<PAGE>
As filed with the Securities and Exchange Commission on February 18, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PARADIGM GENETICS, INC.
(Exact name of Registrant as specified in our charter)
----------------
<TABLE>
<S> <C> <C>
North Carolina 8731 54-2047837
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number ) Identification Number)
</TABLE>
104 Alexander Drive
Research Triangle Park, North Carolina 27709
(919) 425-3000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
John A. Ryals, Ph.D.
Chief Executive Officer and President
Paradigm Genetics, Inc.
104 Alexander Drive
Research Triangle Park, North Carolina 27709
(919) 425-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
<TABLE>
<S> <C>
Jeffrey M. Wiesen, Esq. David W. Pollak, Esq.
Peter S. Lawrence, Esq. Stephanie M. Gulkin, Esq.
Mintz, Levin, Cohn, Ferris, Morgan, Lewis & Bockius LLP
Glovsky and Popeo, P.C. 101 Park Avenue
One Financial Center New York, NY 10178
Boston, MA 02111 (212) 309-6000
(617) 542-6000
</TABLE>
----------------
Approximate date of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number 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 number of the earlier effective registration statement number for
the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<CAPTION>
Title of Securities Proposed Maximum Amount of
to be Registered Aggregate Offering Price(1) Registration Fee(2)
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01
per share................... $100,000,000 $26,400
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(o) under the Securities Act,
as amended.
(2) Calculated pursuant to Rule 457(a) based on an estimate of the proposed
maximum offering price.
----------------
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, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell securities, and we are not soliciting +
+offers to buy these securities, in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 2000
PROSPECTUS
[PARADIGM GENETICS, INC. LOGO]
Shares
Common Stock
This is an initial public offering of common stock by Paradigm Genetics,
Inc. We are selling shares of common stock.
-------------
There is currently no public market for our common stock. We have applied to
list our common stock on the Nasdaq National Market under the symbol PDGM.
-------------
<TABLE>
<CAPTION>
Per
Share Total
------ -------
<S> <C> <C>
Public offering price........................................... $ $
Underwriting discounts.......................................... $ $
Proceeds to Paradigm Genetics................................... $ $
</TABLE>
The underwriters may also purchase up to additional shares of common
stock from us at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
Chase Securities Inc. expects to deliver the shares to purchasers on or
about , 2000.
-------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 5.
-------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Chase H&Q
J.P. Morgan
Pacific Growth Equities, Inc.
Stephens Inc.
, 2000
<PAGE>
Photographs of Paradigm's target markets with this text superimposed:
Paradigm Genetics is harnessing the power of biology for global crop
production, nutrition, industrial applications, and human health.
Collage of target market photos:
. field crops with agricultural workers
. family eating fresh food at a picnic
. children with malnutrition with fields of rice in the background
. carpet coming off factory line
. factory floor showing machinery with industrial lubricant being applied
. supermarket shelves showing cereals
. generic shot of vitamins, other pills
Text: Industrializing Gene Function Determination
Graphical representation of Paragdigm's process for industrializing gene
function determination:
. GeneFunction Factory graphic showing how gene function determination has
been automated and industrialized. The process from gene discovery to
data being captured in the database is exemplified by cutouts showing
actual photos of Paradigm staff and equipment superimposed over a toned
down factory/assembly line.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................................................. 1
Risk Factors....................................................... 5
Special Note Regarding Forward-Looking Statements.................. 15
Use of Proceeds.................................................... 16
Dividend Policy.................................................... 16
Capitalization..................................................... 17
Dilution........................................................... 18
Selected Financial Data............................................ 19
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 20
Business........................................................... 24
Management......................................................... 40
Certain Transactions............................................... 50
Principal Stockholders............................................. 52
Description of Capital Stock....................................... 54
Shares Eligible for Future Sale.................................... 57
Underwriting....................................................... 59
Legal Matters...................................................... 62
Experts............................................................ 62
Where You Can Find More Information................................ 62
Index to Financial Statements...................................... F-1
</TABLE>
------------------
"Paradigm Genetics", the Paradigm Genetics logo and FunctionFinder are
trademarks of Paradigm Genetics, Inc. The Company has filed a trademark
application for GeneFunction Factory. Other trademarks and trade names
appearing in this prospectus are the property of their holders.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights the most important features of this offering and
the information contained elsewhere in this prospectus. This summary is not
complete and does not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully, especially the risks of investing in our common stock discussed
under "Risk Factors" beginning on page .
Paradigm Genetics, Inc.
Overview
We are industrializing the process of determining gene function to
generate information that will enable us to develop novel products in four
major sectors of the global economy: crop production, nutrition, human health
and industrial products. We have developed our GeneFunction Factory to
simultaneously study the functions of many genes in our selected organisms. Our
GeneFunction Factory is designed to be an integrated, rapid, industrial-scale
laboratory through which we can discover and modify genes, measure the
consequences of the modifications and reliably determine the function of those
genes. We store and annotate gene function information in our FunctionFinder
bioinformatics system. We currently have strategic alliances with Bayer in the
area of crop production and with Monsanto in the areas of crop production and
nutrition as described in greater detail below.
The Opportunity
In the early 1990s, a worldwide effort began to decipher and make publicly
available the precise sequence of the genomes of various organisms, including
humans, pathogens and agricultural crops. Industry experts anticipate that
researchers will complete the sequencing of the entire human genome, as well as
the genome of the small mustard plant, Arabidopsis, by the end of the year
2000. However, knowing a gene's sequence does not provide enough information to
determine gene function. In addition, the traditional process of determining
gene function has been slow, labor intensive and formulaic and new
technologies, such as gene expression profiling, in the absence of other
supporting data, provide insufficient information to conclude a gene's
function.
Our GeneFunction Factory
We believe the most reliable way to determine a gene's precise function is
to study the effects of altered forms of the gene on an organism. By applying
our GeneFunction Factory to selected model and target organisms, we and our
strategic partners intend to use the resulting information to develop novel
products. By using our GeneFunction Factory we are able to discover a gene,
alter the gene, measure the consequences of the alteration, determine the
function of the gene and place the resulting large amounts of information into
our FunctionFinder bioinformatics system. Our assembly-line approach automates
the measurement of thousands of physical and chemical characteristics of a
selected organism at different times of the organism's life cycle using gene
expression profiling, metabolic profiling and phenotypic profiling. We believe
that we will be able to determine the function of hundreds of genes per week
with our GeneFunction Factory when it is operating at full capacity.
Initially, we are using our GeneFunction Factory to determine the function
of genes in Arabidopsis, rice and six filamentous fungi. Arabidopsis is a
useful model organism because it is related to soybeans, cotton, vegetables and
oil seed crops. Rice is an important target and model organism because it is
one of the world's most important grains and commodity crops, and it is closely
related to corn, wheat, barley, sugarcane, oats and rye. We work with our model
organisms to extrapolate gene function to a target organism when working
directly with the target is not practicable. We have chosen our particular
models
1
<PAGE>
because they are relevant to target organisms with commercial value, are
efficient research tools and are amenable to the collection of large numbers of
measurements. We intend to study the function of essentially every gene in
these organisms, and utilize this information to develop novel products.
Our Strategy
Our goal is to be the leading supplier of gene function information in our
model and target organisms. The key elements of our strategy are to:
. determine the function of genes in our target and model organisms;
. continue to develop our GeneFunction Factory and FunctionFinder
bioinformatics system;
. develop products both with strategic partners and independently;
. focus our development efforts on large market opportunities; and
. pursue intellectual property protection for our GeneFunction Factory and
gene function information.
Our Strategic Alliances
To date, we have established strategic alliances with Bayer and Monsanto.
The Bayer alliance is focused on the development of new herbicides while the
Monsanto alliance is focused on the development of crop production and
nutrition products. Under these alliances, we have total committed funding of
$56 million and have performance fees, milestone payments and payments in
connection with extension options that could generate an additional $134
million. We will also earn product development milestones and sales royalties
if products are commercialized from these alliances.
In September 1998, we entered into a three-year collaboration with Bayer
for the development of new chemical herbicides. We will use our GeneFunction
Factory to identify Arabidopsis genes that may be targets for herbicide
discovery and will provide Bayer with assays to screen chemicals for potential
herbicides and access to customized Arabidopsis-based releases of our
FunctionFinder bioinformatics system.
In November 1999, we entered into a six-year strategic alliance with
Monsanto to develop crop production and nutrition products. Monsanto is to
provide us with thousands of gene sequences from Arabidopsis and other
organisms. Using our GeneFunction Factory, we will provide functional analysis
of these genes to Monsanto.
We were incorporated in North Carolina on September 9, 1997 and we plan to
reincorporate in Delaware in March 2000. Our facilities and executive offices
are located at 104 Alexander Drive, Research Triangle Park, North Carolina
27709, and our telephone number at that address is (919) 425-3000. Our
worldwide web address is www.paragen.com. The information on our web site is
not incorporated by reference into this prospectus.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock offered by Paradigm Genetics........... shares
Common Stock to be outstanding after this offering.. shares
Use of proceeds..................................... Research and development and general
corporate purposes, including
possible acquisition of or
investment in complementary
businesses, products or
technologies. For a more detailed
discussion of our anticipated use of
proceeds from this offering, see
"Use of Proceeds."
Proposed Nasdaq National Market symbol.............. PDGM
</TABLE>
The above information is based on the number of shares outstanding as of
February 18, 2000 and excludes:
. 1,580,458 shares of common stock issuable upon the exercise of stock
options at a weighted average exercise price of $1.01 per share; and
. 763,779 shares of common stock underlying warrants at a weighted
average exercise price of $1.77 per share.
------------------
Unless otherwise indicated, all information contained in this prospectus:
. assumes that the underwriters do not exercise their over-allotment
option;
. reflects a for split of our common stock to be completed
prior to the closing of this offering; and
. reflects the mandatory conversion of all of our outstanding shares of
preferred stock into a total of 13,353,198 shares of common stock upon
completion of this offering.
3
<PAGE>
Summary Financial Data
The following statement of operations data for the period from inception
(September 9, 1997) through December 31, 1997 and for the years ended December
31, 1998 and 1999 have been derived from our financial statements and the notes
to those financial statements that are included elsewhere in this prospectus.
The summary balance sheet data as of December 31, 1999 are presented (1) on an
actual basis, (2) on a pro forma basis to reflect:
. our sale of 3,000,000 shares of our Series C Preferred Stock for
$5.00 per share on January 21, 2000, and
. the mandatory conversion of all of our outstanding preferred stock into
a total of 13,353,198 shares of common stock upon completion of this
offering;
and (3) on a pro forma as adjusted basis to reflect the receipt of estimated
proceeds from our sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share, after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us.
For a more detailed explanation of the financial data, see "Selected
Financial Data" on page , "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page and our
financial statements and the notes to those financial statements beginning on
page F-1 of this prospectus.
<TABLE>
<CAPTION>
Period From
Inception
(September 9, Years Ended December
1997) to 31,
December 31, -----------------------
1997 1998 1999
------------- ---------- -----------
(in thousands, except per share
data)
<S> <C> <C> <C>
Statements of Operations Data:
Collaborative research agreements and
grant revenues....................... $ -- $ 871 $ 2,197
Total operating expenses.............. 220 5,171 12,308
Net loss.............................. (220) (4,290) (10,487)
Net loss per share--basic and
diluted.............................. $ (0.19) $ (1.14) $ (2.48)
Weighted average common shares
outstanding--basic and diluted....... 1,160,958 3,750,036 4,236,409
Pro forma net loss per share--basic
and diluted.......................... $ (0.75)
Pro forma weighted average common
shares outstanding--basic and
diluted.............................. 14,046,759
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments............................... $ 3,956 $18,956
Working capital............................ (3,635) 11,365
Total assets............................... 14,225 29,225
Long-term debt, less current portion....... 8,047 8,047
Preferred stock............................ 11,919 --
Accumulated deficit........................ (15,029) (15,029)
Total stockholders' equity (deficit) ...... (2,827) 12,173
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially harm our business, operating results and
financial condition and could result in a complete loss of your investment.
Risks Related to our Business
We are an early stage company using unproven technologies and, as a result, we
may never become profitable.
You should evaluate us in light of the uncertainties affecting an early
stage biotechnology company. Our GeneFunction Factory is still in the early
stages of development. Our technology is largely based on the premise that
knowledge regarding the function of genes in our selected model organisms can
be used to determine the function of genes in commercially significant target
organisms and that this information may result in commercial products. We have
not yet proven that determining the function of a gene in commercially
significant target organisms will necessarily result in commercial products.
Also, we have no experience in using the genes or gene functions we identify in
our GeneFunction Factory to develop our own proprietary products. Since we are
an early stage company using unproven technology, we may never achieve, or be
able to maintain, profitability.
Commercialization of our technologies depends on strategic alliances with other
companies. If we are not able to find strategic partners in the future, or if
we are unable to maintain our existing strategic alliances, we may not be able
to develop our technologies or products.
Since we do not currently possess the resources necessary to develop and
commercialize potential products ourselves, we must enter into strategic
alliances to develop and commercialize products. We have entered into only two
strategic alliances to fund the development of certain new products for
specific purposes. Substantially all of our revenues to date have been derived
from these two collaborative research and development agreements. Revenues from
research and development strategic alliances depend upon continuation of the
strategic alliances, the achievement of milestones and the receipt of royalties
derived from future products developed from our research. If we are unable to
successfully achieve milestones or our strategic partners fail to develop
successful products, we will not earn the revenues contemplated under such
collaborative agreements. In addition, we may not be able to enter into
additional strategic alliances. Further, any of our existing or potential
strategic alliances may not be successful. If we fail to enter into or maintain
and fullfill the terms of strategic alliances, our products may not be
commercialized.
We have limited or no control over the resources that any strategic
partners may devote to our products. Any of our present or future strategic
partners may not perform their obligations as expected. These strategic
partners may breach or terminate their agreements with us or otherwise fail to
conduct their strategic alliance activities with us successfully and in a
timely manner. Further, our strategic partners may elect not to develop
products arising out of our strategic alliances or devote sufficient resources
to the development, manufacture, marketing or sale of these products. If any of
these events occur, we may not be able to commercialize our products.
5
<PAGE>
If we do not develop commercially successful products, our business may be
significantly harmed.
We may not be successful in the commercial development of our products.
Significant research and development, financial resources and personnel will be
required to advance our technologies, develop commercially viable products and
obtain regulatory approvals. Initially, we intend to rely on our strategic
partners to develop and commercialize products based upon our research and
operations. We have no experience in manufacturing and marketing, and we
currently do not have the resources or capability to manufacture products on a
commercial scale. In order for us to commercialize our products directly, we
would need to develop, or obtain through outsourcing arrangements or through
acquisition, the capability to manufacture, market and sell products. We do not
have these capabilities and we may not be able to develop or otherwise obtain
the requisite manufacturing, marketing and sales capabilities. If we are unable
to successfully commercialize products resulting from our proprietary research
efforts, we will incur losses and our business may be significantly harmed.
We have incurred net losses since inception, expect our losses to continue and
may never achieve or maintain profitability.
We have a limited operating history and are at an early stage of
development. We have incurred net losses in each year since our inception and
expect these losses to continue. We experienced a net loss of approximately
$10.5 million for the year ended December 31, 1999. As of December 31, 1999, we
had an accumulated deficit of approximately $15.0 million. To date, all of our
revenues have been derived from two strategic alliances and a government grant.
We expect to derive revenue in the foreseeable future principally from
strategic alliances. Revenues from strategic alliances and grants are uncertain
and we may not be able to secure future grants and revenues from strategic
alliances. We expect to spend a significant amount of capital to fund research
and development and enhance our core technologies including our GeneFunction
Factory. As a result, we expect that our operating expenses will increase
significantly in the near term and, consequently, we will need to generate
significant additional revenues to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. We cannot predict when, if ever, we will be
profitable.
We may need additional financing, which may not be available, and any
financings may dilute, or otherwise adversely affect the rights of, existing
stockholders, cause us to relinquish rights to our technologies or cause us to
grant licenses on unfavorable terms.
Our existing capital resources may not be sufficient to fund our future
operating plans and we may therefore need to raise significant additional
capital. We have expended significant resources in developing our GeneFunction
Factory and expect our capital expenditures and operating expenses to increase
over the next several years as we continue developing the GeneFunction Factory
and increase our research and development activities. The amount of additional
capital which we expect we will need to raise will depend on many factors,
including:
. the number, breadth and progress of our research programs;
. the achievement of the milestones under certain of our existing
strategic alliances;
. our ability to establish additional and maintain current and
additional strategic alliances;
. our strategic partners' success in commercializing products developed
under our strategic alliances;
. our success in commercializing products to which we have retained the
rights under our strategic alliances;
. the costs incurred in enforcing and defending our patent claims and
other intellectual property rights; and
6
<PAGE>
. the costs and timing of obtaining regulatory approvals for any of our
products.
We may need to raise additional capital through public or private equity
offerings, debt financings or additional strategic alliances and licensing
arrangements. Additional financing may not be available to us when we need it,
or, if available, we may not be able to obtain such financing on terms
favorable to our stockholders or us. If we raise additional capital by issuing
equity securities, such an issuance will reduce the percentage ownership of
existing stockholders. Furthermore, it may be necessary for us to issue
securities that have rights, preferences and privileges senior to our common
stock. If we raise additional funds through strategic alliances and licensing
arrangements, we may be required to relinquish rights to certain of our
technologies or product candidates, or to grant licenses on unfavorable terms.
The relinquishing of rights or granting of licenses on unfavorable terms could
harm our business.
We may choose to raise additional capital due to market conditions or
strategic considerations even if we have sufficient funds to carry out our
operations.
Since our technologies have many potential applications and we have limited
resources, our focus on a particular area may result in our failure to
capitalize on more profitable areas.
We have limited financial and managerial resources. Because our
technologies, identified genes and identified gene functions potentially have
applications across numerous and diverse industries, we are required to apply
our resources to selective efforts. This requires us to focus on product
candidates in specific industries and forego opportunities with regard to other
products and industries. For example, depending on our ability to allocate
resources, a decision to concentrate on a particular agricultural program may
mean that we will not have resources available to apply the same technology to
a human health project. While our technologies may permit us to work in both
areas, resource commitments may require trade-offs resulting in delays in the
development of, or the failure to develop, certain programs or research areas,
which may place us at a competitive disadvantage. Our decisions affecting
resource allocation may not lead to the development of viable commercial
products and may divert resources from more profitable market opportunities.
Risks Related to our Industry
Social issues may limit the acceptance of genetically modified products.
The commercial success of our product candidates will depend in part on
public acceptance of the use of genetically modified products, including drugs,
plants and plant products. Public attitudes may be influenced by claims that
genetically modified products are unsafe for consumption or pose a danger to
the environment. Any genetically modified products that our collaborators or we
may develop may not gain public acceptance. Negative public reaction to
genetically modified products could result in greater government regulation of
genetic research and resultant products, including stricter labeling
requirements, and cause a decrease in the demand for our products.
The subject of genetically modified products has received negative
publicity, which has aroused public debate. The adverse publicity could lead to
greater regulation and trade restrictions on imports and exports of genetically
modified products, and genetic research and resultant products could be subject
to greater domestic regulation and could cause a decrease in the demand for our
products.
7
<PAGE>
Stringent laws may limit the market for genetically modified agricultural
products that we may provide.
As part of our business strategy, we may develop genetically modified
agricultural products. The field-testing, production and marketing of
genetically modified plants and plant products are subject to federal, state,
local and foreign governmental regulation. Regulatory agencies administering
existing or future regulations or legislation may not allow us to produce and
market our genetically modified products in a timely manner or under
technically or commercially feasible conditions. In addition, regulatory action
or private litigation could result in expenses, delays or other impediments to
our product development programs or the potential commercialization of
resulting products.
Although the FDA has announced in a policy statement that it will apply
the same regulatory standards to foods developed through genetic modification
as applied to foods developed through traditional plant breeding, genetically
modified food products will be subject to FDA premarket review if these
products raise safety questions or are deemed to be food additives. Our
products may be subject to lengthy FDA reviews and unfavorable FDA
determinations if they raise questions or are deemed to be food additives.
The FDA has also announced in a policy statement that it will not require
that genetically modified agricultural products be labeled as such, provided
that these products are as safe and have the same nutritional characteristics
as conventionally developed products. The FDA may reconsider or change its
policies or local or state authorities may enact labeling requirements, either
of which could have a material adverse effect on the demand for our products.
The United States Department of Agriculture, or the USDA, prohibits
genetically modified plants from being grown and transported except pursuant to
an exemption, or under special controls. In general, companies apply for an
exemption to facilitate product development because the special controls are
burdensome. However, we cannot predict or guarantee that the products we
develop will qualify for such an exemption.
We intend to conduct proprietary research programs, and any conflicts with our
strategic partners could harm our business.
An important part of our strategy involves conducting proprietary research
programs. We may pursue opportunities in fields that could conflict with our
strategic partners. Any conflict with our strategic partners could reduce our
ability to expand existing, or enter into additional, strategic alliances and
negatively impact our relationship with existing strategic partners, which
could harm our business.
Some of our strategic partners could also become competitors in the
future. Our strategic partners could develop competing products, fail to obtain
timely regulatory approvals, terminate their agreements with us prematurely or
fail to devote sufficient resources to the development and commercialization of
products. Any of these events could harm our product development efforts.
Growth in our operations has and will continue to strain our resources; our
failure to manage growth effectively could harm our business.
We are experiencing a period of rapid and substantial growth that has
placed and, since we expect this growth to continue, will continue to place a
strain on our administrative and operational infrastructure. If we are unable
to manage this growth effectively, our business may be harmed. The number of
our employees increased from four at December 31, 1997 to 47 at December 31,
1998 and to 92 at December 31, 1999. Our revenues increased from approximately
$871,000 in 1998 to approximately $2.2 million in 1999. Our ability to manage
our operations and growth effectively requires us to continue to
8
<PAGE>
improve our operational, financial and management controls, reporting systems
and procedures, to attract and retain sufficient numbers of talented employees
and add appropriate physical facilities. We may not be able to successfully
make any of these changes or improvements in an efficient or timely manner.
We depend on the services of a number of key personnel, and a loss of any of
these personnel could disrupt our operations and result in reduced revenues.
Our success depends on the continued services and on the performance of
our senior management and scientific staff, in particular John Ryals, Ph.D.,
our Chief Executive Officer and President. The loss of the services of Dr.
Ryals or any of our other senior management or scientific staff could seriously
impair our ability to operate and achieve our objectives, which could reduce
our revenues. We have $2 million of key man life insurance on Dr. Ryals. This
amount may not be sufficient to compensate us for the loss of his services. In
addition, recruiting and retaining qualified scientific personnel to perform
future research and development work will be critical to our success.
In order to achieve our business objectives, we must identify, attract,
train and motivate additional personnel with expertise in specific industries
and areas applicable to the products developed through our technologies. We
compete intensely for these personnel and we may be unable to achieve our
personnel goals. Our failure to achieve any of these goals could seriously
limit our ability to improve our operations and financial results.
Our business and the products developed using the information we provide may be
subject to a lengthy and uncertain government regulatory process that may not
result in the necessary approvals, may delay the commercialization of our
strategic partners' products or may be costly, which could harm our business.
Any new product that our strategic partners develop will likely undergo
extensive regulatory review process in the United States and other countries
before it can be marketed or sold. This regulatory review process can take many
years and require substantial expense. Changes in the policies of United States
and foreign regulatory bodies can increase the time required to obtain
regulatory approval for each new product. Even after investing significant time
and capital, we or our strategic partners may not obtain regulatory approval
for new products. Even if marketing clearance is obtained, a marketed product
and its manufacturer are subject to continuing review. Discovery of previously
unknown problems with a product may result in withdrawal of the product from
the market.
We may be sued for product liability, which, if a suit were successful, could
cause us to face substantial liabilities that exceed our resources.
We may be held liable if any product we develop, or any product which is
made using our technologies, causes injury or is found unsuitable during
product testing, manufacturing, marketing or sale. These risks are inherent in
the development of chemical, agricultural and pharmaceutical products. We
currently do not have product liability insurance. If we choose to obtain
product liability insurance but cannot obtain sufficient insurance coverage at
an acceptable cost or otherwise protect against potential product liability
claims, the commercialization of products that we or our strategic partners
develop may be prevented or inhibited. If we are sued for any injury caused by
our products, our liability could exceed our total assets.
If we engage in any acquisition, we will incur a variety of costs, and the
anticipated benefits of the acquisition may never be realized.
If appropriate opportunities become available, we may attempt to acquire
businesses, technologies, services or products that we believe will enhance our
business. We cannot be sure, however, that acquisition candidates will be
available on terms acceptable to us. We currently have no commitments or
agreements
9
<PAGE>
with respect to any material acquisitions. If we do make an acquisition, the
process of integrating an acquired business, technology, service or product may
result in unforeseen operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of our business. Moreover, the anticipated benefits of any
acquisition may fail to be realized. Future acquisitions could result in
potentially dilutive issuances of equity securities, the incurrence of debt,
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, which could adversely affect our results of operations and
financial condition.
In addition, recent proposed changes in the Financial Accounting Standards
Board rules for merger accounting may affect the cost of making acquisitions,
integrating our acquisitions and retaining key employees. For example,
elimination of the "pooling-of-interests" method of accounting for mergers
would likely result in our having to record goodwill that we would amortize to
earnings if we merge with another company. Such amortization would adversely
impact our future operating results. Further, accounting rule changes that
reduce the availability of write-offs of the value of in-process research and
development in connection with an acquisition could result in the
capitalization and amortization of these amounts which would negatively impact
results of operations in future periods.
We may not be able to compete effectively, which could cause our business to
suffer.
Our technology platform for the industrialization of gene function
determination faces competition from functional genomics technologies created
by others. We expect competition to intensify in genomics research as
technology advances are made and become widely known. Genomic technologies have
undergone and are expected to continue to undergo rapid and significant change.
Our future success will depend in large part on maintaining a competitive
position in the genomics field, and particularly in the functional genomics
field. Rapid technological development by us or others may result in products
or technologies becoming obsolete before we recover the expenses we incur in
connection with our development. Products offered by us and/or our strategic
partners could be made obsolete by less expensive or more effective crop
enhancement, nutrition enhancement, drug discovery and industrial product
development technologies, including technologies that may be unrelated to
genomics. We may not be able to make the enhancements to our technology
necessary to compete successfully with newly emerging technologies.
Any products that we may develop alone or in collaboration with others
will compete in highly competitive markets. In the specific markets in which we
apply or intend to apply our technology platform, we face competition from
plant genomics, pharmaceutical, agrochemical and biotechnology companies. Many
of our existing and potential competitors have substantially greater financial
resources, research and development staffs, facilities, manufacturing and
marketing experience, distribution channels and human resources than we do.
Many of these competitors have achieved substantial market penetration in the
crop enhancement, nutrition, human health and industrial products markets.
Our ability to compete in the human health market and the industrial
products markets may be limited by our exclusive use of plant and fungal model
organisms. We believe that our ability to compete in the human health market
will depend on the degree to which information we develop on plant gene and
pathway function may relate to human physiology. Competing companies who use
model organisms with greater similarities to human genes, such as mice, as well
as companies that do direct studies of human populations, may have a
substantial advantage in developing products for humans.
Any inability to adequately protect our proprietary technologies could harm our
competitive position.
Our business and competitive position will depend in part on our ability
to obtain patents and maintain adequate protection of our other intellectual
property for our technologies and products in the United States and other
countries. As of February 1, 2000, we had 30 patent applications pending
covering
10
<PAGE>
our technology with the United States Patent and Trademark Office. We hold no
issued patents and we may never receive patents on our applications in the U.S.
or other countries. The laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the United States, and
many companies have encountered significant problems in protecting their
proprietary rights in these foreign countries. These problems can be caused by,
for example, a lack of rules and methods for defending intellectual property
rights.
The patent positions of biopharmaceutical and biotechnology companies,
including our patent position, are generally uncertain and involve complex
legal and factual questions. Patent law relating to the scope of claiming the
technology field in which we operate is still evolving. We will be able to
protect our proprietary rights from unauthorized use by third parties only to
the extent that our proprietary technologies are covered by valid and
enforceable patents or are effectively maintained as trade secrets. We will
apply for patents covering both our technologies and products, as we deem
appropriate. However, these applications may be challenged and may not result
in issued patents. Any future patents we obtain may not be sufficiently broad
to prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, our
patents may be challenged, invalidated or fail to provide us with any
competitive advantages.
We rely upon trade secret protection for our confidential and proprietary
information. We have taken security measures to protect our proprietary
information. These measures may not provide adequate protection for our trade
secrets or other proprietary information. While we seek to protect our
proprietary information by entering into confidentiality agreements with
employees, strategic partners and consultants, we cannot assure you that our
proprietary information will not be disclosed, or that we can meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise
gain access to our trade secrets.
Litigation or other proceedings or third party claims of intellectual property
infringement could require us to spend time and money and could shut down some
of our operations.
Third parties have filed, and in the future are likely to file, patent
applications covering genes, gene function or technology upon which our
technology platform depends and on which we may wish to file. If these patent
applications result in issued patents and we wish to use the claimed
technology, we would need to obtain a license from the third party.
Third parties may assert that we are employing their proprietary
technology without authorization. In addition, third parties may obtain patents
in the future and claim that use of our technologies infringes these patents.
We could incur substantial costs and diversion of management and technical
personnel in defending ourselves against any of these claims or enforcing our
patents against others. Furthermore, parties making claims against us may be
able to obtain injunctive or other equitable relief which could effectively
block our ability to further develop, commercialize and sell products, and
could result in the award of substantial damages against us. In the event of a
successful claim of infringement, we may be required to pay damages and obtain
one or more licenses from third parties. We may not be able to obtain these
licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to
obtain any of these licenses could prevent us from commercializing available
products.
Because we may not be able to receive appropriate patents or licenses, we may
not be able to successfully operate our business.
Our patent applications covering methods of preparing gene expression
profiles of an organism, for example, do not cover all techniques for gene
expression profiling. Similarly, our patent applications covering methods for
production of gene knock-out libraries do not cover all techniques for making
organisms with such genetic modifications. In addition, our patent
applications, if they are granted, may not protect against
11
<PAGE>
the use or importation of gene-based products identified or manufactured using
our technology. For example, other parties could have blocking patent rights to
products made using our technology because of a proprietary position covering a
gene that we have developed, or they could have blocking rights to our
bioinformatics or data mining technologies.
We will seek to obtain licenses to such patents when, in our judgment,
such licenses are needed. If any licenses are required, there can be no
assurance that we will be able to obtain any such license on commercially
favorable terms, if at all, and if these licenses are not obtained, we might be
prevented from using certain of its technologies or taking certain products to
market. Our failure to obtain a license to any technology or product that may
be required may prevent us from commercializing product candidates. There also
can be no assurances that our core technologies and/or activities taken in the
course of developing or selling our products will not infringe such patents. In
general, our patent protection may not prevent others from developing
competitive products using our technology or other technologies. Similarly,
others may obtain patents that could limit our ability to use, import,
manufacture, market or sell products or impair our competitive position.
Risks Related to this Offering
Our management will have broad discretion as to the use of proceeds from this
offering and may spend the proceeds in ways with which you may not agree.
Our management will have broad discretion over the use of proceeds from
this offering. We currently intend to use the proceeds of this offering for
research and development and general corporate purposes. Our management may
allocate the net proceeds among these purposes as it determines is necessary.
In addition, market factors may require our management to allocate all or
portions of the net proceeds for other purposes. Management may not use the
proceeds in a manner in which you approve. Accordingly, you will be relying on
the judgment of our management with regard to the use of proceeds from this
offering.
Our stock price may be extremely volatile and you may not be able to resell
your shares at or above the initial public offering price.
Prior to this offering, there has been no public market for shares of our
common stock. An active trading market may not develop following completion of
this offering, or if developed, may not be maintained. The initial public
offering price for the shares will be determined by negotiations between us and
representatives of the underwriters. This price may not be indicative of prices
that will prevail later in the market. The stock market has experienced
significant price and volume fluctuations, and the market prices of technology
companies, particularly life science companies, have been highly volatile. You
may not be able to resell your shares at or above the initial public offering
price.
We expect our results of operations to fluctuate and the price of our common
stock could fall if quarterly results are lower than the expectations of
securities analysts.
Our operating results historically have fluctuated on a quarterly basis
and are likely to continue to do so in the future. These fluctuations could
cause our stock price to fluctuate significantly or decline. Some of the
factors, which could cause our operating results to fluctuate, include:
. expiration of research contracts with strategic partners, which may
not be renewed or replaced;
. the success rate of our discovery efforts leading to milestones and
royalties;
. the timing and willingness of strategic partners to commercialize our
products which would result in royalties; and
. general and industry specific economic conditions, which may affect
our strategic partners' research and development expenditures.
12
<PAGE>
A large portion of our expenses, including expenses for facilities,
equipment and personnel are relatively fixed. Accordingly, if revenues decline
or do not grow as anticipated due to expiration of research contracts or
government research grants, failure to obtain new contracts or other factors,
we may not be able to correspondingly reduce our operating expenses. In
addition, we plan to significantly increase operating expenses in 2000. Failure
to achieve anticipated levels of revenues could therefore significantly harm
our operating results for a particular fiscal period.
Our operating results in some quarters may not meet the expectations of
stock market analysts and investors. In that case, our stock price would likely
decline.
If our stockholders sell substantial amounts of our common stock after this
offering, the market price of our common stock may fall.
The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market after the closing
of this offering, or the perception that these sales could occur. In addition,
these factors could make it more difficult for us to raise funds through future
offerings of common stock. There will be shares of common stock outstanding
immediately after this offering, or shares if the underwriters exercise their
over-allotment option in full. All of the shares sold in this offering will be
freely transferable without restriction or further registration under the
Securities Act, except for any shares purchased by our "affiliates," as defined
in Rule 144 of the Securities Act, and except for shares that will be
subject to 180-day lock-up agreements providing that the stockholders will not
offer, sell, pledge or otherwise dispose of their shares for a period of 180
days after this date of this prospectus without the prior written consent of
Chase Securities Inc. The remaining shares of common stock outstanding will be
"restricted securities" as defined in Rule 144. These shares may be sold in the
future without registration under the Securities Act to the extent permitted by
Rule 144 or other exemptions under the Securities Act. See "Shares Eligible for
Future Sale."
Future issuances of preferred stock may dilute the rights of our common
stockholders.
Our board of directors will have the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, privileges and
other terms of these shares. The board of directors may exercise this authority
without the approval of the stockholders. The rights of the holders of any
preferred stock that we may issue in the future may adversely affect the rights
of holders of our common stock.
Anti-takeover provisions of Delaware law and our charter could make a third-
party acquisition of us difficult.
Because we intend to reincorporate as a Delaware corporation in March
2000, the anti-takeover provisions of Delaware law could make it more difficult
for a third party to acquire control of us, even if the change in control would
be beneficial to stockholders. We will be subject to the provisions of Section
203 of the General Corporation Law of Delaware. Section 203 will prohibit us
from engaging in certain business combinations, unless the business combination
is approved in a prescribed manner. Accordingly, Section 203 may discourage,
delay or prevent someone from acquiring or merging with us. In addition, upon
completion of this offering, our amended and restated certificate of
incorporation and bylaws will contain certain provisions that may make a third
party acquisition of us difficult, including:
. a classified board of directors, with three classes of directors each
serving a staggered three-year term;
. the ability of the board of directors to issue preferred stock; and
. the inability of our stockholders to call a special meeting or act by
written consent.
13
<PAGE>
Some of our existing stockholders can exert control over us, and may not make
decisions that are in the best interests of all stockholders.
After this offering, our officers, directors and stockholders who
beneficially own more than five percent of our common stock will together
control approximately % of our outstanding common stock and will own
approximately % of our outstanding common stock. As a result, these
stockholders, if they act together, will be able to exert a significant degree
of influence over our management and affairs and over matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, this concentration of
ownership may delay or prevent a change in control of us and might affect the
market price of our common stock, even when a change may be in the best
interests of all stockholders. In addition, the interests of this concentration
of ownership may not always coincide with our interests or the interests of
other stockholders and accordingly, they could cause us to enter into
transactions or agreements, which we would not otherwise consider.
You will experience immediate dilution in the book value per share of the
common stock you purchase.
The assumed initial public offering price is substantially higher than the
book value per share of our common stock. Investors purchasing common stock in
this offering will, therefore, incur immediate dilution of $ in net
tangible book value per share of common stock, based on an assumed initial
public offering price of $ per share. Investors will incur additional
dilution based on the exercise of outstanding stock options and warrants.
14
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus are forward-looking
statements concerning our operations, economic performance and financial
condition. Forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, are included, for example, in
the discussions about:
. our strategy;
. sufficiency of our cash resources;
. revenues from existing and new strategic alliances;
. product development;
. our research and development and other expenses; and
. our operational and legal risks.
These statements involve risks and uncertainties. Actual results may
differ materially from those expressed or implied in those statements. Factors
that could cause these differences include, but are not limited to, those
discussed under "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
15
<PAGE>
USE OF PROCEEDS
The net proceeds that we will receive from our sale of shares of common
stock in this offering are estimated to be $ million, after
deducting the estimated underwriting discounts and commissions and offering
expenses payable by us and assuming an initial public offering price of $
per share. If the underwriters exercise their over-allotment option in full, we
estimate the net proceeds from this offering will be $ million. We intend
to use the net proceeds of this offering for the following purposes:
. for research and development;
. for acquisitions of plant and equipment;
. for the development of our physical infrastructure; and
. for general corporate purposes, including the possible acquisition of
or investment in complementary businesses, products or technologies.
At the present time, we have no understandings, commitments or agreements with
respect to any material acquisition. Pending the use of the net proceeds of
this offering for the purposes described above, we intend to invest these
proceeds in short-term, interest-bearing, investment-grade securities.
The foregoing information is based on current expectations, and we may
allocate the net proceeds among these purposes as we deem necessary or
appropriate. The amounts and timing of our actual expenditures will depend upon
numerous factors, including the time required to reach profitability, the
status of our product development efforts, the success of our strategic
alliances, the amount of proceeds actually raised in this offering, the amount
of cash generated by our operations and competition. In addition, these and
other market factors may require us to allocate portions of the net proceeds
for purposes other than those described above. See "Risk Factors--Risks Related
to This Offering--Our management will have broad discretion as to the use of
proceeds from this offering and may spend the proceeds in ways with which you
may not agree" on page .
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable
future. Under an existing loan arrangement, we cannot pay dividends on our
capital stock except for dividends to the lender.
16
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of December
31, 1999 (1) on an actual basis, (2) on a pro forma basis to reflect:
. our sale of 3,000,000 shares of our Series C Preferred Stock for $5.00
per share on January 21, 2000, and
. the mandatory conversion of all of our outstanding preferred stock into
a total of 13,353,198 shares of common stock upon the completion of
this offering;
and (3) on a pro forma as adjusted basis to reflect the receipt of the
estimated proceeds from our sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share,
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us. This information should be read in conjunction
with our financial statements and the notes to those financial statements
beginning on page F-1 of this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(in thousands, except
share data)
<S> <C> <C> <C> <C>
Long-term debt, less current portion..... $ 8,047 $ 8,047
Stockholders' equity (deficit):
Series A Preferred Stock, $0.01 par
value; 8,000,000 shares designated,
7,562,500 shares issued and
outstanding, actual; no shares issued
or outstanding, pro forma and pro forma
as adjusted............................ 5,951 --
Series B Preferred Stock, $0.01 par
value; 2,790,698 shares designated,
2,790,698 shares issued and
outstanding, actual; no shares issued
or outstanding, pro forma and pro forma
as adjusted............................ 5,968 --
Series C Preferred Stock, $0.01 par
value; no shares designated, issued or
outstanding, actual; 3,000,000 shares
designated, no shares issued and
outstanding, pro forma and pro forma as
adjusted............................... --
Common stock, $0.01 par value;
30,000,000 shares authorized; 5,224,257
shares issued and outstanding, actual;
18,577,455 shares issued and
outstanding, pro forma; and shares
issued and outstanding, pro forma
as adjusted............................ 52 186
Additional paid-in capital.............. 2,510 29,295
Deferred compensation................... (2,279) (2,279)
Accumulated deficit..................... (15,029) (15,029)
-------- --------
Total stockholders' equity
(deficit)........................... (2,827) 12,173
-------- --------
Total capitalization............... $ 5,220 $ 20,220
======== ========
</TABLE>
The outstanding share information is based on our shares outstanding as of
December 31, 1999 and excludes:
. 1,580,458 shares of common stock issuable upon the exercise of stock
options outstanding as of February 18, 2000 at a weighted average
exercise price of $1.01 per share; and
. 763,779 shares of common stock issuable upon the exercise of warrants
outstanding as of February 18, 2000 at a weighted average exercise
price of $1.77 per share.
See "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and
Results of Operations" and the financial statements and notes thereto included
in this prospectus.
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999, after
giving effect to (1) our sale of 3,000,000 shares of our Series C Preferred
Stock for $5.00 per share on January 21, 2000 and (2) the mandatory conversion
of all of our outstanding preferred stock into a total of 13,353,198 shares of
common stock was $12,147,299 million or $0.65 per share of common stock. Pro
forma net tangible book value per share represents the amount of total
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding. Assuming the sale by us of shares of common
stock in this offering at an assumed initial public offering price of $
per share, our pro forma net tangible book value as of December 31, 1999 would
have been $ million, or $ per share of common stock. This
represents an immediate increase in pro forma net tangible book value of
$ per share to our existing stockholders and an immediate dilution in
pro forma net tangible book value of $ per share to new investors
purchasing shares in this offering. This means that after this offering, the
per share value of our tangible assets after subtracting our liabilities will
be $ , which is substantially lower than the assumed price investors
will pay in this offering. The following table illustrates this dilution on a
per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $
Pro forma net tangible book value per share at December 31, 1999.... $
----
Increase per share attributable to new investors....................
Pro forma net tangible book value per share after the offering........
----
Dilution per share to new investors................................... $
====
</TABLE>
The following table summarizes, as of December 31, 1999, on a pro forma
basis, the number of shares of stock purchased from us, including amounts paid
by purchasers of preferred stock, the total consideration paid to us and the
average price per share paid by existing stockholders and by new investors,
based upon an assumed initial public offering price of $ per share for
shares purchased in this offering, before deducting the estimated underwriting
discounts and commissions and estimated offering expenses. This table
illustrates that although investors purchasing common stock in this offering
will have contributed about % of the total consideration paid to us for
our outstanding common stock, they will only own about % of our
outstanding common stock.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 18,577,455 % $27,070,998 % $1.46
New investors..............
Total.................... 100.0% $ 100.0% $
========== ===== =========== =====
</TABLE>
The above tables assume no exercise of any outstanding stock options or
warrants to purchase common stock. As of February 18, 2000, there were:
. 1,580,458 shares of common stock issuable upon the exercise of stock
options outstanding at a weighted average exercise price of $1.01 per
share; and
. 763,779 shares of common stock issuable upon the exercise of warrants
outstanding at a weighted average exercise price of $1.77 per share.
To the extent these options or warrants are exercised, there will be further
dilution to the new investors.
18
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data for the period from inception (September
9, 1997) through December 31, 1997, and for 1998 and 1999 and the balance sheet
data as of December 31, 1998 and 1999 have been derived from our audited
financial statements beginning on page F-1 of this prospectus. The balance
sheet data as of December 31, 1997 have been derived from audited financial
statements that are not included in this prospectus. The historical results are
not necessarily indicative of the operating results to be expected in the
future. The selected financial data shown below should be read in conjunction
with our financial statements and the notes to those financial statements
beginning on page F-1 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page of this prospectus.
<TABLE>
<CAPTION>
Period from
Inception
(September Years Ended December
1997) to 31,
December 31, ------------------------
1997 1998 1999
------------ ----------- -----------
(in thousands, except per share
amounts)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Collaborative research agreements..... $ -- $ 820 $ 2,052
Grant revenue......................... -- 51 145
---------- ----------- -----------
Total revenues....................... -- 871 2,197
Operating costs and expenses:
Research and development.............. 71 3,641 7,528
Selling, general and administrative... 149 1,524 4,714
Stock based compensation.............. -- 6 66
---------- ----------- -----------
Total operating costs and expenses... 220 5,171 12,308
---------- ----------- -----------
Loss from operations................... (220) (4,300) (10,111)
---------- ----------- -----------
Interest income (expense), net......... -- 10 (376)
---------- ----------- -----------
Net loss............................... $ (220) $ (4,290) $ (10,487)
========== =========== ===========
Net loss per share--basic and diluted.. $ (0.19) $ (1.14) $ (2.48)
========== =========== ===========
Weighted average common shares
outstanding--basic and diluted........ 1,160,958 3,750,036 4,236,409
========== =========== ===========
Pro forma net loss per share--basic and
diluted............................... $ (0.75)
===========
Pro forma weighted average common
shares outstanding--basic and
diluted............................... 14,046,759
===========
<CAPTION>
December 31,
-------------------------------------
1997 1998 1999
------------ ----------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments........................... $ 18 $ 3,455 $ 3,956
Working capital........................ (224) 1,148 (3,635)
Total assets........................... 63 7,435 14,225
Long-term debt, net of current
portion............................... -- 3,539 8,047
Preferred stock........................ -- 5,951 11,919
Accumulated deficit.................... (253) (4,543) (15,029)
Total stockholders' equity (deficit)... (216) 1,452 (2,827)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that are based
upon current expectations. Our actual results and the timing of events could
differ materially from those anticipated in our forward-looking statements as a
result of many factors, including those set forth under "Risk Factors",
"Special Note Regarding Forward-Looking Statements" and elsewhere in this
prospectus.
