closing....................................................................................I-41
Merger Consideration.................................................................................I-41
Treatment of Pentose Stock Options and Warrants; Other Pentose Stock-Based Awards....................I-41
Exchange of Shares...................................................................................I-41
VITEX Board and Related Matters......................................................................I-41
Certain Covenants....................................................................................I-42
Representations and Warranties.......................................................................I-43
Conditions to the Completion of the Merger...........................................................I-44
Termination of the Merger Agreement..................................................................I-45
Investment Upon Termination..........................................................................I-46
Other Expenses.......................................................................................I-46
Amendments; Waivers..................................................................................I-46
Appraisal Rights.....................................................................................I-47
CHAPTER TWO--INFORMATION ABOUT THE MEETINGS AND VOTING.................................................................II-1
Matters Relating to the Meetings.....................................................................II-1
Vote Necessary to Approve VITEX and Pentose Proposals................................................II-3
Proxies..............................................................................................II-4
Other Business; Adjournments.........................................................................II-5
CHAPTER THREE--OTHER INFORMATION REGARDING VITEX......................................................................III-1
BUSINESS OF VITEX............................................................................................III-1
Overview............................................................................................III-1
Background..........................................................................................III-2
The Blood Components Market.........................................................................III-2
Strategic Collaborations............................................................................III-9
Manufacturing and Supply...........................................................................III-11
Sales, Marketing and Distribution..................................................................III-12
Patents, Licenses and Proprietary Rights...........................................................III-13
Competition........................................................................................III-14
Government Regulation..............................................................................III-15
Health Care Reimbursement..........................................................................III-17
Research and Development...........................................................................III-17
Environmental Regulation; Use of Hazardous Substances..............................................III-18
Customers..........................................................................................III-18
Employees..........................................................................................III-18
Properties.........................................................................................III-18
Legal Proceedings..................................................................................III-18
VITEX'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............III-20
MANAGEMENT..................................................................................................III-28
Directors And Executive Officers...................................................................III-28
New Director and Officer Following the Merger......................................................III-30
Board Committees and Meetings......................................................................III-31
Compensation of Directors..........................................................................III-31
Executive Compensation.............................................................................III-32
Summary Compensation Table.........................................................................III-32
Stock Option Grants in Fiscal Year 1998............................................................III-33
1998 Aggregated Option Exercises and Fiscal Year End Option Values.................................III-34
Employment Agreements and Severance and Change of Control Arrangements.............................III-34
Compensation Committee Interlocks and Insider Participation........................................III-35
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
PRINCIPAL STOCKHOLDERS OF VITEX.............................................................................III-36
CHAPTER FOUR--OTHER INFORMATION REGARDING PENTOSE......................................................................IV-1
BUSINESS OF PENTOSE...........................................................................................IV-1
PENTOSE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION................IV-1
PRINCIPAL STOCKHOLDERS OF PENTOSE.............................................................................IV-5
CHAPTER FIVE--CERTAIN LEGAL INFORMATION.................................................................................V-1
COMPARISON OF STOCKHOLDER RIGHTS...............................................................................V-1
DESCRIPTION OF VITEX CAPITAL STOCK.............................................................................V-5
Authorized Capital Stock..............................................................................V-5
VITEX Common Stock....................................................................................V-5
VITEX Preferred Stock.................................................................................V-5
Stock Purchase Warrant................................................................................V-5
Anti-Takeover Measures................................................................................V-6
Transfer Agent........................................................................................V-6
Nasdaq National Market Listing........................................................................V-7
TRADEMARK MATTERS.......................................................................................................V-7
LEGAL MATTERS..................................................................................................V-7
EXPERTS........................................................................................................V-7
CHAPTER SIX--VITEX SPECIAL MEETING PROPOSALS...........................................................................VI-1
ITEM 1 -- VITEX MERGER PROPOSAL...............................................................................VI-1
ITEM 2 -- ADOPTION OF SUPPLEMENTAL STOCK OPTION PLAN..........................................................VI-1
ITEM 3 -- AMENDMENT OF VITEX'S CERTIFICATE OF INCORPORATION...................................................VI-3
CHAPTER SEVEN -- PENTOSE SPECIAL MEETING PROPOSAL.....................................................................VII-1
ITEM 1 --PENTOSE MERGER PROPOSAL.............................................................................VII-1
CHAPTER EIGHT --ADDITIONAL INFORMATION FOR STOCKHOLDERS..............................................................VIII-1
FUTURE STOCKHOLDER PROPOSALS................................................................................VIII-1
WHERE YOU CAN FIND MORE INFORMATION.........................................................................VIII-1
INDEX TO FINANCIAL STATEMENTS...........................................................................................F-1
</TABLE>
ANNEXES
Annex A Agreement and Plan of Merger and Reorganization
Annex B Opinion of Warburg Dillon Read LLC
Annex C 1999 Supplemental Option Plan
Annex D Delaware General Corporation Law Section 262
iii
<PAGE>
Chapter One - The Merger
CHAPTER ONE--
THE MERGER
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: When and where are the stockholder meetings?
A: The VITEX meeting will take place on _____________, 1999 at 10:00 a.m.,
Eastern Time, at the offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C. in Boston, Massachusetts. The address of the meeting is on page II-1.
The Pentose meeting will take place on ____________________, 1999 at 10:00
a.m., Eastern Time, at the offices of Palmer & Dodge LLP in Boston,
Massachusetts. The address of the meeting is on page II-1.
Q: What do I need to do now?
A: Just mail your signed proxy or proxy card in the enclosed return envelope, as
soon as possible, so that your shares may be represented at your meeting. In
order to assure that your vote is obtained, please give your proxy as instructed
on your proxy or proxy card even if you currently plan to attend a meeting in
person. The Board of Directors of each of VITEX and Pentose recommends that its
stockholders vote in favor of the merger.
Q: What do I do if I want to change my vote?
A: Just send in a later-dated, signed proxy or proxy card to your company's
Secretary (for Pentose stockholders) or Assistant Secretary (for VITEX
stockholders) before your meeting. Or, you can attend your meeting in person and
vote. You may also revoke your proxy by sending a notice of revocation to your
company's Secretary or Assistant Secretary, as the case may be, at the address
under "The Companies" on page I-2.
Q: If my VITEX shares are held in "street name" by my broker, will my broker
vote my shares for me?
A: If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be permitted to vote them on the
merger. You should therefore be sure to provide your broker with instructions
on how to vote your shares.
If you are a VITEX stockholder and do not give voting instructions to your
broker, you will, in effect, be voting against the merger unless you appear in
person at the VITEX meeting and vote in favor of the merger.
Q: Should I send in my stock certificates now?
A: No. If the merger is completed, we will send Pentose stockholders written
instructions for exchanging their stock certificates. VITEX stockholders will
keep their existing certificates.
Q: What happens to my future dividends?
A: We expect no changes in VITEX's or Pentose's dividend policies before the
merger. The payment of dividends by VITEX in the future will depend on business
conditions, VITEX's financial condition and earnings, and other factors.
Neither VITEX nor Pentose has paid dividends in the past and VITEX does not
anticipate paying dividends to stockholders in the foreseeable future.
Q: When do you expect the merger to be completed?
A: We are working towards completing the merger as quickly as possible. We hope
to complete the merger by November 1, 1999.
Q: Who do I call if I have questions about the meetings or the merger?
A: VITEX stockholders may call VITEX Investor Relations at (516) 752-7314.
Pentose stockholders may call Dr. Samuel K. Ackerman at (617)-864-4800 or
Lynnette C. Fallon, Esq. at (617) 573-0220.
I-1
<PAGE>
SUMMARY
This summary highlights selected information from this Joint Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should read this document and
the documents we have referred you to carefully. See "Chapter Eight -
Additional Information for Stockholders -- Where You Can Find More Information."
The Companies
V.I. Technologies, Inc. (see Chapter Three)
155 Duryea Road
Melville, New York 11747
(516) 752-7314
VITEX's principal business is the development and manufacture of blood products
that utilize patented viral inactivation technologies designed to ensure safe
blood products. VITEX's technologies are designed for all blood component
applications and other blood-derived products, including plasma, plasma
derivatives, red blood cells and platelets. VITEX's first virally-inactivated
product, PLAS+SD, is the only FDA-approved method for the viral inactivation of
plasma.
Pentose Pharmaceuticals, Inc. (see Chapter Four)
45 Moulton Street
Cambridge, MA 02138
(617) 864-4800
Pentose's principal business involves the development for commercialization of
novel antiviral products for medical use based on innovative applications of
nucleic acid chemistry. Pentose has developed the INACTINE(TM) technology
platform for the inactivation of viral pathogens in blood components for
transfusion, plasma derivatives and biopharmaceuticals.
Reasons for the Merger
We believe the merger combines complementary technologies and scientific and
product development expertise into a single company in the emerging field of
blood product viral inactivation. As a result, we believe the merger will create
substantial long-term value for the stockholders of both companies. Of course,
these benefits depend on our ability to obtain the necessary approvals for the
merger, to integrate the businesses of VITEX and Pentose successfully after the
merger, and on other uncertainties described on page I-12.
To review the reasons for the merger in greater detail, see pages I-19 through
I-30.
Merger Recommendations to Stockholders
To VITEX Stockholders:
The VITEX Board believes that the merger is fair to you and in your best
interest and recommends that you vote FOR the merger and the related amendments
to VITEX's charter described on page VI-2.
To Pentose Stockholders:
The Pentose Board believes that the merger is fair to you and in your best
interest and recommends that you vote FOR the approval of the merger agreement
and the merger.
The Merger
The merger agreement is attached as Annex A to this Joint Proxy
Statement/Prospectus. We encourage you to read the merger agreement as it is
the legal document that governs the merger.
What Pentose Stockholders Will Receive (see page I-37).
As a result of the merger, Pentose stockholders will receive approximately 34%
of the outstanding shares of VITEX common stock after giving effect to the
merger. Based on the current number of VITEX and Pentose shares outstanding,
Pentose stockholders will receive, for each share of Pentose common or preferred
stock, approximately 0.5965 of a share of VITEX common stock. The actual
exchange ratio for shares of VITEX common stock for Pentose shares will be
determined at closing by dividing (1) the number of shares of VITEX common stock
which will equal 34% of the outstanding shares of VITEX common stock giving
effect to the shares issued in the merger by (2) the number of outstanding
shares of Pentose common and preferred stock at that time. For purposes of this
Joint Proxy Statement/Prospectus we have estimated the exchange ratio and the
number of shares of VITEX common stock to be issued in the merger based on the
number of VITEX and Pentose shares outstanding as of the date hereof. Such
share amounts will vary between now and closing primarily due to the exercise of
outstanding options issued by both companies.
VITEX will not issue any fractional shares. Pentose stockholders will receive a
check in the amount of the fractional share amount multiplied by the average
closing price of a share of VITEX common stock for the ten (10) most recent
trading days ending on the second trading day immediately prior to the effective
time, as reported on the Nasdaq Stock Market as reported in the Wall Street
Journal.
I-2
<PAGE>
Example:
. If you currently own 1,000 shares of Pentose common and/or preferred
stock, then after the merger, based upon the estimated exchange ratio,
you would receive 596 shares of VITEX common stock and a check for the
sale proceeds for .5 of one share of VITEX common stock, rounded to
the nearest one cent. The value of the stock that you will receive
will fluctuate as the price of VITEX common stock changes prior to the
merger.
. On , 1999, the closing price of VITEX common stock on the
Nasdaq Stock Market was $ . Applying the estimated exchange ratio
to the VITEX closing price on that date, each holder of Pentose common
stock would be entitled to receive VITEX common stock with a market
value of approximately $ for each share of Pentose common stock.
However, the market price for VITEX common stock is likely to change
between now and the merger. You are urged to obtain current price
quotes for VITEX common stock.
Comparative Per Share Market Price Information.
VITEX common stock is listed on the Nasdaq National Market. On July 27, 1999,
the last full trading day before VITEX and Pentose issued a joint release
announcing the proposed merger, VITEX common stock closed at $6.375. On
___________, 1999, VITEX common stock closed at $ .
Listing of VITEX Common Stock.
The shares of VITEX common stock to be issued in the merger will be listed on
the Nasdaq National Market under the symbol "VITX".
Ownership of VITEX After the Merger.
VITEX will issue, based on the assumed exchange ratio, approximately 6,414,110
shares of VITEX common stock to Pentose stockholders in the merger. The shares
of VITEX common stock to be issued to Pentose stockholders in the merger will
represent approximately 34% of the outstanding VITEX common stock after the
merger. This information is based on the number of VITEX and Pentose shares
outstanding on , 1999 and does not take into account the shares of
common stock of VITEX issued after that date.
Stockholder Vote Required to Approve the Merger.
For VITEX stockholders: Approval of the merger and related issuance of common
stock requires two-thirds of the total votes represented by the outstanding
shares of VITEX common stock, voting as a single class.
For Pentose stockholders: Approval of the merger requires a majority of the
total votes represented by the outstanding shares of Pentose common stock and
Pentose preferred stock, voting as a single class.
Appraisal Rights.
The holders of VITEX common stock do not have any right to an appraisal of the
value of their shares in connection with the merger. The holders of Pentose
common stock do have a right to an appraisal of the value of their shares in
connection with the merger if they do not vote for the merger and follow certain
procedures outlined on page I-49.
Board of Directors and Management of VITEX and Related Matters After the Merger
(see page III-28).
Following the merger, the board of directors of VITEX will have 9 members,
including the 8 current VITEX directors plus Dr. Samuel K. Ackerman, currently
the Chief Executive Officer of Pentose. Following the merger, Dr. Ackerman will
also serve as Executive Vice President of VITEX.
Interest of Officers and Directors in the Merger.
When you consider the recommendations of the Pentose Board and VITEX Board that
Pentose and VITEX stockholders vote in favor of the merger, you should be aware
that a number of Pentose officers and directors and some VITEX directors may
have interests in the merger that may be different from, or in addition to,
yours (see page I-38).
As of July 30, 1999, all executive officers and directors of VITEX, together
with their affiliates, own as a group approximately 65% of the shares of VITEX
common stock entitled to vote at the VITEX special meeting. A vote of two-
thirds of the total votes represented by the outstanding shares of VITEX common
stock is required to approve the merger.
As of July 31, 1999, all executive officers and directors of Pentose, together
with their affiliates, own as a group approximately 44% of the shares of Pentose
common stock, 94% of the Pentose Series A Preferred Stock, 57% of the Pentose
Series B Preferred Stock and 68% of all stock (assuming conversion of all
preferred stock to common stock) entitled to vote at the Pentose special
meeting. A vote of the majority of the total votes represented by the
outstanding shares of Pentose common stock and Pentose preferred stock is
required to approve the merger.
Entities affiliated with the venture capital firm, Ampersand Ventures, own
approximately 52% of all Pentose common stock (assuming conversion of all
preferred stock to common stock), and approximately 21% of VITEX common stock.
Accounting Treatment.
The merger will be accounted for by VITEX under the purchase method of
accounting in accordance with generally
I-3
<PAGE>
accepted accounting principles. Therefore, the aggregate consideration paid by
VITEX in connection with the merger, together with the direct costs of
acquisition, will be allocated to Pentose's tangible and intangible assets and
liabilities based on their fair market values and the fair value of in-process
research and development acquired. The results of operations of Pentose will be
consolidated into the results of operations of VITEX as of the effective date of
the merger.
Material Federal Income Tax Consequences of the Merger (see page I-25).
The merger has been structured as a "tax-free reorganization" for federal income
tax purposes. Accordingly, holders of Pentose common stock or Pentose preferred
stock generally will not recognize any gain or loss for federal income tax
purposes on the exchange of their Pentose stock for VITEX stock in the merger,
except for any gain or loss recognized in connection with the receipt of cash
instead of a fractional share of VITEX common stock. The companies themselves,
as well as holders of VITEX stock, will not recognize gain or loss as a result
of the merger. It is a condition to the obligations of Pentose and VITEX to
complete the merger that each receive a legal opinion from its outside counsel
that the merger will be a tax-free reorganization for federal income tax
purposes.
The federal income tax consequences described above may not apply to all holders
of Pentose stock. Your tax consequences will depend upon your personal
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the merger to you.
Conditions to the Completion of the Merger (see page I-44).
The completion of the merger depends upon meeting a number of conditions,
including the following:
. declaration by the SEC of the effectiveness of the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part;
. approval of the stockholders of VITEX and Pentose;
. absence of any law or court order prohibiting the merger;
. receipt of opinions of VITEX's and Pentose's counsel that the merger
will qualify as a tax-free reorganization;
. absence of a material adverse effect on VITEX or Pentose during the
period from July 28, 1999 until the closing of the merger;
. material accuracy as of closing of the representations and warranties
made by the other party; and
. filing of a Notification Form for Listing of Additional Shares with
Nasdaq and the payment of applicable fees of VITEX.
In addition, VITEX's obligation to complete the merger is subject to
. receipt of agreements executed by affiliates of Pentose regarding
compliance with securities laws;
. receipt of lock-up agreements from affiliates of Ampersand Ventures
and from Dr. Samuel K. Ackerman providing for restrictions on transfer
of shares of VITEX common stock received in the merger;
. receipt of a fairness opinion dated the effective date of this Joint
Proxy Statement/Prospectus that the merger consideration is fair to
VITEX from a financial point of view;
. receipt of all required consents to the transfer of all material
agreements;
. dissenting stockholders shall have not exercised dissenters' rights
with respect to more than 5% of the Pentose capital stock; and
. VITEX shall receive an amendment to a tax indemnity agreement in favor
of certain Pentose stockholders limiting Pentose's liability
thereunder to $50,000.
Regulatory Approvals.
Neither VITEX nor Pentose is aware of any government regulatory approvals
required to be obtained with respect to the consummation of the merger, except
for the filing of a certificate of merger with the office of the Secretary of
State of the State of Delaware, the filing with the Securities and Exchange
Commission of the Registration Statement on Form S-4 registering the merger
shares and of this Joint Proxy Statement/Prospectus which constitutes a part
thereof, and compliance with all applicable state securities laws regarding the
offering and issuance of the merger shares.
Termination of the Merger Agreement (see page I-44).
(a) The merger agreement may be terminated by mutual written consent of VITEX
and Pentose.
(b) The merger agreement may be terminated by either VITEX or Pentose if:
(1) the merger has not been completed by January 31, 2000, provided the
party terminating may not be the
I-4
<PAGE>
party whose conduct was responsible for not closing;
(2) VITEX or Pentose stockholders fail to give the necessary approval at a
duly held meeting, provided the party terminating may not be the party
whose conduct was responsible for the failure to receive such vote;
(3) there is a permanent legal prohibition to closing the merger;
(4) by either party if the Board of Directors of the other party shall have
withheld, withdrawn or modified in any way adverse to such party its
recommendation in favor of the merger;
(5) by either party upon the breach of any covenant or agreement in the
merger agreement by the other party which is not cured as provided for
in such agreement;
(6) by either party, if there shall have occurred any material adverse
change with respect to the other party; or
(7) by either party if any representation or warranty on the part of the
other party proves to be untrue on July 28, 1999, if such failure is
reasonably likely to have a material adverse effect.
Termination Fees and Investment Upon Termination (see page I-46)
Pentose must pay VITEX a termination fee of $1 million in cash if:
(a) the merger agreement is terminated by VITEX as described in item (7)
above.
(b) the merger agreement is terminated in circumstances where
. Pentose's stockholders do not vote in favor of the merger, and
. within six months of the termination of the merger agreement Pentose
enters into an agreement for an alternative transaction with a third
party.
VITEX must pay Pentose a termination fee of $1 million in cash if the merger
agreement is terminated by Pentose because a representation or warranty of VITEX
is untrue as of July 28, 1999, if such failure is reasonably likely to have a
material adverse effect.
In the event that the merger agreement is terminated in any situation not
involving payment of a termination fee or the mutual consent of VITEX and
Pentose, within 30 days VITEX shall, if requested by Pentose, purchase a
$2,000,000 promissory note convertible into shares of Pentose stock sold in its
next equity financing at the price at which Pentose stock is sold in such
financing or, if that financing is not closed within nine months from the date
of termination of the merger agreement, Series B Preferred Stock of Pentose at
the price of $2.97 per share. Such obligation is conditioned upon affiliates of
Ampersand Ventures investing an equal amount in Pentose on the same terms and
conditions.
Opinions of Financial Advisor (see pages I-33).
In deciding to approve the merger, the VITEX Board considered the opinion of its
financial advisor. VITEX received an opinion from Warburg Dillon Read LLC as to
the fairness from a financial point of view of the exchange ratio in the merger
to the holders of VITEX common stock as of July 28, 1999. This opinion was
confirmed as of , 1999 and such confirmation is attached as Annex B. We
encourage you to rea d this opinion.
Other VITEX Special Meeting Matters
At the VITEX meeting, VITEX is also asking its stockholders to:
. adopt a supplemental option plan;
. approve a charter amendment to increase the number of authorized shares
of common stock from 29,000,000 to 35,000,000; and
. conduct other business if properly presented.
Approval by VITEX stockholders of the supplemental option plan and charter
amendment is not a condition to completion of the merger. Approval of the
merger is a condition to approval of these other special meeting proposals.
The VITEX Board recommends that you vote FOR the adoption of the new option plan
and the charter amendment.
Other Pentose Special Meeting Matters
At the Pentose meeting, Pentose is also asking its stockholders to conduct other
business if properly presented.
By written consent dated September 14, 1999, holders of a majority of the
outstanding shares of Pentose preferred stock:
. elected not to treat the merger of Pentose with and into VITEX as a
liquidation of Pentose; and
. agreed to amend the First Amended and Restated Investor Rights Agreement
among Pentose and the holders of Series A and Series B Convertible
Preferred Stock of Pentose dated July 15, 1998 so that the agreement
terminates immediately prior to the closing of the merger.
I-5
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
How We Prepared the Financial Statements
We are providing the following information to aid you in your analysis of
the financial aspects of the merger. We derived this information from the
audited financial statements of VITEX for the years 1995 through 1998 and from
the audited financial statements of Pentose for the years 1995 through 1998.
The information is only a summary and you should read it together with our
historical financial statements and related notes contained elsewhere in this
Joint Proxy Statement/Prospectus. See "Chapter Eight - Additional Information
for Stockholders -- Where You Can Find More Information."
Accounting Treatment
We prepared the pro forma condensed combined statements of income and pro
forma condensed combined balance sheet by adding or combining the historical
amounts of each company. The companies may have performed differently had they
always been combined. You should not rely on the unaudited pro forma condensed
combined financial information as being indicative of the historical results
that we would have had or the future results that we will experience after the
merger. See "Unaudited Pro Forma Condensed Combined Financial Statements" on
page I-28.
Merger-Related Expenses
We estimate that merger-related fees and expenses, consisting primarily of
SEC filing fees, fees and expenses of investment bankers, attorneys and
accountants, and financial printing and other related charges, will be
approximately $1,500,000. See note A on page I-32.
Integration-Related Expenses
We estimate that costs of approximately $2,500,000 will be incurred for
severance and other integration-related expenses, including the elimination of
duplicate facilities and excess capacity, operational realignment and related
workforce reductions. These expenditures are necessary to reduce costs and
operate efficiently. These costs will be charged to operations in the relevant
period and therefore are not reflected in the unaudited pro forma condensed
combined financial statements.
Periods Covered
The unaudited pro forma condensed combined statements of operations combine
VITEX's results for the year ended January 2, 1999 and the twenty-six weeks
ended July 3, 1999 with Pentose's results for the year ended December 31, 1998
and the six months ended June 30, 1999, giving effect to the merger as if it had
occurred on January 1, 1998. The unaudited pro forma condensed combined balance
sheet combines the balance sheets of VITEX as of July 3, 1999 and Pentose as of
June 30, 1999, giving effect to the merger as if it had occurred on July 3,
1999.
I-6
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
Selected Historical and Pro Forma Financial Data of VITEX
The following selected historical financial data as of and for each of the
years ended December 31, 1995 through 1997 and as of and for the year ended
January 2, 1999 has been derived from VITEX's audited financial statements.
Financial data for the year ended 1994 is not included as VITEX commenced
operations on January 1, 1995. This information is only a summary and you should
read it together with VITEX's historical financial statements and related notes
contained elsewhere in this Joint Proxy Statement/Prospectus. See "Chapter
Eight --Additional Information for Stockholders -- Where Can You Find More
Information." The unaudited pro forma combined financial data has been derived
from and should be read with the "Unaudited Pro Forma Condensed Combined
Financial Statements" and related notes on page I-28 through page I-32. This
information is based on the historical balance sheets and related historical
statements of operations of VITEX and Pentose giving effect to the merger using
the purchase method of accounting for business combinations. This information is
for illustrative purposes only. The companies may have performed differently had
they always been combined. You should not rely on the selected unaudited pro
forma combined financial data as being indicative of the historical results that
would have been achieved had the companies always been combined or the future
results that the combined company will experience after the merger.
<TABLE>
<CAPTION>
Pro Forma
Combined
Year Ended Year Ended
Year Ended December 31, January 2, January 2, Twenty six Weeks Ended
1995 1996 1997 1999 1999 July 4, 1998 July 3, 1999
---- ---- ---- ---- ---- ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product sales $ 438 $ 14,899 $ 15,843 $ 33,755 $ 33,930 $ 12,067 $ 20,494
Licensing fee - 3,000 - - - - -
-------- -------- -------- -------- -------- -------- ---------
Total revenue 438 17,899 15,843 33,755 $ 33,930 12,067 20,494
-------- -------- -------- -------- -------- -------- ---------
Costs and expenses:
Cost of sales 7,024 10,588 16,326 23,860 23,860 10,105 11,386
Research and development, net 2,777 4,367 5,912 7,507 9,405 3,395 4,115
Selling, general and administrative 1,330 2,478 4,353 6,951 8,114 3,538 4,989
Charge related to products - 4,100 - - -
Charge related to research collaboration - - - 2,202 2,202 2,202 -
Charge related to product recall - - - - - - 2,645
-------- -------- -------- -------- -------- -------- ---------
Total operating costs and expenses 11,131 21,533 26,591 40,520 43,581 19,240 23,135
-------- -------- -------- -------- -------- -------- ---------
Loss from operations (10,693) (3,634) (10,748) (6,765) (9,651) (7,173) (2,641)
Interest income (expense), net (146) (491) (952) (279) (151) (738) 228
Discount on customer advance, net - - - 644 644 - (140)
-------- -------- -------- -------- -------- -------- ---------
Total interest, net (146) (491) (952) 365 493 (738) 88
-------- -------- -------- -------- -------- -------- ---------
Net loss $(10,839) $ (4,125) $(11,700) $ (6,400) $ (9,158) $ (7,911) $ (2,553)
======== ======== ======== ======== ======== ======== =========
Basic and diluted net loss per share $ (3.63) $ (0.84) $ (1.62) $ (0.61) $ (0.54) $ (0.91) $ (0.21)
======== ======== ======== ======== ======== ======== =========
Weighted average shares used in
calculation of basic and
diluted net loss per share 2,982 4,897 7,241 10,454 16,867 8,738 12,421
<CAPTION>
Pro Forma
Combined
Twenty-Six
weeks
Ended
July 3, 1999
------------
(Unaudited)
<S> <C>
Statement of Operations Data:
Revenues:
Product sales $ 20,544
Licensing fee -
----------
Total revenue 20,544
----------
Costs and expenses:
Cost of sales 11,386
Research and development, net 5,517
Selling, general and administrative 5,662
Charge related to products -
Charge related to research collaboration -
Charge related to related to all 2,645
----------
Total operating costs and expenses 25,210
----------
Loss from operations (4,666)
Interest income (expense), net 228
Discount on customer advance, net (140)
----------
Total interest, net 148
----------
Net loss $ (4,518)
==========
Basic and diluted net loss per share $ (0.24)
==========
Weighted average shares used in
calculation of basic and
diluted net loss per share 18,834
</TABLE>
I-7
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Combined
December 31, January 2, July 3, July 3,
1995 1996 1997 1999 1999 1999
-------- -------- -------- -------- -------- ---------
(Unaudited) (Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 3,310 $ 4,752 $ 5,250 $ 35,265 $ 27,470 $ 28,127
Working capital (deficit) (1,594) (4,314) (2,775) 33,102 25,680 26,462
Total assets 23,242 37,626 38,167 75,225 72,535 80,084
Long-term obligations, less current portion 8,488 12,681 15,318 11,055 8,339 8,719
Stockholders' equity 8,632 8,905 11,678 53,635 51,348 56,590
</TABLE>
I-8
<PAGE>
Selected Historical Financial Data of Pentose
The following statement of operations data for the period from June 8, 1995
(date of inception) through December 31, 1995 and for each of the years ended
December 31, 1996 through December 31, 1998 and the selected balance sheet data
as of December 31, 1996, 1997 and 1998 has been derived from Pentose's audited
financial statements. This information is only a summary and you should read it
together with Pentose's historical financial statements and related notes
contained elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
June 8, 1995
(date of Cumulative
inception) from inception
through Six Months Six Months (June 8, 1995)
December 31, Years Ended December 31, Ended Ended through
1995 1996 1997 1998 June 30, 1998 June 30, 1999 June 30, 1999
---- ------- ------- ------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ - $ - $ - $ 425 $ 75 $ 300 $ 725
------ ------ ------- ------- --------- ------- -------
Costs and expenses:
Research and development 10 189 1,285 3,336 1,286 2,143 6,963
Selling, general and administrative 40 150 849 1,163 502 673 2,875
------ ------ ------- ------- --------- ------- -------
Total operating costs and expenses 50 339 2,134 4,499 1,788 2,816 9,838
------ ------ ------- ------- --------- ------- -------
Loss from operations (50) (339) (2,134) (4,074) (1,713) (2,516) (9,113)
Interest income (expense), net (2) 60 111 133 14 64 366
Other - - (10) (4) (2) (4) (18)
------ ------ ------- ------- --------- ------- -------
Total other income, net (2) 60 101 129 12 60 348
------ ------ ------- ------- --------- ------- -------
Net loss $ (52) $ (279) $(2,033) $(3,945) $ (1,701) $(2,456) $(8,765)
====== ====== ======= ======= ========= ======= =======
Basic and diluted net loss per share $(0.01) $(0.07) $ (0.52) $ (1.01) $ (0.44) $ (0.63)
====== ====== ======= ======= ========= =======
Weighted average shares used in
calculation of basic and diluted
net loss per share 4,363 4,128 3,896 3,896 3,896 3,896
</TABLE>
<TABLE>
<CAPTION>
December 31, June 30,
------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
marketable securities $134 $4,202 $ 2,265 $ 5,276 $ 2,575
Working capital (deficit) (47) 4,121 1,891 4,835 2,282
Total assets 141 4,208 2,776 5,942 3,464
Long-term obligations, less current portion - - 260 345 380
Redeemable convertible preferred stock - 4,451 4,459 11,500 11,500
Stockholders' equity (deficit) (47) (330) (2,372) (6,387) (8,843)
</TABLE>
I-9
<PAGE>
Comparative Per Share Data
We are providing the following comparative per share information to aid you
in your analysis of the financial aspects of the merger. You should read this
information in conjunction with the historical financial statements and pro
forma combined financial statements of VITEX and Pentose and the related notes
that are included elsewhere in this Joint Proxy Statement/Prospectus. The pro
forma combined per share data presented below reflects the purchase method of
accounting for business combinations. The results may have been different if
the companies had always been combined. VITEX has a fiscal year ending on the
Saturday closest to December 31, and Pentose has a fiscal year ending December
31. The Pentose pro forma equivalent per share data equals an estimated
exchange ratio of .5965 multiplied by the VITEX pro forma combined per share
data (the final exchange ratio will be determined by dividing (1) the number of
shares of VITEX Common Stock which will equal 34% of the outstanding shares of
VITEX common stock (giving effect to the issuance of shares of such stock
pursuant to the merger) by (2) the number of issued and outstanding shares of
Pentose capital stock as of the effective date). For purposes of providing the
information in this Joint Proxy Statement/Prospectus the exchange ratio of .5965
was calculated based on the number of shares of VITEX common stock as of
September 1, 1999. The Pentose historical book value per share set forth below
assumes the conversion of 6,856,903 shares of redeemable convertible preferred
stock into 6,856,903 shares of Pentose common stock. The pro forma per share
data are not necessarily indicative of the results that would have occurred,
your financial interest in such results, or the future results that will occur
after the merger. See "VITEX Selected Pro Forma Combined Financial Data."
<TABLE>
<CAPTION>
Pro Forma
VITEX Pentose Pro Forma VITEX Pentose Combined
Year Year Combined Twenty-six Six Months Twenty-six
Ended Ended Year Ended Weeks Ended Ended Weeks Ended
January 2, December 31, January 2, July 3, June 30, July 3,
1999 1998 1999 1999 1999 1999
----------- ------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net loss per common share - basic and diluted $(0.61) $(1.01) $(0.54) $(0.21) $(0.63) $(0.24)
Book value per share $ 4.33 $ 1.64 $ 4.13 $(2.26) $ 3.00
Pentose pro forma equivalent - net loss
per common share - basic and diluted $(0.32) $(0.14)
Pentose pro forma equivalent - book value per share $ 1.79
</TABLE>
I-10
<PAGE>
Chapter One - The Merger
RISK FACTORS
You should consider the following risk factors in determining how to vote at the
your stockholders' meeting.
THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS RELATE TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF
VITEX. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "PLANS", "ANTICIPATES",
"BELIEVES", "ESTIMATED", "PREDICTS", "POTENTIAL", OR "CONTINUE" OR THE NEGATIVE
OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ONLY REFLECT
MANAGEMENT'S EXPECTATIONS AND ESTIMATES. ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER
VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED BELOW. THESE FACTORS MAY CAUSE
OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS. WE
ARE NOT UNDERTAKING ANY OBLIGATIONS TO UPDATE ANY FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS TO REFLECT ANY FUTURE EVENTS
OR DEVELOPMENTS.
THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY THE PENTOSE STOCKHOLDERS
AND VITEX STOCKHOLDERS IN EVALUATING WHETHER TO ADOPT THE MERGER AGREEMENT AND
APPROVE THE MERGER. THESE FACTORS SHOULD BE CONSIDERED IN CONJUNCTION WITH ANY
OTHER INFORMATION INCLUDED OR INCORPORATED BY REFERENCE HEREIN, INCLUDING IN
CONJUNCTION WITH FORWARD-LOOKING STATEMENTS MADE HEREIN. SEE "WHERE YOU CAN
FIND MORE INFORMATION" ON PAGE VIII-1.
RISKS RELATING TO THE MERGER
The ability of VITEX and Pentose to successfully integrate their businesses is
uncertain
After the merger, VITEX and Pentose, each of which previously operated
independently, will have to integrate their operations. The integration will
require significant efforts from each company, including the coordination of
their research and development. VITEX may find it difficult to integrate the
operations of Pentose. The expected efficiencies and cost savings of
consolidating of research and development, marketing and development personnel
and for research facilities may not be realized. The combination of VITEX and
Pentose research and development organizations may result in greater competition
for resources and elimination of development programs that might otherwise be
successfully completed. VITEX management may have their attention diverted
while trying to integrate the two companies, one of which is located in
Melville, New York and one of which is located in Cambridge, Massachusetts.
Such diversion of management's attention or difficulties in the transition
process could have an adverse impact on VITEX. If VITEX is not able to
successfully integrate the operations of Pentose, VITEX's expectations of its
future results of operations may not be met.
Failure to achieve beneficial synergies could result in decreased income and
increased operating costs
VITEX and Pentose have entered into the merger agreement with the
expectation that the merger will result in beneficial synergies. Achieving
these anticipated synergies and the potential benefits underlying the two
companies' reasons for the merger will depend on a number of factors, some of
which include:
. integration of research and development efforts;
. retention of scientific staff;
. reduction of operating expenses due to consolidation of operations;
. the ability of the combined company to increase sales of VITEX's
products including those developed from the Pentose technology;
. competitive factors, including technological advances attained by
competitors and patents granted to or contested by competitors, which
would result in competitors' ability to compete against the combined
companies more effectively;
I-11
<PAGE>
. significant litigation adverse to Pentose and VITEX, including,
particularly, product liability litigation and patent and trademark
litigation; and
. the ability of the combined company to continue development of VITEX and
Pentose products.
Even if the two companies are able to integrate operations, there can be no
assurance that the anticipated synergies will be achieved. The failure to
achieve such synergies could have a material adverse effect on the business,
results of operations and financial condition of the combined company.
The value of the shares of VITEX common stock to be received is not fixed and
may decline from its current value
The number of shares of VITEX common stock to be issued in the merger is
fixed and each stockholder of Pentose will receive a fixed number of shares of
VITEX common stock in exchange for their Pentose common stock and preferred
stock in the merger. However, because VITEX common stock is publicly traded,
the value of a share of VITEX common stock may change on a daily basis.
Therefore, the value of the shares of VITEX common stock each Pentose
stockholder is to receive in the merger may decline from the value as of the
date of the Joint Proxy Statement/Prospectus. Consequently, at the time of your
stockholders' meeting, you will not know the exact value of the VITEX common
stock Pentose stockholders will receive when the merger is completed.
Pentose stockholders will have reduced ownership and voting interests after the
merger
After the merger's completion, Pentose stockholders will own a
significantly smaller percentage of VITEX than they currently hold of Pentose.
Consequently, they may be able to exercise less influence over the management
and policies of VITEX than they currently exercise over Pentose.
Substantial sales of VITEX common stock could adversely affect its market price
VITEX cannot predict the effect, if any, that future sales of shares of
VITEX common stock or the availability of such shares for future sale will have
on its market price from time to time. Although certain of Pentose's
stockholders will enter into agreements restricting sales of VITEX common stock
for a period of one year following the merger, sales of substantial amounts of
VITEX common stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the stock.
RISKS RELATING TO VITEX AND PENTOSE AS A COMBINED COMPANY
Failure to develop new products and systems could impair VITEX's business
The success of VITEX's business following the merger will depend on the
development and commercialization of its virally inactivated product candidates
and viral inactivation systems, including products based on Pentose's INACTINE
technology. At the time of the merger, Pentose will have no FDA-approved
products and will not have generated any revenues from the sale of products. On
May 6, 1998, VITEX received FDA approval to market its pooled virally
inactivated transfusion plasma product, PLAS+SD. Although end-customer sales of
PLAS+SD by the American National Red Cross (the "Red Cross") have increased
since the product was introduced, end-user market penetration has increased at a
slower rate than anticipated. See " - VITEX's market share depends on new
product introductions and acceptance." VITEX's other virally inactivated blood
product candidates are under development and have not been approved by the FDA
for marketing in the United States or by regulatory authorities for marketing in
other countries. VITEX's product candidates and systems may not be successfully
developed and, if developed, they may not generate revenues and profits. Due to
uncertainties that are part of the development process, many of the product
candidates that VITEX tries to develop will not be completed. VITEX may choose
product candidates that will not be successful, VITEX may not be able to execute
development in a timely manner and VITEX may not be able to fully fund programs
necessary to complete development. Successful commercialization of VITEX's
product candidates and systems under development depends, in significant part,
on VITEX's ability to:
. complete their development in a timely fashion;
. obtain and maintain patents or other proprietary protections;
I-12
<PAGE>
. obtain required regulatory approvals;
. implement and maintain efficient, commercial-scale manufacturing
processes;
. gain early entry into relevant markets;
. obtain reimbursement for sales of its products;
. establish and maintain sales, marketing, distribution and development
collaborations; and
. demonstrate the competitiveness of VITEX's products and systems.
Failure to receive government approvals for new products could impair growth
All of VITEX's product candidates are subject to extensive regulation by
the federal government, principally the FDA, and state, local and non-U.S.
governments. Such regulation governs, among other things, the development,
testing, manufacturing, labeling, storage, marketing approval, advertising,
promotion, sale and distribution of such products. The process of obtaining
regulatory approvals is generally lengthy, expensive and uncertain.
Satisfaction of regulatory requirements of the FDA, or similar requirements of
non-U.S. regulatory agencies, typically takes several years, depending upon the
type, complexity, novelty and intended purpose of the product.
The effect of this governmental regulation on the development of products
includes:
. The regulatory process includes pre-clinical studies and clinical trials
of each product to establish its safety and efficacy, and may include
post-marketing studies that require expenditure of substantial
resources.
. The results from pre-clinical studies and early clinical trials
conducted by VITEX may not be predictive of results obtained in later
clinical trials, and there can be no assurance that clinical trials
conducted by VITEX will demonstrate sufficient safety and efficacy to
obtain marketing approvals.
. The rate of completion of VITEX's clinical trials may be delayed by many
factors, including slower than anticipated patient enrollment or adverse
events occurring during the clinical trials.
. Data obtained from pre-clinical and clinical activities are susceptible
to varying interpretations, which could delay, limit or prevent
regulatory approval. In addition, delays or rejections may be
encountered based upon many factors, including changes in regulatory
policy during the period of product development.
. VITEX's clinical development plan for its cellular products assumes that
only data from in vitro studies, not from clinical trials, will be
required to demonstrate efficacy in inactivating viruses and that
clinical trials for these products will instead focus on demonstrating
therapeutic efficacy, safety and tolerability of blood components
treated with the system.
. Although VITEX has had discussions with the FDA concerning VITEX's
proposed clinical plan for its product candidates, there can be no
assurance that this plan of demonstrating safety and efficacy will
ultimately be acceptable to the FDA or that the FDA will continue to
believe that this clinical plan is appropriate.
. No assurance can be given that any of VITEX's development programs will
be successfully completed or that the proposed schedules for filing
investigational new drug applications with the FDA and initiating and
completing clinical studies will be maintained, or that required United
States or non-U.S. regulatory approvals will be obtained on a timely
basis, if at all, or that any products for which approval is obtained
will be commercially successful. See "- VITEX's market share depends on
new product introductions and acceptance."
VITEX's market share depends on new product introductions and acceptance
Market acceptance of VITEX's products and systems will largely depend on
VITEX's ability to convincingly demonstrate their safety, efficacy and cost-
effectiveness. VITEX will need to convince patients, doctors, health care
providers, blood centers and other participants in the blood products market
that the increased cost of VITEX's virally
I-13
<PAGE>
inactivated plasma and, if successfully developed and approved for marketing,
VITEX's other virally inactivated blood products, as compared to widely used,
lower priced, corresponding blood products that have not been virally
inactivated, is justified. Although end-customer sales of PLAS+SD by the Red
Cross have increased since the product was introduced, end-user market
penetration has increased at a slower rate than anticipated.
During Phase IV safety studies following the commercial introduction of
PLAS+SD, VITEX observed several seroconversions to parvovirus B19 in healthy
volunteers who received the product from two production lots which were found to
contain high concentrations of the virus. Although there was no evidence of
clinical disease typical of parvovirus B19 associated with these
seroconversions, on April 16, 1999, VITEX initiated a voluntary recall of 37
lots of PLAS+SD which were found to contain moderate to high levels of
parvovirus B19 DNA. The recall was completed on May 12, 1999.
VITEX depends on strategic collaborators and distribution agreements for sales
of products
VITEX is dependent on strategic collaborators for sales, marketing and
distribution support as well as the development of products and product
candidates. VITEX entered into:
. an agreement with Bayer Corporation ("Bayer") to process plasma
fractions from plasma supplied by Bayer;
. an agreement with the Red Cross for the distribution of VITEX's virally
inactivated plasma;
. an agreement with United States Surgical Corporation ("U.S. Surgical")
for the sale, marketing and distribution of VITEX's virally inactivated
fibrin sealant, if and when approved for marketing; and
. an agreement with Pall Corporation ("Pall") for the development, sale,
marketing and distribution of any system incorporating VITEX's viral
inactivation technology for red blood cell concentrates and platelets.
In addition, as part of the merger, VITEX will assume all of Pentose's rights
and obligations under Pentose's agreements with Cangene Corporation to assess
and develop the use of INACTINE compounds in viral inactivation used in the
manufacture of Cangene's hyperimmune products. Although VITEX established its
own national sales force in December of 1998 to support the efforts of its
partners, the success of VITEX depends, to a large extent, upon its ability to
develop and deliver products to Bayer, the Red Cross, U.S. Surgical, Pall and,
other potential strategic collaborators.
Reliance on such collaborators subjects VITEX to the following risks:
. Collaborators may be unable to satisfy minimum purchase requirements or
achieve projected sales levels under VITEX's collaborative agreements.
This could result in the termination of such agreements, causing a
material adverse effect on VITEX's business, financial condition and
results of operations.
. VITEX may need to seek new collaborators or alliances to sell and
distribute future products or to establish its own direct
commercialization capabilities, which is a costly and time-consuming
process. There is no guarantee that any agreements with new
collaborators will be favorable to VITEX or that such collaborations
will be successful.
. Most collaborative agreements require VITEX to meet certain research and
development and commercialization milestones. The failure to meet
milestones could have a material adverse effect on VITEX's receipt of
funding and revenues under the agreement and the continuation of the
agreement. The failure to maintain existing strategic alliances for
whatever reason and to secure new alliances would delay the
commercialization of existing and future products.
Manufacturing failures could seriously disrupt VITEX's business
Following the merger, VITEX will continue to operate a single manufacturing
facility. Any catastrophic event that interrupts production at this facility
would reduce revenues and would harm VITEX's collaborations. In August 1996,
VITEX experienced a malfunction in its fractionation equipment that resulted in
VITEX incurring expenses of $5.1 million, consisting of $4.1 million in
replacement costs of Bayer's plasma and $1.0 million of unrecoverable processing
costs. There can be no assurance that VITEX's fractionation equipment will not
malfunction in the future, resulting in additional unanticipated costs. In
addition, to achieve the level of production of PLAS+SD required under VITEX's
agreement with the Red Cross, VITEX must operate its single, highly customized
filling machine for extended periods without interruption.
I-14
<PAGE>
Any significant damage to, or malfunction of, this filling machine that cannot
be repaired would require VITEX to replace the machine. The construction of a
replacement machine could take as long as 18 months.
VITEX's industry is highly competitive and subject to rapid technological change
The fields of transfusion medicine and therapeutic use of blood products
are characterized by rapid technological change. Accordingly, VITEX's success
will depend, in part, on its ability to respond quickly to such change through
the development and introduction of new products and systems. Product and
system development involves a high degree of risk, and there can be no assurance
that VITEX's product and system development efforts will result in any
commercial successes.
Technological developments by others may result in VITEX's products
becoming obsolete or non-competitive before VITEX is able to generate any
significant revenue.
VITEX expects that all of its products and systems will encounter
significant competition. Any such product or system will compete with current
approaches to blood safety, including screening, donor retesting and autologous
(i.e., self) donations, as well as with future products and systems developed by
medical technology, biopharmaceutical and hospital supply companies, national
and regional blood centers, or certain governmental organizations and agencies.
Many companies and organizations that may be competitors or potential
competitors have substantially greater financial and other resources than VITEX
and may have more experience in conducting pre-clinical studies and clinical
trials and obtaining regulatory approvals.
Potential product liability claims could adversely affect VITEX's earnings and
financial condition
VITEX's operations will expose it to the risk of product liability claims
which may result in losses due to any such claims. VITEX maintains product
liability insurance coverage, but there can be no assurance that VITEX's product
liability insurance will continue to be available to VITEX on a cost-effective
basis and that such insurance will be adequate to cover any or all potential
claims. In the event that a claim is brought against VITEX, liability for
damages beyond the extent of coverage under the insurance policy combined with
the expense of litigating such claim could have a material adverse effect upon
VITEX's business, financial condition and results of operations.
VITEX's failure to continue to hire and retain qualified technical personnel
could hurt its business
VITEX's success and competitive position is dependent upon its ability to
recruit and retain its scientific, managerial and technical staff. Dr. Samuel
K. Ackerman, the President, Chief Executive Officer and founder of Pentose, will
serve as Executive Vice President of VITEX following the merger and will be
responsible for directing VITEX's research and development activities. Dr. John
Chapman, currently Vice President, Blood Products Research of Pentose, will
serve as Vice President, Blood Products Research for the combined company. The
loss of the services of either of these individuals could have a material
adverse effect on VITEX's business, financial condition and results of
operations.
VITEX's proprietary technologies and patents could affect its ability to compete
VITEX's success depends, in part, on its ability to develop proprietary
products and technologies, to obtain and maintain patents, to protect its trade
secrets, to operate without infringing upon the proprietary rights of others and
to prevent others from infringing on the proprietary rights of VITEX.
VITEX has exclusive licenses to patents and patent applications covering
critical components of its viral inactivation technologies. There can be no
assurance that any patents owned by or licensed to VITEX will afford protection
against competitors or that any pending patent applications now or hereafter
filed by or licensed to VITEX will result in patents being issued.
The laws of certain non-U.S. countries do not protect VITEX's intellectual
property rights to the same extent as do the laws of the United States. Medical
technology patents involve complex legal and factual questions and, therefore,
their enforceability cannot be predicted with certainty.
VITEX's patents or patent applications, if issued, may be challenged,
invalidated or circumvented, and the rights granted thereunder may not provide
proprietary protection or competitive advantages to VITEX against competitors
with similar technology. VITEX's competitors may obtain patent protection or
other intellectual property rights that would limit VITEX's ability to use its
technology or commercialize products that may be developed. VITEX's planned or
potential
I-15
<PAGE>
products may be covered by third-party patents or other intellectual property
rights, in which case continued development and marketing of such products would
require a license under such patents or other intellectual property rights.
There can be no assurance that such required licenses will be available to VITEX
on acceptable terms, if at all. Litigation may be necessary to defend against or
assert such claims of infringement, to enforce patents issued to VITEX, to
protect trade secrets or know-how owned by VITEX or to determine the scope and
validity of the proprietary rights of others. Litigation or interference
proceedings could result in substantial costs and diversion of management focus.
Third-party reimbursement policies may limit reimbursement for use of VITEX's
products and thus may limit demand for such products
Successful commercialization of VITEX's products is, in part, dependent on
the reimbursement policies of third-party payers for the costs of VITEX's
products. Failure by doctors, hospitals and other users of VITEX's products or
systems to obtain reimbursement from managed care organizations, private health
insurers, government authorities and other medical cost reimbursement channels
could adversely affect VITEX's ability to sell its products and systems.
Certain existing stockholders of VITEX will continue to control VITEX's common
stock
Prior to the merger, VITEX's directors and executive officers and their
respective affiliates controlled a majority of the outstanding common stock of
VITEX. Certain affiliates of VITEX also controlled a majority of the
outstanding common stock of Pentose prior to the merger. See "-- Interests of
certain persons in the merger." As a result of these relationships, the
directors and executive officers and their respective affiliates will continue
to control a majority of the outstanding common stock of VITEX following the
merger. Accordingly, these stockholders will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying, preventing or
deterring a change in control of VITEX.
VITEX's stock price is very volatile
VITEX's stock price, like that of other companies in its industry, is
subject to significant volatility. The stock price may be affected by, among
other things, clinical trial results and other product development related
announcements by VITEX or its competitors, regulatory matters, announcements in
the scientific and research community, intellectual property and legal matters,
changes in reimbursement policies or medical practices or broader industry and
market trends unrelated to VITEX's performance. In addition, if revenues or
earnings in any period fail to meet the investment community's expectations,
there could be an immediate adverse impact on VITEX's stock price.
Year 2000 complications may disrupt VITEX's operations and harm its business
Many currently installed computer systems are not capable of distinguishing
21/st/ century dates from 20/th/ century dates. As a result, in a few months
computer systems and software used by many companies will experience operating
difficulties unless they are modified or upgraded to adequately process
information involving the century change. VITEX is heavily dependent upon the
proper functioning of its own computer and data-dependent systems. VITEX cannot
assure you that VITEX will successfully identify and address all Year 2000
issues. Even if VITEX acts in a timely manner to complete all of its
assessments and identify, develop and implement remediation plans believed to be
adequate, some problems may not be identified or corrected in time to prevent
material adverse consequences to VITEX's business. See "Chapter Three - Other
Information Regarding VITEX - VITEX's Management's Discussion and Analysis of
Financial Condition and Results of Operations."
I-16
<PAGE>
FORWARD LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains certain statements that
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934. All statements other than statements of historical information provided
herein are forward-looking statements and may contain information about
financial results, economic conditions, trends and known uncertainties. These
forward-looking statements are subject to risks and uncertainties, including,
without limitation, quarterly fluctuations in operating results, the timely
availability of new products, market acceptance of VITEX's products, and the
impacts of competitive products and pricing and other factors set forth above
under the heading, "Risk Factors." These risks and uncertainties could cause
actual results to differ materially from those reflected in the forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-
looking statements, which reflect management's analysis, judgment, belief or
expectation only as of the date hereof. VITEX undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
I-17
<PAGE>
THE MERGER TRANSACTION
General
VITEX's Board is using this Joint Proxy Statement/Prospectus to solicit
proxies from the holders of VITEX common stock for use at the VITEX meeting.
Pentose's Board is also using this document to solicit proxies from the holders
of Pentose common stock and Pentose preferred stock for use at the Pentose
meeting.
VITEX Proposals
At the VITEX meeting, holders of VITEX common stock will be asked to vote
upon:
(1) approval of the Agreement and Plan of Merger and Reorganization
dated as of July 28, 1999 among VITEX, Pentose and certain Pentose
stockholders, including the related issuance of VITEX common stock;
(2) adoption of the 1999 Supplemental Stock Option Plan as described
under "Other VITEX Special Meeting Proposals" in Chapter Six of this
booklet; and
(3) approval of the amendment of VITEX's certificate of incorporation
to increase the number of authorized shares of VITEX common stock from
29,000,000 to 35,000,000.
Pentose Proposal
At the Pentose meeting, holders of Pentose common stock and Pentose
preferred stock will be asked to vote upon the approval and adoption of the
aforementioned merger agreement and the merger.
Background of the Merger
Beginning in February of 1998, VITEX and Pentose began a series of
discussions on potential technical and business collaborations. A joint decision
at that time was made to focus on the use of the Pentose INACTINE technology as
a complementary viral inactivation step for use in PLAS+SD, VITEX's FDA-approved
virally inactivated plasma blood product. A series of discussions in March and
April of 1998 led to agreement on a basic set of terms and conditions for an
agreement for the development and commercialization of INACTINEs as a second
viral inactivation step.
Informal discussions on a potential merger with Pentose were briefly held
by the VITEX Board of Directors at its July 26, 1998 Board meeting but such a
transaction was not pursued at that time due to the ongoing plasma collaboration
discussions as well as to allow VITEX's scientific and technical personnel to
evaluate the technical merits of the Pentose technology for other transfusion
products such as red cells and platelets.
On October 2, 1998, VITEX and Pentose signed the agreement for the
development and commercialization of INACTINEs as a second viral inactivation
step. That agreement was structured as an option agreement to license certain
technology and required a series of payments by VITEX tied to progress through
the various stages of commercialization.
Beginning in October 1998, Pentose and VITEX scientists initiated a series
of monthly meetings to review progress in jointly developing INACTINEs for use
in transfusion plasma.
Between October 19, 1998 and December 13,1998, various proposals were
developed by Pentose for a licensing and development agreement for red cells and
platelets similar to the agreement in place for plasma. The terms were not
thought to be attractive by VITEX management and no immediate follow-up
occurred.
Pentose throughout this time continued to make progress with their red cell
program. In November 1998, Pentose had a promising meeting with the FDA in
preparation for the filing of an IND for use of INACTINEs in the viral
inactivation of red blood cells. The FDA agreed on the Pentose approach to the
design of the clinical trial, the testing required prior to entering clinical
trials and the information needed by the FDA to approve the commencement of
clinical trials.
In parallel, VITEX scientists, through the plasma collaboration with
Pentose, developed a better understanding of the potential of Pentose's INACTINE
technology for viral inactivation of plasma and red cells.
I-18
<PAGE>
On February 5, 1999, at a regularly scheduled VITEX Board meeting, the
Board reviewed a memorandum prepared by John R. Barr, President and Chief
Executive Officer of VITEX. That memorandum recommended initiating formal
discussions with Pentose regarding a possible combination of VITEX and Pentose.
Damion E. Wicker, M.D., aVITEX Director and partner at Chase Capital Partners, a
VITEX stockholder, was directed by the Board to advise Mr. Barr and Thomas T.
Higgins, Chief Financial Officer and Executive Vice President of VITEX, on
potential deal terms. Messrs. Richard A. Charpie and Peter D. Parker, the VITEX
Board members representing Ampersand Ventures, a venture capital firm, the
affiliates of which own a majority equity interest in Pentose (the "Ampersand
Directors"), were recused from the discussions relating to the possible
combination.
On February 12, 23 and 24, 1999, proposals were exchanged between the two
companies on an alternative licensing arrangement for red cells and platelets.
The proposals were judged by the VITEX Board not to be economically attractive
as compared to a direct combination of the businesses, particularly in
combination with the plasma agreement already in place between the two
organizations.
On February 25, 1999, after extensive discussions among Messrs. Barr,
Higgins and Wicker, a formal offer to combine the two businesses was forwarded
to Pentose.
On March 5, 1999, Pentose responded via letter to the VITEX proposal.
Pentose indicated that although the VITEX offer merited serious discussion,
Pentose's position was that on the basis of the proposed terms the offer would
have to reward Pentose stockholders with a higher premium than indicated in the
VITEX proposal.
On March 10, 1999, VITEX responded via letter supporting its position that
existing capital market conditions would not support the Pentose view of
agreement terms, including pricing.
On March 13, 1999, Pentose responded to the VITEX letter and presented
counterarguments to support its position.
On March 16, 1999, Mr. Barr and Dr. Samuel K. Ackerman, President and Chief
Executive Officer of Pentose, met for dinner in Boston. Discussions continued
on potential deal structures and progress was made in moving both companies
closer to a common view on terms. Both Mr. Barr and Dr. Ackerman reaffirmed the
strategic advantages of combining the two companies.
On March 20, 1999, Pentose forwarded a counter proposal that addressed some
of the issues discussed at the March 16th dinner.
On March 24, 1999, VITEX formally responded with a revised proposal.
On March 25 through 27, 1999, VITEX reviewed with its accountants potential
deal structures. Based on a comprehensive analysis of financial, tax and
accounting considerations applicable to both VITEX and Pentose, it was
determined that a deal could not be structured so as to qualify as a pooling of
interests for accounting purposes.
From April 1 to April 8, 1999, representatives of VITEX and Pentose had
numerous phone discussions. The outcome of those discussions was a simplified
deal structure.
On April 9, 1999, the VITEX Board authorized Mr. Barr to negotiate and
execute a non-binding letter of intent with Pentose. The VITEX Directors
affiliated with Ampersand Ventures recused themselves from the discussion and
vote by the VITEX Board.
From April 9 to April 24, 1999, there were numerous phone conversations
between Pentose and VITEX to negotiate the terms of the non-binding letter of
intent. The letter of intent was signed by both parties on April 24, 1999.
From May 3 to May 20, 1999, both companies conducted extensive technical
and financial due diligence on the other. The due diligence included visits to
all Pentose and VITEX facilities, extensive documentation review, consultation
with outside technical experts and consultants and direct questioning of
management.
On May 21, 1999, at a regularly scheduled VITEX Board meeting, the Board
was briefed on the status of the due diligence and requested follow-up on
several items. The Ampersand Directors recused themselves from the discussion.
I-19
<PAGE>
From May 22 to June 6, 1999, Messrs. Higgins and Barr prepared multiple
analyses of alternative deal structures.
On June 7, 1999, a special VITEX Board meeting was held at the offices of
Chase Capital Partners. The Board agreed that the deal structure in the signed
letter of intent continued to represent the best alternative for VITEX. The
Board was updated on several technical issues from the due diligence on Pentose.
The Ampersand Directors recused themselves from the discussion.
On June 10, 1999, the VITEX Board conducted a conference call with members
of VITEX management to receive an update on the due diligence follow-up. The
Ampersand Directors recused themselves from the discussion.
On June 21, 1999, the VITEX Board conducted a conference call to receive an
update on the due diligence follow-up. Mr. Barr was authorized to begin
discussions with investment banks to provide a fairness opinion on the
transaction. The Ampersand Directors recused themselves from the discussion.
On June 28, 1999, the VITEX Board met by conference call. After an update
and review of the remaining due diligence issues, the Board voted to authorize
Mr. Barr to negotiate a definitive agreement with Pentose and report back on
progress. The Board authorized Mr. Barr to engage Warburg Dillon Read LLC for
purposes of obtaining an opinion that the financial terms of the proposed
transaction were fair to the VITEX stockholders. The Ampersand Directors were
recused from the discussion.
From June 28 until July 26, 1999, numerous discussions were held by and
among representatives of Pentose and VITEX, and their respective advisors and
legal counsel, to reach agreement on terms of the merger. VITEX and Pentose
provided information to Warburg Dillon Read LLC required for the fairness
opinion. VITEX continued its due diligence review of Pentose.
On July 26, 1999, VITEX held a Board meeting to consider and vote on the
proposed merger agreement and related transactions. At this meeting,
representatives of Warburg Dillon Read LLC presented to the VITEX Board their
opinion on the fairness of the exchange ratio, from a financial point of view,
to VITEX. VITEX management reported on the results of the due diligence of
Pentose. Additionally, VITEX's outside counsel reviewed the VITEX board's
responsibilities in considering the proposed transaction, the significant terms
of the merger agreement and the results of legal due diligence. Following such
presentations and further discussion, the execution of such documents and
related matters were approved by the VITEX Board.
The Pentose Board members generally considered the merger and related
issues in informal discussions throughout the period described above and
approved the merger by written consent dated July 28, 1999.
Following the respective Board approvals, the merger agreement was
finalized and executed by each of the parties. The terms of the merger were
announced in a joint press release that was issued after the close of the Nasdaq
Stock Market on July 28, 1999.
Joint Reasons for the Merger
The VITEX board and Pentose board each believe the combined company after
the merger will have the potential for greater financial strength, research and
development productivity, product development and subsequent earning power and
financial growth than either VITEX or Pentose would have on its own. The VITEX
board and Pentose board identified a number of potential benefits to the merger
which they believe could contribute to the success of the combined company and
thus inure to the benefit of stockholders of VITEX, including the following:
. The addition of a platform technology - INACTINEs - that has
demonstrated compatibility with red cells in pre-clinical studies
accompanied with a broad spectrum of viral inactivation. When combined
with VITEX's solvent detergent technology the combined company will
have viral technologies that address all key blood components.
. A more rapid path to commercialization for the red cell viral
inactivation technology than VITEX's current approach for viral
inactivation of red cells. Analysts have identified red cell viral
inactivation as the largest potential market for the technology.
I-20
<PAGE>
. A simpler path to red cell inactivation. The Pentose technology uses a
chemistry that will be easier to package for VITEX and easier for
customers to adopt than VITEX's current approach for viral
inactivation of red cells. The simplicity could result in lower costs
for VITEX.
. A technology platform for viral inactivation of other blood
components. This includes the use of INACTINEs with VITEX's solvent
detergent method for plasma. The INACTINE technology could also be
used as a viral inactivation technology for platelets. With success in
plasma, additional licensing and revenue opportunities may be
available for VITEX for the use of INACTINEs as a viral inactivation
step in the manufacture of plasma derivatives.
. A stronger research and development team in the combined company and
the ability to create operational efficiencies as the two
organizations combine and scale back research efforts in non-core
technologies.
. VITEX believes it can increase economic benefits from collaborations
already in place with the American National Red Cross and Pall
Corporation. VITEX management believes that successful
commercialization of the INACTINE technology for red cells and
platelets will potentially provide additional products for Pall
Corporation and the American National Red Cross to sell on behalf of
VITEX and that the availability of virally-inactivated versions of all
three blood components will establish viral inactivation as a standard
of care and increase the rate of conversion from untreated products.
VITEX also expects that because INACTINEs are easier to manufacture
than VITEX's current red cell and platelet product candidates, use of
this technology will reduce the manufacturing cost of goods and
improve the profitability of VITEX's red cell and platelet products.
. The broadening of the VITEX product line resulting in avoiding
excessive dependence on any particular product or technology platform.
VITEX's Senior Management Team
The VITEX senior management team is expected to consist of the three
individuals named below after the merger.
John R. Barr Chief Executive Officer and President
Thomas T. Higgins Chief Financial Officer and Executive
Vice President, Operations
Dr. Samuel K. Ackerman Executive Vice President
Mr. Barr and Dr. Ackerman will also serve on the Board of Directors of
VITEX.
Factors Considered by, and Recommendation of, the VITEX Board:
At a meeting of the VITEX Board held on July 26, 1999, after due
consideration, the VITEX Board:
(1) determined that the merger agreement, the merger, the amendment to
VITEX's charter and the related transactions are fair to and in the best
interests of VITEX and its stockholders,
(2) approved the merger agreement, the merger, the charter amendment and
the related transactions, and
(3) determined to recommend that the stockholders of VITEX approve the
merger, including the issuance of VITEX common stock in the merger, and the
charter amendment. Accordingly, the VITEX Board recommends that the VITEX
stockholders vote "FOR" the approval of the merger, including the issuance
of VITEX common stock in the merger, and the charter amendment.
In approving the transaction and making these recommendations considered at
Board meetings held between February 5 and July 26, 1999, the VITEX Board
consulted with VITEX's management as well as its outside legal counsel and
financial advisor, and considered the following material factors:
(1) all the reasons described in "Joint Reasons for the Merger" above;
(2) the possibility, as alternatives to the merger, of pursuing an
acquisition of or a business combination or joint venture with an entity
other than Pentose and the VITEX Board's conclusion that a transaction with
Pentose is more feasible, and is expected to yield greater benefits, than
the likely alternatives. The VITEX Board reached this
I-21
<PAGE>
conclusion for reasons including Pentose's interest in pursuing a
transaction with VITEX, VITEX's view that the transaction could be
acceptably completed from a timing and regulatory standpoint, and VITEX
management's assessment of the alternatives and the expected benefits of
the merger and compatibility of the companies as described above and
VITEX's Board's favorable conclusion regarding the strengths of the
INACTINE technology in inactivating viruses in red blood cells and how it
could enable VITEX to achieve its strategic objective of developing into
the market leader in viral inactivation technology;
(3) the fact that VITEX stockholders would participate in the potential
growth of the combined company as a result of their holding approximately
66% of the outstanding stock of the combined company after the merger;
(4) current industry, economic and market conditions, including the
difficulties which biomedical companies currently face in raising capital
in the public markets and trends toward consolidation among companies
having market capitalizations comparable to that of VITEX;
(5) comparisons of historical information concerning Pentose's business,
technology, financial performance and condition, management and competitive
position;
(6) the ability to complete the merger as a tax-free reorganization for
U.S. federal income tax purposes;
(7) the terms and conditions of the merger agreement, including the
conditions to closing and the termination fees payable under certain
circumstances (see " - The Merger Agreement - Conditions to the Completion
of the Merger" and "Termination of the Merger Agreement");
(8) the presentation of Warburg Dillon Read LLC, and Warburg Dillon Read
LLC's written opinion to the effect that, as of July 26, 1999, and based
upon and subject to the various considerations set forth in its opinion,
the consideration to be paid by VITEX in the merger was fair from a
financial point of view to VITEX;
(9) the role that VITEX's current management would play in the management
of the combined company and the composition of the combined company's Board
of Directors;
(10) the challenges of combining the businesses of the two corporations and
the risk of not achieving developmental synergies or expected cost servings
and other benefits and of directing management focus from other strategic
and operational matters; and
(11) that while the merger is likely to be completed, there are risks
associated with obtaining necessary approvals, and as a result of certain
conditions to the completion of the merger, it is possible that the merger
may not be completed (see " - The Merger Agreement - Conditions to the
Completion of the Merger").
In view of the wide variety of factors considered in connection with its
evaluation of the merger and the complexity of these matters, the VITEX Board
did not find it useful to and did not attempt to quantify, rank or otherwise
assign relative weights to these factors. In addition, the VITEX Board did not
undertake to make any specific determination as to whether any particular
factor, or any aspect of any particular factor, was favorable or unfavorable to
the VITEX Board's ultimate determination, but rather the VITEX Board conducted
an overall analysis of the factors described above, including thorough
discussions with and questioning of VITEX's management and legal, financial and
accounting advisors. In considering the factors described above, individual
members of the VITEX Board may have given different weight to different factors.
Factors Considered by, and Recommendation of, the Pentose Board
By a written consent dated July 28, 1999, the Pentose Board determined that
the merger agreement and the related transactions, including the merger, are
fair to and in the best interests of Pentose and Pentose's stockholders.
Accordingly, the Pentose Board has adopted the merger agreement, and recommends
that Pentose's stockholders vote "FOR" approval of the merger agreement and the
merger.
In the course of reaching its decision to adopt the merger agreement, the
Pentose Board consulted with Pentose's management, as well as its outside legal
counsel, and considered the following material factors:
(1) the risks and potential rewards associated with, as an alternative to
the merger, continuing to execute Pentose's strategic plan as an
independent entity. Such risks include, among others, the risks associated
with remaining
I-22
<PAGE>
independent amidst industry-wide consolidation, and such rewards include,
among others, the ability of existing Pentose stockholders to partake in
the potential future growth and profitability of Pentose;
(2) the possibility, as alternatives to the merger, of seeking to be
acquired by another company, seeking to engage in one or more joint
ventures or seeking to engage in a combination with a company other than
VITEX and the Pentose Board's conclusion that a transaction with VITEX is
more feasible, and is expected to yield greater benefits, than the likely
alternatives. The Pentose Board concluded that a combination with VITEX was
more feasible than the other alternatives it reviewed for reasons including
the fact that VITEX was interested in pursuing a transaction with Pentose,
and Pentose's view that the transaction could be acceptably completed from
a timing and regulatory standpoint, and would yield greater benefits than
the alternatives given VITEX's financial strength, and the ability of a
combined company to fund a greater number of long-term growth projects and
to compete effectively;
(3) the value of the exchange ratio provided for in the merger agreement
based on the then-current market price and historical trading price of
VITEX shares over the past year and relative to the stock price premiums
paid in mergers of comparable size that the premium offered in the merger
was within the range of premiums paid in comparable transactions, and that
Pentose's stockholders would hold approximately 34% of the outstanding
stock of the combined company after the merger;
(4) the prospects of Pentose to compete effectively in the future, the
prospects of VITEX based on its analysis of publicly available information,
and Pentose management's view, based on its due diligence, of VITEX's
prospects to compete effectively in the future;
(5) the ability to complete the merger as a tax-free reorganization for
U.S. federal income tax purposes;
(6) the terms and conditions of the merger agreement, which permit Pentose
generally to conduct its business in the ordinary course during that period
(see " - The Merger Agreement");
(7) that one of the Pentose Board's members would become as executive
officer and a director of VITEX, as described under "The Merger Agreement -
VITEX Board and Related Matters";
(8) the fact that while VITEX's corporate headquarters will remain in
Melville, New York, VITEX will maintain a research and development facility
in Cambridge, Massachusetts;
(9) that while the merger is likely to be completed, there are risks
associated with obtaining necessary approvals, and as a result of certain
conditions to the completion of the merger, it is possible that the merger
may not be completed (see " - The Merger Agreement - Conditions to the
Completion of the Merger");
(10) the interests that certain executive officers and directors of Pentose
may have with respect to the merger in addition to their interests as
stockholders of Pentose generally (see " - Interests of Certain Persons in
the Merger");
(11) the merger will enable Pentose stockholders to participate in, and
benefit from the future growth potential of, an integrated company with a
greater depth of technologies, marketing opportunities and financial and
operating resources which should enhance the ability to bring the INACTINE
technology to market;
(12) the public market for VITEX common stock will offer the Pentose
stockholders liquidity while avoiding the risk and investment in time and
expense of an initial public offering;
(13) the availability of stock options for the publicly traded VITEX stock
will enable the combined companies to attract high caliber employees and
consultants to continue the development of the INACTINE technology; and
(14) after the merger, the combined companies will be able to pursue
further acquisitions to strengthen their technology offerings using the
publicly traded VITEX common stock as all or part of the consideration.
In view of the wide variety of factors considered in connection with its
evaluation of the merger and the complexity of these matters, the Pentose Board
did not find it useful to and did not attempt to quantify, rank or otherwise
assign relative weights to these factors. In addition, the Pentose Board did
not undertake to make any specific determination as to whether any particular
factor, or any aspect of any particular factor, was favorable or unfavorable to
the Pentose Board's ultimate determination, but rather the Pentose Board
conducted an overall analysis of the factors described above, including thorough
I-23
<PAGE>
discussions with and questioning of Pentose's management and legal, financial
and accounting advisors. In considering the factors described above, individual
members of the Pentose Board may have given different weight to different
factors.
Accounting Treatment
The merger will be accounted for by VITEX under the purchase method of
accounting in accordance with generally accepted accounting principles.
Therefore, the aggregate consideration paid by VITEX in connection with the
merger, together with the direct costs of acquisition, will be allocated to
Pentose's tangible and intangible assets and liabilities based on their fair
market values and the fair value of in-process research and development
acquired. The results of operations of Pentose will be consolidated into the
results of operations of VITEX as of the effective date of the merger.
Material Federal Income Tax Consequences of the Merger
The following is a summary of the material federal income tax consequences
of the merger. This discussion is based upon the Internal Revenue Code of 1986,
as amended, the regulations promulgated under the Code, Internal Revenue Service
rulings, and judicial and administrative rulings in effect as of the date
hereof, all of which are subject to change, possibly with retroactive effect.
This discussion does not address all aspects of federal income taxation that may
be relevant to a stockholder in light of the stockholder's particular
circumstances or to those Pentose stockholders subject to special rules, such as
stockholders who are not citizens or residents of the United States, financial
institutions, tax-exempt organizations, insurance companies, dealers in
securities, stockholders who acquired their Pentose stock pursuant to the
exercise of options or similar derivative securities or otherwise as
compensation or stockholders who hold their Pentose stock as part of a straddle
or conversion transaction. This discussion assumes that Pentose stockholders
hold their respective shares of Pentose stock as capital assets within the
meaning of Section 1221 of the Code.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel to VITEX, and
Palmer & Dodge, LLP, counsel to Pentose, have each delivered an opinion that the
description of the federal income tax consequences of the merger contained in
this section fairly and accurately summarizes the material federal income tax
consequences of the merger. These tax opinions, which are attached as Exhibits
8.1 and 8.2 to the Registration Statement in which this Joint Proxy
Statement/Prospectus is included, are based on certain assumptions and subject
to certain limitations and qualifications, including the assumptions that the
merger will be consummated as described in this Joint Proxy Statement/Prospectus
and the merger agreement and that the factual representations contained in
letters delivered to counsel by VITEX and Pentose in connection with the tax
opinions are true, correct and complete as of the date of the tax opinions and
will remain true, correct and complete through the effective time of the merger.
An opinion of counsel only represents counsel's best judgment, and has no
binding effect or official status of any kind, and no assurance can be given
that contrary positions may not be taken by the IRS or a court considering the
issues. Neither VITEX nor Pentose has requested or will request a ruling from
the IRS with regard to any of the federal income tax consequences of the merger.
It is a condition to the obligations of Pentose and VITEX to complete the
merger that each receive a legal opinion from its counsel that the merger
constitutes a tax-free reorganization, within the meaning of Section 368 of the
Code, for federal income tax purposes. These legal opinions will assume the
absence of certain changes in the existing facts and may rely on assumptions,
representations and covenants made by Pentose, VITEX and others similar to those
set forth above with respect to the tax opinions attached as exhibits 8.1 and
8.2 to the Registration Statement.
Federal Income Tax Consequences to VITEX Stockholders. Holders of VITEX
stock will not recognize any gain or loss for federal income tax purposes as a
result of the merger.
Federal Income Tax Consequences to Pentose Stockholders. Except as
provided below, holders of shares of Pentose stock will (1) not recognize any
gain or loss for federal income tax purposes by reason of the exchange of their
shares of Pentose stock for VITEX stock in the merger except with respect to
cash received instead of a fractional share of VITEX common stock and (2) have a
tax basis in the VITEX stock received in the merger equal to the tax basis of
the Pentose stock surrendered in the merger less any tax basis of the Pentose
stock surrendered that is allocable to a fractional share of VITEX common stock
for which cash is received. The Pentose stockholders' holding period with
respect to the VITEX stock received in the merger will include the holding
period of the Pentose stock surrendered in the merger.
To the extent that a holder of shares of Pentose common stock receives cash
instead of a fractional share of VITEX common stock, the holder will be required
to recognize gain or loss for federal income tax purposes, measured by the
difference between the amount of cash received and the portion of the tax basis
of the holder's shares of Pentose common stock allocable to such fractional
share of VITEX common stock. This gain or loss will be a capital gain or loss
and will be a
I-24
<PAGE>
long-term capital gain or loss if the share of Pentose common stock exchanged
for the fractional share of VITEX common stock was held for more than one year
at the effective time of the merger.
Federal Income Tax Consequences to Pentose and VITEX. Neither VITEX nor
Pentose will recognize gain or loss for federal income tax purposes as a result
by reason of the merger.
WE INTEND THIS DISCUSSION TO PROVIDE ONLY A SUMMARY OF THE MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER. WE DO NOT INTEND THAT IT BE A COMPLETE
ANALYSIS OR DESCRIPTION OF ALL POTENTIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER. IN ADDITION, WE DO NOT ADDRESS TAX CONSEQUENCES WHICH MAY VARY WITH, OR
ARE CONTINGENT UPON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, WE DO NOT ADDRESS ANY
NON-INCOME TAX OR ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF THE MERGER.
