<PAGE>
As filed with the Securities and Exchange Commission on October 7, 1999
Registration No. 333-87443
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
Amendment No. 1
To
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 Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
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)
Copies to:
William T. Whelan, Esq. Samuel K. Ackerman, M.D. Lynnette C. Fallon, Esq.
R. Mark Chamberlin, Esq.Pentose Pharmaceuticals, Inc. Palmer & Dodge, LLP
Mintz, Levin, Cohn, 45 Moulton Street One Beacon Street
Ferris, Cambridge, MA 02138 Boston, MA 02108
Glovsky and Popeo, P.C. (617) 864-4800 (617) 573-0100
One Financial Center
Boston, MA 02111
(617) 542-6000
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. [_]
--------------
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.
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- --------------------------------------------------------------------------------
<PAGE>
[PRELIMINARY DRAFT DATED OCTOBER 7, 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 0.5967 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
6,416,874 shares of VITEX common stock to Pentose stockholders in the merger,
based on outstanding shares on September 24, 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 the 1999 Supplemental
Stock Option Plan and to approve the increase in the number of authorized
shares of VITEX common stock.
/s/
----------------------------------
John R. Barr
President and Chief Executive
Officer
V.I. Technologies, Inc.
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-12 of this Joint Proxy Statement/Prospectus.
The dates, times and places of the meetings are:
For VITEX stockholders:
Friday, November 5, 1999
10:00 a.m., Eastern Time
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts
For Pentose stockholders:
Friday, November 5, 1999
10:00 a.m., Eastern Time
Palmer & Dodge LLP One Beacon Street Boston, Massachusetts
/s/
----------------------------------
Samuel K. Ackerman, M.D.
President and Chief Executive
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.
Joint Proxy Statement/Prospectus dated October , 1999 and first mailed to
stockholders on or about October , 1999.
<PAGE>
Sources of Additional Information
This Joint Proxy Statement/Prospectus incorporates important business and
financial information about VITEX that is not included or delivered with this
document. Such information is available without charge to VITEX and Pentose
stockholders upon written or oral request. Contact VITEX at 155 Duryea Road,
Melville, New York 11747, attn.: VITEX Investor Relations. VITEX's telephone
number is (516) 752-7314.
To obtain timely delivery of requested documents prior to the special
meeting of VITEX stockholders or the special meeting of Pentose stockholders,
you must request them no later than November , 1999, which is five business
days prior to the date of such meetings.
Also see "Where You Can Find More Information" in this Joint Proxy
Statement/Prospectus.
2
<PAGE>
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 NOVEMBER 5, 1999
To the Stockholders of V.I. Technologies, Inc.:
A special meeting of V.I. Technologies, Inc. ("VITEX") will be held on
Friday, November 5, 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 6,416,874 shares of VITEX common stock, or such greater number as is
required in the event securities convertible into common stock of VITEX
are exercised prior to the closing of the merger, 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.
By Order of the Board of
Directors
/s/ Thomas T. Higgins
----------------
Thomas T. Higgins
Assistant Secretary
, 1999
<PAGE>
Pentose Pharmaceuticals, Inc.
45 Moulton Street
Cambridge, MA 02138
NOTICE OF SPECIAL MEETING OF PENTOSE PHARMACEUTICALS, INC.
TO BE HELD ON NOVEMBER 5, 1999
To the Stockholders of Pentose Pharmaceuticals, Inc.:
The special meeting of stockholders of Pentose Pharmaceuticals, Inc.
("Pentose") will be held on Friday, November 5, 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.
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.
By Order of the Board of
Directors
/s/ Lynnette C. Fallon
---------------
Lynnette C. Fallon
Secretary
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
CHAPTER ONE--THE MERGER
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-3
Other VITEX Special Meeting Matters..................................... I-6
Other Pentose Special Meeting Matters................................... I-6
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA.......................... I-7
How We Prepared the Financial Statements................................ I-7
Accounting Treatment.................................................... I-7
Merger-Related Expenses................................................. I-7
Integration-Related Expenses............................................ I-7
Periods Covered......................................................... I-7
Selected Historical and Pro Forma Financial Data of VITEX............... I-8
Selected Historical Financial Data of Pentose........................... I-10
Comparative Per Share Data.............................................. I-11
RISK FACTORS.............................................................. I-12
Risks Relating to the Merger............................................ I-12
Risks Relating to VITEX and Pentose as a Combined Company............... I-13
FORWARD LOOKING STATEMENTS................................................ I-18
THE MERGER TRANSACTION.................................................... I-19
General................................................................. I-19
Background of the Merger................................................ I-19
Joint Reasons for the Merger............................................ I-22
VITEX's Senior Management Team.......................................... I-23
Factors Considered by, and Recommendation of, the VITEX Board........... I-23
Factors Considered by, and Recommendation of, the Pentose Board......... I-24
Accounting Treatment.................................................... I-26
Material Federal Income Tax Consequences of the Merger.................. I-26
Regulatory Approvals.................................................... I-27
Appraisal Rights........................................................ I-27
Federal Securities Laws Consequences; Stock Transfer Restriction
Agreements............................................................. I-27
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION............... I-28
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............... I-29
OPINION OF FINANCIAL ADVISOR.............................................. I-34
EXISTING RELATIONSHIP BETWEEN VITEX AND PENTOSE........................... I-38
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
INTERESTS OF CERTAIN PERSONS IN THE MERGER.............................. I-38
Ampersand Ventures.................................................... I-38
Board of Directors and Management..................................... I-39
Indemnification; Directors' and Officers' Insurance................... I-39
Incentive Compensation and Stock Ownership Plans...................... I-39
Other Agreements...................................................... I-40
TRANSACTIONS BETWEEN VITEX AND ITS DIRECTORS, OFFICERS OR PRINCIPAL
SHAREHOLDERS........................................................... I-40
THE MERGER AGREEMENT.................................................... I-42
Structure of the Merger............................................... I-42
Timing of Closing..................................................... I-42
Merger Consideration.................................................. I-42
Treatment of Pentose Stock Options and Warrants; Other Pentose Stock-
Based Awards......................................................... I-42
Exchange of Shares.................................................... I-42
VITEX Board and Related Matters....................................... I-43
Certain Covenants..................................................... I-43
Representations and Warranties........................................ I-45
Conditions to the Completion of the Merger............................ I-46
Termination of the Merger Agreement................................... I-47
Investment Upon Termination........................................... I-47
Other Expenses........................................................ I-48
Amendments; Waivers................................................... I-48
Appraisal Rights...................................................... I-48
CHAPTER TWO--INFORMATION ABOUT THE MEETINGS AND VOTING
Matters Relating to the Meetings...................................... II-1
Vote Necessary to Approve VITEX and Pentose Proposals................. II-3
Proxies............................................................... II-3
Other Business; Adjournments.......................................... II-4
CHAPTER THREE--OTHER INFORMATION REGARDING VITEX
BUSINESS OF VITEX....................................................... III-1
Overview.............................................................. III-1
Background............................................................ III-2
The Blood Components Market........................................... III-2
The Plasma Derivatives Market......................................... III-3
Challenges Facing the Blood Products Market........................... III-4
Risks of Viral Infection from Blood Transfusions...................... III-4
Approaches to the Safety of the Blood Supply.......................... III-5
Products and Product Development...................................... III-6
Plasma Derivatives.................................................... III-7
Transfusion Plasma.................................................... III-7
Wound Care Products................................................... III-9
Red Blood Cell Concentrates........................................... III-9
Viral Inactivation Technology Platform................................ III-10
Strategic Collaborations.............................................. III-11
Manufacturing and Supply.............................................. III-14
Sales, Marketing and Distribution..................................... III-14
Patents, Licenses and Proprietary Rights.............................. III-15
Competition........................................................... III-17
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Government Regulation................................................. III-18
Health Care Reimbursement............................................. III-20
Research and Development.............................................. III-21
Environmental Regulation; Use of Hazardous Substances................. III-21
Customers............................................................. III-22
Employees............................................................. III-22
Properties............................................................ III-22
Legal Proceedings..................................................... III-22
VITEX'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................. III-24
MANAGEMENT.............................................................. III-35
Directors And Executive Officers...................................... III-35
New Director and Executive Officer Following the Merger............... III-37
Board Committees and Meetings......................................... III-37
Compensation of Directors............................................. III-38
Executive Compensation................................................ III-39
Summary Compensation Table............................................ III-39
Stock Option Grants in Fiscal Year 1998............................... III-40
1998 Aggregated Option Exercises and Fiscal Year End Option Values.... III-41
Employment Agreements and Severance and Change of Control
Arrangements......................................................... III-41
Compensation Committee Interlocks and Insider Participation........... III-42
PRINCIPAL STOCKHOLDERS OF VITEX......................................... III-43
CHAPTER FOUR--OTHER INFORMATION REGARDING PENTOSE
BUSINESS OF PENTOSE..................................................... IV-1
PENTOSE'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION............................................... IV-3
PRINCIPAL STOCKHOLDERS OF PENTOSE....................................... IV-7
CHAPTER FIVE--CERTAIN LEGAL INFORMATION
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 Warrants............................................... V-6
Anti-Takeover Measures................................................ V-6
Transfer Agent........................................................ V-7
Nasdaq National Market Listing........................................ V-7
TRADEMARK MATTERS....................................................... V-7
LEGAL MATTERS........................................................... V-7
EXPERTS................................................................. V-7
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
CHAPTER SIX--VITEX SPECIAL MEETING PROPOSALS
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-2
CHAPTER SEVEN--PENTOSE SPECIAL MEETING PROPOSAL
ITEM 1--PENTOSE MERGER PROPOSAL........................................ VII-1
CHAPTER EIGHT--ADDITIONAL INFORMATION FOR STOCKHOLDERS
FUTURE STOCKHOLDER PROPOSALS............................................. VIII-1
WHERE YOU CAN FIND MORE INFORMATION...................................... VIII-1
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
ANNEXES
Annex A Opinion of Warburg Dillon Read LLC
Annex B 1999 Supplemental Option Plan
Annex C Delaware General Corporation Law Section 262
iv
<PAGE>
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 Friday, November 5, 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 Friday, November 5, 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 8, 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>
Chapter One - The Merger
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 INACTINETM 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-28.
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 beginning 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.
I-2
<PAGE>
Chapter One - The Merger
The Merger
The merger is described in "Chapter One--The Merger--The Merger
Transaction" beginning on page I-19. The merger agreement is an exhibit to the
Registration Statement on Form S-4 in which this Joint Proxy
Statement/Prospectus is included.
What Pentose Stockholders Will Receive (see page I-42)
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 0.5967 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.
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 0.7 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
6,416,874 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 September 24, 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
I-3
<PAGE>
Chapter One - The Merger
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 pages I-48 and 49.
Board of Directors and Management of VITEX and Related Matters After the
Merger (see page III-35)
Following the merger, the board of directors of VITEX will have nine
members, including the eight 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 September 24, 1999, all executive officers and directors of VITEX,
together with their affiliates, owned 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 September 24, 1999, all executive officers and directors of Pentose,
together with their affiliates, owned 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 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-26)
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.
I-4
<PAGE>
Chapter One - The Merger
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-46)
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 by Pentose
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-47)
(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 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;
I-5
<PAGE>
Chapter One - 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 $1,000,000 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 $1,000,000 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-34)
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 A. We encourage you to read 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-6
<PAGE>
Chapter One - The Merger
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-29.
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-33.
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-7
<PAGE>
Chapter One - The Merger
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-29 through page I-
33. 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 Pro Forma
Combined Combined
Year Ended December 31, Year Ended Year Ended Twenty six Weeks Ended Twenty-Six
---------------------------- January 2, January 2, ------------------------- weeks Ended
1995 1996 1997 1999 1999 July 4, 1998 July 3, 1999 July 3, 1999
-------- -------- -------- ---------- ----------- ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(In thousands, except per share data)
<S> <C> <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 $ 20,544
Licensing fee.......... -- 3,000 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue........ 438 17,899 15,843 33,755 $ 33,930 12,067 20,494 20,544
-------- -------- -------- -------- -------- -------- -------- --------
Costs and expenses:.....
Cost of sales.......... 7,024 10,588 16,326 23,860 23,860 10,105 11,386 11,386
Research and
development, net...... 2,777 4,367 5,912 7,507 9,405 3,395 4,115 5,517
Selling, general and
administrative........ 1,330 2,478 4,353 6,951 8,114 3,538 4,989 5,662
Charge related to
products.............. -- 4,100 -- -- -- -- --
Charge related to
research
collaboration......... -- -- -- 2,202 2,202 2,202 -- --
Charge related to
product recall........ -- -- -- -- -- -- 2,645 2,645
-------- -------- -------- -------- -------- -------- -------- --------
Total operating costs
and expenses........ 11,131 21,533 26,591 40,520 43,581 19,240 23,135 25,210
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations.... (10,693) (3,634) (10,748) (6,765) (9,651) (7,173) (2,641) (4,666)
Interest income
(expense), net......... (146) (491) (952) (279) (151) (738) 228 228
Discount on customer
advance, net........... -- -- -- 644 644 -- (140) (140)
-------- -------- -------- -------- -------- -------- -------- --------
Total interest, net.. (146) (491) (952) 365 493 (738) 88 148
-------- -------- -------- -------- -------- -------- -------- --------
Net loss................ $(10,839) $ (4,125) $(11,700) $ (6,400) $ (9,158) $ (7,911) $ (2,553) $ (4,518)
======== ======== ======== ======== ======== ======== ======== ========
Basic and diluted net
loss per share......... $ (3.63) $ (0.84) $ (1.62) $ (0.61) $ (0.54) $ (0.91) $ (0.21) $ (0.24)
======== ======== ======== ======== ======== ======== ======== ========
Weighted average shares
used in calculation of
basic and diluted net
loss per share......... 2,982 4,897 7,241 10,454 16,871 8,738 12,421 18,838
</TABLE>
I-8
<PAGE>
Chapter One - The Merger
<TABLE>
<CAPTION>
Pro Forma
Combined
December January July 3, July 3,
1995 31, 1996 1997 2, 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-9
<PAGE>
Chapter One - The Merger
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>
Cumulative
from
June 8, 1995 inception
(date of (June 8,
inception) Years Ended December Six Months Six Months 1995)
through 31, Ended Ended through
December 31, ------------------------ June 30, June 30, June 30,
1995 1996 1997 1998 1998 1999 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-10
<PAGE>
Chapter One - The Merger
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 0.5967 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
0.5967 was calculated based on the number of shares of VITEX common stock as of
September 24, 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
Pro Forma VITEX Combined
VITEX Year Pentose Year Combined Twenty-six Pentose Twenty-six
Ended Ended Year Ended Weeks Ended Six Months Weeks Ended
January 2, December 31, January 2, July 3, Ended June July 3,
1999 1998 1999 1999 30, 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-11
<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;
I-12
<PAGE>
Chapter One - The Merger
. 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;
. 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
I-13
<PAGE>
Chapter One - The Merger
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;
. 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
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Chapter One - The Merger
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 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.
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Chapter One - The Merger
. 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. 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
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<PAGE>
Chapter One - The Merger
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 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.
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Chapter One - The Merger
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
21st century dates from 20th 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."
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.
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Chapter One - The Merger
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 "VITEX Special Meeting Proposal" 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.
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Chapter One - The Merger
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.
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., a VITEX 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 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 counterproposal that addressed some
of the issues discussed at the March 16th meeting.
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.
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Chapter One - The Merger
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.
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
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Chapter One - The Merger
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.
. 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.
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Chapter One - The Merger
VITEX's Senior Management Team
The VITEX senior management team is expected to consist of the three
individuals named below after the merger.
<TABLE>
<C> <S>
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
</TABLE>
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 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;
I-23
<PAGE>
Chapter One - The Merger
(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 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;
I-24
<PAGE>
Chapter One - The Merger
(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 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.
I-25
<PAGE>
Chapter One - The Merger
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
I-26
<PAGE>
Chapter One - The Merger
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 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.
I-27
<PAGE>
Chapter One - The Merger
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
transfers of shares by affiliates of Ampersand Ventures described above.
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 1/8 4 3/8
July 4, 1999--October 2, 1999...................... 6 7/8 3 3/4
</TABLE>
As of September 23, 1999, VITEX had 44 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 October , 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-28
<PAGE>
Chapter One - The Merger
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, 1999 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-29
<PAGE>
Chapter One - The Merger
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 equip-
ment, 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-30
<PAGE>
Chapter One - The Merger
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 18,838 (H)
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
I-31
<PAGE>
Chapter One - The Merger
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 16,871(H)
</TABLE>
See accompanying notes to pro forma combined condensed financial statements.
I-32
<PAGE>
Chapter One - The Merger
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 6,416,874
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:
<TABLE>
<S> <C>
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
=======
</TABLE>
The estimated purchase price has been allocated as follows:
<TABLE>
<S> <C>
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
=======
</TABLE>
(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.
(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.
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Chapter One - The Merger
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 October
, 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 October , 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 A
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
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Chapter One - The Merger
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 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).
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Chapter One - The Merger
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 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
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Chapter One - The Merger
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 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.
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Chapter One - The Merger
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.
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
("AVMC"), an affiliate of Ampersand Ventures, 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.
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Chapter One - The Merger
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 letter with Dr. Ackerman
providing for salary and benefits. Dr. Ackerman is also the President, Chief
Executive Officer and Treasurer of Pentose Development Corporation, an early
stage biotechnology company that has not commenced formal operations which has
a services agreement with Pentose that will be assumed by VITEX. 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.
VITEX has also agreed that Dr. Ackerman will serve as Executive Vice
President, John Chapman, currently the Vice President, Blood Products Research
of Pentose, will serve as Vice President, Blood Products Research of VITEX and
Martin Williams, currently the Vice President, Business Development, Sales and
Marketing of Pentose, will serve as the Vice President, Business Development,
Sales and Marketing of VITEX following 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.
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Chapter One - The Merger
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 385,000 shares held by certain former and
current officers of Pentose (not including options held by Dr. Samuel K.
Ackerman and Dr. John Chapman but including options to purchase 195,000 shares
held by Martin Williams) 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 recently formed company which acquired 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 outstanding capital stock of PDC.
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.
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Chapter One - The Merger
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 light activated compound ("LAC") technologies.
See also "--Existing Relationship between VITEX and Pentose" and "Interests
of Certain Persons in the Merger."
I-41
<PAGE>
Chapter One - The Merger
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 is an exhibit to the Registration Statement in which this Joint Proxy
Statement/Prospectus is included.
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.
I-42
<PAGE>
Chapter One - The Merger
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 eight to nine.
. One director of Pentose, Dr. Samuel K. Ackerman, will become a director
of VITEX. The other Pentose directors, Dr. Charpie and Mr. Parker, are
currently directors of VITEX.
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.
I-43
<PAGE>
Chapter One - The Merger
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:
<TABLE>
<CAPTION>
Restriction Pentose VITEX
----------- ------- -----
<S> <C> <C>
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 *
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 * *
</TABLE>
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 which will apply to
employees of Pentose who become employees of VITEX following the merger.
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.
Please see "--Interests of Certain Persons in the Merger," for additional
information on employee benefits matters covered in the merger agreement.
I-44
<PAGE>
Chapter One - The Merger
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;
. 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.
I-45
<PAGE>
Chapter One - The Merger
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 Joint
Proxy Statement/Prospectus, being effective and not subject to any stop
order by the SEC;
. 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 Benefit. VITEX's obligation 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 fairness opinions dated July 26, 1999 and the effective date
of this Joint Proxy Statement/Prospectus to the effect 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 by
Pentose in favor of certain Pentose stockholders limiting the liability
of Pentose thereunder to $50,000.
I-46
<PAGE>
Chapter One - The Merger
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;
(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 $1,000,000 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 $1,000,000 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.
I-47
<PAGE>
Chapter One - The Merger
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.
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 C 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.
I-48
<PAGE>
Chapter One - The Merger
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-49
<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: Friday, November 5, 1999 Friday, November 5, 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
to Vote on the including the related issuance of up to merger as described under
Following Items: 6,416,874 shares of VITEX common stock "Chapter One--The Merger--
or such greater number as is required in the The Merger Transaction--
event securities convertible into common General"; and
stock of VITEX are exercised prior to the
closing of the merger, described under
"Chapter One--The Merger--The Merger
Transaction--General";*
2. the adoption of a new option plan, 2. such other matters as may
as described under "Chapter Six-- properly come before the
VITEX Special Meeting Proposals-- Pentose meeting, including
Item 1--Adoption of Supplemental the approval of any
Stock Option Plan" beginning on adjournment of the meeting.
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-2; and
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 The record date for shares entitled
to vote is September 23, 1999. to vote is the close of business on
the day preceding the date on which
notice is given of the Pentose meeting.