You should read the following discussion and analysis in conjunction with
the "Selected Financial Data" financial statements and related notes included
elsewhere in this prospectus.
Overview
To date, we have generated revenues from a collaborative herbicide
discovery and commercialization agreement with Bayer and a grant from the U.S.
Department of Energy. The agreement with Bayer was signed in September 1998 and
generated substantially all of our revenues for fiscal years 1998 and 1999. In
November 1999, we signed a joint development and commercialization agreement
with Monsanto. This agreement will not contribute to our revenue until the
first quarter of fiscal year 2000.
We have invested heavily in establishing our GeneFunction Factory and in
our bioinformatics infrastructure. Our total number of employees increased from
four employees at December 31, 1997 to 47 employees at December 31, 1998 and to
92 employees at December 31, 1999. Of our total number of employees on December
31, 1999, 74% were engaged in research and development activities. Our research
and development efforts consisted of work performed under our collaborative
research agreements and our federal government grant and work advancing our own
core technologies.
We have incurred significant losses since our inception. As of December
31, 1999, our accumulated deficit was $15.0 million and total stockholders'
deficit was $2.8 million. Operating expenses increased from $220,000 during the
period from inception through December 31, 1997, to $5.2 million in the year
ended December 31, 1998 and to $12.3 million in the year ended December 31,
1999. We expect to incur additional operating losses over at least the next two
years as we continue to expand our research and development efforts on our core
technologies and establish the infrastructure necessary to support our
business.
Source of Revenue and Revenue Recognition Policy
We recognize revenues from collaborative research agreements on a
percentage of completion basis in accordance with the applicable performance
requirements of each agreement. Revenues related to our government grant are
recognized as related research and development expenses are incurred. Milestone
payments under collaborative research agreements are recognized when milestones
have been achieved and acknowledged by the relevant strategic partner. Payments
received in excess of revenue recognized that are related to future performance
are deferred and recognized as revenue as performance occurs. As of December
31, 1999, we had deferred revenues of approximately $5.8 million. Our sources
of potential revenue for the next two years are likely to be payments under
existing and possible future collaborative research agreements, government
research grants and milestone payments received under collaborative research
agreements.
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Results of Operations
Years Ended December 31, 1998 and 1999.
Revenues. Revenues are comprised of amounts recognized under two
collaborative research agreements and a grant from the U.S. Department of
Energy. Total revenues increased 152% from approximately $871,000 in 1998 to
approximately $2.2 million in 1999. This increase was primarily a result of our
signing a collaborative research agreement in September 1998 with Bayer for the
development of novel screening targets in the field of herbicides.
Revenues earned under collaborative research agreements increased 150%
from approximately $820,000 in 1998 to approximately $2.1 million in 1999. This
increase was the result of an increase in revenues earned under the Bayer
collaborative research agreement in 1999 as compared to 1998 due to the fact
that this agreement was not signed until September 1998. Substantially all of
our revenues during 1998 and 1999 relate to the collaborative research
agreement with Bayer.
Grant revenues increased 187% from approximately $51,000 in 1998 to
approximately $145,000 in 1999. This increase was the result of the grant being
extended in 1999.
Research and Development Expenses. Research and development expenses
consist primarily of personnel costs, facility costs, cost of supplies and
depreciation of laboratory equipment. Research and development expenses
increased 107% from approximately $3.6 million in 1998 to approximately
$7.5 million in 1999. This increase was primarily due to an increased number of
research and development staff and an increased cost of supplies and laboratory
equipment to support our collaborative research agreements and development of
our core technology. We expect to continue to devote substantial resources to
research and development and expect that research and development expenses will
continue to increase.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of personnel costs, facilities costs,
business development costs and professional expenses, such as legal and
accounting fees. Selling, general and administrative expenses increased 209%
from approximately $1.5 million in 1998 to approximately $4.7 million in 1999.
This increase was primarily due to increased staffing necessary to manage and
support our growth and an increase in business development expenses. We expect
that our selling, general and administrative expenses will continue to increase
as we expand our legal, accounting and business development staff, add
infrastructure, incur additional costs related to being a public company,
including directors' and officers' insurance premiums, investor relations
programs and increased professional fees and continue to make commission
payments related to our collaborative research agreements.
Stock Based Compensation Expense. Stock based compensation expense
represents the amortization of deferred compensation related to stock options
granted to employees with an exercise price below the estimated fair market
value of our common stock at the date of grant, as determined by our board of
directors. Deferred compensation is amortized over the vesting period of the
related stock options, which is generally four years. We recognized
approximately $6,000 in non-cash compensation expense related to amortization
of deferred compensation in 1998 as compared to approximately $66,000 in 1999.
Deferred compensation for options granted to employees has been determined
as the difference between the estimated fair market value for financial
reporting purposes of our common stock on the date the options were granted and
the exercise price. Deferred compensation for options granted to consultants
has been determined in accordance with Statement of Financial Accounting
Standards No. 123 as the fair value of equity instruments issued. In connection
with the grant of stock options to employees, we recorded deferred compensation
of approximately $2.3 million in 1999.
Net Interest Income (Expense). Net interest income (expense) represents
interest earned on our cash and cash equivalents and short-term investments
offset by interest expense on long-term debt and capital leases. Net interest
income was approximately $11,000 in 1998, as compared to net interest expense
of approximately $376,000 in 1999. This change was attributable to increases in
senior long-term debt and an increase in notes payable secured by capital
equipment purchases, partially offset by an increase in interest income.
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The Period from Inception (September 9, 1997) through December 31, 1997, and
the Year Ended December 31, 1998.
Revenues. Total revenues increased from zero during 1997 to approximately
$871,000 in 1998. The revenues in 1998 were attributable primarily to the Bayer
collaborative research agreement.
Research and Development Expenses. Research and development expenses
increased from approximately $71,000 in 1997 to approximately $3.6 million in
1998. The increase was primarily due to an increase in the number of our
research and development staff and related costs to support our internal
research and development efforts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from approximately $149,000 in 1997 to
approximately $1.5 million in 1998. Selling, general and administrative
expenses increased primarily due to an increase in the number of administrative
staff necessary to manage and support the growth of our business and expenses
related to the negotiation of our collaboration agreement with Bayer.
Net Interest Income (Expense). Net interest expense was de minimus in
1997, as compared to net interest income of approximately $11,000 in 1998. The
increase in net interest income was attributable to higher average cash
balances during 1998.
Liquidity and Capital Resources
We have historically financed our operations through the sale of preferred
stock, debt and capital lease financing and payments received from
collaborative research agreements and a government grant. From our inception
through December 31, 1999, we have raised approximately $11.9 million in net
cash proceeds from the sale of preferred stock.
We had cash, cash equivalents and short-term investments of approximately
$18,000 at December 31, 1997, compared to approximately $3.5 million at
December 31, 1998 and approximately $4.0 million at December 31, 1999.
Our operating activities used cash of approximately $233,000 in 1997,
approximately $2.1 million in 1998 and approximately $4.4 million in 1999. Cash
used in operating activities was primarily related to net operating losses.
Cash used by investing activities totaled approximately $4,000 in 1997,
approximately $6.1 million in 1998 and approximately $7.6 million in 1999.
Investing activities consist primarily of additions to property and equipment
and net purchases of short-term investments. We expect to continue to make
significant investments in the purchase of property and equipment to support
our expanding operations. A portion of our cash may be used to acquire or
invest in complementary businesses, products or technologies, or to obtain the
right to use such complementary technologies.
Financing activities provided cash of approximately $254,000 in 1997,
approximately $9.2 million in 1998 and approximately $11.5 million in 1999.
Cash provided by financing activities resulted from the receipt of
approximately $6.0 million in net proceeds from the sale of Series A Preferred
Stock in 1998, including $350,000 in proceeds from bridge loans which were
converted to Series A Preferred Stock and approximately $6.0 million in net
proceeds from the sale of Series B Preferred Stock in 1999. In addition, we had
net borrowings of approximately $250,000 in 1997, approximately $3.6 million in
1998 and approximately $5.5 million in 1999, from borrowings.
In January 2000, we completed the sale of our Series C Preferred Stock for
gross proceeds of approximately $15.0 million and received approximately $9.0
million in payments under collaboration agreements.
Our forecast of the period of time through which our financial resources
will be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could
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vary as a result of a number of factors. We believe that our existing cash and
investment securities and anticipated cash flow from existing collaborations
together with the net proceeds of this offering will be sufficient to support
our current operating plan for at least the next two years. We have based this
estimate on assumptions that may prove to be wrong. Our future capital
requirements will depend on many factors, including:
. the number, breadth and progress of our research programs;
. the achievement of the milestones under certain of our existing
strategic alliances;
. our ability to establish additional and maintain current and
additional strategic alliances;
. our strategic partners' success in commercializing products developed
under our strategic alliances;
. our success in commercializing products to which we have retained the
rights under our strategic alliances;
. the costs incurred in enforcing and defending our patent claims and
other intellectual property rights; and
. the costs and timing of obtaining regulatory approvals for any of our
products.
Future capital requirements will also depend on the extent to which we
acquire or invest in businesses, products and technologies. Until we can
generate sufficient levels of cash from our operations, which we do not expect
to achieve for at least the next two years, we expect to finance future cash
needs through the sale of equity securities, strategic collaborations and debt
financing as well as interest income earned on cash balances. We cannot assure
you that additional financing or collaboration and licensing arrangements will
be available when needed or that, if available, such financing will be obtained
on terms favorable to us or our stockholders. Insufficient funds may require us
to delay, scale back or eliminate some or all of our research or development
programs, to lose rights under existing licenses or to relinquish greater or
all rights to product candidates at an earlier stage of development or on less
favorable terms than we would otherwise choose or may adversely affect our
ability to operate as a going concern. If additional funds are raised by
issuing equity securities, substantial dilution to existing stockholders may
result.
Our cash and investments policy emphasizes liquidity and preservation of
principal over other portfolio considerations. We select investments that
maximize interest income to the extent possible given these two constraints. We
satisfy liquidity requirements by investing excess cash in securities with
different maturities to match projected cash needs and limit concentration of
credit risk by diversifying our investments among a variety of high credit-
quality issuers.
Quantitative and Qualitative Disclosures of Market Risk
Our exposure to market risk is principally confined to our cash
equivalents and investments that have maturities of less than five years and a
maximum average maturity of less than three years. We maintain a non-trading
investment portfolio of investment grade, liquid debt securities that limits
the amount of credit exposure to any one issue, issuer or type of instrument.
The securities in our investment portfolio are not leveraged, are classified as
available for sale and are therefore subject to interest rate risk. We
currently do not hedge interest rate exposure.
Year 2000 Impact
We have not experienced any problems with our computer systems relating to
distinguishing twenty-first century dates from twentieth century dates, which
are generally referred to as year 2000 problems. We are also not aware of any
material year 2000 problems with our vendors, business service providers or
distribution partners. Accordingly, we have not incurred nor do we anticipate
incurring material expenses or experiencing any material operational
disruptions as a result of any year 2000 problems.
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BUSINESS
Overview
We are industrializing the process of determining gene function to
generate information that will enable us to develop novel products in four
major sectors of the global economy: crop production, nutrition, human health
and industrial products. We have developed our GeneFunction Factory to
simultaneously study the functions of many genes in our selected organisms. Our
GeneFunction Factory is designed to be an integrated, rapid, industrial scale
laboratory through which we can discover and modify genes, measure the
consequences of the modifications and reliably determine the function of those
genes. Our assembly-line approach automates the measurement of thousands of
physical and chemical characteristics of a selected organism at different times
of the organism's life cycle using gene expression profiling, metabolic
profiling and phenotypic profiling. The resulting large amounts of information
are then fed into our FunctionFinder bioinformatics system. We believe that we
will be able to determine the function of hundreds of genes per week with our
GeneFunction Factory when it is operating at full capacity.
To date, we have established strategic alliances with Bayer and Monsanto.
The Bayer alliance is focused on the development of new herbicides while the
Monsanto alliance is focused on the development of crop production and
nutrition products. Under these alliances, we have total committed funding of
$56 million and have performance fees, milestone payments and payments in
connection with extension options that could generate an additional $134
million. We will also earn product development milestones and sales royalties
if products are commercialized from these alliances.
Background
Genes
The physical and chemical characteristics of an organism, whether animal,
plant or microbe, are determined by its genes. The entire gene content of an
organism is called its genome. Genes consist of organized units of molecules
called deoxyribonucleic acid, or DNA, which in turn consist of four different
chemical bases, called nucleotides. Each nucleotide pairs with its
complementary nucleotide in the double helix structure of DNA, forming what
scientists call a base pair. The precise sequence of the nucleotides in a gene
determines the physical and chemical activity that the gene produces in an
organism. Each cell of an organism contains at least one complete copy of the
organism's genes, but each cell type expresses only those genes that are
necessary for the cell to perform its role. When a gene is expressed, it acts
alone or in combination with other expressed genes to synthesize structural
proteins and enzymes. The activity of these proteins causes the cell to perform
biological functions, which may influence the physical and chemical
characteristics of the organism. A modification in a gene sequence may lead to
the over- or under-production of a protein, modifying the normal biological
function of the cell, and potentially affecting the physical and chemical
characteristics of the entire organism.
The Industrialization of Gene Sequencing
In the early 1990s, a worldwide effort began to decipher the precise
sequence of the genomes of various organisms, including humans, pathogens and
agricultural crops. This effort was fueled by the search to identify genes and
their encoded proteins that are associated with both health and disease.
Advances in DNA sequencing technology and instrumentation have allowed
researchers to begin to sequence genes on an industrial scale by creating
"sequencing factories," instead of sequencing genes one at a time. During the
last two decades, the speed at which scientists can sequence the building
blocks of genes, or base pairs, has increased from hundreds per week to
millions per week, while the cost of sequencing a base pair has decreased
proportionately. Large sequencing centers at universities, research institutes
and private
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companies produce tens of thousands of gene sequences each week. To date,
scientists have cataloged the complete genomes of over forty species of
bacteria, Baker's Yeast and a nematode, which is a small worm-like organism. In
an effort called the Human Genome Project, scientists funded by the government,
as well as several foundations, have been systematically sequencing human DNA
since the late 1980s. Industry experts anticipate that researchers will
complete the sequencing of the entire human genome, as well as the genome of
the plant Arabidopsis, by the end of the year 2000. Additionally, the
government and private industry are funding researchers attempting to complete
the sequencing of the entire genomes of several species of crops, such as rice,
corn, tomato and soybean, as well as bacteria, protists and fungi. It is
expected that the entire DNA sequences of these organisms will be determined in
the near future.
The gene sequence information that has been discovered to date provides a
vast and diverse starting point for gene function research. However, in the
absence of other information, a gene's sequence does not provide any clues to a
gene's function. Without understanding function, researchers will have a
limited ability to translate this gene sequence data into information necessary
to develop new commercial products.
Determining Gene Function
Historically, gene function determination has been a slow, labor intensive
and formulaic process. An investigator would identify a gene, determine its
sequence, gather information on how the gene was expressed in an organism's
tissues, determine the activity of the encoded protein, isolate or create
modifications in the gene and investigate the impact of modifications on the
organism. Most of this type of genetic research has been conducted by
individual research laboratories in different locations using variations on the
same techniques to study different genes, one gene at a time. Only recently
have methods been developed to study the function of many genes at one time and
in one place, using one or more of the following techniques:
. gene annotation and homology determination;
. gene expression profiling; and
. model organism functional genomics.
Gene Annotation and Homology Determination
Researchers can use search and alignment algorithms to determine the
degree to which a newly discovered gene sequence is similar to previously known
sequences. Researchers can then examine any annotated remarks written by other
scientists about the characteristics, activity or function of the previously
studied sequence, and draw inferences about the function of the new gene
sequence based on its structural similarity to the known gene sequence. It is
possible to find similarities among gene sequences from different species,
because many gene families are found in certain groups of organisms, and some
are even found in all organisms.
Although gene annotation and homology determination may provide insight
into the function of a newly discovered gene, there are limitations to the
value of the information that can be inferred. First, even if a similar gene
has been studied, very few of the studied genes have reliable annotation about
function. Second, of the genes that currently have been annotated for function,
most annotations relate to fundamental processes, such as respiration, which
address only a fraction of the potential commercial applications of functional
genomics. Third, genes with similar sequences often have very different
functions.
Gene Expression Profiling
A gene expression profile provides a snapshot of genes that are expressed
in specific tissues of specific organisms at specific points in time. This
snapshot tells an investigator where, when and to what extent a particular gene
is expressed in a cell, tissue or organism and what physiological pathways are
active
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in the cell. Gene expression technology has progressed rapidly over the past
few years. Currently, various profiling technologies such as gene chips are
used to analyze the expression patterns of tens of thousands of genes at once.
Although gene expression profiling may provide clues to a gene's function
in a particular process or pathway, it does not provide sufficient information
to conclusively determine a gene's function or its commercial value. A gene
expression profile shows that a gene was expressed in a cell at the time a
certain biological function occurred in the cell. However, the profile does not
show whether the expression of the gene was causally related to the cellular
activity, or how the gene interacted with other genes that were expressed at
the same time. Also, the profile does not show the chemical and physical
effects of changes in gene expression in an organism.
Model Organism Functional Genomics
We believe the most reliable way to determine a gene's precise function is
to study the effects of modified, or variant, forms of the gene on an organism.
The biology and genetics of certain organisms make them effective models for
investigating the function of genes of other, target organisms with commercial
value. Generally, model organisms must be similar enough to associated target
organisms to allow meaningful comparisons. They must also be easier, faster and
less costly to investigate. Model organisms may also serve as targets for gene
discovery when there is commercial potential for the model organism itself.
Researchers use model organisms to determine the function of a gene from a
target organism by comparing the physical and chemical characteristics produced
by normal and variant forms of a comparable gene from the model organism, and
extrapolating the results to the target organism.
Companies utilizing model organism functional genomics face several
critical challenges. First, they must choose a model organism that is relevant
to target organisms with commercial value. Second, they must choose model
organisms with physical and chemical characteristics that make them efficient
research tools. Third, they must collect large amounts of information about a
small number of genes in a model in their normal and variant states. Fourth,
they must have powerful informatics tools to manage and analyze collected data.
However, even when these challenges are met, determination of gene function
using model organisms typically occurs on a small scale, with individual
investigators studying a small number of genes at a time.
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Our Approach to Industrializing Gene Function Discovery: Our GeneFunction
Factory
The existing approaches to determining gene function have produced limited
results, as evidenced by the fact that the functions of most genes are still
unknown. We believe that an inexpensive, rapid, large-scale approach to
determining gene function is necessary to address this problem. We have
responded to this need by developing our GeneFunction Factory to study gene
function for numerous genes simultaneously in our selected organisms. Our
GeneFunction Factory is designed to be an integrated, rapid, reliable,
industrial scale laboratory through which we can discover and modify genes,
measure the consequences of the modifications and reliably determine the
function of those genes. We believe that by determining gene function we will
be able to develop novel products in our target markets. In effect, we are
industrializing the discovery of gene function.
GENEFUNCTION FACTORY CHART
In our GeneFunction Factory, we first identify genes and produce organisms
with modified forms of the genes, leading to an over- or under-expression of
the encoded protein. We then measure thousands of physical and chemical
characteristics of the variant organisms at different times of the organisms'
life using gene expression, metabolic and phenotype profiling. Next, we
organize and store the data associated with the measurements taken in the
previous step. Finally, we analyze the data to elucidate function of the genes.
We believe we will be able to determine the function of hundreds of genes per
week with our GeneFunction Factory when it is fully developed.
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Our Model and Target Organisms
The organisms we study in our GeneFunction Factory have been carefully
selected. Some researchers use yeast and the bacterium Escherichia coli as
general model organisms, and others use the mouse as a model for humans. Yeast
and bacteria are efficient model organisms, but are such simple organisms that
extrapolating information about gene function to more complex target organisms
is often not meaningful. Mice are more useful for annotating genes of higher
organisms, but have long life cycles and are expensive to maintain and study.
We conduct our research directly in target organisms when feasible, but when a
model organism is needed, we have chosen, and will likely continue to choose,
those organisms that are comparable to the target organism, are economical and
efficient to maintain and study, have short life cycles and whose genes are
easy to modify. The first eight organisms we have decided to study are a
mustard plant known as Arabidopsis, rice and six fungi.
Arabidopsis is a useful model organism because it is related to soybeans,
cotton, vegetables and oil seed crops. It is an efficient model organism
because it has a short life cycle of seven weeks and a small genome. Rice is an
important target and model organism because it is one of the world's most
important grains and commodity crops, and it is closely related to corn, wheat,
barley, sugarcane, oats and rye. We are currently studying three fungi that
cause diseases in cereals, rice and broadleaf plants. We intend to study three
additional fungi that have commercial value for fermentation, human fungal
disease and natural product discovery. We believe we can use our GeneFunction
Factory to study the function of essentially every gene in these organisms.
Gene Discovery and Variant Generation
One constraint in gene function discovery has been the time consuming
nature of constructing gene variants. In gene discovery, libraries of DNA
fragments are constructed for an organism. The DNA fragments are sequenced and
altered to produce a gene variant. In plants, we produce two types of variants:
knock-out variants, in which we have modified the selected gene to under-
produce its encoded protein, and over-expression variants, in which we have
modified the selected gene to over-produce its protein. In fungi, we use
proprietary technology to activate or inactivate genes using specialized DNA
fragments that can be inserted into genes to modify the gene. The modified gene
is then placed into the fungal nucleus where it efficiently and precisely
replaces the normal gene. Using these proprietary technologies, we have
modified hundreds of plant genes and thousands of fungal genes.
Variant Analysis
Traditionally, the process of understanding the often-subtle difference
between a variant and normal organism has required years of experimentation. We
have solved this problem by rapidly and accurately collecting large volumes of
data for many different gene modifications with our automated workstations,
sample tracking and data collection software that constitute our GeneFunction
Factory. The three types of data that we collect for each variant are gene
expression profiles, metabolic profiles and phenotype profiles.
Gene Expression Profiling. Gene expression profiling provides a snapshot
of the genes expressed in an organism at a given time. By comparing gene
expression profiles of a variant organism to a normal organism, we gather
information about the function of the modified gene as well as the effect of
that gene on the expression of other normal genes. By determining how a
modified gene affects normal genes, we gain insight into biochemical pathways
of an organism.
Metabolic Profiling. Metabolic profiling provides a snapshot of the
chemicals in an organism's cell, including vitamins, minerals and other
biochemicals, at a given time. We are collaborating to develop a proprietary
method for extracting chemicals from an organism, which has traditionally been
the most time-consuming step in the metabolic profiling process. We detect and
measure these extracted chemicals using combinations of mass spectroscopy and
chromatography to separate them by size and electrical charge.
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Phenotype Profiling. Phenotype profiling is the measurement of physical
and chemical characteristics of an organism at one or more times during its
life cycle. Characteristics of our target and model organisms that are measured
include flowering time, plant height, plant weight, seed set, seed shape, leaf
shape, color reflectance, root density, nutrient utilization and appearance.
Different measurements, when taken at specified times, produce a phenotype
profile for a variant that can be compared to a phenotype profile for a normal
organism to help understand the function of the modified gene. We have
developed a proprietary method for obtaining a phenotype profile for an
organism that is an important part of our variant analysis.
Our FunctionFinder Bioinformatics System
Data Management. Laboratory researchers typically track and collect data
using notebooks, which makes it difficult to organize, store and access the
volumes of data generated. We are addressing the issue of data management by
developing a proprietary Laboratory Information Management System, or LIMS,
utilizing barcodes and other automated data collection devices to track samples
and store data. We have also developed technology to improve the organization,
formatting and storage of data collected from our variant analyses. Our LIMS
system allows us to record and manage the thousands of daily measurements
produced by our GeneFunction Factory.
Data Analysis. The challenge with the vast amounts of data that have been
collected and stored for so many genes is being able to retrieve and make sense
of relevant information to determine the function of genes. To meet this
challenge, we have developed our FunctionFinder bioinformatics system, which
incorporates information obtained from our variant analyses and from public
sources. FunctionFinder includes tools for storing, retrieving, analyzing and
mining data to create knowledge about genes. The FunctionFinder bioinformatics
system contains proprietary software that we have developed.
Market Opportunities
By determining the function of genes in Arabidopsis, rice and six
filamentous fungi, we believe that we and our strategic partners will be able
to develop novel products in four major sectors of the global economy. We have
focused our initial efforts on generating gene function information that can be
used to develop crop and nutrition products. In the future, we intend to use
our GeneFunction Factory to discover gene function information on an industrial
scale that can be used to develop human health and industrial products. Our
target sectors are:
<TABLE>
<CAPTION>
Crop
Production Nutrition Human Health Industrial Products
---------- --------- ------------ -------------------
<S> <C> <C> <C>
Herbicides Additives Anti-Fungals Fermentation
Fungicides Botanicals Nutraceuticals Fiber
Fertilizers Foods Pharmaceuticals Industrial Enzymes
Seeds Health Foods Vaccines Specialty Chemicals
Crop Outputs
</TABLE>
Our near-term strategy in these sectors is to establish strategic
alliances with leading companies in order to develop commercial products. To
date, we have entered into strategic alliances with Bayer to develop novel
herbicides and with Monsanto to develop crop outputs and nutritional and human
health products.
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Crop Production
The crop production sector consists of crop inputs and crop outputs.
Herbicides, fungicides, fertilizers and seeds are examples of crop inputs.
Harvested grain, vegetables and fiber are examples of crop outputs. We intend
to utilize the information derived from our GeneFunction Factory to develop
commercial products, independently or with strategic partners, in the following
areas:
Crop Inputs
Herbicides. Herbicides are chemicals that kill weeds that cause
substantial crop loss. The herbicide market is a mature market in which
innovative products have historically been introduced only about once per
decade. In 1998, global sales of herbicides were approximately $15 billion,
with Roundup(R) being the leading product. While there are many herbicides
on the market today, there is still a need for new types of products. For
example, there is a need for a herbicide that can be applied at the same
time seeds are planted, remains active in the field for several weeks, is
environmentally friendly and kills a broad spectrum of weeds quickly.
Conventionally, researchers have discovered new herbicide products by
spraying various chemicals on weeds in the hope of finding a chemical that
kills weeds without killing crops. Once a promising chemical is discovered,
researchers use labor-intensive genetics, physiology and biochemistry
techniques to determine the protein in the weed that is affected by the
chemical. This conventional approach is expensive and slow and has a low
success rate. Typically, 80,000 chemicals must be screened to find a
commercial product.
We believe our GeneFunction Factory may provide new herbicide targets
for chemical screening faster and more economically than the conventional
method. As part of our collaboration with Bayer, we use our GeneFunction
Factory to identify Arabidopsis genes that may be promising targets for new
herbicides. We then produce the proteins encoded by these promising genes
in quantities that are sufficient for large-scale high-throughput chemical
screening for herbicides. Finally, our assay group produces assays
containing those proteins that can be used to screen for new herbicides. By
narrowly focusing our discovery efforts on finding chemicals that disable
specific genes within weeds, we believe that, together with our strategic
partners, we may be able to discover environmentally friendly herbicides
more efficiently than our competition.
Fungicides. Fungal plant diseases impose greater costs upon food growers
than any other plant disease. Chemicals used to control these diseases are
called fungicides. The global market for fungicides, such as Tilt(R) and
Ridomil PC(R), was approximately $6 billion in 1998. There is a need for
better and safer fungicides, particularly those that treat currently
untreatable fungal diseases or fungal strains that become resistant to
existing fungicides.
As with herbicides, researchers conventionally have discovered
fungicides by spraying various chemicals on crops in the hope of finding a
chemical that inhibits fungal infections on crops without killing the crops
themselves. Until recently, a genomics-based approach has not been used for
fungicide discovery. We believe our GeneFunction Factory will provide
potential new fungicide targets for screening chemicals faster and more
economically than the conventional method. We are currently examining three
filamentous fungi, including Magnaporthe grisea, a rice pathogen, and
Mycosphaerella graminicola, a wheat pathogen. We plan to identify genes in
these fungi that are essential for the survival of the fungi, but not the
crop. We believe that these genes will provide promising targets for
chemical screening using assays produced by us or our strategic partners.
Fertilizers. Fertilizers are products that are applied to the soil to
provide crops with the nutrients needed to produce high yields. The primary
ingredients of most fertilizers are nitrogen, potassium and phosphorus. The
global market for fertilizers in 1998 was about $50 billion. In general,
current product
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discovery efforts for fertilizers are focused on blending or reformulating
known fertilizer compounds and reducing production costs. Plants are
limited in their ability to utilize fertilizers. Excess fertilizer enters
the environment either as run-off or ground water seepage, both of which
are major environmental concerns. We believe that products that enhance
fertilizer utilization will dramatically improve the economics and lessen
environmental concerns of crop production because growers will be able to
use less fertilizer to produce the same yields. We believe that our
GeneFunction Factory may allow us to identify genes in crops that improve
their ability to utilize fertilizer.
Seeds. Typical commercial seeds include hybrid corn seeds, registered
wheat seeds and vegetable seeds. The global market for commercial seeds in
1998 was over $15 billion. Currently, there is a need for new commercial
seeds that can increase crop yields and improve the quality of foods and
fibers. One commercial seed that has successfully increased crop yield
while reducing the use of pesticides is the Bollgard(TM) cottonseed. Its
developers inserted a microbial gene into cottonseed that encodes a protein
that kills the cotton budworm, a significant pest of cotton. The resulting
seed produces a high yield of cotton while avoiding both the cost and
negative environmental impact of budworm pesticide.
Historically, research in the seed industry has been dominated by time-
consuming plant breeding techniques. Recently, the seed industry has
invested heavily in the genetic modification of crops, which has resulted
in a number of commercialized products and products in development. The
seed industry now has the technology to efficiently insert genes into
seeds, and products such as the Bollgard cottonseed have demonstrated the
commercial viability of this technology. We believe that there is a market
need for a technology that can rapidly generate information about the
function of a large number of genes and identify those genes that code for
commercially valuable crop traits that could then be bred or inserted into
crops. Examples of valuable crop traits are disease resistance, vitamin
content and resistance to herbicides and fungicides.
Crop Outputs
The output side of crop production consists of harvested crops. The
global value of harvested crops in 1998 was approximately $700 billion with
additional value created through crop processing. While there are more than
170 crops grown worldwide, only a few key crops, such as corn, soybean,
rice, wheat, potatoes and tomatoes, account for most of the value. Two
major market opportunities involve improving processing and product
attributes. An example of a processing improvement is a reduction in the
soluble fiber present in wheat. Pasta made from this type of wheat would be
faster drying than ordinary pasta and could therefore be produced and
packaged at a reduced cost. An example of an improved product attribute is
an increased amount of oil in each ton of processed canola. We believe that
our GeneFunction Factory may allow us to quickly and efficiently identify
novel genes that control processing and product attributes.
Nutrition
We believe that advances in functional genomics will make it possible for
companies to enhance the nutritional content of foods and develop foods that
can reduce the risk of disease in consumers. The nutrition market includes
additives, botanicals, foods and health foods. Product examples include
cholesterol-reducing margarines and nutritionally enhanced breakfast cereals.
It has been estimated that the size of the market for enhanced nutrition foods
will reach $15 billion by 2010 and $500 billion by 2020. Because many foods and
additives come from plants and microbes, we believe our GeneFunction Factory
can be used to develop food products with improved nutritional content.
Food production companies are exploring ways to create foods with
pharmaceutical benefits. For example, in January 2000, DuPont's Protein
Technologies International and General Mills, Inc. announced plans to
collaborate in developing and marketing functional foods containing proprietary
soy technology consistent with the FDA approved health claim that there is an
association between consumption of soy
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protein and the reduced risk of coronary heart disease. According to General
Mills, sales for soy foods are expected to top $2.5 billion in 2000 and grow at
a 15% to 20% compound annual rate over the next five years.
We believe that our GeneFunction Factory may, in the future, generate gene
function information that could be used to develop food products that contain:
. elevated levels of vitamins and essential amino acids in foods;
. novel proteins useful in the prevention or treatment of medical
conditions;
. elevated levels of compounds that are present in plants and reduce
serum cholesterol levels; and
. reduced levels of saturated fats.
Human Health
We are focusing our efforts in the human health sector on the discovery of
novel anti-fungal targets for drug discovery and the use of our model organisms
and our FunctionFinder bioinformatics system to understand the genetic basis of
human disease. There is a need for novel anti-fungals to treat immune-
compromised individuals coping with AIDS, recovering from transplant surgery or
undergoing cancer therapy.
We believe that the model organisms that we are studying may be useful in
discovering novel gene targets for the prevention and treatment of human
disease. By using the sequence and function information of each gene in our
model organisms and identifying the similarity of these known genes to human
genes using our FunctionFinder bioinformatics system, we may provide a powerful
tool for human drug discovery.
Industrial Products
Within the industrial products sector, we are targeting the markets for
industrial enzymes, fermentation, fiber and specialty chemicals. Proteases for
laundry detergent, paper and plastic are examples of products from such
markets. These industries are capital intensive, and research has focused on
improving current products. There is a need for industrial products that are
novel, effective, inexpensive and environmentally friendly. To fill this need,
major companies in each of these industries have recently made significant
investments in biotechnology. For example, a new plastic made from natural
plant chemicals is being developed and is expected to be as versatile and
strong as some common synthetic plastics, yet less expensive and more
biodegradable.
Since many industrial products are derived from biological sources, we
believe that by understanding how gene function dictates product
characteristics, we may be able to develop information that will significantly
reduce production costs as well as lead to the creation of novel products. We
believe that the use of our GeneFunction Factory may lead to the discovery of
gene function information useful for the development of various industrial
products, including:
. improved or novel fermentation products, such as enzymes and specialty
chemicals;
. improved fiber products such as wood, plastics, cotton and linen; and
. improved industrial processes such as wastewater treatment.
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Our Strategy
Our goal is to be the leading provider of gene function information to
accelerate the commercialization of improved applications in crop production,
nutrition, human health and industrial products. The key elements of our
strategy are to:
Determine the Function of Genes in Our Target and Model Organisms.
Using our GeneFunction Factory, we intend to determine the function of
essentially every gene in each of our target and model organisms and
incorporate this data into our FunctionFinder bioinformatics system. We intend
to establish our FunctionFinder bioinformatics system as the definitive source
of gene function information for these target and model organisms, as well as
other target organisms related to our model organisms.
Continue to Develop Our GeneFunction Factory.
In order to expand our capability in the industrialization of gene
function determination, we will continue to develop our GeneFunction Factory.
In addition to internal efforts to further streamline our industrialization
process, we plan to license and acquire technologies that complement our core
capabilities. We intend to utilize our partners' expertise and information to
expand our FunctionFinder bioinformatics system and improve the capabilities of
our GeneFunction Factory. In addition to expanding our technology, we plan to
expand our facilities, equipment and personnel in order to increase
productivity.
Develop Products Both with Strategic Partners and Internally.
We intend to establish additional strategic alliances with leading
companies in the crop production, nutrition, human health and industrial
products industries. We seek to receive short-term financial support to advance
our internal discovery and development efforts, as well as generate long-term
revenues from milestone and royalty payments on any commercialized products. We
also intend to develop products independently when opportunities arise.
Focus Our Development Efforts on Large Market Opportunities.
We intend to utilize our GeneFunction Factory to develop products in the
crop production, nutrition, human health and industrial products sectors. We
believe there are substantial opportunities in these sectors for novel products
that can be efficiently developed with information from our GeneFunction
Factory. We intend to focus our development efforts on large opportunities
within these sectors.
Pursue Intellectual Property Protection for Our GeneFunction Factory and Gene
Function Information.
We intend to continue to aggressively pursue patents for our discovery
methods, our research platform and aspects of our bioinformatics system.
Additionally, we intend to aggressively pursue patents on discoveries of novel
genes and gene functions. To date, we have rights to 30 U.S. patent
applications, relating to our technologies and genes. We intend to protect and
build on our existing patent portfolio and also rely on trade secrets to
protect our proprietary technologies. Where necessary, we will seek licenses to
implement aspects of our research platform subject to ownership rights of
others.
Strategic Alliances
As part of our business strategy, we have established strategic alliances
with pharmaceutical and agricultural companies in the fields of herbicide
development, crop production and nutrition. Assuming our research efforts for
existing strategic alliances are continued for the full research terms under
those
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agreements, we will have total committed funding of approximately $56 million
from strategic partners. In addition, performance fees, milestone payments and
payments made in connection with the exercise of options to extend these
strategic alliances could generate as much as an additional $134 million. We
will also earn sales royalties and product milestones in the event that any of
our strategic alliances yield commercial products. To date, we have entered
into significant strategic alliances with Bayer and Monsanto.
Bayer
In September 1998, we entered into a collaboration research agreement with
Bayer for the development of new chemical herbicides. Under the terms of the
agreement, we have agreed to use our GeneFunction Factory to identify
Arabidopsis genes that may be targets for herbicide discovery. We will provide
exclusively to Bayer assays based on these targets for use in high throughput
screening for herbicides, as well as access to customized Arabidopsis-based
releases of FunctionFinder for use in herbicide discovery. The collaboration
has an initial term of three years, and Bayer has the option to extend it for
two additional years. The agreement provides that we are entitled to committed
research funds, additional fees based on the number of assays we deliver and
our success in delivering customized releases of FunctionFinder, and milestone
and royalty payments for any products that might emerge from the collaboration.
We have achieved two milestones in our collaboration research agreement
with Bayer. These milestones include the delivery of the first assay for high
throughput screening and the delivery of release 1.1 of a customized
FunctionFinder bioinformatics system for discovery of novel herbicide targets.
Monsanto
In November 1999, we entered into a collaboration agreement with Monsanto
to provide certain Arabidopsis-based gene function data for the development of
crop inputs and outputs. Under the terms of this agreement, Monsanto is to
provide us with thousands of genes from Arabidopsis and other organisms. We are
to perform a functional analysis of such genes for Monsanto using our
GeneFunction Factory. Monsanto will either own or have exclusive licenses to
certain patents that result from this project. The collaboration has an initial
term of six years, and Monsanto has the option to extend it for up to two years
and nine months. Monsanto may expand the collaboration either by increasing the
number of genes that we are to analyze in Arabidopsis or by requiring us to
analyze gene function in a second model, or both, for additional research and
possible milestone payments. The agreement provides that we are entitled to
committed research funds, additional fees based on the number of genes analyzed
and royalty payments for any products that might emerge from the collaboration.
LION bioscience
We have entered into a binding letter of intent with LION bioscience to
negotiate an agreement for the co-development and co-marketing of
bioinformatics software products for analyzing gene function. The companies
initially intend to focus on the development of metabolic profiling informatics
tools, and later develop improved phenotype profiling tools. We cannot
guarantee that we will successfully negotiate a definitive agreement with LION
bioscience.
Research and Development
Our research and development efforts are directed towards the development
of our GeneFunction Factory, including our FunctionFinder bioinformatics system
and research activities in connection with our strategic alliances and our
government grant. We spent approximately $72,000 in 1997, approximately $3.6
million in 1998 and approximately $7.5 million in 1999 on our research and
development efforts.
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Competition
We face competition from functional genomics companies. We expect
competition to intensify in genomics research as technology advances are made
and become widely known. Genomic technologies have undergone and are expected
to continue to undergo rapid and significant change. Our future success will
depend in large part on maintaining a competitive position in the genomics
field, and particularly in the functional genomics field. Rapid technological
development by us or others may result in products or technologies becoming
obsolete or noncompetitive before we recover the expenses we incur in
connection with our development. Products offered by us and/or our strategic
partners could be made obsolete by less expensive or more effective crop
production, nutrition enhancement, human health and industrial application
product development technologies, including technologies that may be unrelated
to genomics. We may not be able to make the enhancements to our technology
necessary to compete successfully with newly emerging technologies.
Any products that we may develop alone or in collaboration with others
will compete in highly competitive markets. In the specific markets in which we
apply or intend to apply our FunctionFinder bioinformatics system, we face
competition from plant genomics, pharmaceutical, agrochemical and biotechnology
companies. Many of our existing and potential competitors have substantially
greater financial resources, research and development staffs, facilities,
manufacturing and marketing experience, distribution channels and human
resources than we do. Many of these competitors have achieved substantial
market penetration in the crop enhancement, nutrition, human health and
industrial product sectors. We have entered into strategic alliances with Bayer
and Monsanto in the crop production and nutrition sectors, but have not yet
entered into any strategic alliances or commenced development work in the human
health and industrial products sectors. Moreover, our competitors may obtain
patent protection or other intellectual property rights that could limit our
rights or our strategic partners' ability to use our technologies or
commercialize products in the crop production, nutrition, human health and
industrial products sectors.
Our ability to compete in the human health sector and the industrial
products sector may be limited by our exclusive use of plant and fungal model
organisms. We believe that our ability to compete in the human health sector
will depend on the degree to which information we develop on plant gene and
pathway function is useful in developing information about how similar human
genes and pathways code for human pathology. Competing companies that use model
organisms with greater similarities to human genes, such as mice, as well as
companies that do direct studies of human populations, may have a substantial
advantage in developing products for humans. Similarly, we believe that as it
relates to industrial products, our FunctionFinder bioinformatics system will
only be useful in the development of products that are plant or fungal based,
such as enzymes and alcohols.
Government Regulation
Regulation of Development and Commercialization of Agricultural Products
Our efforts, alone or together with our strategic partners, to develop and
commercialize genetically enhanced nutrition and crop products will be subject
to federal, state, local and foreign government regulations and regulatory
agencies. These regulations and agencies may prevent us and our strategic
partners from developing and marketing nutrition and crop product candidates in
a timely manner or under technically or commercially feasible conditions, and
may impose expenses, delays and other impediments to our efforts to develop
such product candidates.
The FDA has adopted the policy that it will apply the same regulatory
standards to genetically modified foods that it applies to foods developed
through traditional plant breeding. This means that a food or food ingredient
developed by genetic modification must meet the same rigorous safety standards
under the Federal Food, Drug, and Cosmetic Act as other food products. Under
this policy, the FDA will
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ordinarily only require premarket review of genetically modified foods if they
raise significant safety concerns, such as elevated levels of toxicants or the
presence of allergens, or if they are deemed to contain a food additive.
Premarket approval as food additives for products from introduced genes is
required only if the product differs substantially in structure and function
from similar naturally occurring substances. Also, the FDA does not currently
require that genetically modified products be labeled as such, as long as they
are as safe and have the same nutritional characteristics as conventional
products. The FDA is considering the adoption of a Premarket Notification
procedure, pursuant to which our strategic partners and we would have to inform
the FDA when we intend to commercialize a genetically modified food product and
that our internal safety procedure is complete.
The United States Department of Agriculture, or USDA, prohibits
genetically modified plants from being grown and transported except pursuant to
an exemption or under special controls. In general, companies apply for an
exemption to facilitate product development because the special controls are
burdensome. However, we can not guarantee that the products we develop will
qualify for such an exemption.
Regulatory policies for genetically modified nutrition and crop products
vary widely, are currently the subject of intense political controversy, and
may change substantially in the near future. Accordingly, labeling, premarket
notification or other restrictions in foreign countries where we and our
strategic partners may want to develop and/or market genetically modified
product candidates may impose additional expenses and delays on such product
candidates or may make commercialization in such countries impracticable.
Our future nutrition and crop product candidates may also be subject to
other regulations and regulatory agencies, such as the Occupational Safety and
Health Act, the Toxic Substances Control Act, the National Environmental Policy
Act, other federal water, air and environmental quality statutes, import/export
control legislation and other laws. Any product candidates relating to
pesticides will be subject to the jurisdiction of the Environmental Production
Agency, or EPA.
Regulation of Drug Development and Commercialization
Prior to the marketing of any new drug developed by us or our strategic
partners, that new drug must undergo an extensive regulatory review process in
the United States and other countries. This regulatory process, which includes
preclinical studies and clinical trials, and may include post-marketing
surveillance of any compound to establish its safety and efficacy, can take
many years and require the expenditure of substantial resources. Data obtained
from preclinical studies and clinical trials are subject to varying
interpretations that could delay, limit or prevent marketing. Delays or
rejections may also be encountered based on changes in government agency
policies for drug review. Delays in obtaining marketing clearance could delay
the commercialization of any drugs or diagnostic products developed by us or
our strategic partners, impose costly procedures on our strategic partners'
activities, diminish any competitive advantages that our strategic partners may
attain and lessen our potential royalties.