ACCORDINGLY, WE STRONGLY URGE YOU TO CONSULT YOUR TAX ADVISOR TO DETERMINE YOUR
PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX
CONSEQUENCES RESULTING FROM THE MERGER, WITH RESPECT TO YOUR INDIVIDUAL
CIRCUMSTANCES.
Regulatory Approvals
Neither VITEX nor Pentose is aware of any government regulatory approvals
required to be obtained with respect to the consummation of the merger, except
for the filing of a certificate of merger with the office of the Secretary of
State of the State of Delaware, the filing with the Securities and Exchange
Commission of the Registration Statement on Form S-4 registering the merger
shares and of this Joint Proxy Statement/Prospectus which constitutes a part
thereof, and compliance with all applicable state securities laws regarding the
offering and issuance of the merger shares.
Appraisal Rights
Holders of VITEX common stock are not entitled to dissenters' appraisal
rights under Delaware law in connection with the merger. Holders of Pentose
common stock do have dissenters' appraisal rights under Delaware law in
connection with the merger. In order to validly exercise their dissenters'
appraisal rights under Delaware law, Pentose stockholders shall (1) file written
notice with Pentose prior to the Pentose special meeting of the stockholder's
intent to demand payment for fair value for such holder's shares and (2) not
vote such shares in favor of adoption of the merger, as more fully described in
"The Merger Agreement -- Appraisal Rights." See "Chapter Five - Comparison of
Stockholder Rights - Appraisal Rights".
Federal Securities Laws Consequences; Stock Transfer Restriction Agreements
This Joint Proxy Statement/Prospectus does not cover any resales of the
VITEX common stock to be received by the stockholders of Pentose upon completion
of the merger, and no person is authorized to make any use of this Joint Proxy
Statement/Prospectus in connection with any such resale.
All shares of VITEX common stock received by Pentose stockholders in the
merger will be freely transferable, except that shares of VITEX common stock
received by persons who are deemed to be "affiliates" of Pentose under the
Securities Act of 1933, as amended, at the time of the Pentose meeting may be
resold by them only in transactions permitted by Rule 145 under the 1933 Act or
as otherwise permitted under the 1933 Act. Persons who may be deemed to be
affiliates of Pentose for such purposes generally include individuals or
entities that control, are controlled by or are under common control with
Pentose and include directors and executive officers of Pentose. The merger
agreement requires Pentose to use its reasonable best efforts to cause each of
such affiliates to execute a written agreement to the effect that such persons
will not offer, sell or otherwise dispose of any of the shares of VITEX common
stock issued to them in the merger in violation of the 1933 Act or the related
SEC rules. In addition, the merger agreement provides that a condition to
closing is the receipt by VITEX of such agreements with Dr. Ackerman and
affiliates of Ampersand Ventures that will additionally provide that such
persons will not sell or transfer any shares of VITEX common stock received in
the merger until the earlier of (1) the first anniversary of the merger or (2)
the date upon which the closing price of VITEX common stock as quoted on the
Nasdaq National Market as reported in the Wall Street Journal for the prior 20
consecutive trading days has been greater than $12. Dr. Ackerman's agreement
will allow for the transfer to affiliates of Ampersand Ventures of approximately
40% of the VITEX common stock received by Dr. Ackerman in the merger. Any
shares so transferred will be subject to the restrictions on tranfers of shares
by affiliates of Ampersand Ventures described above.
I-25
<PAGE>
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
VITEX common stock began trading on the Nasdaq National Market under the
symbol "VITX" on June 11, 1998. The following table shows, for the periods
indicated, the high and low sales prices per share of VITEX common stock, as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
VITEX Common Stock
------------------
High Low
---- ---
<S> <C> <C>
June 11, 1998 - July 4, 1998 $ 12-1/8 $ 10-1/2
July 5, 1998 - October 3, 1998 17-5/8 4-17/32
October 4, 1998 - January 2, 1999 11-5/8 3-1/8
January 3, 1999 - March 27, 1999 11-3/4 8
March 28, 1999 - July 3, 1999 12.125 4.375
July 4, 1999 - October 2, 1999 [ ] [ ]
</TABLE>
As of September 1, 1999, VITEX had 43 shareholders of record.
On July 27, 1999, the last full trading day before VITEX and Pentose issued
a joint press release announcing that they had reached an agreement concerning
the proposed merger, the closing price of VITEX Common Stock as reported on the
Nasdaq National Market was $6.375 per share. On September __, 1999, the most
recent practicable date prior to the printing of this Joint Proxy
Statement/Prospectus, the closing price as reported on the Nasdaq National
Market was $_______ per share.
Because the market price of VITEX common stock is subject to fluctuation,
the market value of the shares of VITEX common stock that holders of Pentose
common and preferred stock will receive in the merger may increase or decrease.
Pentose stockholders are urged to obtain a current market quotation for VITEX
common stock.
VITEX and Pentose have never paid cash dividends. If the merger is not
consummated, the board of directors of Pentose presently intends to continue a
policy of retaining all earnings to finance the expansion of its business.
Following the merger, it is expected that the board of directors of VITEX will
continue the policy of not paying cash dividends in order to retain earnings for
reinvestment in the business of the combined company.
Pentose common stock and preferred stock are not traded in any public
market.
I-26
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
combine the historical balance sheets and statements of operations of VITEX and
Pentose giving effect to the merger using the purchase method of accounting for
a business combination and also reflects the transfer by Pentose of its Papirine
technology by Pentose to Pentose Development Corporation in June 1999. See
"Chapter Four - Other Information Regarding Pentose - Pentose's Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Pentose Development Corporation is not a party to the merger agreement between
VITEX and Pentose.
We are providing the following information to aid you in your analysis of
the financial aspects of the merger. We derived this information from the
audited financial statements of VITEX for the year ended January 2, 1998 and the
unaudited financial statements as of and for the twenty-six weeks ended July 3,
1999 and from the audited financial statements of Pentose for the year ended
December 31, 1998 and the unaudited financial statements as of and for the six
months ended June 30, 1999. The information is only a summary and you should
read it in conjunction with our historical financial statements and related
notes contained in the annual reports and other information that we have filed
with the SEC. See "Chapter Eight -- Additional Information for Stockholders --
Where Can You Find More Information."
The unaudited pro forma condensed combined statements of operations for the
fiscal year ended January 2, 1999 and the twenty-six weeks ended July 3, 1999
assume the merger was effected on January 1, 1998. The unaudited pro forma
condensed combined balance sheet gives effect to the merger as if it had
occurred on July 3, 1999.
The estimated charge of $34.3 million resulting from purchased in-process
research and development costs has been reflected as a reduction of
stockholders' equity in the pro forma condensed balance sheet as of July 3,
1999. This same charge has been excluded from the pro forma condensed statement
of operations for the year ended January 2, 1999 since the charge is non-
recurring and directly related to the acquisition.
The unaudited pro forma combined financial information is for illustrative
purposes only. The companies may have performed differently had they always
been combined. You should not rely on the pro forma combined financial
information as being indicative of the historical results that would have been
achieved had the companies always been combined or the future results that the
combined company will experience after the merger.
I-27
<PAGE>
Pro Forma Combined Condensed Balance Sheet
As of July 3, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
VITEX Pentose Adjustments Combined
-------------- ------------------ --------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,470 $ 657 $ $ 28,127
Marketable securities 1,918 1,918
Trade receivables 5,980 5,980
Other receivables 838 838
Due from related parties 92 92
Inventory 3,098 3,098
Prepaid expenses and other 1,050 134 1,184
------------------------------------------------------------------------------------
Total current assets 38,528 2,709 41,237
------------------------------------------------------------------------------------
Property, plant and equipment, net 33,504 618 34,122
Intangible assets 4,085(B) 4,085
Other assets 503 137 640
------------------------------------------------------------------------------------
Total assets $ 72,535 $ 3,464 $ 4,085 $ 80,084
====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,587 $ $ $ 3,587
Current portion of capital lease obligations 1,272 150 1,422
Accounts payable and accrued expenses 7,989 277 1,500(A) 9,766
------------------------------------------------------------------------------------
Total current liabilities 12,848 427 1,500 $ 14,775
------------------------------------------------------------------------------------
Long-term debt, net of current portion 5,627 5,627
Capital lease obligations,
net of current portion 2,712 380 3,092
------------------------------------------------------------------------------------
Total liabilities 21,187 807 1,500 23,494
------------------------------------------------------------------------------------
Redeemable convertible preferred stock 11,500 (11,500) (C) -
Stockholders' equity:
Common stock 125 4 60 (C) 189
Additional paid-in capital 86,840 39,478 (C) 126,318
Less: treasury stock (1) 1 (C) -
Accumulated deficit (35,617) (8,846) (25,454) (C)(D) (69,917)
------------------------------------------------------------------------------------
Total stockholders' equity 51,348 (8,843) 14,085 56,590
------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 72,535 $ 3,464 $ 4,085 $ 80,084
====================================================================================
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
I-28
<PAGE>
Pro Forma Combined Condensed Statement of Operations
For the twenty-six weeks ended July 3, 1999
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
VITEX Pentose Adjustments Combined
-------------- ------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Revenue $20,494 $ 300 $ (250) (E) $20,544
Costs and expenses:
Cost of sales 11,386 11,386
Research and development, net 4,115 2,143 (250) (E) 5,347
(661) (F)
Amortization of intangibles 170 (G) 170
Selling, general and administrative 4,989 673 5,662
Charge related to product recall 2,645 2,645
--------------------------------------------------------------------------------
Total costs and expenses 23,135 2,816 (741) 25,210
--------------------------------------------------------------------------------
Loss from operations (2,641) (2,516) $ 491 (4,666)
Interest and other income, net 88 60 148
--------------------------------------------------------------------------------
Net loss $(2,553) $(2,456) $ 491 $(4,518)
================================================================================
Basic and diluted loss per share $ (0.21) $ (0.63) $ (0.24)
================================================================================
Weighted average shares used in computation 12,421 3,896 18,834 (H)
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
I-29
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the fiscal year ended January 2, 1999
(Unaudited)
(In thousands, except per share and share amounts)
<TABLE>
<CAPTION>
Historical Historical Pro Forma Pro Forma
VITEX Pentose Adjustments Combined
-------------- ------------------ --------------- --------------
<S> <C> <C> <C> <C>
Revenue $33,755 $ 425 $ (250) (E) $33,930
Costs and expenses:
Cost of sales 23,860 23,860
Research and development, net 7,507 3,336 (250) (E) 9,065
(1,528) (F)
Amortization of intangibles 340 (G) 340
Selling, general and administrative 6,951 1,163 8,114
Charge related to research collaboration 2,202 2,202
----------------------------------------------------------------------------
Total costs and expenses 40,520 4,499 (1,438) 43,581
----------------------------------------------------------------------------
Loss from operations (6,765) (4,074) 1,188 (9,651)
Interest and other income, net 365 129 493
----------------------------------------------------------------------------
Net loss $(6,400) $(3,945) $ 1,188 $(9,158)
============================================================================
Basic and diluted loss per share $ (0.61) $ (1.01) $ (0.54)
============================================================================
Weighted average shares used in computation 10,454 3,896 16,867 (H)
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
I-30
<PAGE>
Notes to Pro Forma Combined Condensed Financial Statements
(Unaudited)
(In thousands, except per share amounts)
(A) Estimated transaction expenses of VITEX associated with acquisition of
Pentose.
(B) Reflects acquisition of Pentose in exchange for an estimated 6,414,110
shares of VITEX with a fair value of $5.75 per share based on the average
of the closing price of VITEX's common stock before and after the
announcement of the merger agreement with Pentose. The estimated purchase
price and preliminary purchase price allocation are summarized as follows:
Fair value of VITEX shares issued in exchange
for all outstanding shares of Pentose $36,895
Fair value of VITEX stock options issued in
exchange for all outstanding stock options
of Pentose 2,647
Estimated transaction expenses 1,500
-------
Estimated purchase price 41,042
=======
The estimated purchase price has been allocated as follows:
Estimated fair value of in-process research
and development costs $34,300
Estimated fair value of intangible assets - core
developed technology and assembled work force 4,085
Estimated fair value of other Pentose net assets 2,657
$41,042
=======
(C) Represents the elimination of Pentose's stockholders' equity accounts and
the recording of the issuance of VITEX common stock and stock options with
total estimated fair value of $39,542.
(D) Includes charge of $34,300 for acquired in-process research and development
costs. The value of the purchased in-process research and development from
the acquisition was determined by estimating the projected net cash flows
related to such products, based upon the future revenues to be earned upon
commercialization of the products. The percentage of the cash flow
allocated to purchased in-process research and development was based upon
the estimated percentage complete for each of the projects. These cash
flows were discounted back to their net present value. The resulting
projected net cash flows from such projects were based on management's
estimates of revenues and operating profits related to such projects. No
tax benefit has been reflected in connection with this charge in
recognition of the uncertainty that any such tax benefits will be realized
by VITEX based on its history of operating losses since inception.
(E) Elimination of license fees paid by VITEX to Pentose totaling $250 in both
the year ended January 2, 1999 and the twenty-six weeks ended July 3, 1999.
(F) Elimination of research and development costs associated with Pentose's
Papirine technology that was spun off from Pentose to Pentose Development
Corporation in June 1999 prior to the proposed merger with VITEX.
(G) Represents the amortization of intangible assets acquired on a straight-
line basis computed as follows:
. Core/developed technology, totaling $3,600, amortized over fifteen
years.
. Assembled work force, totaling $485, amortized over five years.
I-31
<PAGE>
(H) The pro forma weighted average number of shares outstanding is based on the
weighted average shares outstanding of VITEX during the period adjusted to
give effect to shares assumed to be issued had the merger taken place as of
January 1, 1998.
I-32
<PAGE>
OPINION OF FINANCIAL ADVISOR
The Board of Directors of VITEX retained Warburg Dillon Read LLC ("Warburg
Dillon Read"), based upon Warburg Dillon Read's experience, expertise and
knowledge of VITEX from prior interactions, to provide an opinion as to the
fairness, from a financial point of view, of the exchange ratio to the holders
of VITEX common stock. VITEX and Pentose arrived at the exchange ratio through
arm's length negotiations. Warburg Dillon Read delivered a written opinion,
dated July 26, 1999, and an updated confirmation of that opinion dated September
__, 1999, to the Board of Directors of VITEX, to the effect that, and based upon
and subject to the limitations, assumptions and qualifications set forth
therein, as of the date of each opinion, the exchange ratio is fair to the
holders of VITEX Common Stock, from a financial point of view. The full text of
Warburg Dillon Read's opinion dated September __, 1999, which sets forth a
description of the assumptions made, general procedures followed, matters
considered and limitations on the review undertaken, is set out in Appendix B
and is incorporated herein by reference. Holders of VITEX Common Stock are
urged to read the opinion carefully in its entirety, especially with regard to
the assumptions made and matters considered by Warburg Dillon Read. The summary
of opinion set forth herein is qualified in its entirety by reference to the
full text of such opinion.
In arriving at its opinion, Warburg Dillon Read, among other things:
. reviewed certain publicly available business and historical financial
information relating VITEX;
. reviewed certain internal financial information and other data
relating to the business and financial prospects of VITEX, including
estimates and financial forecasts prepared by VITEX management, that
were provided to Warburg Dillon Read by VITEX and not publicly
available;
. reviewed certain internal financial information and other data
relating to the business and financial prospects of Pentose, including
estimates and financial forecasts prepared by the managements of VITEX
and Pentose and not publicly available;
. conducted discussions with members of the senior managements of VITEX
and Pentose;
. reviewed publicly available financial and stock market data with
respect to certain other companies in lines of business Warburg Dillon
Read believes to be generally comparable to those of VITEX;
. compared the financial terms of the merger with the publicly available
financial terms of certain other transactions which Warburg Dillon
Read believes to be generally relevant;
. considered certain pro forma effects of the transaction on VITEX's
financial statements and reviewed certain estimates of synergies
prepared by VITEX management;
. reviewed drafts of the merger agreement; and
. conducted such other financial studies, analyses, and investigations,
and considered such other information as Warburg Dillon Read deemed
necessary or appropriate.
Warburg Dillon Read's opinion was necessarily based upon economic,
monetary, market and other conditions as in effect on, and the information made
available to Warburg Dillon Read as of, the date thereof.
In connection with its review, Warburg Dillon Read, with VITEX's consent,
did not assume any responsibility for independent verification of any of the
foregoing information and, with VITEX's consent, relied on such information as
being complete and accurate in all material respects. In addition, with VITEX's
consent, Warburg Dillon Read did not make or receive any evaluation or appraisal
of any of the assets or liabilities (contingent or otherwise) of VITEX or
Pentose nor was Warburg Dillon Read furnished with such appraisal or
evaluations. With respect to the financial forecasts, estimates, pro forma
effects and estimates of merger savings, Warburg Dillon Read assumed, at VITEX's
direction, that the VITEX and Pentose financial forecasts, estimates, pro forma
information and estimates of merger savings or synergies provided to or
otherwise reviewed by or discussed by it had been prepared reasonably on a basis
reflecting the best currently available estimates and judgments of the
respective managements as to the future financial performance of their
respective companies and would be realized in the amounts and at the times
contemplated thereby. With respect to the business and financial information
relating to Pentose pro forma for the merger, Warburg Dillon Read did not, with
VITEX's consent, hold any independent discussion with Pentose's management as to
any specific aspect of the information provided to Warburg Dillon
I-33
<PAGE>
Read. In rendering the opinion expressed herein, at VITEX's direction, WDR has
relied upon VITEX and the assurances of its management and advisors concerning
the accounting treatment to be given to purchased research and development and
the amortization of goodwill.
Warburg Dillon Read's opinion does not address VITEX's underlying business
decision to effect the merger. In rendering its opinion, Warburg Dillon Read
did not render any opinion as to the value of Pentose or make any recommendation
to the holders of Pentose common or preferred stock with respect to the
advisability of disposing of or retaining VITEX Common Stock received in the
merger. In addition, Warburg Dillon Read did not make any recommendation
regarding whether or not it is advisable for holders of VITEX Common Stock to
vote in favor of the merger.
For the purposes of the opinion, with the consent of VITEX, Warburg Dillon
Read assumed that the representations and warranties of each party contained in
the merger agreement were true and accurate, that each party thereto would
perform all of the covenants and agreements required to be performed by it under
the merger agreement and that all conditions to the consummation of the merger
would be satisfied without waiver thereof. VITEX did not place any limitations
upon Warburg Dillon Read regarding the procedures to be followed or the factors
to be considered in rendering its opinion.
In arriving at its opinion, Warburg Dillon Read did not assign any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments based on its experience in rendering such opinions and on
then existing economic, monetary and market conditions as to the significance
and relevance of each analysis and factor. Accordingly, Warburg Dillon Read
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and the factors considered, without considering all
analyses and factors, could create a misleading or incomplete view of the
processes underlying such analyses and its opinion. In its analyses, Warburg
Dillon Read made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond VITEX's or Pentose's control. Any estimates contained in Warburg Dillon
Read's analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable than
as set forth therein. In addition, analyses relating to the value of a business
or securities do not purport to be appraisals or to reflect the actual prices at
which businesses or securities might be sold.
In connection with rendering its opinion, Warburg Dillon Read employed a
variety of valuation methods. The material valuation methods are summarized
below.
Analyses Related to Pentose
Analysis of Selected Comparable Companies. Using publicly available
information, Warburg Dillon Read analyzed, based upon market trading values,
selected financial criteria of companies which, in Warburg Dillon Read's
judgment, were generally comparable to Pentose for the purpose of this analysis.
The companies selected were as follows: Cerus Corporation, Cubist
Pharmaceuticals, Microcide Pharmaceuticals, Pharmacopeia Inc. and Trega
Biosciences (the "Pentose Generally Comparable Companies"). The analysis
considered, among other things:
. the market value of the total outstanding common equity;
. the "technology value" (defined as equity market value plus the book
value of debt and preferred stock less cash and cash equivalents);
. the latest twelve month ("LTM") net burn rate (defined as net loss
plus depreciation and amortization expense, less capital
expenditures); and
. the years of cash remaining (defined as cash and cash equivalents
divided by the LTM net burn rate).
Warburg Dillon Read noted that at the proposed consideration based on
VITEX's average stock price before and after the transaction announcement, the
market value of Pentose of $39.5 million was at the low end of the range of
$23.7 million to $321.8 million, and was below the mean and median of $162.0
million and $157.6 million, respectively, for the Pentose Generally Comparable
Companies. Warburg Dillon Read also noted that the technology value of Pentose
of $35.8 million was at the low end of the range of $18.8 million to $268.5
million, and was below the mean and median of $131.7 million and $148.3 million,
respectively, for the Pentose Generally Comparable Companies. Finally, Warburg
Dillon Read considered Pentose's years of cash available based on the LTM net
burn rate of $4.7 million, which at 0.8 years was at the
I-34
<PAGE>
low end of the range of 0.4 years to 2.4 years and below the mean and median of
1.4 years and 1.4 years, respectively, for the Pentose Generally Comparable
Companies.
Analysis of Selected Comparable Transactions. Using publicly available
information, Warburg Dillon Read analyzed the financial terms of certain recent
merger transactions which, in Warburg Dillon Read's judgment, were considered
relevant for the purpose of this analysis. The transactions that Warburg Dillon
Read considered comparable to the merger included 10 merger transactions that
occurred in the biotechnology industry since 1996 (the "Pentose Generally
Comparable Transactions"). The Pentose Generally Comparable Transactions are:
Geron/Roslin Bio-Med, LeukoSite/CytoMed, MagaBios/GeneMedicine, Incyte
Pharmaceuticals/Hexagen, T Cell Sciences/Virus Research Institute,
Intercardia/Transcell Technologies, Triangle Pharmaceuticals/Avid Therapeutics,
Medarex/GenPharm International, Cell Genesys/Somatix Therapy and
Chiroscience/Darwin Molecular. The analysis considered, among other things:
. the equity purchase price of the total common equity;
. the "technology value" (defined as the purchase price of the equity
plus the book value of debt and preferred stock less cash and cash
equivalents);
. the LTM net burn rate (defined as net loss plus depreciation and
amortization expense, less capital expenditures); and
. the years of cash remaining (defined as cash and cash equivalents
divided by the LTM net burn rate).
Warburg Dillon Read noted that at the proposed consideration based on
VITEX's average stock price before and after the transaction announcement, the
market value of Pentose of $39.5 million was within the range of $15.0 million
to $114.6 million, was below the mean and median of $53.6 million and $46.4
million, respectively, for the Pentose Generally Comparable Transactions, and
was below the mean of $49.9 million and above the median of $2.1 million for the
Pentose Generally Comparable Transactions with a private target only. Warburg
Dillon Read also noted that the technology value of Pentose of $35.8 million was
within the range of $16.5 million to $77.9 million, was below the mean and
median of $43.6 million and $48.2 million, respectively, for the Pentose
Generally Comparable Transactions, and was below the mean and median of $37.1
million for the Pentose Generally Comparable Transactions with a private target
only. Finally, Warburg Dillon Read considered Pentose's years of cash available
based on the LTM net burn rate of $4.7 million, which at 0.8 years was at the
low end of the range of 0.6 years to 2.4 years, was below the mean and median of
1.4 years and 1.3 years, respectively, for the Pentose Generally Comparable
Transactions, and was slightly above the mean and median of 0.7 years for the
Pentose Generally Comparable Transactions with a private target only.
No company, transaction or business used in the analysis described under
"Analysis of Selected Comparable Companies" and "Analysis of Selected Comparable
Transactions" is identical to Pentose. Accordingly, an analysis of the results
thereof necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics and other factors which
could effect the transaction or the public trading or other values of VITEX or
companies to which they are being compared. Mathematical analysis (such as
determining the mean or median) is not in itself a meaningful method of using
generally comparable acquisition or company data.
Discounted Cash Flow Analysis. Warburg Dillon Read performed discounted
cash flow analyses based on the stand alone projections provided by VITEX's
management. Utilizing these projections, Warburg Dillon Read calculated the
theoretical discounted present value of equity for Pentose by adding together
the present value of (1) the future stream of cash flow through the year ended
December 31, 2009, (2) the future value of Pentose at the end of the year ended
December 31, 2009, and (3) the net debt as of March 31, 1999. The terminal
value was calculated based on terminal EBIT (defined as earnings before interest
and taxes) multiples of 9.0x to 13.0x. The cash flow streams and terminal
values were then discounted to present values using a range of discount rates
from 40% to 50%. These assumptions yielded equity values of $57 million to $139
million.
Analyses Related to VITEX
Discounted Cash Flow Analysis. Warburg Dillon Read performed discounted
cash flow analyses based on two assumed economic projections - a base case and
lower, downside case - stand alone and pro forma for the merger with Pentose,
provided by VITEX's management. The two sets of projections were developed by
VITEX management based on different assumptions with respect to the timing of
the market acceptance of VITEX's virally inactivated plasma products. Utilizing
these projections, Warburg Dillon Read calculated the theoretical discounted
present value of equity for VITEX by
I-35
<PAGE>
adding together the present value of (1) the future stream of cash flow through
the year ended December 31, 2009, (2) the future value of VITEX at the end of
the year ended December 31, 2009, and (3) the net debt as of March 31, 1999. The
terminal value was calculated based on terminal EBIT multiples of 9.0x to 13.0x.
The cash flow streams and terminal values were then discounted to present values
using a range of discount rates from 30% to 35% for the stand alone analysis and
from 35% to 45% for the analysis pro forma for the merger with Pentose. These
assumptions yielded per share equity values of $7.13 to $11.56 under the VITEX
stand-alone and $7.27 to $16.53 under the pro forma merger projections for the
Base Case; $3.01 and $5.58 under the VITEX stand-alone and $5.49 to $13.58 under
the pro forma merger projections for the Downside Case.
Pro Forma Merger Analysis. Warburg Dillon Read examined the impact of the
merger on VITEX's net income per share by preparing a pro forma analysis of the
impact of the merger using the projections provided by the VITEX management.
Using the Base Case projections for VITEX, the impact on VITEX's pro forma
earnings per share was dilutive in the years ending December 31, 2000 through
December 31, 2003 and accretive thereafter. Using the Downside Case projections
for VITEX, the impact on VITEX's pro forma earnings per share was accretive
throughout the forecasted period.
Warburg Dillon Read is an internationally recognized investment banking
firm which, as a part of its investment banking business, regularly is engaged
in the evaluation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. In the past, Warburg
Dillon Read and its predecessors have provided investment banking services to
VITEX and have received customary compensation for the rendering of such
services. In the ordinary course of business, Warburg Dillon Read, its
predecessors and affiliates, may have traded the securities of VITEX and Pentose
for their own accounts and, accordingly, may at any time hold a long or short
position in such securities.
Pursuant to the engagement letter between VITEX and Warburg Dillon Read,
VITEX has paid to Warburg Dillon Read a fee of $450,000 for the rendering of its
opinion. VITEX has also agreed to reimburse Warburg Dillon Read for the
expenses reasonably incurred by it in connection with its engagement (including
reasonable counsel fees) and to indemnify Warburg Dillon Read and its officers,
directors, employees, agents and controlling persons against certain expenses,
losses, claims, damages or liabilities in connection with its services,
including those arising under the federal securities laws.
I-36
<PAGE>
EXISTING RELATIONSHIP BETWEEN VITEX AND PENTOSE
In October 1998, VITEX entered into an Option, Development, Manufacture and
License Agreement (the "Pentose Agreement") with Pentose whereby VITEX has
contracted to perform an initial evaluation relating to a possible collaboration
using the parties' respective technologies and to further develop and
commercialize virally inactivated blood products. In 1998 and 1999, VITEX paid
a total of $500,000 to Pentose to review and examine Pentose's viral
inactivation technology for a stated period. Upon expiration of the evaluation
period, VITEX has the option to acquire the exclusive right and license to the
Pentose technology for a stated amount, subject to certain terms and conditions.
If the proposed merger is consummated, the option will not be exercised and the
Pentose Agreement will terminate.
I-37
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Pentose Board and of the VITEX
Board with respect to the merger agreement, stockholders should be aware that
certain members of the management and Board of Directors of Pentose, and certain
members of the Board of Directors of VITEX have interests in the merger that may
be different from, or in addition to, the interests of the other stockholders
generally.
Ampersand Ventures
Ampersand Ventures (as defined below) owns approximately 52% of the Pentose
common stock on an as converted to common stock basis. See "Chapter Four -Other
Information Regarding Pentose - Principal Stockholders of Pentose." In addition
it owns approximately 21% of the issued and outstanding common stock of VITEX.
Accordingly, Ampersand Ventures has an interest in the merger as a VITEX
stockholder as well as a Pentose stockholder. After the closing of the merger as
contemplated hereby, based on the estimated exchange ratio, Ampersand Ventures
will own approximately 32% of the common stock of VITEX and certain individuals
affiliated with Ampersand Ventures who are VITEX Directors will hold options to
acquire shares of VITEX common stock and may receive additional options to
acquire VITEX common stock in the future. In the event the ownership of VITEX
common stock by Ampersand Ventures increases above 33.3%, Ampersand Ventures
would be able to effectively block any action, such as the merger contemplated
hereby, requiring a vote of two-thirds of the shares eligible to vote. See
"Chapter Five - Certain Legal Information - Comparison of Stockholder Rights."
Ampersand Ventures will enter into an agreement prior to closing pursuant to
which it will agree not to sell or transfer any shares of VITEX common stock
received in the merger until the earlier of (1) the first anniversary of the
merger or (2) the date upon which the closing price of VITEX common stock on the
Nasdaq National Market as reported in the Wall Street Journal for the prior 20
consecutive trading days has been greater than $12. See "Chapter Five - Certain
Legal Information - Comparison of Stockholder Rights," and "Description of VITEX
Capital Stock".
In addition, two of the three Pentose directors Peter D. Parker and
Richard A. Charpie, both representatives of Ampersand Ventures are also
directors of VITEX.
In fiscal years 1997 and 1998, Ampersand Venture Management Corporation, an
affiliate of Ampersand Ventures ("AVMC"), provided management advisory services
to VITEX for which VITEX paid a total of $156,000. This amount includes $100,000
paid to AVMC for services rendered by Dr. Richard A. Charpie, a Director of
VITEX and the managing general partner of Ampersand Ventures, who served as
Chief Executive Officer of VITEX from August 1997 through November 23, 1997 and
as a Vice President of VITEX from November 24, 1997 through January 23, 1998. An
additional $50,000 of the fee paid to AVMC was for the services of other AVMC
employees made available to VITEX during the period when Mr. Charpie served as
Chief Executive Officer and Vice President of VITEX. Dr. Charpie and Mr. Parker,
Directors of VITEX, are directors of AVMC and Dr. Charpie is the president and
sole stockholder of AVMC.
Dr. Charpie is the managing general partner, and Mr. Parker is a general
partner, of each of ASMC-II MCLP LLP, ASMC-III MCLP LLP and Ampersand Lab
Partners MCLP LLP (such entities, and the entities of which such entities are
directly or indirectly partners, are collectively referred to as "Ampersand
Ventures"). ASMC-III MCLP LLP is the general partner of ASMC-III Management
Company Limited Partnership, which itself is the general partner of both
Ampersand Specialty Materials and Chemicals III Limited Partnership ("ASMC III")
and Ampersand Specialty Materials and Chemicals III Companion Fund Limited
Partnership ("ASMC III CF"). ASMC-II MCLP LLP is the general partner of ASMC-II
Management Company Limited Partnership, which itself is the general partner of
Ampersand Specialty Materials and Chemicals II Limited Partnership ("ASMC II").
Ampersand Lab Partners MCLP LLP is the general partner of Ampersand Lab Partners
Management Company Limited Partnership, which itself is the general partner of
both Laboratory Partners I Limited Partnership ("Lab Partners") and Laboratory
Partners Companion Fund Limited Partnership ("Lab Partners CF"). ASMC-II, ASMC-
III, ASMC-III CF, Lab Partners and Lab Partners CF collectively own 21.3% of
VITEX's common stock. See Note 3 under "Principal Stockholders of VITEX" in
Chapter Four.
Board of Directors and Management
VITEX has agreed that, as of the closing of the merger, it will cause Dr.
Ackerman, the Chief Executive Officer and Director of Pentose, to be appointed
to the VITEX Board. See "-- The Merger Agreement - VITEX Board and Related
Matters." VITEX expects to enter into an employment agreement with Dr. Ackerman
providing for salary and benefits. For information about the benefits received
by VITEX directors, see "Chapter Three - Other Information Regarding VITEX -
Management - Compensation of Directors." Dr. Charpie and Mr. Parker are
expected to continue as directors of VITEX after the merger.
I-38
<PAGE>
VITEX has also agreed that Dr. Ackerman will serve as Executive Vice
President and that John Chapman, currently the Vice President, Blood Products
Research of Pentose, will serve as Vice President, Blood Products Research of
VITEX after the merger. Mr. Chapman's Employment Letter Agreement with Pentose
will be assumed by VITEX if the merger is completed.
Indemnification; Directors' and Officers' Insurance
For one year after the closing, VITEX has agreed to indemnify, to the
extent provided under Pentose's charter and by-laws in effect prior to closing,
the individuals who on or before the closing were officers, directors and
employees of Pentose or its subsidiaries with respect to all acts or omissions
before the closing by these individuals in these capacities. VITEX has further
agreed to cause Pentose to honor all its existing indemnification agreements,
including under Pentose's by-laws, prior to closing.
Incentive Compensation and Stock Ownership Plans
At the effective time, each outstanding option granted by Pentose to
purchase shares of Pentose common stock will be assumed by VITEX and will, after
the effective time, constitute an option to acquire, on the same terms and
conditions as applied to the Pentose stock option prior to the effective time,
the number, rounded down to the nearest whole number, of shares of VITEX common
stock determined by multiplying:
. the number of shares of Pentose common stock subject to the option
immediately before the effective time by
. the exchange ratio.
The exercise price of each of these options will be a price per share of
VITEX common stock, rounded up to the nearest cent, equal to:
. the per share exercise price for Pentose common stock that otherwise
could have been purchased under the Pentose stock option divided by
. the exchange ratio.
The vesting of Pentose common stock options does not generally accelerate
upon the merger. The exercisability of Pentose common stock options will
accelerate as to an aggregate of 400,000 shares held by former and current
officers of Pentose (not including options held by Dr. Samuel K. Ackerman and
Dr. John Chapman) upon the consummation of the merger.
Other Agreements
Dr. Edward Budowsky, who owns approximately 13% of the outstanding capital
stock of Pentose, is a party to a Consulting/Employment Letter with Pentose
dated December 8, 1995, as amended by an Amendment Letter dated July 28, 1996.
Dr. Budowsky's amended agreement will be assumed by VITEX if the merger is
completed.
Certain directors and officers of Pentose and their affiliates own
substantially all of the outstanding capital stock of Pentose Development
Corporation ("PDC"), a company recently formed to acquire certain assets of
Pentose in June 1999. Under a Services Agreement between Pentose and PDC dated
June 16, 1999, Pentose is obligated to provide certain administrative services
to PDC and it is intended that Pentose will also make available to PDC a portion
of its leased facility in Watertown, Massachusetts on terms and conditions to be
negotiated. Assuming the completion of the merger contemplated hereby, VITEX
will assume the Pentose lease and Pentose's rights and obligations with respect
to PDC. Peter D. Parker is a director of VITEX, Pentose and PDC. Ampersand
Ventures, of which Mr. Parker and Dr. Charpie are representatives, holds a
majority of the capital stock of PDC.
I-39
<PAGE>
TRANSACTIONS BETWEEN VITEX AND ITS DIRECTORS, OFFICERS OR PRINCIPAL SHAREHOLDERS
In February 1998, VITEX and Pall Corporation ("Pall") entered into a series
of agreements (the "Pall Agreements") providing for, among other things, a
collaboration on the development and marketing of systems employing VITEX's
viral inactivation technologies for red blood cell concentrates. Pall is a
leading manufacturer and supplier of filtration products, including those
relating to the collection, preservation, processing, manipulation, storage and
treatment of blood and blood components. Under the Pall Agreements, Pall
receives exclusive worldwide distribution rights to any system incorporating any
of VITEX's viral inactivation technologies for red blood cells and platelets.
The parties have also agreed to share research, development, clinical and
regulatory responsibilities and will equally share profits and joint expenses
from operations after each party is reimbursed for its cost of goods. Upon
execution of the Pall Agreements in February 1998, Pall acquired 477,042 shares
of common stock for $4.0 million or $8.39 per share. Pursuant to the terms of
the Pall Agreements, Pall acquired 448,028 shares of VITEX's common stock in a
private placement, which closed contemporaneously with, and at the same price,
terms, and conditions as the initial public offering of VITEX's common stock in
June 1998. In addition, the Pall Agreements provide that Pall will purchase up
to $17.0 million worth of common stock at the prevailing market price per share
in installments tied to the achievement of specified development milestones in
the development of VITEX's red blood cell concentrates. No such purchases
occurred in fiscal year 1998. In fiscal year 1998, VITEX purchased
approximately $1,076,000 of production related materials from Pall. Mr.
Hayward-Surry, a Director of VITEX, is the President and a member of the board
of directors of Pall Corporation.
In April 1997, VITEX sold 1,797,893 shares of common stock at a purchase
price of $8.39 per share to CB Capital Investors, L.P. In December 1997, the
Chase Manhattan Bank, an affiliate of CB Capital Investors, L.P. made a term
loan in the principal amount of $10,750,000 to VITEX. The principal of this
loan is repayable in 16 consecutive quarterly installments commencing on March
31, 1998. The unpaid principal on the loan accrues interest, at VITEX's option
at either LIBOR plus 2.75% to 1.75% or the base rate of the bank, as defined,
plus margins of up to 0.5%. See note 6 to VITEX's financial statements included
herein. Dr. Wicker, a member of VITEX's Board of Directors, is a general
partner of Chase Capital Partners, an affiliate of CB Capital Investors, L.P.
and the Chase Manhattan Bank.
VITEX has entered into various license agreements with the New York Blood
Center ("NYBC"). Under these agreements, VITEX has been granted exclusive and
non-exclusive worldwide licenses under the NYBC patents relating to viral
inactivation and other technologies. VITEX also has rights of first negotiation
for the license to any NYBC improvements not otherwise exclusively licensed in
the field of viral inactivation for use with certain products, as defined.
Under the license agreements, VITEX is required to pay royalties to the NYBC on
VITEX's revenues derived from the use of these licenses, as defined. VITEX and
the NYBC have also entered into an Omnibus Agreement which allocates various
rights and obligations under license agreements that the NYBC has entered into
with third parties relating to blood fractionation and other technology. VITEX
is required to pay aggregate minimum royalties to maintain its exclusive
licenses of $1,500,000 in fiscal 1999, $2,200,000 in fiscal 2000, $2,400,000 in
fiscal 2001 and $2,800,000 in each year thereafter. Royalty and milestone
payments in the amount of $1,037,000 were payable to the NYBC during fiscal year
1998. VITEX also is required to meet certain research and development
milestones, as defined, to maintain its exclusive licenses. Further, VITEX is
required to spend a minimum annual amounts towards the further development,
evaluation and registration of products, as defined. If minimum royalties are
not paid or if any milestone is not met, as defined for a given country, the
NYBC may terminate the license for that country and may terminate other such
licenses if the licenses in all covered countries have been individually
terminated. The NYBC may terminate any license by reasonable notice if VITEX
fails to cure a breach, conform to government regulations, or sell products
within a specified number of years, as defined. Upon termination, all rights
revert to the NYBC. VITEX is currently in compliance with all such obligations
and covenants. The NYBC sponsors certain scientific research at VITEX. NYBC made
payments of $96,000 to VITEX for fiscal year 1998. Mr. Tendler, a Director of
VITEX, is a member of the Board of Trustees and the Executive Committee of the
NYBC.
Dr. Bernard Horowitz, VITEX's former Executive Vice President and Chief
Scientific Officer and a current Director of VITEX, is one of the inventors
named in the patents covering viral inactivation technologies owned by the NYBC
and licensed to VITEX. Under the terms of arrangements with the NYBC, Dr.
Horowitz will receive a percentage of the royalty payments made by VITEX to the
NYBC based on sales of VITEX's products and systems employing the licensed S/D,
UVC or LAC technologies.
See also " - Existing Relationship between VITEX and Pentose" and
"Interests of Certain Persons in the Merger."
I-40
<PAGE>
THE MERGER AGREEMENT
The following summary of the merger agreement is qualified by reference to
the complete text of the merger agreement, which is incorporated by reference
and attached as Annex A.
Structure of the Merger
Under the merger agreement, Pentose will merge into VITEX so that VITEX
becomes the surviving corporation.
Timing of Closing
The closing will occur within two business days after the day on which the
last of the conditions set forth in the merger agreement has been satisfied or
waived, unless VITEX and Pentose agree to a different date. We expect that,
immediately upon the closing of the merger, we will file a merger certificate
with the Secretary of State of the State of Delaware, at which time the merger
will be effective.
Merger Consideration
The merger agreement provides that each share of Pentose capital stock
outstanding immediately prior to the effective time will, at the effective time,
be converted into the right to receive a percentage of a share of VITEX common
stock equal to the quotient of (1) the number of shares as will equal thirty-
four percent (34%) of the issued and outstanding shares of VITEX common stock as
of the effective time (giving effect to the issuance of shares of such stock in
the merger) divided by (2) the number of issued and outstanding shares of
Pentose capital stock as of the effective time. However, any shares of Pentose
common stock held by Pentose as treasury stock or owned by VITEX or any
subsidiary of VITEX will be canceled without any payment for those shares.
Treatment of Pentose Stock Options and Warrants; Other Pentose Stock-Based
Awards
At the effective time, each outstanding option and warrant granted by
Pentose to purchase shares of Pentose common stock will be converted into an
option or warrant to acquire VITEX common stock having the same terms and
conditions as the Pentose stock option or warrant had before the effective time.
The number of shares that the new VITEX option or warrant will be exercisable
for and the exercise price of the new VITEX option or warrant will reflect the
exchange ratio in the merger.
Exchange of Shares
Immediately prior to the closing, VITEX will provide to each holder of
Pentose stock instructions explaining how to surrender Pentose stock
certificates to VITEX. Holders of Pentose stock that surrender their
certificates to VITEX, together with a properly completed letter of transmittal,
will receive the appropriate merger consideration. Holders of unexchanged
shares of Pentose stock will not be entitled to receive any dividends or other
distributions payable by VITEX after the closing until their certificates are
surrendered.
VITEX will not issue any fractional shares in the merger. Holders of
Pentose stock will receive a cash payment in the amount of the fractional share
amount multiplied by the average closing price of a share of VITEX common stock
for the ten (10) most recent trading days ending on the second trading day
immediately prior to the effective time, as reported on the Nasdaq Stock Market
in the Wall Street Journal.
VITEX Board and Related Matters
VITEX has agreed to take the necessary corporate action so that, as of the
closing:
. The VITEX Board size will be increased from 8 to 9.
. One director of Pentose, Dr. Samuel K. Ackerman, will become a director
of VITEX. The other Pentose directors Dr. Charpie and Mr. Parker are
already directors of VITEX.
I-41
<PAGE>
Certain Covenants
Each of VITEX and Pentose has undertaken certain covenants in the merger
agreement. The following summarizes the more significant of these covenants.
No Solicitation by Pentose. Pentose has agreed that it and its
subsidiaries and their officers, directors, employees and advisers will not take
action to solicit or encourage an offer for an alternative acquisition
transaction involving Pentose of a nature defined in the merger agreement.
Restricted actions include engaging in discussions or negotiations with any
potential bidder, or disclosing non-public information relating to Pentose.
These actions are permitted in response to an unsolicited bona fide offer so
long as prior to doing so the Pentose Board by a majority vote determines in its
good faith judgment that it is necessary to do so to comply with its fiduciary
duty to stockholders, after receiving the advice of outside legal counsel.
Pentose must keep VITEX informed of the identity of any potential bidder
and the terms and status of any offer.
Pentose Board's Covenant to Recommend. The Pentose Board has agreed to
recommend the approval and adoption of the merger agreement to Pentose's
stockholders. However, the Pentose Board is permitted not to make, to withdraw
or to modify in a manner adverse to VITEX this recommendation if the Pentose
Board reasonably determines that such recommendation would constitute a breach
of its fiduciary duty to stockholders under applicable law, after receiving the
written advice of outside legal counsel, and Pentose and the senior officers and
directors of Pentose have substantially complied with their obligations under
the no-solicitation covenant described above under " - No Solicitation by
Pentose."
VITEX Board's Covenant to Recommend. The VITEX Board has agreed to
recommend the approval of the VITEX merger proposal to VITEX's stockholders.
However, the VITEX Board is permitted not to make, to withdraw or to modify in a
manner adverse to Pentose this recommendation if the VITEX Board reasonably
determines that such recommendation would constitute a breach of its fiduciary
duty to stockholders under applicable law after receiving the written advice of
outside legal counsel.
Interim Operations of VITEX and Pentose. Each of VITEX and Pentose has
undertaken a separate covenant that places restrictions on it until either the
effective time or the merger agreement is terminated. In general, Pentose is
required to conduct its business in the ordinary course consistent with past
practice and to use their reasonable best efforts to preserve intact their
business organizations and relationships with third parties. VITEX has agreed to
carry on its business diligently and in accordance with good commercial
practice. The companies have also agreed to some specific restrictions which are
subject to exceptions described in the merger agreement. The following table
summarizes the more significant of these restrictions undertaken by each
company:
Restriction Pentose VITEX
amending its organizational documents * *
entering into any merger, liquidation or other significant
transaction * *
issuing or disposing of equity securities, options or other
securities convertible into or exercisable for equity
securities, except to a limited extent to employees or
directors * *
splitting, combining or reclassifying its capital stock * *
declaring dividends * *
selling, transferring, licensing, or disposing of any
intellectual property rights * *
amending the terms of any outstanding stock options *
I-42
<PAGE>
making capital expenditures, subject to certain ordinary
course exceptions *
increasing employee compensation or benefits except for
normal ordinary course increases consistent with past
practice *
acquiring or disposing of material assets *
changing its accounting policies *
entering into any material joint venture or partnership *
taking any other action that would make any representation
or warranty by it inaccurate in any material respect * *
Best Efforts Covenant. VITEX and Pentose have agreed to cooperate with
each other and use their reasonable best efforts to take all actions and do all
things necessary or advisable under the merger agreement and applicable laws to
complete the merger and the other transactions contemplated by the merger
agreement.
Certain Employee Benefits Matters. The merger agreement provides that
VITEX will adopt an employee stock option plan upon substantially the same terms
and conditions as Pentose's current employee stock option plan.
Lock-up Agreement. Affiliates of Ampersand Ventures and Dr. Samuel K.
Ackerman have agreed to enter into an agreement providing that they will not
sell, assign or transfer any shares of VITEX common stock they receive in the
merger until the earlier to occur of (1) the first anniversary date of the
effective time or (2) the date upon which the closing price of VITEX common
stock reported in the Wall Street Journal has been in excess of $12 per share
for the previous 20 consecutive trading days, provided that, Dr. Ackerman may
transfer approximately 40% of such shares to affiliates of Ampersand Ventures at
any time, which shares will remain subject to the lock-up described therein.
Please see " -- Interests of Certain Persons in the Merger," for additional
information on employee benefits matters covered in the merger agreement.
Indemnification and Insurance of Pentose Directors and Officers. VITEX has
agreed that:
. For one year after closing, it will indemnify former Pentose directors,
officers and employees for liabilities from their acts or omissions in
those capacities occurring prior to closing to the extent provided
under Pentose's charter and by-laws as in effect just prior to the
effective time.
. It will cause Pentose to honor all indemnification agreements with its
former directors, officers and employees in effect just prior to the
effective time.
Certain Other Covenants. The merger agreement contains mutual covenants of
the parties, the most significant of which are that each party agrees:
. not to jeopardize the intended tax or accounting treatment of the
merger, and
. to consult with the other before issuing any press release or otherwise
making any public statement with respect to the merger.
Representations and Warranties
The merger agreement contains representations and warranties made by
VITEX and Pentose to each other. The most significant of these relate to:
. corporate authorization to enter into the contemplated transaction;
. the stockholder votes required to approve the contemplated transaction;
I-43
<PAGE>
. governmental approvals required in connection with the contemplated
transaction;
. absence of any breach of organizational documents, law or certain
material agreements as a result of the contemplated transaction;
. capitalization;
. ownership of subsidiaries;
. filings with the SEC;
. information provided by it for inclusion in this Joint Proxy
Statement/Prospectus;
. financial statements;
. absence of certain material changes since a specified balance sheet
date;
. intellectual property;
. tax matters; and
. finders' or advisors' fees.
In addition, Pentose represents and warrants to VITEX as to certain other
matters, including
. absence of undisclosed material liabilities;
. compliance with laws;
. litigation;
. employee benefits matters;
. environmental matters;
. absence of liens on assets;
. material contracts; and
. the accuracy of the books and records.
The representations and warranties in the merger agreement do not survive
the closing or termination of the merger agreement except that claims based upon
the untruth of a representation or warranty based on fraud or willful,
intentional or reckless misrepresentation or willful omission shall survive in
accordance with the applicable statute of limitations.
Conditions to the Completion of the Merger
Mutual Closing Conditions. The obligations of VITEX and Pentose to
complete the merger are subject to the satisfaction or, to the extent legally
permissible, waiver of the following conditions:
. approval by the VITEX and Pentose stockholders;
. absence of legal prohibition on completion of the merger;
. VITEX's registration statement on Form S-4, which includes this proxy
statement/prospectus, being effective and not subject to any stop order
by the SEC;
I-44
<PAGE>
. the filing of a Notification Form for Listing of Additional Shares
with Nasdaq and the payment of the applicable fee by VITEX;
. receipt of opinions of VITEX's and Pentose's counsel that the merger
will qualify as a tax-free reorganization;
. absence of a material adverse effect or any reasonable expectation of
a material adverse effect on VITEX or Pentose during the period from
July 28, 1999 until closing;
. accuracy as of closing of the representations and warranties made by
the other party to the extent specified in the merger agreement;
. performance in all material respects by the other party of the
obligations required to be performed by it at or prior to closing;
. receipt of all material consents, waivers, approvals or orders
required to be obtained;
. absence of any action or proceeding by any governmental authority
seeking to prohibit the waiver; and
. receipt by each party of an opinion of counsel to the other party
regarding the merger.
Additional closing conditions for VITEX's Benefits. VITEX's obligations to
complete the merger is subject to the following additional conditions:
. receipt of agreements executed by affiliates of Pentose regarding
compliance with securities laws;
. receipt of lock-up agreements from affiliates of Ampersand Ventures
and Dr. Samuel K. Ackerman providing for restrictions on transfer of
shares of VITEX common stock received in the merger;
. receipt of a fairness opinion dated July 26, 1999 and the effective
date of this Joint Proxy Statement/Prospectus that the merger
consideration is fair to VITEX from a financial point of view;
. receipt of all consents to the transfer of all material agreements;
. dissenting stockholders shall have not exercised dissenters' rights
with respect to more than 5% of the Pentose capital stock; and
. VITEX shall receive an amendment to the tax indemnity agreement
limiting the liability thereunder of Pentose to $50,000.
Termination of the Merger Agreement
Right to Terminate. The merger agreement may be terminated at any time
prior to the closing in any of the following ways:
(a) By mutual written consent of VITEX and Pentose.
(b) By either VITEX or Pentose if:
(1) the merger has not been completed by January 31, 2000 provided
the party terminating may not be the party whose conduct was
responsible for not closing;
(2) VITEX or Pentose stockholders fail to give the necessary
approval at a duly held meeting provided the party terminating may
not be the party whose conduct was responsible for the failure to
receive such vote;
(3) there is a permanent legal prohibition to closing the merger;
I-45
<PAGE>
(4) if the Board of Directors of the other party shall have
withheld, withdrawn or modified in any way adverse to such party its
recommendation in favor of the merger;
(5) upon the breach of any covenant or agreement in the merger
agreement by the other party which is not cured as provided for in
such agreement;
(6) if there shall have occurred any material adverse change with
respect to the other party; or
(7) if any representation or warranty on the part of the other
party proves to be untrue on July 28, 1999, if such failure is
reasonably likely to have a material adverse effect.
If the merger agreement is validly terminated, the agreement will become
void without any liability on the part of any party unless such party is in
willful breach thereof. However, the provisions of the merger agreement
relating to termination fees will continue in effect notwithstanding termination
of the merger agreement.
Termination Fees Payable by Pentose. Pentose has agreed to pay VITEX a
cash amount equal to $1 million in any of the following circumstances:
(a) VITEX terminates the merger agreement due to a representation or
warranty on the part of Pentose that is untrue on July 28, 1999, if
such failure is reasonably likely to have a material adverse effect; or
(b) either VITEX or Pentose terminates the merger agreement in
circumstances where the following conditions are met:
(1) Pentose's stockholders do not vote in favor of the merger; and
(2) within six months of the termination of the merger agreement
Pentose enters into an agreement for an alternative transaction
with a third party.
Termination Fees Payable by VITEX. VITEX has agreed to pay Pentose a cash
amount equal to $1 million if Pentose terminates the merger agreement due to a
representation or warranty on the part of VITEX that is untrue on July 28, 1999,
if such failure is reasonably likely to have a material adverse effect.
Investment Upon Termination
In the event that the merger agreement is terminated in any situation not
involving payment of a termination fee or the mutual consent of VITEX and
Pentose, within 30 days VITEX shall, if requested by Pentose, purchase a
$2,000,000 promissory note convertible into shares of Pentose stock sold in its
next equity financing at such price or, if such financing is not closed within
nine months from the date of termination of the merger agreement, Series B
preferred stock at the price of $2.97 per share. Such obligation is conditioned
upon affiliates of Ampersand Ventures investing an equal amount in Pentose on
the same terms and conditions.
Other Expenses
Except as described above and subject to an exception relating to the
payment of transfer taxes, all costs and expenses incurred in connection with
the merger agreement and related transactions will be paid by the party
incurring such costs or expenses. We estimate that merger-related fees and
expenses, consisting primarily of SEC filing fees, fees and expenses of
investment bankers, attorneys and accountants, and financial printing and other
related charges, will total approximately $1,500,000 assuming the merger is
completed.
Amendments and Waivers
Any provision of the merger agreement may be amended or waived prior to
closing if the amendment or waiver is in writing and signed, in the case of an
amendment, by Pentose and VITEX or, in the case of a waiver, by the party
against whom the waiver is to be effective. After the approval of the merger
agreement by the stockholders of Pentose, no amendment or waiver that by law
requires further approval by stockholders may be made without the further
approval of such stockholders.
I-46
<PAGE>
Appraisal Rights
By virtue of Section 262 of the Delaware General Corporation Law, or the
DGCL, if holders of Pentose stock exercise appraisal rights in connection with
the merger, any shares of Pentose stock as to which such appraisal rights are
exercised will not be converted into the right to receive shares of VITEX common
stock but instead will be converted into the right to receive such consideration
as may be determined to be due with respect to such dissenting shares pursuant
to the DGCL.
THE FOLLOWING SUMMARY OF THE PROVISIONS OF SECTION 262 IS NOT INTENDED TO
BE A COMPLETE STATEMENT OF SUCH PROVISIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SECTION 262, A COPY OF WHICH IS ATTACHED HERETO AS
ANNEX D AND IS INCORPORATED HEREIN BY REFERENCE.
If the merger is approved by the required vote of Pentose's stockholders,
each holder of Pentose stock who (1) files written notice with Pentose of his
intention to exercise his rights to appraisal of his shares prior to the Pentose
special meeting and (2) does not vote in favor of the merger and who follows the
procedures set forth in Section 262 will be entitled to have his, her or its
Pentose stock purchased by the surviving corporation for cash at the fair market
value of the shares of Pentose stock. The fair market value of shares of Pentose
stock will be determined by the Delaware Court of Chancery, exclusive of any
element of value arising from the merger. The shares of Pentose stock with
respect to which holders have perfected their appraisal demand in accordance
with Section 262 and have not effectively withdrawn or lost such appraisal
rights are referred to in this Joint Proxy Statement/Prospectus as the
"dissenting shares."
Within ten days after the effective date, Pentose must mail a notice to all
stockholders who have complied with 1 and 2 above notifying such stockholders of
the effective date. Within 120 days after the effective date such holders of
stock may file a petition in the Delaware Court of Chancery for the appraisal of
their shares, provided such holders may within 60 days of the effective date
withdraw their demand for appraisal. Within 120 days of the effective time, the
holders of dissenting shares may also, upon written request, receive from the
surviving corporation a statement setting forth the aggregate number of shares
with respect to which demands for appraisals have been received.
If any holder of Pentose stock who demands the appraisal and purchase of
his, her or its shares under Section 262 fails to perfect, or effectively
withdraws or loses his or her right to such purchase, the shares of such holder
will be converted into a right to receive a number of shares of VITEX common
stock in accordance with the terms of the merger agreement. Dissenting shares
lose their status as dissenting shares if
. the merger is abandoned;
. the shares are transferred prior to their submission for the required
endorsement;
. the dissenting stockholder fails to make a timely written demand for
appraisal;
. the dissenting shares are voted in favor of the merger;
. neither VITEX nor the stockholder files a complaint or intervenes in a
pending action within 120 days after mailing of the approval notice; or
. the stockholder delivers to VITEX a written withdrawal of such
stockholder's demand for appraisal of his, her or its shares.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 FOR PERFECTING
APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS (IN WHICH EVENT A
STOCKHOLDER WILL BE ENTITLED TO RECEIVE THE CONSIDERATION RECEIVABLE WITH
RESPECT TO SUCH DISSENTING SHARES IN ACCORDANCE WITH THE MERGER AGREEMENT). IN
VIEW OF THE COMPLEXITY OF THE PROVISIONS OF SECTION 262, PENTOSE STOCKHOLDERS
WHO ARE CONSIDERING OBJECTION TO THE MERGER SHOULD CONSULT THEIR OWN LEGAL
ADVISORS.
I-47
<PAGE>
CHAPTER TWO--
INFORMATION ABOUT THE MEETINGS AND VOTING
VITEX's Board is using this Joint Proxy Statement/Prospectus to solicit
proxies from the holders of VITEX common stock for use at the VITEX meeting.
Pentose's Board is also using this document to solicit proxies from the holders
of Pentose common stock and Pentose preferred stock for use at the Pentose
meeting. We are first mailing this Joint Proxy Statement/Prospectus and
accompanying form of proxy to VITEX and Pentose stockholders on or about
___________________________, 1999.
Matters Relating to the Meetings
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
VITEX Meeting Pentose Meeting
------------- ---------------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Time and Place: ___________, 1999 ____________, 1999
10:00 a.m., Eastern Time 10:00 a.m., Eastern Time
Mintz, Levin, Cohn, Ferris, Glovsky and Palmer & Dodge LLP
Popeo, P.C. One Beacon Street
One Financial Center Boston, MA 02108
Boston, MA 02111
- ---------------------------------------------------------------------------------------------------------------------
Purpose of Meeting is 1. the merger agreement and the merger, 1. the merger agreement and the merger as
to Vote on the including the related issuance of up to described under " Chapter One - The
Following Items: ____ shares of VITEX common stock, Merger - The Merger Transaction -
described under "Chapter One - The General";
Merger - The Merger Transaction -
General";*
2. the adoption of a new option plan, as 2. such other matters as may properly
described under "Chapter Six - VITEX come before the Pentose meeting,
Special Meeting Proposals - Item 1 - including the approval of any
Adoption of Supplemental Stock Option adjournment of the meeting.
Plan" beginning on page VI - 1.
3. the amendment to the VITEX charter
described under "Chapter Six - VITEX
Special Meeting Proposals - Item 3 -
Amendment of VITEX's Certificate of
Incorporation" beginning on page VI-3.
4. such other matters as may properly come
before the VITEX meeting, including the
approval of any adjournment of the
meeting.
* The VITEX charter amendment will not be
effected and the adoption of the
Supplemental Stock Option Plan will not
occur unless the merger is approved by
VITEX stockholders.
- ---------------------------------------------------------------------------------------------------------------------
Record Date: The record date for shares entitled to vote The record date for shares entitled to vote
is September 23, 1999. is ________________, 1999.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
VITEX Meeting Pentose Meeting
------------- ---------------
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding As of September ____, 1999, there were As of September 10, 1999, there were 4,949,736
Shares Held on ________ shares of VITEX common stock shares of Pentose common stock, 4,500,000
Record Date: outstanding. shares of Series A Preferred Stock, and
2,356,903 shares of Series B Preferred Stock
outstanding.
Shares Entitled to Shares entitled to vote are VITEX common Shares entitled to vote are Pentose common
Vote: stock held at the close of business on the stock and Pentose preferred stock held at
record date, September 23, 1999. the close of business on the record date,
__________, 1999.
Each share of VITEX common stock that you Each share of Pentose common stock and
own entitles you to one vote. Pentose preferred stock that you own
entitles you to one vote. The Pentose
preferred stock is entitled to vote on all
matters submitted to a vote of holders of
common stock, voting with the common stock
as a single class.
Shares held by VITEX in its treasury are Shares held by Pentose in its treasury are
not voted. not voted.
- -----------------------------------------------------------------------------------------------------------------------
Quorum A quorum of stockholders is necessary to A quorum of stockholders is necessary to
Requirement hold a valid meeting. hold a valid meeting.
The presence in person or by proxy at the The presence in person or by proxy at the
meeting of holders of shares representing a meeting of holders of shares representing
majority of the votes of the VITEX common at least a majority of the votes of the
stock entitled to vote at the Meeting is a Pentose common stock and Pentose preferred
quorum. Abstentions and broker "non-votes" stock entitled to vote at the meeting is a
count as present for establishing a quorum. quorum. Abstentions count as present for
Shares held by VITEX in its treasury or establishing a quorum. Shares held by
held by another corporation where the Pentose in its treasury do not count toward
majority of shares entitled to vote in the a quorum.
election of directors of such other
corporation is held by VITEX do not count
toward a quorum.
A broker non-vote occurs on an item when a
broker is not permitted to vote on that
item without instruction from the
beneficial owner of the shares and no
instruction is given.
- -----------------------------------------------------------------------------------------------------------------------
Shares 8,244,763 shares of VITEX common stock, 7,296,669 shares of Pentose common stock
Beneficially including exercisable options. These and shares of Pentose preferred stock.
Owned by VITEX shares represent in total approximately 65% These shares represent in total
and Pentose of the voting power of VITEX's common stock. approximately 67.9% of the voting power of
Directors and Pentose's voting securities, voting
Executive Officers together as a single class.
as of July 30, 1999:
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
II-2
<PAGE>
Vote Necessary to Approve VITEX and Pentose Proposals
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Item Vote Necessary
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
I. Merger Proposal VITEX: Approval of the merger and merger agreement described in
"Chapter One -- The Merger" requires an affirmative vote
of 66 2/3% of the issued and outstanding shares of VITEX
common stock. A failure to vote or an abstention or a
broken non-vote has the same effect as a vote against.
Pentose: Approval of the merger and the merger agreement requires
the affirmative vote of a majority of the issued and
outstanding shares of Pentose common stock and Pentose
preferred stock. A failure to vote or an abstention has
the same effect as a vote against.
- ------------------------------------------------------------------------------------------------------------------
II. Adoption of Supplemental Stock VITEX: The adoption of the 1999 Supplemental Stock Option Plan as
Option Plan described in "Chapter Six VITEX Special Meeting Proposals
- Item 2 - Adoption of New Option Plan", requires the
affirmative vote of the holders of a majority of the shares
of common stock represented and voting at the meeting. A
failure to vote or an abstention has the same effect as a
vote against; a broker non-vote has no effect on the vote.
Pentose: Not Applicable
- ------------------------------------------------------------------------------------------------------------------
III. Amendment of VITEX Charter VITEX: The amendment of the VITEX charter as described in "Chapter
Six - VITEX Special Meeting Proposals - Item 3 - Amendment
of VITEX's Certificate of Incorporation" requires the
affirmative vote of the holders of a majority of the shares
of common stock represented and voting at the meeting. A
failure to vote or an abstention or a broken non-vote has
the same effect as a vote against.
Pentose: Not Applicable
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
II-3
<PAGE>
Proxies
Voting Your Proxy. You may vote in person at your meeting or by proxy. We
recommend you vote by proxy even if you plan to attend your meeting. You can
always change your vote at the meeting.
Voting instructions are included on your proxy or proxy card. If you
properly give your proxy and submit it to the address set forth on page I-1 in
time to vote, one of the individuals named as your proxy will vote your shares
as you have directed. You may also vote for or against the other proposals or
abstain from voting.
How to Vote by Proxy
<TABLE>
<CAPTION>
VITEX Pentose
----- -------
<S> <C>
Complete, sign, date and return your proxy card Complete, sign, date and return your proxy
in the enclosed envelope. in the enclosed envelope.
</TABLE>
If you submit your proxy but do not make specific choices, your proxy will
follow the Board's recommendations and vote your shares:
<TABLE>
<CAPTION>
VITEX Pentose
<S> <C>
. "FOR" the VITEX merger proposal . "FOR" the Pentose merger proposal
. "FOR" adoption of the supplemental stock option
plan (as described beginning on page VI-1)
. "FOR" the amendment of VITEX's Certificate of
Incorporation (as described beginning on page VI-3)
. "FOR" any proposal by the VITEX Board to adjourn the . "FOR" any proposal by the Pentose Board to
meeting. adjourn the meeting.
. In its discretion as to any other business as may . In its discretion as to any other business as may
properly come before the VITEX meeting properly come before the Pentose meeting.
</TABLE>
Revoking Your Proxy. You may revoke your proxy before it is voted by:
. submitting a new proxy with a later date,
. notifying your company's Secretary (in the case of Pentose) or
Assistant Secretary (in the case of VITEX) in writing before the
meeting that you have revoked your proxy, or
. voting in person at the meeting.
Voting in person. If you plan to attend a meeting and wish to vote in
person, we will give you a ballot at the meeting. However, if your shares are
held in the name of your broker, bank or other nominee, you must bring an
account statement or letter from the nominee indicating that you are the
beneficial owner of the shares on ___________, 1999, the record date for voting.
People with disabilities. We can provide reasonable assistance to help you
participate in the meeting if you tell us about your disability and your plan to
attend. Please call or write the Secretary or Assistant Secretary, as the case
may be, of your company at least two weeks before your meeting at the number or
address under "The Companies" on page I-2.
Proxy solicitation. VITEX will pay its own costs, if any, of soliciting
proxies. VITEX reserves the right to retain outside agencies for the purpose of
soliciting proxies. Pentose will pay its own costs, if any, of soliciting
proxies.
In addition to this mailing, VITEX and Pentose employees may solicit
proxies personally, electronically or by telephone.
II-4
<PAGE>
The extent to which these proxy soliciting efforts will be necessary
depends entirely upon how promptly proxies are submitted. You should send in
your proxy without delay. We also reimburse brokers and other nominees for their
expenses in sending these materials to you and getting your voting instructions.
Do not send in any stock certificates with your proxy. VITEX will provide
instructions for the surrender of stock certificates for Pentose common stock
and Pentose preferred stock to Pentose stockholders immediately prior to the
completion of the merger.
Other Business; Adjournments
We are not currently aware of any other business to be acted upon at either
meeting. Under the laws of Delaware, where VITEX and Pentose are incorporated,
no business other than procedural matters may be raised at the VITEX meeting
unless proper notice to the stockholders has been given. If, however, other
matters are properly brought before either meeting, or any adjourned meeting,
your proxies will have discretion to vote or act on those matters according to
their best judgment, including to adjourn the meeting.
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by approval of
the holders of shares representing a majority of the votes present in person or
by proxy at the meeting, whether or not a quorum exists, without further notice
other than by an announcement made at the meeting. Neither of us currently
intends to seek an adjournment of our meeting.
II-5
<PAGE>
Chapter Three - Other Information Regarding VITEX
CHAPTER THREE---
OTHER INFORMATION REGARDING VITEX
BUSINESS OF VITEX
OVERVIEW
V.I. Technologies, Inc. ("VITEX") is a leading developer of a broad
portfolio of blood products and systems which use its proprietary viral
inactivation technologies. VITEX's technologies are intended to address the
risks of viral contamination in blood products, including plasma, plasma
derivatives, red blood cells and platelets. Viral inactivation processes have
the potential to eliminate viruses that are enveloped by lipid membranes such as
hepatitis B virus ("HBV"), hepatitis C virus ("HCV") and HIV, the virus that
causes AIDS, and non-enveloped viruses such as hepatitis A virus ("HAV") and
parvovirus and other known and unknown pathogens.
VITEX currently manufactures two human therapeutic products:
. PLAS+SD. VITEX has entered into a collaboration agreement with the
American National Red Cross (the "Red Cross") whereby the Red Cross is
the exclusive distributor of VITEX's PLAS+SD in North America.
PLAS+SD, the first of VITEX's virally inactivated products, received
marketing clearance from the FDA on May 6, 1998. Commercial scale
production and sale of PLAS+SD, a pooled transfusion plasma which
utilizes VITEX's solvent/detergent ("SD") viral inactivation
technology to inactivate lipid enveloped viruses, began in June 1998.
PLAS+SD is the only FDA-approved virally inactivated blood component
available for use in the United States.
. VITEX Plasma Fractions. VITEX supplies VITEX Plasma Fractions,
primarily to Bayer Corporation ("Bayer"), under a collaboration
arrangement. VITEX utilizes a combination of fractionation procedures
to separate and purify the protein components of plasma. The plasma
fractions are further processed by VITEX's customers into virally
inactivated plasma derivatives for use in FDA-approved therapeutic
applications.
VITEX's other virally inactivated blood product candidates are all under
development and include:
. Universal PLAS+SD. Universal PLAS+SD is a product candidate which is
intended to provide the same benefits as PLAS+SD without the need for
matching donor and recipient blood types. Under VITEX's collaboration
agreement with the Red Cross, the Red Cross has a right of first offer
to distribute this product if it is approved by the FDA. VITEX filed
an IND for Universal PLAS+SD on August 8, 1999.
. Universal PLAS+SD II. Universal PLAS+SD II is intended to improve upon
Universal PLAS+SD by adding additional methods of viral inactivation
to inactivate both enveloped and non-enveloped viruses. Universal
PLAS+SD II is at an early stage of development and, consequently,
there can be no assurance that VITEX will be able to successfully
develop, secure approval for or commercialize this product.
. VITEX Fibrin Sealant. VITEX Fibrin Sealant, which is currently in
Phase III clinical trials, is designed for use during surgical
procedures for hemostasis and to augment or replace sutures or staples
for wound closure. VITEX has collaborated with United States Surgical
Corporation ("U.S. Surgical") to develop this product candidate and
distribute it if it is approved by the FDA.
. VITEX RBCC Systems. VITEX has entered into strategic collaboration
agreements with Pall Corporation ("Pall") for the development and
marketing, subject to FDA approval, of VITEX RBCC Systems which employ
VITEX's technologies to broadly inactivate viruses and other pathogens
in red blood cell concentrates. Upon consummation of the merger
contemplated hereby, VITEX intends to incorporate Pentose's INACTINE
technologies into this collaboration.
VITEX's mission is to enable the global availability of safe blood products
using its proprietary viral inactivation systems. To achieve this objective,
VITEX intends to: (1) expand its technological leadership; (2) build a broad
product portfolio; and (3) leverage existing manufacturing capabilities and
regulatory expertise. VITEX believes that the sales, marketing and distribution
agreements that have been established with its strategic collaborators can
accelerate the commercialization of VITEX's products.
III-1
<PAGE>
VITEX's predecessor, Melville Biologics, Inc., was formed more than 15
years ago by the New York Blood Center, Inc. ("NYBC"), a world leader in
research and development in the fields of hematology and transfusion medicine,
to process plasma fractions and derivatives, and to facilitate the NYBC's
research efforts. VITEX was incorporated in Delaware in January 1993. Effective
January 1, 1995, pursuant to a transfer agreement between VITEX and the NYBC,
the NYBC transferred to VITEX substantially all of the assets of Melville
Biologics, Inc., including a manufacturing facility used primarily to produce
plasma fractions and related operating and product licenses and certain other
specified tangible and intangible assets, as well as various contracts and the
assumption of certain obligations of the NYBC related to such assets and
contracts. As a result of its spin-off from the NYBC, VITEX became the licensee
of a substantial portfolio of patents and patent applications held by the NYBC,
including those related to the use of the SD viral inactivation technology. In
exchange for these net assets, the NYBC received all of the then issued and
outstanding common stock of VITEX.
Background
Whole blood contains important therapeutic components, including red blood
cells, platelets and plasma. Each of these components can be transfused directly
into patients. Plasma may also be fractionated into plasma fractions, which in
turn can be purified into protein products, referred to as plasma derivatives.
The worldwide blood products market is comprised of the blood components market
and the plasma derivatives market, as illustrated by the following diagram:
-------------
Therapeutic
Blood
Products
-------------
------------ -------------
Blood Plasma
Components Derivatives
------------ -------------
- -------- ----------- ------------ --------- ----------- ------------
Red
Blood Platelets Transfusion Albumin Clotting Immuno-
Cells Plasma Factors globulins
- -------- ----------- ------------ --------- ----------- ------------
The Blood Components Market
Blood Components. Each of the components of blood serves specific
functions. Red blood cells, which transport oxygen and carbon dioxide throughout
the body, are frequently administered to patients who have anemia, trauma,
surgical bleeding or genetic disorders and account for the majority of
transfusions. Platelets, which initiate blood clotting and facilitate the repair
of damaged blood vessels, are often used to treat cancer patients following
chemotherapy and patients who lose large volumes of blood as a result of trauma
or during surgery. Plasma is the liquid part of the blood that contains a large
number of proteins, several of which have important therapeutic applications,
including mediating and controlling blood clotting, providing immune protection,
and treating several rare and life-threatening diseases such as thrombotic
thrombocytopenic purpura ("TTP"). White blood cells, an additional component of
blood, are comprised of many different types of cells that form part of the
body's immune system and are active in wound repair. White blood cells are
rarely transfused because of the potential for an adverse immune response by the
recipient.
Collection and Processing. The processors in the blood components market
collect and process whole blood from donors at either mobile or fixed collection
sites. Approximately 35 million whole blood donations occur in North America,
Western Europe and Japan annually. In the United States, approximately 45% of
donated blood is collected by the Red Cross, another 45% is collected by
independent community blood centers and the remaining 10% is collected by
hospitals.
Whole blood is usually separated by blood banks into red blood cells,
platelets and plasma to optimize transfusion therapy and to efficiently allocate
the limited available blood supply. These blood components are then distributed
by blood collection centers to hospitals for storage and subsequent transfusion.
Red blood cells and platelets each have a very short shelf life, of 42 and 5
days, respectively. Plasma can be frozen and stored for up to one year in the
form of fresh frozen plasma ("FFP") after being collected.
III-2
<PAGE>
Transfusions. VITEX projects that approximately 30% to 40% of all people in
the United States will receive a transfusion at some point in their lives.
Transfusions containing one or more blood components are often required to treat
diseases or disorders and to replace blood loss resulting from trauma or during
surgery. In the United States, over 11.3 million units of red blood cells are
transfused annually, while annual platelet and plasma transfusions account for
approximately 8.0 million units and 2.8 million units, respectively. The average
unit price paid by hospitals for red blood cells, platelets and plasma is
estimated to be approximately $85, $50 and $50, respectively, and varies
depending on geographic and other factors.
The Plasma Derivatives Market
Plasma Derivatives. Plasma contains a large number of proteins, several of
which are well characterized and have FDA-approved therapeutic applications.
These proteins are separated and purified into plasma derivatives through a
combination of fractionation procedures and modern chromatographic techniques.
Collection and Processing. Approximately 80% of plasma used for
fractionation in North America is collected from paid donors by plasmapheresis
- --the removal of blood plasma from the body by the withdrawal of blood, its
separation into plasma and blood cells and the reintroduction of the blood cells
into the body. After plasma is collected from donors, it is frozen and shipped
to large processing facilities where fractionators purify, virally inactivate,
sterile fill and package protein products. Plasma derivatives are then sold to
hospitals where they are administered to patients. Four plasma fractionators,
Bayer, Centeon L.L.C., Alpha Therapeutics, and Baxter Corporation, currently
account for almost 50% of the worldwide plasma derivatives market. These plasma
fractionators are currently operating at or near manufacturing capacity. The
large capital costs involved in establishing fractionation capacity and the
regulatory approvals necessary to manufacture and sell fractionated products may
tend to restrict the entry of new participants into the market.
Applications. Plasma derivatives have widespread therapeutic applications.
Albumin is frequently used as a volume expander to treat high volume blood loss,
which occurs during surgical procedures. Factor VIII and Factor IX concentrates
are routinely administered to patients with hemophilia. Immunoglobulins,
including formulations for intravenous administration, have been embraced for
the prevention and treatment of viral infections in immunocompromised patients
and in treating certain autoimmune disorders. The market for plasma derivatives
delivered to hospitals in 1994 was approximately $1.1 billion in the United
States and approximately $4.6 billion worldwide.