</TABLE>
II-1
<PAGE>
Chapter Two - Information About The Meetings And Voting
<TABLE>
<CAPTION>
VITEX Meeting Pentose Meeting
<S> <C> <C>
Outstanding As of September 23, 1999, there were As of September 10, 1999, there were
Shares Held 12,456,286 shares of VITEX common stock 3,896,870 shares of Pentose common
on Record outstanding. stock, 4,500,000 shares of Series A
Date: Preferred Stock, and 2,356,903 shares
of Series B Preferred Stock outstanding.
- ----------------------------------------------------------------------------------------------------------------
Shares Shares entitled to vote are VITEX common Shares entitled to vote are Pentose
Entitled stock held at the close of business on common stock and Pentose preferred
to Vote: the record date, September 23, 1999. stock held at the close of business on the
record date, which is the close of business
on the day preceding the date on which
notice is given of the Pentose meeting.
Each share of VITEX common stock that you Each share of Pentose common stock
own entitles you to one vote. and 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
Shares held by VITEX in its treasury are class. Shares held by Pentose in its
not voted. treasury are not voted.
- ----------------------------------------------------------------------------------------------------------------
Quorum A quorum of stockholders is necessary to A quorum of stockholders is necessary
Requirement: hold a valid meeting. to hold a valid meeting.
The presence in person or by proxy at the The presence in person or by proxy at
meeting of holders of shares representing a the meeting of holders of shares
majority of the votes of the VITEX common representing at least a majority of the
stock entitled to vote at the Meeting is a votes of the Pentose common stock
quorum. Abstentions and broker "non-votes" and Pentose preferred stock entitled to
count as present for establishing a quorum. vote at the meeting is a quorum.
Shares held by VITEX in its treasury or Abstentions count as present for
held by another corporation where the establishing a quorum. Shares held by
majority of shares entitled to vote in the Pentose in its treasury do not count
election of directors of such other toward a quorum.
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 Beneficially 8,375,681 shares of VITEX common 7,296,669 shares of Pentose common
Owned by VITEX stock, including exercisable options. stock and shares of Pentose preferred
and Pentose Directors These shares represent in total stock. These shares represent in total
and Executive approximately 65% of the voting power approximately 68% of the voting
Officers as of of VITEX's common stock. power of Pentose's voting securities,
September 24, 1999: voting together as a single class.
</TABLE>
II-2
<PAGE>
Chapter Two - Information About The Meetings And Voting
Vote Necessary to Approve VITEX and Pentose Proposals
<TABLE>
<CAPTION>
Item Vote Necessary
<S> <C> <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 VITEX: The adoption of the 1999 Supplemental Stock Option Plan as
Supplemental Stock described in "Chapter Six VITEX Special Meeting Proposals--
Option Plan 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: The amendment of the VITEX charter as described in "Chapter Six
VITEX Charter --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>
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-2 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
Complete, sign, date and return your proxy proxy
card 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-2)
</TABLE>
II-3
<PAGE>
Chapter Two - Information about the Meetings and Voting
<TABLE>
<S> <C>
. "FOR" any proposal by the VITEX Board to . "FOR" any proposal by the Pentose
adjourn the meeting. Board to adjourn the meeting.
. In its discretion as to any other business . In its discretion as to any other
as may properly come before the VITEX business as may properly come before
meeting. 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 you are a VITEX
shareholder and 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 September 23,
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.
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-4
<PAGE>
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.
III-1
<PAGE>
Chapter Three - Other Information Regarding VITEX
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.
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
Transfusion Clotting Immuno-
Blood Platelets Plasma Albumin Factors globulins
Cells
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
III-2
<PAGE>
Chapter Three - Other Information Regarding VITEX
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.
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.
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Chapter Three - Other Information Regarding VITEX
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 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)
--------------------- ---------------
(5 donors) (100 donors)
--------------------- ---------------
<S> <C> <C>
Virus
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
III-4
<PAGE>
Chapter Three - Other Information Regarding VITEX
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;
. 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.
III-5
<PAGE>
Chapter Three - Other Information Regarding VITEX
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
Inactivation
Market VITEX Product Technology Therapeutic Indication Collaborator Development Status
------ ------------- ------------ ---------------------- ------------ ------------------
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <S> <C>
Plasma VITEX Plasma SD(1) Expanding blood Bayer Commercialization
Derivatives Fractions volume, treating commenced
infections and November
diseases 1995
- -------------------------------------------------------------------------------------------------------------
Transfusion PLAS+SD SD Controlling bleeding Red Cross PLA and ELA
Plasma 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 Pall Pentose red cell
Concentrates INACTINE and genetic disorders IND filed August
(3) 1999
</TABLE>
- --------
(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 ("LAC"), 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.
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<PAGE>
Chapter Three - Other Information Regarding VITEX
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 things,
provide for increased sales and marketing spending
III-7
<PAGE>
Chapter Three - Other Information Regarding VITEX
by both VITEX and the Red Cross. See "--Strategic Collaborations--American
National Red Cross" and "--VITEX's Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
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.
III-8
<PAGE>
Chapter Three - Other Information Regarding VITEX
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-10) 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-10) in treating
fibrin sealant, fibrinogen and thrombin products.
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
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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 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
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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 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
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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 intend to continue operating under 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 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
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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
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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 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.
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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 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,
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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 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.
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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
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
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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.
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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;
. 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.
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Chapter Three - Other Information Regarding VITEX
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.
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
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Chapter Three - Other Information Regarding VITEX
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.
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.
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Chapter Three - Other Information Regarding 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 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
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Chapter Three - Other Information Regarding VITEX
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.
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Chapter Three - Other Information Regarding VITEX
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-18
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
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Chapter Three -Other Information Regarding VITEX
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 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 intend to continue
operating under 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.
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Chapter Three - Other Information Regarding VITEX
. 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, 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
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Chapter Three - Other Information Regarding VITEX
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 ("LACs") 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 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.
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Chapter Three - Other Information Regarding VITEX
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.
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
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<PAGE>
Chapter Three - Other Information Regarding VITEX
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, 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.
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Chapter Three - Other Information Regarding VITEX
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.
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Chapter Three - Other Information Regarding VITEX
Net Interest Expense
Net interest expense increased from $0.5 million in 1996 to $1 million in
1997 due to additional debt financing.
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 intends to 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.
III-31
<PAGE>
Chapter Three - Other Information Regarding VITEX
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 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.
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Chapter Three - Other Information Regarding VITEX
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 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
III-33
<PAGE>
Chapter Three - Other Information Regarding VITEX
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-12
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.
III-34
<PAGE>
Chapter Three - Other Information Regarding VITEX
MANAGEMENT
Directors And Executive Officers
The following table provides information concerning directors and executive
officers of VITEX as of October 1, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John R. Barr............ 42 President, Chief Executive Officer and Director
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 48 Director
(1)....................
Jeremy Hayward-Surry 57 Director
(1)....................
Bernard Horowitz, Ph.D.. 55 Director
Irwin Lerner (2)........ 69 Director
Peter Parker (2)........ 48 Director
Damion E. Wicker, M.D. 39 Director
(2)....................
</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.
III-35
<PAGE>
Chapter Three - Other Information Regarding VITEX
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
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 October 1, 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.
III-36
<PAGE>
Chapter Three - Other Information Regarding VITEX
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 Executive 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. Dr. Ackerman has been President, Chief Executive Officer and
Treasurer of Pentose Development Corporation, an early stage biotechnology
company that has not commenced formal operations, since its inception in April
1999.
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.
III-37
<PAGE>
Chapter Three - Other Information Regarding 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-38
<PAGE>
Chapter Three - Other Information Regarding VITEX
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
$100,000 in fiscal year 1998 (all four being hereinafter referred to as the
"Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------------ ------------
Securities All Other
Name and Principal Underlying Compensation
Position Year Salary($) Bonus($) Options(1) ($) (2)
------------------ ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
John R. Barr............. 1998 280,000 145,000 0 0
President and Chief
Executive Officer 1997(3) 16,154 0 367,621 6,635(4)
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 President 1997 182,262 36,960 125,223
and 1996 166,231 0 0 0
Chief 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 $93,000 upon Ms. Leonard's resignation from
VITEX, made pursuant to a Letter Agreement between VITEX and Ms. Leonard
dated June 24, 1998, as amended.
III-39
<PAGE>
Chapter Three - Other Information Regarding VITEX
Stock Option Grants in Fiscal Year 1998
The following table sets forth information concerning individual grants of
options to purchase common stock made to each Named Executive Officer during
fiscal year 1998. Mr. Barr and Dr. Horowitz were not granted any options to
purchase common stock in fiscal 1998.
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Rates of Stock
Price
Appreciation
for Option
Individual Grants Term(3)
------------------------------------------------ -----------------
Percentage
Number of of Total
Securities Options
Underlying Granted to
Options Employees in Exercise or
Granted Fiscal Year Base Price Expiration
Name (#)(1) 1998(2) ($/Share) 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-40
<PAGE>
Chapter Three - Other Information Regarding VITEX
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
Shares Options at Options at
Acquired on January 2, 1999(#) January 2, 1999($)
Exercise Value Exercisable/ Exercisable/
Name (#) 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 was 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) was entitled to an annual salary of
$170,000 subject to increase by the Board; (2) was 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) was 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) was 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 and VITEX executed a Separation Agreement and
General Release on September 13, 1999 pursuant to which Dr. Horowitz resigned
as an employee of VITEX on October 1, 1999. The separation agreement supercedes
the employment agreement with Dr. Horowitz. Under the separation agreement, Dr.
Horowitz will receive from VITEX a severance payment equal to his current
annual salary of $198,919. 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
and will be exercisable for ten years from the date of grant. The separation
agreement also provides that during the period from October 1, 1999 to
September 30, 2000, Dr. Horowitz may, at VITEX's request, provide consulting
services to VITEX at no additional cost for the first 800 hours of such
services and at a rate of $200.00 per hour for each hour in excess
III-41
<PAGE>
Chapter Three - Other Information Regarding VITEX
of 800 hours. During such one year period, Dr. Horowitz's participation in
VITEX's medical and dental benefit plans will continue and VITEX will continue
to pay for a life insurance policy for Dr. Horowitz.
Following October 1, 2000, Dr Horowitz will receive a $25,000 quarterly
retainer for up to 200 hours of consulting services per quarter until the
consulting arrangement is terminated by either VITEX or Dr. Horowitz.
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 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-42
<PAGE>
Chapter Three - Other Information Regarding VITEX
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 September 24, 1999
and after giving effect to the proposed merger, (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
Number of Shares Common Stock Common Stock
Beneficially Owned Prior to Owned After the
Name of Beneficial Owner Owned(1) Merger Merger(2)
------------------------ ---------------- -------------- ---------------
<S> <C> <C> <C>
5% Stockholders
New York Blood Center,
Inc.(3).................. 3,434,703 27.6% 18.2%
310 East 67th Street
New York, NY 10021-6295
Ampersand Funds(4)........ 2,642,357 21.2% 31.7%(20)
55 William Street, Suite
240
Wellesley, MA 02481
CB Capital Investors,
L.P.(5).................. 1,801,470 14.5% 9.5%
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
Named Executive Officers
John R. Barr(8)........... 91,905 * *
Bernard Horowitz,
Ph.D.(9)................. 341,637 2.7% 1.8%
Thomas T. Higgins(10)....... 29,442 * *
Joanne M. Leonard(11)....... 55,459 * *
Other Directors
David Tendler(12)........... 3,443,953 27.6% 18.2%
Richard A. Charpie(13)...... 2,636,607 21.2% 31.7%(21)
Jeremy Hayward-Surry(14).... 0 * *
Irwin Lerner(15)............ 19,167 * *
Peter D. Parker(16)......... 2,636,607 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 Officers as a
Group (9 persons)(19).... 8,375,681 65.1% 60.7%
</TABLE>
- --------
*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
III-43
<PAGE>
Chapter Three - Other Information Regarding VITEX
power. Shares of common stock subject to options currently exercisable or
which become exercisable on or before November 23, 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 6,416,874 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 5,750 shares
issuable upon the exercise of outstanding options exercisable on or
before November 23, 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 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.
III-44
<PAGE>
Chapter Three - Other Information Regarding VITEX
(8) Consists entirely of shares issuable upon the exercise of outstanding
options exercisable on or before November 23, 1999.
(9) Includes 286,114 shares issuable upon the exercise of outstanding options
exercisable on or before November 23, 1999.
(10) Includes 25,000 shares issuable upon the exercise of outstanding options
exercisable on or before November 23, 1999.
(11) Consists entirely of shares issuable upon the exercise of outstanding
options exercisable on or before November 23, 1999.
(12) Consists of the 3,434,703 shares held by the NYBC, 3,500 shares held by
Mr. Tendler, and includes 5,750 shares issuable upon the exercise of
outstanding options held by Mr. Tendler and exercisable on or before
November 23, 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 5,750 shares
issuable upon the exercise of outstanding options exercisable on or
before November 23, 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 7,986 shares issuable upon the exercise of outstanding options
exercisable on or before November 23, 1999.
(16) Consists of the shares described in note (4), excluding the 5,750 shares
issuable upon the exercise of outstanding options exercisable on or
before November 23, 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 5,750
shares issuable upon the exercise of outstanding options exercisable on
or before November 23, 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 1,014,310 shares of VITEX common stock issued in
connection with the merger for 1,699,867 shares of Pentose common stock.
(19) Includes 416,005 shares issuable upon the exercise of outstanding options
exercisable on or before November 23, 1999. Excludes Ms. Leonard, whose
employment with VITEX ended in June 1998.
(20) Calculated based upon the shares described in note (4) and 3,339,611
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.
(21) Calculated as described in note (20), but excluding 5,750 shares issuable
upon the exercise of outstanding options exercisable on or before
November 23, 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 5,750 shares issuable
upon the exercise of outstanding options exercisable on or before
November 23, 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-45
<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.
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 (the "Papirine technology") to a newly formed
corporation, Pentose Development Corporation, and distributed equity in the new
company to the Pentose stockholders. See "Chapter One--The Merger--Interests of
Certain Persons in the Merger--Other Agreements" on page I-40.
IV-1
<PAGE>
Chapter Four - The Information Regarding Pentose
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 13% 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 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 30, 2000 to support its indemnification obligation; and
. release Pentose from any claims PDC may have against Pentose in
connection with the litigation or the transfer of Papirine technology.
IV-2
<PAGE>
Chapter Four - The Information Regarding Pentose
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 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.
IV-3
<PAGE>
Chapter Four - The Informtion Regarding Pentose
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
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
IV-4
<PAGE>
Chapter Four - The Information Regarding Pentose
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.
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
IV-5
<PAGE>
Chapter Four - The Information Regarding Pentose
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.
Directors and Executive Officer of Pentose Joining VITEX
Following the merger, Dr. Ackerman, the President, Chief Executive Officer
and a Director of Pentose will become an executive officer and Director of
VITEX. See "Chapter Three--Other Information Regarding VITEX--Management--New
Director and Executive Officer Following the Merger" for a description of
Dr. Ackerman's business experience and the positions held by him. The entire
compensation paid by Pentose to Dr. Ackerman in all capacities during the year
ended December 31, 1998 was a salary of $240,000. Dr. Ackerman does not receive
options to purchase stock from Pentose.
Dr. Charpie and Mr. Parker, both Directors of Pentose and of VITEX, will
continue as Directors of VITEX following the merger. Dr. Charpie and Mr. Parker
received no compensation from Pentose in 1998 for serving on the Pentose Board
of Directors.
IV-6
<PAGE>
Chapter Four - The Information Regarding Pentose
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 September 24,
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
------------------------------------------------------------------
Series A Series B
Common Stock Preferred Stock Preferred Stock Percent of
Name (% of Class) (% of Class) (% of Class) Total Voting Power(2)
- ---- ------------ --------------- --------------- ---------------------
<S> <C> <C> <C> <C>
Ampersand Funds......... 0 4,250,000 1,346,802 52.0%
55 William Street (94%) (57%)
Wellesley, MA 02181(3)
JAFCO Funds............. 0 0 1,010,101 9.4%
Tekko Building 1-8-2 (43%)
Marunouchi, Chiyoda-ku
Tokyo 100-0005 JAPAN(4)
Edward Budowsky......... 1,416,556 0 0 13.2%
1404 Commonwealth Ave,
#10 (36%)
Boston, MA 02135
Thomas Monath, M.D...... 679,947 0 0 6.3%
21 Sinn Road (17%)
Harvard, MA 01451
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.
(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
IV-7
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Chapter Four - The Information Regarding Pentose
("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-8
<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 The rights of Pentose stockholders
Governance: currently governed by Delaware law and the are currently governed by Delaware
certificate of incorporation and by-laws of law and the certificate of
VITEX. incorporation and by-laws of
Pentose.
Upon consummation of the merger, the rights Upon consummation of the merger, the
of VITEX stockholders will continue to be rights of Pentose stockholders will
governed by Delaware law and the be governed by Delaware law and the
certificate of incorporation and by-laws of certificate of incorporation and by-
VITEX. laws of VITEX.
- -----------------------------------------------------------------------------------------------------
Authorized The authorized capital stock of VITEX The authorized capital stock of
Capital Stock: consists of 29 million shares of VITEX Pentose consists of 12 million
common stock and 1 million shares of shares of Pentose common stock and 8
preferred stock. If the merger is completed million shares of Pentose preferred
and the stockholders have approved the stock, 4.5 million of which are
charter amendment, the authorized capital designated as "Series A Preferred
stock will consist of 35 million shares of Stock" and 3.5 million of which are
common stock and 1 million shares of designated as "Series B Preferred
preferred stock. See "Chapter Six--VITEX Stock."
Special Meeting Proposals--Item 3--
Amendment of VITEX's Certificate of
Incorporation."
- -----------------------------------------------------------------------------------------------------
Number of VITEX's certificate of incorporation Pentose's by-laws provide that the
Directors: provides that the number of directors shall authorized number of directors shall
be determined by the Board of Directors but be five.
that it shall never be fewer than three.
- -----------------------------------------------------------------------------------------------------
Classification of VITEX's certificate of incorporation Pentose's by-laws do not provide for
Board of provides that the Board of Directors shall a classified Board of Directors;
Directors: be divided into three classes as nearly each director serves until his
equal in number as possible, with each successor is duly elected and
class serving a staggered three-year term. qualified or until his earlier
death, resignation or removal.
- -----------------------------------------------------------------------------------------------------
Removal of Under VITEX's certificate of incorporation, Under Pentose's by-laws, unless
Directors: a director may be removed for cause by a otherwise restricted by statute, any
vote of the holders of a majority of shares director or the entire Board of
entitled to vote for the election of Directors may be removed, with or
directors. A director may not be removed without cause, by the holders of a
without cause. majority of shares then entitled to
vote on the election of directors.
</TABLE>
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Chapter Five - Certain Legal Information
<TABLE>
<CAPTION>
VITEX Stockholder Rights Pentose Stockholder Rights
<C> <S> <C>
Stockholder According to VITEX's certificate of According to Pentose's by-laws, any
Action by incorporation, the power of stockholders to action required or permitted to be
Written act by consenting in writing without a taken at any annual or special
Consent: meeting is specifically denied. 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
Business at stockholder meetings, including annual notice of annual meetings need not
Annual meetings, must include a statement of the specify the purposes for which the
Meetings: purposes for which the meeting is called. meeting is called, and "any proper
Also, stockholder-proposed business may business" may be transacted during
only be transacted if the proposing such meetings.
stockholder provides timely written notice
to an officer of the corporation.
- --------------------------------------------------------------------------------------------------
Certain Under VITEX's certificate of incorporation, The Pentose certificate of
Business the affirmative vote of two-thirds of all incorporation provides that a
Combinations: voting shares is necessary to engage in any consolidation, merger, or sale of
transaction, the effect of which is to substantially all of the
combine the corporation's assets and corporation's assets shall
business with that of another corporation constitute a liquidation or
that is the beneficial owner of 5% or more dissolution of the corporation,
of the outstanding shares of VITEX stock unless a majority of the holders of
eligible to vote in the election of the outstanding Pentose preferred stock,
Board of Directors. Two-thirds stockholder elect otherwise.
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.
</TABLE>
V-2
<PAGE>
Chapter Five - Certain Legal Information
<TABLE>
<CAPTION>
VITEX Stockholder Rights Pentose Stockholder Rights
<S> <C> <C>
Liquidation Under VITEX's certificate of incorporation, In the event of a liquidation or
Rights: holders of VITEX Common stock are entitled dissolution, holders of Pentose
to share ratably in the remaining assets of Series A and Series B Preferred
the corporation, after payment to the Stock are entitled to be paid an
preferred stock holders of all amounts to amount equal to the initial purchase
which such preferred holders are entitled. 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 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 Each share of Pentose preferred
Rights: issued or outstanding. Under the VITEX stock is convertible at the option
certificate of incorporation, the VITEX of the holder at a conversion price,
Board of Directors has the authority to set initially by the certificate of
establish conversion rights with respect to incorporation at $1.00 per share of
any issuance of preferred stock. common 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
reorganization of Pentose.