Even if regulatory clearance is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may result in withdrawal of the product from the
market, which could reduce our revenue sources and hurt our financial results.
No product resulting from the use of our FunctionFinder bioinformatics
system has been approved for commercialization in the United States or
elsewhere. In addition, no investigational new drug application has been
submitted by us our any of our strategic partners for any such product
candidate. We cannot be certain if or when we or our strategic partners will
submit an application for regulatory review, or whether we or our strategic
partners will be able to obtain marketing approval for any products on a timely
basis, if at
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all. If we and our strategic partners fail to obtain required governmental
approvals, it will prevent us from marketing drugs or diagnostic products. The
occurrence of any of these events may cause our business, financial condition
and results of operations to suffer.
Environmental Regulation
Our research and development activities involve the controlled use of
hazardous materials and chemicals. We are subject to federal, state and local
laws and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. The risk of accidental contamination or
injury from these materials cannot be eliminated. In the event of an accident,
we could be held liable for any damages that result, and any liability could
exceed our resources.
Intellectual Property
We seek U.S. and foreign patent protection for major components of our
FunctionFinder bioinformatics system, including elements of:
. our gene sequencing, phenotype analysis, gene expression profiling,
metabolic profiling and other methods of determining gene function;
. our FunctionFinder bioinformatics system technologies; and
. the gene function resulting from our technology.
We also rely on trade secret protection for certain of our confidential and
proprietary information, and we use license agreements both to access external
technologies and assets and to convey certain intellectual property rights to
others. Our commercial success will be dependent in part on our ability to
obtain commercially valuable patent claims and to protect our intellectual
property portfolio. We have filed thirty (30) U.S. patent applications, which
are subject to rights that we have granted to various collaborators and
development partners. We have filed sixteen (16) trademark applications in the
United States and have received allowances on six (6) of them.
The patent positions of life science companies are generally uncertain and
involve complex legal and factual questions. Our business could be hurt by any
of the following:
. our pending patent applications may not result in issued patents;
. the claims of any issued patents may not provide meaningful
protection;
. we may be unsuccessful in developing additional proprietary
technologies that are patentable;
. our patents may not provide a basis for commercially viable products
or provide us with any competitive advantages and may be challenged by
third parties; and
. others may have patents that relate to our technology or business.
In addition, patent law relating to the scope of claims in the technology
field in which we operate is still evolving. The extent of future patent
protection is uncertain. In particular, we are aware of several groups that are
attempting to identify and patent gene fragments and full-length genes, both
characterized and uncharacterized. There is substantial uncertainty regarding
the possible patent protection for gene fragments or genes without known
function or correlation with specific functions. Furthermore, others may
independently develop similar or alternative technologies, duplicate any of our
technologies, and if patents
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are licensed or issued to us, design around the patented technologies licensed
to or developed by us. In addition, we could incur substantial costs in
litigation if we are required to defend ourselves in patent suits brought by
third parties or if we initiate such suits.
We are aware of a number of U.S. patents and patent applications and
related foreign patents and patent applications owned by third parties relating
to gene sequences and the analysis of gene function. These other technologies
may provide third parties with competitive advantages over us and may hurt our
business. In addition, some third party patent applications contain broad
claims, and it is not possible to determine whether or not such claims will be
narrowed during prosecution and/or will be allowed and issued as patents, even
if such claims appear to cover prior art or have other defects. An owner or
licensee of a patent in the field may threaten or file an infringement action
and we may or may not prevail in any such action. The cost of defending an
infringement action may be substantial, which could significantly increase our
expenses and increase our losses. Furthermore, required licenses may not be
made available on commercially viable terms, if at all. Failure to obtain any
required license could prevent us from utilizing or commercializing one or more
of our technologies or gene-related products.
We have applied, and intend to make additional applications, for patent
protection for:
. methods relating to gene sequencing, phenotype analysis, gene
expression profiling, metabolic profiling and other methods for
determination of gene function;
. bioinformatic technologies;
. function specific patterns of gene expression we identify; and
. individual genes and targets we discover.
Such patents may include claims relating to novel genes and gene fragments and
to novel uses for known genes or gene fragments identified through our
discovery programs. We may not be able to obtain meaningful patent protection
for our discoveries; even if patents are issued, the scope of the coverage or
protection they would afford is uncertain. Failure to secure such meaningful
patent protection would endanger our competitive position.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests, including
several elements of our FunctionFinder bioinformatics system. In addition, we
are developing a proprietary index of plant and fungal gene and gene fragment
sequences which we update on an ongoing basis. Some of this data will be the
subject of patent applications, whereas other data will be maintained as
proprietary trade secret information. We have taken security measures to
protect our proprietary know-how and technologies and confidential data and
continue to explore further methods of protection. While we require all
employees, consultants and strategic partners to enter into confidentiality
agreements, we cannot be certain that proprietary information will not be
disclosed, that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets, or that we can meaningfully protect our trade secrets. In the case of
arrangements with our strategic partners that require the sharing of data, our
policy is to make available to our strategic partners only such data as is
relevant to our agreements with such strategic partners, under controlled
circumstances, and only during the contractual term of those agreements, and
subject to a duty of confidentiality on the part of our customer. However, such
measures may not adequately protect our data. Any material leak of confidential
data into the public domain or to third parties may cause our business,
financial condition and results of operations to be harmed.
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We are a party to various license agreements that give us rights to use
technologies and biological materials in our research and development
processes. We may not be able to maintain such rights on commercially
reasonable terms, if at all. Failure by us to maintain such rights could harm
our business.
Employees
As of February 15, 2000, we had 102 full-time employees, of whom 30 hold
Ph.D. degrees. Of our total workforce, 76 are engaged in research and
development activities and 26 are engaged in business development, finance and
administration. None of our employees is represented by a collective bargaining
agreement. We believe that our relations with our employees are good.
Facilities
We occupy approximately 48,000 square feet of single-story laboratory and
office space in Research Triangle Park, North Carolina. We also have access to
greenhouse facilities located at North Carolina State University. All of our
facilities are covered by short-term leases renewable at our option.
two-story laboratory and office complex covering approximately 54,000 square
feet and a single-story plant facility incorporating growth rooms and
greenhouse space covering approximately 32,000 square feet. Both facilities are
scheduled to be completed by the end of 2000. We also have an option to require
the real estate investment trust to develop and finance an additional two-story
laboratory and office facility covering approximately 50,000 square feet on the
same site.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding our executive
officers and directors as of February 10, 2000.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John A. Ryals, Ph.D. ..... 45 Chief Executive Officer, President and Director
Henry P. Nowak, Esq. ..... 44 Vice President of Intellectual Property,
General Counsel and Secretary
Richard E. Kouri, Ph.D. .. 56 Vice President of Business Development
Ian A.W. Howes............ 41 Vice President of Finance and Operations,
Chief Financial Officer and Treasurer
Athanasios Maroglou,
Ph.D. ................... 41 Vice President of Project Management
Scott J. Uknes, Ph.D. .... 39 Vice President of Business Strategy
John Hamer, Ph.D. ........ 42 Vice President of Research
Craig Liddell, Ph.D. ..... 41 Vice President of Informatics
G. Steven Burrill (1)..... 55 Director and Chairman of the Board
Dennis Dougherty (1)...... 52 Director
Robert Goodman, Ph.D.
(2)...................... 54 Director
Terrance McGuire (2)...... 43 Director
Michael Summers (2)....... 57 Director
Henri Zinsli, Ph.D. (1)... 58 Director
</TABLE>
- ------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
John A. Ryals, Ph.D. co-founded our company in September 1997 and has
served as our Chief Executive Officer and President since inception. From
October 1996 to September 1997, Dr. Ryals was Vice President of Research for
Novartis Crop Protection, Inc. and Head of the Biotechnology and Genomics
Center of Novartis in Research Triangle Park, North Carolina, where he was
responsible for worldwide biotechnology and genomics research and target-based
discovery. Dr. Ryals has 15 years of experience in agricultural biotechnology
working in various positions at the Agricultural Biotechnology Research Unit of
Ciba-Geigy Corporation, including Head of Agricultural Biotechnology Research
and Vice-President of Biotechnology at Ciba Seeds, a position which he held
from 1993 to 1996. Dr. Ryals received his Ph.D. in Molecular Biology from the
University of Texas at Dallas in 1982 and is an Adjunct Professor at North
Carolina State University.
Henry P. Nowak, Esq. has been our Vice President of Intellectual Property,
General Counsel and Secretary since May 1998. From March 1995 to April 1998,
Mr. Nowak served as the legal and patent counsel at Novartis Pharmaceuticals
and Systemix. Previously, he served as legal and patent counsel for Somatogen,
Amgen, Ciba-Geigy Agriculture and Schering-Plough. He is a member of three
state bars and the Federal Patent Bar. Mr. Nowak received his joint J.D./M.B.A.
degree from Florida State University in 1986 and a M.S. in Biochemistry from
Utah State University in 1981.
Richard E. Kouri, Ph.D. has served as our Vice President of Business
Development since June 1999. From January 1997 to January 1999, he was Senior
Vice President of Research at VIMRX Pharmaceuticals, Inc. and President and
Chief Executive Officer of VIMRX Genomics, Inc., a subsidiary of VIMRX
Pharmaceuticals, Inc. From June 1994 to January 1997, he was Chief Operating
Officer, Chief Technical Officer and Senior Vice President at Gene Logic, Inc.
Dr. Kouri received the Ph.D. degree in Radiation Biology from the University of
Tennessee and was a post-doctoral fellow at the Roche Institute of Molecular
Biology.
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Ian A. W. Howes has served as our Vice President of Finance and Operations
and Chief Financial Officer and Vice President of Finance and Operations since
January 1999. From February 1998 to December 1998, Mr. Howes was Chief
Financial Officer at Analytika, Inc., a provider of pharmaceutical data mining
software and services. From October 1995 to January 1998, he was Chief
Financial Officer at American Care Communities. From May 1991 to August 1995,
Mr. Howes was Chief Financial Officer at EnSys, Inc., a publicly traded
biotechnology company. Mr. Howes received his M.B.A. from the Kenan-Flagler
Business School at the University of North Carolina at Chapel Hill in 1997 and
is a Chartered Accountant in England and Wales.
Athanasios Maroglou, Ph.D. has served as our Vice President of Project
Management since October 1999. From 1985 to 1999, Dr. Maroglou was Research and
Development Manager at E. I. DuPont De Nemours & Company. As Research and
Development Manager, he was responsible for discovery and commercialization of
new herbicides and for product support and renewal. In his 14 years at DuPont,
Dr. Maroglou also served as Process Development Manager, Operations Supply
Chain Manager and Manufacturing Area Manager. He received his Ph.D. in Chemical
Engineering at the University of Birmingham, England.
Scott J. Uknes, Ph.D. co-founded our company in September 1997 and has
served as our Vice President of Business Strategy since March 1999. From
inception to March 1999, he served as our Vice President of Fungal Research.
From 1990 to September 1997, Dr. Uknes held various positions at Ciba-Geigy
Corporation, including Research Director for the Seeds Disease Control
projects, where he led a research program aimed at meeting the market need for
disease resistant crops. Dr. Uknes is an adjunct professor at North Carolina
State University. Dr. Uknes received his Ph.D. in Plant Molecular Biology from
Washington University, St. Louis, Missouri, in 1990.
John Hamer, Ph.D. has served as our Vice President of Research since
February 2000. From March 1999 to February 2000, Dr. Hamer served as our
Director of Microbial Research. From September 1998 to March 1999, he served as
our Director of Fungal Biology. From September 1989 to September 1998, Dr.
Hamer served as Professor of Biological Sciences and Adjunct Professor of
Microbiology and Immunology at Purdue University. While at Purdue, Dr. Hamer
was awarded the David and Lucille Packard Fellowship and the National Science
Foundation Presidential Faculty Fellowship. He is currently editor-in-chief of
the academic press journal Fungal Genetics and Biology and currently serves on
the NSF-Microbial Genetics Study Panel. Dr. Hamer received his Ph.D. in
Microbiology from the University of California, Davis in 1987.
Craig Liddell, Ph.D. has served as our Vice President of Informatics since
February 2000. Since July 1998 through February 2000, Dr. Liddell served as our
Director of Informatics. Dr. Liddell has been an Adjunct Professor of Plant
Pathology and since 1991 he has been a Principal Investigator at the Computing
Research Laboratory at New Mexico State University. From July 1996 to July
1998, Dr. Liddell was an Associate Professor of Plant Pathology and from 1989
to July 1996, Dr. Liddell was an Assistant Professor of Plant Pathology at New
Mexico State University. Dr. Liddell was a Postdoctoral Research Scientist in
the Departments of Plant Pathology at the University of California, Davis and
the University of Wisconsin - Madison. He is the senior editor of the journal
Phytopathology. Dr. Liddell received his Ph.D. in Plant Pathology from the
University of Sydney, Australia in 1986.
G. Steven Burrill has been a member of our board of directors since March
1999, and has served as the chairman of our board of directors since December
1999. Mr. Burrill is the Chief Executive Officer of Burrill & Company, a
private merchant bank focused on life science companies, which he founded in
1996. Prior to starting Burrill & Company, Mr. Burrill spent 27 years with
Ernst & Young, including the last 17 years as partner of the firm. Mr. Burrill
received his BBA degree from the University of Wisconsin - Madison. Mr. Burrill
currently serves on the boards of directors of DepoMed, Inc. and Transgene SA.
41
<PAGE>
Dennis Dougherty has been a member of our board of directors since
February 1998. Since October 1984, Mr. Dougherty has been a General Partner of
Intersouth Partners, a series of venture capital funds which invests in life
science and technology companies throughout the Mid-Atlantic and Southeast. Mr.
Dougherty currently serves on the boards of directors of six private life
science companies, which include Xanthon, Inc., Cogent Neuroscience, Inc.,
Biolex, Inc., Insmed Pharmaceuticals, Inc. and Encelle, Inc.
Terrance McGuire has been a member of our board of directors since
February 1998. Mr. McGuire is a founder and has been a general partner of
Polaris Venture Funds, Inc., a venture capital fund, since March 1996. Since
1992, he has served as a general partner of Burr, Eagan, Deleage and Co., a
venture capital firm, and since 1989 he has served as general partner of Beta
Partners, a venture capital firm. He is also a member of the board of directors
of Akamai Technologies, Inc., Aspect Medical Systems, Inc., Inspire
Pharmaceuticals, Inc., Wrenchead.com, Inc. and deCODE Genetics, Inc. Mr.
McGuire received his B.S. in Physics and Economics from Hobart College, his
M.S. in Engineering from Dartmouth College and his M.B.A. from the Harvard
Business School.
Michael Summers has been a member of our board of directors since March
1998. Since October 1990, Mr. Summers has been a managing partner of Summers
Associates, a specialized international business development organization. Mr.
Summers is also managing director of Floranova Limited. He received his B.S. in
Botany from the University of Exeter in 1964.
Robert M. Goodman, Ph.D. has been a member of our board of directors since
June 1998. Since September 1991, Dr. Goodman has been a Professor of Plant
Pathology at the University of Wisconsin-Madison. Dr. Goodman is also a member
of the Department of Microbiology graduate program, the interdepartmental
program in plant genetics and plant breeding, the Institute of Environmental
Studies, the graduate program in cellular and molecular biology and the
biotechnology training program. Dr. Goodman received a Ph.D. in plant virology
from Cornell University in 1973.
Henri Zinsli, Ph.D. has been a member of our board of directors since June
1998. Since 1997, Dr. Zinsli has served as the Chairman of Discovery
Technologies Ltd. in Allschwil, Switzerland, and since 1999, he has served as
the Chief Executive Officer of Discovery Technologies Ltd. Since 1998, he has
served as the Chairman of Zeptosens Inc. in Witterswil, Switzerland. He is also
a non-executive Director of Plasmon, PLC, and Royston, UK, in positions which
he has held since 1996. Until 1996, he was the head of Corporate Business
Development at Ciba-Geigy Ltd. in Basel. Dr. Zinsli has over 30 years of
experience at Ciba-Geigy Ltd. He received his Dr. OEC in economics at the
University of St. Gall, Switzerland in 1998.
Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers. No director has
a contractual right to serve as a member of our board of directors.
Scientific Advisory Board
The following individuals are members of our Scientific Advisory Board:
Michael Bevan, Ph.D. heads the Molecular Genetics Department at the John
Innes Institute in the United Kingdom. Dr. Bevan also leads the European arm of
the Arabidopsis genome sequencing effort.
Joseph R. Ecker, Ph.D. is Professor of Plant Biology at the Salk Institute
in La Jolla California. In addition, he leads the U.S. Arabidopsis genome
sequencing effort.
Luis Herrera-Estrella, Ph.D. is Professor of Plant Genetic Engineering in
the Department of Genetics, Centro de Investigacion y Estudios Avanzanidos del
I.P.N.
42
<PAGE>
Mark Johnston, Ph.D. is Professor of Genetics at Washington University
School of Medicine. Dr. Johnston led the U.S. effort to sequence the genome of
Baker's yeast.
Sharon R. Long, Ph.D. is a Howard Hughes Medical Institute Investigator
and Professor in the departments of Biological Sciences and Biochemistry at
Stanford University.
Ingo Potrykus, Ph.D. is Professor of Plant Sciences at the Institute of
Plant Sciences, Swiss Federal Institute of Technology in Zurich, Switzerland.
A. Ian Scott, Ph.D. is Distinguished Professor of Chemistry at Texas A&M
University and is the C.J. Davidson Chair in Science. He is a Fellow of the
Royal Society and the American Association for the Advancement of Science.
Bruce C. Weir is the William Neal Reynolds Professor of Statistics and
Genetics at North Carolina State University.
Board Composition
Upon completion of this offering, our board of directors will consist of
seven members divided into three classes, with two members in two of the
classes and three members in the third class. Each year, the stockholders will
elect the members of one of the three classes to a three-year term of office.
Upon completion of this offering, and will serve in the class
whose term expires in 2001; and will serve in the class whose
term expires in 2002; and , and will serve in the
class whose term expires in 2003.
Board Committees
Audit Committee. Our audit committee, consisting of Dr. Goodman, Mr.
McGuire and Mr. Summers, reviews our internal accounting procedures and the
services provided by our independent auditors.
Compensation Committee. Our compensation committee, consisting of Mr.
Burrill, Mr. Dougherty and Dr. Zinsli, reviews and recommends to our board of
directors the compensation and benefits of all our officers and executive
management and establishes and reviews general policies relating to
compensation and benefits of our employees.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee has at any time been one
of our officers or employees. No member of the compensation committee serves a
member of the board of directors or compensation committee of any entity that
has an executive officer serving as a member of our board of directors or
compensation committee.
Compensation of Directors
We provide cash compensation of $2,000 per meeting attended in person and
$1,000 per meeting via telephone to Dr. Goodman, Mr. Summers and Dr. Zinsli for
serving on our board of directors or for participating in committee meetings.
Members of our board of directors are reimbursed for some expenses in
connection with attendance at board and committee meetings. In June 1998, Dr.
Goodman, Mr. Summers and Dr. Zinsli each received options to purchase 50,000
shares at an exercise price of $0.08 per share. In December 1999, Dr. Goodman,
Mr. Summers and Dr. Zinsli each received 2,666 options at an exercise price of
$0.60 per share. These options vest ratably beginning on the grant date of the
option and extending through the next four years of service. For more
information, see "Benefit Plans--1998 Stock Option Plan."
43
<PAGE>
Limitations of Liability; Indemnification of Directors and Officers
The Delaware General Corporation Law authorizes corporations to limit or
eliminate, subject to certain conditions, the personal liability of directors
to corporations and their stockholders for monetary damages for breach of their
fiduciary duties. In connection with the consummation of this offering, we will
adopt and file an amended and restated certificate of incorporation and amended
and restated bylaws. Our amended and restated certificate of incorporation will
limit the liability of our directors to the fullest extent permitted by
Delaware law.
Our amended and restated certificate of incorporation and bylaws will also
provide that we will indemnify any of our directors and officers who, by reason
of the fact that he or she is one of our officers or directors, is involved in
a legal proceeding of any nature. We will repay certain expenses incurred by a
director or officer in connection with any civil or criminal action or
proceeding, specifically including actions by us or in our name (derivative
suits). Such indemnifiable expenses include, to the maximum extent permitted by
law, attorney's fees, judgments, civil or criminal fines, settlement amounts
and other expenses customarily incurred in connection with legal proceedings. A
director or officer will not receive indemnification if he or she is found not
to have acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, our best interest.
Such limitation of liability and indemnification does not affect the
availability of equitable remedies. In addition, we have been advised that in
the opinion of the SEC, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is therefore unenforceable.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
44
<PAGE>
Executive Compensation
The following table sets forth the total compensation, during the year
ended December 31, 1999, paid to or accrued by our Chief Executive Officer and
each of our four other most highly compensated executive officers whose total
salary and bonus for 1999 exceeded $100,000:
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Annual Number of
Compensation Securities
----------------- Underlying All Other
Name and Principal Position Salary Bonus Options Compensation
- --------------------------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C>
John A. Ryals, Ph.D.............. $221,825 $ 58,438 77,917 $ 600(1)
Chief Executive Officer,
President and Director
Ian A.W. Howes................... 155,400 41,250 303,300 --
Vice President of Finance and
Operations, Chief Financial
Officer and Treasurer
Henry P. Nowak, Esq.............. 145,000 41,250 303,300 --
Vice President of Intellectual
Property, General Counsel and
Secretary
Scott J. Uknes, Ph.D ............ 131,250 33,750 9,000 --
Vice President of Business
Strategy
John Hamer, Ph.D................. 142,500 37,500 167,500 5,000(2)
Vice President of Research
</TABLE>
- ------------------
(1) Represents life insurance premiums paid on behalf of Dr. Ryals.
(2) Represents reimbursements for moving expenses paid to Dr. Hamer.
Option Grants in 1999
The following table presents each grant of stock options during the fiscal
year ended December 31, 1999, to each of the individuals listed in the Summary
Compensation Table.
All options were granted under our 1998 Stock Option Plan. The following
options are immediately exercisable in full at the date of grant, but shares
purchased on exercise of unvested options are subject to a repurchase right in
our favor that entitles us to repurchase unvested shares at their original
exercise price on termination of the employee's services with us.
The potential realizable value is calculated based on the ten year term of
the option at the time of grant. Stock price appreciation of 0%, 5% and 10% is
assumed pursuant to the rules promulgated by the SEC and does not represent our
estimate of future stock price performance. The potential realizable value at
0%, 5% and 10% appreciation are calculated by:
. multiplying the number of shares of common stock under the option by
the assumed public offering price of $ per share;
. assuming that the aggregate stock value derived from that calculation
compounds at the annual 0%, 5% or 10% rate shown in the table until
the expiration of the options; and
. subtracting from that result the aggregate option exercise price.
45
<PAGE>
Percentages shown under "Percentage of Total Options Granted to Employees
in 1999" are based in an aggregate of 1,633,119 options granted to our
employees and directors under our 1998 Stock Option Plan during 1999.
<TABLE>
<CAPTION>
Potential Realization
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
----------------------------------------------- ----------------------
Number of Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Per Expiration
Name Granted 1999 Share Date 0% 5% 10%
- ---- ---------- ------------- --------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Ryals, Ph.D. ... 77,917(1) 4.8% $0.60 12/14/2006 $ $ $
Ian A.W. Howes.......... 270,300(2) 16.6% 0.08 01/01/2006
33,000(1) 2.0% 0.60 12/14/2006
Henry P. Nowak, Esq..... 33,000(1) 2.0% 0.60 12/14/2006
Scott J. Uknes, Ph.D.... 9,000(1) 0.6% 0.60 12/14/2006
John Hamer, Ph.D........ 50,000(3) 3.1% 0.22 06/29/2006
17,500(1) 1.1% 0.60 12/14/2006
</TABLE>
- ------------------
(1) Our repurchase right lapses in equal monthly installments over the four
years commencing on the grant date.
(2) Includes 27,030 options as to which our repurchase right lapsed at the
grant date, 60,818 options as to which our repurchase right lapsed on the
first anniversary of the grant date, and 182,452 options as to which our
repurchase right will lapse in equal monthly installments over the 36
months following the first anniversary of the grant date.
(3) Includes 12,500 options as to which our repurchase right will lapse on the
first anniversary of the grant date and 37,500 options as to which our
repurchase right will lapse in equal monthly installments over the 36
months following the first anniversary of the grant date.
46
<PAGE>
Option Values at December 31, 1999
The following table presents the number and value of unexercised options
and securities issuable upon the exercise of options that were held by each of
the individuals listed in the Summary Compensation Table as of December 31,
1999.
These options are immediately exercisable in full at the grant date, but
shares purchased by exercise of unvested options are subject to a repurchase
right in our favor that entitles us to repurchase unvested shares at their
original exercise price on termination of the employee's services with us. The
value realized is based on the fair market value of the underlying securities
as of the date of exercise, minus the per share exercise price, multiplied by
the number of shares underlying the option. The value of unexercised in-the-
money options are based on a value of $4.50 per share, the fair market value of
our common stock on December 31, 1999 as determined in good faith by our board
of directors. Amounts reflected are based on the value of $4.50 per share,
minus the per share exercise price, multiplied by the number of shares
underlying the option.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Value
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at the-Money Options at
Shares December 31, 1999 December 31, 1999
Acquired Value -------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. Ryals, Ph.D. ... -- -- 77,919(1) -- 83,371 --
Ian A.W. Howes.......... 303,300 132,618 -- -- -- --
Henry P. Nowak, Esq. ... 270,300 97,308 33,000(1) -- 35,310 --
Scott J. Uknes, Ph.D. .. -- -- 9,000(1) -- 9,630 --
John Hamer, Ph.D. ...... 33,333 52,999 134,167(2) -- 197,226 --
</TABLE>
- ------------------
(1) As of December 31, 1999, our repurchase right had not lapsed as to any of
these options. Accordingly, these options were exercisable but not vested
on that date.
(2) As of December 31, 1999, our repurchase right had lapsed as to 33,333.
Accordingly, the remaining 134,167 options were exercisable, but net
vested, on that date.
Employment Agreements and Termination of Employment Agreements
At the time of commencement of employment, most of our employees sign
offer letters and employment agreements. These employment agreements provide
for employment at will and contain standard provisions relating to confidential
information and invention assignment by which the employee agrees not to
disclose any confidential information received during his or her employment
with us and that,
47
<PAGE>
with some exceptions, he or she will assign to us any and all inventions
conceived or developed during employment.
In February 1998, we entered into employment agreements with our founders,
Drs. Ryals and Uknes. Pursuant to these employment agreements, initial annual
base salaries were set at $180,000 for Dr. Ryals and $120,000 for Dr. Uknes. In
addition, each is entitled to receive annual bonuses of 25% of base salary to
be awarded on the basis of mutually agreed upon objectives and criteria between
each founder and us. The agreements provide that the employment relationship
may be terminated with or without cause at any time by the founder or us.
Furthermore, the agreements provide that, if we terminate any of Drs. Ryals,
Uknes, Gorlach or Mr. Stewart with or without "cause", as defined in the
agreements, we have no obligation to pay severance beyond the individual's
accrued base salary and bonus up to the date of termination. However, if we
continue to pay the founder an amount equal to his current monthly salary for a
three month period following a termination without cause, the founder shall be
prohibited from competing with us for that three month period. Moreover, upon
proper notice to the founder, we may extend the non-compete period to a total
of twelve months provided we continue to pay the founder such amounts. If we
terminate Dr. Ryals or Dr. Uknes for cause or if either terminates his
employment relationship, he shall be prohibited from competing with us for a
period of twelve months following the date of termination. These employment
agreements also provide that employment is contingent upon execution of
separate agreements pursuant to which the founder agrees that he will not
disclose any confidential information received during his employment with us
and, that, with some exceptions, he will assign to us any and all inventions
conceived or developed during his employment with us. Termination for any
reason other than for cause results in accelerated vesting of all of their
restricted stock.
Benefit Plans
1998 Stock Option Plan
In October 1998, we adopted our 1998 Stock Option Plan. The stockholders
approved the plan in June 1999. The plan will terminate in November 2008 unless
it is terminated earlier by our board. Under this plan we may grant incentive
stock options and nonqualified stock options. As of February 18, 2000, a total
of 4,015,000 shares of common stock have been reserved for issuance under this
plan. Of these shares, 3,210,703 shares have been issued pursuant to options
granted under this plan, 1,580,458 shares were subject to outstanding options
and 804,297 shares were available for future grant. Shares subject to stock
options that have expired or otherwise terminated without having been exercised
in full again become available for the grant of awards under the 1998 Plan.
Shares issued under the 1998 Plan may be previously unissued shares or
reacquired shares of common stock.
Our board of directors administers the 1998 Plan. Our board of directors
may delegate authority to administer the 1998 Plan to a committee of our board
of directors. Subject to the terms of the plan, our board of directors or our
authorized committee determines recipients and the terms of the options granted
pursuant to this plan, including,
. the term, exercise price and the numbers of shares subject to each
option;
. the form of consideration to be paid upon exercise of the options;
. the vesting schedule for the options; and
. termination or cancellation provisions applicable to the options.
Options granted to purchase shares of our common stock under our 1998
Stock Option Plan are generally immediately exercisable by the optionee but are
subject to a right of repurchase pursuant to the vesting schedule of each
specific grant. In the event that a purchaser ceases to provide service to us
and our affiliates, we have the right to repurchase any of that person's
unvested shares of common stock at the original option exercise price.
48
<PAGE>
Our board of directors or its designated committee may, in its sole
discretion, include additional provisions in any option or award granted or
made under the 1998 Plan that are not inconsistent with the 1998 Plan or
applicable law. Our board of directors or its designated committee may also, in
its sole discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the 1998 Plan may be exercised. In
the event of a decline in the value of our common stock, our board of directors
or its designated committee has the authority to offer optionees the
opportunity to replace outstanding higher priced options with new options below
our priced options.
The maximum term of options granted under this plan is ten years.
If we are acquired, all our outstanding options under the plan either will
be assumed or substituted for by any surviving entity or our parent or
subsidiary corporation, if any. For stock options granted, if the surviving
entity or our parent or subsidiary corporation, if any, determines not to
assume or substitute the options, the board of directors shall provide for the
options to be fully exercisable for a period of 30 days from the date of
notice. If the board of directors makes the options fully exercisable for this
30-day period, the options will terminate at the end of this period.
401(k) Plan
We maintain a retirement and deferred savings plan for our employees that
is intended to qualify as a tax-qualified plan under the Internal Revenue Code.
The 401(k) Plan provides that each participant may contribute up to 15% of his
or her pre-tax compensation to the savings plan, subject to statutorily
prescribed annual limits, which is $10,500 in the calendar year 2000. Under
this plan each participant who makes pre-tax contributions is eligible to have
a matching contribution in cash made by us to his or her matching plan account
in an amount up to 25% of the participant's savings plan contribution with a
maximum annual employer contribution of 6% of each participant's annual salary,
subject to statutorily prescribed annual limits. The matching contributions
vest annually over a three year period. We may make additional discretionary
contributions for all participants to their matching plan accounts.
49
<PAGE>
CERTAIN TRANSACTIONS
The following executive officers, directors or holders of more than five
percent of our voting securities purchased securities in the amounts as set
forth below. Each share of our Series A, Series B and Series C Preferred Stock
is convertible into one share of our common stock.
<TABLE>
<CAPTION>
Shares of Preferred Stock
-----------------------------
Common Stock Series A Series B Series C Warrants (9)
------------ --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers
John A. Ryals (1)....... 1,195,181
Henry P. Nowak (2)...... 271,300
Richard E. Kouri........
Ian A.W. Howes ......... 303,300
Athanasios Maroglou..... 165,000
Scott J. Uknes.......... 852,272
John Hamer (3).......... 39,333
Craig Liddell...........
G. Steven Burrill (4)... 1,395,349 400,000
Dennis Dougherty (5).... 2,687,500 516,389 200,000 250,000
Robert Goodman.......... 52,666
Terrance McGuire (6).... 1,875,000 329,610 1,800,000
Michael Summers.........
Henri Zinsli............ 50,000
Five Percent
Stockholders
The Burrill AgBio
Capital Fund L.P. ..... 1,395,349 400,000
Intersouth Partners
(7).................... 2,687,500 516,389 200,000 250,000
Polaris Venture Funds
(8).................... 1,875,000 329,610 1,800,000
Innotech Investments
Limited................ 2,937,500 549,350 200,000 187,500
</TABLE>
- ------------------
(1) Includes 2,000 shares held by Dr. Ryals' wife.
(2) Includes 1,000 shares held by Mr. Nowak's wife.
(3) Includes 6,000 shares held by Dr. Hamer's wife.
(4) Represents shares held of record by The Burrill AgBio Capital Fund L.P. Mr.
Burrill, the chairman of our board directors, is Chief Executive Officer of
Burrill & Company, the General Partner of Burrill AgBio Capital Fund L.P.
(5) Represents shares and warrants held of record by Intersouth Partners IV,
L.P. and Intersouth Partners III, L.P. Mr. Dougherty, one of our directors,
is General Partner of Intersouth Partners IV, L.P. and Intersouth Partners
III, L.P.
(6) Represents shares held of record by Polaris Venture Partners III, L.P.,
Polaris Venture Partners Founders' Fund L.P. and Polaris Venture Partners
L.P. Mr. McGuire is a founding partner of Polaris Venture Partners
Founders' Fund L.P., Polaris Venture Partners, L.P. and Polaris Venture
Partners III, L.P.
(7) Represents shares held of record by Intersouth Partners IV, L.P. and
Intersouth Partners III, L.P.
(8) Represents shares held of record by Polaris Venture Partners L.P., Polaris
Venture Partners Founders' Fund L.P. and Polaris Venture Partners III, L.P.
(9) These are warrants issued in connection with the Series A Preferred Stock
round. They are warrants to purchase shares of Series A Preferred Stock at
an exercise price of $0.80 per share. These warrants expire on February
2008.
We have entered into the following agreements with our executive officers,
directors and holders of more than five percent of our voting securities.
50
<PAGE>
Amended and Restated Registration Rights Agreement. We, our founders,
including Drs. Ryals and Uknes, the preferred stockholders listed above and
other stockholders have entered into an agreement, pursuant to which they will
have registration rights with respect to their shares of common stock following
this offering. See "Description of Capital Stock -- Registration Rights" for a
more detailed description of the terms of this agreement.
In June 1998, Mr. Zinsli, Mr. Summers and Dr. Goodman each received
options to purchase a total of 50,000 shares at an exercise price of $0.08 per
share. In December 1999, Mr. Zinsli, Mr. Summers and Dr. Goodman each received
options to purchase a total of 2,666 shares of common stock at an exercise
price of $0.60 per share.
In February 1998, we entered into Founder Stock Repurchase and Vesting
Agreements with Drs. Ryals and Uknes. Pursuant to the terms of these vesting
agreements, we have the right to repurchase unvested shares of common stock
held by each of them at the initial purchase price in the event that he ceases
his employment with us. These vesting agreements apply to 1,193,181 shares of
common stock held by Dr. Ryals and 852,272 shares of common stock held by Dr.
Uknes. As of February 2000, 50% of the shares subject to these vesting
agreements had vested, and the remaining shares vest in equal monthly
installments over the following 36 months. Our repurchase right with respect to
these shares will terminate in the event that the shares of common stock sold
in this offering are sold at a price of $10 per share or greater and at an
aggregate public offering price of $20 million or greater.
In February 2000, the Company agreed to pay Deborah Ryals, the wife of Dr.
Ryals, $14,250 and agreed to grant to Mrs. Ryals stock options to purchase
6,000 shares of common stock in consideration of prior services rendered to the
Company by Mrs. Ryals.
We believe that all of the transactions described above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and our affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested directors, and will continue to be on terms no less favorable to
us than could be obtained from unaffiliated third parties.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides summary information known to us regarding the
beneficial ownership of our outstanding common stock as of February 18, 2000,
as adjusted to reflect the sale of shares of common stock in this
offering and the conversion of all outstanding shares of our convertible
preferred stock into shares of common stock, by:
. each person or group known to us who beneficially owns more than 5% of
outstanding our common stock;
. each of our directors and each named executive officer; and
. all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission. Unless otherwise indicated, the persons
included in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws, where
applicable.
Shares of common stock subject to options currently exercisable or
exercisable within 60 days of February 18, 2000 are treated as outstanding for
the purpose of computing the percentage ownership of the person holding such
options. However, these shares are not treated as outstanding for the purposes
of computing the percentage ownership of any other person. Applicable
percentage ownership in the following table is based on 18,733,440 shares of
common stock outstanding as of February 18, 2000, after giving effect to the
conversion of all outstanding shares of preferred stock into common stock upon
the closing of this offering, and shares of common stock outstanding
immediately following the completion of this offering. Unless otherwise
indicated, the address of each of the named individuals is c/o Paradigm
Genetics, Inc., 104 Alexander Drive, Research Triangle Park, North Carolina
27709. The percentages in the "After Offering" Column assumes that the
underwriters do not exercise their over-allotment option to purchase up to
shares.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Beneficially Owned
----------------------
Number of Shares Before After
Beneficial Owner Beneficially Owned Offering Offering
- ---------------- ------------------ --------- ---------
<S> <C> <C> <C>
Directors and Executive Officers
Terrance McGuire (1)............ 4,004,610 21.4%
Dennis Dougherty (2)............ 3,653,889 19.2%
G. Steven Burrill (3)........... 1,795,349 9.6%
John A. Ryals (4)............... 1,273,195 6.8%
Scott J. Uknes (5).............. 861,272 4.6%
Henry P. Nowak (6).............. 304,300 1.6%
Ian A.W. Howes (7).............. 280,300 1.5%
Craig Liddell (8)............... 167,500 *
John Hamer (9).................. 183,700 *
Robert Goodman (10)............. 52,666 *
Michael Summers (11)............ 52,666 *
Henri Zinsli (12)............... 52,666 *
Richard E. Kouri (13)........... 290,725 1.5%
Athanasios Maroglou (14)........ 170,260 *
All executive officers and
directors as a group (14
persons)....................... 13,143,098 63.7%
Five Percent Stockholders
Polaris Venture Funds (1)....... 4,004,610 21.4%
Innotech Investments Limited.... 3,874,350 20.5%
Intersouth Partners (2)......... 3,653,889 19.2%
The Burrill AgBio Capital Fund
L.P. (3)....................... 1,795,349 9.6%
</TABLE>
52
<PAGE>
- ------------------
* Less than one percent (1%).
(1) Represents shares held of record by Polaris Venture Partners III, L.P.,
Polaris Venture Partners Founders' Fund L.P. and Polaris Venture Partners
L.P. Mr. McGuire is a founding partner of each of those entities. Mr.
McGuire disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest in those entities.
(2) Represents shares held of record by Intersouth Partners IV, L.P. and
Intersouth Partners III, L.P. Includes a warrant to purchase 31,250 shares
of common stock held by Intersouth Partners IV, L.P. and a warrant to
purchase 218,750 shares of common stock held by Intersouth Partners III,
L.P. Mr. Dougherty is General Partner of those entities. Mr. Dougherty
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest in those entities.
(3) Represents shares held of record by The Burrill AgBio Capital Fund L.P.
Mr. Burrill is Chief Executive Officer of Burrill & Company, the General
Partner of Burrill Ag Bio Capital Fund L.P. Mr. Burrill disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest in Burrill AgBio Capital Fund L.P.
(4) Includes 2,000 shares held by Dr. Ryals' wife and 77,917 shares that are
subject to immediately exercisable stock options. As of February 18, 2000,
we had the right to repurchase 74,670 shares issuable upon exercise of
these options if Dr. Ryals ceases his employment with us. Includes
1,193,181 shares of common stock subject to a vesting agreement described
in "Certain Transactions."
(5) Includes 9,000 shares which are subject to immediately exercisable
options. As of February 18, 2000, we had the right to repurchase 8,625
shares issuable upon exercise of these options if Dr. Uknes ceases his
employment with us. Includes 852,272 shares of common stock subject to a
vesting agreement described in "Certain Transactions."
(6) Includes 1,000 shares held by Mr. Nowak's wife, 33,000 shares that are
subject to immediately exercisable stock options and 270,300 shares which
were issued upon the exercise of immediately exercisable stock options. As
of February 18, 2000, we had the right to repurchase 183,669 of the shares
issued or issuable upon exercise of these options if Mr. Nowak ceases his
employment with us.
(7) As of February 18, 2000, we had the right to repurchase 209,009 shares
which were issued upon exercise of options if Mr. Howes ceases his
employment with us.
(8) Includes options to purchase 167,500 shares that are subject to
immediately exercisable stock options. As of February 18, 2000, we had the
right to repurchase 119,896 shares issuable upon exercise of these options
if Dr. Liddell ceases his employment with us.
(9) Includes 6,000 shares which were issued upon the exercise of immediately
exercisable options and 10,200 immediately exercisable options held by Dr.
Hamer's wife. Also includes 33,333 shares of common stock that were issued
upon the exercise of immediately exercisable options and 134,167 shares
that are subject to immediately exercisable stock options held by Dr.
Hamer. As of February 18, 2000, we had the right to repurchase 131,354
shares that are issuable upon exercise of Dr. Hamer's options if Dr. Hamer
ceases his employment with us.
(10) Consists of 52,666 shares subject to immediately exercisable options. As
of February 18, 2000, we had the right to repurchase 32,763 shares issued
upon exercise of options if Dr. Goodman ceases his directorship with us.
(11) Includes 52,666 shares that are subject to immediately exercisable stock
options. As of February 18, 2000, we had the right to repurchase 32,763
shares issuable upon exercise of these options if Mr. Summers ceases his
directorship with us.
(12) Includes 2,666 shares that are subject to immediately exercisable stock
options and 50,000 shares which were issued upon the exercise of stock
options. As of February 18, 2000, we had the right to repurchase 32,763 of
these shares issued or issuable upon exercise of these options if Dr.
Zinsli ceases his directorship with us.
(13) Includes 290,725 shares that are subject to immediately exercisable stock
options. As of February 18, 2000, we had the right to repurchase 290,725
shares issuable upon exercise of these options if Dr. Kouri ceases his
employment with us.
(14) Includes 5,260 shares that are subject to immediately exercisable options
and 165,000 shares that were issued upon the exercise of immediately
exercisable stock options. As of February 18, 2000, we had the right to
repurchase 170,260 of the shares issued or issuable upon exercise of these
options if Mr. Maroglou ceases his employment with us.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering and the filing of our amended and
restated certificate of incorporation, we will be authorized to issue 30
million shares of common stock, $0.01 par value per share, and 5 million shares
of preferred stock, $0.01 par value per share, and there will be
shares of common stock and no shares of preferred stock
outstanding. Assuming the conversion of our preferred stock, as of February 18,
2000, we had 18,733,440 shares of common stock outstanding held of record by
103 stockholders, and there were outstanding options to purchase 1,580,458
shares of common stock and outstanding warrants to purchase 763,779 shares of
common stock.
Common Stock
The holders of common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders, and do not
have cumulative voting rights. Subject to preferences that may be applicable to
any outstanding shares of preferred stock, holders of common stock are entitled
to receive ratably such dividends, if any, as may be declared from time to time
by our board of directors out of funds legally available for dividend payments.
All outstanding shares of common stock are fully paid and nonassessable, and
the holders of common stock have no preferences or rights of conversion,
exchange or pre-emption. In the event of any liquidation, dissolution or
winding-up of our affairs, holders of common stock will be entitled to share
ratably in our assets that are remaining after payment or provision for payment
of all of our debts and obligations and after liquidation payments to holders
of outstanding shares of preferred stock, if any.
Preferred Stock
The preferred stock, if issued, would have priority over the common stock
with respect to dividends and other distributions, including the distribution
of assets upon liquidation. Our board of directors has the authority, without
further stockholder authorization, to issue from time to time shares of
preferred stock in one or more series and to fix the terms, limitations,
relative rights and preferences and variations of each series. Although we have
no present plans to issue any shares of preferred stock, the issuance of shares
of preferred stock, or the issuance of rights to purchase such shares, could
decrease the amount of earnings and assets available for distribution to the
holders of common stock, could adversely affect the rights and powers,
including voting rights, of the common stock, and could have the effect of
delaying, deterring or preventing a change in control of us or an unsolicited
acquisition proposal.
Warrants
As of February 18, 2000 the following warrants were outstanding.
. Warrants to purchase 437,500 shares of Series A Preferred Stock at an
exercise price of $0.80 per share. These warrants expire five years
after the completion of this offering.
. A warrant to purchase 150,000 shares of our common stock at an
exercise price of $3.00 per share. The warrant will expire five years
after the completion of this offering.
. A warrant to purchase 116,279 shares of our common stock at an
exercise price of $ 2.15 per share. The warrant expires in July 2006.