Challenges Facing the Blood Products Market
The use of plasma and plasma derivatives has increased dramatically in the
United States over the past two decades. In its July 1998 issue, the periodical
"Transfusion" reported that fresh frozen plasma usage increased by over 16%
between 1992 and 1994. While plasma and its derivatives represent a valuable and
lifesaving resource, these products have transmitted infectious agents to
recipients, most notably HIV, HBV and HCV. The viral safety of transfused blood
products relies on the dual safeguards of careful donor screening and rigorous
viral testing of donations.
Safety of the Blood Supply. Despite the many benefits that blood products
provide, and recent improvements in testing and processing of blood, concerns
remain over the presence of viruses, bacteria and parasites in donated blood.
Viruses such as HBV, HCV, HIV, cytomegalovirus ("CMV") and human T-cell
lymphotropic virus ("HTLV") can present life-threatening risks. In addition,
bacteria and many other agents can transmit disease during transfusion,
including the bacteria which can cause sepsis or other systemic infections which
can result in serious illness or even death. The parasites that cause malaria
and Chagas' disease may also be transmitted by transfusions.
The risk of transmission of any of these pathogens from an infected donor
is compounded by a number of factors, including:
. dividing a unit of infected blood into its components which may expose
several patients to the pathogen;
. deriving therapeutic quantities of blood components from typically two
to eight donor units, any one of which may contain pathogens; and
. administering frequent transfusions to certain patient populations,
such as patients with cancer, suppressed immune systems, congenital
anemia and kidney and liver disorders, resulting in a heightened risk
of infection
III-3
<PAGE>
due to multiple transfusions. The following table illustrates the
current risks of exposure to the major, identified pathogenic viruses
in transfused blood.
Risks of Viral Infection from Blood Transfusions
<TABLE>
<CAPTION>
Average Multiple
--------- --------
Single Transfusion(1) Transfusions(2)
--------------------- ---------------
Virus (5 donors) (100 donors)
---------- ------------
<S> <C> <C>
HBV........................................................ 1:12,600 1:630
HCV........................................................ 1:20,600 1:1,030
HIV........................................................ 1:98,600 1:4,930
HTLV (I&II)................................................ 1:128,200 1:6,410
Aggregate Risk............................................. 1:6,800 1:340
</TABLE>
(1) Such as patients who have had surgery or trauma.
(2) Such as patients who have cancer, liver disease and sickle cell
anemia.
Emerging and unidentified pathogens also present a threat to the blood
supply, illustrated by the recent history of HIV contamination. It is estimated
that HIV was present in the blood supply for at least seven years before it was
identified as the causative agent of AIDS and at least eight years before a test
was commercially available to detect the presence of HIV antibodies in donated
blood. During those years, many transfusion recipients were infected with HIV,
including approximately 70% of patients with severe hemophilia. In addition,
approximately 2.7 million Americans are infected with HCV. Eighty-five percent
of those infected develop chronic liver disease and approximately 10-20% develop
cirrhosis of the liver. Of these 4 million people, more than one million have
received potentially HCV infected blood or blood products. Moreover, most tests
to detect viruses are antibody tests, which detect an immune response to the
virus, rather than the virus itself. As a result, these tests fail to detect
viruses when performed during the "infectivity window" early in the course of an
infection before antibodies appear in detectable quantities.
Product Consistency. Unlike pharmaceutical products, blood components vary
in their consistency, creating uncertainty as to proper dosing. This occurs as a
result of:
. the variability of component concentrations among donors;
. the impracticality of selecting donors with the optimal blood
component profile; and
. the imprecision in the processes for collecting and separating red
blood cells, platelets and plasma.
Large plasma fractionators achieve high consistency by processing plasma from
multiple donors in a single batch and through processing under controlled
conditions.
Approaches to the Safety of the Blood Supply
There are several approaches to improving blood safety currently available
and under development, including the following:
Screening. The screening of blood and blood components for known pathogens
is universally accepted. However, there are many reasons why screening cannot
ensure a safe blood supply, including the following:
. failure of tests during the infectivity window;
. limitations of test sensitivity where tests cannot detect a small
quantity of virus or antibody;
. limitations of test specificity where tests fail to detect certain
viral variants;
III-4
<PAGE>
. the presence of new viruses that have not been identified and for
which no test exists; (v) the presence of identified viruses for which
no test is available; and
. human error.
Donation Strategies. Autologous (self) donation avoids the risk of
receiving contaminated donor blood, but is impractical for most patients.
Quarantining of blood seeks to address the problems associated with the
infectivity window by storing a donor's blood for three to six months after
which time the donor must return for additional testing. However, quarantining
depends on the donor's timely return for additional testing, cannot be applied
to red blood cells or platelets because of their limited shelf life and is
subject to limitations associated with blood screening.
Blood Substitutes. Several companies are developing synthetic blood
substitutes. However, blood substitutes may be less effective in certain
indications than the blood components they are intended to replace, and may be
missing important blood factors, including those utilized for blood clotting,
immune surveillance and wound healing.
Viral Inactivation. Viral inactivation has been used successfully for
plasma derivatives worldwide since the mid-1980's and for the treatment of
transfusion plasma in Europe since the early 1990's. Viral inactivation has the
potential to inactivate both known and unknown viruses. Viral inactivation for
cellular blood components, such as red blood cells, is still under development.
Products and Product Development
VITEX has developed and is further developing a comprehensive portfolio of
blood products and systems using its proprietary viral inactivation
technologies. In addition to SD technology, which inactivates lipid-enveloped
viruses in protein solutions, VITEX is developing several other viral
inactivation technologies, including, through a collaboration with Pentose,
INACTINE technology, which it expects to acquire from Pentose as a part of the
merger transaction. These additional technologies include an irradiation
technology that uses short wavelength ultraviolet light ("UVC") to inactivate
both enveloped and non-enveloped viruses in protein solutions and affinity
chromatography technology in which ligands are used to develop specific bonds to
targeted proteins for the removal of viruses and other pathogens. Additionally,
VITEX expects to further develop INACTINE compounds to inactivate both enveloped
and non-enveloped viruses in plasma. After the merger, Pentose's INACTINE
compounds will be incorporated into VITEX's existing red cell programs. The
following table identifies VITEX's principal product candidates and product
development programs:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Viral
VITEX Inactivation Therapeutic Development
Market Product Technology Indication Collaborator Status
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Plasma Derivatives VITEX Plasma SD(1) Expanding blood Bayer Commercialization
Fractions volume, treating commenced November
infections and diseases 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Transfusion Plasma PLAS+SD SD Controlling bleeding Red Cross PLA and ELA
approved by FDA on
May 6, 1998.
Commercialization
commenced in June
1998
Universal PLAS+SD SD Controlling bleeding, Red Cross(2) Research and
without need for blood development; IND
typing filed in August
1999
Universal PLAS+SD II SD; UVC; Controlling bleeding, Red Cross(2) Research and
INACTINE without need for blood development
typing
- -----------------------------------------------------------------------------------------------------------------------------------
Wound Care VITEX Fibrin Sealant SD; UVC; Tissue sealant, U.S. Surgical Phase III clinical
Quenchers controlling bleeding trials; BLA filing
and wound care anticipated
during 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Red Blood Cell VITEX RBCC Pc 4; Treatment for anemia and Pall Pentose red cell
Concentrates INACTINE genetic disorders IND filed August
(3) 1999
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
III-5
<PAGE>
(1) SD technology is used by VITEX's customers under non-exclusive licenses from
the NYBC to virally inactivate certain plasma derivatives manufactured from
fractions supplied to them by VITEX.
(2) The Red Cross has a right of first offer to distribute this product.
(3) VITEX has pursued a program for viral inactivation for red cells based on a
technology employing a light-activated compound, Pc4. VITEX expects to scale
back this approach and, following the merger, concentrate on the Pentose
INACTINE technology. The Pentose red cell program will be implemented under the
Pall collaboration.
Plasma Derivatives
VITEX Plasma Fractions. VITEX is currently producing and selling
commercial quantities of its VITEX Plasma Fractions, principally to Bayer, one
of the four major providers of plasma derivatives worldwide. Bayer purifies and
produces virally inactivated fractions using SD technology and packages these
plasma fractions as final plasma derivatives products. Because most blood
products processors have been licensed by the NYBC to use SD technology in the
manufacture of virally inactivated plasma derivatives, VITEX's strategy has been
to be a supplier to, rather than a competitor of, these plasma fractionators.
VITEX's Processing Agreement with Bayer is structured as a multi-year "take-or-
pay" supply agreement.
Plasma Derivatives Market. The principal products derived from plasma are
albumin, Factor VIII and Factor IX and immunoglobulins. The market for plasma
derivatives was estimated to be approximately $1.1 billion in the United States
and approximately $4.6 billion worldwide in 1994. VITEX believes that worldwide
demand for plasma derivatives is increasing at a rate of 10-20% annually, due
primarily to an aging population requiring more medical care, the discovery of
new clinical applications for existing products derived from plasma, and the
development of new products such as fibrin sealants and other bioadhesives.
While the demand for plasma derivatives is increasing, each of the four major
fractionators, Bayer, Centeon, Alpha Therapeutics and Baxter, is currently
operating at or near manufacturing capacity. Because of the substantial capital
expenditures and time associated with the construction, validation and licensing
of fractionation facilities, VITEX believes that demand for its fractionation
capacity will remain high for the foreseeable future.
The NYBC processed plasma fractions and derivatives from 1970 through 1993.
Following its spin-off from the NYBC in 1995, VITEX began processing plasma
fractions and has since expanded this business. The NYBC also received an
establishment license from the FDA for a new manufacturing facility in 1980.
The NYBC received product licenses from the FDA for the manufacture of albumin,
Factor VIII and immunoglobulins. These FDA approvals were included in the
assets assigned to VITEX in January 1995.
Transfusion Plasma
PLAS+SD. PLAS+SD, which serves as a virally inactivated substitute to FFP,
was approved for marketing by the FDA on May 6, 1998. While virally inactivated
plasma fractions have been commercially available since 1985, PLAS+SD is the
only virally inactivated blood component, as opposed to virally inactivated
plasma fraction, marketed in the United States. PLAS+SD is a transfusion plasma
treated with the SD viral inactivation process to virtually eliminate the
transmission of HIV, HBV, HCV and other lipid-enveloped viruses which present
the most significant viral risks from blood transfusions. Its labeled uses are
the same as those for FFP and include the treatment of certain coagulation
factor deficits and thrombotic thrombocytopenic purpura, a disease characterized
in part by a low platelet count. VITEX holds an exclusive license in North
America and a non-exclusive license in the rest of the world, excluding Europe,
from the NYBC to apply the proprietary SD process to the viral inactivation of
plasma. The SD viral inactivation process used for PLAS+SD achieves rapid and
complete viral killing of lipid-enveloped viruses transmitted by transfusion,
while preserving the normal functional performance characteristics expected from
FFP. Since PLAS+SD is a pooled product, it offers the advantages of relatively
uniform composition from lot to lot (FFP is much more variable in its
coagulation factor content), and there is a wider variety of immunoglobulins
(antibodies) present that may provide some protection against other diseases,
such as HAV and parvovirus B19.
Under an agreement with the Red Cross, the Red Cross acts as the exclusive
distributor of PLAS+SD in North America, provided that the Red Cross purchases
from VITEX certain stated minimum quantities of PLAS+SD. Although end-customer
sales of PLAS+SD have risen since the product was introduced, end-user market
penetration has increased at a slower rate than anticipated. Effective October
1, 1998, the agreement with the Red Cross was amended to, among other
III-6
<PAGE>
things, provide for increased sales and marketing spending by both VITEX and the
Red Cross. See "--Strategic Collaborations -- American National Red Cross."
Transfusion Plasma Market. FFP is the component of blood used primarily in
the treatment of certain coagulation factor deficits. FFP is a source of all
blood clotting factors except platelets and is used to control bleeding in
patients who require clotting factors, such as patients undergoing surgical
transplant or other extensive medical procedures and patients with chronic liver
disease or certain genetic clotting factor deficiencies. The production of FFP
in 1995 is estimated to have been 2.7 million units in North America, 2.7
million units in Western Europe and 5.2 million units in Japan. The average
unit selling price for FFP in North America is currently estimated by VITEX to
be $50. The FFP market is currently served by the Red Cross and by more than
100 independent blood centers in the United States.
Regulatory Status. VITEX received marketing approval for PLAS+SD from the
FDA on May 6, 1998, and began commercialization of the product in June 1998.
See " - VITEX's Management's Discussion and Analysis of Financial Condition and
Results of Operations." On June 16, 1999, VITEX received approval to market
PLAS+SD in Canada. The SD viral inactivation process does not inactivate non-
enveloped viruses. Two such non-enveloped viruses that have been reported to be
transmitted by blood products include HAV and human parvovirus B19. During
April 1999, in connection with PLAS+SD Phase IV safety studies, VITEX observed
several seroconversions to parvovirus B19 in healthy volunteers who received
PLAS+SD from production lots which were found to contain high concentrations of
the virus. Although there was no evidence of clinical disease typical of
parvovirus B19 associated with these seroconversions, on April 16, 1999, VITEX
initiated a voluntary recall of lots of PLAS+SD that were found to contain
heightened levels of parvovirus B19 DNA. See "Chapter One - The Merger - Risk
Factors - Risks Relating to VITEX as a Combined Company - Vitex's market share
depends on new product introductions and acceptance" and "--VITEX's Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overiew." PLAS+SD is screened for HAV. In addition, VITEX has developed a
process to screen untreated plasma for parvovirus B19 prior to commencing the
manufacturing process. This screening uses an experimental, highly sensitive
Polymerase Chain Reaction ("PCR") test in order to ensure that this virus is
below specified laboratory levels. VITEX has completed formal validation of
this screening technique and applied to the FDA for a parvovirus B19 label claim
with approval expected in early 2000.
Universal PLAS+SD. Universal PLAS+SD is a product under development by
VITEX which, in addition to having the same characteristics and benefits as
PLAS+SD, would eliminate the need for matching donor and recipient blood types.
Universal PLAS+SD is prepared using patented technology, exclusively licensed
from the NYBC, which binds and removes specific antibodies present in donor
plasma that would otherwise cause an immune response in the recipient. VITEX
has established the feasibility of this approach and has initiated pre-clinical
studies. VITEX filed an IND for Universal PLAS+SD on August 8, 1999.
Universal PLAS+SD II. Universal PLAS+SD II is also under development and
will add additional methods of viral inactivation to Universal PLAS+SD. VITEX
is evaluating alternative technologies for use in this product, including UVC
and INACTINE compounds, which are intended to inactivate known non-enveloped
viruses and may offer added protection against other non-enveloped viruses that
might contaminate the blood supply in the future. Although the presence of
antibodies normally found in pooled plasma may provide some protection against
known non-enveloped viruses, SD and these second generation technologies used in
combination may provide a higher margin of blood product safety than SD
technology alone. Universal PLAS+SD II is at an early stage of development and,
consequently, there can be no assurance that VITEX will be able to successfully
develop, secure approval for or commercialize this product.
Wound Care Products
VITEX Fibrin Sealant. VITEX is developing its VITEX Fibrin Sealant for use
during surgical procedures to augment or replace sutures or staples for wound
closure. Fibrin sealants - also known as fibrin glues - are created by
combining the two principal clotting factors found in blood, fibrinogen and
thrombin, whose natural function is to halt bleeding and seal tissues. Fibrin
sealants are biodegradable, and their use does not generally elicit an immune
response frequently associated with non-biological glues. VITEX's approach to
viral inactivation of its VITEX Fibrin Sealant is based on the use of its
proprietary double viral inactivation system, utilizing VITEX's SD and UVC
technologies. VITEX expects that its fibrin sealant will be the first doubly
virally inactivated fibrin sealant available in the United States. VITEX holds
an exclusive worldwide license from the NYBC to use Ultraviolet C Light
technology (as further explained on page III-9) in treating fibrin sealant,
fibrinogen and thrombin products. VITEX holds a non-exclusive worldwide license
from the NYBC to use SD technology (as further explained on page III-8) in
treating fibrin sealant, fibrinogen and thrombin products.
III-7
<PAGE>
Fibrin Sealant Market. In Europe and Japan where fibrin sealants have been
in use for many years, these products have been shown to reduce the loss of
blood or other important bodily fluids and to produce less scarring when used as
a tissue adhesive as compared to conventional sutures. VITEX estimates that the
market for fibrin sealants in Europe and Japan was $150 million and $200
million, respectively, in 1997. VITEX estimates that the U.S. market for fibrin
sealants will be in excess of $350 million within five years. The first fibrin
sealant was approved for use in the U.S. during 1998.
Regulatory Status. VITEX submitted an IND and commenced clinical trials
for VITEX Fibrin Sealant in late 1995. Initial Phase II trials were designed to
evaluate the safety and efficacy of VITEX Fibrin Sealant in patients who have
undergone modified radical mastectomy or lumpectomy in the treatment of breast
cancer. Eighty patients at five clinical sites participated in the
mastectomy/lumpectomy trial which was completed in late 1996. VITEX, in
collaboration with U.S. Surgical, commenced two Phase III trials at more than 20
sites in late 1997, one of which is a continuation of the evaluation of VITEX
Fibrin Sealant following breast cancer surgery. The other evaluates VITEX
Fibrin Sealant's ability to reduce blood loss following carotid artery surgery.
VITEX completed patient enrollment of the breast surgery study at the end of
September 1998 and of the carotid artery surgery study in the second quarter of
1999. VITEX plans to conduct an additional Phase III study under new FDA
guidelines published in early 1999 and believes that such a trial will provide
broader label claims for use in multiple surgical settings. VITEX expects to
submit a BLA for fibrin sealant in the second half of 2000. During 1998, VITEX
completed construction of a multi-use manufacturing suite within its existing
facility to permit the production, subject to FDA approval, of commercial
quantities of VITEX Fibrin Sealant. Validation of the new manufacturing area is
currently underway.
Red Blood Cell Concentrates
VITEX has pursued a program for viral inactivation for red cells based
on a technology employing a light-activated compound, Pc4. VITEX expects to
scale back this approach and, following the merger, concentrate on the Pentose
INACTINE technology. In pre-clinical studies, the INACTINE technology has been
shown to inactivate all classes of virus known to contaminate blood-derived
products while preserving such products' key therapeutic properties.
Red Blood Cell Market. The majority of blood product transfusions
involve red blood cells. Red blood cells deliver oxygen to and remove carbon
dioxide from tissues. Red blood cells are used in the care of patients with
trauma, anemia and certain genetic disorders. The current worldwide market for
red blood cell concentrates ("RBCC") is estimated at approximately $3.0 billion.
In the United States alone, homologous (donation by someone other than the
recipient) RBCC transfusions exceed 11 million annually, with an estimated
market value of $1 billion. The average unit selling price for red blood cell
concentrates in the U.S. is currently estimated by VITEX to be $80-90. The red
blood cell concentrate market is served by the Red Cross and by more than 100
independent blood centers in the United States. VITEX has entered into
strategic collaboration agreements with Pall for the development and marketing
of VITEX RBCC systems that employ VITEX's technologies to broadly inactivate
viruses and other pathogens in red blood cell concentrates.
Regulatory Status. Pentose submitted an IND to the FDA in August
1999 for INACTINE-treated red blood cells for transfusion. Assuming the merger
of Pentose and VITEX is completed, VITEX and Pentose plan to commence Phase I
clinical trials for this product in the fourth quarter of 1999. The Phase I
clinical trials will be designed to evaluate the safety of infusing INACTINE-
treated red blood cell concentrates in humans as well as to repeat red cell
physiology studies previously completed in animals. VITEX and Pentose expect
the Phase I study to be completed approximately 6 months following enrollment of
the first patient. VITEX and Pentose further believe that in the second half of
2000 they will receive approval to proceed to the next phase of clinical trials.
Viral Inactivation Technology Platform
VITEX's product candidates are based on a portfolio of technologies which
are designed to be used either individually or in combination. Members of
VITEX's scientific team developed the core VITEX viral inactivation technologies
while working at the NYBC. The NYBC subsequently licensed these technologies to
VITEX. In addition, VITEX continues to make substantial investments in research
and development to enhance the value of its technology platform and has filed
several patent applications as a result of these activities. The technologies
being developed by VITEX are described below:
The Solvent/Detergent ("SD") Technology. Most pathogenic viruses found in
blood, including HBV, HCV and HIV, are protected by a lipid shell or envelope.
The SD process involves the addition of a chemical solvent (a di- or trialkyl
phosphate) and a detergent, which serves to enhance the contact between solvent
and virus, into pools of plasma or plasma fractions, which dissolves the lipid
shell of the virus, after which the virus can no longer bind to and infect
cells. The process
III-8
<PAGE>
is completed by removing the SD reagents, typically by extraction with vegetable
oil and hydrophobic chromatography, and sterile filtering to remove bacteria,
parasites and blood leukocytes and leukocyte debris. In September 1998, the
FDA's Blood Products Advisory Committee recommended leukoreduction of blood
components. This recommendation is now under consideration by the FDA.
The SD process was first applied to plasma derivatives in 1985 for use in
patients with hemophilia. This process has become the most widely used method
for the inactivation of lipid enveloped viruses around the world and currently
is used, under license from the NYBC, by more than 50 plasma fractionators.
Since 1985, it is estimated that more than 15 million doses of SD-treated
Factors VIII and IX, and a total of over 35 million doses of all SD-treated
products, have been administered without a single reported case of HBV, HCV or
HIV transmission. Experience has demonstrated that plasma for transfusion, when
treated with the SD process, retains blood protein structure and function with
minimal loss of essential protein components and can be implemented cost-
effectively. In support of FDA licensure for PLAS+SD in the United States,
VITEX conducted eight clinical studies in over 31 medical centers. These
studies were designed to evaluate the efficacy and safety of PLAS+SD when used
either to replace coagulation factors in patients with a documented deficiency
for which no specific coagulation factor concentrate was available, or when used
to treat patients with chronic or acute TTP. These trials demonstrated that
with PLAS+SD, coagulation factor recovery was normal following treatment, and
bleeding ceased where it was preexistent. Clotting times decreased in accord
with expectations when PLAS+SD was used to replace clotting factor deficiency.
In patients with TTP, clinical symptoms resolved. Side effects were
characteristic of those reported with FFP. Moreover, there was no evidence of
transmission of either lipid-enveloped or non-enveloped viruses by the product.
Ultraviolet C Light ("UVC") Technology. VITEX's proprietary short
wavelength ultraviolet light irradiation technology has been shown to inactivate
both enveloped and non-enveloped viruses in protein solutions. Viral
inactivation occurs because viral nucleic acids are modified directly when they
absorb ultraviolet light energy. Specificity results from differential
absorption of UVC by nucleic acids and proteins and the much larger target size
presented by nucleic acids. Quenchers added to plasma or plasma derivatives
prior to treatment serve as a source of antioxidant, preventing oxidative damage
to therapeutic proteins without interfering with viral inactivation.
Initial research and development of the UVC technology was conducted by
VITEX's scientists at the NYBC and is being continued at VITEX. The research
and development effort includes the development of an irradiator which controls
UVC intensity and provides a fluid path for the plasma or plasma derivative
being treated. VITEX plans to conduct an additional Phase III clinical trials
of its VITEX Fibrin Sealant which employs SD and UVC technologies. VITEX
intends to file a BLA for this product in the second half of 2000.
Affinity Chromatography technology. Affinity chromatography is a
separation technique for isolating proteins from complex mixtures such as
plasma. The method exploits the unique interaction of one molecule with a
second, complementary binding molecule ("ligand"). The ligand is coupled to an
insoluble material called a matrix and poured into a column. The complex
mixture, such as plasma, is poured through the column and the targeted molecule
binds to the immobilized ligand. The purified mixture pours out of the column.
This chromatographic method leaves coagulation factors and other therapeutic
proteins unchanged. This technology is used to produce the VITEX universal
plasma in which proteins that determine blood type are removed from the plasma
VITEX believes that future applications of this technology will result in the
removal of virus and other pathogen removal from blood products.
Strategic Collaborations
VITEX believes that it can efficiently accelerate the commercialization of
its products by collaborating with sales, marketing, distribution and technology
partners. VITEX has entered into collaborations with Bayer, the Red Cross, U.S.
Surgical and Pall, for development, licensing and marketing of VITEX's products
and systems. As part of these agreements, VITEX is collaborating with U.S.
Surgical and Pall for the development of certain of VITEX's products and
systems. VITEX may seek to establish additional collaborations with partners in
other areas of strategic focus. The terms of VITEX's strategic collaborations
are described below:
Bayer Corporation. VITEX, as one of many non-exclusive licensees of SD
technology for viral inactivation of plasma fractions, does not itself use the
SD technology to virally inactivate plasma fractions. Rather than competing
with existing suppliers of virally inactivated plasma fractions, VITEX has
decided to participate in the market for virally-inactivated plasma fractions by
providing plasma fractions to other parties for viral inactivation by such other
parties. In February 1995, VITEX entered into an Agreement for Custom
Processing (the "Processing Agreement") with Bayer, one of the largest
processors of blood plasma, to supply VITEX Plasma Fractions to Bayer. This
Processing Agreement was
III-9
<PAGE>
amended in January 1996, December 1997 and December 1998 to, among other things,
extend the term through 2001 and increase the volume of plasma fractionated
under this agreement through 1999. The term of the agreement is automatically
extended for two additional one-year periods unless Bayer notifies VITEX within
certain specified periods that it does not desire to extend the agreement for
either one-year period. During the period from January 3, 1999 through the
remainder of the term in December 2001, the contract provides for revenues to
VITEX of approximately $19 million per annum, subject to VITEX meeting certain
performance obligations. Assuming the arrangement is extended as permitted by
the contract, VITEX will have revenue of approximately $19 million during each
of the years ending December 31, 2002 and 2003. VITEX received $14.7 million in
revenue from Bayer during the year ended January 2, 1999 under this agreement.
Under the agreement, Bayer is obligated to provide VITEX with a specified
quantity of plasma annually during the term of the agreement and VITEX is
obligated to return plasma fractions to Bayer within certain specified periods.
The agreement is structured as a take-or-pay arrangement under which Bayer is
obligated to pay VITEX a fixed fee per liter of fractionated plasma whether or
not Bayer fulfills its obligation to supply plasma to VITEX. Certain of the
plasma fractions supplied to Bayer are virally inactivated by Bayer using the SD
technology licensed to Bayer by the NYBC. In the event that VITEX does not
provide fractions as required under the agreement, or upon the occurrence of
other events of default, Bayer has certain rights to take over and operate the
fractionation portion of VITEX's production facility. As security for the
performance of VITEX's obligations under the Bayer agreement, VITEX granted
Bayer a mortgage on VITEX's manufacturing facility, which Bayer has subordinated
to a subsequent mortgage granted by VITEX to The Chase Manhattan Bank, and a
security interest in substantially all of the personal property of VITEX that is
necessary or useful to the processing and fractionation of Bayer supplied
plasma. VITEX may terminate the agreement upon written notice of a material
breach of the agreement and failure to cure by Bayer. Bayer may terminate the
agreement in certain circumstances including a material breach of the agreement
and failure to cure by VITEX and an event of default under VITEX's credit
agreement with its institutional lender.
American National Red Cross. In December 1997, VITEX entered into a supply,
manufacturing and distribution agreement with the Red Cross (the "Red Cross
Distribution Agreement") over a term of 57 months, for the Red Cross to become
the exclusive distributor of VITEX's PLAS+SD in North America. Under the
agreement, the Red Cross, which is the largest supplier of transfusion plasma to
hospitals in the United States, providing about 45% of the transfusion plasma
used annually, is required to purchase stated minimum quantities of PLAS+SD.
VITEX may either terminate the agreement in its entirety or convert the
exclusive rights of the Red Cross to non-exclusive rights if the stated minimum
purchase requirements are not met. In addition, the Distribution Agreement
requires the Red Cross to achieve certain end-user sales levels. Failure to
achieve these end-user sales levels could result in termination of the
Distribution Agreement by either the Red Cross or VITEX. Although the current
sales by the Red Cross are below the levels required under the Agreement with
VITEX, the parties are in negotiations to increase production and lower the
minimum levels necessary to avoid termination of the Distribution Agreement.
Once the Red Cross places its annual purchase order with VITEX, it is obligated
to supply VITEX with a sufficient quantity of plasma to enable VITEX to fulfill
the order. The Red Cross must pay for the amount of PLAS+SD specified in the
purchase order even if it is unable to supply sufficient quantities of plasma.
The Red Cross must purchase all of its virally-inactivated plasma from VITEX
unless an FDA approved product has been independently shown to be safer than
PLAS+SD. VITEX, in turn, is obligated to offer any excess capacity that it has
to produce PLAS+SD above the stated minimum purchase requirements to the Red
Cross before selling PLAS+SD to any other party. Partially in response to slower
than expected market acceptance, effective October 1, 1998, the Red Cross
Agreement was amended to, among other things, reduce the Red Cross's minimum
annual purchase order commitment, provide higher pricing during periods of lower
volume purchases, and commit increased marketing spending by both VITEX and the
Red Cross. Under the amended agreement, the Red Cross is required to pay to
VITEX a fixed price per unit of PLAS+SD, plus a royalty which is initially
fixed. Beyond a specified volume, the royalty becomes variable, based on equal
sharing of the amount by which the average selling price of the Red Cross
exceeds a stated amount. Anticipated revenue under the amended agreement is
approximately $50 million during the two-year period ending September 30, 2000.
VITEX recorded revenue of $16.3 million during the year ended January 2, 1999
under the original and amended agreements. VITEX has granted to the Red Cross a
right of first offer to acquire exclusive distribution rights to any subsequent
generation of virally inactivated transfusion plasma products that are developed
during the term of the agreement. VITEX and the Red Cross have each committed to
spend minimum amounts for marketing PLAS+SD during the two-year period ending
September 30, 2000. VITEX's spending commitment is expected to be satisfied, to
a large extent, by the cost of its sales force. Additionally, a joint marketing
committee will coordinate all marketing activities for PLAS+SD. The exclusive
distribution agreement between VITEX and the Red Cross provides that the Red
Cross will use its best efforts to ensure availability of VITEX's virally
inactivated transfusion plasma products to all potential customers, including
Red Cross blood centers and non-Red Cross blood centers. See "--Legal
Proceedings" and "VITEX's Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Under a previous collaboration agreement, the Red Cross had made a total of
$3.0 million non-interest bearing, unsecured advances to VITEX's predecessor to
be used to fund improvements to the manufacturing facility. Under this previous
agreement, the loan amortized at the rate of 15% per year following receipt of
approval from the FDA of
III-10
<PAGE>
PLAS+SD's product license application ("PLA"), which occurred in May 1998, with
a balloon payment due in year five. In conjunction with the amended agreement,
the repayment schedule was modified to require repayment of 30% of the loan
balance on the second anniversary date of the approval of the PLAS+SD PLA and
15% of the balance on each of the following two years, with the balance of the
loan payable on the fifth anniversary of the PLAS+SD PLA. Each of VITEX and Red
Cross has the right to terminate the agreement upon written notice in certain
circumstances, including a material breach of the agreement which is not cured
by the other party.
United States Surgical Corporation. In September 1996, VITEX and U.S.
Surgical entered into an exclusive worldwide distribution agreement, which was
amended in October 1996, regarding VITEX Fibrin Sealant for an initial period of
15 years. Upon entering into the agreement, U.S. Surgical paid a $3.0 million
up front fee to VITEX. U.S. Surgical has agreed to fund all direct clinical and
regulatory costs associated with the development and regulatory approval of
VITEX Fibrin Sealant after the initial Phase II trial conducted by VITEX. In
addition, in return for exclusive rights, U.S. Surgical has agreed, subject to
termination upon notice, to pay a substantial portion of agreed upon research
and development costs associated with any improvements or, enhancements to VITEX
Fibrin Sealant. Pursuant to this agreement, VITEX granted U.S. Surgical the
mutually exclusive worldwide right, until October 2011, to seek, in its own name
as permitted by law, necessary government approvals for and to use, market,
distribute and sell fibrin sealants, and any improvements thereto which improve
the storage or reconstitution time of such products, for use in in vivo human
and veterinary medical applications. This mutually exclusive distribution
agreement further provides U.S. Surgical with a first option to obtain exclusive
distribution rights on any enhanced products developed by VITEX as well as
certain other wound care products developed in the future. U.S. Surgical must
achieve certain minimum sales of the products to maintain its exclusive rights
under the agreement. Under the agreement, VITEX agrees to supply U.S.
Surgical's forecasted demand for the products and if it is unable to supply an
agreed upon level in excess of such forecasted demand, for a stated period, U.S.
Surgical has an option to make arrangements to have the excess demand for such
products produced by third-party manufacturers. Either VITEX or U.S. Surgical
may terminate the agreement upon written notice in certain circumstances,
including a breach of the agreement by the other party which is not cured. U.S.
Surgical may also terminate the agreement for any reason upon nine months'
notice to VITEX. In January 1999, the agreement was amended to reflect modified
pricing terms for sale of the product by VITEX to U.S. Surgical. During 1998,
VITEX completed construction of a multi-use manufacturing suite, within its
existing facility, to permit the production, subject to FDA approval, of
commercial quantities of VITEX Fibrin Sealant. Validation of the new
manufacturing area is currently underway. U.S. Surgical was acquired by Tyco
Corporation in 1998.
Pall Corporation. In February 1998, VITEX and Pall entered into a series
of agreements (the "Pall Agreements") providing for, among other things, a
collaboration on the development and marketing of systems employing VITEX's
viral inactivation technologies for red blood cell and platelet concentrates.
Pall is a leading manufacturer and supplier of filtration products, including
those relating to the collection, preservation, processing, manipulation,
storage and treatment of blood and blood components. Under the Pall Agreements,
Pall receives exclusive worldwide distribution rights to any system
incorporating any VITEX viral inactivation technology for red blood cells and
platelets. Assuming the completion of the merger contemplated hereby, Pentose's
INACTINE technology will be incorporated into the colloboration with Pall. The
parties have also agreed to share research, development, clinical and regulatory
responsibilities and will equally share profits and joint expenses from
operations after each party is reimbursed for its cost of goods. Upon execution
of the Pall Agreements in February 1998, Pall acquired 477,042 shares of the
VITEX common stock for $4.0 million, or $8.39 per share. Pursuant to the terms
of the Pall Agreements, Pall acquired $5 million of VITEX's common stock in a
private placement, which closed contemporaneously with, and at the same price,
terms, and conditions as VITEX's initial public offering in June, 1998. In
addition, the Pall Agreements provide that Pall will purchase up to $17 million
of VITEX common stock in installments tied to the achievement of specified
development milestones in the development of VITEX RBCC and such equity
investments by Pall will be made at the prevailing market price per share.
Pursuant to the Pall Agreements, certain existing stockholders of VITEX have
agreed to vote their shares to elect to the Board of Directors of VITEX a
nominee designated by Pall. Certain of the Pall Agreements may be terminated in
certain circumstances including an event of default by either party. In
connection with the transition of Dr. Bernard Horowitz's status from employee to
consultant of VITEX, Pall has the right to terminate the Pall Agreements within
a one year period ending in October 2000. Based solely on informal discussions
with representatives of Pall, VITEX management does not believe that Pall
intends to terminate the Pall Agreements as a result of this employee
transition.
Manufacturing and Supply
VITEX currently produces all of its VITEX Plasma Fractions and PLAS+SD in
its 92,000 square foot facility. In May 1998, the FDA approved VITEX's PLA, for
the manufacture of PLAS+SD at VITEX's manufacturing facility. The existing
manufacturing facility has sufficient capacity to meet the current minimum
purchase requirements for PLAS+SD
III-11
<PAGE>
under its agreement with the Red Cross. In December 1998, VITEX completed
construction of a $2.5 million multi-use manufacturing suite, within its
existing facility, to permit the production, subject to FDA approval, of
commercial quantities of fibrinogen and thrombin for production of VITEX Fibrin
Sealant. The manufacturing suite utilizes a design which provides operational
flexibility, and allows for multi-purpose production within the suite.
Validation of the new manufacturing suite is currently underway. VITEX is
currently utilizing all of its existing fractionating plasma capacity. Due to an
industry-wide shortage of fractionation capacity, in conjunction with
solicitations from Bayer and others, VITEX has expanded its fractionation
capacity by 15%, subject to FDA approval, which is expected by the end of the
third quarter of 1999. VITEX is currently evaluating the cost/benefit of further
expansion. Through its collaboration with Pall, VITEX will cooperate in the
development of red blood cell concentrate viral inactivation systems and intends
to contract with third parties for the manufacture of these systems.
VITEX's manufacturing processes are subject to extensive regulation by the
FDA, including the FDA's current Good Manufacturing Practice ("cGMP")
requirements. Failure to comply with such requirements would materially impair
VITEX's ability to maintain commercial-scale production of its plasma fractions
and PLAS+SD or achieve and maintain commercial-scale production of any future
products. If VITEX is unable to achieve full scale production capability for
any product, acceptance by the market of such product would be impaired and any
such impairment in market acceptance would have a material adverse effect on
VITEX's business, financial condition and results of operations.
VITEX purchases certain key components for the manufacture of its products
from a limited number of outside suppliers and intends to continue purchasing
components from outside suppliers for its future products. VITEX currently
obtains from a single supplier the customized bags for the packaging of its
PLAS+SD product. However, VITEX has entered into an agreement with an
additional supplier for the provision of such bags. Establishing or utilizing
additional or replacement suppliers for any such components, if required, may
not be accomplished quickly and could involve significant additional costs. Any
failure by VITEX to obtain any components used to manufacture its products from
alternative suppliers, if required, could limit VITEX's ability to manufacture
its products and could have a material adverse effect on VITEX's business,
financial condition and results of operations. Moreover, the inclusion of
components manufactured by others could require VITEX to seek approvals from
government regulatory authorities, which could result in delays in product
delivery. There can be no assurance that VITEX would receive any such
regulatory approvals. Any such delay would have a material adverse effect on
VITEX's business, financial condition, results of operations and cash flows.
Sales, Marketing and Distribution
As referred to in "Strategic Collaborations," VITEX has entered into
agreements with Bayer, Red Cross, U.S. Surgical and Pall, for the development,
licensing and marketing of VITEX's products and systems. In 1999, VITEX
established its own national sales force to support the efforts of the Red Cross
by increasing product awareness and accelerating market penetration. VITEX may
seek to establish additional collaborations in other areas of strategic focus.
In December 1997, and as subsequently amended effective October 1998, VITEX
contracted with the Red Cross for the Red Cross to become the exclusive
distributor of VITEX's PLAS+SD in North America. VITEX and the Red Cross have
each committed to spend certain minimums for marketing PLAS+SD in 1999.
Additionally, a joint marketing committee will coordinate all marketing
activities for PLAS+SD. VITEX has entered into a distribution agreement with
U.S. Surgical pursuant to which VITEX has granted U.S. Surgical the exclusive
worldwide rights to market and distribute its VITEX Fibrin Sealant, subject to
U.S. Surgical achieving stated minimum sales requirements for such products.
Under the terms of the Pall Agreements, Pall agreed to, among other things,
collaborate on the development and marketing of systems employing VITEX's viral
inactivation technologies for RBCC and platelets. Under the Pall Agreements,
among other things, Pall receives exclusive worldwide distribution rights to any
systems incorporating any VITEX viral inactivation technology, including, if the
merger contemplated hereby is consummated, INACTINEs for red blood cells and
platelets.
VITEX believes that market acceptance of VITEX's products and systems will
depend, in part, on VITEX's ability to provide acceptable evidence of the
safety, efficacy and cost-effectiveness of its products and systems, as well as
the ability of blood centers and hospitals to obtain adequate reimbursement for
such products. VITEX believes that market acceptance of its products and
systems will also depend upon the extent to which physicians, patients and
health care payers perceive that the benefits of using VITEX's products and
systems justify the additional costs and processing requirements. There can be
no assurance that VITEX's products and systems will gain any significant degree
of market acceptance among blood centers, physicians, patients and health care
payers, even if clinical trials demonstrate safety and efficacy and necessary
regulatory approvals and health care reimbursement approvals are obtained.
There can be no assurance that VITEX's strategic collaborators will market
VITEX's products successfully or that any third-party collaboration will be on
terms favorable to VITEX. If a collaborator with VITEX does not market a
product successfully, VITEX's business would be
III-12
<PAGE>
materially adversely affected. There can be no assurance that VITEX's
collaborators will be successful in gaining market acceptance for any products
that VITEX may develop and a failure to do so would result in a material adverse
affect on VITEX's business, results of operations and financial condition.
Market acceptance of VITEX's first virally inactivated blood product, PLAS+SD,
has not occurred as quickly as anticipated. See "Chapter One - The Merger - Risk
Factors" and " - VITEX's Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Patents, Licenses and Proprietary Rights
VITEX's success depends in part on its ability to maintain licensed patent
rights, obtain patents, protect trade secrets, operate without infringing upon
the proprietary rights of others and prevent others from infringing on the
proprietary rights of VITEX. VITEX's policy is to seek to protect its
proprietary position by, among other methods, filing United States and foreign
patent applications related to its proprietary technology, inventions and
improvements that are important to the development of its business. VITEX
believes that the protection of its proprietary technologies may create
competitive barriers to entry into the viral inactivation market. VITEX intends
to continue to pursue its patent filing strategy and to vigorously defend its
intellectual property position against infringement.
In connection with its spin-off from the NYBC, VITEX became the licensee of
a substantial portfolio of patents and patent applications held by the NYBC.
VITEX is a nonexclusive worldwide licensee under 12 issued United States patents
which expire at various times from 2000 to 2009, 28 issued foreign counterpart
patents and three pending foreign counterpart patent applications held by the
NYBC for use of the SD process in treating plasma derivatives. VITEX is a
nonexclusive worldwide licensee under two issued United States patents which
expire in 2010 and 2014, four pending United States patent applications, five
issued foreign counterpart patents and 19 pending foreign counterpart patent
applications held by the NYBC for use of UVC technology in treating plasma
derivatives. VITEX is the exclusive licensee for the U.S., Canada and Mexico
and a non-exclusive licensee outside of the United States, Canada, Mexico and
Europe under 16 issued United States patents which expire at various times from
2000 to 2014, four pending United States patent applications, 19 issued foreign
counterpart patents and 14 pending foreign counterpart patent applications held
by the NYBC for use of the SD process and UVC technology in treating transfusion
plasma products. VITEX is the exclusive worldwide licensee under 10 issued
United States patents which expire in 2010 and 2014, five pending United States
patent applications, five issued foreign counterpart patents and 28 pending
foreign counterpart patent applications held by the NYBC for use of UVC
technology in treating fibrin sealant, fibrinogen and thrombin products and for
the manufacture and use of fibrin sealant, fibrinogen and thrombin and the
nonexclusive worldwide licensee under 12 issued United States patents which
expire at various times from 2000 to 2009, 28 issued foreign counterpart patents
and three pending foreign counterpart patent applications held by the NYBC for
use of the S/D process in treating fibrin sealant, fibrinogen and thrombin
products. Finally, VITEX is the exclusive worldwide licensee under six issued
United States patents which expire at various times from 2010 to 2015, eleven
pending United States patent applications, six issued foreign counterpart
patents and 43 pending foreign counterpart patent applications held by the NYBC
for use of light and certain compounds in virally inactivating cellular
products. The rights referred to above are granted to VITEX by five license
agreements between VITEX and the NYBC. The NYBC has the right to terminate any
of these licenses if VITEX breaches the respective license and fails to cure
such breach, fails to produce and market the relevant products within specified
time frames or fails to conform to government regulations in the production of
the relevant products. For exclusive licenses, the NYBC has the right to
terminate the license if certain minimum payments and/or minimum royalties are
not paid by VITEX. If any of the licenses between VITEX and the NYBC were
terminated it would have an adverse effect upon VITEX's business, results of
operations and financial condition.
During the year ended January 2, 1999, VITEX incurred royalty and milestone
related expenses amounting to $1,037,000 for use of technology licensed by the
NYBC.
In addition to being a licensee to patents and patent applications held by
the NYBC, VITEX has three additional exclusive licenses for patents relating to
its red cell program, and is developing its own technologies and products and
pursuing patent protection for such technologies and products. VITEX has four
pending United States patent application and is the co-owner of one issued
United States patent.
Proprietary rights relating to VITEX's planned and potential products will
be protected from unauthorized use by third parties only to the extent that they
are covered by valid and enforceable patents or are effectively maintained as
trade secrets. There can be no assurance that any patents owned by, or licensed
to, VITEX will afford protection against competitors or that any pending patent
applications now or hereafter filed by, or licensed, to VITEX will result in
patents being issued. In addition, the laws of certain foreign countries do not
protect VITEX's intellectual property rights to the same extent as do the laws
of the United States. The patent positions of biopharmaceutical companies
involve complex legal and factual questions and, therefore, their enforceability
cannot be predicted with certainty. There can be no assurance that
III-13
<PAGE>
any of VITEX's owned or licensed patents or patent applications, if issued, will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive advantages to
VITEX against competitors with similar technology. Furthermore, there can be no
assurance that others will not independently develop similar technologies or
duplicate any technology developed by VITEX.
Because patent applications in the United States are maintained in secrecy
until patents issue, and since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, VITEX cannot be certain
that it or its licensors were the first to make the inventions covered by each
of its issued, licensed or pending patent applications or that it or its
licensors were the first to file for protection of inventions set forth in such
patent applications. There can be no assurance that VITEX's planned or
potential products will not be covered by third-party patents or other
intellectual property rights, in which case continued development and marketing
of such products would require a license under such patents or other
intellectual property rights. There can be no assurance that such required
licenses will be available to VITEX on acceptable terms, if at all. If VITEX
does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents or could find that
the development, manufacture or sale of products requiring such licenses is
foreclosed.
VITEX may rely, in certain circumstances, on trade secrets to protect its
technology. However, trade secrets are difficult to protect. VITEX seeks to
protect its proprietary technology and processes, in part, by confidentiality
agreements with its employees and certain contractors. There can be no
assurance that these agreements will not be breached, that VITEX will have
adequate remedies for any breach, or that VITEX's trade secrets will not
otherwise become known or be independently discovered by competitors.
Competition
VITEX's products and products under development will compete with current
approaches to enhance blood safety, as well as with future products under
development by others, including medical technology, biotechnology,
pharmaceutical and hospital supply companies, national and regional blood
centers, governmental organizations and agencies, academic institutions and
other agencies. The industries in which VITEX competes are characterized by
rapid and significant technological changes. Accordingly, VITEX's success will
depend in part on its ability to respond quickly to medical and technological
changes through the development and introduction of new products. Many
companies and organizations that may be competitors or potential competitors of
VITEX have substantially greater financial and other resources than VITEX and
may have greater experience in conducting pre-clinical studies and clinical
trials and obtaining regulatory approvals. In addition, other technologies or
products may be developed that have an entirely different approach or means of
accomplishing the intended purposes of VITEX's products, or that might render
VITEX's technology and products obsolete. Furthermore, there can be no
assurance that VITEX's competitors will not obtain patent protection or other
intellectual property rights that would limit VITEX's ability to use VITEX's
technology or commercialize products that may be developed.
VITEX Plasma Fractions face competition from other large plasma
fractionators. Additional competition in the market for plasma derivatives may
come from producers of recombinant blood products. Competition in this area may
have a material adverse effect on VITEX's business, financial condition and
results of operations.
Competition with PLAS+SD and VITEX's products under development may come
from alternative approaches to the problem of improving the safety of blood and
blood products and from alternative viral inactivation technologies. The
alternative approaches to achieving safer blood component products include donor
retesting, apheresis blood collection systems, the use of blood substitutes,
blood salvage systems, blood cell stimulants, leukocyte filters and reduction
systems and improved blood testing. All of these approaches are currently
available, and each has gained some degree of market acceptance.
In the area of viral inactivation of blood and blood components, several
companies are developing technologies which are, or in the future may be, the
basis for products that will directly compete with or reduce the market
opportunity for PLAS+SD and VITEX's viral inactivation products which are under
development. In the plasma market, treatment with methylene blue is used
commercially in Europe for pathogen inactivation. Because VITEX's SD process
involves pooling plasma, there may be an increased risk of transmission of
pathogens not inactivated by the process, as compared with processes, such as
treatment with methylene blue, which do not require pooling. In addition to
methylene blue, other viral inactivation methods which may compete with VITEX's
SD, UVC and affinity chromatography technologies include patented viral
inactivation compounds, including psoralens, developed by Cerus Corporation.
Additionally, ozone sterinetics technology under development may compete with
VITEX's viral inactivation technology. VITEX believes that the primary
III-14
<PAGE>
competitive factors in the market for viral inactivation systems will include
the breadth and effectiveness of viral inactivation processes, compatibility of
processes with cells and proteins, ease of use, the scope and enforceability of
patent or other proprietary rights, product price, product supply and marketing
and sales capability. In addition, the length of time required for products to
be developed and to receive regulatory and, in some cases, reimbursement
approval is an important competitive factor. VITEX believes it competes
favorably with respect to these factors, although there can be no assurance that
it will be able to continue to do so. Any failure by VITEX to compete
effectively with these alternative products and technologies would have a
material adverse effect on VITEX's business, financial condition, results of
operations and cash flows.
VITEX's wound care product candidates will compete with existing wound care
techniques, such as sutures and synthetic glues, which do not carry the risk of
viral contamination as well as a fibrin sealant product of Baxter Healthcare
(Immuno) which was licensed for sale in the U.S. in 1998. VITEX may face
competition from many other companies seeking to develop and market fibrin
sealants. VITEX believes several other companies are developing competitive
wound care products, including synthetic glues and other alternatives to
sutures. There can be no assurance that any of these alternative viral
inactivation systems or wound care products will not achieve widespread
acceptance. For VITEX's products to gain market acceptance, VITEX may need to
demonstrate that its products are superior in performance, safer or more cost-
effective than other existing or future technologies or products.
Government Regulation
VITEX and its products are comprehensively regulated by the FDA and, in
some instances, by state and local governments, and by foreign regulatory
authorities. The FDA regulates drugs, medical devices and biologics under the
Federal Food, Drug and Cosmetic Act and other laws, including, in the case of
biologics, the Public Health Service Act. These laws and implementing
regulations govern, among other things, the development, testing, manufacturing,
record keeping, storage, labeling, advertising, promotion and pre-market
approval of such products.
The PLA for VITEX Plasma Fractions was approved initially by the FDA in
1970 and amended from time to time thereafter. The first of VITEX's virally
inactivated products, PLAS+SD, received marketing approval by the FDA on May 6,
1998. VITEX believes that its VITEX Fibrin Sealant, like VITEX Plasma Fractions
and PLAS+SD, will be regulated by the FDA as a biologic, while its RBCC system
incorporating INACTINE technology (assuming the merger contemplated hereby is
consummated) may be regulated as a medical device. However, despite VITEX's
expectations of how a given product will be regulated, it is possible that the
FDA will decide to regulate any one or more of VITEX's products as biologics, as
medical devices, as "combination products," including drugs or biologics and one
or more medical devices, or as drugs or biologics with one or more medical
devices requiring separate approval or clearance. Whether the FDA regulates
VITEX's products as biologics or as one or more of the other alternatives, it is
likely that the FDA's Center for Biologics Evaluation and Review will be
principally responsible for regulating VITEX's products.
Before a new drug may be marketed in the United States, the FDA must
approve an NDA for the product. Before a biologic may be marketed in the United
States, the FDA must approve a BLA covering both the product and the facility.
Prior to the FDA Modernization Act of 1997, the FDA had to approve a PLA for the
product and an establishment license application ("ELA") for the facility at
which the product is manufactured. Before a medical device may be marketed in
the United States, the FDA must agree that the medical device is substantially
equivalent to another device that was on the market prior to 1976 pursuant to a
510(k) notice or approve a pre-market application ("PMA") for the product.
Before a combination product may be marketed in the United States, it must have
an approved NDA, BLA (or PLA/ELA) or PMA, depending on which statutory authority
the FDA elects to use.
Despite the multiplicity of statutory and regulatory possibilities, the
steps required before approval are essentially the same whether the product is
ultimately regulated as a drug, a biologic, a medical device or a combination
product. The steps required before a drug, biologic or medical device may be
approved for marketing in the United States pursuant to an NDA, BLA or PMA,
respectively, generally include:
. pre-clinical laboratory and animal tests;
. submission to the FDA of an investigational new drug exemption ("IND"),
for drugs or biologics, or an investigational device exemption ("IDE"),
for medical devices, for human clinical trials, which must become
effective before such trials may begin;
III-15
<PAGE>
. appropriate tests in humans to show the product's safety;
. adequate and well-controlled human clinical trials to establish the
product's efficacy for its intended indications;
. submission to the FDA of an NDA, BLA or PMA, as appropriate; and
. FDA review of the NDA, BLA or PMA in order to determine, among other
things, whether the product is safe and effective for its intended uses.
In addition, the FDA inspects the facilities at which the product is
manufactured and will not approve the product unless the facilities and the
process used to manufacture the product comply with cGMP requirements.
VITEX believes that, in deciding whether a viral inactivation system is
safe and effective, the FDA is likely to take into account whether it adversely
affects the therapeutic efficacy of treated blood components as compared to the
therapeutic efficacy of blood components not treated with the system, and that
the FDA will evaluate the system's safety and other risks against the benefits
of using the system in a blood supply that has become safer in recent years.
There can be no assurance that the clinical study design employed by VITEX
to demonstrate safety and efficacy will ultimately be acceptable to the FDA.
Moreover, even if the FDA considers the study design to be acceptable in
principle, there can be no assurance that the FDA will find the data submitted
sufficient to demonstrate safety and efficacy.
Even if regulatory approval or clearance is granted, the FDA could
significantly limit the indicated use for which a product could be marketed.
The testing and review process requires substantial time, effort and financial
resources, and is generally lengthy, expensive and uncertain. The approval
process may be affected by a number of factors, including the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Additional animal studies or clinical trials may be requested during
the FDA review period and may delay marketing approval. After FDA approval for
the initial indications, further clinical trials may be necessary to obtain
approval for the use of the product for additional indications. The FDA may
also require post-marketing testing which can involve significant expense.
Later discovery of previously unknown problems with a product may result in
labeling changes and other restrictions on the product, including withdrawal of
the product from the market. See "Chapter One -- The Merger -- Risk factors --
Risks Relating to VITEX and Pentose as a Combined Company -- VITEX's market
share depends on a new product introductions and acceptance" and " - VITEX's
Management Discussion and Analysis of Financial Condition and Results of
Operations - Overview." In addition, the policies of the FDA may change, and
additional regulations may be promulgated which could prevent or delay
regulatory approval of VITEX's planned products. There can be no assurance that
any approval or clearance will be granted on a timely basis, if at all. Any
failure to obtain or delay in obtaining such approvals or clearances, and any
significant limitation on the approved indications for any product, could have a
material adverse effect on VITEX's business, financial condition and results of
operations.
A drug, biologic or medical device, its manufacturer, and the holder of the
NDA, BLA (or PLA/ELA), PMA or 510(k) for a product are subject to comprehensive
regulatory oversight, both before and after approval or clearance is obtained.
Violations of regulatory requirements at any stage, including during the
preclinical and clinical trial process, during the review process or after the
product is approved for marketing, could result in various adverse consequences,
including the FDA's requiring that a clinical trial be delayed or suspended, the
FDA's delay in approving or refusing to approve a product, withdrawal of an
approved product from the market and the imposition of criminal penalties. For
example, the holder of an NDA, BLA (or PLA/ELA), PMA or 510(k) is required to
report certain adverse reactions to the FDA, and must comply with certain
requirements concerning advertising and promoting the product. Also, the FDA
periodically inspects manufacturing facilities to assess compliance with cGMP,
and the product must continue to be manufactured in compliance with cGMP
regulations after approval. In particular, until VITEX achieves commercial
production levels of its PLAS+SD product, the test results for each lot of this
product will be subject to FDA review prior to release for its intended use.
Accordingly, manufacturers must continue to expend time, monies and efforts on
regulatory compliance, including cGMP compliance. In addition, new government
requirements may be established that could delay or prevent regulatory approval
or clearance of VITEX's product candidates under development or otherwise alter
the applicable law or regulations. There can be no assurance that the FDA will
determine that the facilities and manufacturing procedures of VITEX or any other
third-party manufacturer of VITEX's planned products will conform to cGMP
requirements. On April 16, 1999, VITEX initiated a voluntary recall certain
lots of PLAS+SD.
III-16
<PAGE>
In addition to the regulatory requirements applicable to VITEX and its
products, there are also regulatory requirements applicable to VITEX's
prospective customers, which are primarily entities that ship blood and blood
products in interstate commerce. Such entities are regulated by the FDA
pursuant to the Food, Drug and Cosmetic Act and the Public Health Service Act
and implementing regulations. Blood centers and others that ship blood and
blood products interstate will likely be required to obtain approved license
supplements from the FDA before shipping products processed with VITEX's viral
inactivation systems. This requirement and/or FDA delays in approving such
supplements may deter some blood centers from using VITEX's products, and blood
centers that do submit supplements may face disapproval or delays in approval
that could provide further disincentives to use of the systems. The regulatory
impact on potential customers could have a material adverse effect on VITEX's
business, financial condition and results of operations.
VITEX is subject to federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials, biological
specimens and wastes. As the production volumes of PLAS+SD increase, VITEX may
be required to obtain a permit amendment from regulatory authorities to increase
the associated volume of permitted discharge. Although VITEX has submitted an
application to obtain this permit amendment and is actively pursuing it, there
can be no assurance that such permit amendment will be obtained in a timely
manner, if at all. There can be no assurance that VITEX will not be required to
incur significant costs to comply with environmental and health and safety
regulations in the future. VITEX's research and development involves the
controlled use of hazardous materials, including certain hazardous chemicals,
viruses and radioactive materials. Although VITEX believes that its safety
procedures for handling and disposing of such materials comply with the standard
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In the event
of such an accident, VITEX could be held liable for any damages that result and
any such liability could exceed the resources of VITEX.
Health Care Reimbursement
VITEX's ability to successfully commercialize its products is dependent in
part on the extent to which appropriate levels of reimbursement for VITEX's
products and related treatments are obtained from government authorities,
private health insurers, third party payers, and other organizations such as
managed care organizations ("MCOs"). Failure by doctors, hospitals and other
users of VITEX's products or systems to obtain appropriate levels of
reimbursement could adversely affect VITEX's ability to sell its products and
systems. There are widespread public and private efforts to control health care
costs, and it is unlikely that these efforts will be abandoned in the near
future. Third-party payers are increasingly challenging the pricing of medical
products and services. The trend toward managed care health in the U.S., the
growth of MCOs and legislative proposals to reform health care and government
insurance programs could significantly influence the purchase of medical
products and services, resulting in lower prices and reduced demand for VITEX's
products. Such cost containment measures and health care reform could affect
VITEX's ability to sell its products, which VITEX expects will cost more than
corresponding blood products that are not virally inactivated, and may have a
material adverse effect on VITEX. Significant uncertainty exists about the
reimbursement status of newly approved medical products and services, including
VITEX's PLAS+SD product. There can be no assurance that reimbursement in the
United States or foreign countries will be available for any of VITEX's
products, that any reimbursement granted will be maintained or that limits on
reimbursement available from third-party payers will not reduce the demand for,
or negatively affect the price of, VITEX's products. The unavailability or
inadequacy of third-party reimbursement for VITEX's products would have a
material adverse effect on VITEX's business, financial condition, results of
operations and cash flows.
Research and Development
VITEX believes that continued and timely development of new products and
enhancements to existing products are necessary to maintain its competitive
position. To this end, VITEX relies on a combination of its own internal
expertise and strategic alliances with its collaborators and other companies to
enhance its research and development efforts. In addition to new product
candidates generated by internal research and development activities, VITEX
actively monitors external research and development programs, such as those
undertaken by Pentose relating to INACTINE, in search of complementary and
advanced technology for potential acquisition or license arrangement.
Research and development expense, which includes technology license fees
paid to third parties, amounted to $7.5 million, $5.9 million and $4.4 million
for the years ended January 2, 1999 and December 31, 1997 and 1996,
respectively. Such amounts are net of collaborator reimbursement in the amount
of $2.3 million, $1.2 million and $1 million for the years ended January 2, 1999
and December 31, 1997 and 1996, respectively.
III-17
<PAGE>
The field of transfusion medicine and therapeutic use of blood products is
characterized by rapid technological change. Product development involves a
high degree of risk, and there can be no assurance that VITEX's product
development efforts will result in any commercial success.
Environmental Regulation; Use of Hazardous Substances
VITEX is subject to federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials, biological
specimens, and wastes. VITEX has made, and will continue to make, the necessary
expenditures for environmental compliance and protection. Expenditures for
compliance with environmental laws have not had, and are not expected to have, a
material effect on VITEX's financial position, results of operations or cash
flows. VITEX's research and development activities involve the controlled use
of hazardous materials. Although VITEX believes that its safety procedures for
handling and disposing of such materials comply with the standards proscribed by
state and federal regulations, the risk of accidental contamination or injury
from these materials cannot be eliminated. In the event of such an accident,
VITEX could be held liable for any damages that result and such liability could
exceed the resources of VITEX.
Customers
VITEX's revenues are derived from the sale of plasma fractions, principally
to Bayer, and transfusion plasma to the Red Cross. During the year ended
January 2, 1999, revenue from sales to Bayer and the Red Cross comprised 43.4%
and 48.4%, respectively, of VITEX's total revenues during such period. During
the 26 weeks ended July 3, 1999, revenue from sales to Bayer and the Red Cross
comprised 48.3% and 51.7%, respectively, of VITEX's total revenues during such
period.
Employees
As of July 3, 1999, VITEX had 268 employees, of which 37 were engaged in
research and development, 202 were engaged in manufacturing, 15 were engaged in
sales and marketing and 14 were engaged in other activities. VITEX's
competitive position in the blood products industry depends, in part, on its
continued ability to recruit and retain qualified scientists, managerial and
technical employees who are in considerable demand. There can be no assurance
that VITEX will be able to continue to attract and retain qualified personnel in
sufficient numbers to meet its needs. None of VITEX's employees is represented
by a labor union and VITEX has never experienced a work stoppage, slowdown, or
strike. VITEX considers its employee relations to be good.
Properties
VITEX's primary executive offices and manufacturing facility are contained
within a 92,000 square foot VITEX-owned building in Melville, New York. VITEX
has made, and is continuing to make, improvements to this facility to
accommodate VITEX Plasma Fractions and PLAS+SD production requirements, and to
produce sufficient quantities of VITEX Fibrin Sealant to meet regulatory filing
requirements and to support initial product demand. VITEX currently leases
12,000 square feet of space in New York, New York to accommodate its research
and development activities.
VITEX believes that its current facilities, combined with anticipated
additions and improvements currently under construction, are adequate for all
present and foreseeable future uses.
Legal Proceedings
VITEX is a party to certain legal proceedings which are discussed below.
While it is impossible to predict accurately or to determine the eventual
outcome of these matters, VITEX believes that the outcome of these proceedings
will not have a material adverse effect upon VITEX's business, financial
condition or results of operations.
VITEX is aware that in the course of ongoing litigation between the NYBC
and a third party, the third party has asserted claims against NYBC based on
breach of a contract that was executed in 1988 by those parties and rights under
which were assigned to VITEX in 1995. The third party has claimed that it is
entitled to payments from the NYBC based on improvements in albumin throughput
yields attributable to certain filtration technology licensed to the NYBC by the
third party. VITEX understands that the NYBC believes it has meritorious
defenses against this third party's claims and, in any event, as part of the
assignment of NYBC's rights under the disputed contract by the NYBC to VITEX,
VITEX assumed no responsibility for pre-existing contract liabilities. However,
there can be no assurance that the third party will not assert
III-18
<PAGE>
claims against VITEX under that contract which are similar in nature to the
claims being asserted against the NYBC. No such claims have been asserted to
date. VITEX believes that it would have meritorious defenses against any such
claims.
On March 23, 1998, VITEX received a Civil Investigative Demand ("CID") from
the Antitrust Division of the U.S. Department of Justice (the "Justice
Department") as part of the Justice Department's investigation into possible
antitrust violations in the sale, marketing and distribution of blood products.
A CID is a formal request for information and a customary initial step of any
Justice Department investigation. The Justice Department is permitted to issue
a CID to anyone whom the Justice Department believes may have information
relevant to an investigation. Therefore, the receipt of a CID does not mean
that the recipient is the target of an investigation, nor does it presuppose
that there is a probable cause to believe that a violation of the antitrust laws
has occurred or that any formal complaint ultimately will be filed. VITEX
believes that the primary focus of the CID relates to VITEX's PLAS+SD product
and to the Supply, Manufacturing and Distribution Collaboration Agreement
between VITEX and the American National Red Cross. Following VITEX's response
in April 1998 to the CID, VITEX has not received notice of any further activity
with respect to this matter.
On August 27, 1998, the Appellate Division of the Supreme Court of New York
awarded VITEX a summary judgment against its insurance carrier, reversing a
lower court decision which denied VITEX's previous claim for recovery of costs
incurred in 1996 as a result of a plasma processing loss. VITEX had recorded a
special charge in 1996 to recognize reimbursement due to Bayer Corporation for
the plasma loss ($4.1 million) and to write off processing costs ($1.0 million).
VITEX has filed a claim with the insurer to recover these and related costs. On
October 27, 1998, the insurance carrier filed a motion to appeal the decision of
the Appellate Court. Such appeal was subsequently rejected. The insurance
carrier has since taken its appeal to the New York Court of Appeals which has
declined to hear the matter. The case has now been returned to the New York
Supreme Court for assessment of damages. The ultimate outcome of this matter
can not be determined at the present time.
III-19
<PAGE>
VITEX'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
V.I. Technologies, Inc. ("VITEX") is a leading developer of a broad
portfolio of blood products and systems using its proprietary viral inactivation
technologies. VITEX's technologies are intended to address the risks of viral
contamination in blood products, including plasma, plasma derivatives, red blood
cells and platelets. Viral inactivation processes have the potential to
eliminate viruses that are enveloped by lipid membranes such as hepatitis B
virus ("HBV"), hepatitis C virus ("HCV") and HIV, the virus that causes AIDS,
non-enveloped viruses such as hepatitis A virus ("HAV") and parvovirus B19 and
other known and unknown pathogens.
On July 28, 1999, VITEX announced that it had signed an Agreement and Plan
of Merger and Reorganization pursuant to which Pentose Pharmaceuticals, Inc., a
privately held company developing viral inactivation products, would be merged
with and into VITEX. The agreement, which is subject to approval by
stockholders of both companies, is structured as an all stock transaction under
which Pentose stockholders will acquire 34% of the outstanding shares of the
combined company. The transaction will be treated as a purchase for accounting
purposes and a portion of the transaction value will be written off as in-
process research and development. Pentose is developing a proprietary viral
inactivation technology, called INACTINE compounds, that in preclinical studies
have inactivated all classes of viruses known to infect blood -- both enveloped
and non-enveloped viruses -- in a highly selective manner. Pentose's most
advanced INACTINE development program is for use in red blood cells. Pentose
has filed an investigational new drug ("IND") application for this program and,
assuming the merger is consummated, VITEX intends to begin clinical trials
within the next three months. INACTINEs also have applicability for viral
inactivation of plasma and platelets.
VITEX reported a net loss of $3,168,000 for the second quarter ended July
3, 1999, including one-time costs of $2,918,000 related to a recall of certain
lots of PLAS+SD, and its accumulated deficit to that date was $35,617,000.
Operating results will vary from period to period and, accordingly, the results
for the thirteen and twenty-six weeks ended July 3, 1999 may not necessarily be
indicative of results to be expected in future periods. The significant risk
factors that affect VITEX are described on pages I-12 to I-17 of this Joint
Proxy Statement/Prospectus and in VITEX's annual report on Form 10-K for the
year ended January 2, 1999.
VITEX's revenues are derived from the manufacture and sale of plasma
fractions and transfusion plasma:
. Plasma Fractions. VITEX produces plasma fractions principally for Bayer
Corporation ("Bayer") under terms of a processing agreement the initial
term of which extends through 2001. Under this agreement, Bayer is
obligated to provide VITEX with a specified quantity of plasma annually
and VITEX is obligated to return plasma fractions to Bayer within
certain specified periods. The agreement is structured as a take-or-pay
arrangement under which Bayer is obligated to pay VITEX a fixed fee per
liter of fractionated plasma whether or not Bayer fulfills its
obligation to supply plasma to VITEX. In the event that VITEX does not
provide fractions as required under the agreement, or upon the
occurrence of other events of default, Bayer has certain rights to take
over and operate the fractionation portion of VITEX's production
facility.
. VITEX is currently utilizing all of its existing fractionation plasma
capacity. Due to an industry-wide shortage of fractionation capacity, in
conjunction with solicitations from Bayer and others, VITEX expanded its
fractionation capacity by 15% in the third quarter of 1999. VITEX is
also examining the cost/benefit of further expansion. Although VITEX
believes that it can achieve attractive margins on the increased volume,
there can be no assurance of this.
. Transfusion Plasma. PLAS+SD, the first of VITEX's virally inactivated
products, received marketing clearance from the FDA on May 6, 1998.
Commercial scale production of PLAS+SD, a pooled transfusion plasma
which utilizes VITEX's solvent/detergent ("SD") viral inactivation
technology to inactivate lipid-enveloped viruses, began in June 1998.
PLAS+SD is the only FDA-approved virally inactivated blood component
available for use in the United States. The product is sold under an
exclusive Amended and Restated Supply, Manufacturing and Distribution
Collaboration Agreement, dated October 1, 1998 ("Distribution
Agreement") with the American National Red Cross ("Red Cross") which
expires in 2002. Under the Distribution Agreement, the Red Cross, which
is the largest supplier of transfusion plasma to hospitals in the United
States, providing about 45% of the transfusion plasma used annually, is
required to purchase minimum stated quantities of PLAS+SD to maintain
its exclusive rights. Once the Red Cross places
III-20
<PAGE>
its annual purchase order with VITEX, it is obligated to supply VITEX
with a sufficient quantity of plasma to enable VITEX to fulfill the
order. The Red Cross must pay for the amount of PLAS+SD specified in the
purchase order even if the Red Cross is unable to supply sufficient
quantities of plasma. In the past, there has been variability in the
rate of plasma supply from the Red Cross. This situation could recur in
future periods, which could negatively impact the timing of revenue
recognition, production scheduling and ultimately, production costs.
Under the Distribution Agreement, the Red Cross is required to pay to
VITEX a fixed price per unit of PLAS+SD, plus a royalty which is
initially fixed. Beyond a specified volume, the royalty becomes
variable, based on equal sharing of the amount by which the average
selling price by the Red Cross exceeds a stated amount. VITEX and the
Red Cross have each committed to spend minimum amounts for marketing
PLAS+SD during the two-year period ending September 2000. VITEX's
spending commitment is expected to be satisfied, to a large extent by
the cost of its sales force hired in January 1999.
VITEX is delivering PLAS+SD under the second purchase order of the Red
Cross Distribution Agreement. Under the agreement, the Red Cross is
required to purchase stated minimum quantities of PLAS+SD. VITEX may
either terminate the agreement in its entirety or convert the exclusive
rights of the Red Cross to non-exclusive rights if the stated minimum
purchase requirements are not met. The Distribution Agreement also
requires the Red Cross to achieve certain end-user sales levels.
Failure to achieve these end-user sales levels could result in
termination of the Distribution Agreement by either the Red Cross or
VITEX. Although the current sales by the Red Cross are below the levels
required under the Distribution Agreement with VITEX, the parties are in
negotiations to increase production and lower the minimum levels so as
to avoid termination of the Distribution Agreement. Although end
customer sales of PLAS+SD have risen since the product was introduced,
end-user market penetration has increased at a slower rate than
anticipated. VITEX recently established its own national sales force to
support the efforts of the Red Cross by increasing product awareness
among users in an attempt to accelerate market penetration. While
measurement of the success of the sales force is premature since the
sales force has been in the field only since late January 1999,
preliminary results have shown an upward trend in sales. However, there
can be no assurance that PLAS+SD will continue to increase or maintain
its current level of market acceptance among blood centers, physicians,
patients and health care payers.
During April 1999, in connection with PLAS+SD Phase IV safety studies,
VITEX observed several seroconversions to parvovirus B19 in healthy
volunteers who received PLAS+SD from production lots which were found to
contain high concentrations of the virus. Although there was no evidence
of clinical disease typical of parvovirus B19 associated with these
seroconversions, on April 16, 1999, VITEX initiated a voluntary recall
of lots of PLAS+SD that were found to contain heightened levels of
parvovirus B19 DNA. PLAS+SD is screened for HAV. In addition, VITEX has
developed a process to screen untreated plasma for parvovirus B19 prior
to commencing the manufacturing process. This screening uses an
experimental, highly sensitive Polymerase Chain Reaction ("PCR") test in
order to ensure that this virus is below specified laboratory levels.
VITEX has completed formal validation of this screening technique and
applied to the FDA for a parvovirus B19 label claim with approval
expected in early 2000.
Results for the quarter ended July 3, 1999 include one-time costs
associated with the recall amounting to $2,918,000, or $0.24 per share.
In the condensed statements of operations, the charge related to product
recall of $2,645,000 includes the write-off of inventory lots with
heightened levels of parvovirus B19, production testing, other direct
recall expenses and a reserve for an equitable sharing of recall costs
incurred by VITEX'S exclusive distributor, the Red Cross. The Red Cross
had requested reimbursement of the costs it incurred as a result of the
recall. While VITEX believes it is not contractually liable for Red
Cross costs in this situation, covering a portion of such costs is
consistent with the spirit of the collaboration Costs associated with
idle production facilities during the recall period, in the amount of
$273,000, are included in cost of sales.
VITEX's other virally inactivated blood product candidates are all under
development and include:
. Universal PLAS+SD. Universal PLAS+SD is a product under development by
VITEX which is intended to improve upon PLAS+SD by eliminating the need
for matching donor and recipient blood types. Universal PLAS+SD is
prepared using patented technology, exclusively licensed from the New
York Blood Center ("NYBC"), which binds and removes specific antibodies
present in donor plasma that would otherwise cause an immune response in
the recipient. VITEX has established the feasibility of this approach
and filed an IND for Universal PLAS+SD on August 8, 1999.
. Universal PLAS+SD II. Universal PLAS+SD II adds additional methods of
viral inactivation to Universal PLAS+SD. VITEX is evaluating alternative
technologies, including ultraviolet light and INACTINE compounds, which
are intended to inactivate known non-enveloped viruses, such as
parvovirus B19 and HAV,
III-21
<PAGE>
and which may offer added protection against other non-enveloped viruses
that might contaminate the blood supply in the future. Although the
presence of antibodies normally found in pooled plasma may protect
against known non-enveloped viruses, SD and these second generation
technologies used in combination may provide a higher margin of blood
product safety than SD technology alone. Universal PLAS+SD II is at an
early stage of development and, consequently, there can be no assurance
that VITEX will be able to successfully develop, secure approval for or
commercialize this product candidate.
. VITEX Fibrin Sealant. VITEX is developing its VITEX Fibrin Sealant for
use during surgical procedures to augment or replace sutures or staples
for wound closure. Fibrin sealants - also known as fibrin glues - are
created by combining the two principal clotting factors found in blood,
fibrinogen and thrombin, whose natural function is to halt bleeding and
seal tissues. Fibrin sealant are biodegradable, and their use does not
generally elicit an immune response frequently associated with non-
biological glues. VITEX expects that its fibrin sealant will be the
first double virally inactivated fibrin sealant available in the United
States. This product has completed Phase II clinical trials for two
indications (non-healing rectal fistula and modified radical mastectomy)
and completed enrollment for Phase III clinical trials for use during
breast cancer surgery. Enrollment for an additional Phase III clinical
trial, which is intended to evaluate the product's ability to reduce
blood loss following carotid artery surgery, was completed during the
second quarter of 1999.
VITEX's fibrin sealant development is jointly funded by United States
Surgical Corporation ("U.S. Surgical"), which has entered into an
exclusive worldwide distribution agreement with VITEX. Under the terms
of the agreement, U. S. Surgical must achieve certain minimum product
sales to maintain its exclusive distribution rights. VITEX has agreed to
supply U. S. Surgical's forecasted demand for the product. Either VITEX
or U.S. Surgical may terminate the agreement upon written notice in
certain circumstances, including a breach of the agreement by the other
party. U.S. Surgical may also terminate the agreement for any reason
upon nine months notice to VITEX. During 1998, VITEX completed
construction of a multi-use manufacturing suite, within its existing
facility, to permit the production, subject to FDA approval, of
commercial quantities of VITEX Fibrin Sealant. Validation of the new
manufacturing area is currently underway. U.S. Surgical was acquired by
Tyco Corporation in 1998. The effects, if any, of this acquisition on
the development programs and the eventual success of the product cannot
be assessed at this time.
. VITEX Red Blood Cell Concentrates. VITEX has been working to develop
virally inactivated red blood cell concentrates ("RBCC") based on the
use of light-activated compounds that respond to specific wavelengths of
light and has entered into an agreement with Pall Corporation regarding
the development and distribution of systems for the viral inactivation
of RBCC. Assuming the completion of the merger contemplated hereby,
VITEX intends to focus its future efforts in red cells on the INACTINE
technology. VITEX will incorporate this technology into the agreement
with Pall Corporation.