- -----------------------------------------------------------------------------------------------
Redemption Under VITEX's certificate of incorporation, Under the Pentose certificate of
Rights: holders of common stock have no redemption incorporation, on July 15th in each
rights. The VITEX Board of Directors has of 2003, 2004, and 2005, each holder
the authority to establish redemption of Pentose preferred stock has the
rights with respect to future issuances of right to require the corporation to
preferred stock; there are currently no redeem up to 33.3%, 50%, and 100%,
shares of preferred stock issued or respectively, of the shares of
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
</TABLE>
V-3
<PAGE>
Chapter Five - Certain Legal Information
<TABLE>
<CAPTION>
VITEX Stockholder Rights Pentose Stockholder Rights
<C> <S> <C>
majority of the Pentose preferred
stock.
- ---------------------------------------------------------------------------------------------------
Voting Rights: Under the VITEX certificate of Holders of Pentose preferred stock,
incorporation, holders of VITEX common voting separately as a class, are
stock elect the Board of Directors as a entitled to nominate and elect three
class. 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
Rights: holders of common stock are entitled to incorporation, Common Stock holders
receive such dividends as may be declared will not receive any dividends until
by the VITEX Board of Directors. The Board the holders of preferred stock have
has the authority to establish dividend first received a distribution on
rights with respect to future issuance of each outstanding share of preferred
preferred stock. stock in an amount 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
Rights: Market, VITEX stockholders are not entitled Delaware law, and the Delaware
to appraisal rights under the Delaware General Corporate Law governs the
General Law in connection with the merger. availability of appraisal rights
with respect to any acquisition of
Pentose. Under Section 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.
See "Chapter One--The Merger--The
Merger Agreement--Appraisal Rights."
</TABLE>
V-4
<PAGE>
Chapter Five - Certain Legal Information
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
V-5
<PAGE>
Chapter Five - Certain Legal Information
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 Warrants
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 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
V-6
<PAGE>
Chapter Five - Certain Legal Information
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 718-921-8200.
Nasdaq National Market Listing
It is a condition to the merger that a notification form for listing of
additional shares covering the shares of VITEX common stock issuable in the
merger shall have been filed with the Nasdaq Stock Market and the applicable
fee paid by VITEX.
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
V-7
<PAGE>
Chapter Five - Certain Legal Information
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-8
<PAGE>
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 6,416,874 SHARES OF VITEX COMMON
STOCK OR SUCH GREATER NUMBER AS IS REQUIRED IN THE EVENT SECURITIES CONVERTIBLE
INTO COMMON STOCK OF VITEX ARE EXERCISED PRIOR TO THE CLOSING OF THE MERGER.
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. 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 adopting the New Plan, but approval of the New Plan is not a
condition to completing the merger.
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
VI-1
<PAGE>
Chapter Six - VITEX Special Meeting Proposals
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 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.
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
VI-2
<PAGE>
Chapter Six - VITEX Special Meeting Proposals
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 24, 1999, 12,456,286 shares of VITEX common stock were issued and
outstanding.
To complete the merger, VITEX expects that approximately 6,416,874 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 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
FUTHER STOCKHOLDER PROPOSAL
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, including
the merger agreement.
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.
The SEC allows us to "incorporate by reference" information in this Joint
Proxy Statement/Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
Joint Proxy Statement/Prospectus, except for any information superseded by
information in, or incorporated by reference in, this Joint Proxy
Statement/Prospectus. This Joint Proxy Statement/Prospectus incorporates by
reference the merger agreement, which we have previously filed with the SEC as
part of the registration statement.
You can obtain the merger agreement through us or the SEC. Documents
incorporated by reference are available from us without charge, excluding all
exhibits unless we have specifically incorporated by reference an exhibit in
this Joint Proxy Statement/Prospectus. Shareholders may obtain documents
incorporated by reference in this Joint Proxy Statement/Prospectus by
requesting them in writing or by telephone from the appropriate party at the
following address: V.I. Technologies, Inc., 155 Duryea Road, Melville, New York
11747, attn.: VITEX Investor Relations. VITEX's telephone number is (516) 752-
7314. If you would like to request documents from us, please do so by November
, 1999 to receive them before the meetings.
VIII- 1
<PAGE>
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-2
<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-22
Condensed Statements of Operations for the thirteen and twenty-six
weeks ended July 3, 1999 and July 4, 1998 (unaudited)................ F-23
Condensed Statement of Stockholders' Equity........................... F-24
Condensed Statements of Cash Flows for the twenty-six weeks ended July
3, 1999 and July 4, 1998 (unaudited)................................. F-25
Notes to Condensed Financial Statements (unaudited)................... F-26
PENTOSE PHARMACEUTICALS, INC.
Reports of Independent Public Accountants............................. F-28
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999..... F-30
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-31
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Deficit from inception through June 30, 1999......................... F-32
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-33
Notes to Financial Statements......................................... F-34
</TABLE>
F-1
<PAGE>
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 Years Ended December 31,
January 2, -------------------------
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 Years ended December 31,
January 2, -------------------------
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.
F-7
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
F-8
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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.
F-9
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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.
F-10
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum payments under the capital lease obligation is as follows:
<TABLE>
<S> <C>
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
==========
</TABLE>
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.
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.
F-11
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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
F-12
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
F-13
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
changes in the subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of 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 at December 31,
1996 and 1997 and January 2, 1999 is as follows:
<TABLE>
<CAPTION>
Year ended
January 2, 1999 Years ended December 31,
-------------------- ---------------------------------------
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-
remaining average average
Range of Number contractual exercise Number exercise
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>
F-14
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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
F-15
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(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 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
F-16
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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.
F-17
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 amount 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-18
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
Years Ended December
Year Ended 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:
<TABLE>
<S> <C>
1999............................ $570,000
2000............................ 584,000
2001............................ 590,000
2002............................ 160,000
2003............................ 125,000
</TABLE>
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
F-19
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
F-20
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Concluded)
16. Quarterly Financial Data (Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal 1998 Quarter Ended
----------------------------------------------
January 2, October 3, July 4, April 4,
1999 1998 1998 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)
<CAPTION>
Fiscal 1997 Quarter Ended
----------------------------------------------
December 31, September 30, June 30, March 31,
1997 1997 1997 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-21
<PAGE>
V.I. TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(In thousands, except for share and per share data)
<TABLE>
<CAPTION>
July 3, January 2,
1999 1999
----------- ----------
(Unaudited)
<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
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-22
<PAGE>
V. I. TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except for share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Twenty-
Ended six Weeks 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
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-23
<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-24
<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
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
F-25
<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-26
<PAGE>
V.I. TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Concluded)
3. Inventory
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
July
3, January 2,
1999 1999
------ ----------
<S> <C> <C>
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 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-27
<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-28
<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-29
<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-30
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative from
Six-Month Periods Ended Inception
Years Ended December 31, 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 Share......... $ (.07) $ (.52) $ (1.01) $ (.44) $ (.63)
========= =========== =========== =========== ===========
Basic and Diluted
Weighted Average Common
Shares Outstanding..... 4,127,762 3,896,367 3,896,367 3,896,367 3,896,367
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<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>
Redeemable Convertible Preferred Stock
-----------------------------------------
Series A Series B
-------------------- --------------------
Number of Number of
Shares Amount Shares Amount
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Common stock
issued to
founders........ -- $ -- -- $ --
Net loss........ -- -- -- --
--------- ---------- --------- ----------
Balance,
December 31,
1995............ -- -- -- --
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 -- --
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 -- --
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
Net loss
(unaudited)..... -- -- -- --
--------- ---------- --------- ----------
Balance, June
30, 1999
(Unaudited)..... 4,500,000 $4,500,000 2,356,903 $7,000,000
========= ========== ========= ==========
<CAPTION>
Stockholders' Deficit
-------------------------------------------------------------------------
Deficit
Common Stock Treasury Stock Accumulated
---------------- Additional ------------------ During the Total
Number of Paid-in Number of Development Stockholders'
Shares Amount Capital Shares Amount Stage Deficit
--------- ------ ---------- ---------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock
issued to
founders........ 4,362,992 $4,363 $ -- -- $ -- $ -- $ 4,363
Net loss........ -- -- -- -- -- (51,061) (51,061)
--------- ------ ---------- ---------- ------- ------------ -------------
Balance,
December 31,
1995............ 4,362,992 4,363 -- -- -- (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............ 4,362,992 4,363 -- (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............ 4,362,992 4,363 -- (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............ 4,362,992 4,363 -- (466,625) (467) (6,391,135) (6,387,239)
Net loss
(unaudited)..... -- -- -- -- -- (2,455,624) (2,455,624)
--------- ------ ---------- ---------- ------- ------------ -------------
Balance, June
30, 1999
(Unaudited)..... 4,362,992 $4,363 $ -- (466,625) $ (467) $(8,846,759) $(8,842,863)
========= ====== ========== ========== ======= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative from
For the Six-Month Inception
For the Years Ended December 31, Periods Ended June 30, (June 8, 1995)
------------------------------------ ------------------------ through
1996 1997 1998 1998 1999 June 30, 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-33
<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.
(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.
F-34
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
(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
Useful
Asset Classification 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.
(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.
F-35
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
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
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
F-36
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
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 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.
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.
F-37
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
(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.
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:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------------------------------
Weighted-
Average
Range of Remaining
Exercise Number Number Contractual
Prices Outstanding Exercisable Life
-------- ----------- ----------- -----------
<S> <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-38
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
(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..... -- -- -- -- --
5.42%- 5.42%- 4.57%-
Risk-free interest rate. 6.78% 5.79% 5.63% 5.63% 5.89%
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.
(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.
F-39
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
(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.
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.
F-40
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
(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.
(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.
F-41
<PAGE>
PENTOSE PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
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-42
<PAGE>
ANNEX A
October [ ], 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
A-1
<PAGE>
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 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
A-2
<PAGE>
ANNEX B
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.
B-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
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.
B-2
<PAGE>
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;
B-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.
B-4
<PAGE>
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.
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
B-5
<PAGE>
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.
(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.
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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.
(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.
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(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.
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.
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ANNEX C
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.
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(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.
(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
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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 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
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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 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.
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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.
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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) 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
------- -----------
<C> <S>
2 Agreement and Plan of Merger dated as of July 28, 1999 among the
Company, Pentose and certain stockholders of Pentose. Filed
herewith.
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.
</TABLE>
S4-II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
5 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
regarding the validity of the securities being registered.
Previously filed.
8.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
regarding certain federal income tax consequences relating to
the merger. Previously filed.
8.2 Opinion of Palmer & Dodge LLP regarding certain federal income
tax consequences relating to the merger. Previously filed.
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.
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.
</TABLE>
S4-II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.
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.
</TABLE>
S4-II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.
Filed herewith.
10.35* Letter Agreement between the Company and Joanne Leonard, dated
June 24, 1998. Previously filed.
10.36* Letter Agreement between the Company and Thomas T. Higgins dated
June 15, 1999. Filed herewith.
</TABLE>
S4-II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.37* Separation Agreement and General Release by and between the
Company and Bernard Horowitz, Ph.D. dated September 13, 1999.
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 Exhibits 5 and 8.1 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 previously
filed).
99.1 Form of VITEX Proxy Card. Filed herewith.
99.2 Form of Pentose Proxy. Filed herewith.
99.3 Consent of Dr. Samuel K. Ackerman to be named as a nominee for
director of VITEX Corporation. Previously filed.
99.4 Consent of Warburg Dillon Read LLC. Filed herewith.
</TABLE>
- --------
*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.
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.
S4-II-6
<PAGE>
(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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Melville, State of New York, on October 7, 1999.
V.I. TECHNOLOGIES, INC.
(Registrant)
/s/ John R. Barr
By: _________________________________
John R. Barr
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of October 7, 1999
____________________________________ Directors
David Tendler
/s/ John R. Barr President, Chief Executive October 7, 1999
____________________________________ Officer and Director
John R. Barr (Principal Executive
Officer)
* Executive Vice President, October 7, 1999
____________________________________ Operations, Treasurer and
Thomas T. Higgins Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
* Director October 7, 1999
____________________________________
Richard A. Charpie
* Director October 7, 1999
____________________________________
Jeremy Hayward-Surry
* Director October 7, 1999
____________________________________
Bernard Horowitz, Ph.D.
* Director October 7, 1999
____________________________________
Irwin Lerner
</TABLE>
S4-II-8
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director October 7, 1999
____________________________________
Peter D. Parker
* Director October 7, 1999
____________________________________
Damion E. Wicker, M.D.
</TABLE>
*By: /s/ John R. Barr
-----------------------------
John R. Barr Attorney-in-
Fact
S4-II-9
<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. Filed
herewith.
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.
Previously filed.
8.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
regarding certain federal income tax consequences relating to the
merger. Previously filed.
8.2 Opinion of Palmer & Dodge LLP regarding certain federal income tax
consequences relating to the merger. Previously filed.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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.
Filed herewith.
10.35* 6/24/98 Letter Agreement between the Company and Joanne Leonard,
dated June 24, 1998. Previously filed.
10.36* Letter Agreement between the Company and Thomas T. Higgins dated
June 15, 1999. Filed herewith.
10.37* Separation Agreement and General Release by and between the
Company and Bernard Horowitz, Ph.D. dated September 13, 1999.
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 Exhibits 5 and 8.1 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 previously filed.)
99.1 Form of VITEX Proxy Card. Filed herewith.
99.2 Form of Pentose Proxy. Filed herewith.
99.3 Consent of Dr. Samuel K. Ackerman to be named as a nominee for
director of VITEX Corporation. Previously filed.
99.4 Consent of Warburg Dillon Read LLC. Filed herewith.
</TABLE>
- --------
* 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.
<PAGE>
Exhibit 2
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>
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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
Section 3.11. Intellectual Property.................................... 18
</TABLE>
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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
Section 10.03. Certain Definitions...................................... 40
</TABLE>
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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>
<C> <S>
Schedule 1 Certain Pentose Stockholders
Pentose Disclosure Schedule
Section 2.02 List of outstanding options and warrants
List of material consents, waivers and approvals
Section 2.04 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
List of material consents, waivers and approvals
Section 3.04 for authority
Section 3.11 Vitex Intellectual Property rights
Article IV Exceptions to restrictions on conduct of business
</TABLE>
EXHIBITS
<TABLE>
<C> <S>
Exhibit A-1 Pentose Affiliate Agreement
Exhibit A-2 Pentose Shareholder Affiliate Agreement
</TABLE>
Index of Defined Terms
<TABLE>
<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)
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
</TABLE>
iii
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<TABLE>
<S> <C>
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)
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)
</TABLE>
iv
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<TABLE>
<S> <C>
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)
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>
v
<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:
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.
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
2
<PAGE>
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,
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
3
<PAGE>
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 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
4
<PAGE>
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.
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.
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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 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.
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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.
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
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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, 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,
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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.
(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
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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, (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.
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(b) Hazardous Material Activities. Pentose has not transported, stored,
used, manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in 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;
(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
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(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 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.
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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 $.01 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
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
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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 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
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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 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
10-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.
(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
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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.
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;
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(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;
(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;
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(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.
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.
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
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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.
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
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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 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.
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(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 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 Limited Partnership (collectively
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"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.
(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
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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.
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.
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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.
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.
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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.
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.
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
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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;
(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.
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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 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
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<PAGE>
(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"), 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"),
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<PAGE>
acquires more than 50 percent of the outstanding shares from Pentose,
pursuant to a tender 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.
(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").
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<PAGE>
(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.
(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
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<PAGE>
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 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
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<PAGE>
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
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) 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
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<PAGE>
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.
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.
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<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
34
<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>
35
<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.
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.
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<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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
37
<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]
38
<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.
39
<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.
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
40
<PAGE>
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.
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]
41
<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]
42
<PAGE>
EXHIBIT 10.34
OPTION, DEVELOPMENT, MANUFACTURE AND LICENSE AGREEMENT
between
PENTOSE PHARMACEUTICALS, INC.
and
V. I. TECHNOLOGIES, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS.......................................................... 1
2. GRANT OF OPTION...................................................... 5
2.1 Option Grant..................................................... 5
2.2 Exercise of Option............................................... 5
3. ACTIVITIES DURING OPTION PERIOD...................................... 6
3.1 Research Program................................................. 6
3.2 Delivery of Materials............................................ 6
3.3 Inventions....................................................... 6
3.4 Exchange of Information.......................................... 6
4. LICENSE GRANTS: MANUFACTURING AND MARKETING RIGHTS................... 6
4.1 Exclusive License Grant.......................................... 6
4.2 Non-Exclusive License Grant...................................... 7
4.3 Sublicenses...................................................... 7
4.4 Limitation of License Grant...................................... 7
5. COOPERATIVE DEVELOPMENT WORK......................................... 7
5.1 Objective........................................................ 7
5.2 Steering Committee............................................... 8
5.3 Project Committees............................................... 8
5.4 Development Plan and Budget...................................... 8
5.5 Exchange of Information.......................................... 8
5.6 Records.......................................................... 8
5.7 Funding of the Cooperative Development Work...................... 9
5.8 Commercial Supply of Compounds................................... 9
5.9 Vitex Responsibilities........................................... 10
5.10 Commercialization............................................... 10
5.11 First Commercial Sale........................................... 10
5.12 Sales Targets................................................... 10
5.13 Inspection Rights............................................... 10
5.14 General Disagreements........................................... 11
6. PAYMENTS AND ROYALTIES............................................... 11
6.1 Option Payments.................................................. 11
6.2 Development Milestone Payments................................... 11
6.3 Stock Purchase Agreement......................................... 12
6.4 Sales Milestone Payments......................................... 12
6.5 Payments Contingent on Amendments to Territory 2................. 14
6.6 Payment Terms.................................................... 14
6.7 Base Royalty Pentose Share of Vitex Revenues..................... 14
6.8 Minimum Royalty.................................................. 15
6.9 Sublicense Royalties............................................. 15
6.10 Royalty Reports, Exchange Rates................................. 15
6.11 Audits.......................................................... 16
</TABLE>
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<S> <C>
6.12 Royalty Payment Terms........................................... 16
6.13 Interest on Late Payments....................................... 16
6.14 Third Party Royalties........................................... 16
7. INTELLECTUAL PROPERTY RIGHTS.......................................... 17
7.1 Ownership of Option Period Inventions, Program Technology and
Program Patent Rights........................................... 17
7.2 Pentose's Right to Exploit Compound Intellectual Property........ 17
7.3 Cooperation of Employees......................................... 17
7.4 Prosecution of Parties' Own Patent Rights........................ 18
7.5 Prosecution of Joint Patent Rights............................... 18
7.6 Joint Patent Costs............................................... 18
7.7 Discontinuance of Patent Prosecution............................. 18
8. ENFORCEMENT OF PATENT RIGHTS.......................................... 19
9. TRADEMARKS............................................................ 19
10. TERM AND TERMINATION.................................................. 19
10.1 Term............................................................ 19
10.2 Termination by Either Party..................................... 20
10.3 Termination by Pentose.......................................... 20
10.4 Termination by Vitex............................................ 20
10.5 Effect of Termination........................................... 20
10.6 Survival........................................................ 20
10.7 Remedies........................................................ 20
11. WARRANTY OF AUTHORITY................................................. 21
12. INDEMNITY............................................................. 21
12.1 Vitex Indemnity Obligations..................................... 21
12.2 Pentose Indemnity Obligations................................... 21
12.3 Procedure....................................................... 21
13. CONFIDENTIALITY....................................................... 22
13.1 Nondisclosure Obligations....................................... 22
13.2 Publications.................................................... 23
13.3 Use of Consultants.............................................. 24
13.4 Injunctive Relief............................................... 24
14. MISCELLANEOUS......................................................... 24
14.1 Force Majeure................................................... 24
14.2 Assignment...................................................... 24
14.3 Severability.................................................... 25
14.4 Notices......................................................... 25
14.5 Arbitration..................................................... 26
14.5.1 General.................................................. 26
14.5.2 Procedure................................................ 26
14.6 Applicable Law.................................................. 27
14.7 Entire Agreement................................................ 27
14.8 Headings........................................................ 27
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<S> <C>
14.9 Independent Contractors........................................ 27
14.10 Public Announcements........................................... 28
14.11 Waiver......................................................... 28
14.12 Counterparts................................................... 28
14.13 Further Assurances............................................. 28
14.14 Bankruptcy..................................................... 28
</TABLE>
EXHIBIT A DEVELOPMENT COSTS
EXHIBIT B PENTOSE PATENT RIGHTS
iii
<PAGE>
Confidential
OPTION, DEVELOPMENT, MANUFACTURE AND LICENSE AGREEMENT
This Option, Development, Manufacture and License Agreement ("Agreement"),
effective as of the Effective Date (as defined below), is entered into by and
between Pentose Pharmaceuticals, Inc. ("Pentose"), a Delaware corporation with
its principal place of business at 45 Moulton Street, Cambridge, Massachusetts
02138, and V.1. Technologies, Inc. ("Vitex"), a Delaware corporation with its
principal place of business at 155 Duryea Road, Melville, New York 11747.