. A warrant to purchase 60,000 shares of our common stock at an exercise
price of $5.00 per share. This warrant expires January 2010. The
issuance of this warrant is subject to the terms of an escrow
agreement.
Each of these warrants contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise of
the warrant in the event of stock dividends, stock splits, reorganizations, and
reclassifications and consolidations.
54
<PAGE>
Registration Rights
The holders of the following shares of our common stock are entitled to
certain registration rights with respect to those shares. These registration
rights are subject to certain conditions and limitations, including the right
of the underwriters of an offering to limit the number of shares included in
any such registration under certain circumstances. All expenses incurred in
connection with registrations effected in connection with the following rights
will be borne by us.
Demand Rights. Beginning 180 days after completion of this offering, the
holders of 17,103,195 shares of common stock and 553,779 shares of common stock
issuable upon the exercise of outstanding warrants will have certain rights to
cause us to register those shares under the Securities Act. We may be required
to effect only one such registration. Stockholders with these registration
rights who are not part of an initial registration demand are entitled to
notice and are entitled to include their shares of common stock in the
registration.
Piggyback Rights. If at any time after this offering we propose to
register any of our equity securities under the Securities Act, other than in
connection with a registration relating solely to our stock option plans or
other employee benefit plans, or a registration relating solely to a business
combination or merger involving us, the holders of 17,103,195 shares of common
stock and 703,779 shares of common stock issuable upon the exercise of
outstanding warrants are entitled to notice of such registration and are
entitled to include their common stock in the registration.
S-3 Registration Rights. In addition, the holders of 17,103,195 shares of
common stock and 553,779 shares of common stock issuable upon the exercise of
outstanding warrants will have the right to cause us to register these shares
on a Form S-3, provided that we are eligible to use this form, subject to
certain limitations. We are not required to effect such a registration unless
the aggregate offering price of the shares to be registered, based on the then
current market price is at least $750,000. Also, we are only required to effect
one such registration during any 12-month period. Stockholders with these
registration rights who are not part of an initial registration demand are
entitled to notice and are entitled to include their shares of common stock in
the registration.
Delaware Law and Certain Charter and By-Law Provisions
The provisions of Delaware law and of our amended and restated certificate
of incorporation and by-laws discussed below could discourage or make it more
difficult to accomplish a proxy contest or other change in our management or
the acquisition of control by a holder of a substantial amount of our voting
stock. It is possible that these provisions could make it more difficult to
accomplish, or could deter, transactions that stockholders may otherwise
consider to be in their best interests or the best interests of Paradigm
Genetics.
Delaware Statutory Business Combinations Provision. We are subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporations
Law. In general, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is, or the
transaction in which the person became an interested stockholder was, approved
in a prescribed manner or another prescribed exception applies. For purposes of
Section 203, a "business combination" is defined broadly to include a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and, subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
Classified Board of Directors. Upon completion of this offering, our board
of directors will be divided into three classes. Each year the stockholders
will elect the members of one of the three classes to a three-year term of
office.
55
<PAGE>
All directors elected to our classified board of directors will serve
until the election and qualification of their respective successors or their
earlier resignation or removal. The board of directors is authorized to create
new directorships and to fill such positions so created and is permitted to
specify the class to which any such new position is assigned. The person
filling such position would serve for the term applicable to that class. The
board of directors (or its remaining members, even if less than a quorum) is
also empowered to fill vacancies on the board of directors occurring for any
reason for the remainder of the term of the class of directors in which the
vacancy occurred. Members of the board of directors may only be removed for
cause. These provisions are likely to increase the time required for
stockholders to change the composition of the board of directors. For example,
in general, at least two annual meetings will be necessary for stockholders to
effect a change in a majority of the members of the board of directors.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our by-laws provide that, for nominations to the
board of directors or for other business to be properly brought by a
stockholder before a meeting of stockholders, the stockholder must first have
given timely notice of the proposal in writing to our Secretary. For an annual
meeting, a stockholder's notice generally must be delivered not less than 45
days nor more than 75 days prior to the anniversary of the mailing date of the
proxy statement for the previous year's annual meeting. For a special meeting,
the notice must generally be delivered by the later of 90 days prior to the
special meeting or ten days following the day on which public announcement of
the meeting is first made. Detailed requirements as to the form of the notice
and information required in the notice are specified in the by-laws. If it is
determined that business was not properly brought before a meeting in
accordance with our by-law provisions, such business will not be conducted at
the meeting.
Special Meetings of Stockholders. Special meetings of the stockholders may
be called only by our board of directors pursuant to a resolution adopted by a
majority of the total number of directors.
No Stockholder Action by Written Consent. Our amended and restated
certificate of incorporation does not permit our stockholders to act by written
consent. As a result, any action to be effected by our stockholders must be
effected at a duly called annual or special meeting of the stockholders.
Super-Majority Stockholder Vote Required for Certain Actions. The Delaware
General Corporation Law provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless the corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Our amended and restated certificate of incorporation requires the
affirmative vote of the holders of at least 80% of our outstanding voting stock
to amend or repeal any of the provisions discussed in this section of this
prospectus entitled "Delaware Law and Certain Charter and By-law Provisions".
This 80% stockholder vote would be in addition to any separate class vote that
might in the future be required pursuant to the terms of any preferred stock
that might then be outstanding. A 80% vote is also required for any amendment
to, or repeal of, our by-laws by the stockholders. Our by-laws may be amended
or repealed by a simple majority vote of the board of directors.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock will be
.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices. Furthermore, because
only a limited number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale as described
below, sales of substantial amounts of our common stock in the public market
could occur after these restrictions lapse. This may adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants after , 2000. Of
these shares, the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless these shares are purchased by affiliates. The remaining shares of common
stock held by existing stockholders are restricted securities. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration described below under Rules 144,
144(k) or 701 promulgated under the Securities Act.
As a result of the contractual 180 day lock-up period described below and
the provisions of Rules 144, 144(k) and 701, the restricted shares will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<S> <C>
On the date of this prospectus
After 90 days from the date of this prospectus
After 180 days from the date of this prospectus
(subject, in some cases, to volume limitations)
After various times after 180 days from the date
of this prospectus (subject, in some cases, to
volume limitations)
</TABLE>
Lock-Up Agreements
We, our directors and executive officers and certain of our stockholders
and option holders have each agreed not to offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for common
stock, for a period of at least 180 days after the date of this prospectus,
without the prior written consent of Chase Securities Inc., subject to limited
exceptions. Chase Securities Inc., however, may in its sole discretion, at any
time without notice, release all or any portion of the shares subject to lock-
up agreements.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
this offering, a person, or persons whose shares are aggregated, who owns
shares that were purchased from us, or any affiliate, at least one year
previously, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of our then-outstanding shares of
common stock, which will equal about shares immediately after this
offering, or the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks preceding the filing of a
notice of the sale on Form 144. Sales under Rule 144 are also subject to manner
of sale provisions, notice requirements and the availability of current public
information about us. Any person, or persons whose shares are aggregated, who
is not deemed to have been one of our affiliates at any time during the three
months preceding a sale, and who owns shares within the definition of
"restricted securities" under Rule 144 that
57
<PAGE>
were purchased from us, or any affiliate, at least two years previously, would
be entitled to sell shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.
Rule 701
Subject to limitations on the aggregate offering price of a transaction
and other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers
or consultants prior to the date we become subject to the reporting
requirements of the Securities Exchange Act of 1934, or the Exchange Act, under
written compensatory benefit plans or written contracts relating to the
compensation of these persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Exchange Act, along with the shares acquired upon exercise of the options,
including exercises after the date of this prospectus. Securities issued in
reliance on Rule 701 are restricted securities and, subject to the contractual
restrictions described above, beginning 90 days after the date of this
prospectus, may be sold by persons other than affiliates subject only to the
manner of sale provisions of Rule 144 and by affiliates under Rule 144 without
compliance with its minimum holding period requirements.
Registration Rights
Upon completion of this offering, the holders of shares of
common stock and shares of common stock issuable upon the exercise of
and warrants or their transferees, will be entitled to various rights with
respect to the registration of these shares under the Securities Act.
Registration of these shares under the Securities Act would result in these
shares becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of the registration, except for shares
purchased by affiliates. See "Description of Capital Stock--Registration
Rights" for a more complete description of these registration rights.
Stock Options
As of February 18, 2000 options to purchase a total of 1,580,458 shares of
common stock under our stock option plans were outstanding and 1,580,458 were
exercisable. of the shares subject to options are subject to lock-up
agreements. An additional 804,297 shares of common stock were available for
future option grants under our stock plans.
Upon completion of this offering, we intend to file a registration
statement under the Securities Act covering all shares of common stock subject
to outstanding options or issuable pursuant to our stock option plans. Subject
to Rule 144 volume limitations applicable to affiliates, shares registered
under any registration statements will be available for sale in the open
market, beginning 90 days after the date of the prospectus, except to the
extent that the shares are subject to vesting restrictions with us or the
contractual restrictions described above.
58
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. Chase Securities Inc., J.P. Morgan & Co., Incorporated, Pacific Growth
Equities, Inc. and Stephens Inc. are acting as representatives of the
underwriters.
The underwriting agreement provides for the purchase of a specific number
of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below.
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
Chase Securities Inc. ...............................................
J.P. Morgan & Co., Incorporated......................................
Pacific Growth Equities, Inc. .......................................
Stephens Inc. .......................................................
Total..............................................................
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other
than those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances. We have agreed to indemnify the underwriters against certain
civil liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of such liabilities.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at such price less a
concession of $ per share. The underwriters may also allow to dealers, and
such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the shares are released for sale to the public,
the representatives may change the offering price and other selling terms at
various times.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of additional shares
from us to cover over-allotments. If the underwriters exercise all or part of
this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
public will be $ million and our net proceeds will be approximately $
million. The underwriters have severally agreed that, to the extent the over-
allotment option is exercised, they will each purchase a number of additional
shares proportionate to the underwriter's initial amount reflected in the above
table.
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<PAGE>
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us. Such amount is shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares.
UNDERWRITING DISCOUNT PAID BY US
<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
-------- --------
<S> <C> <C>
Per Share ................................................ $ $
Total..................................................... $ $
</TABLE>
We estimate that the total expenses of the offering, excluding the
underwriting discount, will be approximately $ million.
We have agreed to indemnify each underwriter against all liabilities to
which they may become subject under the federal securities laws or other law,
including reimbursement of expenses, arising out of any untrue statements or
alleged untrue statement of a material fact contained in the registration
statement, including the prospectus, or the omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements not misleading, except that there is no indemnification for specific
information furnished by the underwriters. This includes contribution to any
payments which may be made by the underwriters in the event that
indemnification is not available.
Our executive officers, directors and substantial stockholders, who will
own in the aggregate shares of our common stock after the
offering, have agreed that they will not, without the prior written consent of
Chase Securities Inc., offer, sell, pledge or otherwise dispose of any shares
of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock owned by
them during the 180-day period following the effectiveness of the registration
statement. We have agreed that we will not, without the prior written consent
of Chase Securities Inc., offer, sell or otherwise dispose of any shares of
common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180-day period following the date of this prospectus, except that we may
issue shares upon the exercise of options granted prior to the date hereof and
may grant additional options under our stock option plan, provided that,
without prior written consent of Chase Securities Inc., such additional options
shall not be exercisable during such period.
The underwriters have reserved for sale up to shares for employees,
directors and certain other persons associated with us. These reserved shares
will be sold at the public offering price that appears on the cover of this
prospectus. The number of shares available for sale to the general public in
the offering will be reduced to the extent reserved shares are purchased by
these persons. The underwriters will offer to the general public, on the same
terms as other shares offered by this prospectus, any reserved shares that are
not purchased by these persons.
Prior to this offering, there has been no public market for the common
stock. Consequently, the offering price for the common stock has been
determined by negotiations between us and the underwriters and is not
necessarily related to our asset value, net worth or other established criteria
of value. The factors considered on these negotiations, in addition to
prevailing market conditions, included the history of and prospects for the
industry in which we compete, an assessment of our management, our prospects,
our capital structures, prevailing market conditions, our results of operations
in recent periods and other factors as we deemed relevant.
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<PAGE>
Rules of the SEC may limit the ability of the underwriters to bid for or
purchase shares before the distribution of the shares is completed. However,
the underwriters may engage in the following activities in accordance with the
rules:
. Stabilizing transactions. The representatives may make bids or
purchases for the purpose of pegging, fixing or maintaining the price
of the shares, so long as stabilizing bids do not exceed a specified
maximum.
. Over-allotments and syndicate covering transactions. The underwriters
may create a short position in the shares by selling more shares than
are shown on the cover page of this prospectus. If a short position is
created in connection with the offering, the representatives may
engage in syndicate covering transactions by purchasing shares in the
open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option.
. Penalty bids. If the representatives purchase shares in the open
market in a stabilizing transaction or syndicate covering transaction,
they may reclaim a selling concession from underwriters and selling
group members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of those transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither we nor the underwriters makes any representation or prediction as
to the effect that the transactions described above may have on the price of
the shares. These transactions may occur on the Nasdaq National Market or
otherwise. If these transactions are commenced, they may be discontinued
without notice at any time.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
The representatives have informed us that they do not intend to confirm
the sales to discretionary accounts that exceed 5% of the total number of
shares of common stock offered by them.
One or more members of the underwriting selling group may make copies of
the preliminary prospectus available over the Internet to certain customers
through its or their websites. The representatives expect to allocate a limited
number of shares to that member or members of the selling group for sale to
brokerage account holders.
61
<PAGE>
LEGAL MATTERS
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial Center,
Boston, Massachusetts 02111 will provide us with an opinion as to the validity
of the common stock offered under this prospectus. Morgan, Lewis and Bockius
LLP, 101 Park Avenue, New York, New York 10178 will pass upon certain legal
matters related to this offering for the underwriters.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for the
period from inception (September 9, 1997) to December 31, 1997 and for the
years ended December 31, 1998 and 1999 included in this prospectus have been so
included in reliance upon the report of PricewaterhouseCoopers LLP, independent
accountants, given as the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock offered under this prospectus. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedule to the registration statement. For further information with
respect to us and our common stock, we refer you to the registration statement
and to the exhibits and schedule to registration statement. Statements
contained in this prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and in each instance, we
refer you to the copy of the contract or other document filed as an exhibit to
the registration statement. Each of these statements is qualified in all
respects by this reference. You may inspect a copy of the registration
statement without charge at the SEC's principal office in Washington, D.C., and
copies of all or any part of the registration statement may be obtained from
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of fees prescribed by the SEC. The SEC maintains a
website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the web site is http://www.sec.gov. The SEC's toll free investor
information service can be reached at 1-800-SEC-0330. Information contained on
the web site does not constitute part of this prospectus.
Upon completion of this offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the SEC.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and
quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited interim financial information. Our telephone number is
(919) 425-3000.
62
<PAGE>
PARADIGM GENETICS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statement of Stockholders' Equity (Deficit)................................. F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Paradigm Genetics, Inc.
In our opinion, the accompanying balance sheets and related statements of
operations, of stockholders' equity (deficit), and of cash flows present
fairly, in all material respects, the financial position of Paradigm Genetics,
Inc. (the "Company") at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the period from inception (September 9, 1997)
through December 31, 1997 and the years ended December 31, 1998 and 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States, 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.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 17, 2000
F-2
<PAGE>
PARADIGM GENETICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31,
December 31, 1999
------------------------- (unaudited)
1998 1999 (Note 2)
----------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 970,688 $ 468,342 $15,468,342
Short-term investments................ 2,484,132 3,488,108 3,488,108
Accounts receivable................... 89,025 256,844 256,844
Prepaid expenses...................... 48,166 1,157,851 1,157,851
----------- ------------ -----------
Total current assets................. 3,592,011 5,371,145 20,371,145
Property and equipment, net............ 3,822,293 8,816,665 8,816,665
Other assets, net...................... 20,667 37,494 37,494
----------- ------------ -----------
Total assets......................... $ 7,434,971 $ 14,225,304 $29,225,304
=========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... $ 319,421 $ 1,327,423 $ 1,327,423
Accrued liabilities................... 222,462 571,184 571,184
Deferred revenue...................... 1,484,850 5,825,237 5,825,237
Long-term debt--current portion....... 327,244 1,182,456 1,182,456
Capital lease obligation--current
portion.............................. 90,365 100,075 100,075
----------- ------------ -----------
Total current liabilities............ 2,444,342 9,006,375 9,006,375
Long-term debt......................... 3,215,737 7,823,780 7,823,780
Capital lease obligation............... 322,925 222,850 222,850
----------- ------------ -----------
Total liabilities.................... 5,983,004 17,053,005 17,053,005
----------- ------------ -----------
Commitments (Note 11)
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par
value; 15,000,000 shares authorized:
Series A convertible preferred stock,
8,000,000 shares designated;
7,562,500 shares issued and
outstanding as of December 31, 1998
and 1999, respectively; no shares
issued and outstanding pro forma.... 5,950,899 5,950,899 --
Series B convertible preferred stock;
2,790,698 shares designated; -0- and
2,790,698 shares issued and
outstanding as of December 31, 1998
and 1999, respectively; no shares
issued and outstanding pro forma.... -- 5,967,819 --
Common stock, $.01 par value;
30,000,000 shares authorized;
3,750,247 and 5,224,257 shares issued
and outstanding as of December 31,
1998 and 1999, respectively,
18,577,455 shares issued and
outstanding pro forma................ 37,502 52,242 185,774
Additional paid-in capital............. 6,389 2,509,510 29,294,696
Deferred compensation.................. -- (2,278,788) (2,278,788)
Accumulated deficit.................... (4,542,823) (15,029,383) (15,029,383)
----------- ------------ -----------
Total stockholders' equity
(deficit)........................... 1,451,967 (2,827,701) 12,172,299
----------- ------------ -----------
Total liabilities and stockholders'
equity (deficit).................... $ 7,434,971 $ 14,225,304 $29,225,304
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
PARADIGM GENETICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
For the
Period from
Inception
(September 9,
1997) to
December 31,
1997 1998 1999
------------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Collaborative research agreements... $ -- $ 820,150 $ 2,052,113
Grant revenues...................... -- 50,409 144,862
--------- ----------- ------------
Total revenues..................... -- 870,559 2,196,975
--------- ----------- ------------
Operating expenses:
Research and development............ 71,534 3,641,033 7,527,866
Selling, general and
administrative..................... 148,663 1,523,365 4,713,675
Stock based compensation............ -- 6,371 66,212
--------- ----------- ------------
Total operating expenses........... 220,197 5,170,769 12,307,753
--------- ----------- ------------
Loss from operations................. (220,197) (4,300,210) (10,110,778)
--------- ----------- ------------
Interest income (expense), net:
Interest income..................... -- 139,494 246,896
Interest expense.................... (13) (128,797) (622,678)
--------- ----------- ------------
Interest income (expense), net...... (13) 10,697 (375,782)
--------- ----------- ------------
Net loss............................. $(220,210) $(4,289,513) $(10,486,560)
========= =========== ============
Net loss per share--basic and
diluted............................. $ (0.19) $ (1.14) $ (2.48)
========= =========== ============
Weighted average common shares
outstanding--basic and diluted...... 1,160,958 3,750,036 4,236,409
========= =========== ============
Pro forma net loss per share--basic
and diluted......................... $ (0.75)
============
Pro forma weighted average common
shares outstanding-- basic and
diluted............................. 14,046,759
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PARADIGM GENETICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock Additional
-------------------- -------------------- ----------------- Paid In Deferred Accumulated
Shares Amount Shares Amount Shares Amount Capital Compensation Deficit
--------- ---------- --------- ---------- --------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
inception
(September 9,
1997)........... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of
common stock... -- -- -- -- 3,749,997 37,500 -- -- (33,100)
Net loss........ -- -- -- -- -- -- -- -- (220,210)
--------- ---------- --------- ---------- --------- ------- ---------- ----------- ------------
Balance at
December 31,
1997............ -- -- -- -- 3,749,997 37,500 -- -- (253,310)
Stock based
compensation... -- -- -- -- -- -- 6,371 -- --
Issuance of
Series A
Preferred
Stock.......... 7,125,000 5,600,899 -- -- -- -- -- -- --
Notes payable
converted to
Series A
Preferred
Stock.......... 437,500 350,000 -- -- -- -- -- -- --
Exercise of
stock options.. -- -- 250 2 18 -- --
Net loss........ -- -- -- -- -- -- -- -- (4,289,513)
--------- ---------- --------- ---------- --------- ------- ---------- ----------- ------------
Balance at
December 31,
1998............ 7,562,500 5,950,899 -- -- 3,750,247 37,502 6,389 -- (4,542,823)
Issuance of
Series B
Preferred
Stock.......... -- -- 2,790,698 5,967,819 -- -- -- -- --
Exercise of
stock options.. -- -- -- -- 1,474,010 14,740 158,121 -- --
Deferred
compensation .. -- -- -- -- -- -- 2,345,000 (2,345,000) --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- 66,212 --
Net loss........ -- -- -- -- -- -- -- -- (10,486,560)
--------- ---------- --------- ---------- --------- ------- ---------- ----------- ------------
Balance at
December 31,
1999............ 7,562,500 $5,950,899 2,790,698 $5,967,819 5,224,257 $52,242 $2,509,510 $(2,278,788) $(15,029,383)
========= ========== ========= ========== ========= ======= ========== =========== ============
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
--------------
<S> <C>
Balance at
inception
(September 9,
1997)........... $ --
Issuance of
common stock... 4,400
Net loss........ (220,210)
--------------
Balance at
December 31,
1997............ (215,810)
Stock based
compensation... 6,371
Issuance of
Series A
Preferred
Stock.......... 5,600,899
Notes payable
converted to
Series A
Preferred
Stock.......... 350,000
Exercise of
stock options.. 20
Net loss........ (4,289,513)
--------------
Balance at
December 31,
1998............ 1,451,967
Issuance of
Series B
Preferred
Stock.......... 5,967,819
Exercise of
stock options.. 172,861
Deferred
compensation .. --
Amortization of
deferred
compensation... 66,212
Net loss........ (10,486,560)
--------------
Balance at
December 31,
1999............ $ (2,827,701)
==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
PARADIGM GENETICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
For the
Period from
Inception
(September 9,
1997) to
December 31,
1999 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(220,210) $ (4,289,513) $(10,486,560)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Deferred revenue.................... -- 1,484,850 4,340,387
Depreciation and amortization....... 312 299,044 1,588,762
Stock based compensation............ -- 6,371 66,212
Changes in operating assets and
liabilities
Accounts receivable................ (500) (88,525) (167,819)
Prepaid expenses................... (41,570) (27,263) (1,126,512)
Accounts payable................... 29,017 290,404 1,008,002
Accrued liabilities................ -- 222,462 348,722
--------- ------------ ------------
Net cash used in operating
activities....................... (232,951) (2,102,170) (4,428,806)
--------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment.. (3,741) (3,650,783) (6,583,134)
Purchase of investments............. -- (15,021,015) (26,214,499)
Maturities of investments........... -- 12,536,883 25,210,522
--------- ------------ ------------
Net cash used in investing
activities....................... (3,741) (6,134,915) (7,587,111)
--------- ------------ ------------
Cash flows from financing activities:
Borrowings under notes payable...... 250,000 3,682,506 5,765,761
Repayments of notes payable......... -- (39,525) (302,506)
Repayments of capital lease
obligations........................ -- (53,835) (90,364)
Proceeds from issuance of
convertible preferred stock, net... -- 5,600,899 5,967,819
Proceeds from issuance of common
stock.............................. 4,400 -- --
Proceeds from exercise of stock
options............................ -- 20 172,861
--------- ------------ ------------
Net cash provided by financing
activities....................... 254,400 9,190,065 11,513,571
--------- ------------ ------------
Net increase in cash and cash
equivalents......................... 17,708 952,980 (502,346)
Cash and cash equivalents, beginning
of period........................... -- 17,708 970,688
--------- ------------ ------------
Cash and cash equivalents, end of
period.............................. $ 17,708 $ 970,688 $ 468,342
========= ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company
Paradigm Genetics, Inc. (the "Company" or "Paradigm") was organized on
September 9, 1997 to discover the function of genes in plant and fungal
organisms. The Company is industrializing the process of determining gene
function to generate information that will enable it to develop novel products
in four major sectors of the global economy: crop production, nutrition, human
health and industrial products. The Company has developed its GeneFunction
Factory to simultaneously study the functions of many genes in our selected
organisms. The GeneFunction Factory is designed to be an integrated, rapid,
industrial-scale laboratory through which we can discover and alter genes,
measure the consequences of the alterations and reliably determine the function
of those genes. The Company stores and annotates gene function information in
its FunctionFinder bioinformatics system. Paradigm generates revenues by
licensing information mined from the data in FunctionFinder for the development
of products in crop production, nutrition, human health and industrial
applications. If the Company's strategic partners commercialize products
resulting from this information, the Company is entitled to receive royalty
payments based upon product revenues.
2. Summary of Significant Accounting Policies
Unaudited Pro Forma Balance Sheet
The Board of Directors has authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering ("IPO"). If the IPO
is consummated as presently anticipated, all shares of Series A and Series B
Preferred Stock will automatically convert into shares of common stock at a
one-for-one conversion ratio. The unaudited pro forma balance sheet reflects
the subsequent conversion of the Series A and Series B Preferred Shares into
common stock as if such conversion had occurred as of December 31, 1999.
In addition, the unaudited pro forma balance sheet reflects the sale of
3,000,000 shares of Series C Preferred Stock by the Company for $5.00 per share
in January 2000 as if this sale had occurred on December 31, 1999 and as if
such shares were immediately converted into common stock.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Investments
The Company considers all investments purchased with a maturity of between
three months and one year from the balance sheet date to be short-term
investments. All investments are considered as available for sale and are
carried at fair value in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115") with unrealized
gains and losses recognized as a component of other comprehensive income. At
December 31, 1998 and 1999, the amortized costs of these investments
approximated their market value. Realized gains and losses on sales of
investments are determined using the specific identification method. Realized
gains and losses on sales of investments were not significant during the period
from inception (September 9, 1997) to December 31, 1997 or the years ended
December 31, 1998 and 1999.
F-7
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment is primarily comprised of laboratory equipment,
computer equipment, furniture, and leasehold improvements which are recorded at
cost and depreciated using the straight-line method over their estimated useful
lives which range from one to seven years. Expenditures for maintenance and
repairs are charged to operations as incurred; major expenditures for renewals
and betterments are capitalized and depreciated. Property and equipment
acquired under capital leases are being depreciated over their estimated useful
lives or the respective lease term, if shorter.
Other Assets
Other assets includes deposits for building leases which will be returned
to the Company upon the expiration of related leases.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, investments, accounts payable, capital lease obligations
and long-term debt, are accounted for in accordance with the SFAS No. 115.
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its property and equipment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of'' ("SFAS No. 121"). SFAS No. 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets or the business to which such assets relate. No
impairment was required to be recognized during the period from inception
(September 9, 1997) to December 31, 1997 or the years ended December 31, 1998
and 1999.
Income Taxes
The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the
temporary differences between financial reporting and tax bases of the
Company's assets and liabilities and for tax carryforwards at enacted statutory
rates in effect for the years in which the differences are expected to reverse.
The effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date. In addition, valuation
allowances are established where necessary to reduce deferred tax assets to the
amounts expected to be realized.
Revenue Recognition
Revenues are derived from collaborative research agreements with strategic
partners and from government grants. Revenues are recognized under the
collaborative research agreements on a percentage of completion basis in
accordance with the applicable performance requirements of each collaboration
agreement. Milestone payments under collaborative agreements will be recognized
as revenue when the applicable milestone has been achieved and such achievement
has been acknowledged by the other party to the collaboration agreement.
Revenues from government grants are recognized as expenses are incurred over
the period of each grant. Cash received in excess of revenues recognized under
collaborative agreements and grants is recorded as deferred revenue.
F-8
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Research and Development
Research and development costs include expenses incurred by the Company to
develop its proprietary Gene Function Factory, perform required services under
collaborative research agreements and government grants and perform research
and development on internal projects. Research and development costs are
expensed as incurred.
Stock Based Compensation
The Company accounts for stock-based compensation based on the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25") which states that no compensation expense
is recorded for stock options or other stock-based awards to employees that are
granted with an exercise price equal to or above the estimated fair value of
the Company's common stock on the grant date. In the event that stock options
are granted with an exercise price below the estimated fair value of the
Company's common stock at the grant date, the difference between the fair value
of the Company's common stock and the exercise price is recorded as deferred
compensation. The Company recognized deferred compensation of $2,345,000 to
reflect the difference between the aggregate fair market value and exercise
price of all options granted during 1999 with an exercise price below the fair
market value of the Company's common stock at the date of grant. Deferred
compensation is amortized to compensation expense over the vesting period of
the related stock option. The Company recognized $66,212 in non-cash
compensation expense related to amortization of deferred compensation during
the year ended December 31, 1999. The Company did not recognize any non-cash
compensation expense for the year ended December 31, 1998 or the period from
inception (September 9, 1997) through December 31, 1997 related to stock
options granted to employees as no stock options were granted to employees with
an exercise price below the estimated fair value of the Company's common stock
until 1999. The Company has adopted the disclosure requirements of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
123"), which requires compensation expense to be disclosed based on the fair
value of the options granted at the date of grant.
Cash Flow
The Company made cash payments for interest of $13, $128,797, and $622,678
for the period from inception (September 9, 1997) to December 31, 1997 and the
years ended December 31, 1998 and 1999, respectively.
The Company acquired property and equipment through the assumption of
capital lease obligations amounting to $467,125 for the year ended December 31,
1998.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of temporary cash and short-
term investments and trade receivables. The Company primarily places its
temporary cash and short-term investments with high-credit quality financial
institutions which invest primarily in U.S. Government securities, commercial
paper of prime quality and certificates of deposit guaranteed by banks which
are members of the FDIC. Cash deposits are all in financial institutions in the
United States. The Company performs ongoing credit evaluations to reduce credit
risk and requires no collateral from its customers. Management estimates the
allowance for uncollectible accounts based on their historical experience and
credit evaluation.
The Company has one strategic partner which accounted for 100% of the
Company's collaborative research revenues and 94% and 93% of total revenues for
the years ended December 31, 1998 and 1999, respectively (see Note 8).
F-9
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Comprehensive Income (Loss)
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display comprehensive income and its
components in the financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources. The
Company had no items of other comprehensive income during the period from
inception (September 9, 1997) to December 31, 1997 or during the years ended
December 31, 1998 and 1999.
Net Income (Loss) Per Common Share
Historical
The Company computes net income (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS 128") and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under the
provisions of SFAS 128 and SAB No. 98, basic net income (loss) per common share
("Basic EPS") is computed by dividing net income (loss) by the weighted average
number of common shares outstanding. Diluted net income (loss) per common share
("Diluted EPS") is computed by dividing net income (loss) by the weighted
average number of common shares and dilutive potential common shares
equivalents then outstanding. Potential common shares consist of shares
issuable upon the exercise of stock options and warrants and shares issuable
upon the conversion of outstanding convertible preferred stock. The calculation
of the net loss per share for the years ended December 31, 1998 and 1999 does
not include zero and 8,487,520 potential shares of common stock equivalents,
respectively, as their impact would be antidilutive.
Pro Forma (Unaudited)
Pro forma net income (loss) per common share is calculated assuming the
conversion of all convertible preferred stock which will convert automatically
upon the effectiveness of the Company's initial public offering into 10,353,198
shares of common stock (see Note 9) at January 1, 1999 or the date of issuance,
if later.
Segment Reporting
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement requires companies to report information about
operating segments in interim and annual financial statements. It also requires
segment disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 131 effective for its year ended December
31, 1998. The Company has determined that it did not have any separately
reportable operating segments as of December 31, 1998 or 1999.
Internal Use Software
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Public Accountants ("AICPA"), issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP No. 98-1"), which provides guidance regarding
when software developed or obtained for internal use should be capitalized. The
Company adopted SOP No. 98-1 effective January 1, 1999. The adoption of SOP No.
98-1 did not have a material impact on the Company's financial position or
results of operations.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and
F-10
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
"derivatives"), and for hedging activities. SFAS 133, as amended by SFAS 137,
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000, with earlier application encouraged. The Company does not currently,
nor does it intend in the future, to use derivative instruments and therefore
does not expect that the adoption of SFAS 133 will have any impact on its
financial position or the results of operations.
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Buildings.............................................. $ -- $ 408,079
Leasehold improvements................................. 240,923 2,700,467
Furniture and laboratory equipment..................... 1,974,561 4,513,141
Computer equipment..................................... 1,906,165 3,083,096
---------- -----------
Total costs.......................................... 4,121,649 10,704,783
Less accumulated depreciation.......................... (299,356) (1,888,118)
---------- -----------
Property and equipment, net.......................... $3,822,293 $ 8,816,665
========== ===========
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1998 and 1999 was $299,044 and $1,588,762, respectively.
The Company leases certain equipment under capital lease agreements. The
cost of equipment under capital leases at December 31, 1998 and 1999 was
$467,125. The accumulated amortization for equipment under capital leases was
$116,701 at December 31, 1999.
4. Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts payable and
accounts receivable at December 31, 1998 and 1999 approximated their fair value
due to the short-term nature of these items.
The fair value of the Company's short-term investments at December 31,
1998 and 1999 was determined based on quoted financial market prices and
approximated their carrying values as these investments were primarily in
short-term corporate obligations.
The historical carrying value of the Company's capital lease obligations
and long-term debt approximated their fair value because the interest rates on
these obligations approximate rates currently available to the Company.
5. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Payroll...................................................... $109,024 $539,184
Taxes other than income...................................... 50,000 --
Other........................................................ 63,438 32,000
-------- --------
$222,462 $571,184
======== ========
</TABLE>
F-11
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. Income Taxes
No provision for federal or state income taxes has been recorded as the
Company has incurred net operating losses since inception.
Significant components of the Company's deferred tax assets and
liabilities at December 31, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
1998 1999
Deferred tax assets: ----------- -----------
<S> <C> <C>
Domestic net operating loss carryforwards........... $ 1,265,198 $ 3,778,046
Deferred revenue.................................... 575,899 2,259,318
Stock based compensation............................ -- 28,151
Compensation accruals............................... 25,594 60,004
Other .............................................. 19,393 2,794
----------- -----------
Total deferred tax assets........................... 1,886,084 6,128,314
Valuation allowance for deferred tax assets......... (1,733,030) (5,779,626)
----------- -----------
Deferred tax assets, net ........................... 153,054 348,688
----------- -----------
Deferred tax liabilities:
Property and equipment.............................. 153,054 348,688
----------- -----------
Total deferred tax liabilities...................... 153,054 348,688
=========== ===========
Net deferred tax asset (liability).................. $ -- $ --
=========== ===========
</TABLE>
At December 31, 1998 and 1999, the Company provided a full valuation
allowance against its net deferred tax assets since realization of these
benefits could not be reasonably assured. The increase in the valuation
allowance in 1999 resulted primarily from the additional net operating loss
carryforward generated.
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of $9,741,000. These net operating loss carryforwards begin
to expire in 2012. The utilization of the federal net operating loss
carryforwards may be subject to limitation under the rules regarding a change
in stock ownership as determined by the Internal Revenue Code due to changes in
ownership resulting from the Company's preferred stock financings.
Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- ----------- -----------
<S> <C> <C> <C>
Effective Rate............................ 0% 0% 0%
-------- ----------- -----------
United States federal tax at statutory
rate..................................... $(74,871) $(1,458,434) $(3,565,430)
State taxes (net of federal benefit)...... (8,902) (203,635) (499,238)
Change in valuation allowance............. 82,460 1,650,571 4,046,596
Other nondeductible expenses.............. 1,313 11,498 18,072
-------- ----------- -----------
Provision for income taxes................ $ -- $ -- $ --
-------- ----------- -----------
</TABLE>
F-12
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. Long Term Debt
The Company's long term debt at December 31, 1998 and 1999 consists of the
following:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Senior note payable.................................... $ -- $ 2,000,000
Notes payable for equipment financing.................. 3,542,981 7,006,236
---------- -----------
Total Notes payable.................................. 3,542,981 9,006,236
Less current maturities................................ (327,244) (1,182,456)
---------- -----------
Long-term portion.................................... $3,215,737 $ 7,823,780
========== ===========
</TABLE>
In February 1998, a bridge loan in the amount of $250,000 was converted
into 312,500 shares of the Company's Series A Preferred Stock at a conversion
price of $0.80 per share in conjunction with the closing of the Company's
initial round of financing (See Note 9).
The equipment financing consists of several notes payable to two financial
institutions for the financing of equipment purchases made in 1998 and 1999.
The payment amount is specified in each note agreement and is approximately 1%
of the outstanding balance for the first twelve months and then increases to 3%
of the outstanding balance for the remaining 36 months. A balloon payment of
the remaining balance on the notes is due at the maturity date of the
respective notes. The stated interest rate ranges from 11.3% to 14.2%. The
notes are collateralized by the equipment pledged against these proceeds by the
Company.
Subsequent to December 31, 1999, the Company entered into an additional
equipment financing loan agreement for $3.5 million with an additional $3.5
million available upon completion of an initial public offering. The loan term
will commence upon delivery of equipment with a monthly payment equal to 2.519%
of original principal for a period of 48 months. No additional borrowings will
be available under this loan agreement after January 31, 2001.
During July 1999, the Company entered into a $2 million senior debt
agreement with a financial institution. The note has interest-only payments
until March 1, 2002, followed by six equal principal and interest payments. The
loan is collateralized by the Company's equipment, intellectual property and
receivables. In connection with the debt, Paradigm issued the financial
institution 116,279 warrants to purchase the Company's common stock at an
exercise price of $2.15. The Company did not record any debt amount related to
these warrants as their fair value as determined by the Black Scholes valuation
method was deminimis.
Annual maturities of the long-term debt for the years subsequent to
December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000............................................................ $1,182,456
2001............................................................ 2,081,292
2002............................................................ 4,278,615
2003............................................................ 1,273,607
2004............................................................ 190,266
----------
Total....................................................... $9,006,236
==========
</TABLE>
8. Collaborative Agreements
In September 1998, Paradigm entered into a collaborative research
agreement with Bayer in which the Company is developing assays for the
development of new herbicides. If the collaborative agreement
F-13
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
continues for the full initial research term, the Company will receive a
minimum of $14.7 million in quarterly and up front payments during the
three-year period from September 1998 through October 2001. If the agreement is
extended and the Company meets all of its milestones, the Company will receive
up to a maximum of an additional $25.1 million. The Company has recognized $2.9
million in cumulative revenues from the collaboration agreement through
December 31, 1999.
In addition, the Company is entitled to receive a royalty of the annual
net sales of herbicides developed by Bayer for a defined period of time.
In November 1999, Paradigm entered into a collaborative agreement with
another strategic partner for the development of crop products and nutrition
products. If the collaborative agreement continues for the full research term,
the Company will receive $41.5 million in quarterly and up front payments
during the six-year period from November 1999 through January 2006. The
strategic partner has options to extend the agreement. If the agreement is
extended and all the required milestones are met, the Company will also receive
up to an additional $107.5 million.
9. Stockholders' Equity (Deficit)
In September 1997, the Company issued 4,400 shares of Common Stock to the
founders of the Company for gross proceeds of $4,400. On February 12, 1998, the
Company issued a common stock dividend of 851.2727 shares for each issued and
outstanding share of common stock which increased the number of shares of
outstanding common stock to 3,749,997. All share amounts in the accompanying
financial statements for all periods presented prior to the date of this
dividend have been retroactively adjusted to reflect this dividend.
During 1998, the Company's Articles of Incorporation were amended and
restated to authorize 20,000,000 shares of common stock with a par value of
$0.01 per share and 10,000,000 shares of preferred stock with a par value of
$0.01 per share, of which 9,275,000 shares were designated as Series A
Preferred Stock. The remaining 725,000 shares were undesignated.
In March 1999, the Company's Articles of Incorporation were amended and
restated to increase the number of authorized shares of preferred stock to
15,000,000, of which 8,000,000 shares were designated Series A Preferred Stock,
of which 7,562,500 shares were issued and outstanding at December 31, 1998 and
1999, and 2,790,698 shares were designated Series B Preferred Stock, of which
all were issued and outstanding as of December 31, 1999. The remaining
4,209,302 shares were undesignated. Also, in March 1999 the number of
authorized shares of common stock was increased to 30,000,000 shares, of which
3,750,247 and 5,224,257 shares were issued and outstanding at December 31, 1998
and 1999, respectively.
The Company is required at all times to reserve a number of shares of
unissued common stock for the purpose of effecting the conversion of the issued
and outstanding shares of the Series A and Series B Preferred Stock and the
exercise of all outstanding warrants and options to purchase the Company's
common stock. At December 31, 1999, the Company had 17,755,020 shares of common
stock reserved for this purpose.
In February 1998, the Company sold a total of 4,625,000 shares of Series A
Preferred Stock in a private placement transaction in exchange for gross
proceeds of $3,700,000 or $0.80 per share and issued 375,000 shares of Series A
Preferred Stock in exchange for the cancellation of notes payable of $300,000.
The notes payable were issued in the last quarter of 1997 and in January 1998.
Two of the purchasers of the Series A Preferred Stock each received 187,500
warrants for the purchase of Series A Preferred Stock with an exercise price of
$0.80 per share. Also, in consideration for being a lead investor, the Company
issued an additional 62,500 warrants in total to one of the two purchasers with
an exercise price of $0.80 per share. The Company did not record any additional
paid-in capital related to the value of these warrants, because the fair market
value of the warrants, as calculated using the Black-Scholes pricing model, was
de minimis.
F-14
<PAGE>
PARADIGMS GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In March 1998, 62,500 shares of Series A Preferred Stock were issued to an
investor for the cancellation of convertible debt of $50,000, which borrowing
was made in January 1998.
In May 1998, 2,500,000 shares of Series A Preferred Stock were sold to the
same group of purchasers in a second private placement transaction for gross
proceeds of $2,000,000 or $0.80 per share.
In March 1999, the Company sold 2,790,698 shares of Series B Preferred
Shares in a private placement transaction in exchange for gross proceeds of $
6,000,000 or $2.15 per share. The purchasers of the Series B Preferred Shares
were primarily the same as the holders of the Series A Preferred Stock. All of
the Series B Preferred Shares were issued at a price of $2.15. The rights and
preferences of the Series B Preferred Stock are essentially the same as the
Series A Preferred Stock with certain exceptions which are detailed below.
Rights, Preferences and Terms of Capital Stock
The following is a summary of the rights, preferences, and terms of the
Company's outstanding series of common and preferred stock.
Dividends
The holders of the Series A and Series B Preferred Stock shall be entitled
to receive in any fiscal year of the Company, when and if declared by the Board
of Directors, dividends payable in cash in an amount per share of Series A and
Series B Preferred Stock for such fiscal year at least equal to the product of
(a) the per share amount multiplied by (b) the number of whole shares of Common
Stock into which each such share of Series A and B Preferred Stock is
convertible immediately after the close of business on the record date fixed
for such dividend. No dividend shall be paid on Series A Preferred Stock unless
an equivalent dividend can be paid on the Series B Preferred Stock. The right
to such dividends shall not be cumulative, and no right shall accrue. Nor shall
any undeclared or unpaid dividend bear or accrue interest.
Liquidity
In the event of any liquidation, the holders of Series B Preferred Stock
shall be entitled to receive prior and in preference to any distribution of any
of the assets or surplus funds of the Company to the holders of Series A
Preferred Stock and common stock an amount equal to $2.15 per share plus all
accrued or declared but unpaid dividends. The holders of Series A Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets or surplus funds of the Company to holders of Common Stock
and any series of preferred stock the terms of which specifically provide that
such series ranks junior and subordinate to the Series A Preferred Stock with
respect to distribution of assets upon any liquidation or deemed liquidation,
an amount equal to $0.80 per share, adjusted for any stock splits or dividends,
plus all accrued but unpaid dividends. After payment to the holders of the
Series A Preferred Stock, the entire remaining assets and funds of the Company
legally available for distribution shall be distributed among the holders of
the Common Stock in proportion to the shares of Common Stock then held by the
holders of the Series A Preferred Stock.
Voting
Series A Preferred Stock and Series B Preferred Stock shall be voted
equally with shares of common stock at any annual or special meeting of
stockholders of the Company. As long as twenty percent of each series of
Preferred shares originally issued remain outstanding, the affirmative vote or
written consent of the holders of at least two-thirds of the outstanding shares
shall be required to approve all matters brought before the stockholders for
approval.