Pentose submitted an IND to the FDA in August 1999 for INACTINE-treated
red blood cells for transfusion. VITEX and Pentose expect to commence
Phase I clinical trials in the fourth quarter of 1999. The Phase I
clinical trials will be designed to evaluate the safety of infusing
INACTINE-treated red blood cell concentrates in humans as well as to
repeat red cell physiology studies previously completed in animals.
VITEX and Pentose expect the Phase I study to be completed within
approximately 6 months following enrollment of the first patient. VITEX
and Pentose further believe that in the second half of 2000 they will
receive approval to proceed to the next phase of clinical trials.
The field of transfusion medicine and therapeutic use of blood products is
characterized by rapid technological change. Product development involves a
high degree of risk, and there can be no assurance that VITEX's product
development efforts will result in any commercial success.
Results of Operations
Thirteen Weeks and Twenty-Six Weeks Ended July 4, 1998 Compared to Thirteen and
Twenty-Six Weeks Ended July 3, 1999
Revenue
Revenue increased $1.4 million in the second quarter of 1999 to $9.4
million, compared to $7.9 million during the second quarter of 1998. For the
twenty-six weeks ended July 3, 1999, revenue increased to $20.5 million from
$12.1 million
III-22
<PAGE>
for the twenty-six weeks ended July 4,1998. The increase for both the quarter
and twenty-six weeks was primarily due to the initiation of sales of PLAS+SD,
which was approved by the FDA in May 1998. Sales of plasma fractions were also
higher for the quarter and year-to-date, as a result of increased processing
volume and higher unit pricing in accordance with VITEX's processing agreement
with Bayer.
Cost of Sales
Cost of sales amounted to $5.3 million in the second quarter of 1999,
compared to $5.4 million during the second quarter of 1998. For the twenty-six
weeks ended July 3, 1999, cost of sales increased to $11.4 million from $10.1
million for the twenty-six weeks ended July 4, 1998. The year-to-date increase
was primarily due to processing costs related to the production of PLAS+SD.
Cost of sales during the second quarter of 1999 includes $0.3 million of costs
associated with idle production facilities during the recall period. Cost of
sales in the corresponding periods of the prior year included additional
processing costs related to the production ramp-up of PLAS+SD.
As a percentage of revenue, cost of sales was 57% (54% excluding idle
facility costs) and 56% (54% excluding idle facility costs), respectively, for
the quarter and twenty-six weeks ended July 3, 1999. This was an improvement
from 67% and 84% for the comparative 1998 periods, as sales of PLAS+SD did not
commence until VITEX received marketing approval from the FDA in May 1998.
Product gross margin was 43% in the second quarter of 1999, compared to 33% for
the second quarter of 1998. Product gross margin was 44% for the twenty-six
weeks ended July 3, 1999 compared to 16% for twenty-six weeks ended July 4,
1998. Since the initial recall, VITEX has been developed and validated a process
to screen untreated plasma for parvovirus B19 prior to commencing the
manufacturing process and applied to the FDA for a parvovirus B19 label claim
with approval expected in early 2000. VITEX expects that the resulting increase
in production costs due to the new testing will be relatively modest.
Research and Development
Research and development costs increased $0.4 million in the second quarter
of 1999 to $2.1 million, compared to $1.7 million during the second quarter of
1998. For the twenty-six weeks ended July 3, 1999, research and development
costs increased to $4.1 million from $3.4 million for the twenty-six weeks ended
July 4, 1998. The increase in research and development costs for the thirteen
and twenty-six weeks ended July 3, 1999 was due to expanded activities in
VITEX's red blood cell and plasma programs, and an increase in expenditures for
PLAS+SD Phase IV clinical trial studies. In connection with the Pentose merger,
VITEX anticipates incurring a restructuring charge in the third fiscal quarter
of approximately $2.5 million as it integrates its research programs with the
Pentose programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $0.3 million in the
second quarter of 1999 to $2.5 million, compared to $2.2 million during the
second quarter of 1998. For the twenty-six weeks ended July 3, 1999, selling
general and administrative expenses increased to $5 million from $3.5 million
for the twenty-six weeks ended July 4, 1998. The increase for the thirteen and
twenty-six weeks ended July 3, 1999, was principally due to marketing costs
associated with PLAS+SD and the hiring of new personnel, including the national
sales force in January 1998. Although VITEX is reducing its general and
administrative expenses in certain areas, expected increases in sales and
marketing expenditures relating to PLAS+SD will likely offset these reductions,
resulting in a similar level of selling, general and administrative expenditures
throughout the remainder of the year.
Charge Related to Product Recall
As further described above, the results for the second quarter of 1999
included one-time costs associated with a recall amounting to $2,918,000, or
$0.24 per share. In the condensed statements of operations, the charge related
to product recall of $2,645,000 includes the write-off of inventory lots with
heightened levels of parvovirus B19, production testing, other direct recall
expenses and a reserve for an equitable sharing of recall costs incurred by
VITEX's exclusive distributor, the Red Cross. The Red Cross has requested
reimbursement of the costs it incurred as a result of the recall. While VITEX
believes it is not contractually liable for Red Cross costs in this situation,
covering a portion of such costs is consistent with the spirit of the
collaboration.
III-23
<PAGE>
Charge Related to Research Collaboration
During the first quarter of 1998, VITEX recorded a one-time charge of $2.2
million in connection with its research collaboration with Pall Corporation.
See "--Strategic Collaborations - Pall Corporation" for a detailed description
of the Pall collaboration. The charge occurred in connection with an equity
investment in VITEX made by Pall under the collaboration agreement and reflects
the difference between the amount paid for the shares issued to Pall and the
fair market value of the common stock at that date.
Net Interest Expense
VITEX earned net interest income of $0.1 million during the quarter ended
July 3, 1999, compared to the second quarter of 1998 when VITEX incurred net
interest expense of $0.3 million. During the twenty-six weeks ended July 3,
1999, VITEX earned net interest income of $0.1 million compared to the twenty-
six weeks ended July 4,1998, when VITEX incurred net interest expense of $0.7
million. The change reflects the reduced level of debt outstanding during 1999,
combined with the interest earned on cash balances, including the proceeds from
VITEX's initial public offering. Included in net interest income during the
thirteen and twenty-six weeks ended July 3, 1999 are non-cash charges of $70,000
and $140,000, respectively, representing the accretion of the balance of VITEX's
non-interest bearing advance from the Red Cross.
Year Ended January 2, 1999 Compared to Year Ended December 31, 1997
Revenue
Revenue increased $18 million during the year ended January 2, 1999 to
$33.8 million compared to $15.8 million during fiscal 1997. The increase was
primarily due to sales of PLAS+SD which received marketing clearance from the
FDA on May 6, 1998. Commercial scale production and sale of PLAS+SD began in
June 1998. Also contributing to the increase in revenue was an increase in sales
of plasma fractions as a result of higher processing volume, partially offset by
a decrease in unit pricing in accordance with VITEX's processing agreement with
Bayer. The processing agreement also specifies a price increase, effective
January 1, 1999, in an amount equal to the increase in the consumer price index.
Cost of Sales
Cost of sales increased $7.6 million during the year ended January 2, 1999
to $23.9 million, compared to $16.3 million during fiscal 1997. The increase was
primarily due to processing and start-up costs related to the production of
PLAS+SD.
Product gross margin was approximately 29.3% for the year ended January 2,
1999. This was a significant improvement from fiscal 1997, which did not
contain revenue from the sale of PLAS+SD. As a result of manufacturing cost
reductions, product yield improvements and higher pricing negotiated under the
amended collaboration agreement with the Red Cross agreement, product gross
margin was approximately 40.8% during the thirteen weeks ended January 2, 1999.
Research and Development
Research and development costs increased $1.6 million during the year ended
January 2, 1999 to $7.5 million, compared to $5.9 million during fiscal 1997.
The increase in research and development costs is primarily due to the expanded
activities in VITEX's red blood cell program, advanced stage development
spending for its fibrin sealant program and additional new product research
activities. Further increases in research and development expenditures are
expected to continue during fiscal 1999. Research and development costs are
recorded net of collaborator reimbursement which amounted to $2.3 and $1.2
million for the years ended January 2, 1999 and December 31, 1997, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.6 million during
the year ended January 2, 1999 to $7 million, compared to $4.4 million during
fiscal 1997. The increase is principally due to administrative costs associated
with the hiring of new personnel, including the national sales force which was
hired in December 1998, marketing costs associated with PLAS+SD, and legal
expenses associated with renegotiating and amending collaborator agreements and
a response to a Civil Investigative Demand from the U.S. Department of Justice.
VITEX and the Red Cross have each committed to spend certain minimum amounts for
marketing PLAS+SD during the two year period ending September 30,
III-24
<PAGE>
2000. VITEX's spending commitment is expected to be satisfied, to a large
extent, by the cost of its sales force. VITEX expects that its selling, general
and administrative expenses will increase during fiscal 1999 as a result of this
increased level of sales and marketing commitment.
Charge Related to Research Collaboration
During the year ended January 2, 1999, VITEX recorded a one-time charge of
$2.2 million in connection with its research collaboration with Pall
Corporation. The charge occurred in connection with an equity investment in
VITEX made by Pall under the collaboration agreement and reflects the difference
between the amount paid for the shares issued to Pall and the fair market value
of the common stock at that date.
Net Interest Expense
During the years ended January 2, 1999 and December 31, 1997, VITEX
incurred net interest expense of $0.3 million and $1 million, respectively,
reflecting the levels of debt outstanding during such periods, offset by
interest earned on cash balances, including the proceeds from VITEX's initial
public offering. During the quarter ended January 2, 1999 VITEX recorded a non-
cash gain of $0.6 million relating to the discounting of the $3 million non-
interest bearing advance from the Red Cross. The advance was discounted upon
finalization of the repayment terms contained in the amended Red Cross
Agreement.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Total revenues decreased from $17.9 million in 1996 to $15.8 million in
1997, a decrease of $2.1 million. This decrease was due principally to the
receipt by VITEX in 1996 of a one-time licensing fee of $3.0 million which was
partially offset by increases in processing and product revenues of $0.9 million
in 1997. The increase in processing and product revenues reflects an increase
in processing volume partially offset by a decrease in unit pricing under
VITEX's processing agreement with Bayer.
Cost of Sales
Cost of sales increased from $10.6 million in 1996 to $16.3 million in
1997, an increase of $5.7 million. Cost of sales includes costs related to
processing fractionated products and those costs formerly classified as facility
costs which amounted to $1.4 and $6 million in 1996 and 1997, respectively.
Fractionation production gross margin, excluding facility costs relating to
PLAS+SD ramp-up costs, decreased from 38.7% in 1996 to 34.7% in 1997. The gross
margin in 1996 reflects unrecovered processing costs of $1.0 million incurred by
VITEX in processing Bayer's plasma during an equipment malfunction. Exclusive
of this $1.0 million charge, the gross margin was 45.4% in 1996. The decrease
in gross margin in 1997 was due to a decrease in unit pricing under the
Processing Agreement with Bayer, increased maintenance costs related to
scheduled servicing of VITEX's plasma fractionation assets and increased
materials costs.
Research and Development
Research and development costs increased from $4.4 million in 1996 to $5.9
million in 1997, an increase of $1.5 million. The increase is due principally to
the expanded activities in VITEX's RBCC programs, expanded clinical trials for
VITEX Fibrin Sealant and additional development activities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased from $2.5 million in
1996 to $4.4 million in 1997, an increase of $1.9 million. The increase
represents costs associated with the initiation of market research activities,
education and other pre-marketing activities in connection with the anticipated
commercial introduction of PLAS+SD. In addition, during 1997, VITEX incurred
$0.7 million of non-recurring severance costs and $0.2 million of debt
refinancing costs.
Net Interest Expense
Net interest expense increased from $0.5 million in 1996 to $1 million in
1997 due to additional debt financing.
III-25
<PAGE>
Liquidity and Capital Resources
VITEX has historically financed its operations primarily through sales of
common stock, issuance of long-term debt and capital lease financing
arrangements. In addition to these financing methods, VITEX generates cash from
revenues derived under its Processing Agreement with Bayer Corporation and the
sale of PLAS+SD to the Red Cross. VITEX also receives research and development
funding, under a collaboration agreement from U. S. Surgical, for the direct
costs associated with clinical and regulatory activities for the development of
its fibrin sealant and from Pall Corporation, as part of a cost sharing
agreement, in connection with the research collaboration described previously.
At July 3, 1999, VITEX had working capital of $25.7 million, including cash
and cash equivalents of $27.5 million, compared to working capital of $33.1
million, including cash and cash equivalents of $35.3 million, at January 2,
1999. At December 31, 1997, there was a working capital deficit of $2.8
million, including cash and cash equivalents of $5.3 million. The increase in
cash balances was primarily due to VITEX's initial public offering in 1998,
which provided cash of $45.6 million. The primary objectives for VITEX's
investment of cash balances are safety of principal and liquidity. Available
cash balances are invested in money market funds with portfolios of investment
grade corporate and U.S. government securities.
During the twenty-six weeks ended July 3, 1999, VITEX used $2.0 million of
cash to fund its operations, primarily as a result of an increase in receivables
due to sales of PLAS+SD, partially offset by an increase in accounts payable and
accrued expenses, reflecting accruals for the charge taken as a result of the
product recall. Cash used in investing activities of $4.2 million during the
twenty-six weeks ended July 3, 1999, was primarily related to VITEX's renovation
of its production facility, while cash used in financing activities of $1.7
million was primarily related to scheduled repayments of VITEX's long-term debt
and capital lease obligations.
In connection with the Pentose merger, VITEX will record a restructuring
charge in the third quarter of approximately $2.5 million for the anticipated
costs of rationalizing its research and development programs with those of
Pentose.
On June 15, 1998, VITEX completed an initial public offering ("IPO") of
3,000,000 shares of VITEX's common stock, raising net proceeds of approximately
$32.2 million. On July 10, 1998, the underwriters of VITEX's IPO partially
exercised their over-allotment option for an additional 325,000 shares, raising
net proceeds of $3.6 million. In conjunction with the collaboration agreement
between VITEX and Pall, Pall purchased $9 million of VITEX's common stock in two
private placements which occurred during 1998. The first placement, which
occurred in February 1998, amounted to $4 million, and the second amounted to $5
million and closed contemporaneously with, and at the same price, terms and
conditions as the IPO.
In order to maintain its exclusive marketing and distribution rights for
PLAS+SD, the Red Cross is required to purchase stated minimum quantities
amounting to approximately $50 million during the two-year period ending
September 30, 2000. VITEX and the Red Cross have each committed to spend minimum
amounts for marketing PLAS+SD during the two-year period ending September 30,
2000. VITEX's spending commitment is expected to be largely satisfied by the
cost of its sales force established in December 1998 to support the Red Cross in
promoting product awareness and accelerating market penetration of the PLAS+SD
product.
U.S. Surgical has agreed to fund all future direct clinical and regulatory
costs associated with the development and regulatory approval of VITEX Fibrin
Sealant. In addition, U.S. Surgical has agreed to pay a portion of agreed upon
research and development costs for improvements and enhancements to VITEX Fibrin
Sealant.
Under its collaboration with Pall, VITEX and Pall have agreed to equally
share research, development, clinical and regulatory costs. Profits will be
shared equally after each party is reimbursed for its cost of goods. The
agreements provide that Pall will purchase up to $17.0 million of VITEX common
stock in installments tied to the achievement of specified development
milestones. These equity investments will be made at the prevailing market
price.
Under VITEX's license agreements with the NYBC, VITEX is required to pay
aggregate minimum royalties of $1,500,000 in 1999, $2,200,000 in 2000,
$2,400,000 in 2001 and $2,800,000 in each year thereafter in order to maintain
its exclusive licenses. VITEX is also required to make specified payments to the
NYBC to maintain its exclusive licenses if certain research and development
milestones are not met by VITEX.
In December 1997, VITEX entered into a credit agreement with a bank
providing for a term loan in the principal amount of $10.8 million. The proceeds
under this term loan were used to repay the outstanding balance of existing term
III-26
<PAGE>
loans aggregating $10.5 million. This loan bears interest at VITEX's option at
LIBOR plus 2.75% to 1.75%, or the base rate of the bank, as defined, plus
margins of up to 0.5% as determined based on defined earnings ratios. As of July
3, 1999, VITEX was using one-month LIBOR (5.18%) plus 2.75%. Under this loan,
interest is payable monthly and the principal balance is payable in 16 equal
consecutive quarterly installments of $0.7 million commencing March 31, 1998 and
continuing until maturity on December 31, 2001. The credit agreement contains
default provisions, including financial covenants which provide restrictions on
capital investments, the payment of cash dividends and, among other things,
requires VITEX to maintain minimum cash balances of $2.0 million and leverage
and coverage ratios as defined. VITEX is in compliance with, or has obtained
waivers under, such covenants.
Under VITEX's capital and operating leases, annual minimum rental payments
and related interest expense over the next five years is approximately $4.4
million.
Prior to 1995, the Red Cross made to VITEX's predecessor a total of $3.0
million of non-interest bearing, unsecured advances to be used to fund
improvements to the manufacturing facility. In conjunction with the amended Red
Cross Agreement, the repayment schedule was modified to require repayment of 30%
of the loan balance on the second anniversary date of the approval of the
PLAS+SD PLA and 15% of the balance on each of the following two years, with the
balance of the loan payable on the fifth anniversary of the PLAS+SD PLA, which
is June 2003. During the quarter ended January 2, 1999, VITEX recorded a non-
cash gain of $0.6 million to discount the advances to their net present value.
At July 3, 1999, VITEX had net operating loss carryforwards for federal
income tax reporting purposes of approximately $28 million and has available
research and development credit carryforwards for federal income tax reporting
purposes of approximately $0.5 million, which are available to offset future
taxable income, if any. These carryforwards expire beginning in 2010. VITEX's
ability to use such net operating loss and research and development credit
carryforwards is limited by change in control provisions under Section 382 of
the Internal Revenue Code. See note 10 to VITEX's financial statements included
herein.
VITEX believes that its existing funds and funds expected to be generated
from operations will be sufficient to meet cash requirements in the foreseeable
future.
Quantitative and Qualitative Disclosures About Market Risk
VITEX's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily on its investment of available cash balances in
money market funds with portfolios of investment grade corporate and U.S.
government securities and, secondarily, its long-term debt arrangements. Under
its current policies, VITEX does not use interest rate derivative instruments to
manage exposure to interest rate changes.
Year 2000
Some of VITEX's older computer software programs were written using two
digit fields rather than four digit fields to define the applicable year (i.e.,
"98" in the computer code refers to the year "1998"). As a result, time-
sensitive functions of those software programs may misinterpret dates after
January 1, 2000, to refer to the twentieth century rather than the twenty-first
century (i.e., "02" could be interpreted as "1902" rather than "2002" (the "Year
2000 Issue"). This could cause system failures or miscalculation, resulting in
inaccuracies in computer output or disruptions of operations, including, among
other things, inaccurate processing of financial information and/or temporary
inability to process transactions, manufacture products, or engage in similar
normal business activities.
VITEX's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, testing, remediation and maintenance. To date VITEX has
fully completed its assessment of all systems that could be significantly
affected by the Year 2000 Issue. The completed assessment indicated that most
of VITEX's significant information, financial reporting and manufacturing
systems were at risk. Affected manufacturing systems include program logic
controllers used in various aspects of the manufacturing process.
VITEX has fully remediated all information and financial reporting systems
and critical manufacturing systems. VITEX is continuing to develop its
contingency plan for critical applications, which primarily involve manual
workaround procedures. The contingency plan is expected to be completed by
October 1999.
VITEX has no systems which directly interface with either customers or
vendors. VITEX has queried, and is in the process of collecting responses from,
its important suppliers and contractors that do not share information systems
with
III-27
<PAGE>
VITEX (external agents). To date, VITEX is not aware of any external agent
Year 2000 issue that would materially impact VITEX's results of operations,
liquidity, or capital resources. However, VITEX has no means of ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could materially
impact VITEX. The effect of non-compliance by external agents is not
determinable.
VITEX will utilize both internal and external resources to reprogram,
replace, test, and implement hardware and software for Year 2000 modifications.
The total cost of the Year 2000 project is estimated at $450,000 and is being
funded through operating cash flows. Through August 31, 1999, VITEX had
incurred costs of approximately $175,000, all of which has been expensed,
relating to all phases of the Year 2000 project and costs of approximately
$250,000 attributable to the purchase of new software and operating equipment,
which costs have been capitalized. The remaining $25,000 relates to continued
Year 2000 compliance monitoring and repair of hardware and software and will be
expensed as incurred.
VITEX's plan to complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources, and
other factors. There can be no guarantee that these estimates will be achieved
and actual results could differ materially.
New Accounting Standards
In June 1999, the Financial Accounting Standards Board issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." SFAS 137 amends SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities," which was issued in June
1998 and was to be effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. SFAS 137 defers the effective date of SFAS 133 to all
fiscal quarters of fiscal years beginning after June 15, 2000. Earlier
application is permitted. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
While management has not determined the impact of the new standard, it is not
expected to be material to VITEX.
Forward-Looking Statements
VITEX's Management's Discussion and Analysis of Financial Condition and
Results of Operations includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934. All statements other than statements of historical
information provided herein are forward-looking statements and may contain
information about financial results, economic conditions, trends and known
uncertainties. These forward-looking statements involve risks and
uncertainties, such as quarterly fluctuations in operating results, the timely
availability of new products, market acceptance of VITEX's products, and the
impacts of competitive products and pricing. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. VITEX undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. In addition to the disclosure contained herein set
forth above under the heading "Risk Factors" on pages I-13 through I-18, readers
should carefully review any disclosure of risks and uncertainties contained in
other documents VITEX has filed with the Securities and Exchange Commission
pursuant to the Exchange Act, including its annual report on Form 10-K for the
year ended January 2, 1999.
MANAGEMENT
Directors And Executive Officers
The following table provides information concerning directors and executive
officers of VITEX as of September 1, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John R. Barr 42 President, Chief Executive Officer and Director
</TABLE>
III-28
<PAGE>
<TABLE>
<S> <C> <C>
Thomas T. Higgins 48 Chief Financial Officer and Executive Vice President, Operations
David Tendler 62 Chairman of the Board of Directors
Richard A. Charpie, Ph.D (1) 48 Director
Jeremy Hayward-Surry (1) 57 Director
Bernard Horowitz, Ph.D. 55 Director
Irwin Lerner (2) 69 Director
Peter Parker (2) 48 Director
Damion E. Wicker, M.D. (2) 39 Director
</TABLE>
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
John R. Barr joined VITEX as President, Chief Executive Officer and a
Director in November 1997. Previously, Mr. Barr served as President of North
American Operations at Haemonetics Corporation from 1995 to 1997 where he had
responsibility for Haemonetics' blood bank, commercial plasma and blood bank
services businesses. He also managed the global manufacturing and North
American research and development functions and served as a member of the Board
of Directors of Haemonetics. Prior to joining Haemonetics in 1990, he held
various positions at Baxter Healthcare Corporation. Mr. Barr has an
undergraduate degree in Biomedical Engineering from the University of
Pennsylvania and an M.M. from the Kellogg School of Management at Northwestern
University.
Thomas T. Higgins has served as Chief Financial Officer and Executive Vice
President, Operations of VITEX since June 1998. Prior to joining VITEX, Mr.
Higgins was with the Cabot Corporation from 1985 to 1997, most recently as
President of Distrigas of Massachusetts Corporation, a subsidiary of the Cabot
Corporation with revenues of $190 million. Also in 1997, Mr. Higgins was
Executive Vice President and Chief Operating Officer of Cabot's Liquefied
Natural Gas Division. From 1989 to 1997, Mr. Higgins served the Cabot
Corporation in Asia, as Vice President and General Manager of the Pacific Asia
Carbon Black Division in Malaysia (1996-1997), Managing Director in Indonesia
(1990-1995) and Director of New Ventures in Japan (1989-1990). Prior to joining
Cabot Corporation, Mr. Higgins was with Price Waterhouse. Mr. Higgins holds a
B.B.A. from Boston University.
David Tendler has served as a Director and Chairman of VITEX since December
1994. In 1985, Mr. Tendler founded his own international consulting firm,
Tendler Beretz LLC, and has since remained as President and Chief Executive
Officer. In 1981, he was named Chairman and CEO of Phibro Corporation, which
subsequently acquired Salomon Brothers - at which point Mr. Tendler became Co-
Chairman and CEO of Phibro-Salomon. He joined Philipp Brothers (the predecessor
to Englehard Minerals & Chemicals Corp./Phibro Corp.) in 1960, managed Far
Eastern operations for more than seven years, and was promoted to President of
Phibro in 1975. He remains active in the private equity and consulting
businesses, and in various charitable organizations, including service as a
director of BioTechnology General Corporation and a member of the Board of
Trustees and the Executive Committee of the NYBC. Mr. Tendler has a B.B.A. from
the City University of New York.
Richard A. Charpie, Ph.D. has served as a Director of VITEX since November
1995. Dr. Charpie served as the Chief Executive Officer of VITEX from August
1997 to November 1997. He was the Vice President of VITEX from November 1997
until January 1998. Dr. Charpie has been the Managing General Partner of
Ampersand Ventures and all of its affiliated partnerships since he founded
Ampersand Ventures in 1988 as a spin-off of the venture capital group of
PaineWebber Incorporated. Currently, Dr. Charpie serves as a director of
AutoCyte, Inc. and of several privately-held companies, including Pentose. Dr.
Charpie holds an M.S. in Physics and a Ph.D. in Applied Economics and Finance,
both from The Massachusetts Institute of Technology.
Jeremy Hayward-Surry has served as a Director of VITEX since December 1997.
He has been the President of Pall Corporation since July 1994 and a member of
its Board of Directors since April 1993. Mr. Hayward-Surry was also the
III-29
<PAGE>
Treasurer and Chief Financial Officer of Pall from August 1992 until December
1997 and Executive Vice President of Pall from 1992 to July 1994. Mr. Hayward-
Surry is a Fellow of the Institute of Chartered Accountants in England and
Wales.
Bernard Horowitz, Ph.D. has served as a Director of VITEX since February
1995. Dr. Horowitz joined VITEX as Executive Vice President, Chief Scientific
Officer in 1995 and, effective July 31, 1999, resigned his employment to assume
a consultant position with VITEX. Prior to joining VITEX, Dr. Horowitz was the
NYBC's Vice President for Commercial Development and a Laboratory Head in the
NYBC's Lindsley F. Kimball Research Institute. Additionally, he has served as a
scientific consultant to the National Institutes of Health, the Food and Drug
Administration, the National Hemophilia Foundation and the International
Association of Biological Standardization. Dr. Horowitz received his B.S. in
Biology from the University of Chicago and his Ph.D. from Cornell University
Medical College.
Irwin Lerner has served as a Director of VITEX since September 1996. He is
the former Chairman of the Board of Directors, Chairman of the Executive
Committee, President and Chief Executive Officer of Hoffmann-LaRoche Inc.,
having retired in September 1993 after being an employee of Hoffman-LaRoche for
over 31 years. Mr. Lerner is the Chairman of the Board of Medarex, Inc. and
serves on the boards of Humana Inc., Inhale Therapeutic Systems, Public Service
Enterprise Group, Covance Inc. and Axys Pharmaceuticals. He has been a member of
the Board of Project Hope and has chaired the New Jersey Governor's Council for
a Drug-Free Workplace. He served for twelve years on the Board of Pharmaceutical
Manufacturers Association (now PhRMA), including chairing the Association's FDA
Issues Committee and the PMA Foundation. Mr. Lerner has served on the Boards of
the National Committee for Quality Health Care, the Partnership for New Jersey
and the Center for Advanced Biotechnology and Medicine of Rutgers University. He
received his B.S. and M.B.A. degrees from Rutgers University, where he is
currently the Distinguished Executive-in-Residence at the Graduate School of
Management.
Peter D. Parker has served as a Director of VITEX since November 1995.
After fourteen years at AMAX, a metals company, Mr. Parker joined Ampersand
Ventures in 1989 to lead its first specialty materials venture capital
partnership, Ampersand Specialty Materials Ventures Limited Partnership and is a
general partner of Ampersand Ventures. He currently serves as a director of
Lighting Technologies International, Pentose and Pentose Development Corporation
and as the chairman of MicroPack Corporation and Protein Ingredient
Technologies. He holds an M.S. in Chemical Metallurgy from Columbia University.
Damion E. Wicker, M.D. has served as a Director of VITEX since May 1997.
Dr. Wicker is a General Partner of Chase Capital Partners. Previously, Dr.
Wicker was President of Adams Scientific since July 1991, and, prior to that,
held positions with MBW Venture Partners and Alexon, Inc. Dr. Wicker was also a
Commonwealth Fund Medical Fellow for the National Institute of Health. He
currently is a director of Landec Corporation and several privately- held health
care companies. Dr. Wicker received a B.S. with Honors from The Massachusetts
Institute of Technology, an M.D. from Johns Hopkins University and holds an
M.B.A. from The Wharton School of the University of Pennsylvania.
The Board is divided into three classes. Each year the stockholders are
asked to elect members of a class of directors for a term of three years and
until their respective successors are duly elected and qualified. Currently, the
terms of office for Class I Directors (Messrs. Barr, Charpie and Lerner) will
expire on the date of the Annual Meeting in 2002; the terms of office for the
Class II Directors (Messrs. Hayward-Surry, Parker and Wicker) will expire on the
date of the Annual Meeting in 2000; and the terms of office for the Class III
Directors (Messrs. Horowitz and Tendler) will expire on the date of the Annual
Meeting in 2001.
New Director and Officer Following the Merger
The Board has appointed Dr. Samuel K. Ackerman to the Board and has
appointed him Executive Vice President, with each such appointment subject to
the closing of the merger. Dr. Ackerman would be a Class III Director and his
term would expire at the 2001 Annual Meeting. With the addition of Dr. Ackerman,
the Board will consist of a total of nine Directors, seven of whom have
principal occupations outside VITEX, one of whom is the President and Chief
Executive Officer of VITEX and one of whom is Executive Vice President of VITEX.
Samuel K. Ackerman, M.D. co-founded Pentose in June 1995 and has served as
President, Chief Executive Officer and Director of Pentose since February 1997.
He previously served as Vice President, Development and Regulatory Affairs of
OraVax, Inc. from December 1993 to January 1997. From May 1986 to November 1993
he was Senior Vice President, Medical and Regulatory Affairs of XOMA Corporation
and before that directed the Investigational New Drug Division of the Center for
Biologics Evaluation and Research of the Food and Drug Administration.
III-30
<PAGE>
Board Committees and Meetings
During the fiscal year ended January 2, 1999, ("fiscal year 1998"), the
Board of Directors held eight meetings. The Board has two committees: an Audit
Committee and a Compensation Committee. There is no Nominating Committee or any
committee performing the functions of a nominating committee.
The Audit Committee consists of Dr. Charpie and Mr. Hayward-Surry, with Mr.
Hayward-Surry serving as Chairman. Neither Dr. Charpie nor Mr. Hayward-Surry are
current employees of VITEX. Dr. Charpie was employed by VITEX from August 1997
through November 23, 1997 as Chief Executive Officer and from November 24, 1997
through January 23, 1998 as a Vice President. The primary function of the Audit
Committee is to assist the Board of Directors in the discharge of its duties and
responsibilities by providing the Board with an independent review of the
financial health of VITEX and of the reliability of VITEX's financial controls
and financial reporting systems. The Audit Committee reviews the general scope
of VITEX's annual audit, the fee charged by VITEX's independent accountants and
other matters relating to internal control systems. The Audit Committee met
twice in fiscal year 1998.
The Compensation Committee of the Board of Directors is currently composed
of Mr. Lerner, Mr. Parker and Dr. Wicker, with Mr. Lerner serving as Chairman.
None of the Compensation Committee members are employees of VITEX. The
Compensation Committee determines the compensation to be paid to all executive
officers of VITEX, including the Chief Executive Officer. The Compensation
Committee's duties include the administration of VITEX's 1998 Equity Incentive
Plan and will include administration of the 1999 Supplemental Stock Option Plan
if the merger is approved and the plan is adopted by the stockholders. The
Compensation Committee met twice in fiscal year 1998.
Each of the Directors attended at least 75% of the Board meetings and
meetings of committees of the Board of which he was a member.
There are no family relationships between any director, executive officer,
or person nominated or chosen by VITEX to become a director or executive officer
of VITEX.
Compensation of Directors
Mr. Tendler receives $40,000 a year for his services as Chairman of VITEX's
Board of Directors. Mr. Lerner receives $1,000 for each meeting of the Board or
of any committee of the Board which he attends. All members of VITEX's Board
receive reimbursement of expenses associated with their attendance of meetings
of the Board or of any committee thereof of which they are a member.
In addition, Directors who are not VITEX employees receive grants of
options pursuant to VITEX's 1998 Director Stock Option Plan. Under this plan,
each such Director who was a member of the VITEX Board on October 9, 1998
automatically received an initial grant of an option to purchase 15,000 shares
of common stock, exercisable in four equal installments on the six month, two-
year, three-year and four-year anniversaries of the grant date. Each non-
employee Director of VITEX also received an additional grant of options on
October 9, 1998 to purchase 2,000 shares of common stock, fully exercisable on
the first anniversary of the date of the grant.
Accordingly, Mr. Tendler, Dr. Charpie, Mr. Parker, Mr. Lerner and Dr.
Wicker each received an automatic initial grant of options on October 9, 1998 to
purchase 15,000 shares of common stock and an additional automatic initial grant
of options on October 9, 1998 to purchase 2,000 shares of common stock.
Mr. Hayward-Surry is prohibited by his employer from receiving stock
options from VITEX and has not received any grants under the 1998 Director Plan.
In 1998, Mr. Hayward-Surry received cash compensation in the form of a $2,335
annual retainer and a $2,000 per meeting fee for a total of $4,335.
Each non-employee Director of VITEX who is elected to the VITEX Board after
October 9, 1998 is entitled to the same initial automatic grant of an option to
purchase 15,000 shares of common stock as those members of the Board who were
Directors on October 9, 1998. Further, each non-employee Director of VITEX who
is reelected or continues in office as a VITEX Director following a VITEX
stockholders meeting at which any Directors are elected or re-elected will
automatically receive an option to purchase 2,000 shares of VITEX common stock.
This grant becomes fully exercisable on the first anniversary of the date of the
grant.
III-31
<PAGE>
Executive Compensation
The following table provides certain summary information concerning
compensation (including salary, bonuses, stock options, and certain other
compensation) paid by VITEX for services in all capacities for fiscal years
ended January 2, 1999, December 31, 1997 and December 31, 1996 to its Chief
Executive Officer and to each of the other persons who served as executive
officers of VITEX during fiscal year 1998 and whose salary plus bonus exceeded
$100,000 in fiscal year 1998 (all four being hereinafter referred to as the
"Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------ ------
Name and Year Salary($) Bonus ($) Securities All Other
---- --------- ---------
Principal Position Underlying Compensation
Options (1) ($) (2)
----------- -------
<S> <C> <C> <C> <C> <C>
John R. Barr 1998 280,000 145,000 0 0
President and Chief 1997 (3) 16,154 0 367,621 6,635 (4)
Executive Officer
Thomas T. Higgins 1998 (5) 94,098 64,750 100,000 0
Executive Vice
President, Operations
and Chief Financial
Officer
Bernard Horowitz, Ph.D. 1998 190,000 53,555 0 0
Executive Vice 1997 182,262 36,960 125,223
President and Chief 1996 166,231 0 0 0
Scientific Officer
Joanne M. Leonard 1998 (6) 11,258 50,000 21,469 115,000 (7)
1997 144,709 23,186 7,155 0
1996 118,846 0 0 0
</TABLE>
(1) All stock options in this column were granted under the 1998 Equity
Incentive Plan, which is administered by the Compensation Committee. Each of
these options has an exercise price equal to fair market value on the date of
the grant, vests in four equal annual installments on the first four
anniversaries of the date of grant, and expires either ten years from the date
of grant or in four equal installments ten years from the dates of vesting.
(2) Excludes perquisites and other personal benefits, securities or property
which, in the aggregate, are less than the lesser of $50,000 or ten percent
(10%) of the total of the annual salary and bonus reported for the Named
Executive Officer for the year.
(3) Mr. Barr became President and Chief Executive Officer of VITEX in November
1997. The information shown in this table for 1997 reflects compensation earned
by Mr. Barr from November 24, 1997 through December 31, 1997.
(4) Consists of reimbursement of relocation expenses.
(5) Mr. Higgins became Executive Vice President, Operations and Chief Financial
Officer of VITEX in June 1998. His annual salary is $185,000.
(6) Ms. Leonard served as Vice President, Chief Financial Officer and Treasurer
of VITEX until June 30, 1998.
(7) Includes a one-time payment of $93,000 upon Ms. Leonard's resignation from
VITEX, made pursuant to a Letter Agreement between VITEX and Ms. Leonard
dated June 24, 1998, as amended.
III-32
<PAGE>
Stock Option Grants in Fiscal Year 1998
The following table sets forth information concerning individual grants of
options to purchase common stock made to each Named Executive Officer during
fiscal year 1998. Mr. Barr and Dr. Horowitz were not granted any options to
purchase common stock in fiscal 1998.
<TABLE>
<CAPTION>
Potential
Individual Grants Realizable
- - - - - - - - - - - - - - - - - - - - - Value at
Assumed Annual
Rates of Stock
Percentage Price
of Total Appreciation
Number of Options for Option
Securities Granted to Term (3)
Underlying Employees in Exercise or
Options Fiscal Year Base Price
Name Granted(#)(1) 1998(2) ($/Share) Expiration Date 5%($) 10%($)
---------- ------------ ----------- --------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Thomas T. Higgins 100,000(4) 15.6% $11.63 (5) 731,404 1,853,522
Joanne M. Leonard 21,469(6) 3.3% $11.18 2/15/2000 13,311 27,266
</TABLE>
(1) See Note (1) to the Summary Compensation Table.
(2) Options to purchase an aggregate of 642,344 shares were granted to all
employees in fiscal 1998.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on VITEX's
common stock over the term of the options. These numbers are calculated based on
rules promulgated by the Securities and Exchange Commission and do not reflect
VITEX's estimate of future stock price growth. Actual gains, if any, on stock
option exercises and common stock holdings are dependent on the timing of such
exercise and the future performance of VITEX's common stock. There can be no
assurance that the rates of appreciation assumed in this table can be achieved
or that the amounts reflected will be received by the option holder.
(4) This figure consists of two option grants. Each of the two options becomes
exercisable in four equal annual installments on each of the first four
anniversaries of the date of grant.
(5) An option to purchase 35,392 shares of common stock expires on June 26,
2008. Each portion of an option to purchase 64,608 shares of common stock
expires ten years after it becomes exercisable, i.e. the first annual
installment which becomes exercisable on June 26, 1999 will expire on June 26,
2009, the second annual installment which becomes exercisable on June 26, 2000
will expire on June 26, 2010, the third annual installment which becomes
exercisable on June 26, 2001 will expire on June 26, 2011 and the fourth annual
installment which becomes exercisable on June 26, 2002 will expire on June 26,
2012.
(6) These options became fully vested pursuant to acceleration provisions
contained in a Letter Agreement between VITEX and Ms. Leonard dated June 24,
1998. The expiration date for these options was extended to February 15, 2000
pursuant to an Amendment Agreement between VITEX and Ms. Leonard dated October
9, 1998.
III-33
<PAGE>
1998 Aggregated Option Exercises and Fiscal Year End Option Values
Presented below is information with respect to the number of shares
issued upon option exercises by the Named Executive Officers during fiscal 1998
and the value realized by the Named Executive Officers upon such exercises. The
table also provides information about the number and value of unexercised stock
options to purchase VITEX's common stock held by each Named Executed Officer as
of January 2, 1999.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Options at
Shares January 2, 1999(#) January 2, 1999($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) (1) Unexercisable Unexercisable(2)
---- ------------ --------------- ------------ ----------------
<S> <C> <C> <C> <C>
John R. Barr 0 0 91,905 / 275,716 182,431 / 547,296
Thomas T. Higgins 0 0 0 / 100,000 0 / 0
Bernard Horowitz 80,722 634,642 118,295 / 149,820 721,080 / 609,892
Joanne M. Leonard 0 0 55,459 / 0 257,483 / 0
</TABLE>
(1) Based on the difference between the option exercise price of such options
and the closing price of the underlying common stock on the date of exercise.
(2) Based on the difference between the option exercise price and the closing
price of the underlying common stock on December 31, 1998, which closing price
was $10.375.
Employment Agreements and Severance and Change of Control Arrangements
Mr. Barr is party to a letter agreement with VITEX, dated November 10,
1997, pursuant to which he serves as President and Chief Executive Officer.
Under this agreement, Mr. Barr is entitled to annual base compensation of
$280,000, subject to increase by the Board, and is also entitled to a
performance bonus based upon the achievement of financial and other performance
goals.
Dr. Horowitz is a party to an employment agreement with VITEX which was
entered into on January 15, 1998. Pursuant to this agreement, VITEX agreed to
employ Dr. Horowitz as Executive Vice President and Chief Scientific Officer for
a four-year term commencing February 1, 1995, with automatic one-year renewals
thereafter unless either party terminates the agreement. Under the terms of this
agreement, Dr. Horowitz: (1) is entitled to an annual salary of $170,000 subject
to increase by the Board; (2) is entitled to a grant of stock options for
223,613 shares of common stock at an exercise price of $2.80 per share vesting
in equal annual installments over a four year period commencing February 1,
1995; (3) is entitled to a grant of stock options for 125,224 shares of common
stock at an exercise price of $8.39 per share vesting in equal annual
installments over a four-year period commencing December 12, 1997; and (4) is
entitled to benefits and bonuses at the discretion of the Board, including an
annual bonus based on the performance of VITEX targeted at 25% of Dr. Horowitz'
annual salary. VITEX also agreed to use its best efforts to cause Dr. Horowitz
to be a member of its Board of Directors throughout the term of the agreement.
Dr. Horowitz resigned as an employee of VITEX effective July 31, 1999 and
executed a Separation Agreement and General Release on September __, 1999. Under
the separation agreement, Dr. Horowitz will receive from VITEX a severance
payment equal to his current annual salary of $198,918. This severance payment
is to be made in two equal installments six months apart. In addition, the stock
options granted to Dr. Horowitz in 1995 to purchase 223,614 shares (at $2.795
per share) and in 1997 to purchase 125,224 shares (at $8.39 per share) of VITEX
common stock will fully vest, to the extent they have not previously vested, on
October 1, 1999.
Mr. Higgins is a party to a letter agreement with VITEX, dated June 15,
1998, pursuant to which he serves as Executive Vice President, Operations and
Chief Financial Officer. Under this agreement, Mr. Higgins is entitled to annual
base compensation of $185,000, subject to increase by the Board, and is also
entitled to a performance bonus based upon the achievement of financial and
other performance goals. In addition, the letter agreement provided for a grant
of an option to purchase 100,000 shares of common stock. This grant will vest in
four equal annual installments, with the first installment vesting one year from
the date of grant.
Ms. Leonard, VITEX's former Vice President, Chief Financial Officer and
Treasurer, entered into a Letter Agreement with VITEX effective as of June 24,
1998 (the "Letter Agreement") terminating her employment with VITEX. Pursuant to
the Letter Agreement, Ms. Leonard received a payment of $165,000, including a
$50,000 bonus and a one time payment upon resignation of $93,000. In addition,
the Letter Agreement provided for accelerated vesting of Ms. Leonard's
III-34
<PAGE>
options to purchase 55,459 shares of VITEX's common stock. These options will
expire on February 15, 2000 pursuant to an Amendment Agreement between VITEX and
Ms. Leonard dated October 9, 1998.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are Messrs. Lerner and
Parker and Dr. Wicker. No member of the Compensation Committee has at any time
been an officer or employee of VITEX. No executive officer of VITEX served as a
member of the compensation committee or board of directors of any other entity
which has an executive officer serving as a member of VITEX's Board of Directors
or Compensation Committee.
Mr. Parker, a member of the Compensation Committee, is a general partner of
ASMC III MCLP LLP, the general partner of the general partner of ASMC-III and
ASMC-III CF, which two funds own an aggregate of approximately 52% of the common
stock of Pentose on an as converted to common stock basis. VITEX made certain
payments to Pentose in 1998 and 1999 for evaluation and licensing of certain
technologies of Pentose as described above in "Chapter One - The Merger -
Existing Relationship Between VITEX and Pentose." Mr. Parker is also a director
of Ampersand Venture Management Corporation. VITEX made payments for management
advisory services to Ampersand Venture Management Corporation in 1998 as
described above in "Chapter One - The Merger - Interests of Certain Persons in
the Merger." Dr. Wicker, a member of the Compensation Committee, is a general
partner of Chase Capital Partners, an affiliate of CB Capital Investors, L.P.,
which purchased 1,797,893 shares of VITEX common stock at $8.39 per share in
April 1997, and of the Chase Manhattan Bank, which made a term loan in the
principal amount of $10,750,000 to VITEX in December 1997. See "Chapter One -
The Merger-Transactions between VITEX and its Directors, Officers or Principal
Shareholders."
III-35
<PAGE>
PRINCIPAL STOCKHOLDERS OF VITEX
The following table sets forth certain information with respect to
beneficial ownership of VITEX's shares of common stock as of July 30, 1999, (1)
by each person (or group of affiliated persons) who is known by VITEX to own
beneficially more than five percent of VITEX's outstanding shares of common
stock, (2) by each of VITEX's executive officers named in the Summary
Compensation Table (the "Named Executive Officers"), (3) by each of VITEX's
Directors; and (iv) by all current Directors and executive officers as a group.
Except as indicated in the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
Percentage Percentage of
Outstanding Outstanding
Common Stock Common Stock
Number of Shares Owned Prior to Owned After the
Name of Beneficial Owner Beneficially Owned (1) Merger Merger (2)
------------------------ --------------------- -------------- ---------------
<S> <C> <C> <C>
5% Stockholders
New York Blood Center, Inc.(3) 3,434,703 27.6% 18%
310 East 67/th/ Street
New York, NY 10021-6295
Ampersand Funds(4) 2,638,357 21.2% 31.7% (20)
55 William Street, Suite 240
Wellesley, MA 02481
CB Capital Investors, L.P.(5) 1,801,470 14.5% 9.6%
c/o Chase Capital Partners
380 Madison Avenue
12th Floor
New York, NY 10017
Pall Corporation(6) 925,070 7.4% 4.9%
2200 Northern Boulevard
East Hills, NY 11548
Massachusetts Financial Services Company (7) 830,797 6.7% 4.4%
500 Boylston Street
Boston, MA 02116
Other Named Executive Officers
John R. Barr(8) 91,905 * *
Bernard Horowitz, Ph.D.(9) 247,719 2.0% 1.3%
Thomas T. Higgins(10) 29,442 * *
Joanne M. Leonard(11) 55,459 * *
Other Directors
David Tendler (12) 3,441,953 27.6% 18.2%
Richard A. Charpie (13) 2,634,607 21.2% 31.7% (21)
Jeremy Hayward-Surry (14) 0 * *
Irwin Lerner (15) 17,167 * *
Peter D. Parker (16) 2,634,607 21.2% 31.7% (22)
Damion Wicker, M.D. (17) 14.5% 9.6%
Person who will become a Director if the
merger is approved
Samuel K. Ackerman, M.D. (18) 0 * 5.4%
All Current Directors and Executive 8,244,763 64.8% 60.6%
</TABLE>
III-36
<PAGE>
<TABLE>
<CAPTION>
Percentage Percentage of
Outstanding Outstanding
Common Stock Common Stock
Number of Shares Owned Prior to Owned After the
Name of Beneficial Owner Beneficially Owned (1) Merger Merger (2)
------------------------ --------------------- -------------- ---------------
<S> <C> <C> <C>
</TABLE>
Officers as a Group (9 persons) (19)
* Indicates less than one percent
(1) Beneficial ownership of common stock is determined in accordance with the
rules of the Securities and Exchange Commission, and includes shares for
which the holder has sole or shared voting or investment power. Shares of
common stock subject to options currently exercisable or which become
exercisable on or before September 28, 1999 are deemed to be beneficially
owned and outstanding by the person holding such options and, in accordance
with the rules of the Securities and Exchange Commission, are included for
purposes of computing the percentage ownership of the person holding such
options, but are not deemed outstanding for purposes of computing the
percentage ownership of any other person.
(2) Assumes the issuance of 6,414,100 shares of VITEX common stock in the
merger.
(3) Mr. Tendler, a Director of VITEX, is a member of the Board of Trustees and
Executive Committee of the NYBC. In addition to Mr. Tendler, the members of
the Board of Trustees of the NYBC are Ted Athanassiades, Andrew G. Bodnar,
M.D., J.D., Jo Ivey Boufford, M.D., William W. Crouse, Jesse R. Gottlieb,
Robert L. Jones, M.D., Edward D. Miller, Howard P. Milstein, John R.
Mullen, Paddy Mullen, Samuel Posner, Alan D. Schwartz, Norman C. Selby,
David A. Silverman, M.D., Howard Sloan, William I. Spencer and Morton
Spivack, M.D .
(4) Consists of 1,087,281 shares held by Ampersand Specialty Materials and
Chemicals III Limited Partnership ("ASMC III"), 17,679 shares held by
Ampersand Specialty Materials and Chemicals III Companion Fund Limited
Partnership ("ASMC III CF"), 1,052,343 shares held by Ampersand Specialty
Materials and Chemicals II Limited Partnership ("ASMC II"), 331,488 shares
held by Laboratory Partners I Limited Partnership ("Lab Partners") and
142,066 shares held by Laboratory Partners Companion Fund Limited
Partnership ("Lab Partners CF") and includes 3,750 shares issuable upon the
exercise of outstanding options exercisable on or before September 28, 1999
by each of Richard A. Charpie and Peter D. Parker. ASMC-III MCLP LLP is
the general partner of ASMC-III Management Company Limited Partnership,
which itself is the general partner of both ASMC III and ASMC III CF and
has voting and investment control over the shares held by those two
entities. ASMC-II MCLP LLP is the general partner of ASMC-II Management
Company Limited Partnership, which itself is the general partner of ASMC II
and has voting and investment control over the shares held by ASMC II.
Ampersand Lab Partners MCLP LLP is the general partner of Ampersand Lab
Partners Management Company Limited Partnership, which itself is the
general partner of both Lab Partners and Lab Partners CF and has voting and
investment control over the shares held by those two entities. The general
partners of ASMC-III MCLP LLP, who share voting and investment control over
the shares controlled by ASMC-III MCLP LLP, are Richard A. Charpie, Peter
D. Parker, Stuart A. Auerbach, K. Kachadurian, David J. Parker and Charles
D. Yie. Richard A. Charpie, Peter D. Parker, Stuart A. Auerbach, Charles D.
Yie and Robert A. Charpie are the general partners of ASMC-II MCLP LLP and
Ampersand Lab Partners MCLP LLP and share voting and investment control
over the shares controlled by those entities. Richard A. Charpie is the
managing general partner of each of ASMC-II MCLP LLP, ASMC-III MCLP LLP,
and Ampersand Lab Partners MCLP LLP. Richard A. Charpie and Peter D. Parker
are Directors of VITEX.
(5) Dr. Wicker, a Director of VITEX, is a general partner of Chase Capital
Partners, which is a limited partner of CB Capital Investors, L.P. CB
Capital Investors, Inc., a wholly-owned subsidiary of Chase Manhattan Bank,
is the general partner of CB Capital Investors, L.P. The Chase Manhattan
Bank is a wholly-owned subsidiary of Chase Manhattan Corporation. The key
officers and the directors of CB Capital Investors, Inc. are Jeffrey C.
Walker (Chief Executive Officer and director), Donald J. Hofmann (President
and director), George E. Kelts (Vice President), Mitchell J. Blutt, M.D.
(Secretary) and Robert C. Carroll (Assistant Secretary).
(6) Mr. Hayward-Surry, a Director of VITEX, is the president and a director of
Pall Corporation. As disclosed in the Definitive Proxy Statement filed by
Pall with the Securities and Exchange Commission via EDGAR on October 19,
1998, the executive officers of Pall are Jeremy Hayward-Surry (President),
Eric Krasnoff (Chief Executive Officer), Gerhard Weich (Group Vice
President) and Samuel T. Wortham (Group Vice President) and the directors
of Pall are
III-37
<PAGE>
Abraham Appel, John H. F. Haskell, Ulric Haynes, Jr., Jeremy
Hayward-Surry, Eric Krasnoff, Edwin W. Martin, Jr., Katharine L. Plourde,
Chesterfield F. Seibert, Heywood Shelley, Alan B. Slifka and James D.
Watson.
(7) Based on the information provided in the Schedule 13G filed by
Massachusetts Financial Services Company ("MFS") with the Securities and
Exchange Commission on February 11, 1999. MFS has sole voting power over
812,097 shares and sole dispositive power over 830,797 shares.
(8) Consists entirely of shares issuable upon the exercise of outstanding
options exercisable on or before September 28, 1999.
(9) Includes 174,196 issuable upon the exercise of outstanding options
exercisable on or before September 28, 1999. Pursuant to a Separation
Agreement and General Release dated September __, 1999, options granted to
Mr. Horowitz in 1995 and 1997 for an aggregate of 348,838 shares will vest,
to the extent they have not previously vested, on October 1, 1999.
(10) Includes 25,000 shares issuable upon the exercise of outstanding options
exercisable on or before September 28, 1999.
(11) Consists entirely of shares issuable upon the exercise of outstanding
options exercisable on or before September 28, 1999.
(12) Consists of the 3,434,703 shares held by the NYBC, 3,500 shares held by Mr.
Tendler, and includes 3,750 shares issuable upon the exercise of
outstanding options held by Mr. Tendler and exercisable on or before
September 28, 1999. Mr. Tendler may be considered the beneficial owner of
the shares held by the NYBC. Mr. Tendler disclaims beneficial ownership of
such shares.
(13) Consists of the shares described in note (4), excluding the 3,750 shares
issuable upon the exercise of outstanding options exercisable on or before
September 28, 1999 by Mr. Parker. Dr. Charpie may be considered the
beneficial owner of the shares described in note (4). Dr. Charpie disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(14) Excludes the shares held by Pall Corporation.
(15) Includes 5,986 shares issuable upon the exercise of outstanding options
exercisable on or before September 28, 1999.
(16) Consists of the shares described in note (4), excluding the 3,750 shares
issuable upon the exercise of outstanding options exercisable on or before
September 28, 1999 by Dr. Charpie. Mr. Parker may be considered the
beneficial owner of the shares described in note (4). Mr. Parker disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(17) Consists of the shares held by CB Capital Investors, L.P. and 3,750 shares
issuable upon the exercise of outstanding options exercisable on or before
September 28, 1999. Dr. Wicker may be considered the beneficial owner of
the shares held by CB Capital Investors, L.P.. Dr. Wicker disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(18) Consists entirely of 1,013,971 shares of VITEX common stock issued in
connection with the merger for 1,699,867 shares of Pentose common stock.
(19) Includes 367,546 shares issuable upon the exercise of outstanding options
exercisable on or before September 28, 1999. Excludes Ms. Leonard, whose
employment with VITEX ended in June 1998.
(20) Calculated based upon the shares described in note (4) and 3,338,492 shares
of VITEX common stock to be issued in connection with the merger for
4,182,000 shares of Pentose Series A Preferred Stock and 1,325,253 shares
of Pentose Series B Preferred Stock held by ASMC III and for 68,000 shares
of Pentose Series A Preferred Stock and 21,549 shares of Pentose Series B
Preferred Stock held by ASMC III CF.
III-38
<PAGE>
(21) Calculated as described in note (20), but excluding 3,750 shares issuable
upon the exercise of outstanding options exercisable on or before Sept. 28,
1999 by Mr. Parker. Dr. Charpie may be considered the beneficial owner of
the shares described in note (4). Dr. Charpie disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(22) Calculated as described in note (20), but excluding 3,750 shares issuable
upon the exercise of outstanding options exercisable on or before September
28, 1999 by Dr. Charpie. Mr. Parker may be considered the beneficial
owner of the shares described in note (4). Mr. Parker disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
III-39
<PAGE>
CHAPTER FOUR--
OTHER INFORMATION REGARDING PENTOSE
BUSINESS OF PENTOSE
Pentose Pharmaceuticals, Inc. ("Pentose") is developing for
commercialization innovative technology to enhance blood safety based on the
chemistry of nucleic acids (DNA and RNA).
The safety of the world's blood supply is increasingly threatened by known
and unknown viruses and other pathogens. Infectious microorganisms originate in
blood donors whose infections, undetected by current testing procedures, pass
into the blood they donate. Recipients of the blood may then become infected
with potentially life-threatening infection. Although HIV and hepatitis B and C
are less a threat today than previously, other dangerous pathogens remain in the
blood supply. These include viruses such as hepatitis A and parvovirus B19. In
addition to known viruses, Pentose believes that unknown viruses with
undetermined pathogenicity are being routinely passed by blood products, such as
a recently discovered transfusion-transmissible virus. Since most blood-derived
products cannot currently be sourced other than through blood donors, there is
an urgent need to reduce the infectivity of the donated blood supply.
In pre-clinical studies, Pentose's proprietary INACTINE(TM) technology has
been shown to inactivate all classes of virus known to contaminate blood-derived
products while preserving such product's key therapeutic properties. INACTINE
technology is being developed to improve the safety of blood components for
transfusion (red blood cells, platelets and plasma) and of products manufactured
from human blood plasma such as gamma globulin and coagulation factors ("plasma
derivatives"). Pentose believes that the combined market for blood components
and plasma derivatives currently exceeds $10 billion worldwide. Pentose
estimates the market for effective viral inactivation of such products to be in
excess of $2 billion worldwide.
INACTINE products are low molecular weight compounds that selectively bind
and irreversibly modify nucleic acids, including both DNA and RNA. Thus, they
inactivate viruses while sparing proteins and cells that have critical
therapeutic value. INACTINE compounds have been demonstrated in pre-clinical
studies to inactivate a broad spectrum of viruses, both enveloped and non-
enveloped viruses.
Pentose expects clinical studies with INACTINE treated red blood cells for
transfusion to begin in the fourth quarter of 1999. Preclinical studies are
underway for transfusion plasma and selected plasma derivatives, and clinical
studies are anticipated to begin in 2000.
Pentose's strategy is to build value by product development rather than
product discovery, focusing on promising technologies to improve blood safety.
To advance products generated by its technology platform, Pentose has recruited
and trained a qualified technical and management team with expertise in nucleic
acid chemistry, virology and pharmaceutical product development. Pentose
currently employs 24 people, nine of whom hold Ph.D.s or M.D.s, at its facility
in Cambridge, Massachusetts.
Pentose plans to commercialize its products through partnerships with blood
products companies, including those involved in collection, processing,
distribution and marketing of blood products worldwide. Pentose intends to
pursue worldwide or regionally exclusive deals with members of this group for
rights to use INACTINE technology in conjunction with their blood transfusion
products.
Pentose has sought and is aggressively pursuing global protection for its
INACTINE technology. Pentose has one issued United States patent and numerous
pending United States and foreign patent applications. Pentose intends to
continue to pursue its patent strategy and to vigorously defend its intellectual
property against infringement.
SUIT BY LICENSOR OF PAPIRINE TECHNOLOGY
On September 3, 1999, a complaint was filed naming Pentose as a defendant
in an action in the Superior Court of the Commonwealth of Massachusetts for
Middlesex County. The complaint named Edward I. Budowsky--a founder of,
consultant to and holder of approximately thirteen percent of the capital stock
of Pentose--as a co-defendant. The plaintiffs are an individual who entered into
an Exclusive License Agreement dated as of August 1997 in which Pentose was
granted a license to certain "Papirine" compounds (the "Licensor"), and his
spouse. Earlier in 1999, Pentose transferred its rights under the Exclusive
License Agreement with the Licensor to Pentose Development Corporation ("PDC")
as part of a spinoff to PDC of the Papirine technology and certain related
assets and liabilities. See "-- Pentose's Management's Discussion and Analysis--
Overview." PDC is an early stage biotechnology company, formed to develop and
commercialize the Papirine technology, the stockholders of which are the
stockholders of Pentose. The complaint alleges, among other things, that (1) the
Licensor's spouse holds rights to the Papirine technology which rights have not
been licensed to Pentose, and (2) that the Licensor signed the 1997 Exclusive
License Agreement and an agreement granting him certain rights to Pentose stock
held by Dr. Budowsky in reliance on false representations by Pentose and Dr.
Budowsky. Dr. Budowsky had also previously licensed his interest in the Papirine
technology to Pentose. The complaint seeks damages in an amount to be determined
at trial, attorneys fees, treble damages under the Massachusetts consumer
protection statute, reformation of an agreement among Pentose, the Licensor and
Dr. Budowsky granting the Licensor rights to Pentose stock and other relief.
Pentose believes that the claims of the Licensor and his spouse are without
merit and intends to defend this action vigorously. Pentose does not believe
that this action will have a material adverse effect on Pentose's or the
surviving corporation's financial condition or results of operations. Because
this action is in the initial stage and discovery is just beginning, Pentose
cannot assure that it will be successful in defending this lawsuit. PDC has
agreed, subject to the negotiation and execution of definitive documents, to:
. indemnify Pentose and, following the merger, VITEX, against any
liabilities resulting from this lawsuit to the extent such
liabilities exceed $100,000;
. maintain cash assets in an amount of not less than $1.5 million until
September 1, 2000 to support its indemnification obligation; and
. release any claims against Pentose in connection with the litigation
or the transfer of Papirine technology.
PENTOSE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Pentose Pharmaceuticals, Inc., located in Cambridge, Massachusetts, is a
privately-held venture-backed company which is developing for commercialization
innovative technology to enhance blood safety based on the chemistry of nucleic
acids. In 1998, Pentose made meaningful scientific progress in its INACTINE
programs for viral inactivation by
IV-1
<PAGE>
demonstrating in pre-clinical research that its INACTINE compounds were
effective in inactivating enveloped and non-enveloped viruses in blood plasma
and red blood cell concentrates. In August 1999, Pentose filed an IND with the
FDA for red blood cell concentrates virally inactivated with INACTINE. Pentose
has, in part, funded this development program with U.S. federal Small Business
Innovation Research grants.
During 1998, Pentose executed an option and license agreement with VITEX
covering the use of INACTINE in conjunction with solvent detergent in pooled
plasma for transfusion. During the first six months of 1999, Pentose concluded
an agreement with an offshore plasma fractionation company that covers the use
of INACTINE in therapeutic proteins derived from plasma.
Since its incorporation, Pentose has also been developing a compound to
treat cutaneous and genital warts, known as PEN203. This compound is the
subject of three Phase II clinical trials in the United States and Europe.
During the second quarter of 1999, Pentose transferred the assets related to
this development program to a newly formed corporation, Pentose Development
Corporation, and distributed equity in the new company to the Pentose
stockholders.
Results of Operations
Pentose was incorporated in 1995, but did not commence significant
operations until February 1997. Since inception, Pentose has generated no
revenue from product sales and has incurred losses, including net losses of $2.5
million for the six months ended June 30, 1999, and of $3.9 million for the year
ended December 31, 1998, resulting in an accumulated deficit of $8.8 million as
of June 30, 1999. Pentose expects to incur significant additional operating
losses over the next several years and expects cumulative losses to increase
substantially due to pre-clinical and clinical testing, and development of
marketing, sales and production capabilities.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
During the first six months of 1999, Pentose's total revenues increased by
$225,000 or 300% over the same period in 1998. The increase was due principally
to the recognition of a license payment from VITEX during the first six months
of 1999.
Research and development expenses increased during the six-month period
ended June 30, 1999 by $857,000 or 67% in comparison to the same period ended
June 30, 1998. The increase was due primarily to the addition of eight new
technical staff, significant investments in pre-clinical toxicology studies and
other outside services in advance of an IND filing for INACTINE and bulk
manufacture of research quantities of INACTINE.
General and administrative expenses increased during the first six months
of 1999 by $171,000 or 34% over the same period of 1998. The increase was due
primarily to the addition of two new staff in the second half of 1998, an
increased allocation of management expense to general and administrative
activities and slightly increased employee benefit costs.
During the six month period ended June 30, 1999, net interest income
increased by $50,000 or 357% over the same period in 1998. The increase was a
result of income earned on the funds raised in July 1998.
Pentose's net loss for the six month period ended June 30, 1999 increased
by $755,000 or 44% over the net loss incurred during the same period of 1998.
The increase in net loss was as a result of increased expenses which were not
offset by increased revenues and income.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
During the year ended December 31, 1998, Pentose realized revenues for the
first time since inception. Pentose's 1998 revenues of $424,500 consisted of
federal grant funds, an option payment from VITEX and payments from a
collaborator for certain experimental work done by Pentose on its behalf.
During the year ended December 31, 1998, Pentose's research and development
expenses increased by $2.1 million or 159.6% over the prior year, primarily as a
result of initiation of clinical trials for PEN203, the addition of five new
technical staff and pre-clinical development activities related to INACTINE.
General and administrative expenses increased by $314,000 or 37% for the year
ended December 31, 1998 in comparison to the year ended December 31, 1997, due
IV-2
<PAGE>
primarily to the addition of two new staff in 1998, a full year of rent expense
compared to eight months in 1997 and additional travel costs associated with
business development activities.
Pentose's net interest income increased by $22,000 during fiscal 1998 in
comparison to fiscal 1997, due primarily to interest earned on the proceeds of
the $7,000,000 venture capital equity financing consummated in July 1998.
During fiscal 1998, Pentose's net loss increased by $1.9 million or 94.0%
over the net loss during fiscal 1997, as a result of significantly increased
expenses not being offset by revenues.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
During the year ended December 31, 1997, Pentose's research and development
expenses increased by $1.1 million or 580% over the year ended December 31,
1996, due principally to the commencement of operations in February 1997. During
1996 spending on research and development was limited to outside contractors. By
the end of 1997 Pentose had hired six full time scientific staff, had leased
5,200 square feet of laboratory and office space and begun aggressive
development of both PEN203 and its INACTINE compounds.
During the year ended December 31, 1997, general and administrative
expenses increased by $699,000 or 466% over the prior year, due principally to
commencement of operations in February 1997. General and administrative spending
in 1996 was predominantly legal fees for patents and other outside costs. During
fiscal 1997, Pentose recruited and hired two full time staff in the general and
administrative functions, leased 5,200 square feet of laboratory and office
space and hired additional consultants to the business.
In 1997, Pentose's net loss increased $1.7 million or 629% over net loss in
1996 as a result of the its increased expenditures.
Liquidity and Capital Resources
At June 30, 1999, Pentose had cash and cash equivalents and marketable
securities of $2.6 million, a decrease of $2.7 million since December 31, 1998.
The decrease is primarily attributable to the use of cash in operations
principally to fund research and development activities and invested in property
and equipment. Pentose's cash requirements have been and are expected to
continue to be significant. As a result of Pentose's failure to generate
sufficient cash flow to fund its operations, Pentose has, to date, been
dependent upon additional equity investments by its stockholders to satisfy its
working capital needs.
Pentose expects that its current funds and interest income will be
sufficient to fund its operations through February 2000. Although management
continues to pursue additional funding arrangements, no assurance can be given
that such financing will be available to Pentose. If Pentose is unable to enter
into one or more additional corporate collaborations that produce revenue for
Pentose, or secure additional financing, Pentose's financial condition will be
adversely affected. If additional funds are raised by issuing equity
securities, further dilution to existing stockholders will result and future
investors may be granted rights superior to those of existing stockholders.
Pentose's working capital and other cash needs will depend heavily on the
success of Pentose's clinical trials and its development programs. Success in
early-stage clinical trials would lead to an increase in working capital
requirements. Pentose's actual cash requirements may vary materially from those
now planned because of the results of research and development, clinical trials,
product testing, relationships with strategic partners, acquisition of new
products and technologies, changes in the focus and direction of Pentose's
research and development programs, competitive and technological advances, the
process of obtaining U.S. FDA or other regulatory approvals and other factors.
At December 31, 1998 Pentose had available net operating loss carryforwards
of approximately $6,183,000 for federal income tax purposes. The utilization of
such net loss carryforwards may be limited as a result of the proposed merger.
On July 28, 1999, Pentose entered into an Agreement and Plan of Merger to
merge into VITEX. The merger agreement provides, as more fully discussed
elsewhere in this Joint Proxy Statement/Prospectus, that each outstanding share
of Pentose stock will be exchanged for shares of VITEX common stock.
IV-3
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
Pentose's earnings and cash flows are subject to fluctuations due to
changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities. Under its current policies, Pentose does not use
interest rate derivative instruments to manage exposure to interest rate
changes.
New Accounting Standards
In June 1999, the Financial Accounting Standards Board issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." SFAS 137 amends SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities," which was issued
in June 1998 and was to be effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 137 defers the effective date of SFAS 133 to
all fiscal quarters of fiscal years beginning after June 15, 2000. Earlier
application is permitted. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
While management has not determined the impact of the new standard, it is not
expected to be material to Pentose.
Year 2000
Pentose is currently assessing the potential impact of the year 2000 on its
information technology and non-information technology systems. The year 2000
problem is the result of computer programs being written using two digits
(rather than four) to define the applicable year. Any of Pentose's programs or
systems that have time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000, which could result in a miscalculation or
system failures. Pentose's most critical uncertainty relates to its third party
vendors' information technology systems not being year 2000 compliant. At this
time, Pentose is not aware of any year 2000 issues relating to its third party
vendors. If any of Pentose's third party vendors are not year 2000 complaint,
Pentose may receive inaccurate information from banks, government agencies,
contracted research organizations, vendors, etc. Pentose believes it has in
place an adequate internal control structure to handle these issues if they were
to occur.
IV-4
<PAGE>
PRINCIPAL STOCKHOLDERS OF PENTOSE
The following table and footnotes sets forth certain information regarding
the beneficial ownership of Pentose's common stock, Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock as of July 31, 1999 and
the percentage which such ownership bears to the total number of outstanding
shares of each class and all classes as of that date by (1) persons known to
Pentose to be beneficial owners of more than 5% of any such stock, (2) the chief
executive officer (who is Pentose's only executive officer), and (3) the chief
executive officer and Directors as a group.
<TABLE>
<CAPTION>
Number of Shares Beneficially Owned
- -------------------------------------------------------------------------------------------------------------------
Common Stock Series A Series B Percent of
Preferred Stock Preferred Stock Total Voting Power(2)
Name (% of Class) (% of Class) (% of Class)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ampersand Funds
55 William Street
Wellesley, MA 02181(3)............... 0 4,250,000 1,346,802 52.0%
(94%) (57%)
JAFCO Funds
Tekko Building 1-8-2
Marunouchi, Chiyoda-ku
Tokyo 100-0005 JAPAN(4)............... 0 0 1,010,101 9.4%
(43%)
Edward Budowsky
1404 Commonwealth Ave, #10
Boston, MA 02135..................... 1,416,556 0 0 13.2%
(36%)
Thomas Monath, M.D
21 Sinn Road
Harvard, MA 01451.................... 679,947 0 0 6.3%
(17%)
Richard A. Charpie(5)................. 0 4,250,000 1,346,802 52.0%
(94%) (57%)
Peter D. Parker(5).................... 0 4,250,000 1,346,802 52.0%
(94%) (57%)
Samuel K. Ackerman.................... 1,699,867 0 0 15.8%
(44%)
All executive officers and directors
as a group (3 persons)(6)............. 1,699,867 4,250,000 1,346,802 67.9%
(44%) (94%) (57%)
</TABLE>
* Less than 1%
(1) The inclusion of any shares deemed beneficially owned does not
constitute an admission by the person named that he is the beneficial owner
of those shares. Although the Series A Preferred Stock and Series B
Preferred Stock is convertible into common stock, it is not reflected on an
as-converted basis in the common stock column because, as a voting
security, it is reflected in its own column. To the best of Pentose's
knowledge, unless otherwise indicated, the beneficial owners named have
sole voting and investment power with respect to the shares held.
(2) The common stock, Series A Preferred Stock and Series B Preferred
Stock vote together as a single class except as required by law or under
Pentose's Certificate of Incorporation. The merger is treated as a
liquidation unless the holders of a majority of Series A Preferred Stock
and Series B Preferred Stock voting together as a class, elect not to treat
it as a liquidation. By written consent dated September 14, 1999, the
holders of a majority of the preferred stock have elected not to treat the
merger as a liquidation.
IV-5
<PAGE>
(3) Consists of the following shares: (1) 4,182,000 shares of Series A
Preferred Stock and 1,325,253 shares of Series B Preferred Stock held by
Ampersand Specialty Materials and Chemicals III Limited Partnership ("ASMC
III") and (2) 68,000 shares of Series A Preferred Stock and 21,549 shares
of Series B Preferred Stock held by Ampersand Specialty Materials and
Chemicals III Companion Fund Limited Partnership ("ASMC III CF").
(4) Consists of the following shares of Series B Preferred Stock: (1)
202,021 shares held by JAFCO Co., Ltd., (2) 138,370 shares held by JAFCO R-
3 Investment Enterprise Partnership, (3) 83,022 shares held by JAFCO JS-3
Investment Enterprise Partnership, (4) 124,533 shares held by JAFCO G-6(A)
Investment Enterprise Partnership, (5) 124,533 shares held by JAFCO G-6(B)
Investment Enterprise Partnership, (6) 168,811 shares held by JAFCO G-7(A)
Investment Enterprise Partnership and (7) 168,811 shares held by JAFCO G-
7(B) Investment Enterprise Limited Partnership.
(5) Consists of shares held by ASMC III and ASMC III CF. Dr. Charpie is
managing general partner and Mr. Parker is a general partner of ASMC-III
MCLP LLP, the general partner of ASMC III Management Company Limited
Partnership, which is the general partner of both ASMC III and ASMC III CF.
Each of Dr. Charpie and Mr. Parker disclaim beneficial ownership of the
shares held by ASMC III and ASMC III CF, except to the extent of his
proportional pecuniary interest therein.
(6) See note 5 above.
IV-6
<PAGE>
CHAPTER FIVE
CERTAIN LEGAL INFORMATION
COMPARISON OF STOCKHOLDER RIGHTS
Both VITEX and Pentose are incorporated in the state of Delaware. If the
merger is consummated, holders of Pentose preferred and common stock will become
holders of VITEX common stock, and the rights of former Pentose stockholders
will be governed by Delaware law and VITEX's certificate of incorporation and
by-laws. The rights of Pentose stockholders under Pentose's certificate of
incorporation and by-laws differ in limited respects from the rights of VITEX
stockholders under VITEX's certificate of incorporation and by-laws. These
differences are summarized in the table below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
VITEX Stockholder Rights Pentose Stockholder Rights
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate The rights of VITEX stockholders are currently The rights of Pentose stockholders are currently
Governance: governed by Delaware law and the certificate of governed by Delaware law and the certificate of
incorporation and by-laws of VITEX. incorporation and by-laws of Pentose.
Upon consummation of the merger, the rights of Upon consummation of the merger, the rights of
VITEX stockholders will continue to be governed by Pentose stockholders will be governed by Delaware
Delaware law and the certificate of incorporation law and the certificate of incorporation and
and by-laws of VITEX. by-laws of VITEX.
- ----------------------------------------------------------------------------------------------------------------------------
Authorized The authorized capital stock of VITEX consists of The authorized capital stock of Pentose consists
Capital Stock: 29 million shares of VITEX common stock and 1 of 12 million shares of Pentose common stock and 8
million shares of preferred stock. If the merger million shares of Pentose preferred stock, 4.5
is completed and the stockholders have approved million of which are designated as "Series A
the charter amendment, the authorized capital Preferred Stock" and 3.5 million of which are
stock will consist of 35 million shares of common designated as "Series B Preferred Stock."
stock and 1 million shares of preferred stock.
See "Chapter Six - VITEX Special Meeting Proposals
- Item 3 - Amendment of VITEX's Certificate of
Incorporation."
- ----------------------------------------------------------------------------------------------------------------------------
Number of VITEX's certificate of incorporation provides that Pentose's by-laws provide that the authorized
Directors: the number of directors shall be determined by the number of directors shall be five.
Board of Directors but that it shall never be
fewer than three.
- ----------------------------------------------------------------------------------------------------------------------------
Classification of VITEX's certificate of incorporation provides that Pentose's by-laws do not provide for a classified
Board of the Board of Directors shall be divided into three Board of Directors; each director serves until his
Directors: classes as nearly equal in number as possible, successor is duly elected and qualified or until
with each class serving a staggered three-year his earlier death, resignation or removal.
term.
- ----------------------------------------------------------------------------------------------------------------------------
Removal of Under VITEX's certificate of incorporation, a Under Pentose's by-laws, unless otherwise
Directors: director may be removed for cause by a vote of the restricted by statute, any director or the entire
holders of a majority of shares entitled to vote Board of Directors may be removed, with or without
for the election of directors. A director may cause, by the holders of a majority of shares then
not be removed without cause. entitled to vote on the election of directors.