RECITALS
--------
WHEREAS, Pentose owns proprietary rights to certain chemical compounds and
methods which it distributes under the trademark INACTINE/TM/, for the
inactivation of viral pathogens in blood products; and
WHEREAS, Vitex has the rights to a method of viral inactivation with
solvent/detergent technology for use in connection with pooled plasma for
transfusion; and
WHEREAS, the parties desire to enter into an agreement whereby Vitex will
undertake an initial evaluation of the efficacy of combining the parties'
respective technologies and further to develop and commercialize human plasma
products virally inactivated using the respective technologies of the parties.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
and agreements contained herein, Pentose and Vitex hereby agree as follows:
1. DEFINITIONS.
-----------
When used in this Agreement, the following capitalized terms shall have the
meaning set forth below.
1.1 "Affiliate" means, respect to each party, any entity directly or
indirectly controlled by, controlling, or under common control with such party.
1.2 "ANRC" means the American National Red Cross.
1.3 "ANRC Agreement" means the Supply, Manufacturing, and Distribution
Collaboration Agreement between Vitex and the American National Red Cross, dated
December 15, 1997.
1.4 "Compounds" means Pentose's ethyleneimine oligomer compounds useful in
the inactivation of viral pathogens, including without limitation, those
compounds sold under the INACTINE/TM/ trademark.
<PAGE>
Confidential
1.5 "Compound Processes" shall mean Pentose's proprietary methods of viral
inactivation using the Compounds.
1.6 "Confidential Information" shall have the meaning set forth in Section
13.1.
1.7 "Cooperative Development Work" shall have the meaning set forth in
Section 5.1.
1.8 "Cost of Goods" means, with respect to the Compounds, (a) the variable
costs and fixed costs incurred by Pentose associated with the manufacture
(inclusive of finishing processes) of batches of such Compounds or (b) if such
Compounds are not manufactured by Pentose, the transfer price for batches of
such Compounds purchased from third party manufacturers plus any variable costs
incurred by Pentose in connection with such Compounds. For purposes of this
Section 1.8, "variable costs shall be deemed to be the cost of labor (including
but not limited to quality control, product stability, regulatory costs, project
management and contract administration), raw materials, supplies and other
resources consumed in the manufacture of batches of such Compounds. For purposes
of this Section 1.8, "fixed costs" shall be deemed to be the cost of facilities,
utilities, insurance, facility and equipment depreciation and other fixed costs
directly related to the manufacture of batches of such Compounds. Fixed costs
shall be allocated to such Compounds based upon the proportion of such costs
directly attributable to support of the manufacturing process for such
Compounds. If a facility is used to manufacture Compounds and products for other
programs of Pentose, fixed costs shall be allocated in proportion to the use of
such facility for the manufacture of Compounds and products for such other
programs. Cost of Goods shall exclude all costs otherwise reimbursed pursuant to
this Agreement, and shall exclude selling and general and administrative
expenses except as otherwise set forth above. Except as otherwise provided in
this Agreement, all cost determinations made hereunder shall be made in good
faith in accordance with United States generally accepted accounting principles,
consistently applied.
1.9 "CPI" shall mean the Consumer Price Index (U.S. City Average) which
became effective in January 1978 as compiled by the Bureau of Labor Statistics,
United States, Department of Labor.
1.10 "Development Costs" means all external costs and direct internal
costs incurred by Pentose and Vitex in connection with the Cooperative
Development Work plus indirect costs allocated to the Cooperative Development
Work as approved by the Steering Committee (other than costs associated with the
performance of clinical trials, process development, scale-up and manufacture of
clinical or commercial product, and marketing, and other than costs associated
with the manufacture, supply and delivery of Compounds) pursuant to standard
cost accounting principles, consistently applied and used by Pentose and Vitex,
as shall be more fully set forth by the Steering Committee and described in
Exhibit A hereto.
2
<PAGE>
Confidential
1.11 "Effective Date" means the earlier of (i) thirty (30) days after
execution of this Agreement by both parties or (ii) approval by both parties of
the Research Program.
1.12 "Fair Market Value" shall have the meaning set forth in Section 6.2.
1.13 "Field" means the treatment of pooled human blood plasma for
transfusion with both Solvent Detergent Products and Compounds.
1.14 "First Commercial Sale" of the Products in each country shall mean
the first sale for use or consumption by the general public of the Products in
such country.
1.15 "Market Price" means the average closing price of the Pentose or
Vitex stock, as applicable, as reported in The Wall Street Journal, for the
thirty (30) trading days (or lesser number of trading days that such stock is
publicly traded), ending on the date prior to the date the applicable stock
purchase or stock issuance is consummated. As used in this definition, a
"trading day" means a day during which such stock may be traded on the relevant
exchange or over the counter.
1.16 "Option" shall have the meaning as set forth in Section 2.1.
1.17 "Option Period" means the period commencing on the Effective Date and
terminating on the date which is the earlier of (i) twelve (12) months after the
Effective Date, or (ii) the date of exercise of the Option by Vitex.
1.18 "Option Period Invention" means any invention, discovery, or other
technology (including proprietary biological materials, compounds or reagents),
patentable or otherwise, conceived, reduced to practice, or otherwise developed
in connection with the Research Program which relates to Pentose Technology.
1.19 "Pentose Technology" means all present and future inventions, trade
secrets, copyrights, data, regulatory submissions and other intellectual
property of any kind (including the Compounds, the Compound Processes, any
proprietary biological materials, compounds or reagents) including all
confidential technical information in the possession of Pentose as of the
Effective Date and during the term of this Agreement (but not including Pentose
Patent Rights) which are owned or controlled by, or licensed (with the right to
sublicense) to, Pentose, and which are necessary or useful for the manufacture,
use or sale of the Compounds or Products, including without limitation any
Program Technology or Option Period Inventions to the extent owned or controlled
by Pentose.
1.20 "Pentose Patent Rights" means all present and future domestic and
foreign patents, patent applications, provisional patent applications, patent
extensions, certificates of invention, or applications for certificates of
invention, together with any divisions, continuations or continuations-in-part
and renewals thereof, or substitutions therefor, and all reissues,
reexaminations or extensions thereof, which are owned or controlled by, or
licensed (with the right to sublicense) to, Pentose, and which are necessary or
useful for
3
<PAGE>
Confidential
the manufacture, use or sale of the Compounds, the Compound Processes or
Products, including without limitation any Program Patent Rights and patent
rights on Option Period Inventions to the extent owned or controlled by Pentose.
Pentose Patent Rights existing as of the Effective Date are listed in Exhibit B
hereto.
1.21 "Product(s)" means products consisting of pooled human blood plasma
intended for transfusion which are treated with both (i) one or more Compounds
using the Compound Processes and (ii) the Solvent Detergent Products, and any
disposables, delivery systems or other components of such products.
1.22 "Product Unit" means two hundred (200) milliliters of frozen liquid
Product, prepared in accordance with manufacturing specifications determined by
the Steering Committee and intended for use in patients.
1.23 "Program Patent" means those United States and foreign patents and
patent applications, provisional patent applications, patent extensions,
certificates of invention, or applications for certificates of invention,
together with any divisions, continuations or continuations-in-part and renewals
thereof; or substitutions therefor, and all reissues, reexarninations or
extensions thereof; and the letters patent that may be issued thereon, relating
to any invention, discovery, procedure, technique, program, creation, method,
protocol, formula, trade secret or other technical information, conceived or
reduced to practice by either party, solely or jointly, during and as part of
the Cooperative Development Work, but not including Option Period Inventions.
1.24 "Program Technology" means any inventions, discoveries, trade
secrets, copyrightable works, know-how, data, regulatory submissions and other
intellectual property of any kind (including any proprietary biological
materials, compounds or reagents), but not including Program Patent Rights or
Option Period Inventions, developed, conceived or created during and as part of
the Cooperative Development Work.
1.25 "Regulatory Approval" shall mean (1) in the United States, approval
from the United States Food and Drug Administration for marketing and promotion
of the Products, and (2) outside of the United States, an analogous order by the
relevant governmental agency which requires regulatory approval prior to
marketing and promotion of the Products in such non-U.S. country.
1.26 "Research Program" shall have the meaning set forth in Section 3.1.
1.27 "Solvent Detergent Product(s)" means (i) the products used to
inactivate viruses that are referenced in the Product License Application
submitted by the New York Blood Center and licensed to Vitex for Regulatory
Approval on February 28, 1993 for solvent/detergent-treated human blood plasma,
which product is a human blood plasma, pooled and treated to inactivate virus
and intended for transfusion as such or (ii) any substantially similar successor
products thereto developed by or on behalf of Vitex.
4
<PAGE>
Confidential
Solvent Detergent Products do not include purified plasma derivatives, such as
coagulation factor concentrates, fibrinogen, or immunoglobulin, prepared from
virus-inactivated plasma.
1.28 "Steering Committee" means the Steering Committee created pursuant to
Section
1.29 "Territory 1" means the territory consisting of the United States of
America and Canada.
1.30 "Territory 2" shall mean worldwide with the exception of Territory 1
and the following countries in which Vitex does not have an exclusive license to
the Solvent Detergent Products: Albania, Austria, Belarus, Belgium, Bosnia,
Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Georgia,
Germany, Greece. Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein.
Lithuania, Luxembourg, Macedonia, Monaco, Mongolia, Netherlands, Norway, Poland,
Portugal, Republic of Moldavia, Romania, Russian Federation, Serbia, Slovakia,
Slovenia, South Africa, Spain, Sweden, Switzerland, Ukraine, United Kingdom, and
Vietnam.
1.31 "Valid Claim" shall mean any claim of (i) a pending patent application
that has neither lapsed nor become abandoned, provided that (a) such pending
patent application does not remain pending for more than five (5) years from the
date of filing for any patent application filed in any country within Territory
1 or Territory 2 other than Japan. or seven (7) years for any patent application
filed in Japan (unless the parties agree to longer patent issuance delay
periods, which agreement shall not be unreasonably withheld by Vitex), and (b)
any such delay in patent issuance in any such country is not reasonably
attributable to circumstances beyond Pentose's control, or (ii) an issued,
unexpired patent that has not been held invalid or unenforceable by a patent
office or court of competent jurisdiction in any unappealed or unappealable
decision, including without limitation any such issued, unexpired patent the
application for which had remained pending for greater than the time periods set
forth in (i) above.
2. GRANT OF OPTION.
---------------
2.1 Option Grant. For the duration of the Option Period, Vitex shall have
------------
an exclusive option ("Option"), to be exercised at Vitex's sole discretion, to
acquire the licenses described in Section 4 hereof.
2.2 Exercise of Option. The Option may be exercised by written notice
------------------
given by Vitex to Pentose during the period commencing ninety (90) days after
the Effective Date and ending upon expiration of the Option Period. Such Option
shall be exercisable only if Vitex shall have made timely payment of the amounts
set forth in Section 6.1 hereof. Upon timely exercise of the Option, the license
grants set forth in Section 4 shall become effective and the Cooperative
Development Work described in Section 5 shall commence.
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3. ACTIVITIES DURING OPTION PERIOD.
-------------------------------
3.1 Research Program. During the Option Period, Vitex shall perform and
----------------
have the right to perform, at its facilities an evaluation of the use of the
Compounds for viral inactivation of Products for applications in the Field
pursuant to a written research program as mutually agreed to by the parties
prior to the initiation of the research (the "Research Program").
3.2 Delivery of Materials. Promptly after the Effective Date, and during
---------------------
the Option Period, Pentose agrees to provide Vitex with quantities of the
Compound as requested by Vitex and as are reasonably available for the purpose
of conducting the Research Program. Vitex shall pay to Pentose fifty percent
(50%) of Pentose's Cost of Goods for quantities of such Compound provided to
Vitex during the Option Period, except that in the event that Pentose's Cost of
Goods for quantities of Compound provided to Vitex during the Option Period
exceeds twenty thousand dollars ($20,000 U.S.), Vitex shall pay to Pentose one
hundred percent (100%) of Pentose's Cost of Goods for quantities of Compound
provided thereafter. In the event that Vitex does not exercise the Option within
the time permitted pursuant to Section 2.2 hereof; or otherwise upon completion
of the Research Program, Vitex shall return to Pentose any remaining quantities
of the Compound.
3.3 Inventions. In the event that Vitex does not exercise the Option
----------
pursuant to Section 2.2 hereof; all Option Period Inventions shall be the sole
property of Pentose. In such event, Vitex agrees to cooperate with and assist
Pentose, at Pentose' s expense, in signing or obtaining signatures for or
executing any legal document reasonably requested by Pentose to transfer all
right, title and interest in any Option Period Invention to Pentose. In the
event that Vitex executes the Option pursuant to Section 2.2 hereof; all Option
Period Inventions shall be treated in accordance with the provisions of Section
7 hereto.
3.4 Exchange of Information. The parties shall exchange all material
-----------------------
information developed pursuant to the Research Program, including without
limitation all information relating to Option Period Inventions. Such exchange
of information shall occur subject to the provisions of Section 13 hereof.
4. LICENSE GRANTS: MANUFACTURING AND MARKETING RIGHTS.
--------------------------------------------------
4.1 Exclusive License Grant. Subject to the terms and conditions of this
-----------------------
Agreement, and conditional upon Vitex's exercise of the Option as provided in
Section 2.2, Pentose hereby grants to Vitex the exclusive right and license
under the Pentose Patent Rights and Pentose Technology to use, have used, make,
have made, promote, distribute, market, sell, offer for sale, have sold, import
and have imported Products in Territory 1 for applications in the Field;
provided, however that if Vitex ceases to hold an exclusive license to the
Solvent Detergent Products in Territory 1, the license granted in this Section
4.1 shall become non-exclusive to the extent necessary to permit Pentose to
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grant similar licenses to other parties holding a license to the Solvent
Detergent Products, but will in no event contain terms less favorable to Vitex
than are the terms of any such similar license granted to such other parties
with respect to Territory 1. Notwithstanding the foregoing, no license is
granted hereunder to make or have made Compounds except as set forth in Section
5.8.
4.2 Non-Exclusive License Grant. Subject to the terms and conditions of
---------------------------
this Agreement, and conditional upon Vitex's exercise of the Option as provided
in Section 2.2. Pentose hereby grants to Vitex the non-exclusive right and
license under the Pentose Patent Rights and Pentose Technology to use, have
used, make, promote, distribute, market, sell, offer for sale, have sold, import
and have imported Products in Territory 2 for applications in the Field. To the
extent that the terms of the license between Vitex and the New York Blood Center
for solvent detergent treatment of plasma for transfusion may be amended in the
future to include countries excluded from Territory 2 under the current terms of
that license, then Vitex shall be granted a non-exclusive right and license
under the Pentose Patent Rights and Pentose Technology to use, have used, make,
promote, distribute, market, sell, offer for sale, have sold, import and have
imported Products in such countries for applications in the field.
Notwithstanding the foregoing, no license is granted hereunder to make or have
made Compounds except as set forth in Section 5.8.
4.3 Sublicenses. Vitex shall have the right to grant sublicenses of the
-----------
right to promote, distribute, market and sell the Products in Territory I and
Territory 2, and shall have the right to grant sublicenses of the right to make
Products in Territory 1 only, provided that Pentose consents in writing in
advance to each such sublicense, which consent shall not be unreasonably
withheld or delayed. Vitex shall not have the right to grant sublicenses of the
right to make Products in Territory 2, except that Vitex may subcontract the
right to make Products in Territory 2 for sale solely by Vitex, provided that no
such subcontractor shall be permitted to distribute, market or sell any such
Products in Territory 2.
4.4 Limitation of License Grant. Notwithstanding anything contained in
---------------------------
this Section 4 or elsewhere in this Agreement, neither Vitex nor any
sublicensees shall have any license or distribution rights hereunder with
respect to (a) the Compounds alone or (b) the Compounds used in combination with
any products or blood products other than Products.
5. COOPERATIVE DEVELOPMENT WORK
----------------------------
5.1 Objective. Upon completion of the Research Program, and conditional
---------
upon Vitex's exercise of the Option, Pentose and Vitex shall work together to
further develop and obtain Regulatory Approval for the Products ("Cooperative
Development Work").
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5.2 Steering Committee. Pentose and Vitex will appoint a four (4) person
------------------
Steering Committee consisting of two (2) senior executives designated by each
company. The purpose of the Steering Committee will be to coordinate the overall
relationship of the parties under this Agreement and to review and manage the
research, development and marketing of Products. Product specifications
recommended by the parties shall not be deemed finalized until they are approved
by the Steering Committee. The Steering Committee shall meet from time to time
as appropriate, but no less frequently than four (4) times during each calendar
year, alternating between the offices of the parties, unless the parties shall
agree otherwise. The Steering Committee shall review and approve budgets,
resource allocations, sales and marketing plans and expenditures. All decisions
of the Steering Committee shall be made by unanimous vote, with Pentose and
Vitex each having one vote regardless of the number of representatives attending
any meeting. In the event the Steering Committee is unable to resolve any matter
before it, the procedure set forth in Section 5.14 shall be followed.
Notwithstanding the foregoing, the final decision on all matters pertaining to
the sales and marketing of Products, and with respect to clinical trials
involving Products, shall be made by Vitex, after giving due respect to the
opinions of Pentose.
5.3 Project Committees. To assist the Steering Committee in its work,
------------------
the Steering Committee may, from time to time, at its sole discretion, create
project committees, whose members may include Steering Committee or non-Steering
Committee members. A project committee shall only have that authority
specifically granted to it by the Steering Committee.
5.4 Development Plan and Budget. The Cooperative Development Work shall
---------------------------
be conducted in accordance with an annual development plan which shall describe
the work to be undertaken with respect to the development of the Products, and
which shall include an annual budget.
5.5 Exchange of Information. While the Cooperative Development Work is
-----------------------
being performed, the parties shall exchange all information developed pursuant
to the Cooperative Development Work and necessary or useful to the other party's
performance of the Cooperative Development Work and including without limitation
the exchange of Program Technology relating to the Field. Such exchange of
information shall occur subject to the provisions of Section 13 hereof.
5.6 Records. Each party shall maintain detailed records which accurately
-------
identify its expenditures in connection with the Cooperative Development Work,
which records each party shall retain for five (5) years after the end of the
calendar year in which expenses were incurred. The records shall conform to
generally accepted cost accounting principles consistently applied. Each party
shall have the right, at its own expense, during the period of the Cooperative
Development Work and during the subsequent five (5) year period to appoint an
independent public accountant reasonably acceptable to the other party to
inspect said records. Upon reasonable notice from the other party (the
"Requesting Party"), a party (the "Reviewed Party") shall make its
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records available during regular business hours for inspection by the
independent public accountant at the place or places where the Reviewed Party
customarily keeps such records, to the extent reasonably necessary to verify the
accuracy of the expenditures. The right of inspection shall not be exercised by
a party more than once in any calendar year.
5.7 Funding of the Cooperative Development Work. Vitex shall bear sixty-
-------------------------------------------
five percent (65%) of the annual Development Costs and Pentose shall bear
thirty-five percent (35%) of the annual Development Costs as defined in Exhibit
A. Vitex shall bear all costs and expenses in connection with clinical trials of
the Products, Product manufacturing, process development and scale-up, and
marketing. Within sixty (60) days of the close of each calendar year, each party
shall provide to the other party a report setting forth such party's actual
Development Costs for such year. Vitex will, within ninety (90) days after the
end of each calendar year, provide Pentose with an additional written report
setting forth the total actual Development Costs of the parties for such
calendar year. and such additional report shall reconcile the amounts of
Development Costs paid by each party during such year with the amounts due from
each party. Together with the said report, Vitex will either make a payment to
Pentose or issue to Pentose an invoice for any balance due.
5.8 Commercial Supply of Compounds. Pentose shall have the exclusive
------------------------------
right to manufacture or have manufactured the Compounds used in the Products.