F-15
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Conversion
Each share of Series A or Series B Preferred Stock shall be convertible,
at the option of the holder, into shares of the Company's common stock. The
initial conversion price per share of Series A Preferred Stock shall be $0.80
which resulted in an initial conversion rate of one to one. The initial
conversion price and value for the Series B Preferred Shares is $2.15. Each
share of Series A and Series B Preferred Stock shall automatically be converted
into shares of common stock at the then-effective conversion rate, immediately
upon the closing of the sale of the Company's Common Stock in a firm
commitment, underwritten public offering, at a public offering price equal to
or exceeding $10.00 per share of common stock and with aggregate gross proceeds
to the Company and any selling stockholders which equal or exceed $20,000,000.
10. Stock Options and Warrants
In February 1998, the Company adopted the 1998 Stock Option Plan ("the
Plan") which provided for the grant of up to 1,765,000 employee stock options.
In March 1999, the Plan was amended to provide for the grant of up to 2,515,000
employee stock options. The board amended the Plan in November 1999 to increase
the options available for grant to 3,715,000. In December 1999, the board
authorized an additional 300,000 options for the Plan. Stock options granted
under the Plan are to have exercise periods not to exceed ten years. Options
granted under the Plan generally vest over a period of four years retroactively
from the date of hire. The Plan provides the right to exercise options before
they are vested into shares of common stock subject to a repurchase right by
the Company.
A summary of the status of the Plan as of December 31, 1999 and changes
during the years ended December 31, 1998 and 1999 presented below:
<TABLE>
<CAPTION>
Shares Underlying Weighted Average
Options Exercise Price
----------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1997............. -- $ --
Granted.................................... 1,412,750 0.08
Forfeited.................................. (2,000) 0.08
Exercised.................................. (250) 0.08
---------- -----
Outstanding at December 31, 1998............. 1,410,500 0.08
Granted.................................... 1,633,119 0.29
Forfeited.................................. (95,823) 0.08
Exercised.................................. (1,474,010) 0.12
---------- -----
Outstanding at December 31, 1999............. 1,473,786 $0.28
========== =====
</TABLE>
As of December 31, 1999, the Company had 831,340 shares of common stock
outstanding which were subject to the Company's lapsing right of repurchase in
the event the holder's association with the Company terminates. These shares
are the result of the exercise of unvested stock options by employees. The
shares which relate to the exercise of unvested stock options generally vest
over the four year vesting period of the underlying exercised stock options.
There were no options granted during the period from inception (September
9, 1997) to December 31, 1997. All options granted during the year ended
December 31, 1998 were granted with an exercise price equal to the fair value
of the underlying common stock on the grant date, as determined by the board of
directors.
F-16
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1999, the Company issued stock options to certain employees with
exercises below the deemed fair value of its common stock at the date of
grant. In accordance with the requirements of APB 25, the Company has recorded
deferred compensation and additional paid-in capital for the difference
between the exercise price of the stock options and the deemed fair value of
the Company's common stock at the date of grant. This deferred compensation is
amortized to expense over the period during which the options or restricted
common stock, subject to repurchase, vest using the straight line method over
a period which is generally four years. During 1999, the Company recognized
$2,345,000 in deferred compensation related to these options of which $66,212
was amortized to expense during the year ended December 31, 1999.
The following is an analysis of stock options granted to employees
subsequent to December 31, 1999:
<TABLE>
<CAPTION>
Options Exercise
Date of Grant Granted Price
------------- ------- --------
<S> <C> <C>
January 17, 2000 57,052 $2.50
January 20, 2000 63,902 4.50
February 8, 2000 148,000 5.00
February 16, 2000 4,439 10.00
</TABLE>
The Company expects to record deferred compensation related to these
option grants in an amount equal to the difference between the estimated fair
value of the Company's common stock and the exercise price of these options.
In addition, in February 2000 the Company granted 12,000 options with an
exercise price of $5.00 per share to members of its Scientific Advisory Board.
The Company expects to record a charge equal to the fair value of these
options as determined in accordance with the provisions of SFAS No. 123.
The following table summarizes information about the Company's stock
options at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------
Weighted Average Weighted Average
Range of Exercise Prices Number Outstanding Contracted Life Exercise Price
- ------------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C>
$ 0.08 533,817 8.7 $0.08
$ 0.22 581,149 9.5 $0.22
$ 0.60 306,320 10.0 $0.60
$ 1.00 52,500 10.0 $1.00
</TABLE>
At December 31, 1999, the Company had 437,500 warrants outstanding to
purchase the Company's common stock at a price of $0.80 which expire in
February 2008. The warrants were issued in connection with the Series A
Preferred Stock financing.
In July 1999, the Company entered into a senior debt agreement. In
connection with the agreement the Company issued 116,279 warrants to purchase
the Company's common stock with an exercise price of $2.15 which will expire
in July 2009. Also in July 1999, the Company entered into an operating lease
agreement for a new facility being constructed. In connection with the
agreement, the Company issued 150,000 warrants to purchase the Company's
common stock with an exercise price of $3.00 per share which will expire in
July 2009. The fair value of these warrants as determined using the Black-
Scholes model in accordance with SFAS 123 was de minimis.
F-17
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The activity for stock warrants is presented in the following table:
<TABLE>
<CAPTION>
Shares Weighted Average Shares Weighted Average
Underlying Exercise Price Underlying Exercise Price
Warrants Per Share Warrants Per Share
---------- ---------------- ---------- ----------------
Year Ended December 31,
-------------------------------------------------------
1998 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................ -- $ -- 437,500 $0.80
Issued.................. 437,500 0.80 266,279 2.63
Outstanding at end of
year................... 437,500 $0.80 703,779 $1.49
Exercisable at end of
year................... 437,500 0.80 703,779 1.49
</TABLE>
Subsequent to December 31, 1999, and in connection with an expansion of
the July 1999 operating lease agreement for a new facility, the Company issued
a further 60,000 warrants to purchase the Company's common stock with an
exercise price of $5.00 per share. These warrants have an exercise period of 10
years. The Company will calculate the value of these warrants in accordance
with SFAS No. 123 using the Black Scholes valuation method. The resulting fair
value will be deferred and recognized as an increase to rent expense over the
life of the related lease.
The Company continues to apply APB No. 25 and related interpretations in
accounting for the Plan. Had compensation costs for the Plan been determined
based on the fair value at the grant date for awards under the Plan consistent
with the methods of SFAS No. 123, the Company's net loss for the years ended
December 31, 1998 and 1999 would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Net Loss Net Loss
Per Share As Per Share
As Reported Pro Forma Reported Pro Forma
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
1998 net loss................ $ (4,289,513) $ (4,293,951) $(1.14) $(1.15)
============ ============ ====== ======
1999 net loss................ $(10,486,560) $(11,050,398) $(2.48) $(2.51)
============ ============ ====== ======
</TABLE>
The per share weighted average fair value of stock options granted during
fiscal 1998 and 1999 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions for 1998
and 1999: expected dividend yield of 0%; risk free interest rate of 6.0% in
1998 and 6.1% in 1999; an expected option life of approximately five years; and
a volatility factor of 0%.
F-18
<PAGE>
PARADIGM GENETICS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. Commitments
The Company leases software under a noncancellable capital lease and
leases office space and certain equipment under operating leases. Future
minimum lease payments required under the leases at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
2000.................................................. $ 128,560 $1,006,731
2001.................................................. 128,560 1,403,288
2002.................................................. 117,847 1,250,641
2003.................................................. 1,175,782
Thereafter............................................ 1,229,520
--------- ----------
Total minimum lease payments........................ 374,967 $6,065,962
==========
Less: amount representing interest.................... (52,042)
---------
Present value of net minimum lease payments......... 322,925
Less: current portion................................. (100,075)
---------
Long-term portion capital lease obligations......... $ 222,850
=========
</TABLE>
Rent expense under operating leases totaled $ 5,788, $282,206 and $519,802
for the period from inception (September 9, 1997) through December 31, 1997 and
the years ended December 31, 1998 and 1999, respectively.
In March 1998, the Company entered into an agreement with a consultant to
identify collaboration opportunities for the Company. The consultant will
receive a monthly fee for its services plus a success fee based on the amount
of funding received by the Company under collaboration agreements entered into
during the term of this consulting agreement.
Based on the amount of funds received by the Company from its
collaboration agreements through December 31, 1999, the Company has paid this
consultant success fees of approximately $296,000. If the Company receives the
maximum amount of funding under its existing collaboration agreements,
approximately an additional $1.9 million in success fees will be required to be
paid to this consultant.
12. Subsequent Events
In January 2000, the Company sold 3,000,000 shares of Series C Preferred
Stock to a group of investors for gross proceeds of $15,000,000 or $5.00 per
share. The Series C Preferred Stock automatically converts into shares of the
Company's common stock upon the effectiveness of a qualified initial public
offering at a one-to-one conversion ratio.
F-19
<PAGE>
[Inside Back Cover]
Text: Bioinformatics Backbone for Laboratory-validated Genomics
FunctionFinder collects, stores, retrieves, analyzes, and performs data
mining on gene function data to create knowledge
Graphics:
. Photos of lab tech entering data into computers and networked equipment
. Screen shot of Laboratory Information Management System
. Screen shot of splash page from FunctionFinder
<PAGE>
Shares
[PARADIGM GENETICS, INC. LOGO]
Common Stock
----------------
PROSPECTUS
----------------
Chase H&Q
J.P. Morgan
Pacific Growth Equities, Inc.
Stephens Inc.
-------------
, 2000
-------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
Until , 2000 (or 25 days after the date of this prospectus) all
dealers that buy, sell or trade Paradigm's common stock, whether or not
participating in this offering may be required to deliver a prospectus. The
delivery requirement is in addition to the dealers' obligation to deliver a
prospectus when serving as underwriters and with respect to their unsold
allotment or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 26,400
Nasdaq National Market Listing Fee............................. 90,000
----------
NASD Filing Fee................................................ 10,500
----------
Printing and Engraving Fees.................................... 150,000
----------
Legal Fees and Expenses........................................ 375,000
----------
Accounting Fees and Expenses................................... 325,000
----------
Blue Sky Fees and Expenses..................................... 10,000
----------
Transfer Agent and Registrar Fees.............................. 10,000
----------
Miscellaneous.................................................. 3,100
----------
Total...................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
The amended and restated certificate of incorporation to be adopted in
connection with our proposed reincorporation into Delaware provides that we
shall indemnify, to the fullest extent authorized by the Delaware General
Corporation Law, each person who is involved in any litigation or other
proceeding because such person is or was a director or officer of Paradigm
Genetics, Inc. or is or was serving as an officer or director of another entity
at our request, against all expense, loss or liability reasonably incurred or
suffered in connection therewith. Our proposed amended and restated certificate
of incorporation provides that the right to indemnification includes the right
to be paid expenses incurred in defending any proceeding in advance of its
final disposition, provided, however, that such advance payment will only be
made upon delivery to us of an undertaking, by or on behalf of the director or
officer, to repay all amounts so advanced if it is ultimately determined that
such director is not entitled to indemnification. If we do not pay a proper
claim for indemnification in full within 60 days after we receive a written
claim for such indemnification, our bylaws authorize the claimant to bring an
action against us and prescribes what constitutes a defense to such action.
Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify any director or officer of the corporation against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding brought by reason of the fact that such person is or was a director
or officer of the corporation, if such person acted in good faith and in a
manner that he reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if he or she had no reason to believe his or her conduct was
unlawful. In a derivative action, (i.e., one brought by or on behalf of the
corporation), indemnification may be provided only for expenses actually and
reasonably incurred by any director or officer in connection with the defense
or settlement of such an action or suit if such person acted in good faith and
in a manner that he or she reasonably believed to be in, or not opposed to, the
best interests of the corporation, except that no indemnification shall be
provided if such person shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
or suit was brought shall determine that the defendant is fairly and reasonably
entitled to indemnity for such expenses despite such adjudication of liability.
II-1
<PAGE>
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law,
Article Tenth of our amended and restated certificate of incorporation
eliminates the liability of a director to us or our stockholders for monetary
damages for such a breach of fiduciary duty as a director, except for
liabilities arising:
. from any breach of the director's duty of loyalty to us or our
stockholders;
. from acts or omissions that the director knew at the time of the
breach knew or believed were clearly in conflict with the best
interests of the corporation;
. under Section 174 of the Delaware General Corporation Law; and
. from any transaction from which the director derived an improper
personal benefit.
We carry insurance policies insuring our directors and officers against
certain liabilities that they may incur in their capacity as directors and
officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the underwriters of
Paradigm, our directors and officers who sign the Registration Statement and
persons who control Paradigm, under certain circumstances.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this Registration Statement, we
have sold the following securities that were not registered under the
Securities Act. The following information gives effect to a -for- split of
our common stock effected on , 2000.
(a) Issuances of Capital Stock and Warrants
The sale and issuance of the securities described in paragraphs (1)
through (12) below were deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) or Regulation D promulgated
thereunder.
(1) On September 9, 1997, we issued 4,400 shares of common stock the
founders of the Company for $1.00 per share.
(2) On February 12, 1998, we issued a common stock dividend of 851.2727
shares for each issued and outstanding share of common stock.
(3) On February 12, 1998, we sold and issued a total of 4,625,000 shares
of Series A Preferred Stock for $0.80 per share to two investors in a
private placement. Each share of Series A Preferred Stock is convertible
into one share of our common stock.
(4) On February 12, 1998, we issued warrants to purchase an aggregate of
437,500 shares of our Series A Preferred Stock at an exercise price of
$0.80 per share to two investors.
(5) On February 12, 1998, we issued 375,000 shares of Series A Preferred
Stock in exchange for the cancellation of notes payable of $300,000.
(6) On March 6, 1998, we issued a total of 62,500 shares of Series A
Preferred Stock in exchange for the cancellation of convertible debt of
$50,000.
(7) On May 29, 1998, we sold and issued a total of 2,500,000 shares of
Series A Preferred Stock for $0.80 per share to two investors in a private
placement.
II-2
<PAGE>
(8) On March 12, 1999, we sold and issued a total of 2,790,698 shares of
Series B Preferred Stock for $2.15 per share to four investors in a private
placement. Each share of our Series B Preferred Stock is convertible into
one share of our common stock.
(9) On January 19, 2000, we issued warrants to purchase an aggregate of
60,000 shares of common stock at an exercise price of $5.00 per share to
one investor.
(10) On July 20, 1999, we issued warrants to purchase an aggregate of
116,279 shares of common stock at an exercise price of $2.15 per share to
one investor.
(11) On July 27, 1999, we issued warrants to purchase an aggregate of
150,000 shares of common stock at an exercise price of $3.00 per share to
one investor.
(12) On January 21, 2000, we sold and issued a total of 3,000,000 shares
of Series C Convertible Preferred Stock for $5.00 per share to five
investors in a private placement. Each share of our Series C Convertible
Preferred Stock is convertible into one share of our common stock.
(b) Certain Grants and Exercises of Stock Options
The sale and issuance of the securities described below were deemed to be
exempt from registration under the Securities Act in reliance on Rule 701
promulgated under Section 3(b) of the Securities Act, as transactions by an
issuer not involving a public offering or transactions pursuant to compensatory
benefit plans and contracts relating to compensation as provided under Rule
701.
Pursuant to our 1998 Stock Option Plan, we have issued options to purchase
an aggregate of 3,331,262 shares of common stock. Of these options:
. options to purchase 120,559 shares of common stock have been canceled
or lapsed without being exercised;
. options to purchase 1,630,245 shares of common stock have been
exercised; and
. options to purchase a total of 1,580,458 shares of common stock are
currently outstanding, at a weighted average exercise price of $1.01
per share.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation of the Registrant.
3.2* Amended and Restated Certificate of Incorporation of the
Registrant to be filed upon completion of this offering.
3.3 By-laws of the Registrant.
3.4* Restated Bylaws of the Registrant to be effective upon completion
of this offering.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
10.1 Registrant's 1998 Stock Option Plan.
10.2 Founder Employment Agreement, dated February 12, 1998, between the
Registrant and John A. Ryals
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.3 Founder Employment Agreement, dated February 12, 1998, between the
Registrant and Scott J. Uknes
10.4 Founder Proprietary Information and Inventions Agreement, dated
February 12, 1998, between the Registrant and John A. Ryals
10.5 Founder Proprietary Information and Inventions Agreement, dated
February 12, 1998, between the Registrant and Scott J. Uknes
10.6 Amended and Restated Registration Rights Agreement, dated January
21, 2000, between the Registrant and certain Founders and
Investors
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
(see Exhibit 5.1)
24.1 Powers of Attorney (see Page II-5)
27 Financial Data Schedule -- 1997 and 1998
27.1 Financial Data Schedule -- 1999
</TABLE>
- ------------------
* To be filed by amendment.
(b) Financial Statement Schedules
Financial Statement Schedules are omitted because the information is
included in our financial statements or notes to those financial statements.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Boston,
Massachusetts, on February 18, 2000.
PARADIGM GENETICS, INC.
/s/ John A. Ryals
By: _________________________________
John A. Ryals
Chief Executive Officer and
President
POWER OF ATTORNEY
We the undersigned officers and directors of Paradigm Genetics, Inc.,
hereby severally constitute and appoint John A. Ryals and Ian A.W. Howes, and
each of them singly (with full power to each of them to act alone), our true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution in each of them for him and in his name, place and stead, and in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement (or any other Registration
Statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933), and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the
premises, as full to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their or his substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities held on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------- -------------------
<S> <C> <C>
/s/ John A. Ryals Chief Executive Officer, February 18, 2000
______________________________________ President and Director
John A. Ryals (principal executive
officer)
/s/ Ian A. W. Howes Vice President of Finance February 18, 2000
______________________________________ and Chief Financial
Ian A. W. Howes Officer (principal
financial and accounting
officer)
/s/ G. Steven Burrill Director February 18, 2000
______________________________________
G. Steven Burrill
/s/ Dennis Dougherty Director February 18, 2000
______________________________________
Dennis Dougherty
/s/ Terrance McGuire Director February 18, 2000
______________________________________
Terrance McGuire
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- -------------------------- -------------------
<S> <C> <C>
/s/ Michael Summers Director February 18, 2000
______________________________________
Michael Summers
/s/ Robert Goodman Director February 18, 2000
______________________________________
Robert Goodman
/s/ Henri Zinsli Director February 18, 2000
______________________________________
Henri Zinsli
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Restated Articles of Incorporation of the Registrant.
3.2* Amended and Restated Certificate of Incorporation of the
Registrant to be filed upon completion of this offering.
3.3 By-laws of the Registrant.
3.4* Restated Bylaws of the Registrant to be effective upon completion
of this offering.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
10.1 Registrant's 1998 Stock Option Plan.
10.2 Founder Employment Agreement, dated February 12, 1998, between the
Registrant and John A. Ryals
10.3 Founder Employment Agreement, dated February 12, 1998, between the
Registrant and Scott J. Uknes
10.4 Founder Proprietary Information and Inventions Agreement, dated
February 12, 1998, between the Registrant and John A. Ryals
10.5 Founder Proprietary Information and Inventions Agreement, dated
February 12, 1998, between the Registrant and Scott J. Uknes
10.6 Amended and Restated Registration Rights Agreement, dated January
21, 2000, between the Registrant and certain Founders and
Investors
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
(see Exhibit 5.1)
24.1 Powers of Attorney (See Page II-5)
27 Financial Data Schedule -- 1997 and 1998
27.1 Financial Data Schedule -- 1999
</TABLE>
- ------------------
* To be filed by amendment.
<PAGE>
Exhibit 3.1
[SEAL OF STATE OF NORTH CAROLINA]
STATE OF NORTH CAROLINA Department of The Secretary of State
- --------------------------------------------------------------------------------
To all whom these presents shall come, Greetings:
I, ELAINE F. MARSHALL, Secretary of State of the State of North Carolina,
do hereby certify the following and hereto attached to be a true copy of
ARTICLES OF RESTATEMENT
OF
PARADIGM GENETICS INC.
the original of which was filed in this office on the 21st day of January, 2000.
IN WITNESS WHEREOF, I have hereunto set my
hand and affixed my official seal at the
City of Raleigh, this 21st day of January, 2000
[SEAL]
/s/ Elaine F. Marshall
Secretary of State
<PAGE>
ARTICLES OF RESTATEMENT TO
THE ARTICLES OF INCORPORATION OF
PARADIGM GENETICS INC.
Pursuant to Sections 55-10-07, 55-10-02 and 55-6-02 of the North Carolina
Business Corporation Act, the undersigned corporation hereby submits these
Articles of Restatement for the purpose of integrating into one document its
original Articles of Incorporation and all amendments thereto and also for the
purpose of further amending its Articles of Incorporation:
1. The name of the corporation is Paradigm Genetics Inc.
2. Attached hereto as Exhibit A are the Amended and Restated Articles of
---------
Incorporation of Paradigm Genetics Inc.
3. The attached Amended and Restated Articles of Incorporation were duly
approved and adopted by the board of directors of Paradigm Genetics
Inc. as of the date hereof, and contain an amendment authorizing the
issuance of a series within a class of its shares and fixing the
preferences, limitations and relative rights of such series, which
amendment does not require shareholder approval pursuant to Sections
55-6-02 and 55-10-02 of the North Carolina Business Corporation Act.
4. These Articles of Restatement will become effective upon filing.
IN WITNESS WHEREOF, I have hereunto set my hand as of the 20th day of
January, 2000.
PARADIGM GENETICS INC.
By: /s/ Henry P. Nowak
------------------------------------
Name: Henry P. Nowak
Title: Secretary, V.P.
<PAGE>
EXHIBIT A
---------
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PARADIGM GENETICS INC.
ARTICLE I
The name of the corporation is Paradigm Genetics Inc. (the "Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State of
North Carolina is 104 Alexander Drive, Building 2, Research Triangle Park,
Durham County, North Carolina 27709-4528, and the name of its registered agent
at such address is John A. Ryals.
ARTICLE III
A. Classes of Stock. The Corporation is authorized to issue two classes
----------------
of shares to be designated, respectively, "Common Stock" and "Preferred Stock".
The total number of shares of capital stock that this Corporation shall have
authority to issue is Forty-Five Million (45,000,000). The total number of
shares of Common Stock this Corporation shall have authority to issue is Thirty
Million (30,000,000) shares, par value $0.01 per share. The total number of
shares of Preferred Stock this Corporation shall have authority to issue is
Fifteen Million (15,000,000) shares, par value $0.01 per share, of which Eight
Million (8,000,000) shares shall be designated Series A Preferred Stock (the
"Series A Preferred Stock"), Two Million Seven Hundred Ninety Thousand Six
Hundred Ninety Eight (2,790,698) shares shall be designated Series B Preferred
Stock (the "Series B Preferred Stock"), and Three Million (3,000,000) shares
shall be designated Series C Preferred Stock (the "Series C Preferred Stock").
The Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock are sometimes collectively referred to herein as the "Series Preferred
Stock".
B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred
-------------------------------------------------------
Stock authorized by these Amended and Restated Articles of Incorporation may be
issued from time to time in one or more classes or series. The powers, rights,
preferences, privileges and restrictions granted to and imposed on the Series
Preferred Stock are set forth in this Article III(B). The remaining shares of
Preferred Stock of the Corporation may be issued from time to time in one or
more classes or series, the shares of each such class or series to have such
designations, preferences, relative rights, and powers, including voting powers,
and par value, if any (or qualifications, limitations or restrictions thereof)
as are stated in the resolution or resolutions providing for the issuance of
such class or series adopted by the Board of Directors of the Corporation.
Authority is expressly granted to the Board of Directors, subject to the
provisions hereof and to any limitations provided under the North Carolina
Business Corporation Act, to authorize the issuance of one or more classes, or
one or more series within a class, of Preferred Stock, and with respect to each
such class or series to determine and fix by resolution or resolutions the
designations, preferences, relative rights, and powers, including
2
<PAGE>
voting powers, full or limited, or no voting power, and the par value, if any,
of such shares or the qualifications, limitations or restrictions of such
shares. This paragraph is intended to afford to the Board of Directors the
maximum authority permitted under Section 55-6-02 of the North Carolina General
Statutes.
1. Dividends. The holders of the Series A Preferred Stock shall be
entitled to receive in any fiscal year of the Corporation, when and as declared
by the Board of Directors, out of any assets at the time legally available
therefor, before any cash dividend shall be paid upon or set aside for the
Common Stock in such fiscal year, dividends payable in cash in an amount per
share of Series A Preferred Stock for such fiscal year at least equal to the
product of (a) the per share amount, if any, of the cash dividend declared, paid
or set aside for the Common Stock in such fiscal year, multiplied by (b) the
number of whole shares of Common Stock into which each such share of Series A
Preferred Stock is convertible immediately after the close of business on the
record date fixed for such dividend. The holders of Series B Preferred Stock
shall be entitled to receive in any fiscal year of the Corporation, when and as
declared by the Board of Directors, out of any assets at the time legally
available therefor, before any cash dividend shall be paid upon or set aside for
the Common Stock in such fiscal year, dividends payable in cash in an amount per
share of Series B Preferred Stock for such fiscal year at least equal to the
product of (c) the per share amount, if any, of the cash dividend declared, paid
or set aside for the Common Stock in such fiscal year, multiplied by (d) the
number of whole shares of Common Stock into which each such share of Series B
Preferred Stock is convertible immediately after the close of business on the
record date fixed for such dividend. The holders of Series C Preferred Stock
shall be entitled to receive in any fiscal year of the Corporation, when and as
declared by the Board of Directors, out of any assets at the time legally
available therefor, before any cash dividend shall be paid upon or set aside for
the Common Stock in such fiscal year, dividends payable in cash in an amount per
share of Series C Preferred Stock for such fiscal year at least equal to the
product of (e) the per share amount, if any, of the cash dividend declared, paid
or set aside for the Common Stock in such fiscal year, multiplied by (f) the
number of whole shares of Common Stock into which each such share of Series C
Preferred Stock is convertible immediately after the close of business on the
record date fixed for such dividend. No dividend shall be paid on the Series A
Preferred Stock unless equivalent dividends, on an as converted basis, are
declared and paid concurrently on the Series B Preferred Stock and the Series C
Preferred Stock. No dividends shall be paid on the Series B Preferred Stock
unless equivalent dividends, on an as converted basis, are declared and paid
concurrently on the Series C Preferred Stock. The right to such dividends on
shares of Series Preferred Stock shall not be cumulative, and no right shall
accrue to holders of shares of Series Preferred Stock by reason of the fact that
dividends on such shares are not declared in any prior year, nor shall any
undeclared or unpaid dividend bear or accrue interest. After payment of
dividends to the holders of Series Preferred Stock, dividends may be declared
and distributed among all holders of Common Stock; provided, however, that no
dividend may be declared and distributed among holders of Common Stock at a rate
greater than the rate at which dividends are paid to the holders of Preferred
Stock based on the number of shares of Common Stock into which such shares of
Preferred Stock are convertible (as adjusted for any stock dividends,
combinations or splits with respect to such shares) on the date such dividend is
declared.
3
<PAGE>
2. Liquidation Preference.
(a) Series C Rights on Liquidation. In the event of any liquidation,
------------------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of the Series C Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds of
the Corporation to the holders of Common Stock, Series A Preferred Stock, and
Series B Preferred Stock, and any series of preferred stock the terms of which
specifically provide that such series ranks junior and subordinate to the Series
C Preferred Stock with respect to distribution of assets upon any liquidation or
deemed liquidation, an amount equal to $5.00 per share (as adjusted for any
stock dividends, combinations or splits with respect to such shares) plus all
accrued or declared but unpaid dividends on such share for each share of Series
C Preferred Stock then held by them. If upon the occurrence of such event, the
assets and funds thus distributed among the holders of the Series C Preferred
Stock shall be insufficient to permit the payment to such holders of the full
preferential amount described in this Section 2(a), then the entire assets and
funds of the Corporation legally available for distribution shall be distributed
ratably among the holders of the Series C Preferred Stock in proportion to the
preferential amount each such holder is otherwise entitled to receive.
(b) Series B Rights on Liquidation. In the event of any liquidation,
------------------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of the Series B Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds of
the Corporation to the holders of Common Stock and Series A Preferred Stock, and
any series of preferred stock the terms of which specifically provide that such
series ranks junior and subordinate to the Series B Preferred Stock with respect
to distribution of assets upon any liquidation or deemed liquidation, an amount
equal to $2.15 per share (as adjusted for any stock dividends, combinations or
splits with respect to such shares) plus all accrued or declared but unpaid
dividends on such share for each share of Series B Preferred Stock then held by
them. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series B Preferred Stock shall be
insufficient to permit the payment to such holders of the full preferential
amount described in this Section 2(b), then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series B Preferred Stock in proportion to the
preferential amount each such holder is otherwise entitled to receive.
(c) Series A Rights on Liquidation. In the event of any liquidation,
------------------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of the Series A Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds of
the Corporation to the holders of Common Stock and any series of preferred stock
the terms of which specifically provide that such series ranks junior and
subordinate to the Series A Preferred Stock with respect to distribution of
assets upon any liquidation or deemed liquidation, an amount equal to $0.80 per
share (as adjusted for any stock dividends, combinations or splits with respect
to such shares) plus all accrued or declared but unpaid dividends on such share
for each share of Series A Preferred Stock then held by them. If upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the full preferential amount described in this
Section 2(c), then the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the holders of the
Series A Preferred Stock in proportion to the preferential amount each such
holder is otherwise entitled to receive.
4
<PAGE>
(d) Distribution of Remaining Assets. After payment to the holders
--------------------------------
of the Series Preferred Stock of the amounts set forth in Article III(B),
Sections 2(a), 2(b) and 2(c) above, the entire remaining assets and funds of the
Corporation legally available for distribution, if any, shall be distributed
among the holders of the Common Stock in proportion to the shares of Common
Stock then held by them.
(e) Certain Other Transactions. For purposes of this Article III(B),
--------------------------
Section 2, a liquidation, dissolution or winding up of the Corporation shall be
deemed to be occasioned by, or to include, (A) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary (other than a mere reincorporation transaction) or (B) a sale
of all or substantially all of the assets of the Corporation; unless, in either
case, the Corporation's stockholders of record as constituted immediately prior
to such acquisition or sale will, immediately after such acquisition or sale (by
virtue of securities issued as consideration for the Corporation's acquisition
or sale or otherwise), hold at least fifty percent (50%) of the voting power of
the surviving or acquiring entity, or unless the fair market value of the
consideration received by holders of the Series A Preferred Stock (assuming
conversion of such shares to Common Stock) is valued at greater than $0.80 per
share of Common Stock, the fair market value of the consideration received by
the holders of the Series B Preferred Stock (assuming conversion of such shares
to Common Stock) is valued at greater than $2.15 per share of Common Stock and
the fair market value of the consideration received by holders of the Series C
Preferred Stock (assuming conversion of such shares to Common Stock) is valued
at greater than $5.00 per share of Common Stock (in each case as adjusted for
any stock dividends, combinations or splits with respect to such shares) (each
such event, a "Combination"). In the event of the occurrence of any
Combination, and in the event the holders of shares of the Series Preferred
Stock do not elect to convert pursuant to Section 4 below prior to or
contemporaneously with such Combination, then such holders shall continue to
have the other rights set forth in this Article III(B), including under Sections
2(a), 2(b) and 2(c) above.
(f) Valuation of Non-Cash Assets. Whenever the distribution provided
----------------------------
for in this Article III(B), Section 2 shall be payable in securities or property
other than cash, the value of such distribution shall be the fair market value
of such securities or other property as determined in good faith by the Board of
Directors.
3. Voting Rights.
(a) Generally. Except as otherwise required by applicable law or as
---------
set forth herein, the shares of Series Preferred Stock shall be voted equally
with the shares of Common Stock (voting together with the shares of Common Stock
as a single class) at any annual or special meeting of stockholders of the
Corporation, or may act by written consent in the same manner as Common Stock,
upon the following basis: each holder of one or more shares of Series Preferred
Stock shall be entitled to notice of any stockholders' meeting in accordance
with the Bylaws of the Corporation and to such number of votes for the shares of
Series Preferred Stock held by him on the record date fixed for such meeting, or
on the effective date of such written consent, as shall be equal to the number
of whole shares of Common Stock into which all of his shares of Series Preferred
Stock are convertible immediately after the close of business on the record date
fixed for such meeting or the effective date of such written consent.
5
<PAGE>
(b) Special Voting Rights. So long as at least twenty percent (20%)
---------------------
of the Series A Preferred Stock, the Series B Preferred Stock or the Series C
Preferred Stock shares issued on or after the Original Issue Date (defined
below) remain outstanding (taken together as a single class), the affirmative
vote or written consent of the holders of at least two-thirds of the outstanding
shares of Series Preferred Stock (voting together as a single class, on the
basis that the holder's Series Preferred Stock shall be entitled to such number
of votes as shall be equal to the number of whole shares of Common Stock into
which such holder's shares of Series Preferred Stock are convertible at such
time) shall be required for (i) any amendment to the Corporation's Articles of
Incorporation or Bylaws, or any repeal of any provision thereof or addition
thereto, or any other action, that adversely alters or changes the rights,
preferences or privileges of any of the Series Preferred Stock, (ii) any action
that creates a new class or series of shares having a preference or priority as
to dividends or assets superior to or on a parity with that of any of the Series
Preferred Stock, (iii) any issuance of bonds, notes, debentures or other
securities that are convertible into or exchangeable for securities of the
Corporation having a preference or priority as to dividends or assets superior
to or on a parity with that of any of the Series Preferred Stock, (iv) any
reclassification of any class or series of shares into securities having a
preference or priority as to dividends or assets superior to or on a parity with
that of any of the Series Preferred Stock (including without limitation with
respect to Series Preferred Stock issued after the Original Issue Date), (v) any
application of the Corporation's assets to the redemption or acquisition of any
shares of stock, except from employees, officers, or directors of, or
consultants to, the Corporation at a price per share equal to the original issue
price therefor, pursuant to vesting arrangements approved by the Board of
Directors, (vi) any action that would result in the acquisition of the
Corporation by means of a merger or other form of corporate reorganization or
the sale of all or substantially all of the assets of the Corporation (other
than an acquisition, sale or other transaction in which the Corporation's
shareholders of record as constituted immediately prior to such transaction
will, immediately after such transaction (by virtue of securities issued as
consideration for the Corporation's acquisition, sale or otherwise), hold at
least fifty percent (50%) of the voting power of the surviving or acquiring
entity, or (vii) the voluntary liquidation, dissolution or winding up of the
Corporation.
4. Conversion. The holders of the Series Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the Corporation or any transfer agent
for such stock. Each share of Series Preferred Stock shall be converted into
the number of fully-paid and nonassessable shares of Common Stock as is
determined by dividing the "Conversion Price" per share in effect for such
Series Preferred Stock at the time of conversion into the "Conversion Value" per
share for such Series Preferred Stock. The number of shares of Common Stock
into which each share of each Series Preferred Stock is convertible is
hereinafter collectively referred to as the "Conversion Rate." The initial
Conversion Price per share of Series A Preferred Stock shall be $0.80, the
initial Conversion Price per share of Series B Preferred Stock shall be $2.15,
and the initial Conversion Price per share of Series C Preferred Stock shall be
$5.00. The initial Conversion Price of each of the Series Preferred Stock shall
be subject to adjustment as set forth in Article III(B), Section 4(d). The
Conversion Value per share of Series A Preferred Stock shall be $0.80, the
Conversion Value per share of Series B Preferred Stock shall be $2.15, and the
Conversion Value per share of Series C Preferred Stock shall be $5.00. No
adjustment shall be made to the voluntary conversion rights of Series Preferred
Stock for declared but
6
<PAGE>
unpaid dividends on the shares of Series Preferred Stock surrendered for
conversion or on the shares of Common Stock delivered upon any such conversion.
(b) Automatic Conversion. Each share of Series Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at the then-effective
Conversion Rate for such series, immediately upon the closing of the sale of the
Corporation's Common Stock in a firm commitment, underwritten public offering
registered under the Securities Act of 1933, as amended (the "Securities Act"),
at a public offering price (prior to underwriters' discounts and expenses) equal
to or exceeding $10.00 per share of Common Stock (as adjusted for any stock
dividends, combinations or splits with respect to such shares) and the aggregate
gross proceeds to the Corporation and/or any selling stockholders (before
deduction for underwriters' discounts and expenses relating to the issuance,
including without limitation fees of the Corporation's counsel) of which equal
or exceed $20,000,000. Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock at the then-effective
Conversion Rate for such series, immediately upon the consent of the holders of
at least two-thirds of the outstanding shares of Series A Preferred Stock. Each
share of Series B Preferred Stock shall automatically be converted into shares
of Common Stock at the then-effective Conversion Rate for such series,
immediately upon the consent of the holders of at least two-thirds of the
outstanding shares of Series B Preferred Stock. Each share of Series C Preferred
Stock shall automatically be converted into shares of Common Stock at the then-
effective Conversion Rate for such series, immediately upon the consent of the
holders of at least two-thirds of the outstanding shares of Series C Preferred
Stock.
(c) Mechanics of Conversion. Before any holder of Series Preferred
-----------------------
Stock shall be entitled to convert the same into shares of Common Stock, he
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for such stock, and shall
give written notice to the Corporation at such office that he elects to convert
the same and shall state therein the name or names in which he wishes the
certificate or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series Preferred Stock, a certificate or certificates
for the number of shares of Common Stock to which he shall be entitled. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of surrender of the shares of Series Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date. If the
conversion is in connection with an underwritten offering of securities pursuant
to the Securities Act, the conversion may, at the option of any holder tendering
shares of Series Preferred Stock for conversion, be conditioned upon the closing
with the underwriters of the sale of securities pursuant to such offering, in
which event the person(s) entitled to receive the Common Stock upon conversion
of the Series Preferred Stock shall not be deemed to have converted such Series
Preferred Stock until immediately prior to the closing of such sale of
securities. Notwithstanding that any certificate for Series Preferred Stock to
be converted in a mandatory conversion shall not have been surrendered as of the
date fixed for conversion, each holder of Series Preferred Stock shall
thereafter be treated for all purposes as the record holder of the number of
shares of Common Stock issuable to such holder upon conversion.
(d) Conversion Price Adjustments of Preferred Stock. The Conversion
-----------------------------------------------
Price of the Series Preferred Stock shall be subject to adjustment from time to
time as set forth below.
7
<PAGE>
(i) Special Definitions. For purposes of this Article
-------------------
III(B), Section 4(d), the following definitions apply:
(1) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Article III(B), Section
4(d)(iii), deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable:
(A) upon conversion of shares of any of the Series
Preferred Stock;
(B) to officers, non-employee directors or employees
of, or consultants to, the Corporation pursuant to stock option or stock
purchase plans or agreements or other stock incentive plans or arrangements on
terms approved by the Board of Directors, but not exceeding Four Million,
Fifteen Thousand (4,015,000) shares of Common Stock (in each case net of any
repurchases of such shares or cancellations or expirations of options), subject
to adjustment for all subdivisions and combinations;
(C) as a dividend or distribution to all holders of
Series A Preferred Stock, Series B Preferred Stock, or Series C Preferred Stock,
or as a dividend or distribution to all holders of Common Stock and Series
Preferred Stock, in each case as authorized herein;
(D) for which adjustment of the Conversion Price for
any of the Series Preferred Stock is made pursuant to Article III(B), Section
4(e); or
(E) pursuant to the exercise of Options (as defined
below) granted prior to the Original Issue Date.
(2) "Convertible Securities" shall mean any evidences of
indebtedness, shares (other than Common Stock and Series Preferred Stock) or
other securities convertible into or exchangeable for Common Stock.
(3) "Original Issue Date" shall mean (A) with respect to
the Series A Preferred Stock, the date on which a share of Series A Preferred
Stock was first issued, (B) with respect to the Series B Preferred Stock, the
date on which a share of Series B Preferred Stock was first issued, and (C) with
respect to the Series C Preferred Stock, the date on which a share of Series C
Preferred Stock was first issued.
(4) "Options" shall mean rights, options, or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
(ii) No Adjustment of Conversion Price. Any provision herein to the
---------------------------------
contrary notwithstanding, no adjustment in the Conversion Price for any share of
Series Preferred Stock shall be made in respect of the issuance of Additional
Shares of Common
8
<PAGE>
Stock unless the consideration per share (determined pursuant to Article III(B),
Section 4(d)(v) hereof) for an Additional Share of Common Stock issued or deemed
to be issued by the Corporation is less than the Conversion Price for such
series of Preferred Stock in effect on the date of, and immediately prior to,
such issue.
(iii) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common Stock. In the event the Corporation, after the Original Issue
- ----------------------
Date shall issue Additional Shares of Common Stock (including Additional Shares
of Common Stock deemed to be issued pursuant to Article III(B), Section
4(d)(iv)) without consideration or for a consideration per share less than the
Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, or
Series C Preferred Stock, as the case may be, in effect immediately prior to
such issue, then and in such event, such Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated to the nearest cent)
determined by multiplying such Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of shares of Common Stock which the
aggregate consideration received by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such Conversion
Price in effect immediately prior to such issue, and the denominator of which
shall be the number of shares of Common Stock outstanding immediately prior to
such issue plus the number of such Additional Shares of Common Stock so issued.
For the purpose of the above calculation, the number of shares of Common Stock
outstanding immediately prior to such issue shall be calculated on a fully-
diluted basis, as if all shares of Series Preferred Stock and all Convertible
Securities had been fully converted into shares of Common Stock immediately
prior to such issuance and any outstanding Options had been fully exercised
immediately prior to such issuance (and the resulting securities fully converted
into shares of Common Stock, if so convertible) as of such date.
(iv) Deemed Issue of Additional Shares of Common Stock. In the event
-------------------------------------------------
the Corporation at any time or from time to time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of holders of any class of securities then entitled to receive
any such Options or Convertible Securities, then the maximum number of shares
(as set forth in the instrument relating thereto without regard to any
provisions contained therein designed to protect against dilution or any other
adjustment) of Common Stock issuable upon the exercise of such Options or, in
the case of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be Additional Shares
of Common Stock issued as of the time of such issue or, in case such a record
date shall have been fixed, as of the close of business on such record date,
provided that in any such case in which Additional Shares of Common Stock are
deemed to be issued:
(1) no further adjustments in the Conversion Price of any of
the Series Preferred Stock shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock upon the exercise of such
Options or conversion or exchange of such Convertible Securities;
(2) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the consideration payable to the Corporation, or decrease or increase in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Conversion
9
<PAGE>
Price of the applicable Series Preferred Stock computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities (provided, however, that no such adjustment of the
Conversion Price of any of the Series Preferred Stock shall affect Common Stock
previously issued upon conversion of any of the Series Preferred Stock);
(3) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Price of the Series Preferred Stock computed upon
the original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(A) in the case of Convertible Securities or Options for
Common Stock the only Additional Shares of Common Stock issued were the shares
of Common Stock, if any, actually issued upon the exercise of such Options or
the conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange; and
(B) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued upon the exercise thereof
were issued at the time of issue of such Options, and the consideration received
by the Corporation for the Additional Shares of Common Stock deemed to have been
then issued was the consideration actually received by the Corporation for the
issue of all such Options, whether or not exercised, plus the consideration
deemed to have been received by the Corporation (determined pursuant to Article
III(B), Section 4(d)(v)) upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(4) no readjustment pursuant to clause (2) or (3) above shall
have the effect of increasing the Conversion Price for the Series Preferred
Stock to an amount which exceeds the lower of (a) the Conversion Price on the
original adjustment date, or (b) the Conversion Price that would have resulted
from any issuance of Additional Shares of Common Stock between the original
adjustment date and such readjustment date;
(5) in the case of any Options which expire by their terms not
more than 30 days after the date of issue thereof, no adjustment of the
Conversion Price for any of the Series Preferred Stock shall be made until the
expiration or exercise of all such Options, whereupon such adjustment shall be
made in the same manner provided in clause (3) above; and
(6) if any such record date shall have been fixed and such
Options or Convertible Securities are not issued on the date fixed therefor, the
adjustment previously made in the Conversion Price for any of the Series
Preferred Stock which became effective on such record date shall be cancelled as
of the close of business on such record date and shall instead be made on the
actual date of issuance, if any.
10
<PAGE>
(v) Determination of Consideration. For purposes of this Article
------------------------------
III(B), Section 4(d), the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and property. Such consideration shall:
-----------------
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation excluding amounts paid or
payable for accrued interest or accrued dividends;
(B) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such issue, as determined in
good faith by the Board of Directors; and
(C) in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration per
----------------------------------
share received by the Corporation for Additional Shares of Common Stock deemed
to have been issued pursuant to Article III(B), Section 4(d)(iv), relating to
Options and Convertible Securities shall be determined by dividing:
(A) the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution or any other adjustment)
payable to the Corporation upon the exercise of such Options or the conversion
or exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities, by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against the dilution or any other
adjustment) issuable upon the exercise of such Options or conversion or exchange
of such Convertible Securities.