- ----------------------------------------------------------------------------------------------------------------------------
Stockholder According to VITEX's certificate of incorporation, According to Pentose's by-laws, any action
Action by the power of stockholders to act by consenting in required or permitted to be taken at any annual or
Written Consent: writing without a meeting is specifically denied. special stockholders meeting may be taken without
a meeting if a consent in writing, setting forth
the action to be taken, is signed by the holders
of outstanding stock having not less than the
minimum number of votes that would be necessary to
authorize or take such an action at a meeting in
which all shares entitled to vote were present and
voted.
- ----------------------------------------------------------------------------------------------------------------------------
Notice of Under VITEX's by-laws, written notice of Under Pentose's by-laws, written notice of annual
Business at stockholder meetings, including annual meetings, meetings need not specify the purposes for which
Annual must include a statement of the purposes for which the meeting is called, and "any proper business"
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
V-1
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
VITEX Stockholder Rights Pentose Stockholder Rights
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Meetings: the meeting is called. Also, stockholder-proposed may be transacted during such meetings.
business may only be transacted if the proposing
stockholder provides timely written notice to an
officer of the corporation.
- ----------------------------------------------------------------------------------------------------------------------------
Certain Business Under VITEX's certificate of incorporation, the The Pentose certificate of incorporation provides
Combinations: affirmative vote of two-thirds of all voting that a consolidation, merger, or sale of
shares is necessary to engage in any transaction, substantially all of the corporation's assets
the effect of which is to combine the shall constitute a liquidation or dissolution of
corporation's assets and business with that of the corporation, unless a majority of the holders
another corporation that is the beneficial owner of outstanding Pentose preferred stock, elect
of 5% or more of the outstanding shares of VITEX otherwise.
stock eligible to vote in the election of the
Board of Directors. Two-thirds stockholder
approval is not necessary, however, if the
combination is approved by a majority of the Board
of Directors, provided that the directors voting
in favor of such resolution include a majority of
the persons who were duly elected and acting
members of the Board of Directors prior to the
time the other corporation became a beneficial
owner of 5% or more of the shares of VITEX stock
eligible to vote in the election of the Board of
Directors. Entities affiliated with Ampersand
Ventures are expected to own approximately 32% of
VITEX common stock if the merger is consummated.
If such ownership increases above 33 1/3%, such
entities shall have the ability to effectively
block any action requiring a vote of two-thirds of
the shares eligible to vote.
- ----------------------------------------------------------------------------------------------------------------------------
Liquidation Under VITEX's certificate of incorporation, In the event of a liquidation or dissolution,
Rights: holders of VITEX Common stock are entitled to holders of Pentose Series A and Series B Preferred
share ratably in the remaining assets of the Stock are entitled to be paid an amount equal to
corporation, after payment to the preferred stock the initial purchase price per share for each
holders of all amounts to which such preferred series of preferred stock plus an amount equal to
holders are entitled. all declared but unpaid dividends, subject to an
adjustment for stock splits, stock dividends,
combinations, and other changes in the preferred
stock before any payment is made to the holders of
common stock. Also, after the owners of common
stock have been paid an amount equal to the price
per share originally paid for each share, any
remaining assets of Pentose will not be
distributed to holders of common stock until
holders of Series A Preferred Stock have received
at least $5.00 per share and Series B Preferred
Stock have received at least $14.85 per share.
- ----------------------------------------------------------------------------------------------------------------------------
Conversion There are no shares of preferred stock issued or Each share of Pentose preferred stock is
Rights: outstanding. Under the VITEX certificate of convertible at the option of the holder at a
incorporation, the VITEX Board of Directors has conversion price, set initially by the certificate
the authority to establish conversion rights with of incorporation at $1.00 per share of common
respect to any issuance of preferred stock. stock for Series A Preferred Stock and $2.97 per
share of common stock for the Series B Preferred
Stock. The conversion price is subject to
adjustment in case of the issuance of diluting
options, convertible securities, dividends, or
shares of common stock; consolidation of
outstanding shares of common stock; and merger or
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
V-2
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
VITEX Stockholder Rights Pentose Stockholder Rights
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
reorganization of Pentose.
- ----------------------------------------------------------------------------------------------------------------------------
Redemption Rights: Under VITEX's certificate of incorporation, Under the Pentose certificate of incorporation, on
holders of common stock have no redemption rights. July 15/th/ in each of 2003, 2004, and 2005, each
The VITEX Board of Directors has the authority to holder of Pentose preferred stock has the right to
establish redemption rights with respect to future require the corporation to redeem up to 33.3%,
issuances of preferred stock; there are currently 50%, and 100%, respectively, of the shares of
no shares of preferred stock issued or outstanding. preferred stock held by the holder on that date.
The redemption price is equal to the initial
purchase price per share for each series of
preferred stock plus an amount equal to all
declared but unpaid dividends, subject to an
adjustment for stock splits, stock dividends,
combinations, and other changes in the preferred
stock. Redemption rights are waivable by the
holders of a majority of the Pentose preferred
stock.
- ----------------------------------------------------------------------------------------------------------------------------
Voting Rights: Under the VITEX certificate of incorporation, Holders of Pentose preferred stock, voting
holders of VITEX common stock elect the Board of separately as a class, are entitled to nominate
Directors as a class. and elect three of the five (60%) members of the
Board of Directors, but in no event less than the
number of directors constituting at least 40% of
the total number of directors.
- ----------------------------------------------------------------------------------------------------------------------------
Dividend Under VITEX's certificate of incorporation, Under the Pentose certificate of incorporation,
Rights: holders of common stock are entitled to receive Common Stock holders will not receive any
such dividends as may be declared by the VITEX dividends until the holders of preferred stock
Board of Directors. The Board has the authority to have first received a distribution on each
establish dividend rights with respect to future outstanding share of preferred stock in an amount
issuance of preferred stock. at least equal to the product of (1) the per share
amount, if any, of the dividends or other
distributions to be declared multiplied by (2) the
number of whole shares of common stock into which
such share of preferred stock is convertible.
- ----------------------------------------------------------------------------------------------------------------------------
Appraisal Because VITEX is quoted on the Nasdaq Stock Pentose is incorporated under Delaware law, and
Rights: Market, VITEX stockholders are not entitled to the Delaware General Corporate Law governs the
appraisal rights under the Delaware General Law in availability of appraisal rights with respect to
connection with the merger. any acquisition of Pentose. Under (S)262 of the
Delaware General Corporate Law, Pentose
stockholders are entitled to an appraisal by the
Court of Chancery of the fair value of their
shares, exclusive of any element of value arising
from the merger, if they:
(1) file written notice with Pentose of their
intention to exercise such appraisal rights prior
to the Pentose special meeting;
(2) continues to hold their shares through the
effective time of the merger;
(3) do not vote in favor of the merger.
Stockholders who follow the procedures set forth
in Section 262 are entitled to have their Pentose
stock purchased by the surviving corporation for
cash at the fair value of the shares of Pentose
stock as determined by the Delaware Court of
Chancery.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
V-3
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
VITEX Stockholder Rights Pentose Stockholder Rights
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
See "Chapter One - The Merger - The Merger
Agreement - Appraisal Rights."
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
V-4
<PAGE>
DESCRIPTION OF VITEX CAPITAL STOCK
The following summary of the current terms of the capital stock of VITEX
and the terms of the capital stock of VITEX to be in effect after completion of
the merger is not meant to be complete and is qualified by reference to the
VITEX charter and VITEX by-laws. Copies of the VITEX charter and VITEX by-laws
are incorporated by reference and will be sent to holders of shares of VITEX
common stock, Pentose common stock and Pentose preferred stock upon request. See
"Chapter Eight -- Additional Information for Stockholders -- Where You Can Find
More Information."
Authorized Capital Stock
Prior to Completion of the Merger. Under the VITEX charter, VITEX's
authorized capital stock consists of 29,000,000 shares of VITEX common stock,
$0.01 par value per share, and 1,000,000 shares of preferred stock, $0.01 par
value per share.
Following Completion of the Merger. If the merger is completed, the VITEX
charter will be amended to increase the authorized number of shares of VITEX
common stock to 35,000,000. See "Chapter Six - VITEX Special Meeting Proposals-
Item 3 - Amendment of VITEX's Certificate of Incorporation."
VITEX Common Stock
VITEX Common Stock Outstanding. The outstanding shares of VITEX common
stock are, and the shares of VITEX common stock issued pursuant to the merger
will be, duly authorized, validly issued, fully paid and nonassessable.
Voting Rights. Each holder of VITEX common stock is entitled to one vote
for each share of VITEX common stock held of record on the applicable record
date on all matters submitted to a vote of stockholders. There are no cumulative
voting rights.
Dividend Rights; Rights upon Liquidation. The holders of VITEX common stock
are entitled to receive, from funds legally available for the payment thereof,
dividends when and as declared by resolution of the VITEX Board, subject to any
preferential dividend rights granted to the holders of any then outstanding
VITEX preferred stock. In the event of liquidation, each share of VITEX common
stock is entitled to share pro rata in any distribution of VITEX's assets after
payment or providing for the payment of liabilities and the liquidation
preference of any then outstanding VITEX preferred stock.
Preemptive Rights. Holders of VITEX common stock have no preemptive rights
to purchase, subscribe for or otherwise acquire any unissued or treasury shares
or other securities.
VITEX Preferred Stock
VITEX Preferred Stock Outstanding. There are no shares of preferred stock
issued or outstanding.
Blank Check Preferred Stock. Under the VITEX charter, the VITEX Board has
the authority, without stockholder approval, to create one or more classes or
series within a class of preferred stock, to issue shares of preferred stock in
such class or series up to the maximum number of shares of the relevant class or
series of preferred stock authorized, and to determine the preferences, rights,
privileges, qualifications, limitations, and restrictions of any such class or
series, including the dividend rights, dividend rates, voting rights, the rights
and terms of redemption, redemption prices, the rights and terms of conversion,
liquidation preferences, sinking fund terms, the number of shares constituting
any such class or series, and the designation of such class or series. VITEX
believes that the power to issue preferred stock will provide flexibility in
connection with possible corporate transactions. The issuance of preferred stock
could adversely affect the voting power of the holders of common stock and
restrict their rights to receive payment upon liquidation and could have the
effect of delaying, deferring or preventing a change of control of VITEX. See
"--Description of VITEX Capital Stock - Anti-Takeover Measures." VITEX has no
present plans to issue any shares of preferred stock.
Stock Purchase Warrant
In connection with the sale of common stock to CB Capital Investors, L.P.
on April 29, 1997, VITEX issued a warrant to purchase 32,361 shares of Common
Stock to Bear, Stearns & Co. Inc., the placement agent. This warrant has an
exercise price of $0.028 per share, is exercisable on or after April 29, 1998,
will expire after April 29, 2002, and was to have been automatically exercised
upon the consummation of VITEX's initial public offering. The processing of such
automatic conversion has not been completed to date. The warrant also granted
the holder registration rights with respect to the shares of common stock issued
upon the exercise of the warrant.
In connection with the execution of a lease with The Trustees of Columbia
University in the City of New York ("TCU") on June 21, 1996, VITEX issued
warrants to purchase 3,577 shares of common stock to TCU as additional
consideration under the lease. This warrant has an exercise price of $2.80 per
share, and is exercisable at any time during the term of the lease, including
renewal periods (June 21, 1996 to October 31, 2001 or to October 31, 2006 if the
longest
V-5
<PAGE>
possible renewal period under the lease is exercised). The warrant also grants
the holder registration rights with respect to the shares of common stock issued
upon the exercise of the warrant.
Anti-Takeover Measures
In addition to the Board of Directors' ability to issue shares of preferred
stock, the VITEX charter and by-laws contain several other provisions that are
commonly considered to discourage unsolicited takeover bids. The VITEX charter
includes a provision classifying the Board of Directors into three classes with
staggered three-year terms and a provision prohibiting stockholder action by
written consent except as otherwise provided by law. Under the charter and by-
laws, the Board of Directors may enlarge the size of the Board and fill any
vacancies on the Board. The charter requires the prior approval of the holders
of at least 66 2/3% of the outstanding capital stock of VITEX for VITEX to enter
into certain transactions with entities that own 5% or more of VITEX's common
stock, such as:
. the merger of VITEX with or into such entity;
. the sale or disposition of all or substantially all of VITEX's assets
to such entity;
. the issuance or transfer by VITEX of its securities having a market
value in excess of $500,000 to such entity; and
. engaging in any other business combination transaction with such
entity.
The prohibitions described in the preceding sentence do not apply to
transactions approved by a majority of the Board of Directors, provided the
Directors voting in favor of such resolution include a majority of the persons
who were Directors prior to the time such entity became a 5% stockholder of
VITEX. Further, provisions of the charter provide that the stockholders may
amend the by-laws or certain provisions of the charter only with the affirmative
vote of 66 2/3% of VITEX's capital stock. The by-laws provide that nominations
for Directors may not be made by stockholders at any annual or special meeting
unless the stockholder intending to make a nomination notifies VITEX, a
specified period in advance, of its intention to do so and furnishes certain
information. The by-laws also provide that special meetings of VITEX's
stockholders may be called only by the President or the Board of Directors and
require advance notice of business to be brought by a stockholder before the
annual meeting.
VITEX is subject to the provisions of Section 203 of the Delaware General
Corporation Law, a law regulating corporate takeovers (the "Anti-Takeover Law").
In certain circumstances, the Anti-Takeover Law prevents certain Delaware
corporations, including those whose securities are listed on the Nasdaq National
Market, from engaging in a "business combination" (which includes a merger or
sale of more than ten percent of the corporation's assets) with an "interested
stockholder" (a stockholder who owns 15% or more of the corporation's
outstanding voting stock) for three years following the date on which such
stockholder became an "interested stockholder" subject to certain exceptions,
unless the transaction is approved by the board of directors and the holders of
at least 66 2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder). The statutory ban does not apply if,
upon consummation of the transaction in which any person becomes an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock of the corporation (excluding shares held by persons who are both
Directors and officers or by certain employee stock plans). A Delaware
corporation subject to the Anti-Takeover Law may "opt out" of the Anti-Takeover
Law with an express provision either in its certificate of incorporation or by-
laws resulting from a stockholders' amendment approved by at least a majority of
the outstanding voting shares; such an amendment is effective following
expiration of twelve months from adoption. VITEX has not "opted out" of the
Anti-Takeover Law.
The foregoing provisions of the charter and by-laws and Delaware law could
have the effect of discouraging others from attempting hostile takeovers of
VITEX and, as a consequence, they may also inhibit temporary fluctuations in the
market price of the common stock that might result from actual or rumored
hostile takeover attempts. Such provisions may also have the effect of
preventing changes in the management of VITEX. It is possible that such
provisions could make it more difficult to accomplish transactions which
stockholders may otherwise deem to be in their best interests.
Transfer Agent
The transfer agent and registrar for the common stock is The American Stock
Transfer and Trust Company. Its telephone number is (212) 936-5100.
V-6
<PAGE>
Nasdaq National Market Listing
It is a condition to the merger that the shares of VITEX common stock
issuable in the merger be approved for listing on the Nasdaq Stock Market at or
prior to the closing, subject to official notice of issuance.
TRADEMARK MATTERS
PLAS+SD, PLAS+SD II, VITEX, VITEX Fibrin Sealant and Solvent Detergent
Technology are trademarks of VITEX. INACTINE is a trademark of Pentose. All
other trademarks or tradenames referred to in this Joint Proxy
Statement/Prospectus are the property of their respective owners.
LEGAL MATTERS
The validity of the VITEX common stock to be issued to Pentose stockholders
pursuant to the merger will be passed upon by Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C. It is a condition to the completion of the merger that
VITEX and Pentose receive opinions from Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C. and Palmer & Dodge LLP, respectively, with respect to the tax
treatment of the merger. See "Chapter One -- The Merger -- The Merger Agreement-
Conditions to the Merger" and "The Merger Transaction - Material Federal Income
Tax Consequences of the Merger."
EXPERTS
The financial statements of VITEX as of January 2, 1999 and December 31,
1997, and for each of the years in the three-year period ended January 2, 1999,
included in this Joint Proxy Statement/Prospectus have been audited by KPMG LLP,
independent certified public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in auditing and accounting.
The financial statements of Pentose as of December 31, 1998 and for the
year then ended included in this Joint Proxy Statement/Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements of Pentose as of December 31, 1997 and for the
years ended December 31, 1997 and 1996 included in this Joint Proxy
Statement/Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
V-7
<PAGE>
Chapter Six - VITEX Special Meeting Proposals
CHAPTER SIX--
VITEX SPECIAL MEETING PROPOSALS
ITEM 1--VITEX MERGER PROPOSAL
For summary and detailed information regarding the VITEX merger proposal,
see "Chapter One - The Merger."
THE VITEX BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE MERGER, THE
MERGER AGREEMENT AND THE ISSUANCE OF UP TO 6,414,110 SHARES OF VITEX COMMON
STOCK
ITEM 2--ADOPTION OF SUPPLEMENTAL STOCK OPTION PLAN
Approval of 1999 Supplemental Stock Option Plan
The Board of Directors has adopted, subject to stockholder approval and the
approval of the merger, the 1999 Supplemental Stock Option Plan (the "New
Plan"). Up to 1,000,000 shares of common stock (subject to adjustment in the
event of stock splits and other similar events) may be issued pursuant to awards
granted under the New Plan.
General
- --------
The New Plan enables VITEX to offer competitive compensation so as to
attract and retain top quality personnel, to provide an incentive for them to
achieve long-range performance goals, and to enable them to participate in the
long-term growth of VITEX. Stock options granted under the New Plan are a
significant element of compensation for VITEX, as they are in the biotechnology
industry generally. Competition for the best personnel in the biotechnology
industry is intense. The Board of Directors believes that it is essential for
VITEX's future strength to continue to offer competitive equity compensation to
employees. The primary purpose of the New Plan is to compensate former employees
of Pentose in a manner substantially consistent with past Pentose practices.
The New Plan permits the grant of incentive and nonstatutory stock options,
stock appreciation rights, performance shares, restricted stock and stock units
(collectively, "Awards") to employees, directors and consultants of VITEX. The
New Plan is administered by the Compensation Committee of the Board of Directors
(the "Compensation Committee"), which determines the persons to whom, and the
times at which, Awards are granted, the type of Award to be granted and all
other related terms, conditions and provisions of each Award. The Compensation
Committee may delegate to one or more officers the power to make awards to
employees who are not executive officers subject to the reporting requirements
of Section 16 of the Securities Exchange Act of 1934, as amended. The New Plan
may be amended or terminated at any time by the Board of Directors, subject to
approval by the stockholders when such approval is deemed to be necessary or
advisable by the Board.
Although the Compensation Committee has discretion in granting Awards, the
exercise price of any incentive stock option ("ISO") may not be less than 100%
of the fair market value of VITEX's common stock on the date of the grant for
grants to employees who own 10% or less of VITEX's capital stock, and not less
than 110% of the fair market value of VITEX's common stock on the date of the
grant for grants to employees who own more than 10% of VITEX's capital stock. In
the case of nonstatutory stock options, the exercise price may not be less than
110% of the fair market value of VITEX's common stock on the date of the grant
for grants to persons who own more than 10% of VITEX's capital stock and not
less than 85% of the fair market value of VITEX's common stock on the date of
the grant for grants to all other persons. No ISO granted under the 1998 Equity
Plan is transferable by the optionee other than by will or the laws of descent
or distribution. Other Awards are transferable to the extent provided by the
Compensation Committee. The term of any ISO granted under the New Plan may not
exceed ten years, and no ISO may be granted under the New Plan more than ten
years from the Plan's adoption.
Options are generally granted subject to forfeiture restrictions that lapse
over time during the optionee's employment. Vested options are generally
cancelled if not exercised within a specified time after termination of the
optionee's employment.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO NEW PLAN OPTIONS
Incentive Stock Options. An optionee does not realize taxable income upon
the grant or exercise of an ISO under the New Plan. If the optionee does not
dispose of shares issued upon exercise of an ISO within two years from the date
of
VI-1
<PAGE>
grant or within one year from the date of exercise, then, upon the sale of such
shares, any amount realized in excess of the exercise price is taxed to the
optionee as long-term capital gain, and any loss sustained will be a long- term
capital loss. No deduction would be allowed to VITEX for Federal income tax
purposes. The exercise of ISOs gives rise to an adjustment in computing
alternative minimum taxable income that may result in alternative minimum tax
liability for the optionee. If shares of common stock acquired upon the exercise
of an ISO are disposed of before the expiration of the two-year and one-year
holding periods described above (a "disqualifying disposition"), the optionee
would realize ordinary income in the year of disposition in an amount equal to
the excess (if any) of the fair market value of the shares at exercise (or, if
less, the amount realized on a sale of such shares) over the exercise price
thereof, and VITEX would be entitled to deduct such amount. Any further gain
realized would be taxed as a short-term or long-term capital gain and would not
result in any deduction to VITEX. A disqualifying disposition in the year of
exercise will generally avoid the alternative minimum tax consequences of the
exercise of an ISO.
Nonstatutory Stock Options. No income is realized by the optionee upon the
grant of a nonstatutory option. Upon exercise of a nonstatutory stock option,
the optionee realizes ordinary income in an amount equal to the difference
between the exercise price and the fair market value of the shares on the date
of exercise, and VITEX is entitled to a tax deduction for the same amount. Upon
disposition of the shares, appreciation or depreciation after the date of
exercise is treated as a short-term or long-term capital gain or loss and will
not result in any deduction for VITEX.
Votes Required to Approve the Adoption of the New Plan
The affirmative vote of the holders of a majority of the shares of common
stock represented and voting at the meeting will be required to adopt the 1999
Supplemental Stock Option Plan.
The Board of Directors considers VITEX's ongoing program of granting stock
options broadly across the employee base to be very important to VITEX's ability
to compete for top talent and a significant incentive to promote VITEX's success
and, therefore, in the best interests of VITEX's stockholders.
THE VITEX BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF ITEM 2
VI-2
<PAGE>
ITEM 3--AMENDMENT OF VITEX'S CERTIFICATE OF INCORPORATION'
At the VITEX meeting, holders of VITEX stock will be asked to approve the
amendment of VITEX's Restated Certificate of Incorporation. The amendment will
increase the number of authorized shares of VITEX common stock to 35,000,000.
Approval by VITEX stockholders of the merger, including the related issuance of
VITEX common stock, as described under "Chapter One - The Merger - The Merger
Transaction - General," is a condition to effecting the VITEX charter amendment,
but approval of the VITEX charter amendment is not a condition to completing the
merger.
Increase of Authorized Common Stock. VITEX's charter currently authorizes
29,000,000 shares of common stock and 1,000,000 shares of preferred stock. On
September 1, 1999, 12,450,920 shares of VITEX common stock were issued and
outstanding.
To complete the merger, VITEX expects that approximately 6,414,110 VITEX
shares will be required to be issued to holders of Pentose common stock, that
approximately 600,000 VITEX shares will be required to be reserved for issuance
under Pentose employee stock options and other stock-based awards and for
similar purposes and that approximately 32,000 VITEX shares will be required to
be reserved for issuance under Pentose warrants.
VITEX has sufficient shares to complete the merger and for the issuance of
all shares authorized under VITEX's existing option plans and the proposed 1999
supplemental Stock Option Plan. At present, VITEX has no plans to issue shares
for any other purpose. However, the VITEX Board of Directors believes it is
desirable to have additional shares available for other corporate purposes that
might arise in the future. For example, shares could also be used for
acquisitions or to raise capital. Under some circumstances, it is also possible
for a company to use unissued shares for antitakeover purposes, but VITEX has no
present intention to take any such action.
Whether or not any future issuance of shares unrelated to the merger would
be submitted for stockholder vote depends upon the nature of the issuance, legal
and stock exchange requirements, and the judgment of VITEX's Board at the time.
THE VITEX BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF ITEM 3
VI-3
<PAGE>
Chapter Seven - Pentose Annual Meeting Proposals
CHAPTER SEVEN--
PENTOSE SPECIAL MEETING PROPOSAL
ITEM 1--PENTOSE MERGER PROPOSAL
For summary and detailed information regarding the Pentose merger proposal,
see "Chapter One - The Merger."
PENTOSE MANAGEMENT RECOMMENDS A VOTE IN FAVOR OF THE MERGER AND THE MERGER
AGREEMENT
VII-1
<PAGE>
Chapter Eight - Additional Information for Stockholders
CHAPTER EIGHT--
ADDITIONAL INFORMATION FOR STOCKHOLDERS
FUTURE STOCKHOLDER PROPOSALS
Any stockholder proposal for VITEX's annual meeting in 2000 must be sent to
the Secretary at the address of VITEX's principal executive office given under
"The Companies" on page I-2. The deadline for receipt of a proposal to be
considered for inclusion in VITEX's proxy statement is December 22, 1999. The
deadline for notice of a proposal for which a stockholder will conduct his or
her own solicitation is the date not less than 50 days nor more than 75 days
prior to the annual meeting, unless less than 65 days notice or public
disclosure is given, in which case the stockholder's notice of proposal to VITEX
must be received within 15 days after such notice or disclosure is given. If
VITEX does not receive notice of any matter to be considered for presentation at
the annual meeting within such time, management proxies may confer discretionary
authority to vote on the matters presented at the annual meeting by a
stockholder in accordance with Rule 14a-4 under the Securities Exchange Act of
1934, as amended.
On request, the Secretary will provide detailed instructions for submitting
proposals.
SEC rules set forth standards for the exclusion of some stockholder
proposals from a proxy statement for an annual meeting.
WHERE YOU CAN FIND MORE INFORMATION
VITEX files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. VITEX's
SEC filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at "http://www.sec.gov."
VITEX filed a registration statement on Form S-4 to register with the SEC
the VITEX common stock to be issued to Pentose stockholders in the merger. This
Joint Proxy Statement/Prospectus is a part of that registration statement and
constitutes a prospectus of VITEX in addition to being a proxy statement of
VITEX and Pentose for the meetings. As allowed by SEC rules, this Joint Proxy
Statement/Prospectus does not contain all the information you can find in the
registration statement or the exhibits to the registration statement.
VITEX has supplied all information contained or incorporated by reference
in this Joint Proxy Statement/Prospectus relating to VITEX, and Pentose has
supplied all such information relating to Pentose.
You should rely only on the information contained in this Joint Proxy
Statement/Prospectus to vote on the VITEX proposals and the Pentose proposal. We
have not authorized anyone to provide you with information that is different
from what is contained in this Joint Proxy Statement/Prospectus. This Joint
Proxy Statement/Prospectus is dated _______, 1999. You should not assume that
the information contained in the Joint Proxy Statement/Prospectus is accurate as
of any date other than such date, and neither the mailing of this Joint Proxy
Statement/Prospectus to stockholders nor the issuance of VITEX common stock in
the merger shall create any implication to the contrary.
VIII-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
V.I. TECHNOLOGIES, INC.
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors................................................................. F-2
Balance Sheets as of January 2, 1999 and December 31, 1997..................................... F-3
Statements of Operations for the Years Ended January 2, 1999, December 31, 1997
and December 31, 1996..................................................................... F-4
Statements of Stockholders' Equity for the Years Ended January 2, 1999,
December 31, 1997 and December 31, 1996................................................... F-5
Statement of Cash Flows for the Years Ended January 2, 1999, December 31, 1997
and December 31, 1996..................................................................... F-6
Notes to Financial Statements.................................................................. F-7
INTERIM FINANCIAL STATEMENTS
Condensed Balance Sheets as of July 3, 1999 (unaudited) and January 2, 1999.................... F-18
Condensed Statements of Operations for the thirteen and twenty-six weeks
ended July 3, 1999 and July 4, 1998 (unaudited)........................................... F-19
Condensed Statement of Stockholders' Equity.................................................... F-20
Condensed Statements of Cash Flows for the twenty-six weeks ended
July 3, 1999 and July 4, 1998 (unaudited)................................................. F-21
Notes to Condensed Financial Statements (unaudited)............................................ F-22
PENTOSE PHARMACEUTICALS, INC.
Reports of Independent Public Accountants...................................................... F-24
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999.............................. F-26
Statements of Operations for the years ended December 31, 1996, 1997 and 1998,
six months ended June 30, 1998 and 1999 and the cumulative period from
inception (June 8, 1995) through June 30, 1999............................................ F-27
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Deficit from inception through June 30, 1999.............................................. F-28
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998,
six months ended June 30, 1998 and 1999 and the cumulative period from
inception through June 30, 1999........................................................... F-29
Notes to Financial Statements.................................................................. F-30
</TABLE>
F-1
<PAGE>
EXHIBIT 13.1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
V.I. Technologies, Inc.:
We have audited the accompanying balance sheets of V.I. Technologies, Inc. as of
January 2, 1999 and December 31, 1997 and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended January 2, 1999. 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 V.I. Technologies, Inc. as of
January 2, 1999 and December 31, 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended January 2, 1999,
in conformity with generally accepted accounting principles.
The Company changed from a calendar year to a 52-53 week fiscal year ending on
the Saturday closest to December 31, beginning with the year ended January 2,
1999.
KPMG LLP
Melville, New York
January 15, 1999
F-2
<PAGE>
V.I. TECHNOLOGIES, INC.
Balance Sheets
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 35,264,447 $ 5,250,019
Trade receivables............................................. 3,966,758 1,355,573
Other receivables............................................. 593,982 894,947
Due from related parties, net................................. 313,216 --
Inventory..................................................... 2,512,213 574,957
Prepaid expenses and other current assets..................... 987,131 320,815
------------ ------------
Total current assets....................................... 43,637,747 8,396,311
Property, plant and equipment, net............................. 30,820,902 29,049,897
Other assets, net.............................................. 766,488 720,593
------------ ------------
$ 75,225,137 $ 38,166,801
============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Current portion of long-term debt............................. $ 2,687,500 $ 2,687,500
Current portion of capital lease obligations.................. 1,272,357 964,055
Current portion of advances from customer..................... -- 337,500
Accounts payable and accrued expenses......................... 6,575,396 6,814,016
Due to related parties, net................................... -- 367,763
------------ ------------
Total current liabilities.................................. 10,535,253 11,170,834
Long-term debt, less current portion........................... 5,375,000 8,062,500
Capital lease obligations, less current portion................ 3,323,874 4,592,588
Advances from customer, less current portion................... 2,356,349 2,662,500
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized
1,000,000 shares; no shares issued and outstanding........... -- --
Common stock, par value $.01 per share; authorized
29,000,000 shares; issued and outstanding 12,359,148 at
January 2, 1999 and 7,852,723 at December 31, 1997........... 123,592 78,527
Additional paid-in-capital.................................... 86,574,660 38,298,387
Note receivable from stockholder.............................. -- (35,000)
Accumulated deficit........................................... (33,063,591) (26,663,535)
------------ ------------
Total stockholders' equity................................. 53,634,661 11,678,379
------------ ------------
$ 75,225,137 $ 38,166,801
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
V.I. TECHNOLOGIES, INC.
Statements of Operations
<TABLE>
<CAPTION>
Year ended
January 2, Years Ended December 31,
1999 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Revenues:
Product sales......................................... $ 33,755,499 $ 15,843,046 $ 14,898,914
Licensing fee......................................... -- -- 3,000,000
------------ ------------- ------------
Total revenues................................... 33,755,499 15,843,046 17,898,914
Costs and expenses, including related party amounts
of $2,302,000, $784,000 and $817,000 during the
year ended January 2, 1999 and December 31, 1997
and 1996, respectively:
Cost of sales......................................... 23,859,984 16,325,810 10,588,272
Research and development, net......................... 7,506,895 5,912,233 4,366,989
Selling, general and administrative expenses.......... 6,950,983 4,352,731 2,477,405
Special charge related to products.................... -- -- 4,100,000
Charge related to research collaboration.............. 2,202,000 -- --
------------ ------------- ------------
Total operating costs and expenses................ 40,519,864 26,590,774 21,532,666
Loss from operations................................... (6,764,367) (10,747,728) (3,633,752)
Interest income........................................ 1,217,363 366,167 125,795
Interest expense....................................... (1,496,703) (1,318,084) (617,228)
Discount on customer advance, net...................... 643,651 -- --
------------ ------------- ------------
Total interest income (expense), net.............. 364,311 (951,917) (491,433)
------------ ------------- ------------
Net loss............................................... ($6,400,056) ($11,699,645) ($4,125,185)
============ ============= ============
Basic and diluted net loss per share................... ($0.61) ($1.62) ($0.84)
============ ============= ============
Weighted average common shares used in computing
basic and diluted net loss per share:................. 10,453,652 7,240,923 4,897,271
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
V.I. TECHNOLOGIES, INC.
Statements of Stockholders' Equity
Years ended January 2, 1999 and December 31, 1997 and 1996
<TABLE>
<CAPTION>
Note
Common Stock Additional Receivable
--------------------- Paid-In From Accumulated Stockholders'
Shares Amount Capital Stockholder Deficit Equity
---------- --------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995................... 4,472,271 $ 44,722 $19,426,278 $ -- $(10,838,705) $ 8,632,295
Issuance of shares of common stock in
connection with a loan agreement.............. 129,964 1,300 361,950 -- -- 363,250
Issuance of shares of common stock upon
exercise of stock options and warrants........ 1,440,072 14,401 4,010,599 -- -- 4,025,000
Issuance of warrant to purchase 3,577
shares of common stock in connection
with a lease agreement........................ -- -- 10,000 -- -- 10,000
Net loss....................................... -- -- -- -- (4,125,185) (4,125,185)
---------- -------- ----------- ----------- ------------- ------------
Balance at December 31, 1996................... 6,042,307 60,423 23,808,827 -- (14,963,890) 8,905,360
Issuance of shares of common stock in
connection with a private placement,
net of issuance costs of $859,000............. 1,797,894 17,979 14,073,435 -- -- 14,091,414
Compensation expense in connection with
issuance of stock options..................... -- -- 381,250 -- -- 381,250
Issuance of shares of common stock upon
exercise of stock options..................... 12,522 125 34,875 (35,000) -- --
Net loss....................................... -- -- -- -- (11,699,645) (11,699,645)
---------- -------- ----------- ----------- ------------- ------------
Balance at December 31, 1997................... 7,852,723 78,527 38,298,387 (35,000) (26,663,535) 11,678,379
Issuance of shares of common stock in
connection with Initial Public
Offering, including exercise
of underwriter's over-allotment
option, net of issuance cost
of $1,239,000................................. 3,325,000 33,250 35,835,068 -- -- 35,868,318
Issuance of shares of common stock in
connection with private placements............ 925,070 9,251 8,990,749 -- -- 9,000,000
Charge in connection with research
collaboration................................. -- -- 2,202,000 -- -- 2,202,000
Issuance of shares of common stock to New
York Blood Center in satisfaction of
obligation.................................... 35,778 358 299,643 -- -- 300,000
Compensation expense in connection with
acceleration of option vesting................ -- -- 289,452 -- -- 289,452
Issuance of shares of common stock upon
exercise of stock options..................... 220,577 2,206 659,362 35,000 -- 696,568
Net loss....................................... -- -- -- -- $ (6,400,056) $ (6,400,056)
---------- -------- ----------- ----------- ------------- ------------
Balance at January 2, 1999..................... 12,359,148 $123,592 $86,574,660 $ -- $(33,063,591) $ 53,634,661
========== ======== =========== =========== ============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
V. I. TECHNOLOGIES, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended
January 2, Years ended December 31,
1999 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ ($ 6,400,056) ($11,699,645) ($4,125,185)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization..................... 3,408,886 2,985,572 2,308,964
Processing reserve................................ -- -- 4,100,000
Debt refinancing costs............................ -- 190,385 --
Compensation expense in connection with
stock options.................................... 289,452 381,250 --
Charge related to research collaboration.......... 2,202,000 -- --
Discount on customer advance...................... (643,651) -- --
Changes in operating accounts:
Trade receivables................................. (2,611,185) (106,446) (811,463)
Other receivables................................. 300,965 1,072,766 (1,736,234)
Inventory......................................... (1,937,256) (133,470) 117,047
Prepaid expenses and other current assets......... (886,236) 147,855 (246,926)
Accounts payable and accrued expenses............. 61,373 (2,910,566) 1,463,268
Due to related parties, net....................... (680,979) 365,595 (75,737)
------------- ------------- ------------
Net cash (used in) provided by operating activities.. (6,896,687) (9,706,704) 993,734
------------- ------------- ------------
Cash flows from investing activities:
Additions to property, plant and equipment.......... (5,005,863) (3,858,031) (9,402,114)
Other investing activities.......................... -- (124,589) (277,032)
------------- ------------- ------------
Net cash used in investing activities................ (5,005,863) (3,982,620) (9,679,146)
------------- ------------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of
issuance costs..................................... 45,564,890 14,091,414 4,025,000
Proceeds from issuance of long-term debt............ -- 10,750,000 5,000,000
Proceeds from issuance of notes payable............. -- 1,472,797 2,847,167
Advances from customer.............................. -- 1,000,000 1,012,000
Principal repayment of long-term debt............... (2,687,500) (12,500,000) (2,500,000)
Principal repayment of capital lease obligations.... (960,412) (627,231) --
Principal repayment of note payable................. -- -- (256,000)
------------- ------------- ------------
Net cash provided by financing activities............ 41,916,978 14,186,980 10,128,167
------------- ------------- ------------
Net increase in cash and cash equivalents............ 30,014,428 497,656 1,442,755
Cash and cash equivalents, beginning of year......... 5,250,019 4,752,363 3,309,608
------------- ------------- ------------
Cash and cash equivalents, end of year............... $ 35,264,447 $ 5,250,019 $ 4,752,363
============= ============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
V.I. TECHNOLOGIES, INC.
Notes to Financial Statements
January 2, 1999
1. Organization and Business Overview
V.I. Technologies, Inc. (VITEX or the Company) is a leading developer of a broad
portfolio of blood products and systems which use its proprietary viral
inactivation technologies. The Company's technologies are intended to reduce the
risks of viral contamination in blood products, including plasma, plasma
derivatives and red blood cells.
The Company's predecessor, Melville Biologics, Inc., was formed more than 15
years ago by New York Blood Center, Inc. (NYBC), a world leader in research and
development in the fields of hematology and transfusion medicine, to process
plasma fractions and derivatives, and to facilitate its research efforts.
Effective January 1, 1995, pursuant to a transfer agreement between the Company
and the NYBC, the NYBC transferred to the Company substantially all of the
assets of the predecessor Company, including a cGMP manufacturing facility used
primarily to produce plasma fractions and related operating and product licenses
and certain other specified tangible and intangible assets, as well as various
contracts and the assumption of certain obligations of the NYBC related to such
assets and contracts. As a result of its spin-off from the NYBC, the Company
became the licensee of a substantial portfolio of patents and patent
applications held by the NYBC, including those related to the use of the SD
viral inactivation technology. In exchange for these net assets, the NYBC
received all of the issued and outstanding Common Stock of the Company.
Reverse Stock Split
In anticipation of the Company's initial public offering (IPO) which is further
described in note 8, effective February 23, 1998, the Board of Directors
authorized and the stockholders approved a 1-for-2.795 reverse split of the
Company's common stock. All share and per share amounts have been restated to
reflect the reverse stock split.
Change of Fiscal Year-End
On August 10, 1998, the Company changed from a calendar year to a 52-53 week
fiscal year ending on the Saturday closest to December 31, beginning with the
fiscal year ending January 2, 1999.
2. Summary of Significant Accounting Policies
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 disclosures 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents. Cash equivalents
consist primarily of money market funds invested in portfolios of investment
grade corporate and U.S. government obligations and are carried at cost which
approximates market value.
Inventory
Costs incurred in connection with plasma fractionation processing and the
production of PLAS+SD are included in inventory and expensed upon recognition of
related revenues. Such costs include direct labor and processing overheads. The
processed plasma is supplied and owned by the Company's customers and, as such,
is not included in inventory. Inventory is stated at the lower of cost, as
determined using the average cost method, or net realizable value.
F-7
<PAGE>
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are being depreciated on a
straight-line basis over the estimated useful lives of the respective assets,
which approximates seven to 25 years for building and manufacturing equipment,
and three to five years for all other tangible assets. During the fourth quarter
of the year ended January 2, 1999, the Company extended the estimated useful
life of its manufacturing facility located in Melville, New York, based on a re-
assessment of the building's utility, in conjunction with ongoing facility
renovation and expansion to accommodate additional products and capacity. The
useful life of the building, which the Company had previously been depreciating
over 10 years, was increased to a remaining life of 25 years. The effect of this
change was to reduce depreciation expense and net loss during the year ended
January 2, 1999 by $194,000 or $0.02 per share.
Revenue Recognition
Revenue from plasma fractionation processing and the production of PLAS+SD is
recognized in the period in which the related services have been rendered and
upon satisfaction of certain quality control requirements. Revenue recognized in
the accompanying statements of operations is not subject to repayment or future
performance obligations.
The Company's plasma fractionation processing revenues are principally derived
from Bayer, while PLAS+SD is sold to the Red Cross for subsequent distribution
to hospitals and other medical facilities. Revenue derived from sale of product
to Bayer and the Red Cross amounted to approximately 43% and 48%, respectively,
of total revenue during the year ended January 2, 1999. At January 2, 1999,
amounts owed from Bayer and the Red Cross amounted to 57% and 37%, respectively,
of net trade receivables. The Company does not require collateral or other
security to ensure collection.
Research and Development
All research and development costs are charged to operations as incurred.
Research and development is recorded net of collaborator reimbursement, which
amounted to $2.3 million, $1.2 million, and $1 million during the years ended
January 2, 1999 and December 31, 1997 and 1996, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the amounts of existing assets
and liabilities carried on the financial statements and their respective tax
bases and the benefits arising from the realization of operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. A valuation allowance is established when necessary
to reduce deferred tax assets to the amount expected to be realized.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding. Diluted net loss per share is the
same as basic net loss per share since the inclusion of potential common stock
equivalents (stock options and warrants) in the computation would be anti-
dilutive.
Fair Value of Financial Instruments
The fair value of the Company's capital lease obligations are estimated using
discounted cash flow analyses, based upon the Company's estimated current
incremental borrowing rate for similar types of securities. For all other
financial instruments, the carrying value approximates fair value due to the
short maturity or variable interest rate applicable to such instrument (see note
7).
Reclassifications
Certain amounts contained in prior year financial statements have been
reclassified to conform with current year's presentation.
F-8
<PAGE>
3. Inventory
Inventory consists of the following components:
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
---- ----
<S> <C> <C>
Work-in-process................................... $1,382,000 $211,000
Supplies.......................................... 1,130,000 364,000
---------- --------
$2,512,000 $575,000
========== ========
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consists of the following components:
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
---- ----
<S> <C> <C>
Land............................................... $ 638,000 $ 638,000
Building and related improvements.................. 22,135,000 21,573,000
Manufacturing and laboratory equipment............. 13,911,000 12,898,000
Office furniture and equipment..................... 1,242,000 581,000
Construction in progress........................... 2,769,000 --
----------- -----------
40,695,000 35,690,000
Accumulated depreciation and amortization.......... (9,874,000) (6,640,000)
----------- -----------
$30,821,000 $29,050,000
=========== ===========
</TABLE>
Interest capitalized in connection with construction activities totaled $370,000
and $306,000 in 1997 and 1996, respectively. No amounts were capitalized during
the year ended January 2, 1999.
The cost of manufacturing equipment held under a capital lease (see note 7)
amounted to $6,184,000 at January 2, 1999 and December 31, 1997, and accumulated
depreciation relating to such equipment amounted to $618,000 at January 2, 1999
and $206,000 at December 31, 1997.
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following components:
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
---- ----
<S> <C> <C>
Trade accounts payable.......................................... $1,701,000 $2,503,000
Accrued pooling and transportation fees......................... 544,000 --
Refunds due to customer......................................... 444,000 --
Amounts payable to Bayer Corporation (see note 7)............... -- 3,075,000
Accrued marketing............................................... 195,000 --
Accrued employee compensation................................... 1,681,000 788,000
Accrued operating taxes......................................... 726,000 --
Other........................................................... 1,284,000 448,000
---------- ----------
$6,575,000 $6,814,000
========== ==========
</TABLE>
6. Long-Term Debt
On December 22, 1997, the Company entered into a credit agreement (the "Credit
Agreement") with a bank providing for a term loan in the principal amount of
$10,750,000 (the "New Term Loan"). The proceeds under the New Term Loan were
used to repay
F-9
<PAGE>
the outstanding balance of existing term loans aggregating $10,500,000
previously provided by other banks, and related expenses associated with
executing the New Term Loan. The New Term Loan bears interest at the Company's
option at either LIBOR plus 2.75% to 1.75% or the base rate of the bank, as
defined, plus margins of up to 0.5%, as determined based on defined earnings
ratios. As of January 2, 1999, the Company was using one-month LIBOR (5.1%) plus
2.75%. Under the New Term Loan, interest is payable monthly and the principal
balance is payable in sixteen equal consecutive quarterly installments of
$671,875 commencing March 31, 1998 and continuing until maturity on December 31,
2001. Amounts outstanding under the Term Loan were $8,062,000 at January 2, 1999
and $10,750,000 at December 31, 1997. The Credit Agreement contains default
provisions, including financial covenants which provide restrictions on capital
investments and the payment of cash dividends and, among other things, requires
the Company to maintain minimum cash balances of $2,000,000 and leverage and
coverage ratios, as defined. The Company is in compliance with these covenants.
Under the New Term Loan, the Company granted the bank a mortgage upon, and
security interest in, substantially all of the property owned by the Company,
including the real property, building and fixtures, equipment, inventory,
accounts receivable, cash and certain intangible assets, subject to Bayer's
security interest in the Bayer Collateral (see note 11) and the security
interests of a third party under a Master Equipment Lease Agreement (see note
7).
7. Capital Lease Obligation
On April 8, 1996, the Company entered into a Master Equipment Lease Agreement
("the Master Lease") under which the Company borrowed $6,200,000 to be used for
leasing production equipment. The Master Lease contains escalating monthly lease
payments over a five-year period. The Master Lease also contains an early
purchase option and an option to purchase the equipment at 15.0% of the
equipment cost at the end of the lease term. The effective interest rate is
approximately 16.2% per annum.
Future minimum payments under the capital lease obligation is as follows:
1999..................................................... $1,762,000
2000..................................................... 1,807,000
2001..................................................... 1,613,000
2002..................................................... 359,000
----------
Total minimum lease payments............................. 5,541,000
Less amounts representing interest....................... (945,000)
----------
Present value of minimum lease payments.................. 4,596,000
Less current maturities.................................. 1,272,000
----------
Long-term portion........................................ $3,324,000
==========
The fair value of the Company's capital lease obligation was approximately
$4,983,000 at January 2, 1999.
8. Stockholders' Equity
Common Stock
Pursuant to the Transfer Agreement between the Company and the NYBC (see note
1), the Company issued to the NYBC 35 shares of no par value common stock,
representing all shares of common stock then issued and outstanding. On October
26, 1995, these shares were exchanged for 35 shares of common stock, $0.01 par
value.
On October 26, 1995, the Board of Directors approved a dividend of 26,833 shares
to be paid on each share of common stock then outstanding. Further, a Warrant to
purchase 715,563 shares of common stock at an exercise price of $2.80 per share
was issued to the NYBC in connection with the Company's recapitalization. This
warrant was exercised by the NYBC in September 1996.
Also on October 26, 1995, the Company completed a $5,000,000 private placement
of 1,788,909 shares of common stock, par value $0.01 per share, to Ampersand.
Both the NYBC and Ampersand have certain registration rights as defined in the
Common Stock Purchase Agreement. In connection with the private placement,
Ampersand also received a Warrant to purchase an additional 715,563 shares of
common stock at $2.80 per share which it exercised in September 1996.
F-10
<PAGE>
On June 21, 1996, in connection with a term loan facility in which the Company
borrowed $5,000,000 from a bank, Ampersand was issued 126,387 shares of common
stock, par value $0.01 per share, as consideration for providing a Letter of
Credit, and an affiliate of the bank was issued 3,577 shares of common stock,
par value $0.01 per share, as part of an up front fee for providing the loan.
The fair market value of these equity instruments was estimated at $2.80 per
share and amortized on a straight-line basis over the term of the related term
loan facility.
On April 29, 1997, the Company completed a $14,950,000 private placement of
1,797,894 shares of common stock, par value $0.01 per share, to CBC, less
issuance costs of $858,586. In addition, the Company issued a contingent stock
purchase warrant exercisable into 1% of the Company's fully diluted shares for
every $1,000,000 in subsequent private equity capital raised, after giving
effect to such financing, subject to a cap of 5% of the fully diluted equity of
the Company. This warrant expired upon consummation of the IPO. The Company
issued a warrant to purchase 32,361 shares of common stock to the private
placement agent with an estimated fair market value of $270,000. This warrant
was exercised upon consummation of the IPO.
In October 1997, the NYBC and the Company agreed to amend a license agreement
whereby the NYBC would receive common stock of the Company in lieu of cash
payable to the NYBC in connection with certain royalty payments due under the
license agreement totaling $300,000 (see note 12). The amendment was approved by
the Company's Board of Directors in January 1998, and pursuant to a Stock
Purchase Agreement dated January 23, 1998, the Company issued 35,778 shares of
common stock, par value $0.01 per share to the NYBC.
On June 15, 1998, the Company completed an initial public offering (IPO) of
3,000,000 shares of the Company's common stock, par value $0.01 per share, at
$12.00 per share, raising gross proceeds of $36,000,000 before underwriter's
commissions and expenses. On July 10, 1998, the underwriters of the IPO
partially exercised their over-allotment option for an additional 325,000 shares
priced at $12.00 per share, raising additional gross proceeds of $3,900,000
before underwriters' commissions and expenses. In conjunction with the
collaboration agreement between the Company and Pall, during 1998, Pall acquired
$9 million of the Company's common stock in two private placements, the second
of which closed contemporaneously with, and at the same price, terms and
conditions as the IPO. The Company is required to reserve 2,504,472 shares of
common stock in connection with future sales under the Pall collaboration
agreement (see note 11). The net proceeds received by the Company have been and
will be used to fund costs associated with the marketing and distribution of
PLAS+SD, clinical trials, research and development, working capital, and capital
investments, including the expansion of the manufacturing facility and other
corporate purposes.
Preferred Stock
The Company's Certificate of Incorporation was restated during 1998 to increase
the number of shares of preferred stock authorized from 500 shares to 1,000,000
shares. The preferred stock may be issued from time to time in one or more
series, with such designations, rights and preferences as shall be determined by
the Board of Directors. No preferred stock was outstanding as of January 2,
1999.
9. Stock Plans
Employee Stock Purchase Plan
In February 1998, the Company adopted its 1998 Employee Stock Purchase Plan (the
1998 Purchase Plan) under which employees may purchase shares of common stock at
a discount from fair market value. The 1998 Purchase Plan is intended to qualify
as an employee stock purchase plan within the meaning of Section 423 of the
Internal Revenue Code. Rights to purchase common stock under the 1998 Purchase
Plan are granted at the discretion of the Compensation Committee of the Board of
Directors, which determines the frequency and duration of individual offerings
under the 1998 Purchase Plan and the dates when stock may be purchased. Eligible
employees participate voluntarily and may withdraw from any offering at any time
before stock is purchased. Participation terminates automatically upon
termination of employment. The purchase price per share of common stock to the
purchaser under the 1998 Purchase Plan is 85% of the lesser of the Company's
common stock fair market value at the beginning of the offering period or on the
applicable exercise date and may be paid through payroll deductions, periodic
lump sum payments or both. The 1998 Purchase Plan terminates in February 2008.
There are 89,445 shares of common stock reserved for issuance under the 1998
Purchase Plan, of which 9,184 shares of common stock were issued during the year
ended January 2, 1999.
F-11
<PAGE>
Director Stock Option Plan
In February 1998, the Company adopted and the Board of Directors and the
stockholders of the Company approved the 1998 Director Stock Option Plan (the
1998 Director Plan). All of the Directors who are not employees of the Company
(the Eligible Directors) are currently eligible to participate in the 1998
Director Plan. Each non-employee who is initially elected to the Company's Board
of Directors shall, upon his initial election by the Company's stockholders,
automatically be entitled to an option to purchase 15,000 shares of common
stock. In addition, each Eligible Director will be entitled to receive an annual
option to purchase 2,000 shares of common stock. During the year of plan
adoption, each of the Company's existing directors, as permitted by his
affiliate or employer, was granted an option to purchase 17,000 shares of common
stock. Directors who were prohibited by their employer from receiving stock
options from the Company were compensated through alternative arrangements.
The options vest over a four-year period with 25% of the grant vesting after six
months, and 25% vesting at the end of the second, third and fourth year
thereafter, provided that the optionholder is still a Director of the Company at
the opening of business on such date. The 1998 Director Plan has a term of ten
years. The exercise price for the Options is equal to the last sale price for
the common stock on the business day immediately preceding the date of grant.
The exercise price may be paid in cash or shares. The Director Plan provides for
the grant of up to 89,445 options (4,445 options available for future grants as
of January 2, 1999) to purchase shares of common stock of the Company. In
February 1999, the Company approved an increase in the maximum number of options
which may be granted under the Director Plan to 150,000. Such increase is
subject to stockholder approval.
Equity Incentive Plan
The Company's 1995 Equity Incentive Plan was originally adopted in October 1995
and was amended and restated in February 1998, as the 1998 Equity Incentive Plan
(the 1998 Equity Plan). The amendment in February 1998 increased the shares of
common stock reserved from 1,788,908 to 2,146,690 (201,672 options available for
future grants as of January 2, 1999). The 1998 Equity Plan permits the granting
of both incentive stock options and nonstatutory stock options. The option price
of the shares for incentive stock options cannot be less than the fair market
value of such stock at the date of grant. Options are exercisable over a period
determined by the Board of Directors, but not longer than ten years after the
grant date. All stock options issued to-date have been granted at the fair
market value of the stock on the respective grant dates.
Stock Based Compensation Plans
The Company continues to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, (APB 25) and related interpretations
when accounting for its stock-based compensation plans. Under APB 25, because
the exercise price of the Company's employee stock options is set equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net loss and net loss per share for each of the
years in the three year period ended January 2, 1999 was determined as if the
Company had accounted for its stock options using the fair value method
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions: volatility of 67% during the year
ended January 2, 1999 and no volatility during 1997 and 1996; expected dividend
yield of 0%; risk-free interest rate of 6.0% during the years ended January 2,
1999 and December 31, 1997 and 5.5% during the year ended December 31, 1996; and
an expected life of five years during the year ended January 2, 1999 and ten
years during the years ended December 31, 1997 and 1996.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
F-12
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
Year ended Years ended December 31,
January 2, ------------------------
1999 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported.............................. ($6,400,000) ($11,700,000) ($4,125,185)
Pro forma................................ ($7,408,000) ($11,975,000) ($4,265,743)
Basic and diluted net loss per share:
As reported.............................. ($0.61) ($1.62) ($0.84)
Pro forma................................ ($0.71) ($1.65) ($0.87)
</TABLE>
Information as to options for shares of common stock granted as December 31,
1996 and 1997 and January 2, 1999 is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
Year ended January 2, ------------------------
1999 1997 1996
---- ---- ----
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options price Options price Options price
------- --------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year... 1,373,300 $ 5.05 812,880 $2.80 677,280 $2.80
Granted.......................... 642,344 10.09 678,487 7.85 165,832 2.80
Exercised........................ (220,577) 2.80 (12,522) 2.80 (8,944) 2.80
Forfeited........................ (92,092) 9.40 (105,545) 7.01 (21,288) 2.80
--------- --------- -------
Outstanding, end of year......... 1,702,975 7.15 1,373,300 5.05 812,880 2.80
========= ========= =======
Exercisable at end of year....... 484,398 4.33 385,957 2.82 164,713 2.80
========= ========= =======
Weighted average fair value of
options granted during the year $ 6.16 $3.94 $1.12
</TABLE>
The following table summarizes the information on stock options outstanding at
January 2, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price Exercisable price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.80 - $2.80 519,929 7.3 $ 2.80 334,284 $2.80
$3.88 - $3.88 125,173 9.8 3.88 - -
$8.39 - $8.39 583,002 8.7 8.39 150,114 8.39
$9.19 - $9.19 10,000 9.8 9.19 - -
$11.18 $11.18 306,947 9.2 11.18 - -
$11.63 - $11.63 141,499 9.4 11.63 - -
$17.58 - $17.58 15,216 9.6 17.58 - -
--------- -------
1,702,975 484,398
========= =======
</TABLE>
10. Income Taxes
The Company's deferred tax assets were as follows at:
<TABLE>
<CAPTION>
January 2, December 31,
1999 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.............. $ 12,334,000 $ 6,474,000
Start-up expenditures........................ 1,490,000 2,125,000
Depreciation and amortization................ 305,000 1,603,000
Replacement cost of plasma................... -- 1,261,000
Other, net................................... 1,312,000 1,495,000
------------ ------------
Total..................................... 15,441,000 12,958,000
Valuation allowance............................ (15,441,000) (12,958,000)
------------ ------------
Net deferred taxes............................. $ -- $ --
============ ============
</TABLE>
F-13
<PAGE>
At January 2, 1999 and December 31, 1997, a valuation allowance has been applied
to offset the respective deferred tax assets in recognition of the uncertainty
that such tax benefits will be realized. The valuation allowance increased by
$2,500,000 during the year ended January 2, 1999 and $5,200,000 and $1,800,000
during the years ended December 31, 1997 and 1996, respectively.
At January 2, 1999, the Company has available net operating loss carryforwards
for federal and state income tax reporting purposes of approximately
$27,900,000, and has available research and development credit carryforwards for
federal income tax reporting purposes of approximately $445,000, which are
available to offset future taxable income, if any. These carryforwards expire
beginning in 2010. The Company experienced a change in ownership during July
1998, which resulted in approximately $22,800,000 of the Federal net operating
loss being subject to an annual limitation of approximately $7,400,000.
11. Collaborations
Bayer. On February 7, 1995, the Company entered into an Agreement for Custom
Processing (the Processing Agreement) with Bayer, a world leader in the
manufacturing and marketing of plasma products, whereby the Company fractionates
plasma for Bayer in return for a contracted fee. Under the Processing Agreement,
as amended in January 1996, December 1997 and December 1998, Bayer contracted
for an initial term through December 31, 2001 at minimum production volumes, as
defined. Bayer has two one-year options to extend the term under essentially the
same terms and conditions. The Processing Agreement provides for annual price
increases based on increases in the consumer price index.
The Processing Agreement contains defined default provisions and, in the case of
a continuing event of default, Bayer may: (i) terminate the Processing
Agreement; (ii) suspend its obligations under the Processing Agreement; or (iii)
take over the operation of fractionating its plasma. In the event of such a
takeover, Bayer continues to be responsible for payment to the Company at the
Base Processing Fee in effect for all volumes of plasma actually processed,
subject to the requirement that Bayer use its best efforts to achieve the
minimum production volumes specified in the Processing Agreement, deducting
therefrom all reasonable expenses paid related to the processing operation. The
Company is currently in compliance with its obligations under the Processing
Agreement.
The Company and Bayer executed, concurrently with the execution of the
Processing Agreement, a Reimbursement and Security Agreement, a Mortgage, a
Lease Agreement and a Sublease Agreement (Reimbursement Agreement), which was
subsequently superseded by a Security Agreement (Security Agreement) upon the
Company's refinancing of its long-term debt on December 22, 1997 (see note 6).
The agreements secure certain obligations of the Company to Bayer, including
Bayer's march-in rights relating to the Processing Agreement, a priority
security interest in all of the equipment and other personal property owned by
the Company involved in the Company's plasma fractionation operation, and a
subordinated security interest in the Company's real property, building,
fixtures and equipment.
On July 17, 1998, the Company repaid, in full, amounts owed to Bayer under the
settlement agreement between the Company and Bayer, whereby the Company agreed
to pay damages of $4.1 million to compensate Bayer for its loss of plasma caused
by an equipment malfunction which occurred in 1996, while the Company was
processing plasma for Bayer. Amounts payable under the settlement agreement were
$1,937,000 at July 17, 1998 and $3,075,000 at December 31, 1997, respectively,
and carried interest at a rate of prime plus 3% at the time the amount was
repaid. The Company has commenced a legal proceeding to recover these and
related costs from its insurer (see note 15).
American National Red Cross. In December, 1997, the Company entered into a
Supply, Manufacturing, and Distribution Agreement (Red Cross Agreement) with the
American National Red Cross (Red Cross) over a term of 57 months for the Red
Cross to become the exclusive distributor of the Company's virally inactivated
transfusion plasma product, PLAS+SD. Under the agreement, the Red Cross, which
is the largest supplier of transfusion plasma to hospitals in the United States,
providing approximately 45% of the transfusion plasma used annually, is required
to purchase stated minimum quantities of PLAS+SD to maintain its exclusive
rights. Once the Red Cross places its annual purchase order with the Company, it
is obligated to supply the Company with a sufficient quantity of plasma to
enable the Company to fulfill such order. The Red Cross must pay for the amount
of PLAS+SD specified in the purchase order even if it is unable to supply
sufficient quantities of plasma. The Red Cross must purchase all of its virally
inactivated plasma from the Company unless an FDA approved product has been
independently shown to be safer than the PLAS+SD. The Company, in turn, is
obligated to offer any excess capacity that it has to produce PLAS+SD above the
stated minimum purchase requirements to the Red Cross before selling PLAS+SD to
any other party. Effective October 1, 1998, the Red Cross Agreement was amended
to, among other things, reduce the Red Cross's minimum
F-14
<PAGE>
annual purchase order commitment required to maintain its exclusive marketing
and distribution rights, provide for higher prices during periods of lower
volume purchases, and commit increased marketing spending by both the Company
and the Red Cross. Under the amended agreement, the Red Cross is required to pay
to the Company a fixed price per unit of PLAS+SD, plus a royalty which is
initially fixed. Beyond a specified volume, the royalty becomes variable, based
on equal sharing of the amount by which the average selling price of the Red
Cross exceeds a stated amount. The Company has granted to the Red Cross a right
of first refusal for exclusive distribution rights to any subsequent generation
of virally inactivated transfusion plasma that is developed during the term of
the agreement. The Company and the Red Cross have each committed to spend
minimum amounts for marketing PLAS+SD during the two year period ending
September 30, 2000. The Company's spending commitment is expected to be
satisfied, to a large extent, by the cost of its sales force. Additionally, a
joint marketing committee will coordinate all marketing activities for PLAS+SD.
The exclusive distribution agreement between the Company and the Red Cross
provides that the Red Cross will use its best efforts to insure universal
availability of the Company's virally inactivated plasma products to all
potential customers, including both Red Cross blood centers and non-Red Cross
blood centers.
Under a previous collaboration agreement, the Red Cross had made a total of $3.0
million non-interest bearing, unsecured advances to the Company's predecessor to
be used to fund improvements to the its manufacturing facility. Under this
previous agreement, the loan amortized at the rate of 15% per year following
receipt of marketing approval of PLAS+SD with a balloon payment due in year
five. In conjunction with the amended agreement, the repayment schedule was
modified to reflect repayment of 30% of the loan balance on the second
anniversary date of the approval of the PLAS+SD PLA and 15% of the balance on
each of the following two years, with the balance of the loan payable on the
fifth anniversary of the PLAS+SD PLA. Upon finalization of the repayment terms,
the Company discounted the advance to its net present value using an interest
rate of 7.75%, resulting in a gain of $644,000. Such gain is included in the
accompanying statement of operations for the year ended January 2, 1999. Each of
the Company and Red Cross has the right to terminate the agreement upon written
notice in certain circumstances, including failure to achieve minimum end-user
sales or a material breach of the agreement which is not cured by the other
party.
United States Surgical Corporation. In September 1996, as amended in October
1996, the Company entered into an Exclusive Distribution Agreement with United
States Surgical Corporation ("U.S. Surgical") regarding the Company's fibrin
sealant for a period of 15 years. U.S. Surgical is primarily engaged in the
development, manufacture and commercialization of surgical wound products for
hospitals throughout the world. In connection with entering into the agreement,
U.S. Surgical paid a $3,000,000 up front fee to the Company. U.S. Surgical has
agreed to fully fund all direct clinical and regulatory costs associated with
the development and regulatory approval of the Company's fibrin sealant. In
addition, U.S. Surgical has agreed, subject to termination upon notice, to pay a
substantial portion of agreed upon research and development costs for
improvements or, in return for exclusive rights, enhancements to the Company's
fibrin sealant. Pursuant to this agreement, the Company granted U.S. Surgical
the mutually exclusive worldwide right, until October 2011, to seek, in its own
name as permitted by law, necessary government approvals for and to use, market,
distribute and sell fibrin sealants, and any improvements thereto. U.S. Surgical
must achieve certain minimum product sales to maintain its exclusive rights
under the agreement. In accordance with the agreement, the Company has agreed to
supply U.S. Surgical's forecasted demand for the products and if it is unable to
supply such forecasted demand, plus an excess of up to 25% over such forecasted
demand, U.S. Surgical has an option to make arrangements to have the excess
demand for such products produced by third-party manufacturers until the later
of one year or the Company's supply of such demand. Either the Company or U.S.
Surgical may terminate the agreement upon written notice in certain
circumstances, including a breach of the agreement, or for any reason upon nine
months' notice to the Company.
Pall. On February 19, 1998, the Company and Pall entered into a series of
agreements (the Pall Agreements) providing for, among other things, a
collaboration on the development and marketing of systems employing the
Company's Light Activated Compounds and Quencher viral inactivation technologies
for red blood cell and platelet concentrates. Pall is a leading manufacturer and
supplier of filtration products, including those relating to the collection,
preservation, processing, manipulation, storage and treatment of blood and blood
products. Under the Pall Agreements, Pall receives exclusive worldwide
distribution rights to all the Company's systems incorporating viral
inactivation technology for red blood cells and platelets. The parties have also
agreed to share research, development, clinical and regulatory responsibilities
and will equally share profits and joint expenses from operations after each
party is reimbursed for its cost of goods. Upon execution of the Pall
Agreements, Pall made a $4,000,000 equity investment representing 477,042 shares
at $8.39 per share. Pursuant to the terms of the Pall Agreements, Pall also
acquired $5,000,000 of the Company's Common Stock in a private placement, which
closed contemporaneously with, and at the same price, terms, and conditions as
the IPO. In addition, the Pall Agreements provide that Pall will purchase up to
$17,000,000 worth of the Company's common stock in installments tied to the
achievement of specified development milestones. Such equity investments by Pall
will be made at the prevailing market price per share. Certain of the Pall
Agreements may be terminated in certain circumstances including an event of
default by either party which, in the case of the Company, includes the
F-15
<PAGE>
termination of the Company's current Chief Scientific Officer. During the year
ended January 2, 1999, the Company recorded a one-time charge to operations and
an increase to stockholder's equity of $ 2.2 million representing the difference
between the purchase price paid by Pall and the estimated fair value of the
common stock on the date of purchase.
12. Related-Party Transactions
License Agreements
The Company has entered into various license agreements with the NYBC. Under
these agreements, the Company has been granted exclusive and non-exclusive
worldwide licenses under the NYBC patents relating to viral inactivation and
other technologies. The Company also has rights of first negotiation for the
license to any NYBC improvements not otherwise exclusively licensed in the field
of viral inactivation for use with certain products, as defined.
Under the license agreements, the Company is required to pay royalties to the
NYBC on the Company's revenues derived from the use of these licenses, as
defined. The Company is required to pay aggregate minimum royalties to maintain
its exclusive licenses of $1,500,000 in fiscal 1999, $2,200,000 in fiscal 2000,
$2,400,000 in fiscal 2001 and $2,800,000 in each year thereafter. Royalty and
milestone payments in the amount of $1,037,000 were payable to the NYBC during
the year ended January 2, 1999, while $600,000 was payable to the NYBC in 1997,
of which $300,000 was paid in cash and the balance paid pursuant to a Stock
Purchase Agreement, whereby the Company issued 35,778 shares of common stock to
the NYBC (see note 8). The Company also is required to meet certain research and
development milestones, as defined, to maintain its exclusive licenses. Further,
the Company is required to spend a minimum annual amounts towards the further
development, evaluation and registration of products, as defined. If minimum
royalties are not paid or if any milestone is not met, as defined for a given
country, the NYBC may terminate the license for that country and may terminate
other such licenses if the licenses in all covered countries have been
individually terminated.
The NYBC may terminate any license by reasonable notice if the Company fails to
cure a breach, conform to government regulations, or sell products within a
specified number of years, as defined. Upon termination, all rights revert to
the NYBC. The Company is currently in compliance with all such obligations and
covenants.
Other Services
The Company leased, through November 30, 1996, approximately 6,000 square feet
of laboratory space from NYBC. Rental payments made to the NYBC were $532,000 in
1996. In November 1996, the Company moved its research and development
laboratories to another location in New York City (see note 15).
The NYBC sponsors certain scientific research at the Company. NYBC payments of
$96,000, $104,000 and $705,000 for the years ended January 2, 1999 and December
31, 1997 and 1996, respectively, have been netted against research and
development expenses in the accompanying statements of operations.
Ampersand has provided certain management advisory services to the Company,
including the provision of an interim Chief Executive Officer. Amounts payable
to Ampersand for such services totaled $156,000 and $134,000 during the years
ended January 2, 1999 and December 31, 1997, respectively.
During the year ending January 2, 1999, the Company had purchased approximately
$1,076,000 of production related materials and supplies from Pall.
F-16
<PAGE>
13. Supplemental Disclosure of Cash Flow Information
Information on cash paid for interest and non-cash investing and financing
activities are as follows:
<TABLE>
<CAPTION>
Year Ended Years Ended December 31,
January 2, ------------------------
1999 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for interest............................. $1,560,000 $1,511,000 $ 924,000
Non-cash investing and financing activities:
Note receivable from stockholder.................................. -- 35,000 --
Conversion of notes payable to capital lease obligations.......... -- 2,847,000 1,864,000
Debt financing costs included in accounts
payable and accrued expenses.................................... -- 170,000 --
Reimbursable construction costs included
in other receivables and accounts
payable and accrued expenses.................................... -- -- 231,000
Capital improvements and equipment costs
included in property, plant and equipment and
accounts payable and accrued expenses........................... 410,000 47,000 425,000
Issuance of common stock to New York
Blood Center in satisfaction of obligation...................... $ 300,000 $ -- $ --
</TABLE>
14. Profit Sharing 401(k) Plan
Effective January 1, 1995, the Company established a 401(k) Profit Sharing Plan
(the "401(k) Plan") which covers substantially all employees. All eligible
employees may elect to contribute a portion of their wages to the 401(k) Plan,
subject to certain limitations. No employer contributions were made during the
years ended January 2, 1999 or December 31, 1997 and 1996.
15. Commitments and Contingencies
Lease Commitments
Future minimum lease payments under operating leases at January 2, 1999 are as
follows:
1999 ......................................................... $570,000
2000 ......................................................... 584,000
2001 ......................................................... 590,000
2002 ......................................................... 160,000
2003 ......................................................... 125,000
Rent expense was approximately $444,000, $415,000 and $107,000 during the years
ended January 2, 1999 and December 31, 1997 and 1996, respectively.
Supply Commitments
At January 2, 1999, the Company had entered into certain raw material supply
agreements for initial terms extending through the end of fiscal 1999. Under the
agreements, the Company is obligated to purchase minimum quantities at pricing
levels, as defined, totaling $780,000 over the term of the agreements. The party
to one of the supply agreements is an affiliate of Pall (see note 11).
Litigation
The Company is aware that in the course of ongoing litigation between the NYBC
and a third party, the third party has asserted claims against NYBC based on
breach of a contract that was executed in 1988 by those parties and rights under
which were assigned to the Company in 1995. The third party has claimed that it
is entitled to payments from the NYBC based on improvements in albumin
throughput yields attributable to certain filtration technology licensed to the
NYBC by the third party. The Company understands that the NYBC believes it has
meritorious defenses against this third party's claims and, in any event, as
part of the assignment of NYBC's rights under the disputed contract by the NYBC
to the Company, the Company assumed no responsibility for pre-existing contract
liabilities. However, there can be no assurance that the third party will not
assert claims against the Company under that contract which are similar in
nature to the claims being asserted against the NYBC. No such claims have been
asserted to date. The Company believes that it would have meritorious defenses
against any such claims.
On March 23, 1998, the Company received a Civil Investigative Demand (CID) from
the Antitrust Division of the U.S. Department of Justice (the Justice
Department) as part of the Justice Department's investigation into possible
antitrust violations in the sale, marketing and distribution of blood products.
A CID is a formal request for information and a customary initial step of any
Justice Department investigation. The Justice Department is permitted to issue a
CID to anyone whom the Justice Department believes may have information relevant
to any investigation. Therefore, the receipt of a CID does not mean that the
recipient is the target of an investigation, nor does it presuppose that there
is a probable cause to believe that a violation of the antitrust laws has
occurred or that any formal complaint ultimately will be filed. The Company
believes that the primary focus of the CID relates to the Company's PLAS+SD
product and to the Supply, Manufacturing and Distribution Collaboration
Agreement between VITEX and the American National Red Cross. Following the
Company's response to the CID, there has been no further activity with respect
to this matter.
On August 27, 1998, the Appellate Division of the Supreme Court of New York
awarded the Company a summary judgement against its insurance carrier, reversing
a lower court decision which denied the Company's previous claim for recovery of
costs incurred in 1996 as a result of a plasma processing loss. The Company had
recorded a special charge in 1996 to recognize reimbursement due to Bayer
Corporation for the plasma loss ($4.1 million) and to write off processing
costs ($1.0 million). The Company has filed a claim with the insurer to recover
these and related costs. On October 27, 1998, the insurance carrier filed a
motion to appeal the decision of the Appellate Court. Such appeal was
subsequently rejected. The insurance carrier has since stated its intention to
take the appeal to a higher court. The ultimate outcome of this matter can not
be determined at the present time.
While it is impossible to predict accurately or to determine the eventual
outcome of these matters, the Company believes that the outcome of these
proceedings will not have a material adverse effect on the Company's financial
position, statement of operations or cash flows.
16. Quarterly Financial Data (Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal 1998 Quarter Ended January 2, 1999 October 3, 1998 July 4, 1998 April 4, 1998
--------------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
Product sales $10,028 $11,660 $ 7,946 $ 4,121
Gross margin from product sales 4,091 3,842 2,583 (621)
Net Income 1,025 486 (1,696) (6,215)
Earnings per share:
Basic and diluted 0.08 0.04 (0.18) (0.76)
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1997 Quarter Ended December 31, 1997 September 30, 1997 June 30, 1997 March 31, 1997
----------------- ------------------ ------------- --------------
<S> <C> <C> <C> <C>
Product sales $ 4,510 $ 3,171 $ 4,429 $ 3,733
Gross margin from product sales 1,075 (2,249) 427 264
Net Income (4,044) (4,361) (1,374) (1,921)
Earnings per share:
Basic and diluted (0.52) (0.56) (0.19) (0.32)
------- ------- ------- -------
</TABLE>
F-17
<PAGE>
V.I. TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(In thousands, except for share and per share data)
<TABLE>
<CAPTION>
July 3,
1999 January 2,
(Unaudited) 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,470 $ 35,265
Trade receivables 5,980 3,967
Other receivables, net 838 594
Due from related parties, net 92 313
Inventory 3,098 2,512
Prepaid expenses and other current assets 1,050 987
-------- --------
Total current assets 38,528 43,638
Property, plant and equipment, net 33,504 30,821
Other assets, net 503 766
-------- --------
Total assets $ 72,535 $ 75,225
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,587 $ 2,687
Current portion of capital lease obligations 1,272 1,272
Accounts payable and accrued expenses 7,989 6,576
-------- --------
Total current liabilities 12,848 10,535
Long-term debt, less current portion 5,627 7,731
Capital lease obligations, less current portion 2,712 3,324
-------- --------
Total liabilities 21,187 21,590
-------- --------
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized
1,000,000 at July 3, 1999 and January 2, 1999;
no shares issued and outstanding - -
Common stock, par value $.01 per share; authorized 29,000,000
shares; issued and outstanding 12,447,628 at July 3, 1999 and
12,359,148 at January 2, 1999 125 124
Additional paid-in-capital 86,840 86,575
Accumulated deficit (35,617) (33,064)
-------- --------
Total stockholders' equity 51,348 53,635
-------- --------
Total liabilities and stockholders' equity $ 72,535 $ 75,225
-------- --------
The accompanying notes are an integral part of the condensed financial statements.
</TABLE>
F-18
<PAGE>
V.I. TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-six Weeks
Ended Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
-------------------- ------------------
<S> <C> <C> <C> <C>
Revenue $ 9,352 $ 7,946 $20,494 $12,067
Costs and expenses:
Cost of sales 5,326 5,363 11,386 10,105
Research and development, net 2,104 1,748 4,115 3,395
Selling, general and administrative expenses 2,496 2,214 4,989 3,538
Charge related to product recall 2,645 - 2,645
Charge related to research collaboration - - - 2,202
------- ------- ------- -------
Total operating costs and expenses 12,571 9,325 23,135 19,240
------- ------- ------- -------
Loss from operations (3,219) (1,379) (2,641) (7,173)
Interest income (expense), net 51 (317) 88 (738)
------- ------- ------- -------
Net loss $(3,168) $(1,696) $(2,553) $(7,911)
------- ------- ------- -------
Basic and diluted net loss per share $ (0.25) $ (0.18) $ (0.21) $ (0.91)
------- ------- ------- -------
Weighted average shares used in calculation of
basic and diluted net loss per share 12,435 9,381 12,421 8,738
The accompanying notes are an integral part of the condensed financial statements.