Pentose shall maintain a Drug Master File, meeting the requirements of the
United States Food and Drug Administration containing manufacturing and other
information pertaining to the Compounds, and shall at all times use commercially
reasonable efforts to supply, or have supplied, Vitex's demand for the Compounds
used in the Products. The parties shall agree in good faith upon a forecasting,
order, supply and delivery mechanism for the Compounds to be set forth in a
Manufacturing and Supply Agreement to be executed by the parties prior to
commencement of any multi-site clinical studies for Products, which agreement
shall also include provisions for Vitex to make or otherwise obtain Compounds
should Pentose fail to meet orders placed by Vitex for certain periods and under
certain conditions to be specified in such agreement. In consideration of
Pentose's manufacture, supply and delivery of Compounds, Vitex agrees to pay
Pentose (i) sixty-five percent (65%) of Pentose's Cost of Goods for such
Compounds when used in connection with the Cooperative Development Work, except
that Vitex shall pay one hundred percent (100%) of Pentose's Cost of Goods for
such Compounds used in connection with clinical trials, including but not
limited to scale up therefor, and (ii), Pentose's Cost of Goods for such
Compounds plus a manufacturing margin determined in good faith by Pentose for
such Compounds when used as a component of Products sold or transferred to third
parties, except that in no event shall such payment exceed $2.00 per Product
Unit, adjusted annually by the change in the CPI.
Upon the written request of Vitex, Pentose shall permit an independent
public accountant selected by Vitex and acceptable to Pentose, which acceptance
shall not be unreasonably withheld, to have access during normal business hours
to records of Pentose related to Pentose's Cost of Goods for the Compounds, as
may be reasonably necessary
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to verify the accuracy of the Cost of Goods for such Compounds as stated by
Pentose. All such verifications shall be conducted at Vitex's expense and not
more than once in each calendar year. The fees charged by such representative
shall be paid by Vitex unless the audit discloses that the Cost of Goods stated
by Pentose for the audited period is incorrect by more than five percent (5%),
in which case Pentose shall pay the reasonable fees and expenses charged by such
representative. Vitex agrees that all information subject to review under this
Section 5.8 shall be subject to the confidentiality provisions of Section 13.
5.9 Vitex Responsibilities. Vitex or its approved sublicensees shall be
----------------------
responsible for all aspects relating to scale-up, production, clinical trials,
Regulatory Approval, marketing and distribution of each Product, other than as
the foregoing relate to the manufacture of Compounds by Pentose. Vitex shall
promptly provide Pentose with copies of all regulatory exchanges and
documentation and give reasonable notice to Pentose of scheduled meetings with
the United States Food and Drug Administration and other regulatory agencies.
Pentose shall have the right to attend such meetings as an observer.
5.10 Commercialization. Vitex and its approved sublicensees shall use
------------------
all commercially reasonable efforts to market and sell Products within Territory
2 and in all countries within Territory 1, unless otherwise agreed by the
parties. In no event shall the marketing efforts of Vitex or its sublicensees
hereunder with respect to the Products be less diligent than those efforts Vitex
or its sublicensees make with respect to their own products of similar
commercial potential.
5.11 First Commercial Sale. In addition to and without limiting Vitex's
---------------------
obligations under Section 5.10, Vitex agrees that it (or any approved
sublicensee) shall consummate the First Commercial Sale of a Product in
Territory 1 within five (5) years of the exercise of the Option.
5.12 Sales Targets. Within ninety (90) days of achieving Regulatory
-------------
Approval in any country within Territory 1, and no less frequently than every
ninety (90) days thereafter, the Steering Committee shall establish a twelve
(12) month rolling forecast of expected sales of Products within Territory 1 for
each of the four subsequent quarters. In the event that sales of Products falls
below eighty percent (80%) of such forecasted sales for a period of eighteen
(18) consecutive months, such occurrence is not reasonably attributable to
circumstances beyond Vitex's control, and the amount of such sales total less
than fifty million dollars ($50,000,000 U.S.) in such eighteen (18)-month
period, Vitex's rights under Section 4.1 hereof shall become non-exclusive. The
obligations of Vitex set forth in this Section 5.12 shall be in addition to and
shall not limit Vitex's obligations under Section 5.10.
5.13 Inspection Rights. Pentose shall have the right, but not the
-----------------
obligation, to inspect Vitex's manufacturing sites, validation and/or processing
records (or those of any contractor of Vitex) on a confidential basis and upon
reasonable notice and no more
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frequently than once in any twelve (12) month period, as they pertain to the use
and implementation of the Pentose Patent Rights and the Pentose Technology.
5.14 General Disagreements. All disputes of the Steering Committee not
---------------------
subject to resolution by Vitex alone shall be subject to the following:
(a) The representatives to the Steering Committee will negotiate in good
faith for a period of not less than thirty (30) days to attempt to resolve the
dispute.
(b) In the event that the dispute is not resolved after the period
specified in clause (a), the representatives shall promptly present the
disagreement to the Chief Executive Officers of Pentose and Vitex or a designee
of such Chief Executive Officer reasonably acceptable to the other party.
(c) Such executives shall meet or discuss in a telephone or video
conference each of such party's views and explain the basis for such dispute.
(d) If such executives cannot resolve such disagreement within sixty (60)
days after such issue has been referred to them, then such dispute shall be
referred to arbitration as described in Section 14.5 hereof.
6. PAYMENTS AND ROYALTIES.
----------------------
6.1 Option Payments. In consideration for the Option described in
---------------
Section 2 hereof and, with respect to the payment under Section 6.1(c), the
exercise thereof; Vitex shall make the following cash payments to Pentose:
(a) a non-refundable payment of two hundred fifty thousand dollars
($250,000 U.S.), due and payable upon the Effective Date; and
(b) a non-refundable payment of two hundred fifty thousand dollars
($250,000 U.S.), due and payable ninety (90) days following the Effective Date,
except that in the event that this Agreement is terminated by Vitex pursuant to
Section 10.4 prior to such date, such payment shall not be due; and
(c) a non-refundable payment of seven hundred fifty thousand dollars
($750,000 U.S.), due and payable upon exercise of the Option by Vitex.
6.2 Development Milestone Payments. In consideration for the grants of
------------------------------
license described in Section 4 hereof; Vitex shall purchase shares of Pentose
Common Stock according to the following terms and schedule:
(a) Purchase shares of Pentose Common Stock having a value equal to one
million dollars ($1,000,000 U.S.) upon filing of the first investigational new
drug application in the United States for the Product in the form of and at
appear share purchase price equal to (i) if Pentose is publicly traded, Common
Stock at the Market
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Price plus twenty percent (20%), or (ii) if then privately held, (1) the per
share purchase price paid by a purchaser in the most recent arms-length
transaction involving the purchase of the Pentose's Common Stock, or (2) if no
such arms-length transaction has taken place within ninety (90) days of the
occurrence of the applicable milestone, the fair market value of the per share
purchase price set by the Pentose Board of Directors (each of (1) and (2),
alternatively, the "Fair Market Value"). Notwithstanding the foregoing, the per
share purchase price of Pentose's Common Stock under this Section 6.2(a) shall
in no event (subject to the last sentence of this Section 6.2(a)) be lower than
three dollars ($3.00 U.S.) per share. Vitex shall have the right to appoint, at
Vitex's expense, an independent appraiser acceptable to Pentose for the purpose
of making an appraisal of the value of Pentose's Common Stock at the time of the
occurrence of the milestone described in this Section 6.2(a). In the event that
such appraisal results in a valuation of Pentose's Common Stock at one dollar
fifty cents ($1.50 U.S.) per share or less, Vitex and Pentose will renegotiate
the price of such stock purchase or, alternatively, Vitex may at its sole option
make such milestone payment in cash.
(b) Purchase shares of Pentose Common Stock having a value equal to five
hundred thousand dollars ($500,000 U.S.) upon initiation of the first Phase II
Clinical Trials for the first Product in the United States, in the form of and
at a per share purchase price equal to (i) if Pentose is publicly traded, Common
Stock at the Market Price plus twenty percent (20%), or (ii) if then privately
held, the Fair Market Value.
(c) Purchase shares of Pentose Common Stock having a value equal to five
hundred thousand dollars ($500,000 U.S.) upon initiation of the first Phase III
Clinical Trials for the first Product in the United States, in the form of and
at a per share purchase price equal to (i) if Pentose is publicly traded, Common
Stock at the Market Price plus twenty percent (20%), or (ii) if then privately
held, Fair Market Value.
(d) Purchase shares of Pentose Common Stock having a value equal to one
million dollars (31,000,000 U.S.) upon the filing of the first Biologics License
Application in the United States for the first Product in the form of and at a
per share purchase puce equal to (i) if Pentose is publicly traded, Common Stock
at the Market Price plus twenty percent (200h), or (ii) if then privately held,
the Fair Market Value.
6.3 Stock Purchase Agreement. The purchases of equity set forth above
------------------------
will be made in accordance with a separate stock purchase agreement to be
entered into between the parties containing representations and warranties
customary for transactions of this nature.
6.4 Sales Milestone Payments. In addition to the option payments
------------------------
described in Section 6.1 and the Development Milestone Payments described in
Section 6.2, Vitex shall make the following payment. to Pentose upon the
following terms and schedule:
(a) A non-refundable payment of two million dollars ($2,000,000 US.) upon
First Commercial Sale of the first Product in the United States
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(b) A non-refundable payment of one million five hundred thousand dollars
($1,500,000 U.S.) which shall accrue on the first business day after the close
of the calendar month in which cumulative gross males of Product by Vitex or its
sublicensees, agents, distributors or representatives in all countries of the
world total two hundred fifty million dollars ($250,000,000 U.S.) in the
aggregate.
(c) A non-refundable payment of two million dollars ($2,000,000 U.S.)
which shall accrue on the first business day after the close of the calendar
month in which cumulative gross sales of Products by Vitex or its sublicenses,
agents, distributors or representatives in all countries of the world total
three hundred fifty million dollars ($350,000,000 U.S.) in the aggregate.
The payments set forth in this Section 6.4 may be made, at Vitex's option, (i)
in cash, or (ii) in shares of Vitex Common Stock, valued at the Market Price on
the date the milestone payment is due under Section 6.5, which stock shall be
subject to demand registration rights with the U.S. Securities and Exchange
Commission and shall be freely transferable by Pentose sixty (60) days after
demand, on a national U.S. securities exchange or on the Nasdaq National Market.
In the event that such stock does not become freely transferable by Pentose
within sixty (60) days after SEC filing, such filing to occur within twenty (20)
days of demand, such payment shall be made in cash. In the event that Vitex
elects payment option (ii), to the extent that (a) any broker's fees,
commissions or other transaction costs are associated with Pentose's sale of
such stock, or (b) any reduction in the price of such stock prior to the sale of
such stock by Pentose reduces the amount realized by Pentose upon the subsequent
sale of such stock by Pentose, Vitex shall, within five (5) days of being
notified of any such shortfall pay the amount of such shortfall to Pentose in
cash, provided that Pentose shall make reasonable efforts to sell all such Vitex
stock within six (6) months of issue thereof to Pentose. Notwithstanding the
foregoing, Vitex shall, with respect to each payment set forth in this Section
6.4, make such payment in cash, if any of the following conditions occur.
. The number of shares of stock required to be issued to Pentose by
Vitex (based upon the Market Price of the stock and the payment
amount) is greater than the total number of shares traded in the
twenty (20) trading days preceding the occurrence of the applicable
milestone.
. The Market Price of Vitex Common Stock has declined by an amount equal
to or greater than twenty percent (20%) in the twenty (20) trading
days preceding the occurrence of the applicable milestone.
. The Vitex Common Stock has, prior to the occurrence of the applicable
milestone, been delisted from the exchange on which it had first been
traded.
. The aggregate Market Price of Vitex Common Stock is less than seventy-
five million dollars ($75,000,000 U.S.) as of the date of the
applicable milestone.
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6.5 Payments Contingent on Amendments to Territory 2. To the extent that
------------------------------------------------
the terms of the license between Vitex and the New York Blood Center for solvent
detergent treatment of plasma for transfusion may be amended in the future to
include countries excluded from Territory 2 under the current terms of this
Agreement, then Vitex shall make the following, nonrefundable payments according
to the following schedule:
(a) Two hundred and fifty thousand dollars ($250,000 U.S.) per country in
France, Germany, Italy, Spain, and United Kingdom upon First Commercial Sale in
such country.
(b) One hundred and twenty five thousand dollars ($125,000 U.S.) per
country for the First Commercial Sale in any country other than France, Germany,
Italy, Spain, and United Kingdom.
The total of such payments under this Section 6.5 shall not exceed two million
dollars ($2,000,000 U.S.) in the aggregate.
6.6 Payment Terms.
-------------
Within twenty (20) days following the occurrence of each of the milestones
set forth in Sections 6.2 and 6.4 above, Vitex shall: (i) pay to Pentose in
United States dollars by certified or bank check or wire transfer the payments
set forth above; or (ii) issue the equity in the manner set forth above.
Payments made to Pentose pursuant to Sections 6.1.6.2 and 6.4 are not refundable
under any circumstances and will not be credited against any royalty payments
due Pentose hereunder.
6.7 Base Royalty Pentose Share of Vitex Revenues. In consideration for
--------------------------------------------
the licenses granted by Pentose to Vitex, and in addition to the payments set
forth above, Vitex shall, on a quarterly basis and subject to the minimum
royalty provisions of Section 6.7 below, pay to Pentose a royalty equal to the
greater of the following:
. One-third (1/3) of any difference between the Base Price for a single
deactivated plasma product ("SD/Plasma") charged to ANRC under Section
5.1(a) of the ANRC Agreement as defined in and as adjusted from time
to time pursuant to the terms thereof, and any such higher sales price
charged to ANRC and/or negotiated by Vitex and ANRC with respect to
distribution of the Products, per Product Unit sold.
. One-half (1/2) of the one-third of the increase in the "average
selling price" (as defined in the ANRC Agreement) per Product Unit
over $110 per Product Unit (the "Increase Margin") due by the ANRC to
Vitex under Section 5.1(a) of the ANRC Agreement (i.e., one-sixth
(1/6) of the Increase Margin).
Pentose and Vitex acknowledge that the purpose of the payment provisions set
forth in this Section 6.6 is to enable Pentose to derive a fair share of the
increased revenue of Vitex related to the distribution of the Products as
compared to the distribution of existing
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products under the ANRC Agreement. Therefore, in the event that (i) ANRC ceases
to be the exclusive distributor of the Products in Territory 1, (u) the relevant
provisions of the ANRC Agreement are otherwise amended or altered such as to
render the base royalty provisions set forth in this Section 6.6 inapplicable or
otherwise to frustrate the purpose thereof, or (iii) sales are to be made other
than by ANRC, in each case Pentose and Vitex agree that they shall in good faith
renegotiate such provisions or negotiate additional provisions, taking into
account such purpose, and recognizing that Pentose shall be entitled to an
equitable share of Vitex's revenues related to the distribution of the Products
whether such revenues of Vitex derive from royalty payments, upfront payments,
milestone payments, or any other form of payment. Vitex agrees that it shall
consult with Pentose as to any negotiations between Vitex and ANRC (or such
other sublicensee) with respect to distribution of the Products and any
amendment of the ANRC Agreement that would materially adversely affect the
operation of this provision.
Notwithstanding the foregoing, in any country where (i) the Product is not
covered by a Valid Claim of a Pentose Patent Right or a Program Patent Right,
and (ii) Vitex or its subdistributor experiences a decline over a period of six
(6) months in sales of greater than fifty percent (50%) due to the introduction
of products in the market that (a) would infringe a Pentose Patent Right or a
Program Patent Right were the Product covered by a Valid Claim thereof, and (b)
are competitive with the Products, the royalty rates pursuant to this Section
6.6, or, if applicable, the Minimum Royalty (as defined in Section 6.7), shall
be reduced by fifty percent (50%).
6.8 Minimum Royalty. Subject to the provisions of the last paragraph of
---------------
Section 6.6 hereof, in no event shall the royalty paid by Vitex to Pentose
hereunder be lower than $5.50 for any Product Unit sold (the "Minimum Royalty"),
which Minimum Royalty shall be adjusted by the change in the CPI each year
commencing with the First Commercial Sale and on each anniversary thereafter
during the term of this Agreement.
6.9 Sublicense Royalties. If Vitex grants a sublicense hereunder to any
--------------------
third party pursuant to Section 4.3 hereof, Vitex shall pay to Pentose royalties
on sales of Products sold by such third party according to the royalty
provisions of Sections 6.6 (including any renegotiations thereunder) and 6.7
hereof.
6.10 Royalty Reports, Exchange Rates. During the term of this Agreement
-------------------------------
following the First Commercial Sale of the Products in either Territory 1 or
Territory 2, Vitex shall within sixty (60) days after each calendar quarter
furnish to Pentose a written quarterly report showing: (i) the gross sales of
the Products sold by Vitex and its permitted sublicensees during the reporting
period and the calculation of royalties from such gross sales; (ii) the royalty
due thereon; (iii) withholding taxes, if any, required by law to be deducted in
respect of such royalties; and (iv) the exchange rates used in determining the
amount of United States dollars. For the purposes of calculating royalties due
hereunder, all sales in currencies other than United States dollars shall first
be converted into United States dollars, based upon the applicable rates set
forth in The Wall Street Journal as of the closing date of the relevant calendar
quarter. If no royalty is due
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for any royalty period hereunder, Vitex shall so report. Vitex shall keep
complete and accurate records in sufficient detail to properly reflect all
Product sales and to enable the royalties payable hereunder to be determined.
6.11 Audits. Upon the written request of Pentose, Vitex shall permit an
------
independent public accountant selected by Pentose and acceptable to Vitex, which
acceptance shall not be unreasonably withheld, to have access during normal
business hours to such records of Vitex as may be reasonably necessary to verify
the accuracy of the royalty reports described herein, in respect of any fiscal
year ending not more than thirty-six (36) months prior to the date of such
request. All such verifications shall be conducted at Pentose's expense and not
more than once in each calendar year. In the event such independent accountant
concludes that additional royalties were owed to Pentose during such period, the
additional royalty shall be paid by Vitex within thirty (30) days of the date
Pentose delivers to Vitex such representative's written report so concluding.
The fees charged by such representative shall be paid by Pentose unless the
audit discloses that the royalties payable by Vitex for the audited period are
incorrect by more than five percent (5%), in which case Vitex shall pay the
reasonable fees and expenses charged by such representative. Vitex shall include
in each Third Party sublicense granted by it pursuant to this Agreement a
provision requiring the sublicensee to make reports to Pentose, to keep and
maintain records of sales made pursuant to such sublicense and to grant access
to such records by Pentose's representatives to the same extent required of
Vitex under this Agreement. Pentose agrees that all information subject to
review under this Section 6.10 or under any sublicense agreement shall be
subject to the confidentiality provisions of Section 13.
6.12 Royalty Payment Terms. Royalties shown to have accrued by each
---------------------
royalty report provided for under this Agreement shall be due sixty (60) days
after the end of each calendar quarter. Payment of royalties in whole or in part
may be made in advance of such due date. Royalties determined to be owing with
respect to any prior quarter shall be added, together with interest thereon
accruing under this Agreement from the date of the report for the quarter for
which such amounts are owing, to the next quarterly payment hereunder.
6.13 Interest on Late Payments. Any payments by Vitex to Pentose that
-------------------------
are not paid on or before the date such payments are due under this Agreement
shall bear interest, to the extent permitted by applicable law, at one (1)
percentage point above the Prime Rate of interest declared from time to time by
BankBoston in Boston, Massachusetts, calculated based upon the number of days
payment is delinquent.
6.14 Third Party Royalties. Pentose shall be responsible for payment of
---------------------
any future royalties or obligations owed to third parties pursuant to future
agreements of Pentose relating to the Pentose Technology and the Pentose Patent
Rights reasonably necessary for the exercise of the rights licensed from Pentose
hereunder.
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7. INTELLECTUAL PROPERTY RIGHTS.
----------------------------
7.1 Ownership of Option Period Inventions, Program Technology and Program
---------------------------------------------------------------------
Patent Rights. All right, title and interest in all Option Period Inventions
- -------------
and patent rights thereon, Program Technology and Program Patent Rights that are
discovered, made or conceived during the Option Period or during and as a result
of the Cooperative Development Work solely by employees of Pentose or others
acting on behalf of Pentose shall be owned by Pentose. AR right, title and
interest in all Option Period Inventions and patent rights thereon, Program
Technology and Program Patent Rights that are discovered, made or conceived
during the Option Period or during and as a result of the Cooperative
Development Work solely by employees of Vitex or others acting on behalf of
Vitex shall be owned by Vitex (except, as set forth in Section 3.3 hereof, in
the event that Vitex does not exercise the Option pursuant to Section 2.2
hereof). All right, title and interest in all Option Period Inventions and
patent rights thereon, Program Technology and Program Patent Rights that are
discovered, made or conceived during the Option Period or during and as a result
of the Cooperative Development Work jointly by employees of Pentose and Vitex or
others acting on their behalf shall be jointly owned by Pentose and Vitex
(except, as set forth in Section 3.3 hereof, in the event that Vitex does not
exercise the Option pursuant to Section 2.2 hereof). Each party shall promptly
disclose to the other party the making, conception or reduction to practice of
any Option Period Inventions, Program Technology and Program Patent Rights by
employees or others acting on behalf of such party. The ownership rights set
forth above are subject to the license grants set forth in Sections 4 and 7.2
hereof.