(e) Adjustments to Conversion Price for Stock Dividends and for
-----------------------------------------------------------
Combinations or Subdivisions of Common Stock. In the event that the Corporation
- --------------------------------------------
at any time or from time to time after the Original Issue Date shall declare or
pay, without consideration, any dividend on the Common Stock payable in Common
Stock or in any right to acquire Common Stock for no consideration, or shall
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or otherwise
than by payment of a dividend in Common Stock or in any right to acquire Common
Stock), or in the event the outstanding shares of Common Stock shall be combined
or consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, then the Conversion Price for each of the Series
Preferred Stock in effect immediately prior to such event shall, concurrently
with the effectiveness of such event, be proportionately decreased or increased,
as appropriate. In the event that this Corporation shall declare or pay,
without
11
<PAGE>
consideration, any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration, then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock.
(f) Adjustments for Reclassification and Reorganization. If the
---------------------------------------------------
Common Stock issuable upon conversion of the Series Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for in
Article III(B), Section 4(e) above or a merger or other reorganization treated
as a liquidation, dissolution or winding up of the Corporation under Article
III(B), Section 2(c) above), the Conversion Price for each of the Series
Preferred Stock then in effect shall, concurrently with the effectiveness of
such reorganization or reclassification, be proportionately adjusted so that the
Series Preferred Stock shall be convertible into, in lieu of the number of
shares of Common Stock, or other securities or property, which the holders would
otherwise have been entitled to receive, a number of shares of such other class
or classes of stock equivalent to the number of shares of Common Stock that
would have been subject to receipt by the holders upon conversion of the Series
Preferred Stock immediately before that change.
(g) No Impairment. The Corporation will not, by amendment of its
-------------
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Article III(B), Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series Preferred Stock against impairment.
(h) Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of the Conversion Price pursuant to this Article
III(B), Section 4, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Preferred Stock a certificate executed by the
Corporation's President and Chief Executive Officer or Chief Financial Officer
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation shall,
upon the written request at any time of any holder of Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting forth (i)
such adjustments and readjustments, (ii) the Conversion Price for each series of
Preferred Stock at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of each series of Preferred Stock.
(i) Notices of Record Date. In the event that the Corporation shall
----------------------
propose at any time: (i) to declare any dividend or distribution upon its Common
Stock (other than by purchase of shares of Common Stock of employees, officers
or directors of, or consultants to, the Corporation pursuant to the termination
of such person's status as such or pursuant to the Corporation's exercise of
rights of first refusal with respect to its shares), whether in cash, property,
stock or other securities, whether or not a regular cash dividend and whether or
not out of earnings or earned surplus; (ii) to offer for subscription pro rata
to the holders of any class or series of its stock any additional shares of
stock of any class or series or other rights; (iii) to effect any re-
classification or recapitalization of its Common Stock outstanding involving a
12
<PAGE>
change in the Common Stock; or (iv) to merge or consolidate with or into any
other corporation, or sell, lease or convey all or substantially all of its
assets, or to liquidate, dissolve or wind up; then, in connection with each such
event, the Corporation shall send to the holders of Preferred Stock:
(1) at least twenty (20) days' prior written notice of the date
on which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote, if any, in respect of the
matters referred to in (iii) and (iv) above; and
(2) in the case of the matters referred to in (iii) and (iv)
above, at least twenty (20) days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event).
Notwithstanding the foregoing, the Corporation's obligation to
give any such notice to the holders of one or more shares of Preferred Stock
shall be deemed waived if the holders of at least two-thirds of the then
outstanding shares of Preferred Stock shall execute and deliver to the
Corporation a written waiver of such notice.
(j) Issue Taxes. The Corporation shall pay any and all issue and
-----------
other taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on mandatory conversion of any Series Preferred Stock pursuant
hereto; provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(k) Reservation of Common Stock Issuable Upon Conversion. The
----------------------------------------------------
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series Preferred Stock, the Corporation will take such corporate action as may,
in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose, including, without limitation, engaging in best efforts to
obtain the requisite stockholder approval of any necessary amendment to these
Articles.
(l) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon the conversion of any share or shares of Series Preferred Stock.
All shares of Common Stock (including fractions thereof) issuable upon
conversion of more than one share of Series Preferred Stock by a holder thereof
shall be aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction of a
share of Common Stock, the Corporation shall, in lieu of issuing any fractional
share, pay the holder otherwise entitled to such fraction a sum in cash equal to
the fair market value of such fraction on the date of conversion (as determined
in good faith by the Board of Directors).
13
<PAGE>
(m) Multiple Issuance Dates. Notwithstanding anything in this
-----------------------
Article III(B), Section 4 to the contrary, in the event the Corporation issues
shares of the same series of Preferred Stock on more than one date, the
Conversion Price shall be adjusted only once for the issuance of shares of such
series of Preferred Stock, such adjustment to occur upon the earlier of (i) one
hundred twenty (120) days after the first issuance thereof, (ii) upon the final
closing of the issuance thereof, or (iii) immediately prior to any conversion or
repurchase of such Preferred Stock.
(n) Notices. Any notice required by the provisions of this Article
-------
III(B), Section 4 to be given to the holders of shares of any Series Preferred
Stock shall be deemed given if deposited in the United States mail, postage
prepaid, or if sent by facsimile or delivered personally by hand or nationally
recognized courier and addressed to each holder of record at such holder's
address or facsimile number appearing in the records of the Corporation.
5. Increasing Common Stock. The number of authorized shares of Common
Stock may be increased or decreased (but not below the number of shares of
Common Stock then outstanding) by an affirmative vote of the holders of a
majority of the voting stock of the Corporation voting together as one class.
6. No Reissuance of Series Preferred Stock. No share or shares of Series
Preferred Stock acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Corporation shall be
authorized to issue.
ARTICLE IV
A director of the Corporation shall not be personally liable to the
Corporation or otherwise for monetary damages for breach of any duty as a
director, except for liability with respect to (i) acts or omissions that the
director at the time of such breach knew or believed were clearly in conflict
with the best interests of the Corporation; (ii) any liability under N.C. Gen.
Stat. (S) 55-8-33 for unlawful distributions; or (iii) any transaction from
which the director derived an improper personal benefit. If the North Carolina
Business Corporation Act is amended to authorize corporate action for further
eliminating or limiting personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the North Carolina Business Corporation Act, as so amended.
Any repeal or modification of the foregoing paragraph shall not adversely
affect any right or protection of a director of the Corporation existing at the
time of such repeal or modification.
ARTICLE V
The provisions of Article 9 and Article 9A of the North Carolina Business
Corporation Act, entitled "The North Carolina Shareholder Protection Act" and
"The North Carolina Control Share Acquisition Act," respectively, shall not be
applicable to the Corporation.
# # #
14
<PAGE>
Exhibit 3.3
BYLAWS OF
PARADIGM GENETICS INC.
ARTICLE I
---------
DEFINITIONS
-----------
In these bylaws, unless otherwise provided, the following terms shall have
the following meanings:
(1) "Act" shall mean the North Carolina Business Corporation Act as
codified in Chapter 55 of the North Carolina General Statutes effective July 1,
1990, and as amended from time to time;
(2) "Articles of incorporation" shall mean the Corporation's articles of
incorporation, including amended and restated articles of incorporation and
articles of merger;
(3) "Corporation" shall mean Paradigm Genetics Inc.;
(4) "Distribution" shall mean a direct or indirect transfer of money or
other property (except the Corporation's own shares) or incurrence of
indebtedness by the Corporation to or for the benefit of its shareholders in
respect of any of its shares. A distribution may be in the form of a declaration
or payment of a dividend, a purchase, redemption, or other acquisition of
shares, a distribution of indebtedness, or otherwise;
(5) "Emergency" shall mean a catastrophic event which prevents a quorum
of the board of directors from being readily assembled;
(6) "Shares" shall mean the units into which the proprietary interests
in the Corporation are divided; and
(7) "Voting group" shall mean all shares of one or more classes or
series that under the articles of incorporation or the Act are entitled to vote
and be counted together collectively on a matter at a meeting of shareholders.
All shares entitled by the articles of incorporation or the Act to vote
generally on a matter are for that purpose a single voting group.
ARTICLE II
----------
OFFICES
-------
SECTION 1. Principal Office: The principal office of the Corporation shall
--------- ----------------
be located at 303 Brittany Place, Cary, Wake County, North Carolina 27511, or at
such other place as may be determined from time to time by the directors.
-1-
<PAGE>
SECTION 2. Registered Office: The registered office of the Corporation
--------- -----------------
shall be located at 303 Brittany Place, Cary, Wake County, North Carolina 27511
SECTION 3. Other Offices: The Corporation may have offices at such other
--------- -------------
places, either within or without the State of North Carolina, as the board of
directors may from time to time determine, or as the affairs of the Corporation
may require.
ARTICLE III
-----------
MEETINGS OF SHAREHOLDERS
------------------------
SECTION 1. Place of Meetings: All meetings of shareholders shall be held
--------- -----------------
at the principal office of the Corporation, or at such other place, either
within or without the State of North Carolina, as shall be designated in the
notice of the meeting or as may be agreed upon by a majority of the shareholders
entitled to vote at the meeting.
SECTION 2. Annual Meeting: The annual meeting of shareholders for the
--------- --------------
election of directors and the transaction of other business shall be held
annually in any month on any day (except Saturday, Sunday or a legal holiday) as
fixed by the board of directors.
SECTION 3. Substitute Annual Meeting: If the annual meeting shall not be
--------- -------------------------
held on the day designated by these bylaws, a substitute annual meeting may be
called by the board of directors or the president. A meeting so called shall be
designated and treated for all purposes as the annual meeting.
SECTION 4. Special Meetings: Special meetings of the shareholders may be
--------- ----------------
called at any time by the board of directors or the president. In addition,
special meetings may be called at any time by the shareholders if the holders of
at least ten percent (10%) of all the votes entitled to be cast on any issue
proposed to be considered at the proposed special meeting sign, date, and
deliver to the secretary a written demand for the meeting describing the purpose
or purposes for which it is to be held; provided, however, the shareholders
shall not have such right to call a special meeting if the Corporation has a
class of shares registered under Section 12 of the Securities Exchange Act of
1934, as amended. Only business within the purpose or purposes described in the
meeting notice specified in Section 5 of this Article may be conducted at a
special meeting of shareholders.
SECTION 5. Notice of Meeting: Written or printed notice stating the time
--------- -----------------
and place of the meeting shall be delivered not less than ten (10) nor more than
sixty (60) days before the date of any shareholders' meeting, either personally,
by mail, by telegraph, by teletype, or by facsimile transmission, by or at the
direction of the chairman of the board, the president, the secretary, or other
person calling the meeting to each shareholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, addressed to the shareholder at his address
as it appears on the record of the shareholders of the Corporation, with postage
thereon prepaid.
In the case of a special meeting, the notice of meeting shall specifically
state the purpose or purposes for which the meeting is called. In the case of
an annual or substitute annual meeting, the
-2-
<PAGE>
notice of meeting need not specifically state the business to be transacted
unless such a statement is required by the Act.
When an annual or special meeting is adjourned to a different date, time,
and place, it is not necessary to give any notice of the adjourned meeting other
than by announcement at the meeting at which the adjournment is taken; provided,
however, that if a new record date for the adjourned meeting is or must be set,
notice of the adjourned meeting must be given to persons who are shareholders as
of the new record date.
The record date for determining the shareholders entitled to notice of and
to vote at an annual or special meeting shall be fixed as provided in Section 3
of Article VIII.
SECTION 6. Waiver of Notice: A shareholder may waive notice of any meeting
--------- ----------------
either before or after such meeting. Such waiver shall be in writing, signed by
the shareholder, and filed with the minutes or corporate records. A
shareholder's attendance at a meeting: (i) waives objection to lack of notice or
defective notice of the meeting, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the meeting;
and (ii) waives objection to consideration of a particular matter at the meeting
that is not within the purpose or purposes described in the meeting notice,
unless the shareholder objects to considering the matter before it is voted
upon.
SECTION 7. Shareholder List: Commencing two (2) business days after notice
--------- ----------------
of a meeting of shareholders is given and continuing through such meeting, the
secretary of the Corporation shall maintain at the principal office of the
Corporation an alphabetical list of the shareholders entitled to vote at such
meeting, arranged by voting group, with the address of and number of shares held
by each. This list shall be subject to inspection by any shareholder or his
agent or attorney at any time during usual business hours and may be copied at
the shareholder's expense.
SECTION 8. Quorum: A majority of the votes entitled to be cast on a matter
--------- ------
by any voting group, represented in person or by proxy, shall constitute a
quorum of that voting group for action on that matter. The shareholders present
at a duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
In the absence of a quorum at the opening of any meeting of shareholders,
such meeting may be adjourned from time to time by a majority of the votes
voting on the motion to adjourn; and at any adjourned meeting at which a quorum
is present, any business may be transacted which might have been transacted at
the original meeting.
SECTION 9. Proxies: Shares may be voted either in person or by one or more
--------- -------
agents authorized by a written proxy executed by the shareholder or by his duly
authorized attorney in fact. A proxy may take the form of a telegram, telex,
facsimile or other form of wire or wireless communication which appears to have
been transmitted by a shareholder. A proxy is effective when received by the
secretary or other officer or agent authorized to tabulate votes. A proxy is
not valid after the expiration of eleven (11) months from the date of its
execution, unless the person executing it specifies therein the length of time
for which it is to continue in force or limits its use to a particular meeting.
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SECTION 10. Voting of Shares: Subject to the provisions of Section 4 of
---------- ----------------
Article IV, the articles of incorporation, and the Act, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote at a meeting of shareholders.
Except for the election of directors, which is governed by the provisions of
Section 3 of Article IV, if a quorum is present, action on a matter by a voting
group is approved if the votes cast within the voting group favoring the action
exceed the votes cast against the action, unless the vote of a greater number is
required by the Act, the articles of incorporation, or these bylaws.
Shares of the Corporation are not entitled to vote if: (i) they are owned,
directly or indirectly, by the Corporation, unless they are held by it in a
fiduciary capacity; (ii) they are owned, directly or indirectly, by a second
corporation in which the Corporation owns a majority of the shares entitled to
vote for directors of the second corporation; or (iii) they are redeemable
shares and (x) notice of redemption has been given and (y) a sum sufficient to
redeem the shares has been deposited with a bank, trust company, or other
financial institution under an irrevocable obligation to pay the holders the
redemption price upon surrender of the shares.
SECTION 11. Informal Action by Shareholders: Any action which may be taken
---------- -------------------------------
at a meeting of the shareholders may be taken without a meeting if a consent in
writing, setting forth the action so taken, is signed by all of the persons who
would be entitled to vote upon such action at a meeting and is delivered to the
Corporation to be included in the minutes or to be kept as part of the corporate
records.
SECTION 12. Corporation's Acceptance of Votes: If the name signed on a
---------- ---------------------------------
vote, consent, waiver, or proxy appointment corresponds to the name of a
shareholder, the Corporation is entitled to accept the vote, consent, waiver, or
proxy appointment and to give it effect as the act of the shareholder.
If the name signed on a vote, consent, waiver, or proxy appointment does not
correspond to the name of its shareholder, the Corporation is nevertheless
entitled to accept the vote, consent, waiver, or proxy appointment and to give
it effect as the act of the shareholder if: (i) the shareholder is an entity and
the name signed purports to be that of an officer or agent of the entity; (ii)
the name signed purports to be that of an administrator, executor, guardian, or
conservator representing the shareholder and, if the Corporation requests,
evidence of fiduciary status acceptable to the Corporation has been presented
with respect to the vote, consent, waiver, or proxy appointment; (iii) the name
signed purports to be that of a receiver or trustee in bankruptcy of the
shareholder and, if the Corporation requests, evidence of its status acceptable
to the Corporation has been presented with respect to the vote, consent, waiver,
or proxy appointment; (iv) the name signed purports to be that of a beneficial
owner or attorney-in-fact of the shareholder and, if the Corporation requests,
evidence acceptable to the Corporation of the signatory's authority to sign for
the shareholder has been presented with respect to the vote, consent, waiver, or
proxy appointment; or (v) two or more persons are the shareholder as co-tenants
or fiduciaries and the name signed purports to be the name of at least one of
the co-owners and the person signing appears to be acting on behalf of all the
co-owners.
The Corporation is entitled to reject a vote, consent, waiver, or proxy
appointment if the
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secretary or other officer or agent authorized to tabulate votes has a
reasonable basis for doubt about the validity of the signature on it or about
the signatory's authority to sign for the shareholder.
SECTION 13. Number of Shareholders: The following persons or entities
---------- ----------------------
identified as a shareholder in the Corporation's current record of shareholders
constitute one shareholder for purposes of these bylaws: (i) all co-owners of
the same shares; (ii) a corporation, partnership, trust, estate, or other
entity; (iii) the trustees, guardians, custodians, or other fiduciaries of a
single trust, estate, or account. Shareholdings registered in substantially
similar names constitute one shareholder if it is reasonable to believe that the
names represent the same person.
ARTICLE IV
----------
BOARD OF DIRECTORS
------------------
SECTION 1. General Powers: All corporate powers shall be exercised by or
--------- --------------
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, its board of directors.
SECTION 2. Number, Term and Qualifications: The number constituting the
--------- -------------------------------
board of directors shall be not less than one (1) nor more than seven (7). The
number of directors within this variable range may be fixed or changed from time
to time by the shareholders or the board of directors. Each director shall hold
office until his death, resignation, retirement, removal, disqualification, or
until his successor is elected and qualified. Directors need not be residents
of the State of North Carolina or shareholders of the Corporation.
SECTION 3. Election of Directors: Except as provided in Section 6 of this
--------- ---------------------
Article, the directors shall be elected at the annual meeting of shareholders;
and those persons who receive the highest number of votes shall be deemed to
have been elected. If any shareholder so demands, the election of directors
shall be by ballot.
SECTION 4. No Cumulative Voting: The shareholders of the Corporation shall
--------- --------------------
have no right to cumulate their votes for the election of directors.
SECTION 5. Removal: Any director, or the entire board of directors, may be
--------- -------
removed from office at any time, with or without cause, but only if the number
of votes cast to remove him exceeds the number of votes cast not to remove him.
If a director is elected by a voting group of shareholders, only members of that
voting group may participate in the vote to remove him. A director may not be
removed by the shareholders at a meeting unless the notice of the meeting
specifies such removal as one of its purposes. If any directors are removed,
new directors may be elected at the same meeting.
SECTION 6. Vacancies: Any vacancy occurring in the board of directors,
--------- ---------
including, without limitation, a vacancy resulting from an increase in the
number of directors or from the failure by the shareholders to elect the full
authorized number of directors, shall be filled by the shareholders or the board
of directors. If such vacancy is to be filled by the board of directors, and if
the directors remaining in office constitute fewer than a quorum of the board,
such vacancy may be filled by the affirmative vote of a majority of the
remaining directors or by the sole remaining director. If the
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vacant office was held by a director elected by a voting group of shareholders,
only the remaining director or directors elected by that voting group or the
holders of shares of that voting group are entitled to fill the vacancy. The
term of a director elected to fill a vacancy shall expire at the next
shareholders' meeting at which directors are elected.
SECTION 7. Chairman of the Board: There may be a chairman of the board of
--------- ---------------------
directors elected by the directors from their number at any meeting of the
board. The chairman shall preside at all meetings of the board of directors and
perform such other duties as may be directed by the board.
SECTION 8. Compensation: The board of directors may compensate directors
--------- ------------
for their services as such and may provide for the payment of all expenses
incurred by directors in attending regular and special meetings of the board.
SECTION 9. Committees: The board of directors may create an executive
--------- ----------
committee and other committees of the board, each of which shall have at least
two (2) members, all of whom shall be directors. The creation of a committee
and the appointment of members to it must be approved by a majority of all the
directors in office when the action is taken. Each committee may, as specified
by the board of directors, exercise some or all of the authority of the board
except that a committee may not: (i) authorize distributions; (ii) approve or
propose to shareholders action that the Act requires be approved by
shareholders; (iii) fill vacancies on the board of directors or on any of its
committees; (iv) amend the articles of incorporation pursuant to N.C. Gen. Stat.
Section 55-10-02 or its successor; (v) adopt, amend, or repeal bylaws; (vi)
approve a plan of merger not requiring shareholder approval; (vii) authorize or
approve a reacquisition of shares, except according to a formula or method
prescribed by the board of directors; or (viii) authorize or approve the
issuance or sale or contract for sale of shares, or determine the designation
and relative rights, preferences, and limitations of a class or series of
shares, except that the board of directors may authorize a committee to do so
within limits specifically prescribed by the board of directors. The provisions
of Article V, which govern meetings of the board of directors, shall likewise
apply to meetings of any committee of the board.
ARTICLE V
---------
MEETINGS OF DIRECTORS
---------------------
SECTION 1. Regular Meetings: A regular meeting of the board of directors
--------- ----------------
shall be held immediately after, and at the same place as, the annual meeting of
the shareholders. In addition, the board of directors may provide, by
resolution, the time and place, either within or without the State of North
Carolina, for the holding of additional regular meetings.
SECTION 2. Special Meetings: Special meetings of the board of directors
--------- ----------------
may be called by or at the request of the president or any director. Such
meetings may be held either within or without the State of North Carolina, as
fixed by the person or persons calling the meeting.
SECTION 3. Notice of Meetings: Regular meetings of the board of directors
--------- ------------------
may be held without notice. The person or persons calling a special meeting of
the board of directors shall, at least
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five (5) days before the meeting, give notice of the meeting by any usual means
of communication, including by telephone, telegraph, teletype, mail, private
carrier, facsimile transmission, or other form of wire or wireless
communication. Such notice may be oral and need not specify the purpose for
which the meeting is called.
SECTION 4. Waiver of Notice: Any director may waive notice of any meeting
--------- ----------------
either before or after such meeting. Such waiver shall be in writing, signed by
the director, and filed with the minutes or corporate records; provided,
however, that a director's attendance at or participation in a meeting waives
any required notice to him unless the director at the beginning of the meeting
(or promptly upon his arrival) objects to holding the meeting or transacting
business at the meeting and does not thereafter vote for or assent to action
taken at the meeting.
SECTION 5. Quorum: A majority of the directors fixed by these bylaws shall
--------- ------
constitute a quorum for the transaction of business at any meeting of the board
of directors.
SECTION 6. Manner of Acting: The act of a majority of the directors
--------- ----------------
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is required by the articles of
incorporation or these bylaws.
SECTION 7. Presumption of Assent: A director of the Corporation who is
--------- ---------------------
present at a meeting of the board of directors or a committee of the board of
directors when corporate action is taken is deemed to have assented to the
action taken unless: (i) he objects at the beginning of the meeting (or
promptly upon his arrival) to holding it or transacting business at the meeting;
(ii) his dissent or abstention from the action taken is entered in the minutes
of the meeting; or (iii) he files written notice of his dissent or abstention
with the presiding officer of the meeting before its adjournment or with the
Corporation immediately after adjournment of the meeting. This right of dissent
or abstention is not available to a director who votes in favor of the action
taken.
SECTION 8. Participation in Meetings: Any or all of the directors may
--------- -------------------------
participate in a regular or special meeting by, or conduct the meeting through
the use of, any means of communication by which all directors participating may
simultaneously hear each other during the meeting.
SECTION 9. Action Without Meeting: Action which may be taken at a board of
--------- ----------------------
directors meeting may be taken without a meeting if the action is taken by all
members of the board and is evidenced by one or more written consents signed by
each director before or after such action, which describes the action taken and
is included in the minutes or filed with the corporate records. Such action is
effective when the last director signs the consent, unless the consent specifies
a different effective date.
ARTICLE VI
----------
OFFICERS
--------
SECTION 1. Officers of the Corporation: The officers of the Corporation
--------- ---------------------------
shall consist of a president, secretary, treasurer, and such vice presidents,
assistant secretaries, assistant treasurers, and other officers as the board of
directors may from time to time appoint. Any two or more offices may
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<PAGE>
be held by the same person, but no officer may act in more than one capacity
where action of two or more officers is required.
SECTION 2. Appointment and Term: The officers of the Corporation shall be
--------- --------------------
appointed by the board of directors. A duly appointed officer may appoint one
or more officers or assistant officers if authorized by the board of directors.
Each officer shall hold office until his death, resignation, retirement,
removal, disqualification or until his successor is appointed and qualifies.
The appointment of an officer does not itself create contract rights for either
the officer or the Corporation.
SECTION 3. Compensation of Officers: The compensation of officers of the
--------- ------------------------
Corporation shall be fixed by the board of directors. No officer shall receive
compensation for serving the Corporation in any other capacity unless such
additional compensation be authorized by the board of directors.
SECTION 4. Resignation and Removal: An officer may resign at any time by
--------- -----------------------
communicating his resignation to the Corporation. A resignation is effective
when it is communicated unless it specifies in writing a later date. If a
resignation is made effective as of a later date and the Corporation accepts the
future effective date, the board of directors may fill the pending vacancy
before the effective date if the board provides that the successor does not take
office until the effective date. An officer's resignation does not affect the
Corporation's contract rights, if any, with the officer. Any officer or agent
appointed by the board of directors may be removed by the board at any time,
with or without cause, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed.
SECTION 5. Bonds: The board of directors may by resolution require any
--------- -----
officer, agent, or employee of the Corporation to give bond to the Corporation,
with sufficient sureties, conditioned on the faithful performance of the duties
of his respective office or position, and to comply with such other conditions
as may from time to time be required by the board of directors.
SECTION 6. Chief Executive Officer: The chief executive officer shall have
---------- ------------------------
general authority and supervision over the officers and employees of the
Corporation, and shall perform such other duties as may be prescribed from time
to time by the board of directors. All officers shall report to him except to
the extent specifically required by the board of directors. He shall consult
with the chairman of the board or the president as to matters within the scope
of the authority of the chairman of the board or the president. He shall have
the authority to sign certificates for shares, as well as any deeds, mortgages,
contracts, or other instruments which the board of directors has authorized to
be executed, except in cases where the signing and execution of such contracts
or instruments shall be expressly delegated by the board of directors or by
these bylaws to some other officer or agent of the Corporation, or shall be
required by the Act to be otherwise signed or executed.
SECTION 7. President: The president shall be the principal executive
--------- ---------
officer of the Corporation, shall have general authority and supervision over
the officers and employees of the Corporation, and shall perform such other
duties as may be prescribed from time to time by the board of directors. He
shall have the authority to sign certificates for shares, as well as any deeds,
mortgages, contracts, or other instruments which the board of directors has
authorized to be executed, except in cases where the signing and execution of
such contracts or instruments shall be expressly delegated by
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<PAGE>
the board of directors or by these bylaws to some other officer or agent of the
Corporation, or shall be required by the Act to be otherwise signed or executed.
SECTION 8. Vice Presidents: In the absence of the president, the vice
--------- ---------------
presidents in the order of their length of service as vice presidents, unless
otherwise determined by the board of directors, shall perform the duties of the
president, and when so acting shall have all the powers of and be subject to all
the restrictions upon that office. Any vice president may sign certificates for
shares, as well as any deeds, mortgages, contracts, or other instruments which
the board of directors has authorized to be executed, except in cases where the
signing and execution of such documents or instruments shall be expressly
delegated by the board of directors or these bylaws to some other officer or
agent of the Corporation or shall be required by the Act to be otherwise signed
or executed. A vice president shall perform such other duties as from time to
time may be assigned to him by the chairman of the board, the president, or the
board of directors.
SECTION 9. Secretary: The secretary shall: (i) keep the minutes of the
--------- ---------
meetings of shareholders, of the board of directors, and of all committees of
the board in one or more books provided for that purpose; (ii) see that all
notices are duly given in accordance with the provisions of these bylaws or as
required by law; (iii) be custodian of the seal of the corporation and see that
the seal of the corporation is affixed to all documents the execution of which
on behalf of the corporation under its seal is duly authorized; (iv) keep a
register of the mailing address of each shareholder which shall be furnished to
the secretary by such shareholder; (v) sign, with the chairman of the board, the
president, or a vice president, certificates for shares, the issuance of which
shall have been authorized by resolution of the board of directors; (vi) have
general charge of the stock transfer books of the Corporation; (vii) keep or
cause to be kept in the State of North Carolina at the Corporation's principal
office a record of the Corporation's shareholders, giving the names and
addresses of all shareholders and the number and class of shares held by each,
and prepare or cause to be prepared a shareholder list prior to each meeting of
shareholders as required by the Act; (viii) maintain and authenticate the books
and records of the Corporation; (ix) with the assistance of the treasurer and
other officers, prepare and deliver to the Corporation's shareholders such
financial statements, notices, and reports as may be required by N.C. Gen. Stat.
Sections 55-16-20 and 55-16-21 (or their successors); (x) prepare and file with
the North Carolina Secretary of State the annual report required by N.C. Gen.
Stat. Section 55-16-22 (or its successor); and (xi) in general perform all
duties incident to the office of secretary and such other duties as from time to
time may be assigned to him by the president or the board of directors.
SECTION 10. Assistant Secretaries: In the absence of the secretary, the
---------- ---------------------
assistant secretaries in the order of their length of service as assistant
secretary, unless otherwise determined by the board of directors, shall perform
the duties of the secretary, and when so acting shall have all the powers of and
be subject to all the restrictions upon the secretary. They shall perform such
other duties as may be assigned to them by the secretary, the president, or the
board of directors. Any assistant secretary may sign, with the president or a
vice president, certificates for shares.
SECTION 11. Treasurer: The treasurer shall: (i) have charge and custody
---------- ---------
of and be responsible for all funds and securities of the Corporation; (ii)
receive and give receipts for monies due and payable to the Corporation from any
source whatsoever, and deposit all such monies in accordance with the provisions
of Section 4 of Article VII; (iii) prepare, or cause to be prepared, an annual
financial statement in accordance with Section 3 of Article IX; and (iv) in
general, perform all of the
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<PAGE>
duties incident to the office of treasurer and such other duties as from time to
time may be assigned to him by the president or the board of directors. The
treasurer may sign, with the president or a vice president, certificates for
shares.
SECTION 12. Assistant Treasurer: In the absence of the treasurer, the
---------- -------------------
assistant treasurers, in the order of their length of service as assistant
treasurer, unless otherwise determined by the board of directors, shall perform
the duties of the treasurer, and when so acting shall have all the powers of and
be subject to all the restrictions upon the treasurer. They shall perform such
other duties as may be assigned to them by the treasurer, the president, or the
board of directors. Any assistant treasurer may sign, with the president or a
vice president, certificates for shares.
ARTICLE VII
-----------
CONTRACTS, LOANS, CHECKS AND DEPOSITS
-------------------------------------
SECTION 1. Contracts: The board of directors may authorize any officer or
--------- ---------
agent to enter into any contract or to execute and deliver any instrument on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
SECTION 2. Loans: No loans shall be contracted on behalf of the
--------- -----
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the board of directors. Such authority may be
general or confined to specific instances.
SECTION 3. Checks and Drafts: All checks, drafts or other orders for
--------- -----------------
payment of money issued in the name of the Corporation shall be signed by such
officers or agents of the Corporation and in such manner as shall from time to
time be determined by resolution of the board of directors.
SECTION 4. Deposits: All funds of the Corporation not otherwise employed
--------- --------
shall be deposited from time to time to the credit of the Corporation in such
depositories as the board of directors shall direct.
ARTICLE VIII
-------------
CERTIFICATES FOR SHARES AND THEIR TRANSFER
------------------------------------------
SECTION 1. Certificates for Shares: Shares may, but need not, be
- --------- -----------------------
represented by certificates. If certificates are issued, they shall be in such
form as the board of directors shall determine; provided that, at a minimum,
each certificate shall state on its face: (i) the name of the Corporation and
that it is organized under the laws of North Carolina; (ii) the name of the
person to whom issued; and (iii) the number and class of shares and the
designation of the series, if any, the certificate represents. If the
Corporation issues certificates for shares of preferred stock, the designations,
relative rights, preferences, and limitations applicable to that class, and the
variations in rights, preferences, and limitations for each series within that
class (and the authority of the board of directors to determine variations for
future series) must be summarized on the front or back of each certificate;
alternatively, each certificate may state conspicuously on its front or back
that the Corporation will furnish the
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<PAGE>
shareholder this information in writing and without charge. These certificates
shall be signed, either manually or in facsimile, by the president, or any vice
president, and the secretary or any assistant secretary, the treasurer or any
assistant treasurer. They shall be consecutively numbered or otherwise
identified and the name and address of the persons to whom they are issued, with
the number of shares and date of issue, shall be entered on the stock transfer
books of the Corporation.
SECTION 2. Transfer of Shares: Transfer of shares of the Corporation shall
--------- ------------------
be made only on the stock transfer books of the Corporation by the holder of
record, by his legal representative (who shall furnish proper evidence of
authority to transfer) or by his attorney (whose authority shall be evidenced by
a power of attorney duly executed and filed with the secretary), and only upon
surrender for cancellation of the certificates for such shares.
SECTION 3. Fixing Record Date: For the purpose of determining shareholders
--------- ------------------
entitled to receive notice of a meeting of shareholders, to demand a special
meeting, to vote, to take any other action, or to receive payment, or for any
other purpose, the board of directors may fix in advance a date as the record
date for any such determination of shareholders, such record date in any case to
be not more than seventy (70) days, and, in case of a meeting of shareholders,
not less than ten (10) days, before the date on which the particular action
requiring such determination of shareholders is to be taken.
When a determination of shareholders entitled to notice of or to vote at any
meeting of shareholders has been made as provided in this section, such
determination shall apply to any adjournment of such meeting unless the board of
directors fixes a new record date, which it must do if the meeting is adjourned
to a date more than 120 days after the date fixed for the original meeting.
SECTION 4. Lost Certificates: The board of directors may authorize the
--------- -----------------
issuance of a new share certificate in place of a certificate claimed to have
been lost or destroyed, upon receipt of an affidavit of such fact from the
person claiming the loss or destruction. When authorizing the issuance of a new
certificate, the board of directors may require the claimant to give the
Corporation a bond in such sum as it may direct to indemnify the Corporation
against loss from any claim with respect to the certificate claimed to have been
lost or destroyed; or the board of directors may, by resolution reciting that
the circumstances justify such action, authorize the issuance of the new
certificate without requiring such a bond.
SECTION 5. Reacquired Shares: A corporation may acquire its own shares and
--------- -----------------
shares so acquired constitute authorized but unissued shares.
ARTICLE IX
----------
GENERAL PROVISIONS
------------------
SECTION 1. Distributions: The board of directors may from time to time
--------- -------------
declare, and the Corporation may make, distributions on its outstanding shares
in the manner and subject to the terms and conditions provided by the Act and by
the articles of incorporation.
SECTION 2. Seal: The corporate seal of the Corporation shall consist of
--------- ----
two concentric circles between which is the name of the Corporation and in the
center of which is inscribed
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<PAGE>
"CORPORATE SEAL" or "SEAL," and which shall have such other characteristics as
the board of directors may determine.
SECTION 3. Records and Reports: All of the Corporation's records shall be
--------- -------------------
maintained in written form or in another form capable of conversion into written
form within a reasonable time.
The Corporation shall keep as permanent records minutes of all meetings of
its incorporators, shareholders, and board of directors, a record of all actions
taken by the shareholders or board of directors without a meeting, and a record
of all actions taken by a committee of the board of directors in place of the
board of directors.
The Corporation shall keep a copy of the following records at its principal
office: (i) the articles of incorporation and all amendments to them currently
in effect; (ii) these bylaws and all amendments to them currently in effect;
(iii) resolutions adopted by its board of directors creating one or more classes
or series of shares and fixing their relative rights, preferences, and
limitations (if shares issued pursuant to those resolutions are outstanding);
(iv) the minutes of all meetings of shareholders and records of all actions
taken by shareholders without a meeting during the past three years; (v) all
written communications to shareholders generally within the past three years;
(vi) the annual financial statements described below, prepared during the past
three years; (vii) a list of the names and business addresses of its current
directors and officers; and (viii) its most recent annual report delivered to
the North Carolina Secretary of State.
The Corporation shall prepare and make available to its shareholders annual
financial statements for the Corporation and its subsidiaries that: (i) includes
a balance sheet as of the end of the fiscal year, an income statement for that
year, and a statement of cash flows for the year; and (ii) is accompanied by
either (x) a report of a public accountant on the annual financial statements,
or (y) a statement by the treasurer stating his reasonable belief whether the
annual financial statements were prepared on the basis of generally accepted
accounting principles (and, if not, describing the basis of preparation) and
describing any respects in which the statements were not prepared on a basis of
accounting consistent with the statements prepared for the preceding year.
These annual financial statements, or a written notice of their availability,
shall be mailed to each shareholder within 120 days after the close of each
fiscal year of the Corporation. On written request from a shareholder who was
not mailed the annual financial statements, the Corporation shall mail to him
the latest such statements.
The Corporation shall also prepare and file with the North Carolina
Secretary of State an annual report in such form as required by N.C. Gen. Stat.
Section 55-16-22, or its successor.
SECTION 4. Indemnification: Any person who at any time serves or has
--------- ---------------
served as a director or officer of the Corporation, or at the request of the
Corporation is or was serving as an officer, director, agent, partner, trustee,
administrator, or employee for any other foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
shall be indemnified by the Corporation to the fullest extent from time to time
permitted by law in the event he is made, or is threatened to be made, a party
to any threatened, pending or completed civil, criminal, administrative,
investigative or arbitrative action, suit or proceeding and any appeal therein
(and any inquiry or investigation that could lead to such action, suit or
proceeding), whether or not brought by
-12-
<PAGE>
or on behalf of the Corporation, seeking to hold him liable by reason of the
fact that he is or was acting in such capacity. In addition, the board may
provide such indemnification for the employees and agents of the Corporation as
it deems appropriate.
The rights of those receiving indemnification hereunder shall, to the
fullest extent from time to time permitted by law, cover (i) reasonable
expenses, including without limitation all attorneys' fees actually and
necessarily incurred by him in connection with any such action, suit or
proceeding, (ii) all reasonable payments made by him in satisfaction of any
judgment, money decree, fine (including an excise tax assessed with respect to
an employee benefit plan), penalty, or settlement for which he may have become
liable in such action, suit or proceeding; and (iii) all reasonable expenses
incurred in enforcing the indemnification rights provided herein.
Expenses incurred by anyone entitled to receive indemnification under this
section in defending a proceeding may be paid by the Corporation in advance of
the final disposition of such proceeding as authorized by the board of directors
in the specific case or as authorized or required under any provisions in the
bylaws or by any applicable resolution or contract upon receipt of an
undertaking by or on behalf of the director to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation against such expenses.
The board of directors of the Corporation shall take all such action as may
be necessary and appropriate to authorize the Corporation to pay the
indemnification required by this bylaw, including without limitation, to the
extent needed, making a good faith evaluation of the manner in which the
claimant for indemnity acted and of the reasonable amount of indemnity due him.
Any person who at any time serves or has served in any of the aforesaid
capacities for or on behalf of the Corporation shall be deemed to be doing or to
have done so in reliance upon, and as consideration for, the right of
indemnification provided herein. Any repeal or modification of these
indemnification provisions shall not affect any rights or obligations existing
at the time of such repeal or modification. The rights provided for herein
shall inure to the benefit of the legal representatives of any such person and
shall not be exclusive of any other rights to which such person may be entitled
apart from the provisions of this bylaw.
The rights granted herein shall not be limited by the provisions contained
in N.C. Gen. Stat. Section 55-8-51 (or its successor).
SECTION 5. Fiscal Year: The fiscal year of the Corporation shall be
--------- -----------
fixed by the board of directors.
SECTION 6. Amendments: (a) The board of directors may amend or repeal
--------- ----------
these bylaws, except to the extent otherwise provided in the articles of
incorporation, a bylaw adopted by the shareholders, or the Act, and except that
a bylaw adopted, amended or repealed by the shareholders may not be readopted,
amended or repealed by the board of directors if neither of the articles of
incorporation nor a bylaw adopted by the shareholders authorizes the board of
directors to adopt, amend, or repeal that particular bylaw or the bylaws
generally.
(b) The Corporation's shareholders may adopt, amend, alter, change, or
repeal any of
-13-
<PAGE>
these bylaws consistent with the provisions of Section 10 of Article III.
(c) A bylaw that fixes a greater quorum or voting requirement
for the board of directors may be amended or repealed: (i) if originally
adopted by the shareholders, only by the shareholders, unless the bylaw
permits amendment or repeal by the board of directors; or (ii) if
originally adopted by the board of directors, either by the shareholders or
by the board of directors.
(d) A bylaw referred to in Subsection (c) above: (i) may not be
adopted by the board of directors by a vote of less than a majority of the
directors then in office; and (ii) may not itself be amended by a quorum or
vote of the directors less than the quorum or vote therein prescribed or
prescribed by a bylaw adopted or amended by the shareholders.
(e) A bylaw adopted or amended by the shareholders that fixes a
greater voting or quorum requirement for the board of directors may provide
that it may be amended or repealed only by a specified vote of either the
shareholders or the board of directors.
SECTION 7. Emergencies: In anticipation of or during an emergency, the
--------- -----------
board of directors may: (i) modify lines of succession to accommodate the
incapacity of any director, officer, employee, or agent; and (ii) relocate the
principal office or designate alternative principal or regional offices, or
authorize the officers to do so.
During an emergency: (i) notice of a meeting of the board of directors need
be given only to those directors whom it is practicable to reach and may be
given in any practicable manner, including by publication and radio; and (ii)
one or more officers present at a meeting of the board of directors may be
deemed to be directors for the meeting, in order of rank and within the same
rank in order of seniority, as necessary to achieve a quorum.
SECTION 8. Severability: Should any provision of these bylaws become
--------- ------------
ineffective or be declared to be invalid for any reason, such provision shall be
severable from the remainder of these bylaws and all other provisions of these
bylaws shall continue to be in full force and effect.
CERTIFICATION BY SECRETARY
I, the undersigned, being the Secretary of the Corporation Do HEREBY CERTIFY
THAT the foregoing are the bylaws of said Corporation, as adopted by the Board
of Directors of said Corporation on the 9th day of September, 1997.
/s/ Scott J. Uknes, Secretary
-------------------------------
Scott J. Uknes, Secretary
-14-
<PAGE>
Exhibit 10.1
PARADIGM GENETICS, INC.
1998 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
--------------------
help enable the Company to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to
Employees, Directors and Consultants and to promote the success of the Company's
business. Options granted under the Plan may be Incentive Stock Options or
Nonqualified Stock Options, as determined by the Administrator at the time of
grant.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or a Committee.
-------------
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
to administer the Plan. The Committee shall be constituted to comply with
Applicable Laws.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Paradigm Genetics, Inc., a North Carolina
-------
corporation.
(h) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services to such entity.
(i) "Director" means a member of the Board.
--------
(j) "Disability" means total and permanent disability within the
----------
meaning of Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company or any entity
(an "Other Entity") in which the Company holds a significant equity interest,
such as a joint venture in which the Company is a partner. An Employee shall
not cease to be an Employee solely by
<PAGE>
virtue 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, any Other Entity, or any successor. For purposes of Incentive Stock
Options, no such leave may exceed ninety days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract. 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 Nonqualified Stock Option. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "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 or The Nasdaq SmallCap Market of The Nasdaq Stock Market, 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 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.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonqualified Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "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.
(q) "Option" means a stock option granted pursuant to the Plan.
------
-2-
<PAGE>
(r) "Option Agreement" means a written or electronic agreement between
----------------
the Company and an Optionee evidencing the terms and conditions of an individual
Option grant. Each Option Agreement is subject to the terms and conditions of
the Plan.
(s) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(u) "Optionee" means the holder of an outstanding Option granted under
--------
the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this 1998 Stock Option Plan.
----
(x) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
-------------
of 1934, as amended.
(y) "Service Provider" means an Employee, Director or Consultant.
----------------
(z) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(aa) "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 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is One Million Seven Hundred Sixty-five Thousand
(1,765,000)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 or otherwise,
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 purchased upon exercise of an
Option are repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
--------------------------
-3-
<PAGE>
(a) Procedure. The Plan shall be administered by the Administrator.
---------
(b) 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, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options may from
time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
Option;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions of any Option granted
hereunder;
(vi) to determine whether and under what circumstances an Option
may be settled in cash under Section 10 hereof 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;
(viii) to institute an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option that number of Shares having a Fair Market Value equal to
the amount required to be withheld. The Fair Market Value of the Shares to be
withheld shall be determined on the date that the amount of tax to be withheld
is to be determined. All elections by an Optionee to have Shares withheld for
this purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.
-4-
<PAGE>
5. Eligibility.
-----------
(a) Nonqualified Stock Options may be granted to Service Providers.
Incentive Stock Options may be granted only to Employees; provided, however,
that Incentive Stock Options may not be granted to Employees of an Other Entity
that is not also a Subsidiary.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonqualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonqualified 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. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option Agreement shall confer upon any
Optionee any right with respect to continuing the Optionee's relationship as a
Service Provider with the Company, nor shall either interfere in any way with
his or her right or the Company's right to terminate such relationship at any
time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. 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 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
Administrator, 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 the Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes
-5-
<PAGE>
of stock of the Company or any Parent or Subsidiary, the 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 subparagraph, 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 Nonqualified Stock Option, the exercise price
shall be determined by the Administrator at the time of the grant.