</TABLE>
F-19
<PAGE>
V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Common Common Additional
Stock Stock Paid-In Accumulated Stockholders'
(Shares) (Amount) Capital Deficit Equity
---------- --------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 2, 1999 12,359,148 $124 $86,575 $(33,064) $53,635
Compensation expense in connection with
acceleration of option vesting - - 4 - 4
Issuance of shares of common stock upon
exercise of stock options and purchase under
the Employee Stock Purchase Plan 88,480 1 261 - 262
Net loss - - - (2,553) (2,553)
---------- -------- ----------- ------------- -------------
Balance at July 3, 1999 12,447,628 $125 $86,840 $(35,617) $51,348
========== ======== =========== ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
July 3, July 4,
1999 1998
-------- --------
<S> <C> <C>
Cash flows (used in) operating activities:
Net loss $(2,553) $(7,911)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,551 2,014
Compensation expense in connection with acceleration of
option vesting 4 281
Charge related to research collaboration - 2,202
Accretion of interest on customer advance 140 -
Changes in operating accounts:
Trade receivables (2,013) (2,631)
Other receivables, net (244) 82
Due to/from related parties 221 (492)
Inventory (586) (2,172)
Prepaid expenses and other current assets 116 (238)
Deferred revenue - 1,868
Accounts payable and accrued expenses 1,413 2,617
------- -------
Net cash used in operating activities (1,951) (4,380)
------- -------
Cash flows used in investing activities:
Additions to property, plant and equipment (4,150) (900)
------- -------
Net cash used in investing activities (4,150) (900)
------- -------
Cash flows (used in) provided by financing activities:
Proceeds from sale of common stock, net of
issuance costs - 41,634
Proceeds from issuance of common stock upon exercise
of options 262 136
Principal repayment of long-term debt (1,344) (1,344)
Principal repayment of capital lease obligations (612) (427)
------- -------
Net cash (used in) provided by financing activities (1,694) 39,999
------- -------
Net (decrease) increase in cash and cash equivalents (7,795) 34,719
Cash and cash equivalents at beginning of year 35,265 5,250
------- -------
Cash and cash equivalents at end of period $27,470 $39,969
======= =======
The accompanying notes are an integral part of the condensed financial statements.
</TABLE>
F-21
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements of V.I.
Technologies, Inc. (the Company or VITEX) have been prepared in accordance
with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all material adjustments (consisting of normal recurring accruals))
necessary for a fair presentation have been included. Operating results for
the thirteen and twenty-six weeks ended July 3, 1999 are not necessarily
indicative of the results that may be expected for the year ended January
1, 2000. For further information, refer to the financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended January 2, 1999.
Certain reclassifications were made to prior year amounts to conform to the
1999 presentation.
Stock Split
In February 1998, the Board of Directors authorized and the stockholders
approved a 1-for-2.795 reverse split of the Company's common stock, which
became effective on February 23, 1998. All share and per share amounts
included in the accompanying condensed financial statements and footnotes
have been restated to reflect the reverse stock split.
Fiscal Year
As reported in the Company's Form 8-K filed August 11, 1998, the Company
changed from a calendar year to a 52-53 week fiscal year ending on the
Saturday closest to December 31, beginning with the fiscal year ending
January 2, 1999.
Research and Development
All research and development costs are charged to operations as incurred.
Reimbursement for research and development costs incurred in accordance
with collaborative agreements is recognized as an offset to research and
development costs in the period in which the eligible costs are incurred by
the Company. Such reimbursement totaled $0.4 million and $0.1 million for
the thirteen weeks ended July 3, 1999 and July 4, 1998, respectively, and
$1.4 million and $0.5 million for the twenty-six weeks ended July 3, 1999
and July 4, 1998 respectively.
Earnings(Loss)Per Share
Basic earnings (loss) per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings (loss) per
share is computed on the basis of the weighted average number of the common
shares outstanding plus the effect of outstanding stock options and
Warrants calculated using the "treasury stock" method. Earnings(loss) per
share for the thirteen and twenty-six weeks ended July 3, 1999 and July 4,
1998 do not include the assumed exercise of stock options and warrants
because the effect of such inclusion would be antidilutive. As of July 3,
1999, the Company had 1,812,270 options and warrants outstanding.
F-22
<PAGE>
3. Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
July 3, January 2,
1999 1999
-------- ----------
Work in process $1,733 $1,382
Supplies 1,365 1,130
------- -------
$3,098 $2,512
------- -------
</TABLE>
4. Charge Related to Product Recall
On April 16, 1999, the Company initialed a voluntary recall of lots of
PLAS+SD which were found to contain a heightened presence of parvovirus B19.
This recall which was a precautionary measure, was completed on May 12,1999.
Results for the quarter included one-time costs associated with the the
recall amounting to $2,918,000 or $0.24 per share. In the accompanying
condensed statements of operations, the charge related to product recall of
$2,645,000 includes the write-off of inventory lots with heightened levels
of parvovirus B19, production testing, other direct recall expenses and a
reserve for an equitable sharing of recall costs incurred by the Company's
exclusive distributor of PLAS+SD, the American National Red Cross (Red
Cross). The Red Cross has requested reimbursement of the costs it incurred
as a result of the recall. While the Company believes it is not
contractually liable for Red Cross costs in this situation, covering a
portion of such costs is consistent with the spirit of the collaboration.
Discussions with the Red Cross on this issue are ongoing and expected to be
resolved shortly. Costs associated with idle production facilities during
the recall period, in the amount of $273,000, are included in costs of
sales.
Since the initial recall, the Company has been developing and validating a
process to screen untreated plasma for parvovirus B19 prior to commencing
the manufacturing process. This screening will use an experimental, highly
sensitive Polymerase Chain Reaction (PCR) test in order to ensure that this
virus is below specified laboratory levels. The Company is completing formal
validation of the technique and intends to apply to the FDA for a parvovirus
B19 label claim with approval expected in early 2000.
5. Subsequent Event
On July 28, 1999, the Company and Pentose Pharmaceuticals, Inc. (Pentose), a
privately held company, signed a definitive agreement to merge. The proposed
merger, which is subject to shareholder approval by both companies, is
structured as an all stock transaction with an estimated value of $40
million. Pentose shareholders will receive shares of common stock of the
Company such that, postmerger, they will own 34% of outstanding shares of
the combined company. The transaction will be accounted for under the
purchase method of accounting by the Company.
F-23
<PAGE>
Report of Independent Public Accountants
To the Stockholders and Board of Directors of
Pentose Pharmaceuticals, Inc.:
We have audited the accompanying balance sheet of Pentose Pharmaceuticals, Inc.
(a Delaware corporation in the development stage) as of December 31, 1998 and
the related statements of operations, redeemable convertible preferred stock and
stockholders' deficit, and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and performs 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 audit provides 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 as of December 31,
1998, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 29, 1999
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pentose Pharmaceuticals, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
operations and redeemable convertible preferred stock and stockholders' deficit
and of cash flows present fairly, in all material respects, the financial
position of Pentose Pharmaceuticals, Inc. at December 31, 1997 and the results
of its operations and its cash flows for the years ended December 31, 1997 and
1996 in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the financial statements of Pentose Pharmaceuticals,
Inc. for any period subsequent to December 31, 1997.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
May 1, 1998,
except as to the information in Note 3
for which the date is July 15, 1998
F-25
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998 1999
(unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 2,265,346 $ 1,483,254 $ 657,023
Marketable securities - 3,792,970 1,917,772
Prepaid expenses 53,216 42,514 62,833
Other current assets - - 70,858
----------- ----------- -----------
Total current assets 2,318,562 5,318,738 2,708,486
----------- ----------- -----------
Property and Equipment, at cost:
Laboratory equipment 300,858 486,213 662,580
Office and computer equipment 53,371 134,934 174,439
----------- ----------- -----------
354,229 621,147 837,019
Less--Accumulated depreciation 47,192 148,349 219,182
----------- ----------- -----------
307,037 472,798 617,837
----------- ----------- -----------
Long-Term Deposit (Note 6) 150,000 150,000 137,933
----------- ----------- -----------
Total assets $ 2,775,599 $ 5,941,536 $ 3,464,256
=========== =========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Current portion of capital lease obligations (Note 6) $ 67,911 $ 127,062 $ 149,692
Accounts payable 268,567 111,752 209,770
Accrued expenses (Note 9) 91,130 244,838 67,235
----------- ----------- -----------
Total current liabilities 427,608 483,652 426,697
----------- ----------- -----------
Long-Term Capital Lease Obligations, net of current portion
(Note 6) 260,197 345,123 380,422
----------- ----------- -----------
Commitments (Note 6)
Redeemable Convertible Preferred Stock (Note 3):
Series A redeemable convertible preferred stock, $0.001 par value-
Authorized--4,500,000 shares
Issued and outstanding--4,500,000 shares (liquidation preference
of $4,500,000) 4,459,528 4,500,000 4,500,000
Series B redeemable convertible preferred stock, $0.001 par value-
Authorized--3,500,000 shares
Issued and outstanding--2,356,903 shares in 1999 (stated at
liquidation value) - 7,000,000 7,000,000
----------- ----------- -----------
Total redeemable convertible preferred stock 4,459,528 11,500,000 11,500,000
----------- ----------- -----------
Stockholders' Deficit:
Common stock, $0.001 par value-
Authorized--12,000,000 shares
Issued--4,362,992 shares
Outstanding--3,896,367 shares 4,363 4,363 4,363
Treasury stock, at cost--466,625 shares (467) (467) (467)
Deficit accumulated during the development stage (2,375,630) (6,391,135) (8,846,759)
----------- ----------- -----------
Total stockholders' deficit (2,371,734) (6,387,239) (8,842,863)
----------- ----------- -----------
Total liabilities and stockholders' deficit $ 2,775,599 $ 5,941,536 $ 3,464,256
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
Cumulative from
--------Years Ended December 31,-------- Six-Month Periods Ended Inception
June 30, (June 8, 1995)
through June 30,
1996 1997 1998 1998 1999 1999
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $ 424,500 $ 75,000 $ 300,000 $ 724,500
---------- ----------- ----------- ----------- ----------- -----------
Operating Expenses:
Research and development 189,424 1,284,983 3,335,794 1,286,390 2,143,115 6,962,768
General and administrative 149,946 849,382 1,162,704 501,239 672,725 2,874,865
---------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 339,370 2,134,365 4,498,498 1,787,629 2,815,840 9,837,633
---------- ----------- ----------- ----------- ----------- -----------
Operating loss (339,370) (2,134,365) (4,073,998) (1,712,629) (2,515,840) (9,113,133)
---------- ----------- ----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 66,427 138,664 182,660 34,432 91,925 480,052
Interest expense (6,291) (27,284) (49,378) (20,218) (27,536) (112,366)
Other expense - (10,264) (4,319) (2,642) (4,173) (18,756)
---------- ----------- ----------- ----------- ----------- -----------
Other income, net 60,136 101,116 128,963 11,572 60,216 348,930
---------- ----------- ----------- ----------- ----------- -----------
Net loss $ (279,234) (2,033,249) (3,945,035) $(1,701,057) $(2,455,624) $(8,764,203)
========== =========== =========== =========== =========== ===========
Basic and Diluted Net Loss per $(.07) $(.52) $(1.01) $(.44) $(.63)
Share ========== =========== =========== =========== ===========
Basic and Diluted Weighted 4,127,762 3,896,367 3,896,367 3,896,367 3,896,367
Average Common Shares ========== =========== =========== =========== ===========
Outstanding
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit
from Inception (June 8, 1995) through June 30, 1999
<TABLE>
<CAPTION>
----Stockholders' Deficit----
---------Redeemable Convertible Preferred Stock--------
Series A Series B Common Stock
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Common stock issued to
founders - $ - - $ - 4,362,992 $ 4,363
Net loss - - - - - -
---------- ----------- ---------- ----------- ---------- -------
Balance, December 31, 1995 - - - - 4,362,992 4,363
Repurchase of common stock - - - - - -
Issuance of Series A
redeemable convertible
preferred stock, net of
issuance costs of $52,658 4,500,000 4,447,342 - - - -
Accretion of Series A
redeemable convertible
preferred stock - 3,584 - - - -
Net loss - - - - -
---------- ----------- ---------- ----------- ---------- -------
Balance, December 31, 1996 4,500,000 4,450,926 - - 4,362,992 4,363
Issuance of warrants - - - - - -
Accretion of Series A
redeemable convertible
preferred stock - 8,602 - - - -
Net loss - - - - - -
---------- ----------- ---------- ----------- ---------- -------
Balance, December 31, 1997 4,500,000 4,459,528 - - 4,362,992 4,363
Issuance of Series B
redeemable convertible
preferred stock, net of
issuance costs of $29,998 - - 2,356,903 7,000,000 - -
Accretion of Series A
redeemable convertible
preferred stock - 40,472 - - - -
Net loss - - - - - -
---------- ----------- ---------- ----------- ---------- -------
Balance, December 31, 1998 4,500,000 4,500,000 2,356,903 7,000,000 4,362,992 4,363
Net loss (unaudited) - - - - - -
---------- ----------- ---------- ----------- ---------- -------
Balance, June 30, 1999
(Unaudited) 4,500,000 $ 4,500,000 2,356,903 $ 7,000,000 4,362,992 $ 4,363
========== =========== ========== =========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
--------------------------Stockholders' Deficit---------------------------
Deficit
Accumulated
Additional -----Treasury Stock----- During the Total
Paid-in Number of Development Stockholders'
Capital Shares Amount Stage Deficit
<S> <C> <C> <C> <C> <C>
Common stock issued to
founders $ - - $ - $ - $ 4,363
Net loss - - - (51,061) (51,061)
------ --------- ------ ------------ ------------
Balance, December 31, 1995 - - - (51,061) (46,698)
Repurchase of common stock - (466,625) (467) - (467)
Issuance of Series A
redeemable convertible
preferred stock, net of
issuance costs of $52,658 - - - - -
Accretion of Series A
redeemable convertible
preferred stock - - - (3,584) (3,584)
Net loss ------ --------- ------ ------------ ------------
Balance, December 31, 1996 - (466,625) (467) (333,879) (329,983)
Issuance of warrants 100 - - - 100
Accretion of Series A
redeemable convertible
preferred stock (100) - - (8,502) (8,602)
Net loss - - - (2,033,249) (2,033,249)
------ --------- ------ ------------ ------------
Balance, December 31, 1997 - (466,625) (467) (2,375,630) (2,371,734)
Issuance of Series B
redeemable convertible
preferred stock, net of
issuance costs of $29,998 - - - (29,998) (29,998)
Accretion of Series A
redeemable convertible
preferred stock - - - (40,472) (40,472)
Net loss - - - (3,945,035) (3,945,035)
------ --------- ------ ------------ ------------
Balance, December 31, 1998 - (466,625) (467) (6,391,135) (6,387,239)
Net loss (unaudited) - - - (2,455,624) (2,455,624)
------ --------- ------ ------------ ------------
Balance, June 30, 1999
(Unaudited) $ - (466,625) $ (467) $ (8,846,759) $ (8,842,863)
====== ========= ====== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative from
Inception
For the Six-Month Periods (June 8, 1995)
For the Years Ended December 31, Ended June 30, through June 30,
1996 1997 1998 1998 1999 1999
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(279,234) $(2,033,249) $(3,945,035) $(1,701,057) $(2,455,624) $(8,764,203)
Adjustments to reconcile net loss to net
cash used by operating activities-
Depreciation and amortization - 47,192 101,157 40,828 70,833 219,182
Conversion of interest payable to
preferred stock 6,900 - - - - 6,900
Changes in current assets and
liabilities-
Prepaid expenses 1,651 (47,642) 10,702 9,015 (20,319) (62,833)
Other current assets - - - - (70,858) (70,858)
Accounts payable 33,753 199,032 (156,815) (187,276) 98,018 209,770
Accrued expenses 14,974 73,831 153,708 (62,913) (177,603) 67,235
---------- ----------- ----------- ----------- ----------- -----------
Net cash used by operating
activities (221,956) (1,760,836) (3,836,283) (1,901,403) (2,555,553) (8,394,807)
---------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (3,497) (45,255) (18,172) (95,557) (144,309)
(Investments in) sale of marketable
securities - - (3,792,970) - 1,875,198 (1,917,772)
Long-term deposit - (150,000) - - 12,067 (137,933)
---------- ----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
investing activities - (153,497) (3,838,225) (18,172) 1,791,708 (2,200,014)
---------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common
stock and warrants - 100 - - - 4,463
Repurchase of common stock (467) - - - - (467)
Net proceeds from issuance of preferred
stock 4,040,442 - 6,970,002 - - 11,010,444
Proceeds from promissory notes 250,000 - - - - 400,000
Principal payments of capital lease
obligations - (22,624) (77,586) (32,873) (62,386) (162,596)
---------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 4,289,975 (22,524) 6,892,416 (32,873) (62,386) 11,251,844
---------- ----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash
and cash equivalents 4,068,019 (1,936,857) (782,092) (1,952,448) (826,231) 657,023
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 134,184 4,202,203 2,265,346 2,265,346 1,483,254 -
---------- ---------- ---------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $4,202,203 $2,265,346 $1,483,254 $ 312,898 $ 657,023 $ 657,023
========== ========== ========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF
NONCASH ITEMS:
Accretion of preferred stock to
liquidation value $ 3,584 $ 8,602 $ 70,470 $ 20,236 $ $ 82,656
========== ========== ========== =========== =========== ==========
Conversion of promissory notes and
accrued interest into preferred stock $ 406,900 $ - $ - $ - $ 120,315 $ 406,900
========== ========== ========== =========== =========== ==========
Equipment acquired under capital lease
obligations $ - $ 350,732 $ 221,663 $ 16,797 $ $ 692,710
========== ========== ========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 1,609 $ 27,284 $ 49,378 $ 19,524 $ 27,536 $ 78,271
========== ========== ========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to unaudited Periods)
(1) Organization
Pentose Pharmaceuticals, Inc. (the Company), a Delaware corporation, was
incorporated on June 8, 1995. The Company is a development-stage enterprise
engaged in the development and commercialization of novel small-molecule
drugs for treatment of human viral disease and for the inactivation of
viruses in blood-derived and biological products.
The Company is subject to risks common to companies in the industry
including, but not limited to, development by the Company or its
competitors of new technological innovations, uncertainty of product
development and commercialization, lack of marketing and sales history,
dependence on key personnel, protection of proprietary technology, the
ability to raise additional financing and compliance with the Food and Drug
Administration government regulations.
(2) Summary of Significant Accounting Policies
The accompanying financial statements reflect the application of certain
significant accounting policies, as described in this note and elsewhere in
the accompanying financial statements and notes.
(a) Interim Financial Statements
The accompanying balance sheet as of June 30, 1999, the statements of
operations, cash flows for the six months ended June 30, 1998 and 1999
and for the period from inception (June 8, 1995) to June 30, 1999 and
the statement of redeemable convertible preferred stock and
stockholders' deficit for the six months ended June 30, 1999 are
unaudited, but, in the opinion of management, have been prepared on a
basis substantially consistent with the audited financial statements
and include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results of these
interim periods. The results of the six months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the
entire year.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
F-30
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
(c) Net Loss Per Share
Basic and diluted net loss per common share was determined by dividing
net loss by the weighted average common shares outstanding during the
period. Basic and diluted net loss per share are the same, as common
stock issuable upon the exercise of outstanding common stock options and
warrants and the conversion of redeemable convertible preferred stock
would be antidilutive, as the Company has recorded a net loss for all
periods presented.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of acquisition to be cash
equivalents. Cash equivalents, which include commercial paper and money
market accounts, are stated at cost, which approximates market.
(e) Marketable Securities
Marketable securities include U.S. Treasury notes with original maturity
dates greater than three months and remaining maturity dates of less than
one year. The Company accounts for its investments in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities. In accordance
with SFAS No. 115, the Company has classified its investments as held-to-
maturity. These investments that the Company has the positive intent and
ability to hold to maturity are reported at amortized cost, which
approximates market value.
(f) Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
related assets, as follows:
<TABLE>
<CAPTION>
Estimated
Asset Classification Useful Life
<S> <C>
Laboratory equipment 5-7 years
Office and computer equipment 3-7 years
</TABLE>
Maintenance and repairs are charged to expense as incurred, while major
betterments are capitalized. When assets are retired or otherwise
disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts and any resulting gain or
loss is reflected in income.
F-31
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
(g) Research and Development Contract Revenue
Revenues from research and development agreements and government grants
are recorded as earned over the term of the agreement. Milestone
revenues are recognized upon the attainment of the milestone.
(h) Research and Development Costs
Research and development costs are expensed as incurred.
(i) Income Taxes
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis carrying
amounts of assets and liabilities using current statutory rates. A
valuation reserve against deferred taxes is recorded, based upon
weighted available evidence, if it is more likely than not that some or
all of the deferred tax assets will not be realized.
(j) Concentrations of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of
Credit Risk, requires disclosure of any significant off-balance-sheet
risk and credit risk concentrations. The Company has no significant off-
balance-sheet risk and credit risk concentrations. The Company maintains
its cash, cash equivalents and short-term investments with several
financial institutions and invests in investment-grade securities.
(k) Financial Instruments
The estimated fair values of the Company's consolidated financial
instruments, which include cash equivalents, marketable securities and
accounts payable approximate their carrying value due to the short
maturity of these instruments.
The estimated fair value of the Company's capital lease obligations
approximates its carrying value based upon the current rates offered to
the Company for similar arrangements.
(l) Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires
disclosure of all components of comprehensive income on an annual and
interim basis. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other
events and
F-32
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
circumstances from nonowner sources. The Company does not have any items
of comprehensive income other than net loss.
(3) Redeemable Convertible Preferred Stock
The Company has two series of redeemable, convertible preferred stock
outstanding: Series A, which was issued on August 6, 1996 for $1.00 per
share and Series B, which was issued on July 15, 1998 for $2.97 per share.
As part of the Series A transaction, $400,000 of notes payable plus accrued
interest of $6,900 were converted into 406,900 shares of Series A
redeemable convertible preferred stock.
The rights and preferences of the Series A and B redeemable convertible
preferred stock are as follows:
Conversion
Each share of preferred stock is convertible into one share of common stock
at the option of the holder at any time. The conversion rate is subject to
adjustment for events such as stock splits, stock dividends or stock
issuance.
Automatic conversion is required if at any time the Company shall effect an
initial public offering in which net proceeds are at least $10 million and
the price per share is at least $4.00 per share.
Voting
Each share of Series A and Series B Preferred Stock is entitled to the
number of votes equal to the number of whole shares of common stock into
which each share of Series A and Series B Preferred Stock could be
converted.
Liquidation and Redemption Preferences
In the event of a liquidation, dissolution or winding up of the Company,
the holders of Series A and Series B convertible redeemable preferred
shares are entitled to a liquidation preference over the Company's common
stock. The liquidation preference equals the original issuance price plus
any declared and unpaid dividends. In the event that the amount available
for distribution is not sufficient to pay both the Series A and B
shareholders, the assets will be distributed on a pro rata basis.
On the fifteenth day of July 2003, 2004 and 2005, each holder of Series A
and Series B Preferred Stock shall have the right to require the Company to
redeem up to 33.3%, 50% and 100%, respectively, of the shares of Series A
and Series B Preferred Stock held by each holder on such date, or such
lesser number of shares of Series A and Series B Preferred Stock as the
holder may determine. The per-share redemption price shall be equal to the
original purchase price plus any declared and unpaid dividends. The
Company's obligation to redeem shares of Series A and Series B Preferred
Stock on each respective redemption date shall be waived if the holders of
a majority of the then-outstanding shares of
F-33
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
Series A and Series B Preferred Stock shall request such waiver by written
notice to the Company at least 10 days prior to such redemption date.
Dividends
The Company shall not declare or pay any distributions by dividend or
otherwise, payable other than in common stock, until the holders of the
Series A and Series B Preferred Stock then outstanding shall have first
received, or simultaneously receive, a distribution on each outstanding
share of Series A and Series B Preferred Stock equal to the per share
amount set aside for the common stock multiplied by the number of whole
shares of common stock into which the shares of Series A and Series B
Preferred Stock is then convertible. No dividends were declared in the
fiscal years 1997 and 1998.
(4) Stockholders' Equity
(a) Common Stock
On June 8, 1995, the founders of the Company purchased 4,362,992
shares of the Company's common stock at par in connection with the
Company's formation.
On July 30, 1996, the Company declared a 1.13324464-to-1 split of the
common shares. All share data in these financial statements have been
restated to reflect the split. The number of shares authorized was
amended from 15,000,000 to 9,500,003 in 1996. The number of shares
authorized was amended from 9,500,003 to 12,000,000 in 1998.
During 1996, a total of 466,625 shares were repurchased from one of
the founding stockholders for $467.
Dividends may be declared and paid on common stock shares at the
discretion of the Company's Board of Directors. No dividends have been
declared since the Company's inception on June 8, 1995.
Each share of common stock is entitled to one vote on all matters
voted on by the stockholders of the Company.
(b) Warrants
During 1997, the Company granted warrants for $100 to an equipment
leasing company in connection with its equipment line of credit, to
purchase 25,000 shares of common stock. The exercise price of the
warrants is $1.00 per share and expires on March 31, 2004. The fair
value of the warrants of $100 has been recorded as additional paid-in
capital.
F-34
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
During 1998 and 1999, the Company granted additional warrants to an
equipment leasing company to purchase a total of 3,366 shares of common
stock at $2.97 per share. The warrant for 1,683 shares expires on
September 30, 2005 and the warrant for the remaining shares expires on
March 31, 2006. No amounts were allocated to the warrants as their fair
value was not material.
During 1999, the Company granted warrants to another equipment leasing
company to purchase 25,000 shares of common stock at an exercise price of
$3.00 per share. The warrants expire on April 30, 2004. No amounts were
allocated to the warrants as their fair value was not material.
(c) Stock Option Plan
The Company adopted a stock option plan (the Plan) in 1996. In
accordance with the Plan, incentive stock options (ISO's) and
nonqualified stock options can be granted to qualified individuals by the
Board of Directors of the Company. ISO's are granted to employees of the
Company at not less than fair market value of the shares on the date of
grant, as determined by the Company's Board of Directors, vest over five-
year period, and are exercisable over a period not to exceed 10 years
from the date of the grant. ISO's granted to employees who hold greater
than 10% of the voting power of the outstanding stock shall be granted
options at a price not less than 110% of fair market value of the shares
and the exercise period shall not exceed five years from the date of the
grant. Nonqualified options are granted to employees, directors and
other advisors to the Company on terms set forth by the Board of
Directors on an individual case basis.
During 1997, 97,500 options were granted pursuant to this Plan at an
exercise price of $0.10, subject to accelerated vesting based upon the
achievement of goals set forth by the Company. These options become
fully vested at various periods from the grant date or immediately upon
achievement by the Company of such goals, and expire 10 years from the
grant date. There was no compensation charge related to these options
for the years ended December 31, 1998 and 1997. As of June 30, 1999,
there are 21,172 shares available for future grant under the Plan.
F-35
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
A summary of option activity for the years ended December 31, 1997 and
1998 and for the six months ended June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted-
Exercise Average
Number of Price Per Exercise
Options Option Price
<S> <C> <C> <C>
Outstanding at December 31, 1996 45,328 $ 0.01 $ 0.01
Granted 315,000 0.10 0.10
-------
Outstanding at December 31, 1997 360,328 0.01-0.10 0.09
Granted 363,000 0.10-0.30 0.29
-------
Outstanding at December 31, 1998 723,328 0.01-0.30 0.19
Granted 310,000 0.30 0.30
Canceled (54,500) 0.10-0.30 0.29
------- ----------- ------
Outstanding at June 30, 1999 978,828 $ 0.01-0.30 $ 0.22
======= =========== ======
Exercisable at June 30, 1999 495,596 $ 0.01-0.30 $ 0.19
======= =========== ======
</TABLE>
The following table represents weighted-average price and life
information about significant option groups outstanding and exercisable
at June 30, 1999:
-----------Options Outstanding-----------
<TABLE>
<CAPTION>
Weighted-Average
Range of Remaining
Exercise Number Number Contractual
Prices Outstanding Exercisable Life
<S> <C> <C> <C> <C>
$ 0.01 45,328 33,996 6.9 years
0.10 328,000 174,100 8.4 years
0.30 605,500 287,500 9.42 years
------- -------
978,828 495,596
======= =======
</TABLE>
F-36
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
(d) Pro Forma Disclosures of Stock-Based Compensation
The Company adopted the disclosure provision of SFAS No. 123, Accounting
for Stock-Based Compensation, and has applied APB Opinion 25 and related
interpretations in accounting for the Plan. Had compensation cost for
the Company's stock-based compensation plan been determined based on the
fair value of the grant dates as calculated in accordance with SFAS No.
123, the Company's net loss for the years ended December 31, 1997 and
1998, and for the six months ended June 30, 1998 and 1999 would have been
as follows:
<TABLE>
<CAPTION>
---------------------December 31,--------------------- -------------June 30,--------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Net Loss:
Reported $ (279,234) $ (2,033,249) $ (3,945,035) $ (1,701,057) $ (2,455,624)
Pro forma (279,234) (2,033,532) (3,949,720) (1,702,321) (2,461,132)
Basic and Diluted Net Loss Per Share:
Reported $ (.07) $ (.52) $ (1.01) $ (.44) $ (.63)
Pro forma (.07) (.52) (1.01) (.44) (.63)
</TABLE>
The fair value of each option granted during 1997, 1998 and 1999 was
estimated on the date of grant using the Black-Scholes option pricing
model using the following weighted average assumptions:
<TABLE>
<CAPTION>
----------December 31,----------- --------June 30,---------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Expected life 7 years 5 years 5 years 5 years 5 years
Expected volatility - - - - -
Risk-free interest 6.78% 5.79% 5.42%-5.63% 5.42%-5.63% 4.57%-5.89%
rate
Dividend yield - - - - -
</TABLE>
The weighted-average grant-date fair value of options granted during the
years ended December 31, 1996, 1997 and 1998, and for the six months
ended June 30, 1998 and 1999, is $0.00, $0.03, $0.07, $0.06 and $0.07,
respectively.
F-37
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
(5) Income Taxes
At December 31, 1997 and 1998, the significant components of the deferred
tax assets and liabilities include the Company's net operating loss, and
timing differences arising from organizational and startup costs. At
December 31, 1997 and 1998, the Company recorded a full valuation allowance
against net deferred tax assets of approximately $940,000 and $2,822,000,
respectively, to reflect management's uncertainty that the benefit from
these assets will be recognized in future years.
As of December 31, 1997 and 1998, the Company has net operating loss
carryforwards of approximately $2,100,000 and $6,183,000, respectively,
which expire through 2018 for federal income tax purposes. Changes in the
Company's ownership, defined in the Internal Revenue Code, may limit the
Company's ability to utilize net operating loss and tax credit
carryforwards.
(6) Commitments
(a) Leases
The Company leases its facility under a noncancelable operating lease
which expires on March 31, 2000. A security deposit of $150,000 to be
applied toward rental payments in the final months of the lease term
has been made and is classified as a deposit on the balance sheet.
Future minimum lease payments for the respective years ending December
31, are as follows:
<TABLE>
<S> <C>
1999 $130,000
2000 32,500
--------
Total $162,500
========
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and
for the six months ended June 30, 1998 and 1999 was approximately $0,
$98,000, $141,000, $76,000 and $70,000, respectively.
The Company has recorded long-term capital lease obligations for
certain equipment leased under a $700,000 equipment line of credit.
The cost of this equipment included in fixed assets was $350,732,
$426,766 and $621,267 at December 31, 1997 and 1998 and June 30, 1999,
respectively, with an associated accumulated amortization of $47,055,
$145,539 and $205,380, respectively. The Company has an option to
purchase all of the leased equipment for the fair market value of the
equipment at the end of the lease. Interest expense was approximately
$6,000, $27,000, $49,000, $20,000 and $28,000 for the years ended
December 31, 1996, 1997, 1998 and for the six months ended June 30,
1998 and 1999, respectively.
Borrowings are payable over a 24- to 42-month period and bear interest
at 12.6%. Borrowings under the equipment line of credit are
collateralized by the equipment acquired.
F-38
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
Future lease payments are as follows:
<TABLE>
<S> <C>
1999 $180,991
2000 179,291
2001 176,584
2002 80,391
2003 1,347
--------
Total minimum lease payment 618,604
Less--Amount representing interest 146,419
--------
Present value of minimum lease payments 472,185
Less--Current portion 127,062
--------
Long-term obligation $345,123
========
</TABLE>
(b) Other
The Company has entered into agreements under which it has committed
to make certain royalty payments based on future sales and to pay
yearly fees for licensing, consulting and research services. As of
December 31, 1998, the future annual commitment for 1999 and 2000 is
$100,000 and $50,000, respectively, in addition to royalty payments
and certain other payments to be made upon the achievement of specific
milestones.
(7) Corporate Collaborations
In October 1998, the Company and V.I. Technologies, Inc. (Vitex) entered
into an option, development, manufacture and license agreement relating to
the Company's proprietary Inactine technology. Upon execution of the
agreement, the Company received a nonrefundable payment of $250,000 for
granting Vitex the exclusive right to evaluate and consider licensing the
technology. This payment was recorded as revenue in the accompanying
statement of operations. In 1999, Vitex paid an additional option fee of
$250,000. Vitex has until October 1999 to determine if they are going to
license the technology.
During 1998, the Company also received a nonrefundable payment of $75,000
from another Company to provide evaluation materials. This payment was
recorded as revenue in the accompanying statement of operations. This
agreement expired during 1998.
During 1998, the Company also recorded revenue of $99,500 relating to a
government research project grant.
During 1999, the Company received a nonrefundable payment of $50,000 from
another company to license the Company's proprietary Inactine technology.
F-39
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
(8) Employee Benefit Plan
The Company instituted a 401(k) savings plan in 1997 pursuant to which
employees may defer compensation for income tax purposes under Section
401(k) of the Internal Revenue Code. Substantially all of the Company's
employees are eligible to participate in this plan. Participants may
contribute up to 15% of their annual compensation to the plan, subject to
certain limitations. The Company matches a discretionary amount as
determined by the Board of Directors. The Company contributed $0, $2,919,
$8,704, $0 and $8,449 to this plan during the years ended December 31,
1996, 1997 and 1998, and during the six months ended June 30, 1998 and
1999, respectively.
(9) Accrued Expenses
Accrued expenses in the accompanying balance sheets consist of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998 1999
<S> <C> <C> <C>
Compensation $56,886 $179,700 $ -
Other 34,244 65,138 67,235
------- -------- -------
$91,130 $244,838 $67,235
======= ======== =======
</TABLE>
(10) Spinoff of Pentose Development Corporation
In April 1999, Pentose Development Corporation (PDC) was incorporated as a
wholly owned subsidiary of the Company. In June 1999, the Company
transferred its existing technology and know-how relating to its Paprine
program to PDC. Subsequent to this transfer, the Company distributed the
stock of PDC to its shareholders based on these respective ownership
interests. There was no accounting relating to these transfers and the
carrying value of the assets transferred was zero.
In addition, the Company and PDC have entered into a services agreement
whereby the Company will perform research and other services on behalf of
PDC for a fee. During the six months ended June 30, 1999, the Company
billed PDC approximately $70,000 for these services.
F-40
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
Notes to Financial Statements
(Including Data Applicable to Unaudited Periods)
(Continued)
(8) Employee Benefit Plan
The Company instituted a 401(k) savings plan in 1997 pursuant to which
employees may defer compensation for income tax purposes under Section
401(k) of the Internal Revenue Code. Substantially all of the Company's
employees are eligible to participate in this plan. Participants may
contribute up to 15% of their annual compensation to the plan, subject to
certain limitations. The Company matches a discretionary amount as
determined by the Board of Directors. The Company contributed $0, $2,919,
$8,704, $0 and $8,449 to this plan during the years ended December 31,
1996, 1997 and 1998, and during the six months ended June 30, 1998 and
1999, respectively.
(9) Accrued Expenses
Accrued expenses in the accompanying balance sheets consist of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998 1999
<S> <C> <C> <C>
Compensation $56,886 $179,700 $ -
Other 34,244 65,138 67,235
------- -------- -------
$91,130 $244,838 $67,235
======= ======== =======
</TABLE>
(10) Spinoff of Pentose Development Corporation
In April 1999, Pentose Development Corporation (PDC) was incorporated as a
wholly owned subsidiary of the Company. In June 1999, the Company
transferred its existing technology and know-how relating to its Paprine
program to PDC. Subsequent to this transfer, the Company distributed the
stock of PDC to its shareholders based on these respective ownership
interests. There was no accounting relating to these transfers and the
carrying value of the assets transferred was zero.
In addition, the Company and PDC have entered into a services agreement
whereby the Company will perform research and other services on behalf of
PDC for a fee. During the six months ended June 30, 1999, the Company
billed PDC approximately $70,000 for these services.
(11) Subsequent Event
On September 3, 1999, a complaint was filed naming Pentose as a defendant
in a legal action. The complaint named Edward I. Budowsky - a founder of,
consultant to and stockholder of Pentose - as a co-defendant. The
plaintiffs are an individual who entered into an Exclusive License
Agreement dated as of August 1997 in which Pentose was granted a license to
certain "Papirine" compounds (the "Licensor"), and his spouse. The
complaint alleges, among other things, that (1) the Licensor's spouse
holds rights to the Papirine technology which rights have not been licensed
to Pentose, and (2) that the Licensor signed the 1997 Exclusive License
Agreement and an agreement granting him certain rights to Pentose stock
held by Dr. Budowsky in reliance on false representations by Pentose and
Dr. Budowsky. Dr Budowsky had also previously licensed his interest in the
Papirine technology to Pentose. The complaint seeks damages in an amount to
be determined at trial, attorneys fees, treble damages under the
Massachusetts statute, reformation of an agreement among Pentose, the
Licensor and Dr. Budowsky granting the Licensor rights to Pentose stock and
other relief. Pentose believes that the claims of the Licensor and his
spouse are without merit and intends to defend this action vigorously.
Pentose does not believe that this action will have a material adverse
effect on Pentose's or the Surviving Corporation's financial condition or
results of operations. Because this action is in the initial stage and
discovery is just beginning, Pentose cannot assure that it will be
successful in defending this lawsuit. PDC as agreed, subject to the
negotiation and execution of definitive documents, to:
. indemnify Pentose and, following the merger, Vitex, against any
liabilities resulting from this lawsuit to the extent such
liabilities exceed $100,000;
. to maintain cash assets in an amount of not less than $1.5 million
until September 1, 2000 to support its indemnification obligation;
and
. release any claims against Pentose in connection with the litigation
or the transfer of Papirine technology.
F-41
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
V.I. TECHNOLOGIES, INC.
AND
PENTOSE PHARMACEUTICALS, INC. ("PENTOSE")
AND
CERTAIN
STOCKHOLDERS
OF
PENTOSE
Dated as of July 28, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I THE MERGER................................................................ 2
SECTION 1.01. THE MERGER....................................................... 2
SECTION 1.02. EFFECTIVE TIME................................................... 2
SECTION 1.03. EFFECT OF THE MERGER............................................. 2
SECTION 1.04. CERTIFICATE OF INCORPORATION; BY-LAWS............................ 2
SECTION 1.05. DIRECTORS AND OFFICERS........................................... 3
SECTION 1.06. EFFECT ON CAPITAL STOCK.......................................... 3
SECTION 1.07. EXCHANGE OF CERTIFICATES......................................... 4
SECTION 1.08. STOCK TRANSFER BOOKS............................................. 5
SECTION 1.09. NO FURTHER OWNERSHIP RIGHTS IN PENTOSE COMMON STOCK.............. 5
SECTION 1.10. LOST, STOLEN OR DESTROYED CERTIFICATES........................... 5
SECTION 1.11. TAX CONSEQUENCES................................................. 6
SECTION 1.12. TAKING OF NECESSARY ACTION; FURTHER ACTION....................... 6
SECTION 1.13. MATERIAL ADVERSE EFFECT.......................................... 6
SECTION 1.14. DISSENTERS' RIGHTS............................................... 6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF PENTOSE................................ 6
SECTION 2.01. ORGANIZATION OF PENTOSE.......................................... 6
SECTION 2.02. CAPITAL STRUCTURE................................................ 7
SECTION 2.03. OBLIGATIONS WITH RESPECT TO CAPITAL STOCK........................ 7
SECTION 2.04. AUTHORITY........................................................ 8
SECTION 2.05. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW NOT
APPLICABLE... 9
SECTION 2.06. PENTOSE FINANCIAL STATEMENTS..................................... 9
SECTION 2.07. ABSENCE OF CERTAIN CHANGES OR EVENTS............................. 9
SECTION 2.08. TAXES............................................................ 9
SECTION 2.09. INTELLECTUAL PROPERTY............................................ 10
SECTION 2.10. COMPLIANCE; PERMITS; RESTRICTIONS................................ 11
SECTION 2.11. LITIGATION....................................................... 11
SECTION 2.12. BROKERS' AND FINDERS' FEES....................................... 11
SECTION 2.13. EMPLOYEE BENEFIT PLANS........................................... 11
SECTION 2.14. ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION OF EQUIPMENT........ 12
SECTION 2.15. ENVIRONMENTAL MATTERS............................................ 12
SECTION 2.16. LABOR MATTERS.................................................... 13
SECTION 2.17. AGREEMENTS, CONTRACTS AND COMMITMENTS............................ 13
SECTION 2.18. CHANGE OF CONTROL PAYMENTS....................................... 14
SECTION 2.19. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS............... 14
SECTION 2.20. BOARD APPROVAL................................................... 15
SECTION 2.21. MINUTE BOOKS..................................................... 15
ARTICLE III REPRESENTATIONS AND WARRANTIES OF VITEX................................. 15
SECTION 3.01. ORGANIZATION OF VITEX............................................ 15
SECTION 3.02. VITEX CAPITAL STRUCTURE.......................................... 15
SECTION 3.03. OBLIGATIONS WITH RESPECT TO CAPITAL STOCK........................ 16
SECTION 3.04. AUTHORITY........................................................ 16
SECTION 3.05. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW NOT
APPLICABLE.... 17
SECTION 3.06. SEC FILINGS; VITEX FINANCIAL STATEMENTS.......................... 17
SECTION 3.07. ABSENCE OF CERTAIN CHANGES OR EVENTS............................. 18
SECTION 3.08. BROKERS' AND FINDERS' FEES....................................... 18
SECTION 3.09. BOARD APPROVAL................................................... 18
SECTION 3.10. TAX MATTERS...................................................... 18
</TABLE>
A-i
<PAGE>
<TABLE>
<S> <C>
SECTION 3.11. INTELLECTUAL PROPERTY............................................ 18
SECTION 3.12. FULL DISCLOSURE.................................................. 19
SECTION 3.13. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS............... 19
ARTICLE IV CONDUCT OF BUSINESS PENDING THE MERGER................................... 20
SECTION 4.01. CONDUCT OF BUSINESS BY PENTOSE................................... 20
SECTION 4.02. NO SOLICITATION BY PENTOSE....................................... 22
SECTION 4.03. CONDUCT OF BUSINESS BY VITEX..................................... 23
ARTICLE V ADDITIONAL AGREEMENTS..................................................... 24
SECTION 5.01. PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT;
OTHER............. 24
SECTION 5.02. MEETINGS OF STOCKHOLDERS......................................... 24
SECTION 5.03. ACCESS TO INFORMATION; CONFIDENTIALITY........................... 25
SECTION 5.04. CONSENTS; APPROVALS.............................................. 25
SECTION 5.05. STOCK OPTIONS AND WARRANTS....................................... 26
SECTION 5.06. PENTOSE AFFILIATE AGREEMENT...................................... 26
SECTION 5.07. LOCK-UP AGREEMENT................................................ 26
SECTION 5.08. INDEMNIFICATION BY SURVIVING CORPORATION AND INSURANCE........... 27
SECTION 5.09. NOTIFICATION OF CERTAIN MATTERS.................................. 28
SECTION 5.10. FURTHER ACTION/TAX TREATMENT..................................... 28
SECTION 5.11. PUBLIC ANNOUNCEMENTS............................................. 28
SECTION 5.12. LISTING OF VITEX COMMON STOCK.................................... 28
SECTION 5.13. CONVEYANCE TAXES................................................. 28
SECTION 5.14. ACCOUNTANTS' LETTERS............................................. 29
SECTION 5.15. THIRD PARTY CONSENTS............................................. 29
SECTION 5.16. TAX-FREE REORGANIZATION.......................................... 29
SECTION 5.17. BOARD OF DIRECTORS OF VITEX...................................... 29
SECTION 5.18. OFFICERS OF VITEX AND OPERATION OF PENTOSE BUSINESS.............. 29
SECTION 5.19. FORM S-8......................................................... 29
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS....................... 30
SECTION 6.01 TITLE; ABSENCE OF CERTAIN AGREEMENTS............................. 30
SECTION 6.02 ORGANIZATION, GOOD STANDING AND POWER............................ 30
SECTION 6.03 AUTHORITY - GENERAL.............................................. 30
SECTION 6.04 BROKERS.......................................................... 30
SECTION 6.05 ACCURACY OF REPRESENTATIONS AND WARRANTIES OF PENTOSE............ 31
ARTICLE VII CONDITIONS TO THE MERGER................................................ 31
SECTION 7.01. CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER...... 31
SECTION 7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF VITEX.................... 32
SECTION 7.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF PENTOSE.................. 33
ARTICLE VIII TERMINATION............................................................ 34
SECTION 8.01. TERMINATION...................................................... 34
SECTION 8.02. NOTICE OF TERMINATION; EFFECT OF TERMINATION..................... 35
SECTION 8.03. FEES AND EXPENSES................................................ 35
ARTICLE IX INDEMNIFICATION.......................................................... 36
SECTION 9.01 DEFINITIONS...................................................... 36
SECTION 9.02. INDEMNIFICATION GENERALLY........................................ 37
SECTION 9.03. LIMITATIONS ON INDEMNIFICATION................................... 37
SECTION 9.04. ASSERTION OF CLAIMS.............................................. 38
SECTION 9.05. NOTICE AND DEFENSE OF THIRD PARTY CLAIMS......................... 38
SECTION 9.06. SURVIVAL OF REPRESENTATIONS AND WARRANTIES....................... 39
ARTICLE X GENERAL PROVISIONS........................................................ 39
SECTION 10.01. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS.......... 39
SECTION 10.02. NOTICES......................................................... 39
</TABLE>
A-ii
<PAGE>
<TABLE>
<S> <C>
SECTION 10.03. CERTAIN DEFINITIONS............................................. 40
SECTION 10.04. AMENDMENT....................................................... 41
SECTION 10.05. WAIVER.......................................................... 41
SECTION 10.06. HEADINGS........................................................ 41
SECTION 10.07. SEVERABILITY.................................................... 41
SECTION 10.08. ENTIRE AGREEMENT................................................ 41
SECTION 10.09. ASSIGNMENT...................................................... 41
SECTION 10.10. PARTIES IN INTEREST............................................. 42
SECTION 10.11. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE........... 42
SECTION 10.12. GOVERNING LAW................................................... 42
SECTION 10.13. COUNTERPARTS.................................................... 42
</TABLE>
SCHEDULES
- ---------
<TABLE>
<CAPTION>
<S> <C>
Schedule 1 Certain Pentose Stockholders
Pentose Disclosure Schedule
Section 2.02 List of outstanding options and warrants
Section 2.04 List of material consents, waivers and approvals for authority
Section 2.09 Pentose Intellectual Property rights
Section 2.11 Notice of Litigation
Section 2.17 Agreements, contracts and commitments
Section 2.18 Change of control payments
Article IV Exceptions to restrictions on conduct of business
Section 4.02 Exceptions to no solicitation by Pentose
Section 5.06 Identification of "affiliates" of Pentose
Vitex Disclosure Schedule
Section 3.04 List of material consents, waivers and approvals for authority
Section 3.11 Vitex Intellectual Property rights
Article IV Exceptions to restrictions on conduct of business
</TABLE>
EXHIBITS
- --------
Exhibit A-1 Pentose Affiliate Agreement
Exhibit A-2 Pentose Shareholder Affiliate Agreement
Index of Defined Terms
<TABLE>
<CAPTION>
<S> <C>
Adopted Employee Stock Option Plan............................ 5.05(a)
Affiliate..................................................... 9.1(a)
affiliates.................................................... 10.03(a)
Agreement..................................................... Preamble
Alternative Transaction....................................... 8.03(d)
</TABLE>
A-iii
<PAGE>
<TABLE>
<S> <C>
Ampersand....................................................... 5.07
business combination............................................ 2.05, 3.05
business day.................................................... 10.03(b)
Certificate of Merger........................................... 1.02
Code............................................................ Recitals
Company Returns................................................. 2.08
Confidentiality Agreement....................................... 5.03(a)
consenting corporation.......................................... 2.08
Delaware Law.................................................... Recitals
Effective Time.................................................. 1.02
employee benefit plan........................................... 2.13(a)
Encumbrance..................................................... 6.01
ERISA Affiliate................................................. 2.13(a)
Event of Indemnification........................................ 9.1(b)
Exchange Act.................................................... 2.04(b)
Exchange Ratio.................................................. 1.06(a)
Former Pentose Director......................................... 5.17
Former Vitex Directors.......................................... 5.17
Fraud Claim..................................................... 9.1(b)
GAAP............................................................ 2.06
Governmental Entity............................................. 2.04(b)
Hazardous Material.............................................. 2.15(a)
Hazardous Material Activities................................... 2.15(b)
incentive stock option.......................................... 2.08
Indemnified Parties............................................. 5.08(b)
Indemnified Persons............................................. 9.1(c)
Indemnifying Persons............................................ 9.1(d)
Injunction...................................................... 7.01(c)
ISO............................................................. 5.05(b)
Losses.......................................................... 9.1(e)
Material Adverse Effect......................................... 1.13
Merger.......................................................... Recitals
Merger Consideration............................................ 1.07(b)
</TABLE>
A-iv
<PAGE>
<TABLE>
<S> <C>
Nasdaq................................................... 1.06(f)
Other Filings............................................ 5.01
person................................................... 10.03(c)
personal holding company................................. 2.08
plan of reorganization................................... 1.11
Proxy Statement.......................................... 2.19
Pentose.................................................. Preamble
Pentose Acquisition Proposal............................. 4.02
Pentose Affiliate........................................ 5.06
Pentose Affiliate Agreement.............................. 5.06
Pentose Balance Sheet.................................... 2.06
Pentose Common Stock..................................... Recitals
Pentose Contract......................................... 2.17 (l)
Pentose Disclosure Schedule.............................. Article II Preamble
Pentose Employee Plans................................... 2.13(a)
Pentose Environmental Permits............................ 2.15(c)
Pentose Financials....................................... 2.06
Pentose IP Rights........................................ 2.09(a)
Pentose IP Rights Agreements............................. 2.09(b)
Pentose Option........................................... 5.05(a)
Pentose Permits.......................................... 2.10(b)
Pentose Shareholder Agreement............................ 5.07
Pentose Stock Option Plan................................ 1.06(c)
Pentose Stockholders' Meeting............................ 2.19
Registration Statement................................... 2.04(b)
SEC...................................................... 2.04(b)
Securities Act........................................... 2.04(b)
Series A and Series B Preferred Stock.................... Recitals
Shares................................................... 1.06(a)
Stockholders............................................. Preamble
subsidiary............................................... 10.03(d)
Survival Date............................................ 9.5
Surviving Corporation.................................... 1.01(a)
</TABLE>
A-v
<PAGE>
<TABLE>
<S> <C>
Tax..................................................... 2.08
Taxes................................................... 2.08
Terminating Breach...................................... 8.01(f)
Third Party............................................. 8.03(d)
Third Party Claim....................................... 9.4
transferee.............................................. 2.08
Vitex................................................... Preamble
Vitex Balance Sheet..................................... 3.06(b)
Vitex Common Stock...................................... 1.06(a)
Vitex Disclosure Schedule............................... Article III Preamble
Vitex Employee Stock Purchase Plan...................... 3.02
Vitex Financials........................................ 3.06(b)
Vitex IP Rights......................................... 3.11(a)
Vitex IP Rights Agreements.............................. 3.11(b)
Vitex SEC Reports....................................... 3.06(a)
Vitex Stock Option Plans................................ 3.02
Vitex Stockholders' Meeting............................. 2.19
Warrants................................................ 1.06(d)
</TABLE>
A-vi
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, (the "Agreement") is
made as of July 28, 1999, by and among V.I. Technologies, Inc., a Delaware
corporation ("Vitex"), Pentose Pharmaceuticals, Inc., a Delaware corporation
("Pentose") and the stockholders of Pentose listed on Schedule 1 hereto (the
"Stockholders").
RECITALS:
WHEREAS, the Boards of Directors of Vitex and Pentose have each determined
that it is advisable and in the best interests of their respective stockholders
for Vitex to enter into a business combination with Pentose upon the terms and
subject to the conditions set forth herein;
WHEREAS, in furtherance of such combination, the Boards of Directors of
Vitex and Pentose have each approved the merger (the "Merger") of Pentose with
and into Vitex in accordance with the applicable provisions of the Delaware
General Corporation Law ("Delaware Law"), and upon the terms and subject to the
conditions set forth herein;
WHEREAS, pursuant to the Merger, each outstanding share of Pentose's common
stock, $.00l par value per share (the "Pentose Common Stock"), on a fully
converted basis, assuming conversion on a one-for-one basis of all issued and
outstanding shares of Series A and Series B Convertible Preferred Stock, both
$.001 par value per share ("Pentose Preferred Stock") shall be converted into
the right to receive the Merger Consideration (as defined in Section 1.07(b)),
upon the terms and subject to the conditions set forth herein;
WHEREAS, Vitex and Pentose intend, by approving resolutions authorizing
this Agreement, to adopt this Agreement as a plan of reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations thereunder, and to cause the Merger to qualify as a
reorganization under the provisions of Section 368(a) of the Code; and
WHEREAS, Vitex, Pentose and the Stockholders desire to make certain
representations and warranties and other agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, Vitex, Pentose and the Stockholders hereby
agree as follows:
A-1
<PAGE>
ARTICLE I
THE MERGER
SECTION 1.01. THE MERGER.
(a) Effective Time. At the Effective Time (as defined in Section 1.02),
and subject to and upon the terms and conditions of this Agreement and Delaware
Law, Pentose shall be merged with and into Vitex, the separate corporate
existence of Pentose shall cease, and Vitex shall continue as the surviving
corporation. Vitex as the surviving corporation after the Merger is hereinafter
sometimes referred to as the "Surviving Corporation." The business of Vitex
within the Surviving Corporation will be managed as set forth in Section 5.18
immediately after the Effective Time.
(b) Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
8.01 and subject to the satisfaction or waiver of the conditions set forth in
Article VI, the consummation of the Merger will take place as promptly as
practicable (and in any event within two business days) after satisfaction or
waiver of the conditions set forth in Article VI, at the offices of Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial Center, Boston,
Massachusetts 02111, unless another date, time or place is agreed to in writing
by the parties hereto.
SECTION 1.02. EFFECTIVE TIME. As promptly as practicable after the
satisfaction or waiver of the conditions set forth in Article VI, the parties
hereto shall cause the Merger to be consummated by filing a Certificate of
Merger in accordance with the relevant provisions of Delaware Law (the
"Certificate of Merger"), together with any required related certificates, with
the Secretary of State of the State of Delaware, in such form as required by,
and executed in accordance with the relevant provisions of, Delaware Law (the
time of such filing being the "Effective Time").
SECTION 1.03. EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchises of Pentose shall vest in the Surviving
Corporation, and all debts, liabilities, obligations and duties of Pentose shall
become the debts, liabilities, obligations and duties of the Surviving
Corporation.
SECTION 1.04. CERTIFICATE OF INCORPORATION; BY-LAWS.
(a) Certificate of Incorporation. The Certificate of Incorporation of
Vitex, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation;
provided, however, that the Certificate of Incorporation of the Surviving
Corporation shall be amended as of the Effective Time to increase the number of
authorized shares of capital stock of the Surviving Corporation.
(b) By-Laws. The By-Laws of Vitex, as in effect immediately prior to the
Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by Delaware Law, the Certificate of Incorporation
of the Surviving Corporation and such By-Laws.
A-2
<PAGE>
SECTION 1.05. DIRECTORS AND OFFICERS. The directors of Vitex immediately prior
to the Effective Time, together with Dr. Samuel K. Ackerman, shall be the
initial directors of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and By-Laws of the Surviving
Corporation, and the officers of Vitex immediately prior to the Effective Time
shall be the initial officers of the Surviving Corporation, in each case until
their respective successors are duly elected or appointed and qualified, except
as otherwise provided in Section 5.18.
SECTION 1.06. EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of
the Merger and without any action on the part of Vitex, Pentose or the holders
of any of the following securities:
(a) Conversion of Securities. Each share of Pentose Common Stock and of
Pentose Preferred Stock (the "Shares") issued and outstanding immediately prior
to the Effective Time (excluding any shares to be canceled pursuant to Section
1.06(b)) shall be converted, subject to Section 1.06(e), into the right to
receive a percentage of a share (the "Exchange Ratio") of validly issued, fully
paid and nonassessable common stock of Vitex, $.0l par value per share ("Vitex
Common Stock") equal to the quotient of (i) the number of shares as will equal
thirty-four percent (34%) of the issued and outstanding shares of Vitex Common
Stock as of the Effective Time (giving effect to the issuance of shares of such
stock pursuant to this Section 1.06(a)) divided by (ii) the number of issued and
outstanding Shares as of the Effective Time. For example, on the basis of the
number of shares of Vitex Common Stock and Shares currently issued and
outstanding the calculation of the Exchange Ratio would be as follows:
Exchange Ratio = x = .5963
-------------
10,753,773
where x = .34 (12,447,791+ x)
x = 6,413,176
All calculations pursuant to this Agreement shall be rounded to the nearest
one-ten thousandth (.0001)
(b) Cancellation. Each Share held in the treasury of Pentose and each
Share owned by Vitex or by any direct or indirect wholly owned subsidiary of
Vitex immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, cease to be outstanding,
be canceled and retired without payment of any consideration therefor and cease
to exist.
(c) Stock Option Plan. All options to purchase Pentose Common Stock then
outstanding under Pentose's 1996 Stock Option Plan (the "Pentose Stock Option
Plan") shall be assumed by Vitex in accordance with Section 5.05.
(d) Warrants. All warrants to purchase Pentose Common Stock (the
"Warrants") then outstanding shall be assumed by Vitex in accordance with
Section 5.05.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect fully the effect of any stock split, reverse split, stock dividend
(including any dividend or distribution of securities convertible into Vitex
Common Stock or Pentose Common Stock), reorganization,
A-3
<PAGE>
recapitalization or other like change with respect to Vitex Common Stock or
Pentose Common Stock occurring after the date hereof and prior to the Effective
Time.
(f) Fractional Shares. No fraction of a share of Vitex Common Stock will
be issued, but in lieu thereof each holder of Pentose Common Stock who would
otherwise be entitled to a fraction of a share of Vitex Common Stock (after
aggregating all fractional shares of Vitex Common Stock to be received by such
holder) shall receive from Vitex an amount of cash (rounded up to the nearest
whole cent), without interest, equal to the product of (i) such fraction,
multiplied by (ii) the average closing price of a share of Vitex Common Stock
for the ten (10) most recent days that Vitex Common Stock has traded ending on
the second trading day immediately prior to the Effective Time, as reported on
the Nasdaq Stock Market ("Nasdaq") as reported in the Wall Street Journal.
SECTION 1.07. EXCHANGE OF CERTIFICATES.
(a) Certificates. Vitex shall supply, or shall cause to be supplied, to or
for the account of the holders of the Shares, for exchange in accordance with
this Section 1.07, certificates evidencing the Vitex Common Stock issuable
pursuant to Section 1.06 in exchange for outstanding Shares.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, Vitex will have certificates available for exchange as set forth
in Section (a) hereof. Upon surrender of a certificate representing Shares (a
"Certificate") for cancellation to Vitex, together with a letter of transmittal
in the form provided by Vitex, duly executed, and such other customary documents
as may be required pursuant to such instructions, the holder of such Certificate
shall be entitled to receive in exchange therefor (A) certificates evidencing
that number of whole shares of Vitex Common Stock which such holder has the
right to receive in accordance with the Exchange Ratio in respect of the Shares
formerly evidenced by such Certificate, (B) any dividends or other distributions
to which such holder is entitled pursuant to Section 1.07(c), and (C) cash in
lieu of fractional shares of Vitex Common Stock to which such holder is entitled
pursuant to Section 1.06(f) (the Vitex Common Stock, dividends, distributions
and cash described in this clause (C) being, collectively, the "Merger
Consideration"), and the Certificate so surrendered shall forthwith be canceled.
In the event of a transfer of ownership of Shares which is not registered in the
transfer records of Pentose as of the Effective Time, Vitex Common Stock and
cash may be issued and paid in accordance with this Article I to a transferee if
the Certificate evidencing such Shares is presented to Vitex, accompanied by all
documents required to evidence and effect such transfer pursuant to this Section
1.07(b) and by evidence that any applicable stock transfer taxes have been paid.
Until so surrendered, each outstanding Certificate that, prior to the Effective
Time, represented Shares will be deemed from and after the Effective Time, for
all corporate purposes, other than the payment of dividends, to evidence the
right to receive the number of full shares of Vitex Common Stock into which such
Shares shall have been so converted and the right to receive an amount in cash
in lieu of the issuance of any fractional shares in accordance with Section
1.06.
(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time, with respect to Vitex
Common Stock with a record date after the Effective Time, shall be paid to the
holder of any unsurrendered Certificate until the holder of such Certificate
shall surrender such Certificate. Subject to applicable law, following surrender
of any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Vitex Common Stock issued in exchange
therefor, without interest, at
A-4
<PAGE>
the time of such surrender, the amount of dividends or other distributions with
a record date after the Effective Time theretofore paid with respect to such
whole shares of Vitex Common Stock.
(d) Transfers of Ownership. If any certificate for shares of Vitex Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed,
signature guaranteed and otherwise in proper form for transfer and that the
person requesting such exchange will have paid to Vitex or any person designated
by it any transfer or other taxes required by reason of the issuance of a
certificate for shares of Vitex Common Stock in any name other than that of the
registered holder of the certificate surrendered, or established to the
satisfaction of Vitex or any agent designated by it that such tax has been paid
or is not payable.
(e) No Liability. Notwithstanding anything to the contrary in this Section
1.07, neither Vitex nor Pentose shall be liable to any holder of Pentose Common
Stock or Vitex Common Stock for any Merger Consideration (or dividends or
distributions with respect thereto) delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
(f) Withholding Rights. The Surviving Corporation shall be entitled to
deduct and withhold from the Merger Consideration otherwise payable pursuant to
this Agreement to any holder of Shares, such amounts as the Surviving
Corporation is required to deduct and withhold with respect to the making of
such payment under the Internal Revenue Code of 1986, as amended (the "Code"),
or any provision of state, local, provincial or foreign tax law. To the extent
that amounts are so withheld, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the Shares in
respect of which such deduction and withholding was made by the Surviving
Corporation.
SECTION 1.08. STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer
books of Pentose shall be closed, and there shall be no further registration of
transfers of Pentose Common Stock thereafter on the records of Pentose.
SECTION 1.09. NO FURTHER OWNERSHIP RIGHTS IN PENTOSE COMMON STOCK. The Merger
Consideration delivered upon the surrender for exchange of Shares in accordance
with the terms hereof shall be deemed to have been issued in full satisfaction
of all rights pertaining to such Shares, and there shall be no further
registration of transfers on the records of the Surviving Corporation of Shares
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
SECTION 1.10. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
Certificates shall have been lost, stolen or destroyed, Vitex shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Vitex Common Stock
as may be required pursuant to Section 1.06; provided, however, that Vitex may,
in its sole discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificates to deliver a
bond in such sum as it may reasonably direct as indemnity against any claim that
may be made against Vitex or with respect to the Certificates alleged to have
been lost, stolen or destroyed.
A-5
<PAGE>
SECTION 1.11. TAX CONSEQUENCES. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code. The parties hereto hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
SECTION 1.12. TAKING OF NECESSARY ACTION; FURTHER ACTION. Each of Vitex and
Pentose in good faith will take all such commercially reasonable and lawful
action as may be necessary or appropriate in order to effectuate the Merger in
accordance with this Agreement as promptly as possible. If, at any time after
the Effective Time, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of Pentose, the officers and directors of Pentose are
fully authorized in the name of the corporation or otherwise to take, and will
take, all such lawful and necessary action.
SECTION 1.13. MATERIAL ADVERSE EFFECT. When used in this Agreement with
respect to Pentose, or Vitex, as the case may be, the term "Material Adverse
Effect" means any change or effect that, individually or when taken together
with all other such changes or effects that have occurred prior to the date of
determination of the occurrence of the Material Adverse Effect, is, or is
reasonably likely to be, materially adverse to the business, assets (including
intangible assets), financial condition or results of operations of Pentose or
Vitex, as the case may be.
SECTION 1.14. DISSENTERS' RIGHTS. Any Shares held by persons who have not
voted in favor of the Merger and with respect to which such persons shall become
entitled to exercise dissenters' rights under Delaware Law ("Dissenting Shares")
shall not be converted into Vitex Common Stock but shall instead be converted
into the right to receive such consideration as may be determined to be due with
respect to such Dissenting Shares pursuant to Delaware Law. Pentose agrees
that, except with the prior written consent of Vitex, or as required under
Delaware Law, it will not voluntarily make any payment with respect to, or
settle or offer to settle, any such purchase demand. Each holder of Dissenting
Shares ("Dissenting Shareholder") who, pursuant to the provisions of Delaware
Law, becomes entitled to payment of the fair value for Shares shall receive
payment therefor (but only after the value therefor shall have been agreed upon
or finally determined pursuant to such provisions). If, after the Effective
Time, any Dissenting Shares shall lose their status as Dissenting Shares, Vitex
shall issue and deliver, upon surrender by such shareholder of certificate or
certificates representing Shares of the Merger Consideration to which such
shareholder would otherwise be entitled under this Article I.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PENTOSE
Pentose hereby represents and warrants to Vitex that, except as set forth
in the written disclosure schedule delivered by Pentose to Vitex (the "Pentose
Disclosure Schedule") or pursuant to transactions and agreements contemplated
hereby:
SECTION 2.01. ORGANIZATION OF PENTOSE. Pentose is a corporation duly organized,
validly existing and in good standing under the laws of Delaware, has the
corporate power to own, lease and
A-6
<PAGE>
operate its property and to carry on its business as now being conducted and as
proposed to be conducted, and is duly qualified to do business and in good
standing as a foreign corporation in the Commonwealth of Massachusetts.
Pentose's only corporate offices are located in the Commonwealth of
Massachusetts. Pentose has no subsidiaries. Pentose has delivered or made
available a true and correct copy of the Certificate of Incorporation and By-
laws of Pentose, each as amended to date, to counsel for Vitex.
SECTION 2.02. CAPITAL STRUCTURE. The authorized capital stock of Pentose
consists of 12,000,000 shares of Common Stock, par value $.0l per share, of
which there are 3,896,870 issued and outstanding as of the date hereof and
8,000,000 shares of Preferred Stock, par value $.001 per share, of which
4,500,000 shares of Series A Convertible Preferred Stock, par value $.001 per
share, and 2,356,903 shares of Series B Convertible Preferred Stock, par value
$.001 per share (collectively, the "Pentose Preferred Stock"), are issued and
outstanding as of such date. All outstanding shares of Pentose capital stock
are duly authorized, validly issued, fully paid and non-assessable and are not
subject to preemptive rights created by statute, the Certificate of
Incorporation or By-laws of Pentose or any agreement or document to which
Pentose is a party or by which it is bound, and were issued in compliance with
all applicable federal and state securities laws. As of the date hereof,
Pentose had reserved an aggregate of 1,000,000 shares of Common Stock, net of
exercises, for issuance to employees, consultants and non-employee directors
pursuant to the Pentose Stock Option Plan, under which options were outstanding
for an aggregate of 975,828 shares. As of the date hereof Pentose has reserved
53,366 shares for issuance to holders of warrants upon exercise of such
warrants. All shares of Pentose Common Stock subject to issuance as aforesaid,
including shares of Pentose Common Stock issuable upon the conversion of shares
of the Pentose Preferred Stock, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are issuable, would be duly
authorized, validly issued, fully paid and nonassessable. Section 2.02 of the
Pentose Disclosure Schedule lists each outstanding option and warrant to acquire
shares of Pentose Common Stock, the name of the holder of such option or
warrant, the number of shares subject to such option or warrant, the exercise
price of such option or warrant, the number of shares as to which such option or
warrant will have vested at such date, the vesting schedule and termination date
of such option or warrant and whether the exercisability of such option or
warrant will be accelerated in any way by the transactions contemplated by this
Agreement or for any other reason, and indicate the extent of acceleration, if
any. Each share of Pentose Preferred Stock is convertible into Pentose Common
Stock on a one share for one share basis.
SECTION 2.03. OBLIGATIONS WITH RESPECT TO CAPITAL STOCK. Except as set forth
in Section 2.02 and except for the convertibility of the Pentose Preferred Stock
into Pentose Common Stock, there are no equity securities of any class of
Pentose, or any securities exchangeable or convertible into or exercisable for
such equity securities, issued, reserved for issuance or outstanding. Except as
set forth in Section 2.03 of the Pentose Disclosure Schedule, there are no
options, warrants, equity securities, calls, rights (including preemptive
rights), commitments or agreements of any character to which Pentose is a party
or by which it is bound obligating Pentose to issue, deliver or sell, or cause
to be issued, delivered or sold, or repurchase, redeem or otherwise acquire, or
cause the repurchase, redemption or acquisition of, any shares of capital stock
of Pentose or obligating Pentose to grant, extend, accelerate the vesting of or
enter into any such option, warrant, equity security, call, right, commitment or
agreement. Except as set forth in Section 2.02, there are no registration
rights and, to the knowledge of Pentose, there are no voting trusts, proxies or
other agreements or understanding with respect to any equity security of any
class of Pentose.
A-7
<PAGE>
SECTION 2.04. AUTHORITY.
(a) Pentose has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Pentose, subject only to the approval of this
Agreement by Pentose's stockholders as described in Section 5.02 and the filing
and recordation of the Certificate of Merger pursuant to Delaware Law. A vote
of the holders of at least a majority of the outstanding shares of the Pentose
Common Stock and Pentose Preferred Stock, voting together on an as-converted
basis, is required for Pentose's stockholders to approve this Agreement. In
addition, the consent of the holders of 51% of the Pentose Preferred Stock is
required in accordance with Section 2.04 of the Pentose Disclosure Schedule.
This Agreement has been duly executed and delivered by Pentose and, assuming the
due authorization, execution and delivery by Vitex, constitutes the valid and
binding obligation of Pentose, enforceable in accordance with its terms, except
as enforceability may be limited by bankruptcy and other similar laws and
general principles of equity. The execution and delivery of this Agreement does
not, and the performance of this Agreement will not, (i) conflict with or
violate the Certificate of Incorporation or Bylaws of Pentose, (ii) subject to
obtaining the approval of Pentose's stockholders of the Merger as contemplated
in Section 5.02 and compliance with the requirements set forth in Section
2.04(b) below, conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Pentose or by which its properties is bound or
affected, or (iii) subject to obtaining the consents set forth in Section 2.04
of the Pentose Disclosure Schedule, result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or impair Pentose's rights or alter the rights of obligations of
any third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of Pentose pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Pentose is a party or by
which Pentose or its properties are bound or affected. Section 2.04 of the
Pentose Disclosure Schedule lists all material consents, waivers and approvals
under any of Pentose's agreements, contracts, license or leases required to be
obtained in connection with the consummation of the transactions contemplated
hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to Pentose in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) the filing of a Form S-4 Registration Statement (the
"Registration Statement") with the Securities and Exchange Commission ("SEC") in
accordance with the Securities Act of 1933, as amended (the "Securities Act"),
(ii) the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware, (iii) the filing of the Proxy Statement (as defined in
Section 2.19) with the SEC in accordance with the Securities Exchange Act of
1934, as amended (the "Exchange Act"), (iv) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable federal and state securities laws and the laws of any foreign country
and (v) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Pentose or Vitex or have a material adverse effect on the ability of
the parties to consummate the Merger.
A-8
<PAGE>
SECTION 2.05. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW NOT
APPLICABLE. The restrictions contained in Section 2.03 of the Delaware General
Corporation Law applicable to a "business combination" (as defined in Section
203) do not apply to the execution, delivery or performance of this Agreement by
Pentose or to the consummation by Pentose of the Merger or the other
transactions contemplated by this Agreement.
SECTION 2.06. PENTOSE FINANCIAL STATEMENTS. The audited consolidated financial
statements (including any related notes thereto) representing the financial
condition of Pentose as of December 31, 1998 and the unaudited financial
statements (including the notes thereto) representing the financial condition of
Pentose as of March 31, 1999 (the "Pentose Financials"), (including any related
notes thereto), were prepared in accordance with U.S. generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto) and fairly
presented the consolidated financial position of Pentose as at the respective
dates thereof and the consolidated results of its operations and cash flows for
the periods indicated, except that the unaudited interim financial statements
(i) were or are subject to normal and recurring year-end adjustments which were
not, or are not expected to be, material in amount, and (ii) do not include
footnotes required by GAAP. The balance sheet of Pentose as of December 31,
1998 is hereinafter referred to as the "Pentose Balance Sheet." Except as
disclosed in the Pentose Financials, Pentose does not have any liabilities
(absolute, accrued, contingent or otherwise) as of the date hereof, of a nature
required to be disclosed on a balance sheet or in the related notes to the
consolidated financial statements prepared in accordance with GAAP which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of Pentose taken as a whole, except
liabilities (i) provided for in the Pentose Balance Sheet, or (ii) incurred
since the date of the Pentose Balance Sheet in the ordinary course of business
consistent with past practices.
SECTION 2.07. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the
Pentose Balance Sheet through the date of this Agreement and except as set forth
in Schedule 2.07, there has not been: (i) any Material Adverse Effect on
Pentose, (ii) any material change by Pentose in its accounting methods,
principles or practices, except as required by concurrent changes in GAAP, or
(iii) any revaluation or disposition by Pentose of any of its assets having a
Material Adverse Effect on Pentose, including, without limitation, writing down
the value of capitalized software or inventory or writing off notes or accounts
receivable other than in the ordinary course of business.
SECTION 2.08. TAXES. Pentose and each other corporation (if any) included in any
consolidated or combined tax return in which Pentose has been included (i) have
filed and will file, in a timely and proper manner, consistent with applicable
laws, all Federal, state and local Tax returns and Tax reports required to be
filed by them through the Closing Date (the "Company Returns") with the
appropriate governmental agencies in all jurisdictions in which Company Returns
are required to be filed and have timely paid or will timely pay all amounts
shown thereon due; (ii) have paid and shall timely pay all Taxes of Pentose (or
such other corporation) required to have been paid by Pentose (or such other
corporation) on or before the Closing Date; and (iii) currently are not the
beneficiary of an extension of time within which to file any Tax return or Tax
report. All such Company Returns were and will be correct and complete at the
time of filing. All Taxes of Pentose attributable to all taxable periods ending
on or before the Closing Date to the extent not required to have been previously
paid, have been adequately provided for on the Pentose Financials and Pentose
will not accrue a Tax Liability from the date of the Pentose Financials up to
and including the Closing Date,
A-9
<PAGE>
other than a Tax Liability accrued in the ordinary course of business. Pentose
has not been notified by the Internal Revenue Service or any state, local or
foreign taxing authority that any issues have been raised (and are currently
pending) in connection with any Company Return, and no waivers of statutes of
limitations have been given with respect to Pentose that are still in effect.
Except as contested in good faith, any deficiencies asserted or assessments
(including interest and penalties) made as a result of any examination by the
Internal Revenue Service or by any other taxing authorities of any Company
Return have been fully paid or are adequately provided for on the Pentose
Financials (as appropriate) and Pentose has received no notification that any
proposed additional Taxes have been asserted. Pentose (i) has not made an
election to be treated as a "consenting corporation" under Section 341(f) of the
Code and (ii) is not a "personal holding company" within the meaning of Section
542 of the Code and (iii) has not been a United States real property holding
corporation within the meaning of Section 897(c) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Pentose has
not agreed to, nor to the best of its knowledge is it required to, make any
adjustment under Section 481(a) of the Code by reason of a change in accounting
method or otherwise. Pentose will not incur a Tax liability resulting from
Pentose ceasing to be a member of a consolidated or combined group that had
previously filed consolidated, combined or unitary Tax returns. Each granted
option that was designated as an "incentive stock option" on the applicable
books and records of Pentose qualified as an "incentive stock option" within the
meaning of the Section 422 of the Code on the date in which such option was
granted. As used in this Agreement, "Tax" means any of the Taxes and "Taxes"
means, with respect to any entity, (A) all income taxes (including any tax on or
based upon net income, gross income, income as specially defined, earnings,
profits or selected items of income, earnings or profits) and all gross
receipts, sales, use, ad valorem, transfer, franchise, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property or
windfall profits taxes, alternative or add-on minimum taxes, customs duties and
other taxes, fees, assessments or charges of any kind whatsoever, together with
all interest and penalties, additions to tax and other additional amounts
imposed by any taxing authority (domestic or foreign) on such entity and (B) any
liability for the payment of any amount of the type described in the immediately
preceding clause (A) as a result of being a "transferee" (within the meaning of
Section 6901 of the Code or any other applicable law) of another entity or a
member of an affiliated or combined group.