7.2 Pentose's Right to Exploit Compound Intellectual Property. The
---------------------------------------------------------
parties recognize that Pentose endeavors to share improvements in technology
relating to the Compounds among all its licensees, and that the sharing of such
improvements benefits all such licensees. Consequently, notwithstanding anything
contained in Section 7.1 to the contrary, Pentose shall have a non-exclusive,
worldwide, royalty-free, perpetual right and license, with the right to grant
sublicenses, to use, make, have made, sell and have sold all Option Period
Inventions, Program Technology and Program Patent Rights that are discovered,
made or conceived during the Option Period or during and as a result of the
Cooperative Development Work solely by employees of Vitex or others acting on
behalf of Vitex that relate to the Compounds or methods of pathogen inactivation
that relate to the Compounds. Pentose shall not grant a sublicense to
improvements solely owned by Vitex to any third party that does not grant
reciprocal rights to improvements solely owned by such third party to Pentose.
To the extent that such third party agreements include such royalty-free grant
of reciprocal rights to Pentose, Vitex shall have the same right to exploit such
third party improvements as may be exercised by Pentose thereunder at no
additional cost to Vitex.
7.3 Cooperation of Employees. Each party represents and agrees that its
------------------------
employees and consultants shall be obligated under a binding written agreement
to assign to such party, or as such party shall direct, all Program Technology
and Program Patent
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Rights made or conceived during and as a result of the Program by such employee
or consultant. Pentose and Vitex agree to undertake to enforce such agreements
with employees or others (including, where appropriate, by legal action)
considering, among other things, the commercial value of such Program Technology
and Program Patent Rights.
7.4 Prosecution of Parties' Own Patent Rights. Pentose shall file,
-----------------------------------------
prosecute and maintain Pentose Patent Rights and Program Patent Rights owned
solely by Pentose. Vitex shall file, prosecute and maintain patents and patent
applications on Program Patent Rights owned solely by Vitex.
7.5 Prosecution of Joint Patent Rights. When any Program Technology that
----------------------------------
is owned jointly by Pentose and Vitex may reasonably be considered patentable,
Pentose shall be responsible for filing a patent application therefor as soon as
reasonably possible. No later than nine (9) months following the filing date of
any such applications, the parties shall consult together, through the Steering
Committee or otherwise, and agree whether such application shall be: abandoned
without replacement; abandoned and refiled; proceeded with in the country of
filing only; or used as the basis for a claim of priority under the Paris
Convention for corresponding applications in other countries. Pentose shall be
responsible for prosecution and maintenance of Program Patent Rights jointly
owned by Pentose and Vitex that relate to Compounds or methods of pathogen
inactivation that relate to Compounds. Vitex shall thereafter be responsible for
prosecution and maintenance of all other jointly owned Program Patent Rights.
7.6 Joint Patent Costs. Each party shall reimburse the other party for
------------------
fifty percent (50%) of the reasonable costs of filing, prosecuting and
maintaining patents and patent applications for which such other party is
responsible under Section 7.5. Notwithstanding the foregoing, upon written
notice, either party may elect not to share in the prosecution or maintenance
costs as described in this Section 7.6 related to a patent or patent application
in a particular country and incurred by the other party after receipt of that
notice; and in such event the party electing to cease paying costs will grant to
the other party all of its patent rights associated with such patent in such
country.
7.7 Discontinuance of Patent Prosecution. Each party shall give thirty
------------------------------------
(30) days advance notice (the "Discontinuance Election") to the other party of
any decision to cease, preparation, filing, prosecution and maintenance of a
Program Patent Right (a "Discontinued Patent") provided, however, that
abandonment of a patent application in favor of a continuation or a
continuation-in-part thereof shall not constitute discontinuance of the patent
application. In such case, the other party may elect at its sole discretion to
continue preparation, filing, prosecution or maintenance of the Discontinued
Patent at its sole expense. Such other party shall thereafter own any such
patent application and patents maturing therefrom; and the party making the
Discontinuance Election shall execute such documents and perform such acts as
may be reasonably necessary for the other party to file or to continue
prosecution or maintenance, including assigning ownership of such patents and
inventions to such electing party. Discontinuance may be on a country-by-country
basis or for a patent application to a patent series in total.
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8. ENFORCEMENT OF PATENT RIGHTS.
----------------------------
Pentose and Vitex shall each promptly notify the other in writing of any
alleged or threatened infringement in the Field of patents or patent
applications included in the Pentose Patent Rights or Program Patent Rights of
which they become aware. Pentose and Vitex shall then confer and may agree
jointly to prosecute any such infringement. The party owning or controlling
patents or patent applications alleged or threatened to be infringed shall
control the joint litigation in the event of any dispute between the parties
with respect to any aspect of the litigation. With respect to Program Patent
Rights covering patents or patent applications jointly owned by Pentose and
Vitex, Pentose shall control any litigation relating to Compounds or methods of
pathogen inactivation relating to Compounds and Vitex shall control all other
such litigation, and each party shall pay fifty percent (50%) of the costs of
such suit or action. Neither party shall have the right to settle any patent
infringement litigation under this Section 8 in a manner that diminishes the
rights or interests of the other party without the express written consent of
such other party.
9. TRADEMARKS.
----------
Vitex and its distributors shall include all trademarks, logos or other
indicia of origin of Pentose designated by Pentose in a prominent manner on all
labels, packaging, literature and promotional materials for the Products and
shall mark all Products as necessary to comply with applicable patent statutes
so as to reasonably protect Pentose Patent Rights. Vitex shall provide to
Pentose for review copies of all proposed uses of such marks. Vitex and its
distributors shall include on material bearing such marks an acknowledgement
that such marks are the property of Pentose. If necessary in any market to
maintain Pentose's rights in Pentose's marks, Vitex and its distributors shall
enter into a registered user agreement regulating the use by Vitex or its
distributors of Pentose's marks. Except as provided in this Section 9, no rights
to Pentose marks are hereby granted to Vitex.
10. TERM AND TERMINATION.
--------------------
10.1 Term. This Agreement will commence on the Effective Date and, unless
----
terminated in accordance with the terms hereof, shall continue in effect on a
country by country basis until fifteen (15) years after the First Commercial
Sale in such country, except that in the event that Pentose Patent Rights or
Program Patent Rights in any country within Territory 1 or Territory 2 expire
after such fifteen-year period, then this Agreement shall continue, in all
countries within Territory I and Territory 2, until such Pentose Patent Rights
and Program Patent Rights terminate or expire within all such countries.
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10.2 Termination by Either Party. This Agreement may be terminated by
---------------------------
either party (a) by reason of a material breach (other than as provided in
Section 10.3) if the breaching party fails to remedy such breach within sixty
(60) days after written notice thereof by the non-breaching party, or (b) upon
written notice to the other party in the event that proceedings in bankruptcy or
insolvency are instituted by or against the other party, or a receiver is
appointed, or if any substantial part of the assets of the other party is the
object of attachment, sequestration or other type of comparable proceeding, and
such proceeding is not vacated or dismissed within thirty (30) days after its
commencement or institution.
10.3 Termination by Pentose. This Agreement may be terminated by Pentose
----------------------
if Vitex fails to (i) fulfill its obligations under Section 5.11, unless such
failure is reasonably attributable to circumstances beyond Vitex's control, or
(ii) make any payment, issue any equity, or fund any equity purchase as provided
hereunder within (10) business days after such payment or funding becomes
payable and such failure is not remedied within thirty (30) days after notice
thereof by Pentose.
10.4 Termination by Vitex. This Agreement may be terminated by Vitex
--------------------
without cause upon written notice to Pentose (i) before expiration of the Option
Period, or (ii) during the period after the expiration of the Option Period and
prior to obtaining Regulatory Approval in any country.
10.5 Effect of Termination. In the event this Agreement is terminated,
---------------------
except by Vitex pursuant to Sections 10.2 or 10.4(i) above, Vitex will (i)
assign to Pentose all right, title and interest in all Program Technology and
Program Patent Rights that are discovered, made or conceived by Vitex, and (ii)
shall pay to Pentose an amount equal to the sum of (a) all Development Costs
borne by Pentose during the term of the Agreement and (b) Pentose's total
cumulative Cost of Goods for the Compounds less such amounts previously paid by
Vitex to Pentose pursuant to Sections 3.2 or 5.8 of this Agreement for Pentose's
manufacture, supply and delivery of the Compounds. In such event, Vitex agrees
to cooperate with and assist Pentose in signing or obtaining signatures for or
executing any legal document reasonably requested by Pentose to transfer all
right, title and interest in such technology or know-how to Pentose.
10.6 Survival. The provisions of Sections 5.6, 5.7, 5.14, 6 (with respect
--------
only to payments accrued at the time of termination but not yet paid), 7.1, 7.2,
7.3, 7.5, 7.7, 10, 11, 12, 13 and 14.5 shall survive termination of this
Agreement.
10.7 Remedies. If either party shall fail to perform or observe or
--------
otherwise breaches any of its material obligations under this Agreement, in
addition to any right to terminate all or any portion of this Agreement, the
non-defaulting party may elect to obtain other relief and remedies available
under the law.
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11. WARRANTY OF AUTHORITY.
---------------------
Each party represents and warrants to the other (a) that it has the right
and power to enter into this Agreement and to extend the rights and licenses
granted to the other in this Agreement, and (b) that the performance of such
obligations will not conflict with any agreements, contracts or other
arrangements to which it is a party. Furthermore, Pentose represents and
warrants that to Pentose's best knowledge, there are no patent rights owned by
third parties relevant and material to an evaluation of Vitex's freedom to
operate with respect to the use of rights licensed hereunder.
12. INDEMNITY.
---------
12.1 Vitex Indemnity Obligations. Vitex agrees to defend, indemnify and
---------------------------
hold Pentose, its Affiliates and their respective employees and agents harmless
from and against all claims, losses, damages or expenses arising as a result of:
(a) actual or asserted violations of any applicable law or regulation by Vitex,
its Affiliates or sublicensees by virtue of which the Products manufactured,
distributed or sold shall be alleged or determined to be adulterated,
misbranded, mislabeled or otherwise not in compliance with any applicable law or
regulation; (b) claims for bodily injury, death or property damage attributable
to the manufacture, distribution, sale or use of the Products by Vitex, its
Affiliates or sublicensees; or (c) a Product recall ordered by a governmental
agency or required by a confirmed Product failure as reasonably determined by
the parties hereto.
12.2 Pentose Indemnity Obligations. Pentose, its Affiliates and their
-----------------------------
respective employees and agents shall not be entitled to the indemnities set
forth in Section 12.1 where the loss, damage, or expense for which
indemnification is sought was either caused by (a) adulteration or non-
conformity with specifications of Compounds manufactured by Pentose or its
Affiliates or (b) a negligent act or omission by Pentose, its directors,
officers, employees or authorized agents. In case of(a) or (b) above, Vitex
shall be entitled to indemnification from Pentose to the extent that such claim,
loss, damage or expense is attributable to (a) or (b) above. In addition,
Pentose shall indemnify Vitex, its Affiliates and their respective employees and
agents from any liability, loss or expense (including reasonable attorneys' fees
and expenses of litigation) arising from any claim that the manufacture, use or
sale of Compounds infringes any patent right of a third party.
12.3 Procedure. A party or any of its Affiliates or their respective
---------
employees or agents (the "Indemnitee") that intends to claim indemnification
under this Section 12 shall promptly notify the other party (the "Indemnitor")
of any loss, claim, damage, liability or action in respect of which the
Indemnitee intends to claim such indemnification, and the Indemnitor shall
assume the defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an Indemnitee shall have the right to retain its own
counsel, with the fees and expenses to be paid by the Indemnitor, if
representation of such Indemnitee by the counsel retained by the Indemnitor
would be inappropriate due to actual or potential differing interests between
such Indemnitee and any other party represented by such counsel in such
proceedings. The indemnity
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provisions of this Section 12 shall not apply to amounts paid in settlement of
any loss, claim, damage, liability or action if such settlement is effected
without the consent of the Indemnitor, which consent shall not be withheld
unreasonably. The failure to deliver notice to the Indemnitor within a
reasonable time after the commencement of any such action, if prejudicial to its
ability to defend such action, shall relieve such Indemnitor of any liability to
the Indemnitee under this Section 12, but the omission so to deliver notice to
the Indemnitor will not relieve it of any liability that it may have to any
Indemnitee otherwise than under this Section 12. The Indemnitee, its employees
and agents, shall cooperate fully with the Indemnitor and its legal
representatives in the investigation of any action, claim or liability covered
by this indemnification. In the event that each party claims indemnity from the
other and one party is finally held liable to indemnify the other, the
Indemnitor shall additionally be liable to pay the reasonable legal costs and
attorneys' fees incurred by the Indemnitee in establishing its claim for
indemnity.
13. CONFIDENTIALITY.
---------------
13.1 Nondisclosure Obligations.
-------------------------
(a) General. Except as otherwise provided in this Section 13, during the
-------
term of this Agreement and for a period often (10) years thereafter, both
parties shall maintain in confidence and use only for purposes specifically
authorized under this Agreement (i) information and data received from the other
party resulting from or related to the development of the Compounds and the
Products, including all such information and data exchanged prior to the
execution of this Agreement under the terms of a Nondisclosure Agreement dated
April 22, 1996 between Melville Biologics, Inc. and Pentose, or derived from or
relating to the Research Program and the Cooperative Development Work, and (ii)
all information and data not described in clause (i) but supplied by the other
party under this Agreement marked "Confidential." For purposes of this Section
13, information and data described in clause (i) or (ii) shall be referred to as
"Confidential Information."
(b) Limitations. To the extent it is reasonably necessary or appropriate
-----------
to fulfill its obligations or exercise its rights under this Agreement, a party
may disclose Confidential Information it is otherwise obligated under this
Section 13 not to disclose to its consultants, outside contractors and clinical
investigators, on a need-to-know basis on condition that such entities or
persons agree to keep the Confidential Information confidential for the same
time periods and to the same extent as such party is required to keep the
Confidential Information confidential; and a party may disclose such
Confidential Information to government or other regulatory authorities to the
extent that such disclosure is reasonably necessary to obtain patents or
authorizations to conduct clinical trials of, and to commercially market, the
Products. The obligation not to disclose Confidential Information shall not
apply to any part of such Confidential Information that: (i) is or becomes part
of the public domain other than by unauthorized acts of the party obligated not
to disclose such Confidential Information; (ii) can be shown by written
documents to have been disclosed to the receiving party by a third party having
22
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a lawful right to disclose it, provided such Confidential Information was not
obtained by such third party directly or indirectly from the other party under
this Agreement pursuant to a confidentiality agreement; (iii) prior to
disclosure under this Agreement, was already in the possession of the receiving
party' provided such Confidential Information was not obtained directly or
indirectly from the other party under this Agreement pursuant to a
confidentiality agreement; (iv) can be shown by written documents to have been
independently developed by the receiving party without breach of any of the
provisions of this Agreement.
(c) Disclosure Required by Law or Government. The Confidential Information
----------------------------------------
may be disclosed by the receiving party pursuant to interrogatories, requests
for information or documents, subpoena, civil investigative demand issued by a
court or governmental agency or as otherwise required by law; provided that the
receiving party notifies the other party immediately upon receipt thereof and
gives the disclosing party the opportunity to seek to limit any such required
disclosure.
13.2 Publications.
------------
(a) Procedure. Each party recognizes the mutual interest in obtaining
---------
patent protection for inventions which arise under this Agreement. In the event
that either party, its employees or consultants or any other third party under
contract to such party wishes to make a publication (including any oral
disclosure made without obligation of confidentiality) relating to work
performed under this Agreement (the "Publishing Party"), such party shall
transmit to the other party (the "Reviewing Party") a copy of the proposed
written publication at least forty-five (45) days prior to submission for
publication, or an abstract of such oral disclosure at least thirty (30) days
prior to submission of the abstract or the oral disclosure, whichever is
earlier. The Reviewing Party shall have the right (a) to propose modifications
to the publication for patent reasons, (b) to request a delay in publication or
presentation in order to protect patentable information or (c) to request that
the information be maintained as a trade secret and, in such case, the
Publishing Party shall not make such publication; provided, however, that the
Publishing Party need only provide the other party with a copy of a proposed
press release within ten (10) days prior to submission for publication or such
other period as the parties may mutually agree.
(b) Delay. If the Reviewing Party requests a delay as described above, the
-----
Publishing Party shall delay submission or presentation of the publication for a
period of ninety (90) days to enable patent applications protecting each party's
rights in such information to be filed.
(c) Resolution. Upon the receipt of written approval of the Reviewing
----------
Party, the Publishing Party may proceed with the written publication or the oral
presentation, and once any publication is approved, either party may
subsequently disclose all or any portion thereof without further approval of the
other party.
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13.3 Use of Consultants. The parties contemplate that from time to time
------------------
during the term of this Agreement third party technical consultants may be
employed by either party in connection with the development of Compounds or
Products. The parties agree that Confidential Information may be disclosed to
such consultants provided that such disclosure shall be limited to such
Confidential Information necessary to enable the technical consultant to provide
technical consulting services. Each such consultant shall be required to sign an
agreement with Pentose or Vitex, as the case may be, setting forth the
consultant's obligations, which shall be consistent with such party's
obligations hereunder, with respect to such Confidential Information.
13.4 Injunctive Relief. The parties hereto understand and agree that
-----------------
remedies at law may be inadequate to protect against any breach of any of the
provisions of this Section 13, or Sections 4,7 or 8, by either party or their
employees, agents, officers or directors or any other person acting in concert
with it or on its behalf. Accordingly, each party shall be entitled to the
granting of injunctive relief by a court of competent jurisdiction against any
action that constitutes any such breach of Sections 4, 7, 8 or 13.
14. MISCELLANEOUS.
-------------
14.1 Force Majeure. Neither party shall be held liable or responsible to
-------------
the other party nor be deemed to have defaulted under or breached this Agreement
for failure or delay in fulfilling or performing any term of this Agreement when
such failure or delay is caused by or results from causes beyond the reasonable
control of the affected party, including but not limited to earthquake, fire,
floods, embargoes, war, acts of war (whether war is declared or not),
insurrections, riots, civil commotions, strikes, lockouts or other labor
disturbances, acts of God or acts, omissions or delays in acting by any
governmental authority or the other party; provided, however, that the party so
affected shall use reasonable commercial efforts to avoid or remove such causes
of nonperformance, and shall continue performance hereunder with reasonable
dispatch whenever such causes are removed. Either party shall provide the other
party with prompt written notice of any delay or failure to perform that occurs
by reason of such causes. The parties shall mutually seek a resolution of the
delay or the failure to perform as noted above.
14.2 Assignment. This Agreement may not be assigned or otherwise
----------
transferred by either party without the consent of the other party; provided,
however, that either Pentose or Vitex may, without such consent, assign its
rights and obligations under this Agreement (i) in connection with a corporate
reorganization, to any Affiliate, all or substantially all of the equity
interest of which is owned and controlled by such party or its direct or
indirect parent corporation, or (ii) in connection with a merger, consolidation
or sale of substantially all of such party's assets to an unrelated third party
provided, however, that such party's rights and obligations under this Agreement
shall be assumed in writing by its successor in interest in any such transaction
and shall not be transferred separate from all or substantially all of its other
business assets, including those business assets that are the subject of this
Agreement. Any purported assignment in violation of the preceding sentence shall
be void. Any permitted assignee shall assume all obligations of its assignor
under this Agreement.
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14.3 Severability. Each party hereby agrees that it does not intend to
------------
violate any public policy, statutory or common laws, rules, regulations, treaty
or decision of any government agency or executive body thereof of any country or
community or association of countries. Should one or more provisions of this
Agreement be or become invalid, the parties hereto shall substitute, by mutual
consent, valid provisions for such invalid provisions which valid provisions in
their economic effect are sufficiently similar to the invalid provisions that it
can be reasonably assumed that the parties would have entered into this
Agreement with such valid provisions. In case such valid provisions cannot be
agreed upon, the invalidity of one or several provisions of this Agreement shall
not affect the validity of this Agreement as a whole, unless the invalid
provisions are of such essential importance to this Agreement that it is to be
reasonably assumed that the parties would not have entered into this Agreement
without the invalid provisions.
14.4 Notices. Any consent, notice or report required or permitted to be
-------
given or made under this Agreement by one of the parties hereto to the other
shall be in writing, delivered personally or by facsimile (and promptly
confirmed by telephone, personal delivery or courier) or courier, postage
prepaid (where applicable), addressed to such other party at its address
indicated below, or to such other address as the addressee shall have last
furnished in writing to the addressor and shall be effective upon receipt by the
addressee.
If to Pentose: Pentose Pharmaceuticals, Inc.