(b) Notwithstanding the foregoing, Options may be granted with a per Share
exercise price of less than 100% of Fair Market Value on the date of grant
pursuant to a merger or other corporate transaction.
(c) 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 (i) cash, (ii)
check, (iii) promissory note, (iv) other Shares which 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 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, (v) consideration received by the Company
under a formal cashless exercise program adopted by the Company in connection
with the Plan, or (vi) any combination of the foregoing methods of payment.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. An Option may not be exercised for a fraction of
a Share.
An Option shall be deemed exercised when the Company receives: (i) written
or electronic notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Notwithstanding
the exercise of the Option, until the Shares are issued (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company), no right to vote or receive dividends or any other rights
as a shareholder shall exist with respect to the Shares. The Company shall
issue (or cause to be issued) such Shares promptly after the Option is
exercised.
-6-
<PAGE>
No adjustment will be made for a dividend or other right for which the record
date is prior to the date the Shares are issued, except as provided in Section
12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares thereafter available, both for purposes of the Plan and for
purchase under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service Provider
----------------------
as a result of the Optionee's Disability, the Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement to the
extent the Option is vested on the date of termination, but in no event later
than the expiration date of the term of such Option as set forth in the Option
Agreement. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
the entire Option, the Shares covered by the unvested portion of the Option
shall revert to the Plan. If, after termination, the Option is not exercised
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. If an Optionee dies while a Service Provider, the
-----------------
Option may be exercised within such period of time as is specified in the Option
Agreement to the extent that the Option is vested on the date of death (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement) by the Optionee's estate or by a person who acquires the
right to exercise the Option by bequest or inheritance. In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable for
twelve (12) months following the Optionee's termination. If, at the time of
death, the Optionee is not vested as to the entire Option, the Shares covered by
the unvested portion of the Option shall revert to the Plan. If the Option is
not so exercised within the time specified herein, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
10. Buyout Provisions. The Administrator may at any time offer to buy out, for
-----------------
a payment in cash or Shares, any Option previously granted, based on such terms
and conditions as
-7-
<PAGE>
the Administrator shall establish and communicate to the Optionee at the time
that such offer is made.
11. Non-Transferability of Options. Unless determined otherwise by the
------------------------------
Administrator, 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. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. 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
Administrator, 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 Administrator shall notify the
Optionee at least thirty (30) 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 or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option, the Optionee shall fully vest in and have
the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an
Option becomes fully vested and exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Administrator shall
notify the Optionee in writing or electronically that the Option shall be fully
exercisable for a period of thirty (30) days from the date of such notice, and
the Option shall
-8-
<PAGE>
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option shall be considered assumed if, following the merger or
sale of assets, the option confers the right to purchase or receive, for each
Share of Optioned Stock subject to the Option immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets 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 or sale of assets is 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 or sale of assets.
13. Date of Grant. 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 Service Provider to whom an Option
is so granted within a reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Board shall obtain shareholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. 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 shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. In the event the Shares have not been
--------------------------
registered under the Securities Act of 1933, as amended (the "Securities Act"),
as a condition to the exercise of an Option, the Administrator may require the
person exercising such Option to
-9-
<PAGE>
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 if, in the opinion of counsel for the Company, such a
representation is required.
(c) Inability to Obtain Authority. 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. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
17. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-10-
<PAGE>
Exhibit 10.2
FOUNDER EMPLOYMENT AGREEMENT
----------------------------
This Founder Employment Agreement ("Agreement") is made and entered into as
of February 12, 1998 by Paradigm Genetics Inc., a North Carolina corporation
(hereinafter the "Company"), and John A. Ryals (hereinafter "Founder"). The
Company desires to employ Founder as its President and Chief Executive Officer
and Founder desires to accept such employment on the terms set forth below.
In consideration of the mutual promises set forth below and other good and
valuable consideration, the receipt and sufficiency of which the parties
acknowledge, the Company and Founder agree as follows:
1. EMPLOYMENT. The Company employs Founder and Founder accepts employment
----------
on the terms and conditions set forth in this Agreement.
2. NATURE OF EMPLOYMENT. Founder shall serve as President and Chief
--------------------
Executive Officer and have such responsibilities and authority as the Company
may reasonably assign from time to time. Additionally, Founder agrees to perform
such other duties as the Company may reasonably assign from time to time.
2.1 Founder shall perform all duties and exercise all authority in
accordance with, and otherwise comply with, all Company policies, procedures,
practices and directions.
2.2 Founder shall devote all working time, best efforts, knowledge and
experience to successfully perform his duties and advance the Company's
interests. During his employment, Founder shall not engage in any other business
activities of any nature whatsoever (including board memberships) for which he
receives compensation without the Company's prior written consent; provided,
however, this provision does not prohibit him from personally owning and trading
in stocks, bonds, securities, real estate, commodities or other investment
properties for his own benefit which do not create actual or potential conflicts
of interest with the Company.
2.3 Founder's base of operation shall be at the Company's principal
executive office, subject to business travel as may be necessary in the
performance of his duties.
3. COMPENSATION.
3.1 Base Salary. Founder's annual salary for all services rendered shall
-----------
be One Hundred Eighty Thousand Dollars ($180,000) (less applicable withholdings)
payable in accordance with the Company's policies, procedures and practices as
they may exist from time to time. Founder's salary shall be reviewed in
accordance with the Company's policies, procedures and practices as they may
exist from time to time.
3.2 Bonus. Founder shall be eligible to receive bonus compensation, in
-----
addition to base salary, of twenty-five percent (25%) of Founder's annual base
salary calculated at the end of each calendar year. Such bonus shall be awarded
on the basis of mutually agreed upon objectives and criteria between Founder and
the Company (which shall
<PAGE>
include the hiring of a Chief Financial Officer of the Company), and paid to
Founder within thirty (30) days of the end of each calendar year.
3.3 Stock Options. Founder shall be eligible to receive stock options in
-------------
accordance with a written stock option agreement; provided, however, that the
grant of any options is subject to the applicable terms, conditions and
requirements of any applicable stock option plan, some of which are within the
plan administrator's discretion, as they may exist from time to time.
3.4 Tax Returns. Founder shall be entitled to tax return preparation and
-----------
reasonable financial planning, consultation and advice by the Company's
accounting firm and/or legal counsel and/or financial consultants as the Company
may provide from time to time to Company Founders at Founder's compensation
level.
3.5 Other Benefits. Founder may participate in all medical, dental,
--------------
disability, insurance, retirement, pension, personal leave, car allowance and
other employee benefit plans and programs which may be made available from time
to time to employees of the Company generally and to Company Founders at
Founder's compensation level; provided, however, that Founder's participation is
subject to the applicable terms, conditions and eligibility requirements of
these plans and programs, some of which are within the plan administrator's
discretion, as they may exist from time to time.
3.6 Business Expenses. Founder shall be reimbursed for reasonable and
-----------------
necessary expenses actually incurred by him in performing services under this
Agreement in accordance with and subject to the terms and conditions of the
applicable Company reimbursement policies, procedures and practices as they may
exist from time to time. Expenses covered by this provision include but are not
limited to travel, entertainment, professional dues, subscriptions and dues,
fees and expenses associated with membership in various professional, business
and civic associations of which Founder's participation is in the Company's best
interest.
3.7 Benefit Plans Subject to Amendment. Nothing in this Agreement shall
----------------------------------
require the Company to create, continue or refrain from amending, modifying,
revising or revoking any of the plans, programs or benefits set forth in
Sections 3.3 through 3.6. Any amendments, modifications, revisions and
revocations of these plans, programs and benefits shall apply to Founder.
3.8 Life Insurance. The Founder may obtain and maintain a term life
--------------
insurance policy, reasonably satisfactory to the Company, on the life of the
Founder in the amount of $500,000 and payable to the designee of Founder, for a
period of three (3) years from the date of this Agreement, and the Company shall
on an annual basis pay to the Founder additional compensation in an amount equal
to the annual premium for such policy (the "Insurance Bonus") plus an amount
equal to the applicable federal and state tax payable by the Founder in respect
of the Insurance Bonus; provided that the Company shall pay such amounts only so
long as the annual premium for such policy shall not increase by more than
fifteen percent (15%) over the initial annual premium; but if the premium does
exceed such percentage, then Founder shall have the option of continuing to
maintain such life insurance
2
<PAGE>
and the Company shall be responsible for paying such additional compensation
except with respect to the amount of such excess.
4. TERM OF EMPLOYMENT. Either party may terminate the employment
------------------
relationship with or without cause at any time.
If Founder terminates the employment relationship for any reason or the
Company terminates it for Cause (as defined below), then the Company's
obligation to compensate Founder ceases upon the date of termination except as
to amounts due at that time, and Founder shall be subject to the provisions set
forth in Section 5.2 for a period of twelve (12) months following the date of
termination (the "Non-Competition Period").
If the Company terminates Founder's employment without Cause, then its
obligation to compensate Founder ceases upon the date of termination except as
to amounts due at that time, and Founder shall be subject to the provisions set
forth in Section 5.2 for a period of three (3) months following the date of
termination, so long as the Company shall pay to Founder an amount equal to his
then current monthly salary (less applicable withholdings) payable on a monthly
basis during such three (3) month period following the date of termination;
provided, however, that within ten (10) business days after the date of
termination of employment, the Company may give to Founder written notice that
such three (3) month period shall be extended for up to twelve (12) months (in
the aggregate) following the date of termination and such period shall be so
extended, so long as the Company shall pay to Founder an amount equal to his
then current monthly salary (less applicable withholdings) on a monthly basis
during each such month so extended (such three (3) month period or such period
as so extended being referred to as the "Alternative Non-Competitive Period").
During the period in which Founder receives post-termination payments pursuant
to this Section 4, he may continue to participate in all employee welfare
benefit plans in which Founder participated on the date of termination of
employment; provided, that Founder's participation is subject to the applicable
terms, conditions and eligibility requirements of these plans and this is not a
guarantee of coverage.
For the purpose of this Agreement, "Cause" shall mean: (i) to the extent
permitted by law, Founder's attaining age 65; (ii) Founder's death; (iii)
Founder's physical or mental inability to perform his duties for a period of
three (3) months or more; (iv) Founder's acts constituting fraud, deceit or
unlawful or illegal conduct involving the Company or any felony affecting the
Company; (v) Founder's engaging in "Competitive Business Activities" as
described in Section 5; (vi) Founder's neglect of duty, or failure to follow
reasonable written directions of the Board of Directors, and the failure to cure
same within thirty (30) days after receipt of written notice thereof from the
Company; or (vii) Founder's material breach of this Agreement, or the Founder
Proprietary Information and Inventions Agreement between Founder and the
Company, and the failure to cure same within thirty (30) days after receipt of
written notice thereof from the Company.
This Agreement shall terminate upon the termination of the employment
relationship with the exception of Section 5 (Company Property and Competitive
Business Activities) and Section 3.8 (Life Insurance) which shall survive the
termination of Founder's employment and/or the termination of this Agreement
regardless of the reasons for such termination.
3
<PAGE>
Founder is not entitled to receive any compensation or benefits upon his
termination except as: (i) set forth in this Agreement; (ii) otherwise required
by law; or (iii) otherwise required by any employee benefit plan in which he
participates with the following exception. Nothing in this Agreement, however,
is intended to waive or supplant any death, disability, retirement or pension
benefits to which he may be entitled under employee benefit plans in which he
participates.
5. COMPANY PROPERTY AND COMPETITIVE BUSINESS ACTIVITIES. Founder
----------------------------------------------------
acknowledges and agrees that: (i) by virtue of his employment by and position
with the Company, he has or will have access to trade secrets and confidential
information of the Company, including valuable information about its business
operations and methods and entities with whom it does business in various
locations throughout the world, and he has developed or will develop
relationships with the Company's clients and customers and others with whom it
does business in various locations throughout the world; (ii) the market for the
Company's services is highly competitive and the Company competes on a worldwide
basis with other biotechnology and genomics companies; the Company's business is
worldwide, and the Company competes within the biotechnology and genomics
industry which is characterized by a global, worldwide marketplace; (iii) the
Founder has highly specialized scientific knowledge in the biotechnology and
genomics industry which is essential to the Company's ability to offer highly
specialized, global biotechnology and genomics services and to compete within
that industry; (iv) this Agreement is being executed contemporaneously with the
Stock Purchase Agreement dated on or about the date hereof among the Company and
certain investors, and this Agreement constitutes part of the consideration for
the parties entering into such Stock Purchase Agreement, and the Company is
relying on this Agreement in connection with entering into such Stock Purchase
Agreement and the transactions contemplated thereby; and (v) the "Competitive
Business Activities" provisions set forth in this Section 5 are reasonably
necessary to protect the Company's legitimate business interests, are reasonable
as to the time, territory and scope of activities which are restricted, do not
interfere with public policy or public interest and are described with
sufficient accuracy and definiteness to enable him to understand the scope of
the restrictions imposed upon him.
5.1 Company Property. Upon termination of his employment, Founder shall:
----------------
(i) deliver to the Company all Company property (including, but not limited to,
keys, credit cards, client or customer files, contracts, proposals, work in
process, manuals, forms, computer stored work in process and other computer
data, research materials, other items of business information concerning any
Company client or customer, or Company business or business methods, including
all copies thereof) which is in his possession, custody or control; (ii) bring
all such records, files and other materials up to date before returning them;
and (iii) fully cooperate with the Company in winding up his work and
transferring that work to other individuals designated by the Company.
5.2 Competitive Business Activities. During his employment and during the
-------------------------------
Non-Competition Period or Alternative Non-Competition Period set forth in
Section 4, as applicable, Founder will not engage in the activities set forth
below in this Section 5.2):
4
<PAGE>
(a) on Founder's own or another's behalf, whether as an officer, director,
stockholder, partner, associate, owner, employee, consultant, advisor or
otherwise, directly or indirectly:
(i) compete with the Company within the geographical areas set
forth in Section 5.2.1;
(ii) solicit or do business which is the same as, similar to or
otherwise in competition with the business engaged in by the Company from or
with persons or entities: (a) who are customers of the Company; (b) who Founder,
or someone for whom he had management responsibility or supervision, solicited,
negotiated, contracted, serviced or had contact with on the Company's behalf;
(c) who were customers of the Company at any time during the last year of
Founder's employment with the Company; or (d) to whom the Company had made
proposals to do business at any time during the last year of Founder's
employment with the Company; or
(iii) offer employment to or otherwise solicit for employment or
engagement (as a consultant, advisor, independent contractor or otherwise) any
employee or other person who had been employed or engaged by the Company during
the last year of Founder's employment with the Company; or
(b) within the geographical areas set forth in Section 5.2.1, be employed
(or otherwise engaged) by any person or entity that competes with the Company in
the field of agricultural biotechnology and genomics, in (i) a management
capacity, (ii) other capacity providing the same or similar services which
Founder provided to the Company, or (iii) any capacity connected with
competitive business activities; or
(c) take any action which is materially detrimental or otherwise intended
to be adverse to the Company's goodwill, name, business relations, prospects and
operations.
5.2.1 The restrictions set forth in Section 5.2 apply to the following
geographical areas: (i) the Raleigh/Durham/Research Triangle Park, North
Carolina metropolitan area; (ii) any city, metropolitan area, county (or similar
political subdivisions in foreign countries) in which the Company is located or
does or, during Founder's employment with Company did business; (iii) any city,
metropolitan area, county (or similar political subdivision in foreign
countries) in which Founder's services were provided (in person or otherwise),
or for which Founder had responsibility, or in which Founder worked on Company
projects, while employed by the Company; (iv) the State of North Carolina; (v)
the Los Angeles, California metropolitan area; (vi) the San Francisco,
California/San Francisco Bay metropolitan area; and (vii) the State of
California.
5.2.2 Notwithstanding the foregoing, Founder's ownership, directly or
indirectly, of not more than one percent of the issued and outstanding stock of
a corporation the shares of which are regularly traded on a national securities
exchange or in the over-the-counter market shall not violate Section 5.2.
5.3 Remedies. Founder acknowledges that his failure to abide by the
--------
"Company Property" or "Competitive Business Activities" provisions of this
Section 5 would
5
<PAGE>
cause irreparable harm to the Company for which legal remedies would be
inadequate. Therefore, in addition to any other relief to which the Company may
be entitled by virtue of Founder's failure to abide by these provisions, the
Company may seek legal and equitable relief, including but not limited to
preliminary and permanent injunctive relief, for Founder's actual or threatened
failure to abide by these provisions.
5.4 Other Agreements. Nothing in this Agreement shall terminate, revoke or
----------------
diminish Founder's obligations or the Company's rights and remedies under law or
any agreements relating to trade secrets, confidential information, non-
competition and intellectual property which Founder has executed in the past or
may execute in the future or contemporaneously with this Agreement, including
without limitation agreements related to intellectual property rights previously
executed by and between Founder and Founder's previous employer, Novartis Crop
Protection, Inc. and its affiliates ("Novartis").
6. EMPLOYEE REPRESENTATION. Founder represents and warrants to the Company
-----------------------
that, to the best of his knowledge, his employment and obligations under this
Agreement will not (i) breach any legal duty or obligation he owes to another or
(ii) violate any law, recognized ethics standard or recognized business custom.
The Founder has not and will not use any trade secrets of Novartis in the course
of his employment with the Company that may expose the Company or any employees
of the Company to any liability under any agreement, rule, regulation or
statute. No patent, discovery, invention, improvement, process or device made,
discovered or developed by Founder while employed with Novartis or within six
months subsequent to such employment has or will be used in any business of the
Company in any manner that violates or infringes the intellectual property
rights of Novartis or violates any agreement between Founder and Novartis.
7. CONFIDENTIALITY, TRADE SECRETS AND INTELLECTUAL PROPERTY AGREEMENT.
------------------------------------------------------------------
Founder's employment and continued employment shall be contingent upon his
execution of confidentiality, trade secrets and intellectual property agreements
as the Company may require Company Founders at his compensation level to execute
from time to time.
8. WAIVER OF BREACH. The Company's or Founder's waiver of any breach of a
----------------
provision of this Agreement shall not waive any subsequent breach by the other
party.
9. ENTIRE AGREEMENT. Except as expressly provided in this Agreement, this
----------------
Agreement: (i) supersedes all other understandings and agreements, oral or
written, between the parties with respect to the subject matter of this
Agreement; and (ii) constitutes the sole agreement between the parties with
respect to this subject matter. Each party acknowledges that: (i) no
representations, inducements, promises or agreements, oral or written, have been
made by any party or by anyone acting on behalf of any party, which are not
embodied in this Agreement; and (ii) no agreement, statement or promise not
contained in this Agreement shall be valid. No change or modification of this
Agreement shall be valid or binding upon the parties unless such change or
modification is in writing and is signed by the parties.
10. SEVERABILITY. If a court of competent jurisdiction holds that any
------------
provision or sub-part thereof contained in this Agreement is invalid, illegal or
unenforceable, that invalidity, illegality or unenforceability shall not affect
any other provision in this Agreement. Additionally,
6
<PAGE>
if any of the provision, clauses or phrases in the Competitive Business
Activities provisions set forth in this Agreement are held unenforceable by a
court of competent jurisdiction, then the parties desire that they be "blue-
penciled' or rewritten by the court to the extent necessary to render them
enforceable.
11. PARTIES BOUND. The terms, provisions, covenants and agreements
contained in this Agreement shall apply to, be binding upon and inure to the
benefit of the Company's successors and assigns. Founder may not assign this
Agreement without the Company's prior written consent.
12. GOVERNING LAW. This Agreement and the employment relationship created
by it shall be governed by North Carolina law without giving effect to North
Carolina choice of law provisions. The parties hereby consent to jurisdiction in
North Carolina for the purpose of any litigation relating to this Agreement and
agree that any litigation by or involving them relating to this Agreement shall
be conducted in the courts of Wake County, North Carolina or the federal courts
of the United States for the Eastern District of North Carolina.
[Signatures appear on next page]
7
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement on the day
and year first written above.
/s/ John A. Ryals
----------------------------------------
John A. Ryals
PARADIGM GENETICS INC.
By: /s/ Scott J. Uknes
------------------------------------
Name: Scott J. Uknes
Title: Secretary
8
<PAGE>
Exhibit 10.3
FOUNDER EMPLOYMENT AGREEMENT
----------------------------
This Founder Employment Agreement ("Agreement") is made and entered into as
of February 12, 1998 by Paradigm Genetics Inc., a North Carolina corporation
(hereinafter the "Company"), and Scott J. Uknes (hereinafter "Founder"). The
Company desires to employ Founder as its President and Chief Executive Officer
and Founder desires to accept such employment on the terms set forth below.
In consideration of the mutual promises set forth below and other good and
valuable consideration, the receipt and sufficiency of which the parties
acknowledge, the Company and Founder agree as follows:
1. EMPLOYMENT. The Company employs Founder and Founder accepts employment
----------
on the terms and conditions set forth in this Agreement.
2. NATURE OF EMPLOYMENT. Founder shall serve as President and Chief
--------------------
Executive Officer and have such responsibilities and authority as the Company
may reasonably assign from time to time. Additionally, Founder agrees to perform
such other duties as the Company may reasonably assign from time to time.
2.1 Founder shall perform all duties and exercise all authority in
accordance with, and otherwise comply with, all Company policies, procedures,
practices and directions.
2.2 Founder shall devote all working time, best efforts, knowledge and
experience to successfully perform his duties and advance the Company's
interests. During his employment, Founder shall not engage in any other business
activities of any nature whatsoever (including board memberships) for which he
receives compensation without the Company's prior written consent; provided,
however, this provision does not prohibit him from personally owning and trading
in stocks, bonds, securities, real estate, commodities or other investment
properties for his own benefit which do not create actual or potential conflicts
of interest with the Company.
2.3 Founder's base of operation shall be at the Company's principal
executive office, subject to business travel as may be necessary in the
performance of his duties.
3. COMPENSATION.
3.1 Base Salary. Founder's annual salary for all services rendered shall
-----------
be One Hundred Twenty Thousand Dollars ($120,000) (less applicable withholdings)
payable in accordance with the Company's policies, procedures and practices as
they may exist from time to time. Founder's salary shall be reviewed in
accordance with the Company's policies, procedures and practices as they may
exist from time to time.
1
<PAGE>
3.2 Bonus. Founder shall be eligible to receive bonus compensation, in
-----
addition to base salary, of twenty-five percent (25%) of Founder's annual base
salary calculated at the end of each calendar year. Such bonus shall be awarded
on the basis of mutually agreed upon objectives and criteria between Founder and
the Company (which shall include the hiring of a Chief Financial Officer of the
Company), and paid to Founder within thirty (30) days of the end of each
calendar year.
3.3 Stock Options. Founder shall be eligible to receive stock options in
-------------
accordance with a written stock option agreement; provided, however, that the
grant of any options is subject to the applicable terms, conditions and
requirements of any applicable stock option plan, some of which are within the
plan administrator's discretion, as they may exist from time to time.
3.4 Tax Returns. Founder shall be entitled to tax return preparation and
-----------
reasonable financial planning, consultation and advice by the Company's
accounting firm and/or legal counsel and/or financial consultants as the Company
may provide from time to time to Company Founders at Founder's compensation
level.
3.5 Other Benefits. Founder may participate in all medical, dental,
--------------
disability, insurance, retirement, pension, personal leave, car allowance and
other employee benefit plans and programs which may be made available from time
to time to employees of the Company generally and to Company Founders at
Founder's compensation level; provided, however, that Founder's participation is
subject to the applicable terms, conditions and eligibility requirements of
these plans and programs, some of which are within the plan administrator's
discretion, as they may exist from time to time.
3.6 Business Expenses. Founder shall be reimbursed for reasonable and
-----------------
necessary expenses actually incurred by him in performing services under this
Agreement in accordance with and subject to the terms and conditions of the
applicable Company reimbursement policies, procedures and practices as they may
exist from time to time. Expenses covered by this provision include but are not
limited to travel, entertainment, professional dues, subscriptions and dues,
fees and expenses associated with membership in various professional, business
and civic associations of which Founder's participation is in the Company's best
interest.
3.7 Benefit Plans Subject to Amendment. Nothing in this Agreement shall
----------------------------------
require the Company to create, continue or refrain from amending, modifying,
revising or revoking any of the plans, programs or benefits set forth in
Sections 3.3 through 3.6. Any amendments, modifications, revisions and
revocations of these plans, programs and benefits shall apply to Founder.
3.8 Life Insurance. The Founder may obtain and maintain a term life
--------------
insurance policy, reasonably satisfactory to the Company, on the life of the
Founder in the amount of $500,000 and payable to the designee of Founder, for a
period of three (3) years from the date of this Agreement, and the Company shall
on an annual basis pay to the Founder additional compensation in an amount equal
to the annual premium for such policy (the "Insurance Bonus") plus an amount
equal to the applicable federal and state tax payable by the Founder in respect
of the Insurance Bonus; provided that the Company shall pay such amounts only so
long as the annual premium for such policy shall not increase by more than
2
<PAGE>
fifteen percent (15%) over the initial annual premium; but if the premium does
exceed such percentage, then Founder shall have the option of continuing to
maintain such life insurance and the Company shall be responsible for paying
such additional compensation except with respect to the amount of such excess.
4. TERM OF EMPLOYMENT. Either party may terminate the employment
------------------
relationship with or without cause at any time.
If Founder terminates the employment relationship for any reason or the
Company terminates it for Cause (as defined below), then the Company's
obligation to compensate Founder ceases upon the date of termination except as
to amounts due at that time, and Founder shall be subject to the provisions set
forth in Section 5.2 for a period of twelve (12) months following the date of
termination (the "Non-Competition Period").
If the Company terminates Founder's employment without Cause, then its
obligation to compensate Founder ceases upon the date of termination except as
to amounts due at that time, and Founder shall be subject to the provisions set
forth in Section 5.2 for a period of three (3) months following the date of
termination, so long as the Company shall pay to Founder an amount equal to his
then current monthly salary (less applicable withholdings) payable on a monthly
basis during such three (3) month period following the date of termination;
provided, however, that within ten (10) business days after the date of
termination of employment, the Company may give to Founder written notice that
such three (3) month period shall be extended for up to twelve (12) months (in
the aggregate) following the date of termination and such period shall be so
extended, so long as the Company shall pay to Founder an amount equal to his
then current monthly salary (less applicable withholdings) on a monthly basis
during each such month so extended (such three (3) month period or such period
as so extended being referred to as the "Alternative Non-Competitive Period").
During the period in which Founder receives post-termination payments pursuant
to this Section 4, he may continue to participate in all employee welfare
benefit plans in which Founder participated on the date of termination of
employment; provided, that Founder's participation is subject to the applicable
terms, conditions and eligibility requirements of these plans and this is not a
guarantee of coverage.
For the purpose of this Agreement, "Cause" shall mean: (i) to the extent
permitted by law, Founder's attaining age 65; (ii) Founder's death; (iii)
Founder's physical or mental inability to perform his duties for a period of
three (3) months or more; (iv) Founder's acts constituting fraud, deceit or
unlawful or illegal conduct involving the Company or any felony affecting the
Company; (v) Founder's engaging in "Competitive Business Activities" as
described in Section 5; (vi) Founder's neglect of duty, or failure to follow
reasonable written directions of the Board of Directors, and the failure to cure
same within thirty (30) days after receipt of written notice thereof from the
Company; or (vii) Founder's material breach of this Agreement, or the Founder
Proprietary Information and Inventions Agreement between Founder and the
Company, and the failure to cure same within thirty (30) days after receipt of
written notice thereof from the Company.
This Agreement shall terminate upon the termination of the employment
relationship with the exception of Section 5 (Company Property and Competitive
Business Activities) and Section 3.8 (Life Insurance) which shall survive the
termination of Founder's
3
<PAGE>
employment and/or the termination of this Agreement regardless of the reasons
for such termination.
Founder is not entitled to receive any compensation or benefits upon his
termination except as: (i) set forth in this Agreement; (ii) otherwise required
by law; or (iii) otherwise required by any employee benefit plan in which he
participates with the following exception. Nothing in this Agreement, however,
is intended to waive or supplant any death, disability, retirement or pension
benefits to which he may be entitled under employee benefit plans in which he
participates.
5. COMPANY PROPERTY AND COMPETITIVE BUSINESS ACTIVITIES. Founder
----------------------------------------------------
acknowledges and agrees that: (i) by virtue of his employment by and position
with the Company, he has or will have access to trade secrets and confidential
information of the Company, including valuable information about its business
operations and methods and entities with whom it does business in various
locations throughout the world, and he has developed or will develop
relationships with the Company's clients and customers and others with whom it
does business in various locations throughout the world; (ii) the market for the
Company's services is highly competitive and the Company competes on a worldwide
basis with other biotechnology and genomics companies; the Company's business is
worldwide, and the Company competes within the biotechnology and genomics
industry which is characterized by a global, worldwide marketplace; (iii) the
Founder has highly specialized scientific knowledge in the biotechnology and
genomics industry which is essential to the Company's ability to offer highly
specialized, global biotechnology and genomics services and to compete within
that industry; (iv) this Agreement is being executed contemporaneously with the
Stock Purchase Agreement dated on or about the date hereof among the Company and
certain investors, and this Agreement constitutes part of the consideration for
the parties entering into such Stock Purchase Agreement, and the Company is
relying on this Agreement in connection with entering into such Stock Purchase
Agreement and the transactions contemplated thereby; and (v) the "Competitive
Business Activities" provisions set forth in this Section 5 are reasonably
necessary to protect the Company's legitimate business interests, are reasonable
as to the time, territory and scope of activities which are restricted, do not
interfere with public policy or public interest and are described with
sufficient accuracy and definiteness to enable him to understand the scope of
the restrictions imposed upon him.
5.1 Company Property. Upon termination of his employment, Founder shall:
----------------
(i) deliver to the Company all Company property (including, but not limited to,
keys, credit cards, client or customer files, contracts, proposals, work in
process, manuals, forms, computer stored work in process and other computer
data, research materials, other items of business information concerning any
Company client or customer, or Company business or business methods, including
all copies thereof) which is in his possession, custody or control; (ii) bring
all such records, files and other materials up to date before returning them;
and (iii) fully cooperate with the Company in winding up his work and
transferring that work to other individuals designated by the Company.
5.2 Competitive Business Activities. During his employment and during the
-------------------------------
Non-Competition Period or Alternative Non-Competition Period set forth in
Section 4, as applicable, Founder will not engage in the activities set forth
below in this Section 5.2 (except that in any event the activities set forth on
Schedule A attached hereto shall be permitted):
- ----------
4
<PAGE>
(a) on Founder's own or another's behalf, whether as an officer, director,
stockholder, partner, associate, owner, employee, consultant, advisor or
otherwise, directly or indirectly:
(i) compete with the Company within the geographical areas set forth
in Section 5.2.1;
(ii) solicit or do business which is the same as, similar to or
otherwise in competition with the business engaged in by the Company from or
with persons or entities: (a) who are customers of the Company; (b) who Founder,
or someone for whom he had management responsibility or supervision, solicited,
negotiated, contracted, serviced or had contact with on the Company's behalf;
(c) who were customers of the Company at any time during the last year of
Founder's employment with the Company; or (d) to whom the Company had made
proposals to do business at any time during the last year of Founder's
employment with the Company; or
(iii) offer employment to or otherwise solicit for employment or
engagement (as a consultant, advisor, independent contractor or otherwise) any
employee or other person who had been employed or engaged by the Company during
the last year of Founder's employment with the Company; or
(b) within the geographical areas set forth in Section 5.2.1, be employed
(or otherwise engaged) by any person or entity that competes with the Company in
the field of agricultural biotechnology and genomics, in (i) a management
capacity, (ii) other capacity providing the same or similar services which
Founder provided to the Company, or (iii) any capacity connected with
competitive business activities; or
(c) take any action which is materially detrimental or otherwise intended
to be adverse to the Company's goodwill, name, business relations, prospects and
operations.
5.2.1 The restrictions set forth in Section 5.2 apply to the following
geographical areas: (i) the Raleigh/Durham/Research Triangle Park, North
Carolina metropolitan area; (ii) any city, metropolitan area, county (or similar
political subdivisions in foreign countries) in which the Company is located or
does or, during Founder's employment with Company did business; (iii) any city,
metropolitan area, county (or similar political subdivision in foreign
countries) in which Founder's services were provided (in person or otherwise),
or for which Founder had responsibility, or in which Founder worked on Company
projects, while employed by the Company; (iv) the State of North Carolina; (v)
the Los Angeles, California metropolitan area; (vi) the San Francisco,
California/San Francisco Bay metropolitan area; and (vii) the State of
California.
5.2.2 Notwithstanding the foregoing, Founder's ownership, directly or
indirectly, of not more than one percent of the issued and outstanding stock of
a corporation the shares of which are regularly traded on a national securities
exchange or in the over-the-counter market shall not violate Section 5.2.
5
<PAGE>
5.3 Remedies. Founder acknowledges that his failure to abide by the
--------
"Company Property" or "Competitive Business Activities" provisions of this
Section 5 would cause irreparable harm to the Company for which legal remedies
would be inadequate. Therefore, in addition to any other relief to which the
Company may be entitled by virtue of Founder's failure to abide by these
provisions, the Company may seek legal and equitable relief, including but not
limited to preliminary and permanent injunctive relief, for Founder's actual or
threatened failure to abide by these provisions.
5.4 Other Agreements. Nothing in this Agreement shall terminate, revoke
----------------
or diminish Founder's obligations or the Company's rights and remedies under law
or any agreements relating to trade secrets, confidential information, non-
competition and intellectual property which Founder has executed in the past or
may execute in the future or contemporaneously with this Agreement, including
without limitation agreements related to intellectual property rights previously
executed by and between Founder and Founder's previous employer, Novartis Crop
Protection, Inc. and its affiliates ("Novartis").
6. EMPLOYEE REPRESENTATION. Founder represents and warrants to the Company
-----------------------
that, to the best of his knowledge, his employment and obligations under this
Agreement will not (i) breach any legal duty or obligation he owes to another or
(ii) violate any law, recognized ethics standard or recognized business custom.
The Founder has not and will not use any trade secrets of Novartis in the course
of his employment with the Company that may expose the Company or any employees
of the Company to any liability under any agreement, rule, regulation or
statute. No patent, discovery, invention, improvement, process or device made,
discovered or developed by Founder while employed with Novartis or within six
months subsequent to such employment has or will be used in any business of the
Company in any manner that violates or infringes the intellectual property
rights of Novartis or violates any agreement between Founder and Novartis.
7. CONFIDENTIALITY, TRADE SECRETS AND INTELLECTUAL PROPERTY AGREEMENT.
------------------------------------------------------------------
Founder's employment and continued employment shall be contingent upon his
execution of confidentiality, trade secrets and intellectual property agreements
as the Company may require Company Founders at his compensation level to execute
from time to time.
8. WAIVER OF BREACH. The Company's or Founder's waiver of any breach of a
----------------
provision of this Agreement shall not waive any subsequent breach by the other
party.
9. ENTIRE AGREEMENT. Except as expressly provided in this Agreement, this
----------------
Agreement: (i) supersedes all other understandings and agreements, oral or
written, between the parties with respect to the subject matter of this
Agreement; and (ii) constitutes the sole agreement between the parties with
respect to this subject matter. Each party acknowledges that: (i) no
representations, inducements, promises or agreements, oral or written, have been
made by any party or by anyone acting on behalf of any party, which are not
embodied in this Agreement; and (ii) no agreement, statement or promise not
contained in this Agreement shall be valid. No change or modification of this
Agreement shall be valid or binding upon the parties unless such change or
modification is in writing and is signed by the parties.
6
<PAGE>
10. SEVERABILITY. If a court of competent jurisdiction holds that any
------------
provision or sub-part thereof contained in this Agreement is invalid, illegal or
unenforceable, that invalidity, illegality or unenforceability shall not affect
any other provision in this Agreement. Additionally, if any of the provision,
clauses or phrases in the Competitive Business Activities provisions set forth
in this Agreement are held unenforceable by a court of competent jurisdiction,
then the parties desire that they be "blue-penciled' or rewritten by the court
to the extent necessary to render them enforceable.
11. PARTIES BOUND. The terms, provisions, covenants and agreements
-------------
contained in this Agreement shall apply to, be binding upon and inure to the
benefit of the Company's successors and assigns. Founder may not assign this
Agreement without the Company's prior written consent.
12. GOVERNING LAW. This Agreement and the employment relationship created
-------------
by it shall be governed by North Carolina law without giving effect to North
Carolina choice of law provisions. The parties hereby consent to jurisdiction in
North Carolina for the purpose of any litigation relating to this Agreement and
agree that any litigation by or involving them relating to this Agreement shall
be conducted in the courts of Wake County, North Carolina or the federal courts
of the United States for the Eastern District of North Carolina.
[Signatures appear on next page]
7
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement on the day
and year first written above.
/s/ Scott J. Uknes
------------------------------------
Scott J. Uknes
PARADIGM GENETICS INC.
By: /s/ John Ryals
----------------------------------
Name: John Ryals
Title: CEO/President
8
<PAGE>
SCHEDULE A
----------
PERMITTED BUSINESS ACTIVITIES
-----------------------------
In addition to those activities permitted by Section 5 of the attached Founder
Employment Agreement, Founder is permitted to work on all activities within
biotechnology and genomics. Notwithstanding the foregoing sentence, Founder
shall be prohibited, during the period set forth in Section 4, from engaging in
activities pertaining to agricultural seeds and chemical research, including
without limitation agricultural fungicide discovery.
9
<PAGE>
Exhibit 10.4
PARADIGM GENETICS INC.
FOUNDER PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
In consideration of my employment or continued employment by Paradigm
Genetics Inc., a North Carolina corporation (the "Company"), and the
compensation now and hereafter paid to me, I hereby agree as follows:
1. Proprietary Information and Confidentiality
1.1 Recognition of Company's Rights; Nondisclosure. I acknowledge and
agree that during and by reason of my employment with the Company, I may have
had access to or received, or may have access to or receive, Proprietary
Information (defined below). At all times during my employment and thereafter, I
will hold in strictest confidence, and in a fiduciary capacity for the benefit
of the Company, and will not disclose, use, lecture upon or publish any
Proprietary Information, except as such disclosure, use or publication may be
required in connection with my work for the Company, or unless an executive
officer of the Company expressly authorizes in writing such disclosure, use or
publication. I agree that all Proprietary Information shall be the sole and
exclusive property of the Company and its successors and assigns. I agree that
my obligations under this Agreement shall continue as to each item of
Proprietary Information until such item has become public knowledge through no
fault of mine and by proper means without breach of this Agreement.
1.2 Proprietary Information. The term "Proprietary Information" shall
mean any and all confidential, private, secret or proprietary knowledge, data or
information of or concerning the Company and/or its affiliates, including, but
not limited to, information relating to products, processes, know-how, trade
secrets, designs, formulae, patterns, methods, techniques, developmental or
experimental work, improvements, discoveries, inventions, devices, ideas, source
and object codes, data, programs, other works of authorship, specifications,
plans for research and development, marketing and selling, business plans,
projections, budgets and unpublished financial statements, licenses, prices and
costs, suppliers and customers, training techniques and materials, and the
skills and compensation of other employees of the Company.
1.3 Third Party Information. I understand, in addition, that the Company
has received and in the future will receive from third parties confidential or
proprietary information ("Third Party Information") subject to a duty on the
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. During the term of my employment and
thereafter, I will hold Third Party Information in the strictest confidence and
will not disclose to anyone (other than the Company's employees and agents who
need to know such information in connection with their work for the Company) or
use, except as required in my work for the Company, Third Party Information
unless expressly authorized in writing by an executive officer of the Company.
<PAGE>
2. Assignment of Inventions and Other Developments.
2.1 Disclosure of Inventions and Other Developments. I agree to hold in
a fiduciary capacity for the benefit of the Company and to make full and prompt
disclosure to the Company of all inventions, discoveries, developments, devices,
processes, designs, methods, software, works of authorship, and improvements,
whether or not patentable or copyrightable, which are made, conceived, created,
discovered, developed, or reduced to practice by me, alone or jointly with
others, or otherwise, during the term of my employment by the Company and during
the period of six (6) months after the termination of such employment, that
relate in any way to the Company's business or actual or anticipated research or
development, or result in any way from any work performed by me for or on behalf
of the Company (all of which inventions and other such items described above are
collectively referred to as "Developments"). I acknowledge that all original
works of authorship which are made by me (solely or jointly with others) within
the scope of my employment and which are protectable by copyright are "works
made for hire," pursuant to the United States Copyright Act.
2.2 Assignment of Inventions and Other Developments; Records. I hereby
assign and agree to assign to the Company (or any entity or person designated by
the Company) all of my right, title and interest in and to all Developments and
all intellectual property or other proprietary information or rights with
respect thereto (the "Proprietary Rights"), including without limitation all
related patents, patent applications, copyrights and copyright applications, and
trade secrets. I agree to keep and maintain complete, accurate and current
accounts and records (including notes, sketches, and drawings and in any other
form that may be required by the Company from time to time) of all Developments
and Proprietary Information made, conceived, created, discovered or developed by
me, which records shall be available to and shall be and remain the sole and
exclusive property of the Company at all times.
2.3 Enforcement of Proprietary Rights. I will assist the Company in
every proper way to obtain, and from time to time enforce, United States and
foreign Proprietary Rights relating to all Developments in any and all
countries. To that end I will execute, verify and deliver such documents and
perform such other acts (including appearances as a witness) as the Company may
reasonably request for use in applying for, obtaining, perfecting, evidencing,
sustaining and enforcing such Proprietary Rights and the assignment thereof. In
addition, I will execute, verify and deliver assignments of such Proprietary
Rights to the Company or its designee. My obligation to assist the Company with
respect to Proprietary Rights relating to all Developments in any and all
countries shall continue beyond the termination of my employment, but the
Company shall compensate me at a reasonable rate after my termination for the
time actually spent by me at the Company's request on such assistance.
2.4 Prior Inventions. Except as I have notified the Company in writing
prior to the date of this Agreement, there are no inventions, discoveries or the
like which I have made prior to the commencement of my employment with the
Company and which are excluded from the scope of this Agreement. The Company
acknowledges and agrees that I have notified the Company of my agreements with
my former employer, Novartis Crop Protection, Inc., and its affiliates
("Novartis") under which Novartis has certain rights with respect to inventions,
discoveries or the like made by me in connection with my employment
2
<PAGE>
with Novartis. I have not and will not use any trade secrets of Novartis in the
course of my employment with the Company that may expose the Company or any
employees of the Company to any liability under any agreement, rule, regulation
or statute. No patent, discovery, invention, improvement, process or device
made, discovered or developed by me while employed with Novartis or within six
months subsequent to such employment has or will be used in any business of the
Company in any manner that violates or infringes the intellectual property
rights of Novartis or violates any agreement between me and Novartis.
3. Additional Activities. I agree that during the period of my employment
by the Company I will not, without the Company's express written consent, engage
in any employment or business activity that is competitive with, or would
otherwise conflict with, my employment by the Company. I agree further that for
the period of my employment by the Company, and for twelve (12) months after the
date of termination of my employment by the Company, I will not induce any
employee of the Company to leave the employ of the Company.
4. Return of Company Property. When I leave the employ of the Company, I
will deliver promptly to the Company any and all records, drawings, sketches,
notes, memoranda, reports, specifications, devices, formulae, and documents,
together with all copies thereof, any other material containing or disclosing
any Developments, Third Party Information or Proprietary Information of the
Company, and other property that I shall have received in connection with or
otherwise possess by virtue of my employment with the Company.
5. Remedies. I agree that any breach of this Agreement by me is likely to
cause the Company substantial and irrevocable damage and, therefore, I agree
that the Company shall have the right to enforce this Agreement by injunction,
specific performance or other equitable relief, without bond and without
prejudice to any other rights and remedies that the Company may have for breach
of this Agreement.
6. General Provisions.
6.1 Governing Law; Consent to Jurisdiction. This Agreement will be
governed by and construed according to the laws of the State of North Carolina,
without regard to conflicts of laws principles. I hereby expressly consent to
the personal jurisdiction of the state and federal courts located in North
Carolina for any lawsuit filed there against me by the Company arising from or
related to this Agreement.
6.2 Severability. In case any one or more of the provisions contained
in this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect the other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein. If moreover, any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, scope, activity or subject, it shall be construed by limiting
and reducing it, so as to be enforceable to the extent compatible with the
applicable law as it shall then appear.
6.3 Employment. I understand that this Agreement does not constitute a
contract of employment and does not imply that my employment will continue for
any period of time.