SECTION 2.09. INTELLECTUAL PROPERTY.
(a) Pentose owns, or has the right to use, sell or license, and has the
right to bring actions for the infringement of, all intellectual property
utilized in its business as presently conducted, which intellectual property is
listed on Section 2.09 of the Pentose Disclosure Schedule (such intellectual
property and the rights thereto are collectively referred to herein as the
"Pentose IP Rights"), except for any failure to own or have the right to use,
sell or license that would not have a Material Adverse Effect on Pentose.
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
breach of any instrument or agreement governing any Pentose IP Rights (the
"Pentose IP Rights Agreements"), will not cause the forfeiture or termination or
give rise to a right of forfeiture or termination of any Pentose IP Rights or
impair the right of Pentose or the Surviving Corporation to use, sell or license
any Pentose IP Rights or portion thereof, except for the occurrence of any such
breach, forfeiture, termination or impairment that would not individually or in
the aggregate, result in a Material Adverse Effect on Pentose.
A-10
<PAGE>
(c) Except as set forth in Section 2.09 of the Pentose Disclosure Schedule
(i) neither the manufacture, marketing, license, sale or intended use of any
product or technology currently licensed or sold or under development by Pentose
violates any license or agreement between Pentose and any third party or,
infringes any intellectual property right of any other party; (ii) to the
knowledge of Pentose, no third party is materially infringing upon, or violating
any license or agreement with Pentose relating to any Pentose IP Rights; and
(iii) to the knowledge of Pentose there is no pending or threatened claim or
litigation contesting the validity, ownership or right to use, sell, license or
dispose of any Pentose IP Rights, nor has Pentose received any written notice
asserting that any Pentose IP Rights or the proposed use, sale, license or
disposition thereof conflicts or will conflict with the rights of any other
party.
(d) Pentose has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all Pentose IP Rights.
SECTION 2.10. COMPLIANCE; PERMITS; RESTRICTIONS.
(a) Pentose is not in conflict with, or in default or violation of (i) any
law, rule, regulation, order, judgment or decree applicable to Pentose or by
which its properties is bound or affected, or (ii) any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Pentose is a party or by which Pentose or its
properties is bound or affected, except for any conflicts, defaults or
violations which would not have a Material Adverse Effect on Pentose. No
investigation or review by any governmental or regulatory body or authority is
pending or threatened against Pentose, nor has any governmental or regulatory
body or authority indicated an intention to conduct the same.
(b) Pentose holds all material permits, licenses, variances, exemptions,
orders and approvals from governmental authorities which are necessary to the
operation of the business of Pentose taken as a whole (collectively, the
"Pentose Permits"). Pentose and its subsidiaries are in compliance with the
terms of the Pentose Permits, except where the failure to so comply would not
have a Material Adverse Effect on Pentose.
SECTION 2.11. LITIGATION. Except as set forth in Section 2.11 of the Pentose
Disclosure Schedule, as of the date of this Agreement, there is no action, suit,
proceeding, claim, arbitration or investigation pending, or as to which Pentose
has received any notice of assertion nor, is there a threatened action, suit,
proceeding, claim arbitration or investigation against Pentose.
SECTION 2.12. BROKERS' AND FINDERS' FEES. Pentose has not incurred, nor will
it incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
SECTION 2.13. EMPLOYEE BENEFIT PLANS.
(a) With respect to each material employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee benefit
plan" as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") maintained or contributed to by Pentose or any
trade or business (an "ERISA Affiliate") which is under common control with
Pentose within the meaning of Section 414 of the Code (the "Pentose Employee
Plans"), Pentose has made available to Vitex a true and complete copy of, to the
extent applicable,
A-11
<PAGE>
(i) such Pentose Employee Plan, (ii) the most recent annual report (Form 5500),
(iii) each trust agreement related to such Pentose Employee Plan, (iv) the most
recent summary plan description for each Pentose Employee Plan for which such
description is required, (v) the most recent actuarial report relating to any
Pentose Employee Plan subject to Title IV of ERISA and (vi) the most recent
United States Internal Revenue Service ("IRS") determination letter issued with
respect to any Pentose Employee Plan.
(b) Each Pentose Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Tax Reform Act of 1986 stating that such Pentose
Employee Plan is so qualified and nothing has occurred since the date of such
letter that could reasonably be expected to affect the qualified status of such
plan. Each Pentose Employee Plan has been operated in all material respects in
accordance with its terms and the requirements of applicable law. Neither
Pentose nor any ERISA Affiliate of Pentose has incurred or is reasonably
expected to incur any material liability under Title IV of ERISA in connection
with the termination of any plan covered or previously covered by Title IV of
ERISA. No Pentose Employee Plan is a Multiemployer Plan as defined in Section
3(37) of ERISA.
(c) With respect to the employees and former employees of Pentose, there
are no employee post-retirement medical or health plans in effect, except as
required by Section 4980B of the Code or other laws. No tax under Section 4980B
or Section 4980D of the Code has been incurred in respect of any Employee Plan
that is a group health plan, as defined in Section 5000(b)(l) of the Code.
SECTION 2.14. ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION OF EQUIPMENT.
Pentose has good and valid title to, or, in the case of leased properties
and assets, valid leasehold interest in, all of its material tangible properties
and assets, real, personal and mixed, used in its business, free and clear of
any liens or encumbrances except as reflected in the Pentose Financials and
except for liens for taxes not yet due and payable.
SECTION 2.15. ENVIRONMENTAL MATTERS.
(a) Hazardous Material. No underground storage tanks and no amount of any
substance that has been designated by any Governmental Entity or by applicable
federal, state or local law, to be radioactive, toxic, hazardous or otherwise a
danger to health or the environment, including, without limitation, PCBs,
asbestos, petroleum, urea-formaldehyde and all substances listed as hazardous
substances pursuant to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, or defined as a hazardous waste pursuant
to the United States Resource Conservation and Recovery Act of 1976, as amended,
and the regulations promulgated pursuant to said laws, (a "Hazardous Material"),
but excluding office and janitorial supplies and any such materials held as
allowed in subsection (b) hereof, are present, as a result of the deliberate
actions of Pentose, or, to Pentose's knowledge, as a result of any actions of
any third party or otherwise, in, on or under any property, including the land
and the improvements, ground water and surface water thereof, that Pentose has
at any time owned, operated, occupied or leased.
(b) Hazardous Material Activities. Pentose has not transported, stored,
used, manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in
A-12
<PAGE>
violation of any law in effect on or before the date hereof, nor has Pentose
disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (collectively "Hazardous Material Activities") in violation
of any rule, regulation, treaty or statute promulgated by any Governmental
Entity in effect prior to or as of the date hereof to prohibit, regulate or
control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. Pentose currently holds all environmental approvals, permits,
licenses, clearances and consents (the "Pentose Environmental Permits")
necessary for the conduct of Pentose's Hazardous Material Activities and other
businesses of Pentose as such activities and businesses are currently being
conducted, except where the failure to so hold would not have a Material Adverse
Effect on Pentose.
(d) Environmental Liabilities. No material action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending,
threatened concerning any Pentose Environmental Permit, Hazardous Material or
any Hazardous Material Activity of Pentose. Pentose is not aware of any fact or
circumstance which could involve Pentose in any environmental litigation or
impose upon Pentose any environmental liability.
SECTION 2.16. LABOR MATTERS. There are no activities or proceedings of any
labor union to organize any employees of Pentose and there are no strikes, or
material slowdowns, work stoppages or lockouts, or threats thereof by or with
respect to any employees of Pentose. Pentose is and has been in compliance with
all applicable laws regarding employment practices, terms and conditions of
employment, and wages and hours (including, without limitation, ERISA (as
defined below), WARN or any similar state or local law).
SECTION 2.17. AGREEMENTS, CONTRACTS AND COMMITMENTS. Except as set forth in
Section 2.17 of the Pentose Disclosure Schedule, Pentose is not a party to or is
bound by:
(a) any collective bargaining agreements;
(b) any bonus, deferred compensation, incentive compensation, pension,
profit-sharing or retirement plans, or any other employee benefit plans or
arrangements;
(c) any employment or consulting agreement, contract or commitment with any
officer or director level employee, not terminable by Pentose on thirty (30)
days notice without liability, except to the extent general principles of
wrongful termination law may limit Pentose's ability to terminate employees at
will;
(d) any benefit or compensation agreement or plan, including, without
limitation, any stock option plan, stock appreciation right plan;
(e) any agreement of indemnification or guaranty not entered into in the
ordinary course of business other than indemnification agreements between
Pentose and any of its officers or directors;
(f) any agreement, contract or commitment containing any covenant limiting
the freedom of Pentose to engage in any line of business or compete with any
person;
A-13
<PAGE>
(g) any agreement, contract or commitment relating to capital expenditures
and involving future obligations in excess of $50,000 and not cancelable without
penalty;
(h) any agreement, contract or commitment currently in force relating to
the disposition or acquisition of assets not in the ordinary course of business
or any ownership interest in any corporation, partnership, joint venture or
other business enterprise;
(i) any mortgages, indentures, loans or credit agreements, security
agreements or other agreements or instruments relating to the borrowing of money
or extension of credit;
(j) any joint marketing or development agreement;
(k) any distribution agreement (identifying any that contain exclusivity
provisions); or
(l) any other agreement, contract or commitment (including real and
personal property leases) which involve payment by Pentose under any such
agreement, contract or commitment of $50,000 or more in the aggregate and is not
cancelable without penalty within thirty (30) days.
Neither Pentose, nor to Pentose's knowledge any other party to a Pentose
Contract (as defined below), has breached, violated or defaulted under, or
received notice that it has breached, violated or defaulted under, any of the
terms or conditions of any of the agreements, contracts or commitments to which
Pentose is a party or by which it is bound of the type described in clauses (a)
through (l) above (any such agreement, contract or commitment, a "Pentose
Contract") in such manner as would permit any other party to cancel or terminate
any such Pentose Contract, or would permit any other party to seek damages.
SECTION 2.18. CHANGE OF CONTROL PAYMENTS. Section 2.18 of the Pentose
Disclosure Schedule sets forth each plan or agreement pursuant to which all
material amounts may become payable (whether currently or in the future) to
current or former officers and directors of Pentose as a result of or in
connection with the Merger.
SECTION 2.19. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The written
information supplied by Pentose for inclusion in the Registration Statement (as
defined in Section 2.04(b)) shall not at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading. The Pentose Financials to be supplied by
Pentose for inclusion in the Registration Statement will comply as to form in
all material respects with the published rules and regulations of the SEC with
respect thereto. The written information supplied by Pentose for inclusion in
the proxy statement/prospectus to be sent to the stockholders of Pentose and the
stockholders of Vitex and in connection with the vote of Pentose's stockholders
to consider the approval of this Agreement (the "Pentose Stockholders' Meeting")
and in connection with the meeting of Vitex's stockholders to consider the
approval of this Agreement and the issuance of shares of Vitex Common Stock
pursuant to the terms of the Merger (the "Vitex Stockholders' Meeting") (such
proxy statement/prospectus as amended or supplemented is referred to herein as
the "Proxy Statement") shall not, on the date the Proxy Statement is first
mailed to Vitex's stockholders, and at the time of the Vitex Stockholders'
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are
A-14
<PAGE>
made, not false or misleading; or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Vitex Stockholders' Meeting which has become
false or misleading. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder. If at any time prior to the Effective Time, any event relating to
Pentose or any of its affiliates, officers or directors should be discovered by
Pentose which should be set forth in an amendment to the Registration Statement
or a supplement to the Proxy Statement, Pentose shall promptly inform Vitex.
Notwithstanding the foregoing, Pentose makes no representation or warranty with
respect to any information supplied by Vitex which is contained in any of the
foregoing documents.
SECTION 2.20. BOARD APPROVAL. The Board of Directors of Pentose has, as of the
date of this Agreement, determined (i) that the Merger is fair to, and in the
best interests of Pentose and its stockholders, and (ii) to recommend that the
stockholders of Pentose approve this Agreement.
SECTION 2.21. MINUTES BOOKS. The minute books of Pentose and its subsidiaries
made available to counsel for Vitex are the only minute books of Pentose and
contain a reasonably accurate summary, in all material respects, of all meetings
of directors (or committees thereof) and stockholders or actions by written
consent since the time of incorporation of Pentose.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VITEX
Vitex hereby represents and warrants to Pentose that except as set forth in
the written disclosure schedule delivered by Vitex to Pentose (the "Vitex
Disclosure Schedule") or pursuant to transactions and agreements contemplated
hereby:
SECTION 3.01. ORGANIZATION OF VITEX. Vitex is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
has the corporate power to own, lease and operate its property and to carry on
its business as now being conducted and as proposed to be conducted, and is duly
qualified to do business and in good standing as a foreign corporation in New
York. Vitex has no subsidiaries. Vitex's only offices are located in New York.
Vitex has delivered or made available a true and correct copy of the Certificate
of Incorporation and By-laws of Vitex, each as amended to date, to counsel for
Pentose.
SECTION 3.02. VITEX CAPITAL STRUCTURE. The authorized capital stock of Vitex
consists of 29,000,000 shares of Common Stock, par value $.0l per share, of
which there were 12,447,791 shares issued and outstanding as of July 2, 1999 and
1,000,000 shares of Preferred Stock, par value $.0l per share, of which no
shares are issued or outstanding. All outstanding shares of the Common Stock of
Vitex are duly authorized, validly issued, fully paid and non-assessable and are
not subject to preemptive rights created by statute, the Certificate of
Incorporation or By-laws of Vitex or any agreement or document to which Vitex is
a party or by which it is bound. As of July 3, 1999 Vitex had reserved an
aggregate of 2,248,737 shares of Common Stock, net of exercises, for issuance to
employees, consultants and non-employee directors pursuant to the Vitex Amended
and Restated 1998 Equity Incentive Plan, and 1998 Amended Director Stock Option
Plan, (collectively, the "Vitex Stock Option Plans"), under which options are
outstanding for 1,841,530 shares. All shares of the Common Stock of Vitex
subject to issuance as aforesaid, upon issuance on the terms and
A-15
<PAGE>
conditions specified in the instruments pursuant to which they are issuable,
would be duly authorized, validly issued, fully paid and nonassessable. As of
July 3, 1999, there were 29 participants in Vitex's 1998 Employee Stock Purchase
Plan (the "Vitex Employee Stock Purchase Plan").
SECTION 3.03. OBLIGATIONS WITH RESPECT TO CAPITAL STOCK. Except as set forth
in Section 3.02, there are no equity securities of any class of Vitex, or any
securities exchangeable or convertible into or exercisable for such equity
securities, issued, reserved for issuance or outstanding. Except for securities
Vitex owns, directly or indirectly through one or more subsidiaries, there are
no equity securities of any class of any subsidiary of Vitex, or any security
exchangeable or convertible into or exercisable for such equity securities,
issued, reserved for issuance or outstanding. Except as set forth in Section
3.02, there are no options, warrants, equity securities, calls, rights
(including preemptive rights), commitments or agreements or any character to
which Vitex or any of its subsidiaries is a party or by which it is bound
obligating Vitex or any of its subsidiaries to issue, deliver or sell, or cause
to be issued, delivered or sold, or repurchase, redeem or otherwise acquire, or
cause the repurchase, redemption or acquisition of, any shares of capital stock
of Vitex or obligating Vitex to grant, extend, accelerate the vesting of or
enter into any such option, warrant, equity security, call, right, commitment or
agreement. There are no registration rights and, to the knowledge of Vitex
there are no voting trusts, proxies or other agreements or understandings with
respect to any equity security of any class of Vitex.
SECTION 3.04. AUTHORITY.
(a) Vitex has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Vitex, subject only to the approval of the
Merger by the holders of at least two-thirds of the outstanding shares of
Vitex's Common Stock as contemplated in Section 5.02 and to the approval by the
holders of a majority of the outstanding shares of Vitex's Common Stock of
certain related matters as contemplated in Section 5.02 and the filing and
recordation of the Certificate of Merger pursuant to Delaware Law. This
Agreement has been duly executed and delivered by each of Vitex and, assuming
the due authorization, execution and delivery of this Agreement by Pentose, this
Agreement constitutes the valid and binding obligation of Vitex, enforceable in
accordance with its terms, except as enforceability may be limited by bankruptcy
and other similar laws and general principles of equity. The execution and
delivery of this Agreement by Vitex does not, and the performance of this
Agreement by Vitex will not, (i) conflict with or violate the Certificate of
Incorporation or By-laws of Vitex or the equivalent organizational documents of
any of its other subsidiaries, (ii) to the best knowledge of Vitex, subject to
obtaining the approval of the Merger by Vitex's stockholders as contemplated in
Section 5.02 and compliance with the requirements set forth in Section 3.04(b)
below, conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to Vitex or by which its properties are bound or affected, or
(iii) subject to obtaining the consents set forth in Section 3.04 of the Vitex
Disclosure Schedule, result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or impair Vitex's rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of Vitex pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or
A-16
<PAGE>
other instrument or obligation to which Vitex is a party or by which Vitex or
its properties are bound or affected, except, with respect to clauses (ii) and
(iii), for any such conflicts, violations, defaults or other occurrences that
would not have a Material Adverse Effect on Vitex. Section 3.04 of the Vitex
Disclosure Schedule lists all material consents, waivers and approvals under any
of Vitex' agreements, contracts, licenses or leases required to be obtained in
connection with the consummation of the transactions contemplated hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required by or with
respect to Vitex in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby, except for (i) the
filing of the Registration Statement with the SEC in accordance with the
Securities Act, (ii) the filing of the Certificate of Merger with the Secretary
of State of the State of Delaware, (iii) the filing of the Proxy Statement with
the SEC in accordance with the Exchange Act, (iv) the filing of a Current Report
on Form 8-K with the SEC, (v) the listing of the Vitex Common Stock on Nasdaq,
(vi) the filing of an amendment to Vitex's Certificate of Incorporation with the
Secretary of State of the State of Delaware, (vii) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable federal and state securities laws and the laws of any
foreign country and (viii) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, would not have a
Material Adverse Effect on Pentose or Vitex or have a Material Adverse Effect on
the ability of the parties to consummate the Merger.
SECTION 3.05. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW NOT
APPLICABLE. The restrictions contained in Section 203 of the Delaware General
Corporation Law applicable to a "business combination" (as defined in Section
203) do not apply to the execution, delivery or performance of this Agreement or
to the consummation of the Merger or the other transactions contemplated by this
Agreement.
SECTION 3.06. SEC FILINGS; VITEX FINANCIAL STATEMENTS.
(a) Vitex has filed all forms, reports and documents required to be filed
with the SEC since January 1, 1998, and has made available to Pentose such
forms, reports and documents in the form filed with the SEC. All such required
forms, reports and documents (including those that Vitex may file subsequent to
the date hereof) are referred to herein as the "Vitex SEC Reports." As of their
respective dates, the Vitex SEC Reports (i) were prepared in accordance with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC thereunder applicable to such Vitex SEC
Reports, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(b) The audited consolidated financial statements (including, any related
notes thereto) contained in the Vitex SEC Reports or delivered to Pentose
representing the financial condition of Vitex as of January 2, 1999 and the
unaudited financial statements (including the notes thereto) representing the
financial condition of Vitex as of April 3, 1999 (the "Vitex Financials"), (x)
complied with the published rules and regulations of the SEC with respect
thereto, (y) were prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as
A-17
<PAGE>
may be indicated in the notes thereto or, in the case of unaudited interim
financial statements, as may be permitted by the SEC on Form l0-Q under the
Exchange Act) and (z) fairly presented the consolidated results of its
operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments which were not, or are not expected to be, material in amount.
The balance sheet of Vitex as of January 2, 1999 is hereinafter referred to as
the "Vitex Balance Sheet." Except as disclosed in the Vitex Financials, Vitex
has no liabilities as of the date hereof (absolute, accrued, contingent or
otherwise) of a nature required to be disclosed on a balance sheet or in the
related notes to the consolidated financial statements prepared in accordance
with GAAP which are, individually or in the aggregate, material to the business,
results of operations or financial condition of Vitex except liabilities (i)
provided for in the Vitex Balance Sheet, or (ii) incurred since the date of the
Vitex Balance Sheet in the ordinary course of business consistent with past
practices.
SECTION 3.07. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the date of the
Vitex Balance Sheet through the date of this Agreement, there has not been: (i)
any Material Adverse Effect on Vitex, (ii) any material change by Vitex in its
accounting methods, principles or practices, except as required by concurring
changes in GAAP, or (iii) any revaluation or disposition by Vitex of any of its
assets having a Material Adverse Effect on Vitex.
SECTION 3.08. BROKERS' AND FINDERS' FEES. Vitex has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
SECTION 3.09. BOARD APPROVAL. The Board of Directors of Vitex has, as of the
date of this Agreement, determined to recommend that the Stockholders of Vitex
approve this Agreement and the issuance of the Vitex Common Stock in the Merger.
SECTION 3.10. TAX MATTERS. Vitex has no plan or intention to (a) reacquire any
of the Vitex Common Stock issued in the Merger or (b) sell or otherwise dispose
of any of the assets of Pentose acquired in the Merger, except for dispositions
made in the ordinary course of business or transfers to subsidiaries described
in Section 368(a)(2)(C) of the Code.
SECTION 3.11. INTELLECTUAL PROPERTY.
(a) Vitex has the right to use and has the right to bring actions for the
infringement of, all intellectual property utilized in its business as presently
conducted as set forth on the Vitex Disclosure Schedule (such intellectual
property and the rights thereto are collectively referred to herein as the
"Vitex IP Rights"), except for any failure to own or have the right to use, sell
or license that would not have a Material Adverse Effect on Vitex.
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
breach of any instrument or agreement governing any Vitex IP Rights (the "Vitex
IP Rights Agreements"), will not cause the forfeiture or termination or give
rise to a right of forfeiture or termination of any Vitex IP Rights or impair
the right of Vitex or the Surviving Corporation to use, sell or license any
Vitex IP Rights or portion thereof, except for the occurrence of any such
breach, forfeiture, termination or impairment that would not individually or in
the aggregate, result in a Material Adverse Effect on Vitex.
A-18
<PAGE>
(c) Except as set forth in Section 3.11 of the Vitex Disclosure Schedule
(i) neither the manufacture, marketing, license, sale or intended use of any
product or technology currently licensed or sold or under development by Vitex
violates any license or agreement between Vitex and any third party or,
infringes any intellectual property right of any other party; (ii) to the
knowledge of Vitex, no third party is materially infringing upon, or violating
any license or agreement with Vitex relating to any Vitex IP Rights and (iii) to
the knowledge of Vitex there is no pending or threatened claim or litigation
contesting the validity, ownership or right to use, sell, license or dispose of
any Vitex IP Rights, nor has Vitex received any written notice asserting that
any Vitex IP Rights or the proposed use, sale, license or disposition thereof
conflicts or will conflict with the rights of any other party.
(d) Vitex has taken reasonable and practicable steps designed to safeguard
and maintain the secrecy and confidentiality of, and its proprietary rights in,
all Vitex IP rights.
SECTION 3.12. FULL DISCLOSURE. The representation and warranties of Vitex in
this Agreement, taken together with the Vitex SEC Reports, do not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made, in light of the
circumstances under which they were made, not false or misleading.
SECTION 3.13. REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The
Registration Statement (as defined in Section 2.04(b)) shall not at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. The
Registration Statement shall, as of the time it becomes effective under the
Securities Act be prepared in accordance with the requirements of the Securities
Act and the rules and regulations of the SEC thereunder applicable thereto. The
information in the Proxy Statement shall not, on the date the Proxy Statement is
first mailed to Pentose's stockholders, and at the time of the Pentose
Stockholders' Meeting, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of circumstances under which they are
made, not false or misleading; or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Pentose Stockholders' Meeting which as become
false or misleading. The Proxy Statement will comply as to form in all material
respect with the provisions of the Exchange Act and the rules and regulations
thereunder. If at any time prior to the Effective Time, any event relating to
Vitex or any of its affiliates, officers or directors should be discovered by
Vitex which should be set forth in an amendment to the Registration Statement or
a supplement to the Proxy Statement, Vitex shall promptly inform Pentose, and
Vitex shall promptly commence preparation of such amendment or supplement in
accordance with Section 5.01. Notwithstanding the foregoing, Vitex makes no
representation or warranty with respect to any information supplied by Pentose
which is contained in any of the foregoing documents.
A-19
<PAGE>
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 4.01. CONDUCT OF BUSINESS BY PENTOSE. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, Pentose agrees, except
(i) as provided in Section 4.01 of the Pentose Disclosure Schedule, or (ii) to
the extent that Vitex otherwise consents in writing, to carry on its business
diligently and in accordance with good commercial practice and to carry on its
business in the usual, regular and ordinary course, in substantially the same
manner as heretofore conducted, to pay its debts and taxes when due subject to
good faith disputes over such debts or taxes, to pay or perform other material
obligations when due, and use its commercially reasonable efforts consistent
with past practices and policies to preserve intact its present business
organization, keep available the services of its present officers and employees
and preserve its relationships with customers, suppliers, distributors,
licensors, licensees, and others with which it has business dealings. In
furtherance of the foregoing and subject to applicable law, Pentose agrees to
confer with Vitex, as promptly as practicable, prior to taking any material
actions or making any material management decisions with respect to the conduct
of business. In addition, except as provided in Article IV of the Pentose
Disclosure Schedule, without the prior written consent of Vitex, Pentose shall
not do any of the following:
(a) amend or otherwise change its Certificate of Incorporation or By-Laws;
(b) issue, sell, pledge, dispose of or encumber, or authorize the issuance,
sale, pledge, disposition or encumbrance of, any shares of capital stock of any
class, or any options, warrants, convertible securities or other rights of any
kind to acquire any shares of capital stock, or any other ownership interest
(including, without limitation, any phantom interest) (except for the issuance
of shares of common stock issuable pursuant to the exercise of employee stock
options under the Pentose Employee Stock Option Plan or the Warrants, which
options, warrants or rights are outstanding on the date hereof).
(c) sell, pledge, dispose of or encumber any assets (except for (i) sales
of assets in the ordinary course of business and in a manner consistent with
past practice and (ii) dispositions of obsolete or worthless assets);
(d) accelerate, amend or change the period (or permit any acceleration,
amendment or change) of exercisability of options granted under the Pentose
Employee Plans (including the Pentose Stock Option Plan) or the Warrants or
authorize cash payments in exchange for any options granted under any of such
plans;
(e) (i) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
any of its capital stock, (ii) split, combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock or
(iii) amend the terms of, repurchase, redeem or otherwise acquire, any of its
securities, or propose to do any of the foregoing;
A-20
<PAGE>
(f) sell, transfer, license, sublicense or otherwise dispose of any Pentose
IP Rights, or amend or modify any existing agreements with respect to any
Pentose IP Rights, or Pentose IP Rights Agreements;
(g) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or division
thereof; (ii) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse or otherwise as an accommodation
become responsible for, the obligations of any person, or make any loans or
advances, except in the ordinary course of business consistent with past
practice; (iii) enter into or amend any material contract, lease or agreement
other than in the ordinary course of business; (iv) authorize any capital
expenditures or purchase of fixed assets which are, in the aggregate, in excess
of $100,000, taken as a whole (except pursuant to a capital expenditures budget
approved in writing by both parties); or (v) enter into or amend any contract,
agreement, commitment or arrangement to effect any of the matters prohibited by
this Section 4.01(g);
(h) increase the compensation payable or to become payable to its officers
or employees, except for increases in salary or wages of employees who are not
officers in accordance with past practices, or grant any severance or
termination pay to, or enter into any employment or severance agreement with any
director, officer (except for officers who are terminated on an involuntary
basis) or other employee, or establish, adopt, enter into or amend any Pentose
Employee Plan;
(i) take any action, other than as required by GAAP, to change accounting
policies or procedures;
(j) make any material tax election inconsistent with past practices or
settle or compromise any material federal, state, local or foreign tax liability
or agree to an extension of a statute of limitations for any assessment of any
tax, except to the extent the amount of any such settlement has been reserved
for on its most recent Pentose Financials;
(k) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice of liabilities reflected or reserved against in
the financial statements of Pentose, or incurred in the ordinary course of
business and consistent with past practice;
(l) except as may be required by law, take any action to terminate or amend
any of its Employee Plans other than in connection with the Merger;
(m) enter into any material partnership arrangements, joint development
agreements or strategic alliances;
(n) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.01(a) through (m) above, or any action which would make
any of the representations or warranties of Pentose, contained in this Agreement
untrue or incorrect or prevent Pentose from performing or cause Pentose not to
perform its covenants hereunder or result in any of the conditions to the Merger
set forth herein not being satisfied.
A-21
<PAGE>
If Pentose wishes to obtain the consent of Vitex to take actions for which
prior consent is required pursuant to this Section 4.01, it shall request such
consent in writing by telecopy to the attention of the Chief Executive Officer
and the Chief Financial Officer of Vitex. A consent signed by either such
officer shall be deemed sufficient for purposes hereof. In addition, if Vitex
receives such a request but does not respond in writing (which may include an e-
mailed response) to such request within 3 business days after the date the
request is telecopied, Vitex shall be deemed to have consented to the requested
action for all purposes of this Agreement.
SECTION 4.02. NO SOLICITATION BY PENTOSE.
(i) Except as set forth in Section 4.02 of the Pentose Disclosure
Schedule, without the prior written consent of Vitex, Pentose shall not,
directly or indirectly, through any officer, director, employee,
representative or agent of Pentose, solicit, or encourage or have
negotiations with respect to (including by way of furnishing information)
the initiation or submission of any inquiries, proposals or offers
regarding any acquisition, merger, take-over bid, sale of substantial
assets, sale of shares of capital stock (including without limitation by
way of a tender offer) or similar transactions involving Pentose (any of
the foregoing inquiries or proposals being referred to herein as a "Pentose
Acquisition Proposal"); provided, however, that nothing contained in this
Agreement shall prevent the Board of Directors of Pentose from referring
any third party to this Section 4.02. Nothing contained in this Section
4.02 or any other provision of this Agreement shall prevent the Board of
Directors of Pentose from taking any of the foregoing actions if the Board
of Directors of Pentose determines in good faith that such action is
necessary in order to exercise its fiduciary duties (after receiving a
written opinion of outside counsel to the effect that the Board of
Directors is required to do so in order to discharge properly its fiduciary
duties).
(ii) Pentose shall immediately notify Vitex after receipt of any
Pentose Acquisition Proposal or any request for nonpublic information
relating to Pentose in connection with a Pentose Acquisition Proposal or
for access to the properties, books or records of Pentose by any person or
entity that informs the Board of Directors of Pentose that it is
considering making, or has made, an Acquisition Proposal. Such notice to
Vitex shall be made orally and in writing and shall indicate in reasonable
detail the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact.
(iii) Pentose shall immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than Vitex)
conducted heretofore with respect to any of the foregoing. Pentose agrees
not to release any third party from any confidentiality or standstill
agreement relating to a Pentose Acquisition Proposal to which Pentose is a
party.
(iv) Pentose shall ensure that the officers, directors and employees
of Pentose and any investment banker or other advisor or representative
retained by Pentose are aware of the restrictions described in this
Section, and shall be responsible for any breach of this Section 4.02 by
such bankers, advisors and representatives.
A-22
<PAGE>
SECTION 4.03. CONDUCT OF BUSINESS BY VITEX. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, Vitex agrees, except (i)
as provided in Article IV of the Vitex Disclosure Schedule, or (ii) to the
extent that Pentose otherwise consents in writing, to carry on its business
diligently and in accordance with good commercial practice. In furtherance of
the foregoing and subject to applicable law, Vitex agrees to notify Pentose, as
promptly as practicable, prior to taking any material actions or making any
material management decisions with respect to the conduct of business. In
addition, except as provided in Article IV of the Pentose Disclosure Schedule,
without the prior written consent of Pentose, Vitex shall not do any of the
following:
(a) amend or otherwise change its Certificate of Incorporation or By-Laws;
or
(b) issue, sell, pledge, dispose of or encumber, or authorize the issuance,
sale, pledge, disposition or encumbrance of, any shares of capital stock of any
class, or any options, warrants, convertible securities or other rights of any
kind to acquire any shares of capital stock, or any other ownership interest
(including, without limitation, any phantom interest) (except for the issuance
of options or shares of common stock issuable pursuant to the exercise of
employee stock options under the Vitex Employee Stock Option Plans or pursuant
to the Vitex Employee Stock Purchase Plan provided that the Vitex Board may
grant rights under the Vitex Employee Stock Purchase Plan for subsequent
offering periods consistent with past practice.)
(c) (i) declare, set aside, make or pay any dividend or other distribution
(whether in case, stock or property or any combination thereof) in respect of
any of its capital stock, (ii) split, combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock or
(iii) amend the terms of, repurchase, redeem or otherwise acquire, any of its
securities, or propose to do any of the foregoing.
(d) sell, transfer, license, sublicense or otherwise dispose of any Vitex
IP Rights, or amend or modify any existing agreements with respect to any Vitex
IP Rights, or Vitex IP Rights Agreement.
(e) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.03(a), (b), (c) or (d), or any action which would make
any of the representations or warranties of Vitex contained in this Agreement
untrue or incorrect or prevent Vitex from performing or cause Vitex not to
perform its covenants hereunder or result in any of the conditions to the Merger
set forth herein not being satisfied.
If Vitex wishes to obtain the consent of Pentose to take actions for which
prior consent is required pursuant to this Section 4.03, it shall request such
consent in writing by telecopy to the attention of the Chief Executive Officer
of Pentose. A consent signed by such officer shall be deemed sufficient for
purposes hereof. In addition, if Pentose receives such a request but does not
respond in writing (which may include an e-mailed response) to such request
within 3 business days after the date the request is telecopied, Pentose shall
be deemed to have consented to the requested action for all purposes of this
Agreement.
A-23
<PAGE>
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT; OTHER.
As promptly as practicable after the execution of this Agreement, Vitex will
prepare and file with the SEC, the Proxy Statement and Vitex will prepare and
file with the SEC the Registration Statement in which the Proxy Statement will
be included as a prospectus. Vitex will respond to any comments of the SEC and
will use its best efforts to have the Registration Statement declared effective
under the Securities Act as promptly as practicable after such filing and will
cause the Proxy Statement to be mailed to its stockholders at the earliest
practicable time. Pentose will cooperate with all reasonable requests of Vitex
in connection with the preparation, filing and response to comments on the
Registration Statement and Proxy Statement. As promptly as practicable after
the execution of this Agreement, Pentose and Vitex will prepare and file any
other filings required under the Exchange Act, the Securities Act or any other
Federal, foreign or Blue Sky laws relating to the Merger and the transactions
contemplated by this Agreement (the "Other Filings"). Vitex will notify Pentose
promptly upon the receipt of any comments from the SEC or its staff and of any
request by the SEC or its staff or any other governmental officials for
amendments or supplements to the Registration Statement, the Proxy Statement or
any Other Filing or for additional information and will supply Pentose with
copies of all correspondence between such party or any of its representatives,
on the one hand, and the SEC, or its staff or other government officials, on the
other hand, with respect to the Registration Statement, the Proxy Statement, the
Merger or any Other Filing. The Proxy Statement, the Registration Statement and
the Other Filings will comply in all material respects with all applicable
requirements of law and the rules and regulations promulgated thereunder.
Whenever any event occurs which is required to be set forth in an amendment or
supplement to the Proxy Statement, the Registration Statement or any Other
Filing, Pentose or Vitex, as the case may be, will promptly inform the other
party of such occurrence and cooperate in filing with the SEC or its staff or
any other government officials, and/or mailing to stockholders of Pentose and
Vitex, such amendment or supplement. Management and the Board of Directors of
Pentose shall recommend to its shareholders approval of this Agreement and the
transactions contemplated hereby, together with any matters incident thereto,
and shall oppose any third party proposal or other action that is inconsistent
with this Agreement or the consummation of the transactions contemplated hereby,
unless the Board of Directors of Pentose, following receipt of written advice of
Pentose's outside legal counsel, reasonably determines that such recommendation
or opposition, as the case may be, could constitute a breach of the exercise of
its fiduciary duty. Subject to the foregoing, the Proxy Statement will include
the recommendation of the Board of Directors of Pentose for the approval of this
Agreement and the Merger. Management and the Board of Directors of Vitex shall
recommend to its shareholders approval of this Agreement and the transactions
contemplated hereby unless the Board of Directors of Vitex, following receipt of
written advice of Vitex's outside legal counsel, reasonably determines that such
recommendation could constitute a breach of the exercise of its fiduciary duty.
Subject to the foregoing, the Proxy Statement will include the recommendation of
the Board of Directors of Vitex for the approval of this Agreement and the
Merger.
SECTION 5.02. MEETINGS OF STOCKHOLDERS. Promptly after the date hereof,
Pentose will take all action necessary in accordance with Delaware Law and its
Certificate of Incorporation and Bylaws to obtain a consent of stockholders, or
to convene the Pentose Stockholders' Meeting to be
A-24
<PAGE>
held as promptly as practicable, and in any event within 30 days after the
declaration of effectiveness of the Registration Statement and delivery of the
Prospectus contained therein to the Stockholders, for the purpose of (i) voting
upon this Agreement and (ii) obtaining the election by the holders of a majority
of the outstanding shares of Pentose Preferred Stock not to treat the merger
contemplated hereby as a liquidation, dissolution or winding up of Pentose under
Section (B)(2)(c) of Article Fourth of Pentose's Certificate of Incorporation.
Promptly after the date hereof, Vitex will take all action necessary in
accordance with Delaware Law and its Certificate of Incorporation and Bylaws to
convene the Vitex Stockholders' Meeting to be held as promptly as practicable,
and in any event within 45 days after the declaration of effectiveness of the
Registration Statement, for the purpose of (i) voting upon this Agreement, (ii)
the issuance of shares of Vitex Common Stock by virtue of the Merger, (iii) the
increase in the number of shares of Vitex Common Stock subject to the Vitex
Amended and Restated 1998 Incentive Plan and (iv) the increase in the number of
authorized shares of capital stock. Vitex and Pentose will each use its
commercially reasonable efforts to solicit from its stockholders proxies in
favor of the approval of the foregoing proposals and to take all other action
necessary or advisable to secure the vote or consent of their respective
stockholders required by the rules of the National Association of Securities
Dealers, Inc. or Delaware Law to obtain such approvals, except to the extent
that the Board of Directors of such party determines that doing so would cause
the Board of Directors of such party to breach its fiduciary duties under
applicable law.
SECTION 5.03. ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) Upon reasonable notice and subject to restrictions contained in
confidentiality agreements to which such party is subject, Pentose and Vitex
shall each afford to the officers, employees, accountants, counsel and other
representatives of the other, reasonable access, during the period prior to the
Effective Time, to all its properties, books, contracts, commitments and records
and, during such period, Pentose and Vitex each shall (and Pentose shall cause
its subsidiaries to) furnish promptly to the other all information concerning
its business, properties and personnel as such other party may reasonably
request, and each shall make available to the other the appropriate individuals
(including attorneys, accountants and other professionals) for discussion of the
other's business, properties and personnel as either party may reasonably
request. Each party shall keep such information confidential in accordance with
the terms of the currently effective confidentiality and standstill agreement
(the "Confidentiality Agreement") between Vitex and Pentose.
(b) Pentose shall provide to Vitex promptly as available its audited
financial statements for the fiscal year ended December 31, 1998 and its
unaudited financial statements for the quarter ended June 30, 1999.
(c) Vitex shall provide to Pentose promptly as available a draft of its
Form 10-Q for the quarter ended July 3, 1999.
SECTION 5.04. CONSENTS; APPROVALS. Pentose and Vitex shall each use their best
efforts to obtain all consents, waivers, approvals, authorizations or orders
(including, without limitation, all United States and foreign governmental and
regulatory rulings and approvals), and Pentose and Vitex shall make all filings
(including, without limitation, all filings with United States and foreign
governmental or regulatory agencies) required in connection with the
authorization, execution and delivery of this Agreement by Pentose and Vitex and
the consummation by them of the transactions contemplated hereby. Pentose and
Vitex shall furnish all information required to be included in the Proxy
Statement and the Registration Statement, or for any application or other filing
to be made
A-25
<PAGE>
pursuant to the rules and regulations of any United States, or foreign
governmental body in connection with the transactions contemplated by this
Agreement.
SECTION 5.05. STOCK OPTIONS AND WARRANTS.
(a) At the Effective Time, Pentose's obligations with respect to each
outstanding option or warrant to purchase Shares of Pentose Common Stock (each,
a "Pentose Option") under the Pentose Stock Option Plan or pursuant to the
Warrants whether vested or unvested, will be assumed by Vitex. Each Pentose
Option so assumed by Vitex under this Agreement shall continue to have, and be
subject to, substantially the same terms and conditions set forth in the Pentose
Stock Option Plan (which shall be adopted upon substantially the same terms and
conditions by Vitex) (the "Adopted Employee Stock Option Plan") and the
agreement or Warrant pursuant to which such Pentose Option was issued as in
effect immediately prior to the Effective Time, except that (i) such Pentose
Option will be exercisable for that number of Shares of Vitex Common Stock equal
to the product of the number of Shares of Pentose Common Stock that were
purchasable, including those not yet vested, under such Pentose Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded up to the nearest whole number of Shares of Vitex Common Stock, and (ii)
the per share exercise price for the shares of Vitex Common Stock issuable upon
exercise of such assumed Pentose Option will be equal to the quotient determined
by dividing the exercise price per share of Pentose Common Stock at which such
Pentose Option was exercisable immediately prior to the Effective Time by the
Exchange Ratio, and rounding the resulting exercise price up to the nearest
whole cent.
(b) It is the intention of the parties that Pentose Options assumed by
Vitex qualify following the Effective Time as incentive stock options as defined
in the Code ("ISO's") to the extent such Pentose Options qualified as ISO's
prior to the Effective Time.
(c) After the Effective Time, Vitex will issue to each holder of an
outstanding Pentose Option a document evidencing the foregoing assumption by
Vitex.
(d) Vitex will reserve sufficient shares of Vitex Common Stock for issuance
under this Section 5.05 hereof.
SECTION 5.06. PENTOSE AFFILIATE AGREEMENT. Set forth in Section 5.06 of the
Pentose Disclosure Schedule is a list of those persons who may be deemed to be,
in Pentose's reasonable judgment, affiliates of Pentose within the meaning of
Rule 145 promulgated under the Securities Act (a "Pentose Affiliate"). Pentose
will provide Vitex with such information and documents as Vitex reasonably
requests for purposes of reviewing such list. Pentose will use its best efforts
to deliver or cause to be delivered to Vitex prior to the Closing Date from each
Pentose Affiliate an executed affiliate agreement in substantially the form
attached hereto as Exhibit A-1 (the "Pentose Affiliate Agreement"), each of
which will be in full force and effect as of the Effective Time. Vitex will be
entitled to place appropriate legends on the certificate evidencing any Vitex
Common Stock to be received by a Pentose Affiliate pursuant to the terms of this
Agreement, and to issue appropriate stop transfer instructions to the transfer
agent for the Vitex Common Stock, consistent with the terms of the Pentose
Affiliate Agreement.
SECTION 5.07. LOCK-UP AGREEMENT. Ampersand Specialty Materials and Chemicals
III Limited Partnership and Ampersand Specialty Materials and Chemicals III
Companion Fund
A-26
<PAGE>
Limited Partnership (collectively "Ampersand") and its affiliates and Dr. Samuel
K. Ackerman shall enter into in lieu of the Pentose Affiliate Agreement, a
modification thereof substantially in the form attached hereto as Exhibit A-2
(the "Pentose Shareholder Affiliate Agreement") pursuant to which such parties
agree not to sell, assign or otherwise transfer the shares of Vitex Common Stock
they receive pursuant to the terms of this Agreement until the earlier to occur
(the "Lock-Up") of (i) the date which is the first anniversary of the Effective
Time or (ii) the day upon which the closing stock price for Vitex Common Stock,
as quoted on the Nasdaq Stock Market National Market System as reported in the
Wall Street Journal for each of the previous 20 consecutive trading days, has
been in excess of $12 per share. The foregoing Lock-Up restrictions on the sale
of shares of Vitex Common Stock shall not apply to any such shares which
represent shares exchanged for up to 673,400 shares of Pentose Common Stock held
by Dr. Ackerman, provided that such shares may only be transferred to Ampersand.
SECTION 5.08. INDEMNIFICATION BY SURVIVING CORPORATION AND INSURANCE.
(a) From and after the Effective Time, the Surviving Corporation will
fulfill and honor in all respects the obligations of Pentose which exist prior
to the date hereof to indemnify Pentose's present and former directors and
officers and their heirs, executors and assigns. The Certificate of
Incorporation and Bylaws of the Surviving Corporation will contain the
provisions with respect to indemnification and elimination of liability for
monetary damages set forth in the Certificate of Incorporation and By-laws of
Pentose, which provisions will not be amended, repealed or otherwise modified
for a period of one year from the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who, at the Effective
Time, were directors, officers, employees or agents of Pentose, unless such
modification is required by law.
(b) After the Effective Time the Surviving Corporation will, to the fullest
extent permitted under applicable law or under the Surviving Corporation's
Certificate of Incorporation or By-laws, indemnify and hold harmless, each
present or former director or officer of Pentose and his or her heirs, executors
and assigns (collectively, the "Indemnified Parties") against any costs or
expenses (including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative or
investigative, to the extent arising out of or pertaining to any action or
omission in his or her capacity as a director, officer, employee or agent of
Pentose occurring prior to the Effective Time (including without limitation
actions or omissions relating to the Merger) and for a period of one year after
the Effective Time. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) any
counsel retained by the Indemnified Parties for any period after the Effective
Time will be reasonably satisfactory to the Surviving Corporation, (ii) after
the Effective Time, the Surviving Corporation will pay the reasonable fees and
expenses of such counsel, promptly after statements therefor are received and
(iii) the Surviving Corporation will cooperate in the defense of any such
matter; provided, however, that the Surviving Corporation will not be liable for
any settlement effected without its prior written consent; and provided,
further, that, in the event that any claim or claims for indemnification are
asserted or made within such one-year period, all rights to indemnification in
respect of any such claim or claims will continue until the disposition of any
and all such claims. The Indemnified Parties as group may retain only one law
firm to represent them with respect to any single action unless there is, under
applicable standards of professional conduct, a conflict on any significant
issue between the positions of any two or more Indemnified Parties.
A-27
<PAGE>
(c) This Section 5.08 will survive any termination of this Agreement and
the consummation of the Merger at the Effective Time, is intended to benefit
Pentose, the Surviving Corporation and the Indemnified Parties, and will be
binding on all successors and assigns of the Surviving Corporation.
SECTION 5.09. NOTIFICATION OF CERTAIN MATTERS. Pentose shall give prompt
notice to Vitex, and Vitex shall give prompt notice to Pentose, of (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which would be likely to cause any representation or warranty contained in
this Agreement to be untrue or inaccurate, and (ii) any failure of Pentose or
Vitex, as the case may be, materially to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder
provided, however, that the delivery of any notice pursuant to this Section
shall not limit or otherwise affect the remedies available hereunder to the
party receiving such notice; and provided, further, that failure to give such
notice shall not be treated as a breach of covenant for the purposes of Sections
6.02(a) and 6.03(a) unless the failure to give such notice results in material
prejudice to the other party.
SECTION 5.10. FURTHER ACTION/TAX TREATMENT. Upon the terms and subject to the
conditions hereof, each of the parties hereto in good faith shall use all
commercially reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all other things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement, to obtain in a timely manner all necessary
waivers, consents and approvals and to effect all necessary registrations and
filings, and to otherwise satisfy or cause to be satisfied all conditions
precedent to its obligations under this Agreement. Each of Vitex and Pentose
shall use its best efforts to cause the Merger to qualify, and will not (both
before and after consummation of the Merger) take any actions which could
prevent the Merger from qualifying, as a reorganization under the provisions of
Section 368 of the Code.
SECTION 5.11. PUBLIC ANNOUNCEMENTS. Vitex and Pentose shall consult with each
other before issuing any press release or otherwise making any public statements
with respect to the Merger or this Agreement and shall not issue any such press
release or make any such public statement without the prior consent of the other
party, which shall not be unreasonably withheld or delayed; provided, however,
that a party may, without the prior consent of the other party, issue such press
release or make such public statement as may upon the advice of counsel be
required by law or the National Association of Securities Dealers, Inc. if it
has used all reasonable efforts to consult with the other party.
SECTION 5.12. LISTING OF VITEX COMMON STOCK. Vitex shall file a Notification
Form for Listing of Additional Shares together with the applicable fee covering
the Vitex Common Stock to be issued in the Merger with Nasdaq prior to the
Effective Time.
SECTION 5.13. CONVEYANCE TAXES. Vitex and Pentose shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees, and any similar taxes which become payable in
connection with the transactions contemplated hereby that are required or
permitted to be filed on or before the Effective Time.
A-28
<PAGE>
SECTION 5.14. ACCOUNTANTS' LETTERS. Upon reasonable notice from Vitex, Pentose
shall use its best efforts to cause Arthur Andersen LLP to deliver to Vitex a
letter covering such matters as are customarily addressed in accountant's
"comfort" letters in a form mutually agreeable to Vitex and Pentose.
SECTION 5.15. THIRD PARTY CONSENTS. As soon as practicable following the date
hereof, Vitex and Pentose will each use its commercially reasonable efforts to
obtain all material consents, waivers and approvals under any of its or its
subsidiaries' agreements, contracts, licenses or leases required to be obtained
in connection with the consummation of the transactions contemplated hereby.
SECTION 5.16. TAX-FREE REORGANIZATION. Vitex and Pentose will each use its
commercially reasonable efforts to cause the Merger to be treated as a
reorganization within the meaning of Section 368 of the Code. Vitex and Pentose
will each make available to the other party and their respective legal counsel
copies of all returns requested by the other party.
SECTION 5.17. BOARD OF DIRECTORS OF VITEX. The Board of Directors of Vitex
shall recommend to the stockholders of Vitex and shall use all other reasonable
efforts to take all actions necessary (i) to cause the Board of Directors of the
Surviving Corporation, immediately after the Effective Time, to consist of 9
persons, eight of whom shall have served on the Board of Directors of Vitex
immediately prior to the Effective Time (the "Former Vitex Directors"), and
Samuel K. Ackerman (the "Former Pentose Director"). If, prior to the Effective
Time, any of the Pentose or Vitex designees shall decline or be unable to serve
as a Pentose or Vitex director, Pentose (if such person was designated by
Pentose) or Vitex (if such person was designated by Vitex) shall designate
another person to serve in such person's stead, which person shall be reasonably
acceptable to the other party.
SECTION 5.18. OFFICERS OF VITEX AND OPERATION OF PENTOSE BUSINESS. At the
Effective Time, John R. Barr will continue to serve as the Chief Executive
Officer and President of the Surviving Corporation, and Thomas T. Higgins will
continue to serve as Chief Financial Officer and Executive Vice President-
Operations of the Surviving Corporation. Dr. Ackerman agrees that he will
remain employed at the Surviving Corporation until the acceptable resolution, in
the Surviving Corporation's sole reasonable discretion, of Dr. Chapman's one-
year post-employment obligations to Baxter, if any. At the Effective Time
Samuel K. Ackerman shall serve as an Executive Vice President and John Chapman
shall serve as the Vice President for Blood Product Research of the Surviving
Corporation. At the Effective Time the operations of the previous business of
Pentose will remain generally intact and will be conducted in the greater
Boston, MA area.
SECTION 5.19. FORM S-8. Vitex agrees to file a registration statement on Form
S-8 for the shares of Vitex Common Stock issuable with respect to assumed
Pentose Stock Options except for any issued and outstanding warrants no later
than sixty (60) business days after the Effective Time.
A-29
<PAGE>
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each of the Stockholders separately represents and warrants to Vitex as
follows:
SECTION 6.01 TITLE; ABSENCE OF CERTAIN AGREEMENTS. Such Stockholder is the
lawful and record and beneficial owner of, and has good and marketable title to
the Shares set forth opposite the name of such Stockholder in Schedule 1 hereto,
with the full power and authority to vote such Shares and transfer and otherwise
dispose of such Shares, and any and all rights and benefits incident to the
ownership thereof free and clear of all liens, restrictions or encumbrances of
any nature whatsoever (an "Encumbrance") and except as set forth on the Pentose
Disclosure Schedule, there are no agreements or understandings between such
Stockholder and Pentose and/or any other Stockholder or any other person with
respect to the voting, sale or other disposition of such Shares or any other
matter relating to the Shares.
SECTION 6.02 ORGANIZATION, GOOD STANDING AND POWER. In the case of any
Stockholder that is not a natural person, such Stockholder is duly organized or
formed and validly existing under the laws of the jurisdiction of its
incorporation or formation and has the corporate or other organizational power
and authority under such laws to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
SECTION 6.03 AUTHORITY - GENERAL. Such Stockholder has full and absolute power
and authority to enter into this Agreement and this Agreement has, in the case
of a Stockholder that is not a natural person, been duly authorized by all
requisite action on the part of such Stockholder; and this Agreement has been
duly executed and delivered by such Stockholder, and is the valid and binding
obligation of such Stockholder, enforceable against such Stockholder in
accordance with its terms. Subject to obtaining the consents set forth in
Section 2.04 of the Pentose Disclosure Schedule, neither the execution, delivery
and performance of this Agreement, nor the consummation of the transactions
contemplated hereby nor compliance by such Stockholder with any of the
provisions hereof or thereof will (A) conflict with, (B) result in any
violations of, (C) cause a default under (with or without due notice, lapse of
time or both), (D) give rise to any right of termination, amendment,
cancellation or acceleration of any obligation contained in or the loss of any
material benefit under or (E) result in the creation of any encumbrance upon or
against any assets, rights or property of Pentose (or against any Shares), under
any term, condition or provision of (x) any agreement or instrument to which
such Stockholder is a party, or by which such Stockholder is a party, or by
which such Stockholder or any of his or its properties, assets or rights may be
bound, (y) any law, statute, rule, regulation, order, writ, injunction, decree,
permit, concession, license or franchise of any Governmental Authority
applicable to such Stockholder or any of his or its properties, assets or rights
or (z) in the case of any Stockholder that is not a natural person, such
Stockholder's Charter or by-laws, as amended through the date hereof.
SECTION 6.04 BROKERS. No Stockholder has, nor have any of their officers,
directors, securityholders or employees (if any), employed any broker or finder
or incurred any liability for any brokerage fees, commissions or finders' fees
in connection with the transactions contemplated hereby.
A-30
<PAGE>
SECTION 6.05 ACCURACY OF REPRESENTATIONS AND WARRANTIES OF PENTOSE. Such
stockholder has carefully read and reviewed this Agreement and the Schedules and
Exhibits hereto. To the best knowledge of such Stockholder, after due inquiry,
the representations and warranties of Pentose set forth in this Agreement, as
modified by the Pentose Disclosure Schedule, are true, correct and complete in
all material respects and Pentose is not in breach or violation thereof.
ARTICLE VII
CONDITIONS TO THE MERGER
SECTION 7.01. CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions:
(a) Effectiveness of the Registration Statement. The Registration
Statement shall have been declared effective by the SEC under the Securities
Act. No stop order suspending the effectiveness of the Registration Statement
shall have been issued by the SEC and no proceedings for that purpose and no
similar proceeding in respect of the Proxy Statement shall have been initiated
or, to the knowledge of Vitex or Pentose, threatened by the SEC;
(b) Stockholder Approval. This Agreement shall have been approved and
adopted, and the Merger shall have been approved and adopted, by the requisite
vote, under applicable law, by the stockholders of Pentose and Vitex,
respectively; and the issuance of shares of Vitex Common Stock by virtue of the
Merger shall have been approved by the requisite vote under the rules of the
National Association of Securities Dealers, Inc. by the stockholders of Vitex;
(c) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by any administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; and there shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger, which makes the consummation of the Merger illegal;
(d) Tax Opinions. Vitex shall have received a written opinion of Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C., and Pentose shall have received a
written opinion of Palmer & Dodge LLP, both in form and substance reasonably
satisfactory to each to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code. In rendering such
opinion, counsel shall be entitled to rely upon, among other things, reasonable
assumptions as well as representations of Vitex and Pentose and agree to provide
reasonable and customary representations in connection with the issuance of such
opinions.
(e) Nasdaq Listing. A Notification Form for Listing of Additional Shares
covering the shares of Vitex Common Stock to be issued in the Merger shall have
been filed with Nasdaq and the applicable fee paid by Vitex.
A-31
<PAGE>
SECTION 7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF VITEX. The obligations
of Vitex to effect the Merger are also subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of
Pentose contained in this Agreement (together with the Pentose Disclosure
Schedule) shall be true and correct in all respects on and as of the Effective
Time, with the same force and effect as if made on and as of the Effective Time,
except for (i) changes contemplated by this Agreement, (ii) those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct as of such date) or (iii) failures to
be true and correct that would not have a Material Adverse Effect on Pentose;
and Vitex shall have received a certificate to such effect signed by the
President of Pentose;
(b) Agreements and Covenants. Pentose shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time, and Vitex shall have received a certificate to such effect signed by the
President of Pentose;
(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, including those set forth in
Section 2.04 of the Pentose Disclosure Schedule, and all filings required to be
made, by Pentose for the authorization, execution and delivery of this Agreement
and the consummation by it of the transactions contemplated hereby shall have
been obtained and made by Pentose;
(d) Governmental Actions. There shall not have been instituted, pending or
threatened any action or proceeding (or any investigation or other inquiry that
might result in such an action or proceeding) by any governmental authority or
administrative agency before any governmental authority, administrative agency
or court of competent jurisdiction, nor shall there be in effect any judgment,
decree or order of any governmental authority, administrative agency or court of
competent jurisdiction, in either case, seeking to prohibit or limit the
ownership or operation by Vitex or the Surviving Corporation, of all or a
material portion of the business or assets of Vitex or the Surviving
Corporation, or seeking to compel Vitex or the Surviving Corporation, or any of
its subsidiaries to dispose of or hold separate all or any material portion of
the business or assets of Vitex or the Surviving Corporation, as a result of the
Merger or the transactions contemplated by this Agreement;
(e) Material Adverse Change. Since the date of this Agreement, there shall
have been no change, occurrence or circumstance in the business, results of
operations or financial condition of Pentose or any subsidiary of Pentose having
or reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect;
(f) Affiliate Agreements. Vitex shall have received from each person who
is identified in Section 5.06 of the Pentose Disclosure Schedule as an
"affiliate" of Pentose an Affiliate Agreement, and each such Affiliate Agreement
shall be in full force and effect;
(g) Legal Opinion. Vitex shall have received a legal opinion from Palmer &
Dodge LLP, counsel to Pentose, in a form reasonably acceptable to Vitex;
A-32
<PAGE>
(h) Transfer of Material Agreements. Pentose shall have received all
consents and approvals required to the Merger under those Agreements set forth
in Schedule 2.04 of the Pentose Disclosure Schedule.
(i) Fairness Opinion. Vitex has received written opinion from Warburg
Dillon Read LLC, dated as of the date of the effective date hereof and as of the
effective date of the Registration Statement, that the Merger is fair to Vitex's
stockholders from a financial point of view.
(j) Amended Agreement. Vitex has received an executed amendment or
agreement, in a form reasonably acceptable to it that the tax liability of
Pentose pursuant to the Tax Indemnity Agreement by and among Pentose and the
stockholders named therein, dated June 18, 1999, be limited to no more than
$50,000.
(k) Shareholder Agreement. Vitex shall have received the executed Pentose
Shareholder Affiliate Agreement from each of Ampersand and its affiliates and
Dr. Samuel K. Ackerman pursuant to Section 5.07 hereof.
(l) Dissenters' Rights. Dissenting Shareholders shall not have exercised
dissenters' rights with respect to more than 5% of the Shares.
SECTION 7.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF PENTOSE. The obligation
of Pentose to effect the Merger is also subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of
Vitex contained in this Agreement (together with the Vitex Disclosure Schedule)
shall be true and correct in all respects on and as of the Effective Time, with
the same force and effect as if made on and as of the Effective Time, except for
(i) changes contemplated by this Agreement, (ii) those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such date) and (iii) failures to be true and
correct that would not have a Material Adverse Effect on Vitex; and Pentose
shall have received a certificate to such effect signed by the President and
Chief Financial Officer of Vitex;
(b) Agreements and Covenants. Vitex shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time, except to the extent any such non-performance or non-compliance would not
have a Material Adverse Effect on Vitex, and Pentose shall have received a
certificate to such effect signed by the President and Chief Financial Officer
of Vitex;
(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, including those set forth in
Section 2.04 of the Pentose Disclosure Schedule, and all filings required to be
made, by Vitex or Pentose for the authorization, execution and delivery of this
Agreement and the consummation by them of the transactions contemplated hereby
shall have been obtained and made by Vitex or Pentose; and
(d) Governmental Actions. There shall not have been instituted, pending or
threatened any action or proceeding (or any investigation or other inquiry that
might result in such an action or proceeding) by any governmental authority or
administrative agency before any governmental authority, administrative agency
or court of competent jurisdiction, nor shall there be in effect any
A-33
<PAGE>
judgment, decree or order of any governmental authority, administrative agency
or court of competent jurisdiction, in either case, seeking to prohibit or limit
Pentose or any of its stockholders from consummating the Merger or otherwise
complying with the terms of this Agreement;
(e) Material Adverse Change. Since the date of this Agreement, there shall
have been no change, occurrence or circumstance in the business, results of
operations or financial condition of Vitex having or reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect.
(f) Legal Opinion. Pentose shall have received a legal opinion from Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel to Vitex, in a form
reasonably acceptable to Pentose.
ARTICLE VIII
TERMINATION
SECTION 8.01. TERMINATION. This Agreement may be terminated at any time prior
to the Effective Time, notwithstanding approval thereof by the stockholders of
Pentose and Vitex:
(a) by mutual written consent duly authorized by the Boards of Directors of
Vitex and Pentose; or
(b) by either Vitex or Pentose if the Merger shall not have been
consummated by January 31, 2000 (provided that the right to terminate this
Agreement under this Section 8.01(b) shall not be available to any party whose
failure to fulfill any obligation under this Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date); or
(c) by either Vitex or Pentose if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued a non-appealable final order, decree or ruling or taken any other action,
in each case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger; or
(d) by either Vitex or Pentose, if the required approvals of the
stockholders of Vitex or Pentose contemplated by this Agreement shall not have
been obtained by reason of the failure to obtain the requisite vote upon a vote
taken at a meeting of stockholders convened therefor or at any adjournment
thereof (provided that the right to terminate this Agreement under this Section
8.01(d) shall not be available to any party where the failure to obtain
stockholder approval of such party shall have been caused by the action or
failure to act of such party in breach of this Agreement); or
(e) by Vitex, if the Board of Directors of Pentose shall have withheld,
withdrawn or modified in a manner adverse to Vitex its recommendation in favor
of the Merger or by Pentose, if the Board of Directors of Vitex shall have
withheld, withdrawn or modified in any manner adverse to Pentose its
recommendation in favor of the Merger, or
(f) by Vitex or Pentose, upon a breach of any, covenant or agreement on the
part of Pentose or Vitex, respectively, set forth in this Agreement, in either
case, such that the conditions set forth in Section 7.02(b), or Section 7.03(b),
would not be satisfied (a "Terminating Breach"),
A-34
<PAGE>
provided that, if such Terminating Breach is curable prior to the expiration of
five (5) days from its occurrence by Vitex or Pentose, as the case may be,
through the exercise of its reasonable best efforts and for so long as Vitex or
Pentose, as the case may be, continues to exercise such reasonable best efforts,
neither Pentose nor Vitex, respectively, may terminate this Agreement under this
Section 8.01(f) unless such 5-day period expires without such Terminating Breach
having been cured; or
(g) by Pentose, if there shall have occurred any Material Adverse Effect
with respect to Vitex since the date of this Agreement; or
(h) by Vitex, if there shall have occurred any Material Adverse Effect with
respect to Pentose since the date of this Agreement; or
(i) by either Vitex or Pentose, if any representation or warranty on the
part of the other party set forth in this Agreement proves to have been untrue
on the date hereof, if such failure to be true is reasonably likely to have a
Material Adverse Effect.
SECTION 8.02. NOTICE OF TERMINATION; EFFECT OF TERMINATION. Any termination of
this Agreement under Section 8.01 above will be effective immediately upon the
delivery of written notice by the terminating party to the other party hereto.
In the event of the termination of this Agreement pursuant to Section 8.01, this
Agreement shall forthwith become void and there shall be no liability on the
part of any party hereto or any of its affiliates, directors, officers or
stockholders except (i) as set forth in Sections 8.02, 8.03 and 9.01 hereof, and
(ii) nothing herein shall relieve any party from liability for any willful
breach hereof. No termination of this Agreement shall affect the obligations of
the parties contained in the Confidentiality Agreement, all of which obligations
shall survive termination of this Agreement in accordance with its terms.
SECTION 8.03. FEES AND EXPENSES.
(a) Except as set forth in this Section 8.03, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, whether or not the
Merger is consummated.
(b) Pentose shall pay Vitex a fee of $1,000,000 upon the earliest to occur
of the following events:
(i) the termination of this Agreement by Vitex pursuant to Section
8.01(i); or
(ii) the termination of this Agreement by Pentose or Vitex pursuant to
Section 8.01(d) as a result of the failure to receive the requisite vote
for approval and adoption by the stockholders of Pentose, if Pentose
subsequently enters into an Alternative Transaction.
(c) Vitex shall pay Pentose a fee of $1,000,000, upon the termination of
this Agreement by Pentose pursuant to Section 8.01(i).
(d) As used herein, "Alternative Transaction" means (i) a transaction
pursuant to which any person (or group of persons) other than Vitex or its
affiliates or any affiliate of Pentose (a "Third Party"), acquires more than 50
percent of the outstanding shares from Pentose, pursuant to a tender
A-35
<PAGE>
offer or exchange offer or otherwise, (ii) a merger or other business
combination involving Pentose pursuant to which any Third Party acquires more
than 50 percent of the outstanding equity securities of Pentose, or the entity
surviving such merger or business combination or (iii) any other transaction
pursuant to which any Third Party acquires control of assets of Pentose having a
fair market value equal to more than 50 percent of the fair market value of all
the assets of Pentose, immediately prior to such transaction, provided that such
transaction is completed or agreed to be completed within six months of
termination of this Agreement.
(e) The fee payable pursuant to Sections 8.03(b)(i) and 8.03(c), shall be
paid within one business day after the first to occur of the events described in
the applicable section. The fee payable pursuant to Section 8.03(b)(ii) shall
be paid on the date of the closing of the Alternative Transaction giving rise to
such fee.
(f) In the event of any termination of this Agreement, other than pursuant
to (i) Section 8.01(a) or (ii) any event involving a fee being paid by Pentose
under Section 8.03 b(i) or (ii) or by Vitex under Section 8.03 (c) then, within
30 days after such termination, Vitex shall, at the request of Pentose, purchase
up to $2,000,000 in shares of Pentose capital stock, at the price and upon the
other terms and conditions of the next round of equity financing for Pentose
("Equity Financing"). In the event such Equity Financing has not occurred
within 30 days after such termination, such investment of $2,000,000 will be
evidenced by a convertible promissory note with standard terms and conditions at
a market rate pending the closing of the Equity Financing. In the event such
Equity Financing is not completed within nine months after the termination of
this Agreement, any outstanding convertible promissory note shall be
automatically converted into Pentose Series B Convertible Preferred Stock at the
price of $2.97 per share and having all other terms and conditions of the other
purchasers of Series B Convertible Preferred Stock. The obligation of Vitex to
invest and/or purchase up to $2,000,000 in Pentose capital stock will be subject
to the condition that Ampersand invests and/or purchases at least an equal
amount in Pentose at such time upon the same terms and conditions as the Vitex
investment and/or purchase. The purchases shall be made pursuant to a purchase
agreement upon terms and conditions and containing representations and
warranties which are usual and customary for a private equity financing.
ARTICLE IX
INDEMNIFICATION
SECTION 9.01. DEFINITIONS. As used in this Agreement, the following terms
shall have the following meanings:
(a) "Affiliate" as to any person means any entity, directly or indirectly,
---------
through one or more intermediaries, controlling, controlled by or under common
control with such person.
(b) "Event of Indemnification" shall mean the untruth, inaccuracy or breach
------------------------
of any representation or warranty by Pentose or a Stockholder contained in
Article II or VI hereof or by Vitex contained in Article III hereof, which in
any case, involves fraud or willful, intentional or reckless misrepresentation
or willful omission of a material fact in connection therewith ("Fraud Claim"),
including any Third Party Claims (as defined below) based on the foregoing.
A-36
<PAGE>
(c) "Indemnified Persons" shall mean and include (i) with respect to an
-------------------
Event of Indemnification arising under Article II or VI, Vitex and the Surviving
Corporation and their respective Affiliates, successors and assigns, and the
respective officers and directors of each of the foregoing, (the "Stockholder
Indemnified Persons") and (ii) with respect to an Event of Indemnification
arising under Article III, each of the Stockholders and their respective
Affiliates, successors and assigns, and the respective officers and directors of
each of the foregoing (the "Vitex Indemnified Persons").
(d) "Indemnifying Persons" shall mean and include (i) with respect to an
--------------------
Event of Indemnification arising under Article II or VI, each of the
Stockholders and its or his respective successors, assigns, heirs and legal
representatives and estate (the "Stockholder Indemnifying Persons") and (ii)
with respect to an Event of Indemnification arising under Article III, the
Surviving Corporation and its successors and assigns (the "Vitex Indemnifying
Persons").
(e) "Losses" shall mean any and all losses, claims, shortages, damages,
------
liabilities, expenses (including reasonable attorneys' and accountants' fees),
assessments, Taxes (including interest or penalties thereon) sustained, suffered
or incurred by any Indemnified Person arising from or in connection with any
such matter that is the subject of indemnification under Section 9.02 hereof.
SECTION 9.02. INDEMNIFICATION GENERALLY. Subject to Section 9.03, the
Indemnifying Persons shall indemnify the Indemnified Persons from and against
any and all Losses arising from or in connection with any Event of
Indemnification.
SECTION 9.03. LIMITATIONS ON INDEMNIFICATION. Notwithstanding the foregoing,
the right to indemnification under this Section 9 shall be subject to the
following terms:
(a) No indemnification shall be payable pursuant to Section 9.02 unless and
until the amount of all claims for indemnification pursuant to Article II or IV
or Article III, as the case may be, exceed $100,000 in the aggregate, whereupon
indemnification pursuant to such Event of Indemnification shall be payable for
such claims without any deduction.
(b) No indemnification shall be payable pursuant to Section 9.02 if on the
date of this Agreement the claiming party had actual knowledge of the breach of
representation, warranty or covenant giving rise to such claim and such facts
could reasonably have been expected to give rise to the Losses in light of the
circumstances known to the claiming party on the date of this Agreement and the
claiming party failed to give notice thereof to the indemnified party.
(c) No indemnification shall be payable pursuant to Section 9.02 for claims
asserted other than as set forth in Section 9.04.
(d) All indemnification claims by Vitex Indemnified Persons may be
satisfied, at the option of the Stockholder who is the Indemnifying Person with
respect to such claim, by either (i) cash or (ii) surrender of shares of Vitex
Common Stock, valued at the fair market value of such shares at such time, based
on the closing price of a share of Vitex Common Stock average over the 20
trading days ending on the trading day prior to the transfer to Vitex
Indemnified Persons.
A-37
<PAGE>
(e) No Stockholder (nor any of such Stockholder's successors, assigns,
heirs and legal representatives or estates) shall be liable for the fraud or
willful, intentional or reckless misrepresentation or willful omission of a
material fact by another Stockholder.
(f) A Stockholder Indemnifying Person's indemnification obligations for
Losses shall not be in excess of the value of the Merger Consideration received
by such Stockholder, valued as set forth in Section 9.03(d). The Vitex
Indemnifying Persons indemnification obligations for Losses shall not be in
excess of the value of the Merger Consolidation delivered to the Stockholders,
valued as set forth in Section 9.03(d).
(g) In determining the amount of any indemnity, there shall be taken into
account any tax benefit, insurance proceeds or other similar recovery or offset
realized, directly or indirectly, by the party to be indemnified.
SECTION 9.04. ASSERTION OF CLAIMS. No claim shall be brought under Section 9.02
hereof unless the Indemnified Persons, or any of them, at any time prior to the
first anniversary of this agreement, give the applicable Indemnifying Person or
Persons (a) a written notice of the existence of any such claim, specifying the
nature and basis of such claim and the amount thereof, to the extent known or
(b) written notice pursuant to Section 9.05 of any third party claim, the
existence of which might give rise to such a claim. The failure so to provide
such notice to the Indemnifying Persons Stockholder will not relieve the
Indemnifying Persons from any liability which they may have to the Indemnified
Persons under this Agreement (unless and only to the extent that such failure
results in the loss or compromise of any rights or defenses of the Indemnifying
Persons and they were not otherwise aware of such action or claim). Upon the
giving of such written notice as aforesaid, the Indemnified Persons, or any of
them, shall have the right to commence legal proceedings prior to the Survival
Date for the Fraud Claim involved.
SECTION 9.05. NOTICE AND DEFENSE OF THIRD PARTY CLAIMS. Losses resulting from
the assertion of liability by third parties (each, a "Third Party Claim") shall
be subject to the following terms and conditions:
(a) The Indemnified Persons shall promptly give written notice to the
applicable Indemnifying Persons of any Third Party Claim that might give rise to
any Loss by the Indemnified Persons, stating the nature and basis of such Third
Party Claim, and the amount thereof to the extent known. Such notice shall be
accompanied by copies of all relevant documentation with respect to such Third
Party Claim, including, without limitation, any summons, complaint or other
pleading that may have been served, any written demand or any other document or
instrument. Notwithstanding the foregoing, the failure to provide notice as
aforesaid to the applicable Indemnifying Persons will not relieve the
Indemnifying Persons from any liability which they may have to the Indemnified
Persons under this Agreement or otherwise (unless and only to the extent that
such failure directly results in the loss or compromise of any rights or
defenses of the Indemnifying Person and they were not otherwise aware of such
action or claim).
(b) The Indemnified Persons shall defend any Third Party Claims with
counsel of their own choosing, and shall act reasonably and in accordance with
their good faith business judgment in handling such Third Party Claims, provided
that no Third Party Claim may be settled without the consent of the Indemnifying
Persons. The Stockholder and the Indemnifying Persons, on the one hand, and the
Indemnified Persons, on the other hand, shall make available to each other and
their
A-38
<PAGE>
counsel and accountants all books and records and information relating to any
Third Party Claims, keep each other fully apprised as to the details and
progress of all proceedings relating thereto and render to each other such
assistance as may be reasonably required to ensure the proper and adequate
defense of any and all Third Party Claims.
SECTION 9.06. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the Vitex, Pentose and the Stockholders shall be deemed to be
a condition to the Merger and shall not survive beyond the Effective Time,
provided, however, that Fraud Claims shall survive in accordance with the
- -------- -------
applicable statute of limitations related to such Fraud Claims and shall be
indemnified as set forth in Section 9.02. For convenience of reference, the
date upon which any Fraud Claim shall terminate is referred to herein as the
"Survival Date."
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
Except as otherwise provided in this Section 10.01, the representations,
warranties and agreements of each party hereto shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any other party hereto, any person controlling any such party or any of their
officers or directors, whether prior to or after the execution of this
Agreement. Any disclosure made with reference to one or more sections of the
Pentose Disclosure Schedule or the Vitex Disclosure Schedule shall be deemed
disclosed with respect to each other section therein as to which such disclosure
is relevant provided such relevance is reasonably apparent. The
representations, warranties and agreements in this Agreement shall terminate at
the Effective Time or upon the termination of this Agreement pursuant to Section
8.01, as the case may be, except that the agreements set forth in Sections 5.05,
5.06, 5.07, 5.08, 5.10, 5.11, 5.17 and 5.19 shall survive the Effective Time
indefinitely and those set forth in Section 8.03 shall survive termination
indefinitely. The Confidentiality Agreement shall remain in full force and
effect and shall survive termination of this Agreement as provided therein.
SECTION 10.02. NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date delivered if delivered personally, three days after being
sent by registered or certified mail (postage prepaid, return receipt
requested), one day after dispatch by recognized overnight courier (provided
delivery is confirmed by the carrier) and upon transmission by telecopy,
confirmed received, to the parties at the following addresses (or at such other
address for a party as shall be specified by like changes of address):
(a) If to Vitex:
V.I. Technologies, Inc.