45 Moulton Street
Cambridge, MA 02138
Attention: Martin D. Williams,
Vice President Business Development, Sales & Marketing
Telephone: (617) 864-4800
Facsimile: (617) 864-4806
With a copy to: Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108-3 190
Attention: Michael Lytton, Esq.
Telephone: (617) 573-0327
Facsimile: (617) 227-4420
If to Vitex: V.1. Technologies, Inc.
155 Duryea Road, Melville, NY 11747
Attention: John R. Barr, President and
Chief Executive Officer
Telephone: (516) 752-7314
Facsimile: (516) 752-8754
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With a copy to: Mintz, Levin. Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Attention: William T. Whelan, Esq.
Telephone: (617) 348-1869
Facsimile: (617) 542-2241
14.5 Arbitration. Any disputes arising between the parties relating to,
-----------
arising out of or in any way connected with this Agreement or any term or
condition hereof, or the performance by either party of its obligations
hereunder, whether before or after termination of this Agreement (a "Dispute"),
which has not been resolved in accordance with the provisions of Section 5.12
hereof, shall be finally resolved by binding arbitration as herein provided.
14.5.1 General. Except as otherwise provided in this Section 14.5, any
-------
arbitration hereunder shall be conducted under the commercial rules of the
American Arbitration Association. Each such arbitration shall be conducted in
the English language by a panel of three (3) arbitrators (the "Arbitration
Panel"). Each of Pentose and Vitex shall appoint one (1) arbitrator to the
Arbitration Panel and the third arbitrator shall be appointed by the two (2)
arbitrators appointed by Pentose and Vitex. The Arbitration Panel shall be
convened upon delivery of the Notice of Arbitration (as herein defined). Any
such arbitration shall be held in Boston, Massachusetts. The Arbitration Panel
shall have the authority to grant specific performance, and to allocate between
the Parties the costs of arbitration in such equitable manner as it shall
determine. Judgment upon the award so rendered may be entered in any court
having jurisdiction or application may be made to such court for judicial
acceptance of any award and an order of enforcement, as the case may be.
14.5.2 Procedure.
---------
(a) Whenever a Party (the "Claimant") shall decide to institute
arbitration proceedings, it shall give written notice to that effect (the
"Notice of Arbitration") to the other Party (the "Respondent"). The Notice of
Arbitration shall set forth in detail the nature of the Dispute, the facts upon
which the Claimant relies and the issues to be arbitrated (collectively, the
"Arbitration Issues"). Within fifteen (15) days of its receipt of the Notice of
Arbitration, the Respondent shall send the Claimant and the Arbitration Panel a
written Response (the "Response"). The Response shall set forth in detail the
facts upon which the Respondent relies. In addition, the Response shall contain
all counterclaims which the Respondent may have against the Claimant which are
within the Arbitration Issues, whether or not such claims have previously been
identified. If the Response sets forth a counterclaim, the Claimant may, within
fifteen (15) days of the receipt of the Response, deliver to the Respondent and
the Arbitration Panel a rejoinder answering such counterclaim.
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(b) Within fifteen (15) days after the later of (i) the expiration of the
period provided in Section 14.5.2(a) above for the Claimant to deliver a
rejoinder or (ii) the completion of any discovery proceedings authorized by the
Arbitration Panel: (A) the Claimant shall send to the Arbitration Panel a
proposed resolution of the Arbitration Issues and a proposed resolution of any
counterclaims set forth in the Response, including without limitation the amount
of monetary damages, if any, or other relief sought (the "Claimant's Proposal");
and (B) the Respondent shall send to the Arbitration Panel a proposed resolution
of the Arbitration Issues, a proposed resolution of any counterclaims set forth
in the Response and a proposed resolution of any rejoinder submitted by the
Claimant, including without limitation the amount of monetary damages, if any,
or other relief sought (the "Respondent's Proposal"). Once both the Claimant's
Proposal and the Respondent's Proposal have been submitted, the Arbitration
Panel shall deliver to each party a copy of the other party's proposal.
(c) The Arbitration Panel shall issue an opinion with respect to any
Dispute, which opinion shall explicitly accept either the Claimant's Proposal or
the Respondent's Proposal in its entirety (the "Final Decision"). The
Arbitration Panel shall not have the authority to reach a Final Decision that
provides remedies or requires payments other than those set forth in the
Claimant's Proposal or the Respondent's Proposal. The concurrence of two (2)
arbitrators shall be sufficient for the entry of a Final Decision. The
arbitrators shall issue a Final Decision within one (1) month from the later of
(i) the last day for submission of proposals under Section 14.5.2(b) above or
(ii) the date of the final hearing on any Dispute held by the Arbitration Panel.
A Final Decision shall be binding on both parties.
14.6 Applicable Law. This Agreement shall be governed by and construed
--------------
in accordance with the laws of the Commonwealth of Massachusetts, without giving
effect to the choice of laws provisions thereof.
14.7 Entire Agreement. This Agreement, together with all exhibits
----------------
hereto, contains the entire understanding of the parties with respect to the
subject matter hereof and supersedes all proposals (oral or written),
understandings, representations, conditions, warranties, covenants, and other
communications between the parties relating hereto. This Agreement may be
amended, or any term hereof modified, only by a written instrument duly executed
by both parties hereto.
14.8 Headings. Section headings are inserted for convenience of
--------
reference only and do not form a part of this Agreement.
14.9 Independent Contractors. It is expressly agreed that Pentose and
-----------------------
Vitex shall be independent contractors and that the relationship between the two
parties shall not constitute a partnership, joint venture or agency. Neither
Pentose nor Vitex shall have the authority to make any statements,
representations or commitments of any kind, or to take any action, which shall
be binding on the other, without the prior consent of the other party to do so.
27
<PAGE>
Confidential
14.10 Public Announcements. During the term of this Agreement, each party
--------------------
shall be free to issue one or more press releases or other public announcements
or disclosures regarding the activities contemplated herein, subject to the
provisions of Section 13, provided that the form and content of each such
announcement or disclosure shall be approved in advance by the other party,
except to the extent that such announcement or disclosure is required by law.
Once any disclosure is approved hereunder, either party may subsequently
disclose all or any portion thereof without further approval of the other party.
14.11 Waiver. Neither party shall by mere lapse of time, without giving
------
notice or taking other action hereunder, be deemed to have waived any breach by
the other party of any of the provisions of this Agreement. Further, the waiver
by either party of a particular breach of this Agreement by the other shall not
be construed as or constitute a continuing waiver of such breach or of other
breaches of the same or other provisions of this Agreement.
14.12 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.13 Further Assurances. The parties agree to duly execute and deliver,
------------------
or cause to be duly executed and delivered, such further instruments and to do
and cause to be done such further acts and things, including, without
limitation, the filing of such additional assignments, agreements, documents and
instruments, that may be necessary or as the other party hereto may at any time
and from time to time reasonably request in connection with this Agreement to
carry out more effectively the provisions and purposes of, or to better assure
and confirm unto such other party its rights and remedies under, this Agreement.
14.14 Bankruptcy. All rights and licenses granted under or pursuant to
----------
this Agreement are, and shall otherwise be, deemed to be, for purposes of
Section 365(n) of the U.S. Bankruptcy Code, licenses of rights to "intellectual
property" as defined under Section 101(52) of the U.S. Bankruptcy Code. The
parties to this Agreement shall retain and may fully exercise all of their
respective rights and elections under the U.S. Bankruptcy Code. The parties
further agree that, in the event of the commencement of a bankruptcy proceeding
by or against a party licensor under the U.S. Bankruptcy Code, the licensee
shall be entitled to a complete duplicate of (or complete access to, as
appropriate) any such intellectual property and, to the extent necessary for the
exercise of the applicable license rights, all embodiments of such intellectual
property, and same, if not already in its possession, shall be promptly
delivered to the licensee (a) upon any such commencement of a bankruptcy
proceeding upon written request therefor by the licensee, unless the licensor
elects to continue to perform all its obligations under this Agreement, or (b)
if not delivered under (a) above, upon the rejection of this Agreement by or on
behalf of the licensor upon written request therefor by the licensee, provided,
however, that upon the licensor's (or its successor's) written notification to
the licensee that it is again willing and able to perform all its obligations
under this Agreement, the licensee shall promptly return all such tangible
materials to the licensor.
28
<PAGE>
Confidential
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date set forth below.
PENTOSE PHARMACEUTICALS, INC.
By: /s/ Martin D. Williams
----------------------
Name: Martin D. Williarns
Title: Vice President Business Development, Sales & Marketing
Date: September 30, 1998
V.I. TECHNOLOGIES, INC.
By: /s/ John R. Barr
----------------
Name: John R. Barr
Title: President and Chief Executive Officer
Date: October 2, 1998
29
<PAGE>
Confidential
EXHIBIT A
DEVELOPMENT COSTS
30
<PAGE>
Confidential
EXHIBIT B
PENTOSE PATENT RIGHTS
<TABLE>
<CAPTION>
COUNTRY FILING DATE TITLE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES 04/08/97 METHODS FOR
INACTIVATING A VIRUS
- ------------------------------------------------------------------------------------------
UNITED STATES 08/29/95 METHODS AND COMPOSITIONS FOR
THE SELECTIVE MODIFICATIONS
OF NUCLEIC ACIDS
- ------------------------------------------------------------------------------------------
UNITED STATES 05/13/97 METHODS AND COMPOSITIONS FOR
THE SELECTIVE MODIFICATIONS
OF NUCLEIC ACIDS
- ------------------------------------------------------------------------------------------
UNITED STATES 10/03/97 METHODS AND COMPOSITIONS FOR
THE SELECTIVE MODIFICATIONS
OF NUCLEIC ACIDS
- ------------------------------------------------------------------------------------------
UNITED STATES 01/12/98 METHODS AND COMPOSITIONS FOR
THE SELECTIVE MODIFICATIONS
OF NUCLEIC ACIDS
- ------------------------------------------------------------------------------------------
UNITED STATES 01/12/98 METHODS AND COMPOSITIONS FOR
INACTIVATING VIRUS
- ------------------------------------------------------------------------------------------
PCT 04/07/98 METHODS FOR INACTIVATING A
VIRUS
- ------------------------------------------------------------------------------------------
PCT 08/29/96 METHODS AND COMPOSITIONS FOR
THE SELECTIVE MODIFICATION
OF NUCLEIC ACIDS
- ------------------------------------------------------------------------------------------
PCT 05/13/98 METHODS AND COMPOSITIONS FOR
THE SELECTIVE MODIFICATION
OF NUCLEIC ACIDS
- ------------------------------------------------------------------------------------------
UNITED STATES 09/25/98 METHODS TO SELECTIVELY
INACTIVATE VIRUSES IN
BIOLOGICAL COMPOSITIONS
- ------------------------------------------------------------------------------------------
UNITED STATES 09/25/98 SOLID PHASE QUENCHING SYSTEMS
- ------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
EXHIBIT 10.36
VITEX
June 15, 1998
Thomas T. Higgins
One Osborne Road
Brookline, MA 02146
Dear Thomas:
I would like to take this opportunity to confirm our offer to you to join the
VITEX team as Executive Vice President, Operations and Chief Financial Officer
reporting to John R. Barr, President and Chief Executive Officer, at our
Melville facility. We are pleased you have accepted our offer to start on or
about June 15, 1998, at a salary of $7,115.38 biweekly (which annualized is
$185,000). You will also be eligible for additional compensation (a
"Performance Bonus") targeted at 28% of your annual salary to be paid after the
end of the Company's fiscal (calendar) year. The Performance Bonus payouts will
be determined by the achievement of personal objectives and by the Company's
achievement of annual financial and other performance goals.
Furthermore, upon approval by the VITEX Board of Directors you will receive a
stock option grant of 100,000 shares which will enable you to participate
meaningfully in the long term growth and success of the Company. A personalized
description of the specific compensation package being offered to you is
attached.
In extending this offer to you, I have intentionally chosen to use the word
"team". Each of us will have specific roles to play in VITEX, and it will be
essential for each of us who are part of the Company to be committed to doing
whatever he or she can do to help us all win in a most challenging and
competitive business environment. But the true determinant of our future
success will be how well each of us supports and is supported by the dedication,
commitment and performance of our fellow team members. Together, as a team, we
have the greatest potential to succeed.
Please sign and date in the space provided below and remit with the enclosed
package. Thomas, I look forward to welcoming you personally to the VITEX team.
Sincerely,
/s/ Jim Northrup
Jim Northrup
V.P. Human Resources
AGREED: /s/ Thomas T. Higgins
---------------------
DATED: 6/15/98
-------
<PAGE>
VITEX
COMPENSATION SUMMARY
Base Salary:
You will receive a base salary at the biweekly rate of
$7,115.38 which annualized is $185,000. Pay checks are
distributed biweekly (every other Thursday) and we provide
Direct Deposit for your convenience.
Performance
Bonus:
You will be eligible for additional compensation, a
"Performance Bonus", targeted at 28% of your annual salary
to be paid after the end of the Company's fiscal (calendar)
year. The Performance Bonus payouts will be determined by
the Company's achievement of annual financial and other
performance goals and by the achievement of specific
personal performance objectives.
Eligibility to participate in the Performance Bonus is
determined by being a regular full-time team member and by
being on the Company's payroll on or before September 30 of
the Performance Bonus year (calendar year).
Incentive Stock
Option:
You will be eligible to participate in the Company's
Incentive Stock Option (ISO) program. Based on your Job
level in the Company and upon approval by the Company's
Board of Directors, you will receive a stock option grant of
100,000 shares.
Stock options are subject to vesting requirements under the
Company's Incentive Stock Option Plan. Yearly vesting occurs
at the rate of 25% per year starting at the date of grant.
For example, if you were granted 1,000 shares, you would
vest in the right to purchase 250 shares one year from the
date of grant at the price in effect as of the date of
grant. You would vest in another 250 shares at the end of
the second year, and so forth.
ISO's are granted to team members upon hire at the total
discretion of the Company's Board of Directors. Therefore,
we cannot guarantee that the number of shares and the timing
of the grant will be as stated in this letter. Grants will
be determined at the next quarterly Board Meeting.
<PAGE>
BENEFITS SUMMARY
Medical &
Dental:
You will be eligible to participate in a comprehensive
medical insurance plan, which includes major medical and
dental coverage. Coverage is provided on either team member-
only, or family coverage basis. Participation in this
program requires partial team member co-payment of premiums
which is deducted on a pre-tax basis via payroll deduction.
Flexible Spending/
Dependent Care
Account:
Team members will have the opportunity to put away monies on
a pre-tax basis for medical expenses and/or dependent care
expenses which are not covered under the medical or dental
plan. For example, this will allow you to save on your
eligible out-of-pocket medical expenses, such as deductibles
or vision care, and/or your out-of-pocket child care
expenses, such as daycare.
Life Insurance,
Accidental Death
& Dismemberment:
Life insurance at one times your base annual salary will be
provided by VITEX. You may purchase additional coverage for
you and your eligible dependents at your own expense and pay
for this coverage via payroll deduction. This optional
coverage is available up to a maximum of $300,000.
Eligibility for and the cost of optional coverage is
governed by your age and evidence of insurability.
Long-Term
Disability:
If you become disabled and the disability lasts for more
than six months, you will be eligible to receive a benefit
of up to 60% of your base annual salary. This coverage will
be paid by VITEX; or if you choose, you may pay the monthly
premium on an after-tax basis. If you pay the premium
instead of the Company, any benefits received by you in the
future would be tax-free, providing added income during your
disability. If VITEX pays your LTD premium, any benefits
received by you in the future would be subject to tax as
ordinary income.
<PAGE>
BENEFITS SUMMARY
Page Two
401(k):
After one month of service, you will be eligible to enter
the VITEX Savings Plan on the first day of the following
months --January, April, July or October. You may save on a
pre-tax basis up to 20% of your pay via payroll deduction.
Vacation/Holidays:
You will be eligible for 32 vacation/holidays. Below are the
regular vacation/holiday benefits:
Regular Shifts 12 Hour Shifts
-------------- --------------
1st five years of service 22 days l-5years 15 days
6th through 10th years 27 days 6-l0 years l8 days
11th year and beyond 32 days 11 or more 21 days
Sick Time:
It is expected that everyone will be at work and fulfilling
their responsibilities whenever possible. If you are sick
and cannot properly carry out your responsibilities, please
remain at home and get well as soon as possible. There is no
specific sick time "allotment".
Relocation:
You will be eligible for the Company's Senior Relocation
Program, a copy of which is enclosed for your review.
Severance:
You will be eligible for the Senior Executive Severance
program. If you are terminated from your employment by the
Company for reasons other than Cause, you will receive a
minimum 6 months salary continuation plus vesting in the
next traunch of stock options.
The compensation and benefits outlined above are subject to change, and they may
be reviewed and revised in the future to ensure that VITEX maintains a
competitive position in the marketplace. More detailed information will be made
available to you in written and oral communications.
Our offer it based on confidence that your employment with VITEX will be a
mutually rewarding and enriching experience, but this offer does not constitute
a contract of employment, nor does it guarantee a lifetime security. Employment
at VITEX is employment - at - will.
<PAGE>
EXHIBIT 10.37
[VITEX Logo]
SEPARATION AGREEMENT AND GENERAL RELEASE
----------------------------------------
Separation Agreement and General Release ("Agreement") executed this 13 day
of September 1999, by and between Bernard Horowitz, Ph.D. ("Dr. Horowitz" or
"Releasor") and V.I. Technologies, Inc. ("VITEX" or "the Company").
WHEREAS, Dr. Horowitz and VITEX entered into an Employment Agreement dated
January 15, 1998 (the "Employment Agreement") a copy of which is annexed hereto
as Exhibit "B"; and
WHEREAS, Dr. Horowitz has expressed his intention to voluntarily terminate
his employment pursuant to the provisions of (P)4.3 of the Employment Agreement;
NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknow1edged it is hereby agreed that:
1. DR. HOROWITZ'S RESIGNATION
--------------------------
(a) Dr. Horowitz hereby irrevocably gives notice of his intention to resign
from his employment at VITEX, effective October 1, 1999, and VITEX accepts that
resignation. Dr. Horowitz and VITEX expressly acknowledge that this Agreement
supercedes and replaces the Employment Agreement and except as otherwise
provided herein, effective October 1, 1999, the Employment Agreement, and all
terms, conditions, and obligations set forth therein, will expire and will be
declared null and void.
2. THE SEVERANCE PAYMENT, VESTING OF STOCK OPTIONS, AND LIFE INSURANCE
-------------------------------------------------------------------
(a) As used herein, the term "Severance Period" refers to the one year
period beginning on October 1, 1999 and ending on September 30, 2000.
(b) Subject to Dr. Horowitz's execution of this Agreement, VITEX shall pay
Dr. Horowitz severance equivalent to one year's salary at his current rate of
pay, a total of $198,919.00 (the "Severance Payment"), less applicable
withholding taxes and deductions. The Severance Payment will be made in two (2)
equal installments, paid six months apart less applicable withholding taxes and
deductions. The first such payment will be made on or before October 20, 1999.
(i) Dr. Horowitz expressly acknowledges that he will not be entitled
to any annual bonus payment pursuant to (P)3.2 of the Employment
Agreement.
(c) Subject to the approval of the Compensation Committee of the Board of
Directors of VITEX, (i) the stock options granted to Horowitz in 1995 and 1997
to purchase 223,614
<PAGE>
shares (at $2.795 per share) and 125,224 shares (at $8.39 per share)
respectively, of VITEX common stock, $.01 par value per share under the Equity
Incentive Plan (the "Stock Options"), shall fully vest, to the extent they have
not previously vested, on October 1, 1999, and (ii) Horowitz shall be permitted
to exercise the Stock Options at any time prior to the tenth anniversary of the
date of grant of such options, in accordance with the terms of the Equity
Incentive Plan and the stock option agreements executed thereunder (as modified
by this Agreement).
(d) Dr. Horowitz's participation in VITEX's medical and dental benefit
plans will continue for the duration of the Severance Period, and will terminate
on September 30, 2000, at which time, and on an annual basis thereafter for as
long as he is alive, he will be offered the opportunity to enroll in any major
medical and dental insurance plans VITEX provides to its full time, senior
management staff. If he chooses to enroll in such plans, the cost to Dr.
Horowitz will be as though he were still actively employed by VITEX.
(e) The life insurance referenced in (P)3.8 of the Employment Agreement
will remain in force (to the extent the policy is payable to Dr. Horowitz's
family), at VITEX's cost, until the end of the Severance Period (September 30,
2000).
(f) Except as provided herein, Dr. Horowitz's participation in all other
benefit plans will cease on October 1, 1999.
3. CONTINUED MEMBERSHIP ON VITEX'S BOARD OF DIRECTORS
--------------------------------------------------
(a) Dr. Horowitz will remain a member of VITEX's Board of Directors after
October 1, 1999. Dr. Horowitz expressly acknowledges that he has been given no
guarantees with respect to his continued membership on the Board of Directors.