3
<PAGE>
6.4 Other Provisions. This Agreement will be binding upon my heirs,
executors, administrators and other legal representatives and will be for the
benefit of the Company, its successors, and its assigns. The provisions of this
Agreement shall survive the termination of my employment and the assignment of
this Agreement by the Company to any successor in interest or other assignee. No
waiver by the Company of any breach of this Agreement shall be a waiver of any
preceding or succeeding breach. No waiver by the Company of any right under this
Agreement shall be construed as a waiver of any other right. The obligations
pursuant to this Agreement shall apply to any time during which I was previously
employed, or am in the future employed, by the Company as a consultant if no
other agreement governs nondisclosure and assignment of inventions during such
period. This Agreement is the final, complete and exclusive agreement of the
parties with respect to the subject matter hereof and supersedes and merges all
prior discussions between us. No modification of or amendment to this Agreement,
nor any waiver of any rights under this Agreement, will be effective unless in
writing and signed by the party to be charged.
[Signatures appear on next page]
4
<PAGE>
This Agreement shall be effective as of the first day of my employment with
the Company, namely: September 9, 1997.
PARADIGM GENETICS INC.
By: /s/ John A. Ryals
----------------------------------
Name: John A. Ryals
Title: CEO/President
Address: 85 Alexander
/s/ Scott J. Uknes
-------------------------------------
Scott J. Uknes
-------------------------------------
(Printed Name)
Dated: February 12, 1998
5
<PAGE>
Exhibit 10.5
PARADIGM GENETICS INC.
FOUNDER PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
In consideration of my employment or continued employment by Paradigm
Genetics Inc., a North Carolina corporation (the "Company"), and the
compensation now and hereafter paid to me, I hereby agree as follows:
1. Proprietary Information and Confidentiality
1.1 Recognition of Company's Rights; Nondisclosure. I acknowledge and
agree that during and by reason of my employment with the Company, I may have
had access to or received, or may have access to or receive, Proprietary
Information (defined below). At all times during my employment and thereafter, I
will hold in strictest confidence, and in a fiduciary capacity for the benefit
of the Company, and will not disclose, use, lecture upon or publish any
Proprietary Information, except as such disclosure, use or publication may be
required in connection with my work for the Company, or unless an executive
officer of the Company expressly authorizes in writing such disclosure, use or
publication. I agree that all Proprietary Information shall be the sole and
exclusive property of the Company and its successors and assigns. I agree that
my obligations under this Agreement shall continue as to each item of
Proprietary Information until such item has become public knowledge through no
fault of mine and by proper means without breach of this Agreement.
1.2 Proprietary Information. The term "Proprietary Information" shall
mean any and all confidential, private, secret or proprietary knowledge, data or
information of or concerning the Company and/or its affiliates, including, but
not limited to, information relating to products, processes, know-how, trade
secrets, designs, formulae, patterns, methods, techniques, developmental or
experimental work, improvements, discoveries, inventions, devices, ideas, source
and object codes, data, programs, other works of authorship, specifications,
plans for research and development, marketing and selling, business plans,
projections, budgets and unpublished financial statements, licenses, prices and
costs, suppliers and customers, training techniques and materials, and the
skills and compensation of other employees of the Company.
1.3 Third Party Information. I understand, in addition, that the Company
has received and in the future will receive from third parties confidential or
proprietary information ("Third Party Information") subject to a duty on the
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. During the term of my employment and
thereafter, I will hold Third Party Information in the strictest confidence and
will not disclose to anyone (other than the Company's employees and agents who
need to know such information in connection with their work for the Company) or
use, except as required in my work for the Company, Third Party Information
unless expressly authorized in writing by an executive officer of the Company.
<PAGE>
2. Assignment of Inventions and Other Developments.
2.1 Disclosure of Inventions and Other Developments. I agree to hold in
a fiduciary capacity for the benefit of the Company and to make full and prompt
disclosure to the Company of all inventions, discoveries, developments, devices,
processes, designs, methods, software, works of authorship, and improvements,
whether or not patentable or copyrightable, which are made, conceived, created,
discovered, developed, or reduced to practice by me, alone or jointly with
others, or otherwise, during the term of my employment by the Company and during
the period of six (6) months after the termination of such employment, that
relate in any way to the Company's business or actual or anticipated research or
development, or result in any way from any work performed by me for or on behalf
of the Company (all of which inventions and other such items described above are
collectively referred to as "Developments"). I acknowledge that all original
works of authorship which are made by me (solely or jointly with others) within
the scope of my employment and which are protectable by copyright are "works
made for hire," pursuant to the United States Copyright Act.
2.2 Assignment of Inventions and Other Developments; Records. I hereby
assign and agree to assign to the Company (or any entity or person designated by
the Company) all of my right, title and interest in and to all Developments and
all intellectual property or other proprietary information or rights with
respect thereto (the "Proprietary Rights"), including without limitation all
related patents, patent applications, copyrights and copyright applications, and
trade secrets. I agree to keep and maintain complete, accurate and current
accounts and records (including notes, sketches, and drawings and in any other
form that may be required by the Company from time to time) of all Developments
and Proprietary Information made, conceived, created, discovered or developed by
me, which records shall be available to and shall be and remain the sole and
exclusive property of the Company at all times.
2.3 Enforcement of Proprietary Rights. I will assist the Company in
every proper way to obtain, and from time to time enforce, United States and
foreign Proprietary Rights relating to all Developments in any and all
countries. To that end I will execute, verify and deliver such documents and
perform such other acts (including appearances as a witness) as the Company may
reasonably request for use in applying for, obtaining, perfecting, evidencing,
sustaining and enforcing such Proprietary Rights and the assignment thereof. In
addition, I will execute, verify and deliver assignments of such Proprietary
Rights to the Company or its designee. My obligation to assist the Company with
respect to Proprietary Rights relating to all Developments in any and all
countries shall continue beyond the termination of my employment, but the
Company shall compensate me at a reasonable rate after my termination for the
time actually spent by me at the Company's request on such assistance.
2.4 Prior Inventions. Except as I have notified the Company in writing
prior to the date of this Agreement, there are no inventions, discoveries or the
like which I have made prior to the commencement of my employment with the
Company and which are excluded from the scope of this Agreement. The Company
acknowledges and agrees that I have notified the Company of my agreements with
my former employer, Novartis Crop Protection, Inc., and its affiliates
("Novartis") under which Novartis has certain rights with respect to inventions,
discoveries or the like made by me in connection with my employment
2
<PAGE>
with Novartis. I have not and will not use any trade secrets of Novartis in the
course of my employment with the Company that may expose the Company or any
employees of the Company to any liability under any agreement, rule, regulation
or statute. No patent, discovery, invention, improvement, process or device
made, discovered or developed by me while employed with Novartis or within six
months subsequent to such employment has or will be used in any business of the
Company in any manner that violates or infringes the intellectual property
rights of Novartis or violates any agreement between me and Novartis.
3. Additional Activities. I agree that during the period of my employment
by the Company I will not, without the Company's express written consent, engage
in any employment or business activity that is competitive with, or would
otherwise conflict with, my employment by the Company. I agree further that for
the period of my employment by the Company, and for twelve (12) months after the
date of termination of my employment by the Company, I will not induce any
employee of the Company to leave the employ of the Company.
4. Return of Company Property. When I leave the employ of the Company, I
will deliver promptly to the Company any and all records, drawings, sketches,
notes, memoranda, reports, specifications, devices, formulae, and documents,
together with all copies thereof, any other material containing or disclosing
any Developments, Third Party Information or Proprietary Information of the
Company, and other property that I shall have received in connection with or
otherwise possess by virtue of my employment with the Company.
5. Remedies. I agree that any breach of this Agreement by me is likely to
cause the Company substantial and irrevocable damage and, therefore, I agree
that the Company shall have the right to enforce this Agreement by injunction,
specific performance or other equitable relief, without bond and without
prejudice to any other rights and remedies that the Company may have for breach
of this Agreement.
6. General Provisions.
6.1 Governing Law; Consent to Jurisdiction. This Agreement will be
governed by and construed according to the laws of the State of North Carolina,
without regard to conflicts of laws principles. I hereby expressly consent to
the personal jurisdiction of the state and federal courts located in North
Carolina for any lawsuit filed there against me by the Company arising from or
related to this Agreement.
6.2 Severability. In case any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect the other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein. If moreover, any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, scope, activity or subject, it shall be construed by limiting
and reducing it, so as to be enforceable to the extent compatible with the
applicable law as it shall then appear.
6.3 Employment. I understand that this Agreement does not constitute a
contract of employment and does not imply that my employment will continue for
any period of time.
3
<PAGE>
6.4 Other Provisions. This Agreement will be binding upon my heirs,
executors, administrators and other legal representatives and will be for the
benefit of the Company, its successors, and its assigns. The provisions of this
Agreement shall survive the termination of my employment and the assignment of
this Agreement by the Company to any successor in interest or other assignee. No
waiver by the Company of any breach of this Agreement shall be a waiver of any
preceding or succeeding breach. No waiver by the Company of any right under this
Agreement shall be construed as a waiver of any other right. The obligations
pursuant to this Agreement shall apply to any time during which I was previously
employed, or am in the future employed, by the Company as a consultant if no
other agreement governs nondisclosure and assignment of inventions during such
period. This Agreement is the final, complete and exclusive agreement of the
parties with respect to the subject matter hereof and supersedes and merges all
prior discussions between us. No modification of or amendment to this Agreement,
nor any waiver of any rights under this Agreement, will be effective unless in
writing and signed by the party to be charged.
[Signatures appear on next page]
4
<PAGE>
This Agreement shall be effective as of the first day of my employment with
the Company, namely: September 9, 1997.
-----------------
PARADIGM GENETICS INC.
By: /s/ Scott J. Uknes
----------------------------------
Name: Scott J. Uknes
Title: Vice-President
Address: 85 Alexander
/s/ John Ryals
-------------------------------------
John Ryals
--------------------------------------
(Printed Name)
Dated: February 12, 1998
<PAGE>
EXHIBIT 10.6
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
AGREEMENT, dated as of February 12, 1998 and amended and restated as of
March 12, 1999 and January 21, 2000 (this "Agreement"), by and among PARADIGM
GENETICS INC., a North Carolina corporation (the "Company"), and the persons
identified as "Investors" and "Founders" on Exhibit A attached hereto.
---------
BACKGROUND
WHEREAS, certain of the Investors (the "Series A Investors") and the
Company previously entered into the Registration Rights Agreement dated as of
February 12, 1998 and amended as of March 6, 1998 and May 29, 1998 (the
"Original Registration Rights Agreement");
WHEREAS, the Original Registration Rights Agreement was entered into in
connection with the Series A Preferred Stock Purchase Agreement dated as of
February 12, 1998 among the Company and the Series A Investors, as amended;
WHEREAS, certain of the Investors and the Company amended and restated the
Original Registration Rights Agreement in its entirety by entering into an
Amended and Restated Registration Rights Agreement dated as of March 12, 1999
(the "Restated Registration Rights Agreement");
WHEREAS, the Restated Registration Rights Agreement was entered into in
connection with the Series B Preferred Stock Purchase Agreement dated as of
March 12, 1999 among the Company and certain of the Investors;
WHEREAS, the Company and certain of the Investors on the date hereof are
entering into a Series C Preferred Stock Purchase Agreement (the "Series C
Purchase Agreement");
WHEREAS, in connection with the Series C Purchase Agreement, the Investors
wish to amend and restate the Restated Registration Rights Agreement in its
entirety by entering into this Amended and Restated Registration Rights
Agreement (this "Agreement"), and certain of the parties' obligations under the
Series C Purchase Agreement are conditioned upon the execution and delivery of
this Agreement; and
WHEREAS, the Founders are holders of shares of Common Stock of the Company;
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth in this Agreement, and intending to be legally bound, the parties agree as
follows:
<PAGE>
SECTION 1. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS.
1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the meanings set forth below:
(a) "Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
(b) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(c) "Founders" shall mean those persons named as such on Exhibit A
---------
hereto.
(d) "Holder" shall mean any Investor who holds Registrable
Securities and any holder of Registrable Securities to whom the registration
rights conferred by this Agreement have been transferred in compliance with
Section 1.2 and Section 1.12 hereof.
(e) "Initiating Holders" shall mean any Holder or Holders of
Registrable Securities who in the aggregate hold(s) not less than twenty percent
(20%) of the Registrable Securities.
(f) "Investors" shall mean those persons named as such on Exhibit A
---------
hereto.
(g) "Other Stockholders" shall mean persons other than Holders who,
by virtue of agreements with the Company, are entitled to include their
securities in certain registrations hereunder.
(h) "Registrable Securities" shall mean (i) shares of Common Stock
issued or issuable pursuant to the conversion of the Series A Preferred, Series
B Preferred and Series C Preferred Stock and (ii) any Common Stock issued as a
dividend or other distribution with respect to or in exchange for or in
replacement of the shares referenced in (i) above; provided, however, that
Registrable Securities shall not include any shares of Common Stock (A) which
have previously been registered, (B) which have been sold to the public either
pursuant to a registration statement or an exemption from registration under the
Securities Act (including Rule 144), (C) which have been sold in a private
transaction in which the transferor's rights under this Agreement are not
assigned or (D) with respect to which shares this Agreement has terminated
pursuant to Section 1.17.
(i) The terms "register," "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness of
such registration statement.
(j) "Registration Expenses" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel
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for the Company, blue sky fees and expenses, and expenses of any regular or
special audits incident to or required by any such registration, but shall not
include Selling Expenses, fees and disbursements of counsel for the Holders, and
the compensation of regular employees of the Company, which shall be paid in any
event by the Company.
(k) "Rule 144" shall mean Rule 144 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(l) "Rule 145" shall mean Rule 145 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(m) "Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(n) "Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the sale of Registrable
Securities and fees and disbursements of counsel for any Holder or Founder.
(o) "Series A Preferred" shall mean the Company's Series A Preferred
Stock, par value $0.01 per share.
(p) "Series B Preferred" shall mean the Company's Series B Preferred
Stock, par value $0.01 per share.
(q) "Series C Preferred" shall mean the Company's Series C Preferred
Stock, par value $0.01 per share.
1.2 Restrictions on Transfer.
(a) Each Holder agrees not to make any disposition of all or any portion
of the Registrable Securities unless and until either:
(i) there is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(ii) (A) such Holder shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition and the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 1.2, and (B) if requested by the Company, such Holder shall have
furnished the Company with an opinion of counsel, reasonably satisfactory to the
Company, that such disposition will not require registration of such shares
under the Securities Act.
(iii) Notwithstanding the provisions of Sections 1.2(a)(i) and (ii)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by a
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Holder which is (A) a partnership, to its partners or retired partners in
accordance with their interests in the partnership, (B) a corporation, to its
shareholders in accordance with their interest in the corporation, (C) a limited
liability company, to its members or former members in accordance with their
interest in the limited liability company, or (D) to the Holder's immediate
family member or trust for the benefit of an individual Holder, provided that a
condition precedent to any such transfer is that the transferee agrees to be
subject to the terms of this Section 1.2 to the same extent as if such
transferee were an original Holder hereunder.
(b) Each certificate representing Registrable Securities shall (unless
otherwise permitted by the provisions of this Agreement) be stamped or otherwise
imprinted with a legend substantially similar to the following (in addition to
any legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
(c) The Company shall be obligated to reissue promptly unlegended
certificates at the request of any Holder thereof if the Holder shall have
obtained an opinion of counsel at such Holder's expense (which counsel may be
counsel to the Company) reasonably acceptable to the Company to the effect that
the securities proposed to be disposed of may lawfully be so disposed of without
registration, qualification or legend.
1.3 Demand Registration.
(a) If the Company shall receive from the Initiating Holders, at any
time not before the earlier of (x) 180 days after the effective date of the
first registration statement filed by the Company covering an underwritten
offering of any of its securities to the general public or (y) February 1, 2003,
a written request that the Company effect any registration with respect to all
or a part of the Registrable Securities at an aggregate offering price of not
less than $5,000,000, then the Company will:
(i) promptly give written notice of the proposed registration to
all other Holders and the Founders; and
(ii) use its best efforts to effect such registration (including,
without limitation, filing post-effective amendments, appropriate qualifications
under applicable blue sky or other state securities laws, and appropriate
compliance with the Securities Act) as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request received by the Company within 15 days after such written
notice from the Company is mailed or delivered.
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The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 1.3:
(A) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting
such registration, qualification, or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be
required by the Securities Act;
(B) after the Company has initiated one such registration pursuant
to Section 1.3(a) after the Company's initial public offering (counting for
these purposes only registrations which have been declared or ordered
effective);
(C) for such periods of time during the period starting with the
date 60 days prior to the Company's good faith estimate of the date of
filing, and ending on a date 180 days after the effective date, of a
Company-initiated registration, as required by the underwriters managing
the offering related to such registration; provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective;
(D) if the Initiating Holders propose to dispose of shares of
Registrable Securities which may be immediately registered on Form S-3
pursuant to a request made under Section 1.5 hereof;
(E) if, in the event that such offering is the Company's initial
public offering, the Initiating Holders do not request that such offering
be underwritten on a firm commitment basis by underwriters selected by the
Initiating Holders (subject to the reasonable consent of the Company);
(F) if the Company and the Initiating Holders are unable to obtain
the commitment of the underwriter described in clause (E) above to
underwrite the offering on a firm commitment basis;
(G) if, in the event that such offering is after the Company's
initial public offering, the Initiating Holders request that such offering
be an underwritten offering; or
(H) unless and until the valuation of the Corporation is at least
$50,000,000 prior to giving effect to the offering, as determined by the
managing underwriter for the offering in the event that such offering is
the Company's initial public offering, and as determined by reference to
the trading price of the Company's stock in the event that such offering is
subsequent to the Company's initial public offering.
In the event that a withdrawal of a registration by the Holders is based
upon material adverse information relating to the Company that is different from
the information made available (upon request from the Company or otherwise) to
the Holders requesting registration at the time of their request for
registration under this Section 1.3, or if the Company delays such registration
pursuant to the terms hereof and the holders of a majority of the Registrable
Securities held by the Initiating Holders with respect to such registration
elect not to proceed
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with such registration, such registration shall not be treated as a counted
registration for purposes of this Section 1.3 hereof.
(b) Subject to the foregoing clauses (A) through (H), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Initiating Holders; provided, however, that if (i) in the good faith
judgment of the Board of Directors of the Company, such registration would be
materially detrimental to the Company, and the Board of Directors of the Company
concludes, as a result, that it is essential to defer the filing of such
registration statement at such time, and (ii) the Company shall furnish to such
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
materially detrimental to the Company for such registration statement to be
filed in the near future and that it is, therefore, essential to defer the
filing of such registration statement, then the Company shall have the right to
defer such filing, upon furnishing such certificate, for a period of not more
than 120 days after receipt of the request of the Initiating Holders, and,
provided further, that the Company shall not defer its obligation in this manner
more than once in any rolling 12-month period.
The registration statement filed pursuant to the request of the Initiating
Holders may, subject to the provisions of Sections 1.3(b) and 1.14 hereof,
include other securities of the Company, with respect to which registration
rights have been granted (including with respect to the Founders), and may
include securities of the Company being sold for the account of the Company.
(c) The right of any Holder to registration pursuant to Section 1.3(a)
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. A Holder may elect to include in such underwriting all
or a part of the Registrable Securities he holds.
(d) If the Company shall request inclusion in any registration pursuant to
Section 1.3 of securities being sold for its own account, or if other persons
shall request inclusion in any registration pursuant to Section 1.3, then the
Company shall provide the Initiating Holders with written notice of such
participation and the Initiating Holders shall, on behalf of all Holders, offer
to include such securities in the underwriting and may condition such offer on
their acceptance of the further applicable provisions of this Section 1
(including Section 1.13). The Company shall (together with all Holders and
other persons proposing to distribute their securities through such
underwriting) enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected for such underwriting
by the Initiating Holders, to which the Company has reasonably consented.
Notwithstanding any other provision of this Section 1.3, if the representative
of the underwriters advises the Initiating Holders in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
number of shares to be included in the underwriting or registration shall be
allocated as set forth in Section 1.14 hereof. If a person who has requested
inclusion in such registration as provided above does not agree to the terms of
any such underwriting, such person shall be excluded therefrom by written notice
from the Company, the underwriter or the Initiating Holders. The securities so
excluded shall also be withdrawn from registration. Any Registrable Securities
or other securities excluded or withdrawn from such underwriting shall also be
withdrawn from such registration. If shares are so withdrawn from the
registration and if the number of shares to be included in such registration was
previously reduced as a result of
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marketing factors pursuant to this Section 1.3(d), then the Company shall offer
to all Holders who have retained rights to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn, with such shares
to be allocated among such Holders requesting additional inclusion in accordance
with Section 1.14.
1.4 Piggy-Back Registration.
(a) If the Company shall determine to register any of its securities
either for its own account or the account of a security holder or holders
exercising their respective demand registration rights (other than pursuant to
Section 1.5 hereof), other than a registration relating solely to employee
benefit plans, or a registration relating to a corporate reorganization or other
transaction under Rule 145, or a registration on any registration form that does
not permit secondary sales, the Company will:
(i) promptly give to each Holder and Founder written notice thereof;
and
(ii) use its best efforts to include in such registration (and any
related qualification under blue sky laws or other compliance), except as set
forth in Section 1.4(b) below, and in any underwriting involved therein, all the
Registrable Securities and shares of Common Stock held by the Founders (the
"Founders' Shares") specified in a written request or requests, made by any
Holder or Founder and received by the Company within 15 days after the written
notice from the Company described in clause (i) above is mailed or delivered by
the Company. Such written request may specify all or a part of a Holder's
Registrable Securities or of a Founder's Shares, as the case may be.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall so
advise the Holders and Founders as a part of the written notice given pursuant
to Section 1.4(a)(i). In such event, the right of any Holder or Founder to
registration pursuant to this Section 1.4 shall be conditioned upon such
Holder's or Founder's participation in such underwriting and the inclusion of
such Holder's Registrable Securities or Founder's Shares in the underwriting to
the extent provided herein. All Holders or Founders proposing to distribute
their securities through such underwriting shall (together with the Company and
the other holders of securities of the Company with registration rights to
participate therein distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the representative
of the underwriter or underwriters selected by the Company. Notwithstanding any
other provision of this Section 1.4, if the representative of the underwriters
advises the Company in writing that marketing factors require a limitation on
the number of shares to be underwritten, the representative may (subject to the
limitations set forth below) exclude all Registrable Securities and Founders'
Shares from, or limit the number of Registrable Securities and Founders' Shares
to be included in, the registration and underwriting. The Company shall so
advise all holders of securities requesting registration, and the number of
shares of securities that are entitled to be included in the registration and
underwriting shall be allocated first to the Company for securities being sold
for its own account and thereafter as set forth in Section 1.14. If any person
does not agree to the terms of any such underwriting, he shall be excluded
therefrom by written notice from the Company or the underwriter. Any
Registrable Securities, Founders' Shares or other securities excluded or
withdrawn from such underwriting shall be withdrawn
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from such registration. If shares are so withdrawn from the registration or if
the number of Registrable Securities or Founders' Shares to be included in such
registration was previously reduced as a result of marketing factors, the
Company shall then offer to all persons who have retained the right to include
securities in the registration the right to include additional securities in the
registration in an aggregate amount equal to the number of shares so withdrawn,
with such shares to be allocated among the persons requesting additional
inclusion in accordance with Section 1.14 hereof.
1.5 Registration on Form S-3.
(a) After its initial public offering, the Company shall use its best
efforts to qualify for registration on Form S-3 under the Securities Act or any
comparable or successor form or forms. After the Company has qualified for the
use of Form S-3, in addition to the rights contained in the foregoing provisions
of this Section 1, Holders of Registrable Securities shall have the right to
request registrations on Form S-3 (such requests shall be in writing and shall
state the number of shares of Registrable Securities to be disposed of and the
intended methods of disposition of such shares by such Holder or Holders),
provided, however, that the Company shall not be obligated to effect any such
registration: (i) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) on Form S-3 at an
aggregate price to the public of less than $750,000 (ii) in the event that the
Company shall furnish the certification described in paragraph 1.3(b) (but
subject to the limitations set forth therein); (iii) if in any rolling 12-month
period, the Company has effected one such registration in such period; or (iv)
within 180 days of the effective date of any other Company registration (other
than on Form S-8 or Form S-3 with respect to employees' stock).
(b) If a request complying with the requirements of Section 1.5(a)
hereof is delivered to the Company, the provisions of Sections 1.3(a)(i) and
(ii) (other than subsections (B), (D), (E), (F), (G) and (H)) and Section 1.3(b)
hereof shall apply to such registration. If the registration is for an
underwritten offering, the provisions of Sections 1.3(c) and 1.3(d) hereof shall
in addition apply to such registration.
1.6 Expenses of Registration. All Registration Expenses, and in the case
of a demand registration the reasonable fees and expenses of one counsel
representing, and designated by, all the selling Holders (not to exceed
$20,000), incurred in connection with any registration, qualification or
compliance pursuant to Sections 1.3, 1.4 and 1.5 hereof shall be borne by the
Company. All Selling Expenses relating to securities so registered shall be
borne by the holders of such securities pro rata on the basis of the number of
shares of securities so registered on their behalf, as shall any other expenses
in connection with the registration required to be borne by the holders of such
securities.
1.7 Registration Procedures. In the case of each registration effected by
the Company pursuant to Section 1, the Company will keep each Holder (including,
for these purposes, each Founder participating in a registration) advised in
writing as to the initiation of each registration and as to the completion
thereof. At its expense, the Company will use its best efforts to:
(a) keep such registration effective for a period of 180 days or until
the Holder or Holders have completed the distribution described in the
registration statement
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relating thereto, whichever first occurs; provided, however, that such 180-day
period shall be extended for a period of time equal to the period the Holder
refrains from selling any securities included in such registration at the
request of an underwriter of Common Stock (or other securities) of the Company
or pursuant to Section 1.16;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
or Founder from time to time may reasonably request;
(d) notify each seller of Registrable Securities or Founder Shares
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the occurrence
of any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of any such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such shares, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(e) use its best efforts to cause all such Registrable Securities
registered pursuant hereunder to be listed on each securities exchange or market
on which similar securities issued by the Company are then listed;
(f) provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP number
for all such Registrable Securities, in each case not later than the effective
date of such registration;
(g) otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security holders,
as soon as reasonably practicable, an earnings statement covering the period of
at least 12 months, but not more than 18 months, beginning with the first month
after the effective date of the Registration Statement, which earnings statement
shall conform materially with the provisions of Section 11(a) of the Securities
Act; and
(h) in connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 1.3 hereof, the Company will
enter into an underwriting agreement in form reasonably necessary to effect the
offer and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if the underwriter
so requests the underwriting agreement will contain customary contribution
provisions.
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1.8 Indemnification.
(a) The Company will indemnify each Holder, each of such Holder's
officers, directors and partners, legal counsel, and accountants and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
and each Founder, with respect to which registration, qualification, or
compliance has been effected pursuant to this Section 1, and each underwriter,
if any, and each person who controls within the meaning of Section 15 of the
Securities Act any underwriter, against all expenses, claims, losses, damages,
and liabilities (or actions, proceedings, or settlements in respect thereof)
arising out of or based on any breach of this Agreement by the Company, any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular, or other document (including any related
registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification, or compliance, and will
reimburse each such Holder, each of its officers, directors, partners, legal
counsel, and accountants and each person controlling such Holder, each such
underwriter, and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability, or action,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability, or expense arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by such Holder or underwriter and stated to be specifically for use
therein, unless such Holder timely provided to the Company additional
information to correct the previously inaccurate or incomplete information. It
is agreed that the indemnity agreement contained in this Section 1.8(a) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of the
Company (which consent has not been unreasonably withheld).
(b) Each Holder and each Founder will, individually and not jointly,
if Registrable Securities or Founders' Shares held by such Holder or Founder are
included in the securities as to which such registration, qualification, or
compliance is being effected, indemnify the Company, each of its directors,
officers, partners, legal counsel, and accountants and each underwriter, if any,
of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, each other such Holder and Other Stockholder,
and each of their officers, directors, and partners, and each person controlling
such Holder or Other Stockholder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular, or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and such Holders, Other Stockholders,
directors, officers, partners, legal counsel, and accountants, persons,
underwriters, or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability, or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement,
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prospectus, offering circular, or other document in reliance upon and in
conformity with written information furnished to the Company by such Holder and
stated to be specifically for use therein provided, however, that the
obligations of such Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages, or liabilities (or actions in
respect thereof) if such settlement is effected without the consent of such
Holder (which consent shall not be unreasonably withheld); and provided that in
no event shall any indemnity under this Section 1.8 exceed the gross proceeds
from the offering received by such Holder.
(c) Each party entitled to indemnification under this Section 1.8 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 1, to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with the defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.8 is held by
a court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the Indemnified
Party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.
1.9 Information by Holder. Each Holder of Registrable Securities, and
each Founder participating in a registration, shall furnish to the Company such
information regarding
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such Holder or Founder and the distribution proposed by such Holder or Founder
as the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification, or compliance
referred to in this Section 1.
1.10 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written consent
of the holders of at least two-thirds of the Registrable Securities, voting as
one class, enter into any agreement with any holder or prospective holder of any
securities of the Company giving such holder or prospective holder any
registration rights the terms of which are superior to or on a parity with the
registration rights granted to the Holders hereunder; provided, however, the
Company may grant registration rights, on a parity with the registration rights
granted to the Holders hereunder, to Alexandria Real Estate Equities, Inc. or an
affiliate thereof ("Alexandria") relating to certain stock purchase warrants to
be issued to Alexandria by the Company in connection with a real estate
financing transaction between the Company and Alexandria.
1.11 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission that may permit the sale of the
Registrable Securities and Founders' Shares to the public without registration,
the Company agrees to use its best efforts to:
(a) make and keep public information regarding the Company available
as those terms are understood and defined in Rule 144 under the Securities Act,
at all times from and after 90 days following the effective date of the first
registration under the Securities Act filed by the Company for an offering of
its securities to the general public;
(b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements; and
(c) so long as a Holder owns any Registrable Securities, furnish to
the Holder forthwith upon written request as to the Company's compliance with
the reporting requirements of Rule 144 (at any time from and after 90 days
following the effective date of the first registration statement filed by the
Company for an offering of its securities to the general public), and of the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements), a copy of the most recent annual or quarterly
report of the Company.
1.12 Transfer or Assignment of Registration Rights. The rights to cause
the Company to register securities granted to a Holder or a Founder by the
Company under this Section 1 may be transferred or assigned by a Holder or a
Founder only to (a) in the case of a Holder, to an affiliate of such Holder or
to such Holder's partners or retired partners in accordance with their rights in
the partnership or (b) a transferee or assignee of not less than 20% of such
Holder's Registrable Securities or such Founder's Shares (as determined on the
date of this Agreement and subject to subsequent adjustments for stock splits,
stock dividends, reverse stock splits, and the like), provided that, in either
case (i) the Company is given written notice at the time of or within 30 days
after transfer or assignment, stating the name and address of the transferee or
assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned, (ii) the transferee or assignee of
such rights assumes in writing the obligations of such Holder or Founder under
this Section 1 and (ii)
12
<PAGE>
in the reasonable opinion of the Company, the transferee is neither a competitor
to the Company nor a party who is or could likely become demonstrably hostile to
the Company.
1.13 "Market Stand-Off" Agreement. If requested by the Company and an
underwriter of Common Stock (or other securities) of the Company, neither an
Investor nor a Founder shall sell or otherwise transfer or dispose of any Common
Stock (or other securities) of the Company held by such Investor or Founder
(other than those included in the registration) during a period not to exceed
180 days following the effective date of a registration statement of the Company
filed under the Securities Act, provided that all officers and directors of the
Company and holders of at least five percent of the Company's voting securities
are bound by and have entered into similar agreements.
The obligations described in this Section 1.13 shall not apply to a
registration relating solely to employee benefit plans on Form S-1, Form S-3 or
Form S-8 or similar forms that may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form S-4 or
similar forms that may be promulgated in the future. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities) subject to the foregoing restriction until the end of such 180 day
period.
1.14 Allocation of Registration Opportunities. In any circumstance in
which all of the Registrable Securities and other shares of Common Stock of the
Company (including shares of Common Stock issued or issuable upon conversion of
shares of any currently unissued series of Preferred Stock of the Company) with
registration rights (the "Other Shares") requested to be included in a
registration on behalf of the Holders or other selling stockholders cannot be so
included as a result of limitations of the aggregate number of shares of
Registrable Securities and Other Shares that may be so included, the number of
shares of Registrable Securities and Other Shares that may be so included shall
be allocated first to the Holders, second to the Founders and then among the
other selling stockholders requesting inclusion of shares, in each case pro rata
on the basis of the number of shares of Registrable Securities and Other Shares
that would be held by such Holders, Founders, and other selling stockholders,
assuming conversion; provided, however, that such allocation shall not operate
to reduce the aggregate number of Registrable Securities and Other Shares to be
included in such registration, if any Holder or other selling stockholder does
not request inclusion of the maximum number of shares of Registrable Securities
and Other Shares allocated to him pursuant to the above-described procedure, and
the remaining portion of his allocation shall be reallocated among those
requesting Holders and other selling stockholders whose allocations did not
satisfy their requests pro rata on the basis of the number of shares of
Registrable Securities and Other Shares which would be held by such Holders and
other selling stockholders, assuming conversion, and this procedure shall be
repeated until all of the shares of Registrable Securities and Other Shares
which may be included in the registration on behalf of the Holders and other
selling stockholders have been so allocated. The Company shall not limit the
number of Registrable Securities to be included in a registration pursuant to
this Agreement in order to include shares held by stockholders with no
registration rights or to include Founders' Shares or any other shares of stock
issued to employees, officers, directors, or consultants pursuant to a Company
Stock Option Plan, or with respect to registrations under Sections 1.3 or 1.5
hereof, in order to include in such registration securities registered for the
Company's own account.
13
<PAGE>
1.15 Delay of Registration. No Holder or Founder shall have any right to
take any action to restrain, enjoin, or otherwise delay any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.16 Suspension. The Holders and Founders agree that, upon receipt of any
notice from the Company of the existence of any state of facts or the occurrence
of any event (including without limitation pending negotiations relating to, or
the consummation of, a transaction, or the occurrence of any event which in the
reasonable opinion of the Company might require additional disclosure of
material, non-public information by the Company in any registration statement
provided for in this Agreement as to which the Company believes in good faith
that it has a bona fide business purpose for preserving confidentiality or which
renders the Company unable to comply with the published rules and regulations of
the Commission promulgated under the Securities Act or the Exchange Act, as in
effect at any relevant time) which might reasonably result in (A) such
registration statement, any amendment or post-effective amendment thereof, or
any document incorporated therein by reference containing an untrue statement of
a material act or omitting to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (B) the
prospectus issued under such registration statement, any prospectus supplement,
or any document incorporated therein by reference including an untrue statement
of material fact or omitting to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, the Holders and Founders will forthwith discontinue
disposition of the Registrable Securities or Founders' Shares pursuant to such
registration statement for a period which is the shorter of (a) 30 calendar days
from the Company's notice to such Holders or (b) until the Holders and Founders
receive copies of prospectus supplements or amendments prepared by or on behalf
of the Company. If so directed by the Company, the Holders and Founders will
deliver to the Company all copies in their possession of the prospectus covering
such Registrable Securities or Founders' Shares current at the time of receipt
of such notice. The Company shall not be permitted to require the suspension of
the disposition of Registrable Securities or Founders' Shares for a period in
excess of 90 calendar days or in excess of two times in each case per rolling 12
month period.
1.17 Termination of Registration Rights. The rights to request
registration of any Company securities pursuant to Sections 1.3, 1.4 and 1.5
shall terminate as to any Holder who holds Registrable Securities or any Founder
upon the earlier of: (a) when a Holder holds one percent or less of the
Company's Common Stock on an as-converted basis; (b) when all of a Holder's
Registrable Securities may be sold during a single three month period under Rule
144; (c) when a Holder's Registrable Securities may be transferred under Rule
144(k) unless such Holder later becomes an affiliate of the Company (as defined
in Rule 144) in which case such Holder's rights to request registration shall be
revived until such Holder's rights otherwise terminate under this Section 1.17;
and (d) three years after the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act covering the offer and sale of the Company's Common Stock at a price per
share of not less than $10.00 (as adjusted for stock splits, dividends,
combinations and the like) and an aggregate offering price to the public of not
less than $20,000,000. Such three-year period shall not include any period of
time during which adequate current public information, as defined in Rule 144(c)
promulgated under the Securities Act, is not available with respect to the
Company.
14
<PAGE>
SECTION 2. MISCELLANEOUS.
2.1 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of North Carolina.
2.2 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
2.3 Entire Agreement; Amendment; Waiver. This Agreement (including the
Exhibits hereto) constitutes the full and entire understanding and agreement
between the parties with regard to the subject matter hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated, except by a written instrument signed by the Company and the holders
of at least two-thirds of the Registrable Securities, voting as one class, and
any such amendment, waiver, discharge or termination shall be binding on all
holders, but in no event shall the obligation of any Holder hereunder be
materially increased, except upon the written consent of such Holder. This
Agreement supercedes the Original Registration Rights Agreement and the Restated
Registration Rights Agreement.
2.4 Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by United States first-class
mail, postage prepaid, sent by facsimile or delivered personally by hand or
nationally recognized courier addressed (a) if to a Holder or Founder, as
indicated on the signature page, or at such other address as such holder or
permitted assignee shall have furnished to the Company in writing, or (b) if to
the Company, at such address or facsimile number as the Company shall have
furnished to each Holder in writing. All such notices and other written
communications shall be effective on the date of mailing, facsimile transfer or
delivery.
2.5 Delays or Omissions. No delay or omission to exercise any right,
power or remedy accruing to any Holder or Founder, upon any breach or default of
the Company under this Agreement shall impair any such right, power or remedy of
such Holder or Founder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default therefore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any Holder or Founder of any breach or default under
this Agreement or any waiver on the part of any Holder or Founder of any
provisions or conditions of this Agreement must be made in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
Holder or Founder, shall be cumulative and not alternative.
2.6 Rights; Severability. Unless otherwise expressly provided herein, a
Holder's or Founder's rights hereunder are several rights, not rights jointly
held with any of the other Holders or Founders. In case any provision of the
Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby. Furthermore, upon request of any party hereto, the parties to
this Agreement shall add, in lieu of such invalid or unenforceable provisions,
provisions as similar in terms to such invalid or unenforceable provisions as
may be possible and legal, valid and enforceable.
15
<PAGE>
2.7 Information Confidential. Each party acknowledges that the
information received by them pursuant hereto may be confidential and for its use
only, and it will not use such confidential information in violation of the
Securities Act or Exchange Act or reproduce, disclose or disseminate such
information to any other person (other than its employees or agents having a
need to know the contents of such information, and its attorneys), except in
connection with the exercise of rights under this Agreement, unless the Company
has made such information available to the public generally or such party is
required to disclose such information by a governmental body.
2.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing or interpreting this Agreement.
2.9 Execution; Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument. This Agreement may be executed and delivered by
telecopy or facsimile and any execution in such manner shall be deemed an
original.
2.10 Further Assurances. The parties agree, from time to time and without
further consideration, to execute and deliver such further documents and take
such further actions as reasonably may be required to implement and effectuate
the transactions contemplated in this Agreement.
2.11 No Third-Party Beneficiaries. This Agreement is intended to inure to
the benefit of the parties hereto only, and no other person shall have any
rights, express or implied, by reason of this Agreement.
2.12 Listing of Shares. The Company shall use its best efforts to cause
all Common Stock held by the Investors to be listed on each securities exchange
or market on which similar securities issued by the Company are then listed.
[signature pages appear on next page]
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Registration Rights Agreement effective as of the day and year first
above written.
PARADIGM GENETICS INC.
By: ________________________________________
Name:
Title:
Address: 104 Alexander Drive
Building 2
Research Triangle Park, NC
27709-4528
INVESTORS:
THE BURRILL AGBIO CAPITAL FUND, L.P.
By: Burrill & Company LLC,
its General Partner
By: ________________________________________
Name:
Title:
Address: 120 Montgomery Street
Suite 1370
San Francisco, CA 94104
INNOTECH INVESTMENTS LIMITED
By: ________________________________________
Name:
Title:
Address: 3 Charterhouse Mews
Charterhouse Square
London EC1M 6BB
England
<PAGE>
[signature page to Paradigm Genetics Inc. Amended and Restated
Registration Rights Agreement]
Intersouth Partners Iv, L.P.
By: Intersouth Associates IV, L.L.C.,
its General Partner
By: ________________________________________
Name:
Title: Member Manager
Address: One Copley Parkway
Suite 102
Morrisville, North Carolina 27560
Intersouth Partners III, L.P.
By: Intersouth Associates III, L.P.,
its General Partner
By: ________________________________________
Name:
Title: General Partner
Address: One Copley Parkway
Suite 102
Morrisville, North Carolina 27560
LION BIOSCIENCE AG
By: ________________________________________
Name:
Title:
Address: Waldhofer Str. 98
69123 Heidelberg
Germany
<PAGE>
[signature page to Paradigm Genetics Inc. Amended and Restated
Registration Rights Agreement]
POLARIS VENTURE PARTNERS III, L.P.
By: Polaris Venture Management Co. III, LLC
its General Partner
By: ________________________________________
Name:
Title: Member
Address: 1000 Winter Street
Suite 3350
Waltham, Massachusetts 02154
POLARIS VENTURE PARTNERS, L.P.
By: Polaris Venture Management Co., LLC
its General Partner
By: ________________________________________
Name:
Title: Member
Address: 1000 Winter Street
Suite 3350
Waltham, Massachusetts 02154
POLARIS VENTURE PARTNERS FOUNDERS'
FUND, L.P.
By: Polaris Venture Management Co., LLC
its General Partner
By ________________________________________
Name:
Title: Member
Address: 1000 Winter Street
Suite 3350
Waltham, Massachusetts 02154
<PAGE>
[signature page to Paradigm Genetics Inc. Amended and Restated
Registration Rights Agreement]
THE BAY CITY CAPITAL FUND I, L.P.
By ________________________________________
Name:
Title:
Address: 750 Battery Street
Suite 600
San Francisco, California 94111
FOUNDERS:
______________________________________________
JOHN A. RYALS
104 Alexander Drive
Building 2
Research Triangle Park, NC 27709-4528
______________________________________________
JORN GORLACH
104 Alexander Drive
Building 2
Research Triangle Park, NC 27709-4528
______________________________________________
SANDY J. STEWART
104 Alexander Drive
Building 2
Research Triangle Park, NC 27709-4528
______________________________________________
SCOTT J. UKNES
104 Alexander Drive
Building 2
Research Triangle Park, NC 27709-4528
<PAGE>
EXHIBIT A
STOCKHOLDERS:
INVESTORS:
The Burrill Agbio Capital Fund, L.P.
Innotech Investments Limited
Intersouth Partners III, L.P.
Intersouth Partners IV, L.P.
Lion Bioscience AG
Polaris Venture Partners III, L.P.
Polaris Venture Partners, L.P.
Polaris Venture Partners Founders' Fund, L.P.
The Bay City Capital Fund I, L.P.
FOUNDERS:
John A. Ryals
Jorn Gorlach
Sandy J. Stewart
Scott J. Uknes
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 17, 2000, relating to the financial statements of
Paradigm Genetics, Inc. which appear in such Registration Statement. We also
consent to the references to us under the heading "Experts" in such
Registration Statements.
/s/ PricewaterhouseCoopers LLP
February 18, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OUR AUDITED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> SEP-09-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 0 970,688
<SECURITIES> 0 2,484,132
<RECEIVABLES> 0 89,025
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 3,592,011
<PP&E> 0 4,121,649
<DEPRECIATION> 0 (299,356)
<TOTAL-ASSETS> 0 7,434,971
<CURRENT-LIABILITIES> 0 2,444,342
<BONDS> 0 3,538,662
0 0
0 5,950,899
<COMMON> 0 37,502
<OTHER-SE> 0 (4,536,434)
<TOTAL-LIABILITY-AND-EQUITY> 0 7,434,971
<SALES> 0 0
<TOTAL-REVENUES> 0 870,559
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 220,197 5,170,769
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 13 128,787
<INCOME-PRETAX> (220,210) (4,289,513)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (220,210) (4,289,513)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (220,210) (4,289,513)
<EPS-BASIC> $(0.19) $(1.14)
<EPS-DILUTED> $(0.19) $(1.14)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OUR AUDITED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 468,342
<SECURITIES> 3,488,108
<RECEIVABLES> 256,844
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,371,145
<PP&E> 10,704,783
<DEPRECIATION> (1,888,118)
<TOTAL-ASSETS> 14,225,304
<CURRENT-LIABILITIES> 9,006,375
<BONDS> 8,046,630
0
11,918,718
<COMMON> 52,242
<OTHER-SE> (14,798,661)
<TOTAL-LIABILITY-AND-EQUITY> 14,225,304
<SALES> 0
<TOTAL-REVENUES> 2,196,975
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,307,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 622,678
<INCOME-PRETAX> (10,486,560)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,486,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,486,560)
<EPS-BASIC> ($2.48)
<EPS-DILUTED> ($2.48)
</TABLE>