155 Duryea Road
Melville, New York 11747
Attn: John R. Barr, President
A-39
<PAGE>
With a copy to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02110
Attn: William T. Whelan, Esq.
(b) If to Pentose:
Pentose Pharmaceuticals, Inc.
45 Moulton Street
Cambridge, MA 02138
Attn: Dr. Samuel K. Ackerman, President
With a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attn: Lynnette C. Fallon, Esq.
(c) If to the Stockholders:
to their address
as set forth on the
stock records of Vitex
With a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attn: Lynnette C. Fallon, Esq.
SECTION 10.03. CERTAIN DEFINITIONS. For purposes of this Agreement, the term:
(a) "affiliates" means a person that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned person, including, without limitation, any partnership
or joint venture in which Pentose or Vitex, as the case may be, (either alone,
or through or together with any other subsidiary) has, directly or indirectly,
an interest of 10 percent or more;
(b) "business day" means any day other than a day on which banks in Boston
are required or authorized to be closed;
(c) "knowledge" and like phrases shall mean and include (i) actual
knowledge and (ii) that knowledge which a prudent business person (including the
officers, directors and Stockholders)
A-40
<PAGE>
could have obtained in the management of his or her business affairs after
making due inquiry and exercising due diligence with respect thereto. In
connection therewith, the knowledge (both actual and constructive) of any
officer, director or key employee of an entity shall be imputed to be the
knowledge of such entity.
(d) "person" means a person, corporation, partnership, association, trust,
unincorporated organization, other entity or group (as defined in Section
13(d)(3) of the Exchange Act); and
(e) "subsidiary" or "subsidiaries" of Pentose, the Surviving Corporation,
Vitex or any other person means any corporation, partnership, joint venture or
other legal entity of which Pentose, the Surviving Corporation, Vitex or such
other person, as the case may be (either alone or through or together with any
other subsidiary), owns, directly or indirectly, more than 50% of the stock or
other equity interests the holders of which are generally entitled to vote for
the election of the board of directors or other governing body of such
corporation or other legal entity.
SECTION 10.04. AMENDMENT. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective Boards of Directors at any
time prior to the Effective Time; provided, however, that, after approval of the
Merger by the stockholders of Pentose and Vitex, no amendment may be made which
by law requires further approval by such stockholders without such further
approval. This Agreement may not be amended except by an instrument in writing
signed by the parties hereto.
SECTION 10.05. WAIVER. At any time prior to the Effective Time, any party
hereto may, with respect to any other party hereto, (a) extend the time for the
performance of any of the obligations or other acts, (b) waive any inaccuracies
in the representations and warranties contained herein or in any document
delivered pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if set
forth in an instrument in writing signed by the party or parties to be bound
SECTION 10.06. HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 10.07. SEVERABILITY. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
SECTION 10.08. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and supersedes all prior agreements and undertakings, including the
letter of intent dated April 14, 1999 (other than the Confidentiality Agreement
between Vitex and Pentose dated April 14, 1999), both written and oral, among
the parties, or any of them, with respect to the subject matter hereof.
SECTION 10.09. ASSIGNMENT. No party may assign this Agreement or any of its
rights, interests or obligations hereunder without the prior written approval of
the other parties hereto.
A-41
<PAGE>
SECTION 10.10. PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
expressed or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 10.11. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any 'such right preclude other or
further exercise thereof or of any other right. All rights and remedies
existing under this Agreement are cumulative to, and not exclusive of, any
rights or remedies otherwise available.
SECTION 10.12. GOVERNING LAW. This agreement shall be governed by, and
construed in accordance with, the internal laws of the State of Delaware
applicable to contracts executed and fully performed within the State of
Delaware.
SECTION 10.13. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
A-42
<PAGE>
IN WITNESS WHEREOF, Vitex and Pentose have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
V.I. TECHNOLOGIES, INC.
By: /s/ John R. Barr
-----------------------------------------
Name: John R. Barr
Title: President and Chief Executive Officer
PENTOSE PHARMACEUTICALS, INC.
By: /s/ Samuel K. Ackerman
-----------------------------------------
Name: Samuel K. Ackerman, M.D.
Title: President and Chief Executive Officer
/s/ Samuel K. Ackerman
---------------------------------------------
Dr. Samuel K. Ackerman
AMPERSAND SPECIALTY MATERIALS
AND CHEMICAL III LIMITED PARTNERSHIP
By: ASMC-III Management Company Limited
Partnership
By: ASMC-III MCLP, LLP, its general partner
By: /s/ Richard A. Charpie
-----------------------------------------
Name: Richard A. Charpie
Title: Managing General Partner
AMPERSAND SPECIALTY MATERIALS AND
CHEMICALS III COMPANION FUND
LIMITED PARTNERSHIP
By: ASMC-III Management Company Limited
Partnership
By: ASMC-III MCLP, LLP, its general partner
By: /s/ Richard A. Charpie
-----------------------------------------
Name: Richard A. Charpie
Title: Managing General Partner
A-43
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Name of Stockholder Number of Shares
<S> <C>
Samuel K. Ackerman 1,699,867
Ampersand Specialty Materials and 4,182,000 Series A Preferred Stock
Chemicals III Limited Partnership 1,325,293 Series B Preferred Stock
Ampersand Specialty Materials and 68,000 Series A Preferred Stock
Chemicals III Companion Fund 31,549 Series B Preferred Stock
</TABLE>
A-44
<PAGE>
Annex A - Agreement and Plan of Merger
EXHIBIT A-1 TO ANNEX A
FORM OF PENTOSE PHARMACEUTICALS, INC.
AFFILIATE AGREEMENT
______________________, 1999
V.I. Technologies, Inc.
155 Duryea Road
Melville, NY 11747
Ladies and Gentlemen:
Pursuant to the terms of the Agreement and Plan of Merger and
Reorganization dated as of July 28, 1999 (the "Agreement"), among V.I.
Technologies, Inc. , a Delaware corporation ("VITEX"), Pentose Pharmaceuticals,
Inc., a Delaware corporation ("Pentose"), and the stockholders of Pentose listed
on Schedule 1 thereto ("Stockholders"), Pentose will merge with and into VITEX
(the "Merger"). Subject to the terms and conditions of the Agreement, at the
Effective Time (as defined in the Agreement), outstanding shares of capital
stock of Pentose ("Pentose Capital Stock") will be converted into the right to
receive shares of the common stock, par value $.01 per share, of VITEX (the
"VITEX Common Stock"), on the basis described in the Agreement.
The undersigned has been advised that as of the date hereof it may be
deemed to be an "affiliate" of Pentose, as the term "affiliate" is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the Rules and Regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act").
The undersigned understands that the representations, warranties and
covenants set forth herein will be relied upon by VITEX, stockholders of VITEX,
Pentose, other stockholders of Pentose and their respective counsel and
accountants.
The undersigned represents and warrants to and agrees with VITEX that:
1. The undersigned has full power to execute and deliver this Affiliate
Agreement and to make the representations and warranties herein and to perform
its obligations hereunder.
2. The undersigned has carefully read this letter and the Agreement
and discussed its requirements and other applicable limitations upon its ability
to sell, transfer or otherwise dispose of VITEX Common Stock to the extent the
undersigned felt necessary, with its counsel or counsel for Pentose.
3. The undersigned shall not make any sale, transfer or other
disposition of VITEX Common Stock in violation of the Act or the Rules and
Regulations.
4. The undersigned has been advised that the issuance of shares of
VITEX Common Stock to the undersigned in connection with the Merger has been or
will be registered with the Commission under the Act on a Registration Statement
on Form S-4. However, the undersigned has also been advised that, since at the
time the Merger was submitted for a vote of the Shareholders of Pentose the
undersigned may be deemed to have been an affiliate of Pentose and the
distribution by the undersigned of any VITEX Common Stock has not been
registered, and is not exempt, under the Act, the undersigned may not sell,
transfer or otherwise dispose of VITEX Common Stock issued to the undersigned in
the Merger unless (i) such sale, transfer or other disposition has been
registered under the Act, (ii) such sale, transfer or other disposition is made
in conformity with the requirements of Rule 145 promulgated by the Commission
under the Act, or (iii) in the opinion of counsel reasonably acceptable to
VITEX, such sale, transfer or other disposition is otherwise exempt from
registration under the Act.
A-A-1-1
<PAGE>
5. Except as set forth in Section 10 below, VITEX is under no
obligation to register the sale, transfer or other disposition of VITEX Common
Stock by the undersigned or on its behalf under the Act or to take any other
action necessary in order to make compliance with an exemption from such
registration available.
6. Stop transfer instructions will be given to the transfer agent of
VITEX with respect to the VITEX Shares the undersigned will receive, and there
will be placed on the certificate representing such stock, or any certificates
delivered in substitution therefor, a legend stating in substance:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 UNDER THE SECURITIES ACT OF 1933 (THE "ACT") APPLIES. THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE
WITH RULE 145(D) OR AN EFFECTIVE REGISTRATION STATEMENT OR EXEMPTION FROM
REGISTRATION UNDER THE ACT."
7. Unless the transfer by the undersigned of the VITEX Shares is a
sale made in conformity with the provisions of Rule 145(d), or made pursuant to
a registration statement under the Act, VITEX reserves the right to put an
appropriate legend on the certificates issued to a transferee.
8. The legends set forth herein above shall be removed by delivery of
substitute certificates without such legend if the undersigned shall have
delivered to VITEX a copy of a letter from the staff of the Commission, or an
opinion of counsel representing the undersigned and reasonably satisfactory to
VITEX, in form and substance reasonably satisfactory to VITEX, to the effect
that such legend is not required for purposes of the Act.
10. VITEX represents and agrees that for so long and to the extent
necessary to permit the undersigned to sell the VITEX Shares pursuant to Rule
145 and, to the extent applicable, Rule 144 under the VITEX Act, VITEX shall use
its best efforts to file, on a timely basis, all reports and data required to be
filed with the SEC by it pursuant to Section 13 of the Securities Exchange Act
of 1934 (the "1934 Act") so long as it is subject to such requirement, furnish
to the undersigned upon request a written statement as to whether VITEX has
complied with such reporting requirements during 12 months preceding any
proposed sale under Rule 145 and otherwise use its reasonable best efforts to
permit such sales pursuant to Rule 145 and Rule 144. VITEX has filed all
reports required to be filed with the SEC under Section 13 of the 1934 Act
during the preceding 12 months.
11. The undersigned is the beneficial owner of (i.e., has sole or
shared voting or investment power with respect to) all the shares of Pentose
Capital Stock and options to purchase Pentose Capital Stock indicated on the
last page hereof (the "Pentose Securities"). Except for Pentose Securities, the
undersigned does not beneficially own any shares of Pentose Common Stock, Series
A Convertible Preferred Stock, Series B Convertible Preferred Stock or any other
equity securities of Pentose or any options, warrants or other rights to acquire
any equity securities of Pentose.
12. This Agreement may be executed in one or more counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
13. This Agreement shall be enforceable by, and shall inure to the benefit
of and be binding upon, the parties and their respective successors and assigns.
As used herein, the term "successors and assigns" shall mean, where the context
so permits, heirs, executors, administrators, trustees and successor trustees
and personal and other representatives.
14. This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts applicable to contracts made and
to be performed therein (without giving effect to the conflicts of law
principles thereunder).
15. Counsel to and accountants for the parties shall be entitled to
rely upon this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-A-1-2
<PAGE>
Shares beneficially owned by Affiliate:
________ shares of Pentose Common Stock
________ shares of Pentose Series A Redeemable
Convertible Preferred Stock
________ shares of Pentose Series B Redeemable
Convertible Preferred Stock
________ shares of Pentose Common Stock issuable
upon exercise of outstanding options and warrants
Very truly yours,
--------------------------------------------------
(print name of Shareholder above)
By:_______________________________________________
Name:
Title:
(if applicable)
Accepted this ____ day of
_____________, 1999, by
V.I. TECHNOLOGIES, INC.
By:_________________________
Name:
Title:
[Signature Page to Affiliate Agreement]
A-A-1-3
<PAGE>
Annex A - Agreement and Plan of Merger
EXHIBIT A-2 TO ANNEX A
FORM OF PENTOSE PHARMACEUTICALS, INC.
STOCKHOLDER AFFILIATE AGREEMENT
______________________, 1999
V.I. Technologies, Inc.
155 Duryea Road
Melville, NY 11747
Ladies and Gentlemen:
Pursuant to the terms of the Agreement and Plan of Merger and
Reorganization dated as of July 28, 1999 (the "Agreement"), among V.I.
Technologies, Inc., a Delaware corporation ("VITEX"), Pentose Pharmaceuticals,
Inc., a Delaware corporation ("Pentose"), and the stockholders of Pentose listed
on Schedule 1 thereto ("Stockholders"), Pentose will merge with and into VITEX
(the "Merger"). Subject to the terms and conditions of the Agreement, at the
Effective Time (as defined in the Agreement), outstanding shares of capital
stock of Pentose ("Pentose Capital Stock") will be converted into the right to
receive shares of the common stock, par value $.01 per share, of VITEX (the
"VITEX Common Stock"), on the basis described in the Agreement.
The undersigned has been advised that as of the date hereof it may be
deemed to be an "affiliate" of Pentose, as the term "affiliate" is defined for
purposes of paragraphs (c) and (d) of Rule 145 of the Rules and Regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act").
The undersigned understands that the representations, warranties and
covenants set forth herein will be relied upon by VITEX, stockholders of VITEX,
Pentose, other stockholders of Pentose and their respective counsel and
accountants.
The undersigned represents and warrants to and agrees with VITEX that:
1. The undersigned has full power to execute and deliver this Affiliate
Agreement and to make the representations and warranties herein and to perform
its obligations hereunder.
2. The undersigned has carefully read this letter and the Agreement and
discussed its requirements and other applicable limitations upon its ability to
sell, transfer or otherwise dispose of VITEX Common Stock to the extent the
undersigned felt necessary, with its counsel or counsel for Pentose.
3. The undersigned shall not make any sale, transfer or other disposition
of VITEX Common Stock in violation of the Act or the Rules and Regulations.
4. The undersigned has been advised that the issuance of shares of VITEX
Common Stock to the undersigned in connection with the Merger has been or will
be registered with the Commission under the Act on a Registration Statement on
Form S-4. However, the undersigned has also been advised that, since at the time
the Merger was submitted for a vote of the Shareholders of Pentose the
undersigned may be deemed to have been an affiliate of Pentose and the
distribution by the undersigned of any VITEX Common Stock has not been
registered, and is not exempt, under the Act, the undersigned may not sell,
transfer or otherwise dispose of VITEX Common Stock issued to the undersigned in
the Merger unless (i) such sale, transfer or other disposition has been
registered under the Act, (ii) such sale, transfer or other disposition is made
in conformity with the requirements of Rule 145 promulgated by the Commission
under the Act, or (iii) in the opinion of counsel reasonably acceptable to
VITEX, such sale, transfer or other disposition is otherwise exempt from
registration under the Act.
5. Except as set forth in Section 10 below, VITEX is under no obligation
to register the sale, transfer or other disposition of VITEX Common Stock by the
undersigned or on its behalf under the Act or to take any other action necessary
in order to make compliance with an exemption from such registration available.
A-A-2-1
<PAGE>
6. Stop transfer instructions will be given to the transfer agent of
VITEX with respect to the VITEX Shares the undersigned will receive, and there
will be placed on the certificate representing such stock, or any certificates
delivered in substitution therefor, a legend stating in substance:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 UNDER THE SECURITIES ACT OF 1933 (THE "ACT") APPLIES. THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE
WITH RULE 145(D) OR AN EFFECTIVE REGISTRATION STATEMENT OR EXEMPTION FROM
REGISTRATION UNDER THE ACT."
7. Unless the transfer by the undersigned of the VITEX Shares is a sale
made in conformity with the provisions of Rule 145(d), or made pursuant to a
registration statement under the Act, VITEX reserves the right to put an
appropriate legend on the certificates issued to a transferee.
8. The legends set forth herein above shall be removed by delivery of
substitute certificates without such legend if the undersigned shall have
delivered to VITEX a copy of a letter from the staff of the Commission, or an
opinion of counsel representing the undersigned and reasonably satisfactory to
VITEX, in form and substance reasonably satisfactory to VITEX, to the effect
that such legend is not required for purposes of the Act.
10. VITEX represents and agrees that for so long and to the extent
necessary to permit the undersigned to sell the VITEX Shares pursuant to Rule
145 and, to the extent applicable, Rule 144 under the VITEX Act, VITEX shall use
its best efforts to file, on a timely basis, all reports and data required to be
filed with the SEC by it pursuant to Section 13 of the Securities Exchange Act
of 1934 (the "1934 Act") so long as it is subject to such requirement, furnish
to the undersigned upon request a written statement as to whether VITEX has
complied with such reporting requirements during 12 months preceding any
proposed sale under Rule 145 and otherwise use its reasonable best efforts to
permit such sales pursuant to Rule 145 and Rule 144. VITEX has filed all reports
required to be filed with the SEC under Section 13 of the 1934 Act during the
preceding 12 months.
11. The undersigned is the beneficial owner of (i.e., has sole or
shared voting or investment power with respect to) all the shares of Pentose
Capital Stock and options to purchase Pentose Capital Stock indicated on the
last page hereof (the "Pentose Securities"). Except for Pentose Securities, the
undersigned does not beneficially own any shares of Pentose Common Stock, Series
A Convertible Preferred Stock, Series B Convertible Preferred Stock or any other
equity securities of Pentose or any options, warrants or other rights to acquire
any equity securities of Pentose.
12. This Agreement may be executed in one or more counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
13. This Agreement shall be enforceable by, and shall inure to the benefit
of and be binding upon, the parties and their respective successors and assigns.
As used herein, the term "successors and assigns" shall mean, where the context
so permits, heirs, executors, administrators, trustees and successor trustees
and personal and other representatives.
14. This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts applicable to contracts made and
to be performed therein (without giving effect to the conflicts of law
principles thereunder).
15. Counsel to and accountants for the parties shall be entitled to rely
upon this Agreement.
16. Except as set forth in Section 17 below, the undersigned hereby
irrevocably agrees that, the undersigned will not, until the earlier of (i) the
date which is the first anniversary of the Effective Time (as defined in the
Agreement) or (ii) the date on which the closing stock price for VITEX Common
Stock as quoted on the Nasdaq National Market as reported in the Wall Street
Journal has been in excess of $12 per share for each of the previous 20
consecutive trading days, directly or indirectly, sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any shares of VITEX Common Stock received in
the Merger. Prior to the expiration of such period, the undersigned will not
announce or disclose any intention to do anything after the expiration of such
period which the undersigned is prohibited, as provided in the preceding
sentence, from doing during such period.
A-A-2-2
<PAGE>
17. [In Ackerman version]. The prohibition contained in Section 16 shall
not apply to shares of VITEX Common Stock issued in exchange for up to 673,400
shares of Pentose Common Stock in the Merger only if such shares are transferred
to Ampersand Specialty Materials and Chemicals III Limited Partnership or its
affiliates ("Ampersand").
[In Ampersand version] The provisions of Section 16 above shall also
apply to any shares of VITEX Common Stock purchased by the undersigned from
Samuel K Ackerman.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-A-2-3
<PAGE>
Shares beneficially owned by Affiliate:
________ shares of Pentose Common Stock
________ shares of Pentose Series A Redeemable
Convertible Preferred Stock
________ shares of Pentose Series B Redeemable
Convertible Preferred Stock
________ shares of Pentose Common Stock issuable
upon exercise of outstanding options and warrants
Very truly yours,
__________________________________________________
(print name of Shareholder above)
By:_______________________________________________
Name:
Title:
(if applicable)
Accepted this ____ day of
_____________, 1999, by
V.I. TECHNOLOGIES, INC.
By:___________________________
Name:
Title:
[Signature Page to Affiliate Agreement]
A-A-2-4
<PAGE>
ANNEX B
September [ ], 1999
The Board of Directors
V.I. Technologies, Inc.
155 Duryea Road
Melville, NY 11747
Dear Member of the Board:
We understand that V.I. Technologies, Inc., a Delaware corporation ("VITEX"
or the "Company"), is considering a transaction whereby the Company will merge
with Pentose Pharmaceuticals, Inc., a Delaware corporation ("Pentose" or the
"Target"). Pursuant to the terms of a draft Agreement and Plan of Merger and
Reorganization (the "Purchase Agreement"), the Target will merge with and into
the Company (the "Transaction"). Pursuant to the terms of the Purchase
Agreement, each of the issued and outstanding shares of the capital stock of
Target, par value of $0.001 per share ("Pentose Capital Stock) will be converted
into the right to receive a percentage (the "Exchange Ratio") of a share of
VITEX Common Stock, par value $.01 per share ("Company Common Stock") equal to
the quotient of (i) the number of shares as will equal 34% of the issued and
outstanding shares of Company Common Stock at the closing of the Transaction,
giving effect to the issuance of shares in the Transaction, divided by (ii) the
number of issued and outstanding shares of Pentose Capital Stock at the closing
of the Transaction. In addition, all outstanding options, warrants or other
stock issuance agreements of Pentose will be assumed by VITEX at the closing of
the Transaction. No Company Common Stock will be issued to holders of
fractional shares of Pentose Common Stock. The terms and conditions of the
Transaction are more fully set forth in the Purchase Agreement.
You have requested our opinion that, from a financial point of view, the
Exchange Ratio in the Transaction is fair to the Company.
In the past, WDR and its predecessors have provided investment banking
services to the Company and received customary compensation for the rendering of
such services. In the ordinary course of business, WDR, its successors and
affiliates may trade securities of the Company for their own accounts and,
accordingly, may at any time hold a long or short position in such securities.
In addition, you have advised us that Messrs. Richard A. Charpie and Peter D.
Parker are members of the Board of Directors of both the Company and the Target
(Mr. Charpie is also Chairman of the Target's Board) and that affiliates of
Ampersand Ventures, a venture fund managed by Messrs. Charpie and Parker, hold a
21.2% equity position in the Company and a 52.2% equity position in the Target.
Our opinion does not address the Company's underlying business decision to
effect the Transaction or constitute a recommendation to any shareholder of the
Company as to how such shareholder should vote with respect to the Transaction.
At your direction, we have not been asked to, nor do we, offer any opinion as to
the material terms of the Purchase Agreement or the form of the Transaction. In
rendering this opinion, we have assumed, with your consent, that the final
executed form of the Purchase Agreement does not differ in any material respect
from the draft that we have examined, and that the Company and the Target will
comply with all the material terms of the Purchase Agreement.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to the Company, (ii) reviewed certain internal financial information
and other data relating to the business and financial prospects of the Company,
including estimates and financial forecasts prepared by management of the
Company, that were provided to us by the Company and not publicly available,
(iii) reviewed certain internal financial information and other data relating to
the business and financial prospects of the Target, including estimates and
financial forecasts prepared by the managements of the Company and the Target
and not publicly available, (iv) conducted discussions with members of the
senior managements of the Company and the Target, (v) reviewed publicly
available financial and stock market data with respect to certain other
companies in lines of business we believe to be generally comparable to those of
the Company, (vi) compared the financial terms of the Transaction with the
publicly available financial terms of certain other transactions which we
believe to be generally relevant, (vii) considered certain pro forma effects of
the Transaction on the Company's financial statements and reviewed certain
estimates of synergies prepared
B-1
<PAGE>
by Company management, (viii) reviewed drafts of the Purchase Agreement, and
(ix) conducted such other financial studies, analyses, and investigations, and
considered such other information as we deemed necessary or appropriate.
In connection with our review, at your direction, we have not assumed any
responsibility for independent verification for any of the information reviewed
by us for the purpose of this opinion and have, at your direction, relied on its
being complete and accurate in all material respects. In addition, at your
direction, we have not made any independent evaluation or appraisal of any of
the assets or liabilities (contingent or otherwise) of the Company or Target,
nor have we been furnished with any such evaluation or appraisal. With respect
to the financial forecasts, estimates, pro forma effects and calculations of
synergies referred to above, we have assumed, at your direction, that they have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of each company as to the future
performance of their respective companies. In addition, we have assumed with
your approval that the future financial results referred to above will be
achieved at the times and in the amounts projected by management. In rendering
the opinion expressed herein, at the Company's direction, WDR has relied upon
the Company and the assurances of its management concerning the accounting
treatment to be given to purchased research and development and the amortization
of goodwill. WDR expresses no opinion respecting this subject matter and has
relied entirely upon the representations of Company management and its other
advisors. Our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as the
date hereof, the Exchange Ratio in the Transaction is fair, from a financial
point of view, to the Company.
Very truly yours,
WARBURG DILLON READ LLC
B-2
<PAGE>
ANNEX C
V.I. TECHNOLOGIES, INC.
1999 Supplemental Stock Option Plan
as proposed for stockholder approval at ______________________, 1999 Special
Meeting
V.I. TECHNOLOGIES, INC.
1999 SUPPLEMENTAL STOCK OPTION PLAN
Adopted by the Board of Directors on _____________, 1999;
Adopted by the Stockholders on - - - - - - - - - -_________________.
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees (primarily former
employees of Pentose Pharmaceuticals, Inc.) and Consultants of the Company and
its Subsidiaries and to promote the success of the Company's business. Options
granted under the Plan may be incentive stock options (as defined under Section
422 of the Code) or nonstatutory stock options, as determined by the
Administrator at the time of grant of an option and subject to the applicable
provisions of Section 422 of the Code, as amended, and the regulations
promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means a Committee appointed by the Board of Directors
---------
in accordance with Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means V.I. Technologies, Inc., a Delaware corporation.
-------
(g) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any director of the Company whether
compensated for such services or not. If and in the event the Company registers
any class of any equity security pursuant to the Exchange Act, the term
Consultant shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave approved by an authorized representative of
the Company. For purposes of Incentive Stock Options, no such leave may exceed
90 days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract, including Company policies. If reemployment upon
expiration of a leave of absence approved by the Company is not so guaranteed,
on the 181st day of such leave any Incentive Stock Option held by the Optionee
shall cease to be treated as an Incentive Stock Option and shall be treated for
tax purposes as a Nonstatutory Stock Option.
C-1
<PAGE>
(i) "Employee" means any person, including Officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(k) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or system for the last market trading day
prior to the time of determination,; as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the Nasdaq National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination, or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(n) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Option" means a stock option granted pursuant to the Plan.
------
(p) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(q) "Optionee" means an Employee or Consultant who receives an Option.
--------
(r) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(s) "Plan" means this 1999 Stock Option Plan.
----
(t) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
-------------
of 1934, as amended.
(u) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 below.
(v) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,000,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated); provided,
--------
however, that Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan, except that if unvested Shares are repurchased by the Company at
their original purchase price, and the original purchaser of
C-2
<PAGE>
such Shares did not receive any benefits of ownership of such Shares, such
Shares shall become available for future grant under the Plan. For purposes of
the preceding sentence, voting rights shall not be considered a benefit of Share
ownership.
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which
----------------------
the Company becomes subject to the Exchange Act, the Plan shall be administered
by the Board or a committee appointed by the Board.
(b) Plan Procedure after the Date, if any, upon Which the Company
-------------------------------------------------------------
becomes Subject to the Exchange Act.
- -----------------------------------
(i) Administration with Respect to Directors and Officers.
-----------------------------------------------------
With respect to grants of Options to Employees who are also Officers or
directors of the Company, the Plan shall be administered by (A) the Board if the
Board may administer the Plan in compliance with the rules under Rule 16b-3
promulgated under the Exchange Act or any successor thereto ("Rule 16b-3")
relating to the disinterested administration of employee benefit plans under
which Section 16(b) exempt discretionary grants and awards of equity securities
are to be made, or (B) a Committee designated by the Board to administer the
Plan, which Committee shall be constituted to comply with the rules under Rule I
6b-3 relating to the disinterested administration of employee benefit plans
under which Section 16(b) exempt discretionary grants and awards of equity
securities are to be made. Once appointed, such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies, however caused, and remove
all members of the Committee and thereafter directly administer the Plan, all to
the extent permitted by the rules under Rule 1 6b-3 relating to the
disinterested administration of employee benefit plans under which Section 16(b)
exempt discretionary grants and awards of equity securities are to be made.
(ii) Multiple Administrative Bodies. If permitted by Rule 16b-
------------------------------
3, the Plan may be administered by different bodies with respect to directors,
non-director Officers and Employees who are neither directors nor Officers.
(iii) Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With respect to grants of Options to Employees or Consultants who are
- ---------
neither directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a committee designated by the Board, which committee shall
be constituted in such a manner as to satisfy the legal requirements relating to
the administration of incentive stock option plans, if any, of Delaware
corporate and securities laws, of the Code, and of any applicable stock exchange
(the "Applicable Laws"). Once appointed, such Committee shall continue to serve
in its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies, however caused, and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(c) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange upon which the Common
Stock is listed, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options
may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan; (vi)
to determine the terms and conditions of any award granted hereunder;
C-3
<PAGE>
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(f) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted; and
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan.
(d) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if otherwise
eligible, be granted additional Options.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value:
(i) of Shares subject to an Optionee's Incentive Stock Options
granted by the Company, any Parent or Subsidiary, which
(ii) become exercisable for the first time during any calendar
year (under all plans of the Company or any Parent or Subsidiary) exceeds
$100,000, such excess Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(c) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any, way with his or her right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
(d) Upon the Company or a successor corporation issuing any class of
common equity securities required to be registered under Section 12 of the
Exchange Act or upon the Plan being assumed by a corporation having a class of
common equity securities required to be registered under Section 12 of the
Exchange Act, the following limitations shall apply to grants of Options to
Employees:
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 250,000 Shares.
(ii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 11.
(iii) If an Option is canceled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 11), the canceled Option will be counted against the limit
set forth in Section 5(d)(i). For this purpose, if the exercise price of an
Option is reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company, as described in Section 17 of the Plan. It shall
continue in effect for a term often (10) years unless sooner terminated under
Section 13 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
C-4
<PAGE>
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described
in the preceding paragraph, the per Share exercise price shall be no less than
100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of the grant.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option have been owned by the Optionee for more
than six months on the date of surrender and (y) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the Board
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Board, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and fill payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
C-5
<PAGE>
(b) Termination of Employment or Consulting Relationship. In the
----------------------------------------------------
event of termination of an Optionee's Continuous Status as an Employee or
Consultant with the Company (but not in the event of an Optionee's change of
status from Employee to Consultant (in which case an Employee's Incentive Stock
Option shall automatically convert to a Nonstatutory Stock Option on the date
three (3) months and one day from the date of such change of status) or from
Consultant to Employee), such Optionee may, but only within such period of time
as is determined by the Administrator, of at least thirty (30) days, with such
determination in the case of an Incentive Stock Option not exceeding three (3)
months after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that Optionee was entitled
to exercise it at the date of such termination. To the extent that Optionee was
not entitled to exercise the Option at the date of such termination, or if
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event of termination of an
----------------------
Optionee's consulting relationship or Continuous Status as an Employee as a
result of his or her disability, Optionee may, but only within twelve (12)
months from the date of such termination (and in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination; provided, however, that if such disability is
not a "disability" as such term is defined in Section 22(e)(3) of the Code, in
the case of an Incentive Stock Option such Incentive Stock Option shall
automatically convert to a Nonstatutory Stock Option on the day three months and
one day following such termination. To the extent that Optionee is not entitled
to exercise the Option at the date of termination, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee s estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If; at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death,
the Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule I 6b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
(f) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Non-Transferability of Options. Options may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger.
----------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
C-6
<PAGE>
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option will terminate immediately prior to
the consummation of such proposed action.
(c) Merger. In the event of a merger of the Company with or into
------
another corporation, the Option may be assumed or an equivalent option may be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation. If, in such event, the Option is not assumed or
substituted, the Option shall terminate as of the date of the closing of the
merger. For the purposes of this paragraph, the Option shall be considered
assumed if, following the merger, the option confers the right to purchase, for
each Share of Optioned Stock subject to the Option immediately prior to the
merger, the consideration (whether stock, cash, or other securities or property)
received in the merger by holders of Common Stock for each Share held on the
effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger was not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of the Option for
each Share of Optioned Stock subject to the Option to be solely common stock of
the successor corporation or its Parent equal in fair market value to the per
share consideration received by holders of Common Stock in the merger.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted, and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares it; in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
16. Agreements. Options shall be evidenced by written agreements in such
----------
form as the Board shall approve from time to time.
C-7
<PAGE>
17. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange upon which the Common Stock is listed.
18. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee, not less frequently than annually, copies of annual financial
statements. The Company shall also provide such statements to each individual
who acquires Shares pursuant to the Plan while such individual owns such Shares.
The Company shall not be required to provide such statements to key employees
whose duties in connection with the Company assure their access to equivalent
information.
C-8
<PAGE>
ANNEX D
APPRAISAL RIGHTS
DELAWARE GENERAL CORPORATION LAW
SECTION 262
DELAWARE GENERAL CORPORATION LAW
262 Appraisal Rights - (a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation: the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation
to be effected pursuant to sec. 251 (other than a merger effected pursuant
to sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec.
263 or sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation if the holders
thereof are required by the terms of an agreement of merger or
consolidation pursuant to secs. 251, 252, 254, 257, 258, 263 and 264 of
this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
D-1
<PAGE>
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of (1)such stockholder's shares shall
deliver to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of (1)such stockholder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of (1)such stockholder's shares. A
proxy or vote against the merger or consolidation shall not constitute such
a demand. A stockholder electing to take such action must do so by a
separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation
who has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw (1)such stockholder's demand for appraisal
and to accept the terms offered upon the merger or consolidation. Within
120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and
(d) hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a
statement setting forth the aggregate number of shares not voted in favor
of the merger or consolidation and with
D-2
<PAGE>
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such written statement shall be mailed to
the stockholder within 10 days after(1) such stockholder's written request
for such a statement is received by the surviving or resulting corporation
or within 10 days after expiration of the period for delivery of demands
for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determinating the fair rate of interest, the Court may consider all
relevant factors, including the rate of interest which the surviving or
resulting corporation would have had to pay to borrow money during the
pendency of the proceeding. Upon application by the surviving or resulting
corporation or by any stockholder entitled to participate in the appraisal
proceeding, the Court may, in its discretion, permit discovery or other
pretrial proceedings and may proceed to trial upon the appraisal prior to
the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or
resulting corporation pursuant to subsection (f) of this section and who
has submitted such stockholder's certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that (1)such stockholder is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound,
as the Court may direct. Payment shall be so made to each such stockholder,
in the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of such stockholder's demand for an appraisal and an
acceptance of the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation,
then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding
D-3
<PAGE>
in the Court of Chancery shall be dismissed as to any stockholder without
the approval of the Court, and such approval may be conditioned upon such
terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
D-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a Delaware
corporation to indemnify officers, directors, employees and agents for actions
taken in good faith and in a manner they reasonably believed to be in, or not
opposed to, the best interests of the corporation, and with respect to any
criminal action, which they had no reasonable cause to believe was unlawful.
The Delaware General Corporation Law provides that a corporation may pay
expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action (upon
receipt of a written undertaking to reimburse the corporation if indemnification
is not appropriate), and must reimburse a successful defendant for expenses,
including attorney's fees, actually and reasonably incurred, and permits a
corporation to purchase and maintain liability insurance for its directors and
officers. The Delaware General Corporation Law provides that indemnification may
be made for any claim, issue or matter as to which a person has been adjudged by
a court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation, unless and only to the extent a court determines
that the person is entitled to indemnity for such expenses as the court deems
proper.
The Restated Certificate of Incorporation ("Certificate of Incorporation")
of V.I. Technologies ("VITEX") and the Amended and Restated By-laws ("By-laws")
of VITEX provide, among other things, that, to the fullest extent authorized by
the Delaware General Corporation Law, VITEX shall indemnify each person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, is or was, or has agreed to become, a director or officer of
VITEX, or is or was serving, or has agreed to serve, at the request of VITEX, as
a director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any such action,
suit or proceeding and any appeal therefrom
Article Tenth of the Certificate of Incorporation further provides that
indemnification may include payment by VITEX of expenses in defending an action
or proceeding in advance of the final disposition of such action or proceeding
upon receipt of an undertaking by the person indemnified to repay such payment
if it is ultimately determined that such person is not entitled to
indemnification. VITEX shall not indemnify any person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person unless
the initiation thereof was approved by the Board of Directors of VITEX.
Section 2 of the by-laws provide that VITEX shall have the power to
purchase and maintain insurance to insure the officers and directors of VITEX
against any liabilities incurred by them in the discharge of their functions as
such officers and directors. VITEX has purchased insurance which purports to
insure the officers and directors of VITEX against certain liabilities incurred
by them in the discharge of their functions as such officers and directors.
The Delaware General Corporation Law permits a Delaware corporation to
include a provision in its certificate of incorporation eliminating or limiting
the personal liability of any director to the corporation or its stockholders
for monetary damages for a breach of the director's fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, which
concerns unlawful payments of dividends, stock purchases or redemptions or (iv)
for any transaction from which the director derived an improper personal
benefit. Article Ninth of the Certificate of Incorporation contains provisions
limiting the liability of its directors, to the fullest extent currently
permitted by the Delaware General Corporation Law for monetary damages for
breach of their fiduciary duty as directors.
While these provisions provide directors with protection from awards for
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
VITEX has entered into indemnity agreements (the "Indemnity Agreements")
with certain directors of VITEX. The Indemnity Agreements provide that VITEX
will pay any attorneys' fees and all other costs, expenses and obligations which
the indemnitee pays or incurs because of claims made against him or her by
reason of the fact that he or she is or was a director or officer of VITEX. The
payments to be made under the Indemnity Agreements include, but are not limited
to, expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such expenses, judgments, fines, penalties of
amounts paid in settlement)
S4-II-1
<PAGE>
of such claims, except VITEX is not obligated to make any payment under the
Indemnity Agreements which VITEX is prohibited by law from paying as indemnity,
or where (a) indemnification is provided to an indemnitee under an insurance
policy, except for amounts in excess of insurance coverage, and (b) the claim is
one for which an indemnitee is otherwise indemnified by VITEX. If so requested
by the indemnitee, VITEX shall advance all expenses to the indemnitee.
Under Section 5.08 of the Merger Agreement, for one year after the
effective time of the merger, VITEX is required to indemnify former directors
and officers of Pentose Pharmaceuticals, Inc. ("Pentose") against costs or
expenses (including attorney's fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim, action,
suit, proceeding or investigation arising out of any act or omissions in such
capacity [as officer or director] prior to the closing. Such indemnification
shall be to the extent provided under Pentose's certificate of incorporation and
by-laws in effect immediately prior to the effective time of the merger. If a
claim for indemnification asserted within the one year period, all rights to
indemnification in respect of such claim will continue until the disposition of
all such claims.
Item 21. Exhibits and Financial Statement Schedules.
(a) List of Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
-----------
<S> <C>
2 Agreement and Plan of Merger dated as of July 28, 1999 among the Company, Pentose and certain
stockholders of Pentose (included as Annex A to the Joint Proxy Statement/Prospectus contained in
this Registration Statement).
3.1 Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.8 to the Registrant's
Registration Statement on Form S-1, as amended (Registration Statement No. 333-46933) and
incorporated herein by reference.
3.2 Amended and Restated By-laws of the Company. Filed as Exhibit 3.10 to the Registrant's
Registration Statement on Form S-1, as amended (Registration Statement No. 333-46933) and
incorporated herein by reference.
4.1 Specimen of Common Stock Certificate. Filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
4.2 Stock Warrant between the Company and Bear, Stearns & Co. Inc., dated April 29, 1997. Filed as
Exhibit 4.2 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
4.3 Warrant to Purchase Common Stock between the Company and the Trustees of Columbia University in
the City of New York, dated June 21, 1996. Filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
5 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding the validity of the
securities being registered. Filed herewith.
8.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding certain federal
income tax consequences relating to the merger. Filed herewith.
8.2 Opinion of Palmer & Dodge LLP regarding certain federal income tax consequences relating
to the merger. Filed herewith.
10.1* 1998 Equity Incentive Plan. Filed with the Registrant's Definitive Proxy Statement in Schedule
14A filed on April 16, 1999 and incorporated herein by reference.
10.2* 1998 Director Stock Option Plan. Filed with the Registrant's Definitive Proxy Statement in
Schedule 14A filed on April 16, 1999 and incorporated herein by reference.
10.3* 1998 Employee Stock Purchase Plan. Filed as Exhibit 10.3 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
</TABLE>
S4-II-2
<PAGE>
<TABLE>
<S> <C>
10.4+ Non-Exclusive License Agreement (#1) for Solvent Detergent Treated Blood Derived Therapeutic
Products between the Company and the New York Blood Center, Inc., dated September 21, 1995.
Filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.5+ Non-Exclusive License Agreement (#2) for UV Treated Blood Derived Therapeutic Products between
the Company and the New York Blood Center, Inc., dated September 21, 1995. Filed as Exhibit 10.5
to the Registrant's Registration Statement on Form S-1, as amended (Registration Statement No.
333-46933) and incorporated herein by reference.
10.6+ Exclusive License Agreement (#3) for Virally Inactivated Transfusion Plasma Products between the
Company and the New York Blood Center, Inc., dated September 21, 1995, as amended on December 31,
1996 and July 1, 1997. Filed as Exhibit 10.6 to the Registrant's Registration Statement on
Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein by reference.
10.7+ Exclusive License Agreement (#4) for Virally Inactivated Fibrin Sealant/Thrombin Products between
the Company and the New York Blood Center, Inc., dated September 21, 1995, as amended on
September 27, 1996 and January 1, 1998. Filed as Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
10.8+ Exclusive License Agreement (#5) for Virally Inactivated Cellular Products between the Company
and the New York Blood Center, Inc., dated September 21, 1995, as amended on February 16, 1998.
Filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.9 Omnibus Agreement between the Company and the New York Blood Center, Inc., dated October 26,
1995. Filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.10+ Exclusive Distribution Agreement between the Company and United States Surgical Corporation,
dated September 11, 1996, as amended on October 3, 1996. Filed as Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1, as amended (Registration Statement No.
333-46933) and incorporated herein by reference.
10.11+ First Amended and Restated Agreement for Custom Processing between the Company and Bayer
Corporation, dated January 24, 1996. Filed as Exhibit 10.11 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated
herein by reference.
10.12+ Modification Agreement between the Company and Bayer Corporation, dated December 22, 1997. Filed
as Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.13++ Amended and Restated Supply, Manufacturing, and Distribution Collaboration Agreement between the
Company and the American National Red Cross, dated October 1, 1998. Filed as Exhibit 10.13 to
the Registrant's Registration on Form 10-K for the year ended January 2, 1999 and incorporated
herein by reference.
10.14+ Joint Development, Marketing and Distribution Agreement between the Company and Pall
Corporation, dated February 19, 1998. Filed as Exhibit 10.15 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated
herein by reference.
10.15+ Stock Purchase Agreement between Pall Corporation and the Company, dated February 19, 1998.
Filed as Exhibit 10.16 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.16 Registration Rights Agreement between the Company and the Investors named therein, dated February
19, 1998. Filed as Exhibit 10.17 to the Registrant's Registration Statement on Form S-1, as
amended (Registration Statement No. 333-46933) and incorporated herein by reference.
</TABLE>
S4-II-3
<PAGE>
<TABLE>
<S> <C>
10.17 Facility Lease Agreement between the Company and Suffolk County Industrial Development Agency,
dated February 15, 1995. Filed as Exhibit 10.18 to the Registrant's Registration Statement on
Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein by reference.
10.18 Lease Agreement between the Company and Bayer Corporation, dated February 7, 1995. Filed as
Exhibit 10.19 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.19 Sublease Agreement between the Company and Bayer Corporation, dated February 7, 1995. Filed as
Exhibit 10.20 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.20 Security Agreement between the Company and Bayer Corporation, dated December 22, 1997. Filed as
Exhibit 10.21 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.21 Lease between the Company and the Trustees of Columbia University in the City of New York, dated
June 21, 1996. Filed as Exhibit 10.22 to the Registrant's Registration Statement on Form S-1,
as amended (Registration Statement No. 333-46933) and incorporated herein by reference.
10.22+ Settlement Agreement between the Company and Bayer Corporation, dated July 1, 1997. Filed as
Exhibit 10.23 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.23* Employment Agreement between the Company and Bernard Horowitz, dated January 15, 1998. Filed as
Exhibit 10.26 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.24* Letter Agreement between the Company and John R. Barr, dated November 10, 1997. Filed as
Exhibit 10.27 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.25* Memorandum from Rick Charpie to the Company's Vice Presidents, dated October 28, 1997. Filed as
Exhibit 10.28 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.26 Credit Agreement between the Company and The Chase Manhattan Bank, dated December 22, 1997.
Filed as Exhibit 10.29 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.27 Intercreditor Agreement among the Company, Bayer Corporation and The Chase Manhattan Bank, dated
December 22, 1997. Filed as Exhibit 10.30 to the Registrant's Registration Statement on Form
S-1, as amended (Registration Statement No. 333-46933) and incorporated herein by reference.
10.28 Mortgage and Security Agreement among the Company, Suffolk County Industrial Development Agency
and The Chase Manhattan Bank, dated December 22, 1997. Filed as Exhibit 10.31 to the
Registrant's Registration Statement on Form S-1, as amended (Registration Statement No.
333-46933) and incorporated herein by reference.
10.29 Guaranty and Collateral Agreement between the Company and The Chase Manhattan Bank, dated
December 22, 1997. Filed as Exhibit 10.32 to the Registrant's Registration Statement on Form
S-1, as amended (Registration Statement No. 333-46933) and incorporated herein by reference.
10.30 Mortgage, Security Agreement and Fixture Filing among the Company, Suffolk County Industrial
Development Agency and Bayer Corporation, dated February 15, 1995, as amended December 22, 1997.
Filed as Exhibit 10.33 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.31 Form of Indemnification Agreement. Filed as Exhibit 10.34 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
</TABLE>
S4-II-4
<PAGE>
<TABLE>
<S> <C>
10.32 First and Second Amendments, each dated March 31, 1998, to the Omnibus Agreement (which was
previously filed as Exhibit (10.9). Filed as Exhibit 10.35 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
10.33 Amendment No. 1 to the Joint Development Marketing and Distribution Agreement between Pall
Corporation and the Company dated July 19, 1999. Filed as Exhibit 4.4 to the Registrant's Report
on Form 10-Q for the quarter ended July 3, 1999 and incorporated herein by reference.
10.34+++ Option, Development, Manufacture and License Agreement between Pentose Pharmaceuticals and the
Company dated October 2, 1998.
10.35* 6/24/98 Letter Agreement between the Company and Joanne Leonard, dated June 24, 1998. Filed
herewith.
23.1 Consent of KPMG LLP. Filed herewith.
23.2 Consent of Arthur Andersen LLP. Filed herewith.
23.3 Consent of PricewaterhouseCoopers LLP. Filed herewith.
23.4 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (included in the opinion filed as
Exhibit 5 to this Registration Statement).
23.5 Consent of Palmer & Dodge LLP (included in the opinion filed as Exhibit 8.2 to this Registration
Statement).
24 Power of Attorney (contained in signature page hereto).
99.1+++ Form of VITEX Proxy Card.
99.2+++ Form of Pentose Proxy.
99.3 Consent of Dr. Samuel K. Ackerman to be named as a nominee for director of VITEX Corporation.
Filed herewith.
99.4 Consent of Warburg Dillon Read LLC. Filed herewith.
* Management contracts and compensatory plans or arrangements.
+ Certain confidential material contained in the document has been omitted and filed separately
with SEC pursuant to Rule 406 of the Securities Act.
++ Certain confidential material contained in the document has been omitted and filed separately
with the SEC pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
+++ To be filed by amendment.
</TABLE>
S4-II-5
<PAGE>
Item 22. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each
such post-effective amendment 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.
(3) To respond to requests for information that is incorporated by
reference into the Joint Proxy Statement/Prospectus pursuant to Item
4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(4) To supply by means of a post-effective amendment all information
concerning a transaction, and VITEX being acquired involved therein,
that was not the subject of and included in the registration statement
when it became effective.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 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 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 Act and will be governed by the final
adjudication of such issue.
S4-II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Melville, State of New
York, on September 20, 1999.
V.I. TECHNOLOGIES, INC.
(Registrant)
By: /s/ John R. Barr
---------------------
Name: John R. Barr
Title: President and Chief Executive Officer
POWER OF ATTORNEY
Know all those by these presents, that each person whose signature appears
below constitutes and appoints each of John R. Barr, Thomas T. Higgins, William
T. Whelan and R. Mark Chamberlin, or any of them, each acting alone, his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for such person and in his name, place and stead, in any and all
capacities, in connection with the Registration Statement on Form S-4 of V.I.
Technologies, Inc. under the Securities Act of 1933, as amended, including,
without limitation of the generality of the foregoing, to sign the Registration
Statement in the name and on behalf of V.I. Technologies, Inc., or on behalf of
the undersigned as a director or officer of V.I. Technologies, Inc., and any and
all amendments or supplements to the Registration Statement, including any and
all stickers and post-effective amendments to the Registration Statement, and to
sign any and all additional Registration Statements relating to the same
offering of Securities as the Registration Statement that are filed pursuant to
Rule 462 under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
SEC and any applicable securities exchange or securities self-regulatory body,
granting unto said attorneys-in-fact and agents, each acting alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ David Tendler Chairman of the Board of Directors September 20, 1999
David Tendler
/s/ John R. Barr President, Chief Executive Officer and September 20, 1999
Director (Principal Executive Officer)
John R. Barr
/s/ Thomas T. Higgins Executive Vice President, Operations, September 20, 1999
Treasurer and Chief Financial Officer
Thomas T. Higgins (Principal Financial Officer and Principal
Accounting Officer)
/s/ Richard A. Charpie Director September 20, 1999
--------
Richard A. Charpie
/s/ Jeremy Hayward-Surry Director September 20, 1999
--------
Jeremy Hayward-Surry
/s/ Bernard Horowitz, Ph.D. Director September 20, 1999
--------
Bernard Horowitz, Ph.D.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Irwin Lerner Director September 20, 1999
--------
Irwin Lerner
/s/ Peter D. Parker Director September 20, 1999
--------
Peter D. Parker
/s/ Damion E. Wicker, M.D. Director September 20, 1999
--------
Damion E. Wicker, M.D.
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
2 Agreement and Plan of Merger dated as of July 28, 1999 among the Company, Pentose and certain
stockholders of Pentose (included as Annex A to the Joint Proxy Statement/Prospectus contained in
this Registration Statement).
3.1 Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.8 to the Registrant's
Registration Statement on Form S-1, as amended (Registration Statement No. 333-46933) and
incorporated herein by reference.
3.2 Amended and Restated By-laws of the Company. Filed as Exhibit 3.10 to the Registrant's
Registration Statement on Form S-1, as amended (Registration Statement No. 333-46933) and
incorporated herein by reference.
4.1 Specimen of Common Stock Certificate. Filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
4.2 Stock Warrant between the Company and Bear, Stearns & Co. Inc., dated April 29, 1997. Filed as
Exhibit 4.2 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
4.3 Warrant to Purchase Common Stock between the Company and the Trustees of Columbia University in
the City of New York, dated June 21, 1996. Filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
5 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding the validity of the
securities being registered. Filed herewith.
8.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding certain federal
income tax consequences relating to the merger. Filed herewith.
8.2 Opinion of Palmer & Dodge LLP regarding certain federal income tax consequences relating
to the merger. Filed herewith.
10.1* 1998 Equity Incentive Plan. Filed with the Registrant's Definitive Proxy Statement in Schedule
14A filed on April 16, 1999 and incorporated herein by reference.
10.2* 1998 Director Stock Option Plan. Filed with the Registrant's Definitive Proxy Statement in
Schedule 14A filed on April 16, 1999 and incorporated herein by reference.
10.3* 1998 Employee Stock Purchase Plan. Filed as Exhibit 10.3 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
10.4+ Non-Exclusive License Agreement (#1) for Solvent Detergent Treated Blood Derived Therapeutic
Products between the Company and the New York Blood Center, Inc., dated September 21, 1995.
Filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.5+ Non-Exclusive License Agreement (#2) for UV Treated Blood Derived Therapeutic Products between
the Company and the New York Blood Center, Inc., dated September 21, 1995. Filed as Exhibit 10.5
to the Registrant's Registration Statement on Form S-1, as amended (Registration Statement No.
333-46933) and incorporated herein by reference.
10.6+ Exclusive License Agreement (#3) for Virally Inactivated Transfusion Plasma Products between the
Company and the New York Blood Center, Inc., dated September 21, 1995, as amended on December 31,
1996 and July 1, 1997. Filed as Exhibit 10.6 to the Registrant's Registration Statement on
Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein by reference.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.7+ Exclusive License Agreement (#4) for Virally Inactivated Fibrin Sealant/Thrombin Products between
the Company and the New York Blood Center, Inc., dated September 21, 1995, as amended on
September 27, 1996 and January 1, 1998. Filed as Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
10.8+ Exclusive License Agreement (#5) for Virally Inactivated Cellular Products between the Company
and the New York Blood Center, Inc., dated September 21, 1995, as amended on February 16, 1998.
Filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.9 Omnibus Agreement between the Company and the New York Blood Center, Inc., dated October 26,
1995. Filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.10+ Exclusive Distribution Agreement between the Company and United States Surgical Corporation,
dated September 11, 1996, as amended on October 3, 1996. Filed as Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1, as amended (Registration Statement No.
333-46933) and incorporated herein by reference.
10.11+ First Amended and Restated Agreement for Custom Processing between the Company and Bayer
Corporation, dated January 24, 1996. Filed as Exhibit 10.11 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated
herein by reference.
10.12+ Modification Agreement between the Company and Bayer Corporation, dated December 22, 1997. Filed
as Exhibit 10.12 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.13++ Amended and Restated Supply, Manufacturing, and Distribution Collaboration Agreement between the
Company and the American National Red Cross, dated October 1, 1998. Filed as Exhibit 10.13 to
the Registrant's Registration on Form 10-K for the year ended January 2, 1999 and incorporated
herein by reference.
10.14+ Joint Development, Marketing and Distribution Agreement between the Company and Pall
Corporation, dated February 19, 1998. Filed as Exhibit 10.15 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated
herein by reference.
10.15+ Stock Purchase Agreement between Pall Corporation and the Company, dated February 19, 1998.
Filed as Exhibit 10.16 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.16 Registration Rights Agreement between the Company and the Investors named therein, dated February
19, 1998. Filed as Exhibit 10.17 to the Registrant's Registration Statement on Form S-1, as
amended (Registration Statement No. 333-46933) and incorporated herein by reference.
10.17 Facility Lease Agreement between the Company and Suffolk County Industrial Development Agency,
dated February 15, 1995. Filed as Exhibit 10.18 to the Registrant's Registration Statement on
Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein by reference.
10.18 Lease Agreement between the Company and Bayer Corporation, dated February 7, 1995. Filed as
Exhibit 10.19 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.19 Sublease Agreement between the Company and Bayer Corporation, dated February 7, 1995. Filed as
Exhibit 10.20 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.20 Security Agreement between the Company and Bayer Corporation, dated December 22, 1997. Filed as
Exhibit 10.21 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.21 Lease between the Company and the Trustees of Columbia University in the City of New York, dated
June 21, 1996. Filed as Exhibit 10.22 to the Registrant's Registration Statement on Form S-1,
as amended (Registration Statement No. 333-46933) and incorporated herein by reference.
10.22+ Settlement Agreement between the Company and Bayer Corporation, dated July 1, 1997. Filed as
Exhibit 10.23 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.23* Employment Agreement between the Company and Bernard Horowitz, dated January 15, 1998. Filed as
Exhibit 10.26 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.24* Letter Agreement between the Company and John R. Barr, dated November 10, 1997. Filed as
Exhibit 10.27 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.25* Memorandum from Rick Charpie to the Company's Vice Presidents, dated October 28, 1997. Filed as
Exhibit 10.28 to the Registrant's Registration Statement on Form S-1, as amended (Registration
Statement No. 333-46933) and incorporated herein by reference.
10.26 Credit Agreement between the Company and The Chase Manhattan Bank, dated December 22, 1997.
Filed as Exhibit 10.29 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.27 Intercreditor Agreement among the Company, Bayer Corporation and The Chase Manhattan Bank, dated
December 22, 1997. Filed as Exhibit 10.30 to the Registrant's Registration Statement on Form
S-1, as amended (Registration Statement No. 333-46933) and incorporated herein by reference.
10.28 Mortgage and Security Agreement among the Company, Suffolk County Industrial Development Agency
and The Chase Manhattan Bank, dated December 22, 1997. Filed as Exhibit 10.31 to the
Registrant's Registration Statement on Form S-1, as amended (Registration Statement No.
333-46933) and incorporated herein by reference.
10.29 Guaranty and Collateral Agreement between the Company and The Chase Manhattan Bank, dated
December 22, 1997. Filed as Exhibit 10.32 to the Registrant's Registration Statement on Form
S-1, as amended (Registration Statement No. 333-46933) and incorporated herein by reference.
10.30 Mortgage, Security Agreement and Fixture Filing among the Company, Suffolk County Industrial
Development Agency and Bayer Corporation, dated February 15, 1995, as amended December 22, 1997.
Filed as Exhibit 10.33 to the Registrant's Registration Statement on Form S-1, as amended
(Registration Statement No. 333-46933) and incorporated herein by reference.
10.31 Form of Indemnification Agreement. Filed as Exhibit 10.34 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
10.32 First and Second Amendments, each dated March 31, 1998, to the Omnibus Agreement (which was
previously filed as Exhibit 10.9). Filed as Exhibit 10.35 to the Registrant's Registration
Statement on Form S-1, as amended (Registration Statement No. 333-46933) and incorporated herein
by reference.
10.33 Amendment No. 1 to the Joint Development Marketing and Distribution Agreement between Pall
Corporation and the Company dated July 19, 1999. Filed as Exhibit 4.4 to the Registrant's Report
on Form 10-Q for the quarter ended July 3, 1999 and incorporated herein by reference.
10.34+++ Option, Development, Manufacture and License Agreement between Pentose Pharmaceuticals and the
Company dated October 2, 1998.
10.35* 6/24/98 Letter Agreement between the Company and Joanne Leonard, dated June 24, 1998. Filed
herewith.
23.1 Consent of KPMG LLP. Filed herewith.
23.2 Consent of Arthur Andersen LLP. Filed herewith.
23.3 Consent of PricewaterhouseCoopers LLP. Filed herewith.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
23.4 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (included in the opinion filed as
Exhibit 5 to this Registration Statement).
23.5 Consent of Palmer & Dodge LLP (included in the opinion filed as Exhibit 8.2 to this Registration
Statement).
24 Power of Attorney (contained in signature page hereto).
99.1+++ Form of VITEX Proxy Card.
99.2+++ Form of Pentose Proxy.
99.3 Consent of Dr. Samuel K. Ackerman to be named as a nominee for director of VITEX Corporation.
Filed herewith.
99.4 Consent of Warburg Dillon Read LLC. Filed herewith.
* Management contracts and compensatory plans or arrangements.
+ Certain confidential material contained in the document has been omitted and filed separately
with SEC pursuant to Rule 406 of the Securities Act.
++ Certain confidential material contained in the document has been omitted and filed separately
with the SEC pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
+++ To be filed by amendment.
</TABLE>
<PAGE>
EXHIBIT 5
[Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. Letterhead]
September 20, 1999
V.I. Technologies, Inc.
155 Duryea Road
Melville, New York 11747
Ladies and Gentlemen:
In connection with the registration on Form S-4 (the "Registration
Statement") being filed by V.I. Technologies, Inc., a Delaware corporation (the
"Company"), with the Securities and Exchange Commission for the purpose of
registering under the Securities Act of 1933, as amended (the "Act"), shares of
the Common Stock of the Company, par value $.01 per share (the "Shares"), to be
issued in connection with the merger (the "Merger") of Pentose Pharmaceuticals,
Inc., a Delaware corporation ("Pentose"), with and into the Company, pursuant to
the terms of the Agreement and Plan of Merger and Reorganization (the "Merger
Agreement") dated July 28, 1999 among Pentose, the Company and certain
stockholders of Pentose, you have requested our opinion with respect to the
matters set forth below.
We have examined originals or copies, certified or otherwise authenticated
to our satisfaction, of all such documents and records and conducted such other
investigations of fact and law as we have deemed necessary as a basis for this
opinion. As to certain questions of fact, we have relied upon statements of
officers of the Company and others.
In rendering this opinion we have assumed that prior to the issuance of any
of the Shares (i) the Registration Statement, as then amended, will have become
effective under the Securities Act, (ii) the shareholders of the Company will
have approved the Merger Agreement and the issuance of the Shares, (iii) the
shareholders of Pentose will have approved and adopted the Merger Agreement, and
(iv) the transactions contemplated by the Merger Agreement will have been
consummated.
On the basis of the foregoing, we are of the opinion that the Shares, when
issued and delivered in accordance with the terms and conditions of the
Agreement, will be duly authorized, validly issued, fully paid and non-
assessable.
This opinion relates solely to the corporate law of the State of Delaware.
We consent to the filing of this opinion as Exhibit 5 to the Registration
Statement. In addition, we consent to the reference to our firm under the
caption "Legal Matters" in the Joint Proxy Statement/Prospectus constituting a
part of the Registration Statement. In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act.
Very truly yours,
/s/ Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
---------------------------------------------------
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
<PAGE>
EXHIBIT 8.1
MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C.
One Financial Center
Boston, MA 02111
Telephone: (617) 542-6000 Facsimile: (617) 542-2241
September 20, 1999
V.I. Technologies, Inc.
155 Duryea Road
Melville, New York 11747
Ladies and Gentlemen:
We have acted as counsel to V.I. Technologies, Inc. ("Vitex"), a Delaware
corporation, in connection with the proposed merger (the "Merger") of Pentose
Pharmaceuticals, Inc. ("Pentose"), a Delaware corporation, with and into Vitex,
pursuant to an Agreement and Plan of Merger and Reorganization (the "Merger
Agreement"), dated as of July 28, 1999, by and among Vitex, Pentose and certain
stockholders of Pentose. The Merger is described in the Registration Statement
on Form S-4 (the "Registration Statement") of which this exhibit is a part.
This opinion is being rendered pursuant to the requirements of Item 21(a) of
Form S-4 under the Securities Act of 1933, as amended. Capitalized terms not
defined herein have the meanings set forth in the Merger Agreement and the
documents related thereto. All section references, unless otherwise indicated,
are to the United States Internal Revenue Code of 1986, as amended (the "Code").
In preparing this opinion, we have examined and relied upon (i) the Merger
Agreement, (ii) the Joint Proxy Statement/Prospectus (the "Proxy Statement")
included in the Registration Statement (iii) the tax representation letters
delivered to us by Vitex and Pentose in connection with this opinion (the
"Representation Letters"), and (iv) such other documents as we have deemed
necessary or appropriate in order to enable us to render this opinion. In our
examination of documents, we have assumed the authenticity of original
documents, the accuracy of copies, the genuineness of signatures, and the legal
capacity of signatories.
In rendering this opinion, we have assumed without investigation or
verification that the facts relating to the Merger as described in the Proxy
Statement are true, correct and complete in all material respects; that all
representations and warranties contained in the Proxy Statement, the Merger
Agreement and the Representation Letters are, at the time they are made, and
will remain at all times through the Effective Time, true, correct and complete
and may be relied upon by us at the time they are made and at all times through
the Effective Time; that any representation in any of the documents referred to
herein that is made "to the best of the knowledge and belief" (or similar
qualification) of any person or party are true, correct and complete without
such qualification; and that, as to all matters for which a person or entity has
represented that such person or entity is not a party to, does not have, or is
not aware of, any plan, intention, understanding or agreement, there is no such
plan, intention, understanding or agreement. We have further assumed that all
parties to the Merger Agreement and to any other documents examined by us have
acted, and will act, in accordance with the terms of such Merger Agreement and
documents; that the Merger will be consummated at the Effective Time pursuant to
the terms and conditions set forth in the Merger Agreement (including all
covenants and conditions contained therein) without the waiver or modification
of any such terms and conditions; that the Merger will be effective as a merger
under the applicable laws of Delaware; and that Vitex and Pentose each will
comply with all reporting obligations required under the Code and Treasury
Regulations with respect to the Merger. Any inaccuracy in, or breach of, any of
the aforementioned statements, representations or assumptions could adversely
affect our opinion.
Our opinion is based on existing provisions of the Code, Treasury
Regulations, judicial decisions, and rulings and other pronouncements of the
Internal Revenue Service (the "IRS") as in effect on the date of this opinion,
all of which are subject to change (possibly with retroactive effect) or
reinterpretation. No assurances can be given that a change in the law on which
our opinion is based or the interpretation thereof will not occur or that such
change will not affect the opinion expressed herein. We undertake no
responsibility to advise you of any such developments in the law after the
Effective Time.
<PAGE>
No ruling has been or will be sought from the IRS by Vitex or Pentose as to
the federal income tax consequences of any aspect of the Merger, and our opinion
is not binding upon either the IRS or any court. Thus, no assurances can be
given that a position taken in reliance on our opinion will not be challenged by
the IRS or rejected by a court.
Based upon and subject to the foregoing, the discussion contained in the
Proxy Statement under the heading "Material Federal Income Tax Consequences of
the Merger," subject to the limitations and qualifications described therein,
fairly and accurately represents our opinion as to the material United States
federal income tax consequences of the Merger.
Our opinion addresses only the specific United States federal income tax
consequences of the Merger set forth herein, and does not address any other
federal, state, local, or foreign income, estate, gift, transfer, sales, use or
other tax consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with the Merger).
This opinion is being provided to you solely for use in connection with the
Registration Statement, and this opinion letter may not be used, circulated,
quoted, or otherwise referred to for any other purpose. We hereby consent to
the use of our name under the caption "Material Federal Income Tax Consequences
of the Merger" and "Legal Matters" in the Registration Statement and to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
---------------------------------------------------
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
<PAGE>
EXHIBIT 8.2
PALMER & DODGE LLP
One Beacon Street, Boston, MA 02108-3190
Telephone: (617) 573-0100 Facsimile: (617) 227-4420
September 20, 1999
Pentose Pharmaceuticals, Inc.
45 Moulton Street
Cambridge, MA 02138
Ladies and Gentlemen:
We have acted as counsel to Pentose Pharmaceuticals, Inc. ("Pentose"), a
Delaware corporation, in connection with the proposed merger (the "Merger") of
Pentose with and into V.I. Technologies, Inc. ("VITEX"), a Delaware corporation,
pursuant to an Agreement and Plan of Merger and Reorganization (the "Merger
Agreement"), dated as of July 28, 1999, by and among VITEX, Pentose and certain
stockholders of Pentose. The Merger is described in the Registration Statement
on Form S-4 (the "Registration Statement") of which this exhibit is a part.
This opinion is being rendered pursuant to the requirements of Item 21(a) of
Form S-4 under the Securities Act of 1933, as amended. Capitalized terms not
defined herein have the meanings set forth in the Merger Agreement and the
documents related thereto. All section references, unless otherwise indicated,
are to the United States Internal Revenue Code of 1986, as amended (the "Code").
In preparing this opinion, we have examined and relied upon (i) the Merger
Agreement, (ii) the Joint Proxy Statement/Prospectus (the "Proxy Statement")
included in the Registration Statement (iii) the tax representation letters
delivered to us by VITEX and Pentose in connection with this opinion (the
"Representation Letters"), and (iv) such other documents as we have deemed
necessary or appropriate in order to enable us to render this opinion. In our
examination of documents, we have assumed the authenticity of original
documents, the accuracy of copies, the genuineness of signatures, and the legal
capacity of signatories.
In rendering this opinion, we have assumed without investigation or
verification that the facts relating to the Merger as described in the Proxy
Statement are true, correct and complete in all material respects; that all
representations and warranties contained in the Proxy Statement, the Merger
Agreement and the Representation Letters are, at the time they are made, and
will remain at all times through the Effective Time, true, correct and complete
and may be relied upon by us at the time they are made and at all times through
the Effective Time; that any representation in any of the documents referred to
herein that is made "to the best of the knowledge and belief" (or similar
qualification) of any person or party are true, correct and complete without
such qualification; and that, as to all matters for which a person or entity has
represented that such person or entity is not a party to, does not have, or is
not aware of, any plan, intention, understanding or agreement, there is no such
plan, intention, understanding or agreement. We have further assumed that all
parties to the Merger Agreement and to any other documents examined by us have
acted, and will act, in accordance with the terms of such Merger Agreement and
documents; that the Merger will be consummated at the Effective Time pursuant to
the terms and conditions set forth in the Merger Agreement (including all
covenants and conditions contained therein) without the waiver or modification
of any such terms and conditions; that the Merger will be effective as a merger
under the applicable laws of Delaware; and that VITEX and Pentose each will
comply with all reporting obligations required under the Code and Treasury
Regulations with respect to the Merger. Any inaccuracy in, or breach of, any of
the aforementioned statements, representations or assumptions could adversely
affect our opinion.
Our opinion is based on existing provisions of the Code, Treasury
Regulations, judicial decisions, and rulings and other pronouncements of the
Internal Revenue Service (the "IRS") as in effect on the date of this opinion,
all of which are subject to change (possibly with retroactive effect) or
reinterpretation. No assurances can be given that a change in the law on which
our opinion is based or the interpretation thereof will not occur or that such
change will not affect the opinion expressed herein. We undertake no
responsibility to advise you of any such developments in the law after the
Effective Time.
<PAGE>
No ruling has been or will be sought from the IRS by VITEX or Pentose as to
the federal income tax consequences of any aspect of the Merger, and our opinion
is not binding upon either the IRS or any court. Thus, no assurances can be
given that a position taken in reliance on our opinion will not be challenged by
the IRS or rejected by a court.
Based upon and subject to the foregoing, the discussion contained in the
Proxy Statement under the heading "Material Federal Income Tax Consequences of
the Merger," subject to the limitations and qualifications described therein,
fairly and accurately represents our opinion as to the material United States
federal income tax consequences of the Merger.
Our opinion addresses only the specific United States federal income tax
consequences of the Merger set forth herein, and does not address any other
federal, state, local, or foreign income, estate, gift, transfer, sales, use or
other tax consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with the Merger).
This opinion is being provided to you solely for use in connection with the
Registration Statement, and this opinion letter may not be used, circulated,
quoted, or otherwise referred to for any other purpose. We hereby consent to
the use of our name under the caption "Material Federal Income Tax Consequences
of the Merger" and "Legal Matters" in the Registration Statement and to the
filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Palmer & Dodge LLP
<PAGE>
EXHIBIT 10.35
June 24, 1998
Ms. Joanne Leonard
7 Dogwood Court
West Paterson, NJ 07424
Dear Joanne:
This letter agreement (the "Letter Agreement") and the release attached as
Exhibit A hereto (the "Release") are provided to you in connection with your
decision to resign your employment by V.I. Technologies, Inc. ("VITEX").
You will receive the following benefits from VITEX upon the effective date
of your resignation in view of your contributions to VITEX including the
completion of the successful initial public offering by VITEX:
1. As you requested, your employment with VITEX and your position as an
officer and employee of VITEX will end on June 30, 1998.
2. VITEX will make a one-time payment to you equal to $143,000 on the
date the Release becomes effective (i.e. it can no longer be revoked
by you pursuant to its terms), subject to reduction for withholding
and other taxes.
3. Subject to the Release becoming effective as above, VITEX will
accelerate the vesting of all of the options to acquire common stock
of VITEX granted to you by VITEX under the V.I. Technologies, Inc.
1995 Equity Incentive Plan (formerly the Melville Biologics, Inc. 1995
Equity Incentive Plan) (the "Plan") so that all such options will be
fully vested on June 30, 1998 -- which would bring your total common
shares of VITEX subject to such options to 55,457 shares of common
stock of VITEX (the "Options"). The Options granted to you on January
8, 1998 for 8,945 shares of VITEX common stock which is an Incentive
Stock Option will be converted into an Incentive Stock Option covering
4,240 shares and a Non-Qualified Option covering 4,705 shares.
Notwithstanding the provisions of the Options and the Plan, the
Options will terminate effective August 15, 1999, except that
Incentive Stock Options which are included in the Options will be
converted to Non-Qualified Options if they are not exercised within
three months from the date your employment by VITEX ends (September
30, 1998). You must execute the Amendment Agreement which is attached
hereto as Exhibit B to permit these changes and deliver such Amendment
Agreement at the time you execute this Letter Agreement.
<PAGE>
Ms. Joanne Leonard
June 24, 1998
Page 2
4. You will be provided with normal medical, dental and insurance
benefits, as currently provided to you by VITEX, until December 31,
1998 or earlier if terminated by you.
5. In addition, you will be paid $22,000 for vacation accrued through
June 30, 1998. You will also be reimbursed for all expenses incurred
by you on behalf of VITEX prior to June 30, 1998 in accordance with
VITEX's policies.
6. VITEX represents that it does not have knowledge of any facts or
circumstances pursuant to which it could bring any claim, demand or
cause of action against you and does not have knowledge of any facts
or circumstances that reasonably would cause VITEX to investigate
whether it could bring any claim, demand or cause of action against
you.
7. VITEX agrees that in the event a director, officer or human resources
manager of VITEX receives an inquiry from any individual concerning
your departure from VITEX, the following statement, or words
substantially similar to the following statement, shall be used in
response:
"Ms. Leonard served as Vice President of Finance, Chief Financial
Officer and Treasurer of VITEX from August 1995 until her resignation
on June 30, 1998. Over that period, VITEX made considerable progress
financially and concluded an initial public offering of its common
stock which was consummated on June 15, 1998. Ms. Leonard elected to
voluntarily terminate her employment with VITEX when the I.P.O. was
completed to pursue another career opportunity."
You understand and acknowledge that VITEX has numerous employees and agents
and that with respect to all such employees and agents other than directors,
officers or human resources personnel, VITEX's only commitments of contractual
significance contained in this paragraph 7 are to insert a memorandum in your
personnel record containing said statement and to do nothing in bad faith to
induce other employees or agents of VITEX not to use that statement in response
to an inquiry.
VITEX may withdraw and terminate this Letter Agreement at any time prior to
your acceptance thereof which shall be evidenced only by returning a copy of
this Letter Agreement signed by you together with the Release and the Amendment
Agreement each executed by you. This Letter Agreement shall be governed and
construed in accordance with the laws of the State of New York. The provisions
of paragraph 9 of the Release are incorporated herein by reference. This Letter
Agreement replaces all prior correspondence to you from VITEX regarding your
termination of employment by VITEX, including but not limited to the memorandum
from John Barr to you dated December 23, 1997. You acknowledge that you have
relied on the advice of
<PAGE>
Ms. Joanne Leonard
June 24, 1998
Page 3
your own legal counsel with respect to the matters set forth in this Letter
Agreement, the Amendment Agreement and the Release.
Sincerely,
V.I. TECHNOLOGIES, INC.
By: /s/ John Barr
-------------------------------------
John Barr
President and Chief Executive Officer
AGREED: June 24, 1998
/s/ Joanne M. Leonard
- ----------------------
JOANNE M. LEONARD
<PAGE>
EXHIBIT 23.1
------------
The Board of Directors
V.I. Technologies, Inc.:
We consent to the use of our report dated January 15, 1999 included herein and
to the reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
---------
KPMG LLP
Melville, New York
September 20, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this Joint Proxy
Statement/Prospectus.
/s/ Arthur Andersen LLP
Boston, Massachusetts
September 14, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of V.I.
Technologies, Inc. of our report dated May 1, 1998, except as to the information
in Note 3 for which the date is July 15, 1998, relating to the financial
statements of Pentose Pharmaceuticals Inc. for the years ended December 31, 1997
and 1996, which appears in such Registration Statement. We also consent to the
references to us under the headings "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
September 14, 1999
<PAGE>
Exhibit 99.3
CONSENT OF DR. SAMUEL K. ACKERMAN
I hereby consent to being named as a person who will become a director of V.I.
Technologies, Inc., a Delaware corporation ("VITEX"), in connection with the
consummation of the merger (the "Merger") contemplated by the Agreement and Plan
of Merger and Reorganization (the "Agreement"), dated as of July 28, 1999, among
VITEX, Pentose Pharmaceuticals, Inc., a Delaware corporation ("Pentose"), and
the stockholders of Pentose listed on Schedule I to the Agreement, in the
Registration Statement on Form S-4 to be filed by VITEX with the Securities and
Exchange Commission in connection with the Merger (the "Registration
Statement"), and to the filing of this consent as an exhibit to the Registration
Statement.
Signature:/s/ Samuel K. Ackerman
----------------------
Dr. Samuel K. Ackerman
Date: September 9, 1999.
<PAGE>
Exhibit 99.4
We hereby consent to the use of Appendix B containing our opinion letter dated
September [], 1999 to the Board of Directors of V.I. Technologies, Inc. in the
Joint Proxy Statement-Prospectus constituting a part of the Registration
Statement on Form S-4 relating to the merger of V.I. Technologies, Inc. with
Pentose Pharmaceuticals, Inc. and to the references to our firm in such Joint
Proxy Statement-Prospectus. In giving this consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities and Exchange Commission promulgated thereunder.
/s/ Warburg Dillon Read LLC
New York, New York
September 14, 1999