Dr. Horowitz agrees that if the Board of Directors requests his resignation from
the Board of Directors for any reason, he will immediately tender his
resignation as a Director of VITEX. After the expiration of the Severance
Period, if Dr. Horowitz remains a member of the Board of Directors, he will be
entitled to receive the same benefits received by other members of the Board of
Directors.
4. CONSULTING SERVICES
-------------------
(a) Although under no obligation to do so, Dr. Horowitz may perform
consulting services to VITEX. Any such consulting services will be performed
upon reasonable notice, at mutually agreeable times and locations. Dr. Horowitz
agrees that during the Severance Period he will not seek, nor is he entitled to,
any additional compensation for any such consulting services, unless he has
provided more than 800 hours of services during the Severance Period. Dr.
Horowitz will be compensated for each hour of consulting services provided
during the Severance Period in excess of 800 hours at the rate of $200.00 per
hour.
(b) After the expiration of the Severance Period, and beginning on October
1, 2000, Dr. Horowitz will begin receiving quarterly retainer payments of
$25,000.00 as compensation for consulting services to be provided during the
following calendar quarter (e.g. the October 1,
2
<PAGE>
2000 payment will cover services rendered during the fourth quarter of 2000).
Such payments will be made on the first day of each quarter during which the
contemplated services are to be provided. These quarterly retainer payments will
continue until such time as this consulting arrangement is terminated by VITEX
or Dr. Horowitz in the manner described below. The $25,000.00 retainer will
constitute full compensation for up to 200 hours of consulting services provided
during the quarter. Dr. Horowitz will be compensated for each hour of consulting
services in excess of 200 hours during a calendar quarter at the rate of $200.00
per hour.
(i) The consulting arrangement described in this sub paragraph "4(b)"
can be terminated by either Dr. Horowitz or VITEX, at any time,
with 90 days notice.
5. CONSIDERATION AND FULL DISCHARGE
--------------------------------
(a) Dr. Horowitz agrees that the aggregate consideration provided in this
Agreement:
(i) exceeds any payment, benefit, or other thing of value to which he
might otherwise be entitled under any policy, plan or procedure
of VITEX, and
(ii) is in full discharge of any and all of VITEX's liabilities and
obligations to him, whether written or oral, including, without
limitation, any bonus, deferred bonus, accrued vacation pay,
severance payment or any other contractual or other obligation,
compensation or remuneration that may be owed to Dr. Horowitz by
VITEX.
6. GENERAL RELEASE
---------------
(a) For good and valuable consideration, the receipt of which is hereby
acknowledged, Dr. Horowitz for himself and for his heirs, executors,
administrators, trustees, legal representatives and assigns (hereinafter,
collectively referred to as "Releasors"), hereby forever release and discharge
VITEX, or any of VITEX's past, present or future parent entities, partners,
subsidiaries, affiliates, divisions, employee benefit and/or pension plans or
funds, successors and assigns and any of its or their past, present or future
directors, officers, attorneys, agents, trustees, administrators, employees, or
assigns (whether acting as agents for VITEX or in their individual capacities)
(collectively referred to as "Releasees") from any and all claims, demands,
causes of action, and liabilities of any kind whatsoever (upon any legal or
equitable theory, whether contractual, common-law, statutory, federal, state,
local, or otherwise), whether known or unknown, by reason of any act, omission,
transaction or occurrence which Releasors ever had, now have or hereafter can,
shall or may have against Releasees up to and including the Agreement Effective
Date, as defined in Paragraph 10(c) below.
Without limiting the generality of the foregoing, Releasors hereby release
and discharge Releasees from:
3
<PAGE>
(i) any and all claims relating to Dr. Horowitz's employment by
VITEX, the terms and conditions of such employment, the
employee benefits related to his employment and/or his
separation from such employment;
(ii) any and all claims of employment discrimination and/or
retaliation under any federal, state or local statute or
ordinance, including without limitation, any and all claims
under Title VII of the Civil Rights Act of 1964 as amended; the
Age Discrimination in Employment Act, the Older Workers Benefit
Protection Act, the Americans with Disabilities Act; the Family
and Medical Leave Act of 1993; the Employee Retirement Income
Security Act; the New York State Human Rights Law; and the New
York City Human Rights Law;
(iii) any and all claims for wrongful discharge and for breach of
employment contract (including, but not limited to the
Employment Agreement) or any claims related to compensation or
benefits, including claims for bonus or deferred payments;
(iv) any and all claims for defamation, libel or slander against any
Releasees; and
(v) any and all claims for attorney's fees, costs disbursements and
the like;
which Releasors ever had, now have or hereafter can, shall or may have against
Releasees for, upon or by reason of any act, omission, transaction or occurrence
up to and including the date of the execution of this Agreement.
(b) Dr. Horowitz agrees, unless such agreement is otherwise prohibited by
law, that he will not commence, maintain, prosecute or participate (except as
compelled by legal process) in any action or proceeding of any kind (judicial or
administrative) against Releasees, arising out of any act, omission, transaction
or occurrence occurring up to and including the Agreement Effective Date, as
defined in paragraph 10(c) below.
(c) Dr. Horowitz further agrees, unless such agreement is otherwise
prohibited by law, that he will not seek or accept any award or settlement from
any source or proceeding with respect to any claim or right covered by
paragraphs "6(a) and (b)" and that this Agreement shall act as a bar to recovery
in any such proceedings.
7. CONFIDENTIALITY
---------------
(a) Dr. Horowitz acknowledges that this Agreement and all terms and
conditions thereof shall be kept strictly confidential and shall not be
disclosed by Dr. Horowitz to anyone, except to the extent required by law;
except that Dr. Horowitz may disclose the terms of this Agreement to his spouse,
accountant, attorney and/or his financial advisor, who shall be instructed that
the Agreement and its terms are to be kept confidential. In the event of any
breach
4
<PAGE>
of this provision, Dr. Horowitz consents to the entry of injunctive relief in
the United States District Court for the Southern District of New York, and
further, inasmuch as the damages from any material breach of this
confidentiality provision cannot be ascertained, Dr. Horowitz agrees that a
material breach of this provision by Dr. Horowitz shall result in the payment by
Dr. Horowitz to VITEX of liquidated damages in the amount of $198,919.00.
Notwithstanding the foregoing, this paragraph shall not apply to Dr. Horowitz if
he is acting in his capacity as director of VITEX.
(b) VITEX acknowledges that this Agreement and all terms and conditions
thereof shall be kept strictly confidential and shall not be disclosed by any
officer or director of VITEX to anyone, except to the extent required by law and
to those persons whose efforts are required to effectuate the terms of this
Agreement; except that VITEX, through its officers, may disclose the terms of
this Agreement to VITEX's attorneys and/or accountants, who shall be instructed
that the Agreement and its terms are to be kept confidential.
(c) The parties agree that this Agreement and the attached General Release
may be used as evidence only in a subsequent proceeding in which any of the
parties allege a breach of this Agreement or the attached General Release.
8. NON-DISPARAGEMENT
-----------------
(a) Dr. Horowitz agrees that he will not disparage (or induce or encourage
others to disparage) VITEX, any of its past or present directors, officers,
agents, trustees, administrators, attorneys or employees with respect to any
events relating to his employment with VITEX, including, without limitation,
disparaging any of such parties in connection with disclosing the facts or
circumstances surrounding his separation from employment with VITEX or
criticizing VITEX's business strategy. For the purposes of this Agreement, the
term "disparage" means any comments or statements which would adversely affect
in any manner: (i) the conduct of VITEX's business; or (ii) the business
reputation or relationships of VITEX and/or any of its past or present
directors, officers, agents, trustees, administrators, attorneys or employees.
Notwithstanding the foregoing, this paragraph shall not apply to Dr. Horowitz if
he is acting in his capacity as a director of VITEX.
(b) VITEX agrees not to disparage Dr. Horowitz. For purposes of this
subparagraph, the term "disparage" means any statements made by VITEX senior
officers or directors, or any statements made officially by VITEX that adversely
affect Dr. Horowitz's personal or professional reputation.
9. COMPANY DOCUMENTS AND PROPERTY
------------------------------
(a) Dr. Horowitz agrees not to copy or take any books, notes or documents
belonging to VITEX without its express written consent. In this regard, Dr.
Horowitz acknowledges that he has had access to confidential, sensitive or
proprietary information during the course of his employment at VITEX. Unless
compelled by judicial process, Dr. Horowitz agrees that he will not, for herself
or any other person or entity, directly or indirectly divulge, communicate or in
5
<PAGE>
any way make use of any confidential, sensitive, or proprietary information
acquired in the performance of his services or in connection with the
performance of such services for VITEX without the prior written consent of
VITEX. Upon receipt of judicial process or governmental request for such
information, Dr. Horowitz shall immediately notify VITEX and shall cooperate
with VITEX in efforts to limit such disclosure and shall not make such
disclosure unless compelled to do so. For the purpose of this Agreement, all
information acquired during the course of Dr. Horowitz's employment and in
connection with such employment shall be deemed to be confidential, sensitive or
proprietary, unless VITEX shall have published said information.
Notwithstanding the foregoing, it is understood that (i) Dr. Horowitz brought
certain materials with him when he joined VITEX and that such materials do not
belong to VITEX, (ii) Dr. Horowitz may retain published scientific works and
slides which he collected while an employee of VITEX.
(b) If Dr. Horowitz has not already done so, he shall immediately return
to VITEX all Company property in his possession (with the exception of a
computer which VITEX has permitted Dr. Horowitz to retain) including, but not
limited to credit cards, building passes, airline tickets, facsimile machines,
paging devices and portable telephones.
(c) If Dr. Horowitz has not already done so, he shall immediately deliver
to VITEX all correspondence, documents, papers and other media containing
information about the accounts, clients, interests, or business of VITEX
together with all copies in his possession.
10. REVIEW AND REVOCATION PERIODS
-----------------------------
(a) Dr. Horowitz shall have at least twenty-one (21) days from the date of
receipt, or until September 30, 1999, to consider the terms and conditions of
this Agreement. Dr. Horowitz may accept this Agreement by signing it, having
his signature notarized and returning it to James Northrup, VITEX, Inc., 155
Duryea Road, Melville, NY 11747, by no later than 5:00 p.m. on September ____,
1999. Further, Dr. Horowitz may sign and return this Release at any time prior
to September 30, 1999.
(b) After signing this Release, Dr. Horowitz shall have seven (7) days to
revoke this Agreement by indicating his desire to do so in writing (a) addressed
to James Northrup, at the address listed above, and (b) received by Mr. Northrup
no later than 5:00 p.m. on the seventh (7th) day following the date Dr. Horowitz
signs this Agreement.
(c) The effective date of this Agreement shall be the eighth (8th) day
following Dr. Horowitz's signing of this Agreement (the "Agreement Effective
Date"), provided Dr. Horowitz does not revoke this Agreement during the
revocation period. In the event Dr. Horowitz does not accept this Agreement as
set forth above, or revokes this Agreement during the Revocation Period, this
Agreement including but not limited to the obligation of the Releasees to
provide the payments, and provide the benefits, referred to in paragraph "2" and
"3" above, shall automatically be deemed null and void.
6
<PAGE>
11. Dr. Horowitz acknowledges that: (a) he has carefully read this
Agreement in its entirety; (b) he has had an opportunity to consider fully the
terms of this Agreement for at least twenty-one (21) days; (c) he has been
advised by VITEX in writing to consult with an attorney of his choosing in
connection with this Agreement; (d) he fully understands the significance of all
of the terms and conditions of this Agreement; (e) he has discussed it with his
independent legal counsel, or has had a reasonable opportunity to do so; (f) he
has had answered to his satisfaction any questions he has asked with regard to
the meaning and significance of any of the provisions of this Agreement; (g) he
is signing this Agreement voluntarily and of his own free will and assents to
all the terms and conditions contained herein; (h) the amounts being paid
hereunder are in excess of those amounts he would be entitled to if he did not
sign this Agreement and (i) that as of December 23, 1999 his employment
relationship with VITEX will be permanently and irrevocably severed and that to
the full extent permitted by law he will not be eligible for rehire or re-
employment with any of the Releasees, that he will not apply for re-employment
with any of the Releasees and that the Releasees have no obligation, now or at
any time in the future, to rehire or re-employ him in any capacity, that any
future decision by any of the Releasees not to hire him will be based upon this
subparagraph and that he will not assert any claims against any Releasees based
upon such decision.
ADDITIONAL PROVISIONS
- ---------------------
12. The making of this Agreement is not intended, and shall not be
construed, as an admission that Releasees have violated any federal, state or
local law (statutory or decisional), ordinance or regulation, breached any
contract, or committed any wrong whatsoever against Dr. Horowitz.
13. This Agreement is binding upon, and shall inure to the benefit of, the
parties and their respective heirs, executors, administrators, successors and
assigns.
14. This Agreement shall be interpreted, construed and governed according
to the laws of the State of New York.
15. If any provision of this Agreement shall be held by a court of
competent jurisdiction to be illegal, void, or unenforceable, such provision
shall be of no force and effect. However, the illegality or unenforceability of
such provision shall have no effect upon, and shall not impair the
enforceability of, any other provision of this Agreement; provided, however,
that, upon any finding by a court of competent jurisdiction that the release and
covenants provided for by paragraphs "5" and "6" of this Agreement are illegal,
void, or unenforceable, Dr. Horowitz agrees, at the Releasees option, either to
return promptly to VITEX the amounts paid to his or paid on his behalf pursuant
to this Agreement or to execute a release, waiver and/or covenant that is legal
and enforceable. Further, if Dr. Horowitz seeks to challenge the validity of or
otherwise vitiate this Agreement or any provision thereof (including, without
limitation, paragraphs "5" and "6"), Dr. Horowitz shall, as a precondition, be
required to repay to VITEX the amounts paid to him or paid on his behalf
pursuant to the terms of this Agreement. Finally, any breach of the terms of
paragraphs "5," "6," "7," "8," and/or "9" shall constitute a material breach of
this Agreement as to which the Releasees may seek appropriate relief (including
but not limited to
7
<PAGE>
repayment of the amounts paid to him or paid on his behalf referred to this
Agreement) in a court of competent jurisdiction.
17. The paragraph and section headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
18. This Agreement (together with the accompanying cover letter)
constitutes the complete understanding between the parties and supersedes any
and all Releases, understandings, and discussions, whether written or oral,
between the parties. No other promises or agreements shall be binding unless in
writing and signed alter the Agreement Effective Date by the parties to be bound
thereby.
WHEREFORE, Dr. Horowitz places his hand on the dates hereinafter set forth.
Bernard Horowitz, Ph.D.
/s/ Bernard Horowitz Date 9-13-99
- -------------------- -------
On this 13/th/ day of September, 1999, before me personally appeared Bernard
Horowitz, Ph.D., to me known personally and known to me to be the individual
described herein, whose name is subscribed to, and who executed the above
Agreement and General Release.
/s/ Howell Bramson
- ------------------
Notary Public
Agreed:
V.I. Technologies, Inc.
By: /s/ John Barr
-------------
John Barr
President and Chief Executive Officer
<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
October 6, 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
Arthur Andersen LLP
Boston, Massachusetts
October 6, 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
October 6, 1999
<PAGE>
EXHIBIT 99.1
V.I. TECHNOLOGIES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John R. Barr and Thomas T. Higgins and each
of them, as Proxies of the undersigned, with full power to appoint a substitute,
and hereby authorizes each of them to represent the undersigned at the Special
Meeting of Stockholders to be held on November 5, 1999, at 10:00 a.m., or any
adjournment thereof, and there to vote all the shares of V.I. Technologies, Inc.
held of record by the undersigned on September 23, 1999, as directed on the
reverse side hereof. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2 AND 3.
In addition, in their discretion, the Proxies are hereby authorized to vote
upon such other business as may properly conduct before the meeting or any
adjournment thereof. This Proxy when properly executed will be voted in the
manner directed herein by the undersigned stockholder.
- -------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY USING
THE ENCLOSED ENVELOPE
- -------------------------------------------------------------------------------
Please sign exactly as your name or names appear hereon. Joint owners should
each sign personally. Trustees and other fiduciaries should indicate the
capacity in which they sign, and when more than one name appears, a majority
must sign. If a corporation, this signature should be that of an authorized
officer who should state his or her title.
- -------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
_________________________________ ________________________________
_________________________________ ________________________________
_________________________________ ________________________________
(To be signed on the reverse side)
<PAGE>
Reverse Side
V.I. TECHNOLOGIES, INC.
Dear Stockholder:
Please take note of the important information enclosed with this Proxy Ballot.
There are a number of issues related to the management and operation of your
Company that require your immediate attention and approval. These are discussed
in detail in the enclosed proxy materials.
Your vote counts, and you are strongly urged to exercise your right to vote your
shares.
Please mark the boxes on this proxy card to indicate how your shares will be
voted. Then sign the card, detach it and return your proxy vote in the enclosed
postage paid envelope.
Your vote must be received prior to the Special Meeting of Stockholders on
November 5, 1999. Thank you in advance for your prompt consideration of these
matters.
Sincerely,
V.I. Technologies, Inc.
Please Detach and Mail in the Envelope Provided
A [X] Please mark your votes as
in this example
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. To approve and adopt the Agreement and Plan of Merger [_] [_] [_]
and Reorganization dated as of July 28, 1999 among the
Company, Pentose Pharmaceuticals, Inc., and certain
stockholders of Pentose, and the merger, including the
issuance of up to 6,416,874 shares of the Company's
common stock, or such greater number as is required in
the event securities convertible into common stock of
the Company are exercised prior to the closing of the
merger.
2. To adopt the 1999 Supplemental Stock Option Plan. This [_] [_] [_]
proposal is conditional upon approval of Proposal 1.
3. To approve an amendment of the Company's Certificate of [_] [_] [_]
Incorporation to increase the number of authorized
shares of common stock from 29,000,000 to 35,000,000.
This proposal is conditional upon approval of Proposal 1.
</TABLE>
Mark box at right if an address change or comment has been [_]
noted on the reverse side of this card
Stockholder signature ____________ Co-owner signature__________ Date:_____, 1999
NOTE: Please be sure to sign and date the Proxy.
2
<PAGE>
EXHIBIT 99.2
PROXY
PENTOSE PHARMACEUTICALS, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 5, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, having received the Notice of Special Meeting and the Joint
Proxy Statement/Prospectus, hereby appoints Samuel K. Ackerman, M.D., Lynnette
C. Fallon, and Yukari Perrella and each of them, attorneys and proxies for the
undersigned (with full power of substitution) to vote all shares of
Pentose capital stock standing in the name of the undersigned at the special
meeting to be held on November 5, 1999 at 10 a.m. local time at the offices of
Palmer & Dodge LLP located at One Beacon Street, Boston, Massachusetts or at any
adjournment or postponement thereof, in the manner designated below.
When properly executed, this proxy will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this proxy will grant
authority to vote "FOR" the proposal set forth below.
IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF
DIRECTORS' RECOMMENDATIONS, JUST SIGN ON THE BOTTOM OF THIS PROXY; YOU NEED NOT
MARK ANY BOXES.
[X] PLEASE MARK VOTES AS IN
THIS EXAMPLE
1. To approve and adopt the Agreement and Plan of Merger and Reorganization,
dated July 28, 1999, among Pentose, V.I. Technologies, Inc. and certain
stockholders of Pentose, pursuant to which Pentose will merge directly with
and into V.I. Technologies. In the merger, each share of Pentose preferred
stock and Pentose common stock, par value $0.001 per share, will be exchanged
for a fraction of a share of V.I. Technologies common stock, par value $0.01
per share, unless the holder exercises appraisal rights under Delaware law.
The fraction will be determined immediately prior to completion of the merger
according to the formula specified in the merger agreement and described in
the Joint Proxy Statement/Prospectus mailed to all stockholders of Pentose
and V.I. Technologies. Adoption of the merger agreement will also constitute
approval of the merger and the other transactions contemplated by the merger
agreement.
[ ] [ ] [ ]
FOR AGAINST ABSTAIN
2. In the discretion of Samuel K. Ackerman, M.D., Lynnette C. Fallon or Yukari
Perella on any business matters or proposals as may properly come before the
special meeting or any adjournment or postponement thereof.
MARK HERE FOR ADDRESS [ ] CHANGE AND NOTE AT RIGHT
PLEASE SIGN AND PRINT YOUR NAME. Joint owners should each sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such.
SIGNATURE: _________________________ DATE
Print Name:_________________________
SIGNATURE: _________________________ DATE
Print Name:_________________________
Postage Prepaid Envelope Enclosed
<PAGE>
Exhibit 99.4
We hereby consent to the use of Appendix B containing our opinion letter dated
September 2, 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 30, 1999
