<PAGE>
As filed with the Securities and Exchange Commission on April 28, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
POZEN Inc.
(Exact name of registrant as specified in its charter)
Delaware 2834 62-1657552
(State or other (Primary Standard (I.R.S.
Jurisdiction of Industrial EmployerIdentification
Incorporation or Classification Code Number)
Organization) Number)
6330 Quadrangle Drive
Suite 240
Chapel Hill, North Carolina 27514
(919) 490-0012
(Address, including zip code, and telephone number, including area code of
registrant's principal executive offices)
---------------
John R. Plachetka, Pharm.D.
POZEN Inc.
6330 Quadrangle Drive
Suite 240
Chapel Hill, North Carolina 27514
(919) 490-0012
(Name, address, including zip code and telephone number, including area code,
of agent for service)
---------------
Copies to:
David R. King, Esq. Fred D. Hutchison, Esq. Justin P. Klein, Esq.
Morgan, Lewis & Bockius Helga L. Leftwich, Esq. Douglas M. Fox, Esq.
LLP Hutchison & Mason PLLC Ballard Spahr Andrews &
1701 Market Street Suite 100 Ingersoll, LLP
Philadelphia, 3110 Edwards Mill Road 300 East Lombard Street
Pennsylvania 19103 Raleigh, North Carolina 19th Floor
(215) 963-5000 27612 Baltimore, Maryland
Facsimile: (215) 963- (919) 829-9600 21202
5299 Facsimile: (919) 829- (410) 528-5600
9696 Facsimile: (410) 528-
5650
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price(1) Registration Fee
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<S> <C> <C>
Common stock, par value $0.001 per share................. $85,000,000 $22,440
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</TABLE>
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(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the Securities and Exchange Commission +
+declares our registration statement effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated April 28, 2000
Preliminary Prospectus
Shares
POZEN INC. [LOGO TO COME]
Common Stock
$ per share
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. POZEN Inc. is offering . This is our initial
shares. public offering and no
public market currently
exists for our shares.
. We anticipate that the
initial public offering
price will be between
$ and $ per share.
. Proposed trading
symbol: Nasdaq National
Market - POZN
-----------
This investment involves risks. See "Risk Factors" beginning on page 8.
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<TABLE>
<CAPTION>
Per Share Total
--------- -------
<S> <C> <C>
Public offering price......................................... $ $
Underwriting discount......................................... $ $
Proceeds to POZEN Inc. ....................................... $ $
</TABLE>
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The underwriters have a 30-day option to purchase up to additional
shares of common stock from us to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of anyone's investment in these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
U.S. Bancorp Piper Jaffray
Prudential Vector Healthcare
a unit of Prudential Securities
Pacific Growth Equities, Inc.
The date of this prospectus is , 2000.
<PAGE>
[LOGO OF POZEN, INC.]
Variety of bullets (5 or 6)
describing the company's
business strategy
Cross-Section Diagram Product table Diagram
depicting MT 100 tablet indicating the product
and the respective candidates and their
layers and ingredients. respective indication
with current clinical
states.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary............................................................. 4
Risk Factors........................................................ 8
Forward-Looking Statements.......................................... 21
Use Of Proceeds..................................................... 22
Dividend Policy..................................................... 22
Capitalization...................................................... 23
Dilution............................................................ 24
Selected Financial Data............................................. 25
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 26
Business............................................................ 30
Management.......................................................... 45
Certain Relationships And Related Transactions...................... 51
Principal Stockholders.............................................. 52
Description Of Capital Stock........................................ 54
Shares Eligible For Future Sale..................................... 57
Underwriting........................................................ 59
Legal Matters....................................................... 60
Experts............................................................. 60
Where You Can Find More Information................................. 61
Index To Financial Statements....................................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate
as of the date on the front cover, but the information may have changed since
that date.
3
<PAGE>
SUMMARY
This summary provides an overview of selected information and does not contain
all the information you should consider. Therefore, you should also read the
more detailed information set out in this prospectus, including the financial
information.
This prospectus contains certain forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include those discussed under "Risk Factors." The cautionary statements made
under "Risk Factors" and elsewhere in this prospectus should be read as being
applicable to all related forward-looking statements wherever they may appear.
We present information in this prospectus, except where otherwise noted, to
give effect to the complete conversion of all outstanding shares of our
preferred stock into our common stock on a one-for-one basis. In addition,
except where we indicate otherwise, we present information in this prospectus
assuming that the underwriters do not exercise their over-allotment option.
Our Business
We are a pharmaceutical development company committed to building a portfolio
of products with significant commercial potential in select therapeutic areas.
Our initial area of focus is migraine, where we have built a portfolio of four
product candidates through a combination of innovation and in-licensing. Our
lead product candidate is MT 100, which we are developing as an oral first-line
therapy for the treatment of migraine. In December 1999, we completed our
initial Phase 3 clinical trial of MT 100. We are currently conducting three
Phase 3 clinical trials of MT 100, and we intend to initiate three additional
Phase 3 clinical trials of MT 100 by year end. In addition to our MT 100
trials, we expect to begin two additional Phase 3 or Phase 2 clinical trials
for two of our other migraine product candidates by the end of 2000. Our
portfolio of migraine product candidates is designed to address all segments of
the migraine market.
Migraine is characterized by recurring attacks of headache that are often
accompanied by visual, auditory or stomach disturbances. The average migraine
patient experiences attacks throughout his or her adult life. Migraine attacks
typically vary in severity. A variety of oral, injectable and intranasal
therapies are currently used to treat migraine attacks. We estimate that global
sales of prescription pharmaceuticals for the treatment of migraine will exceed
$2 billion by 2001. Triptans are the family of drugs most commonly prescribed
for the treatment of migraine attacks, representing, according to statistics
from IMS Health's Retail and Provider Perspective, approximately $1.1 billion
of sales in the U.S. in 1999. Although triptans can be effective in treating
migraine, they have several significant side effects, including potentially
fatal cardiac events. In addition, patients treated with triptans often do not
achieve sustained pain relief. We are developing a portfolio of product
candidates that we believe should overcome many of the limitations of currently
available migraine therapies.
MT 100 is our proprietary product candidate that combines metoclopramide
hydrochloride, a commercially available agent that relieves nausea and enhances
gastric emptying, and naproxen sodium, a commercially available anti-
inflammatory and analgesic agent. To date, more than 1,500 patients have
received MT 100 in Phase 2 and Phase 3 clinical trials. We believe data from
these trials indicate that MT 100 provides rapid and sustained migraine pain
relief compared to placebo and to MT 100's individual components. Furthermore,
MT 100 has been generally well tolerated. In December 1999, we completed a
1,064 patient Phase 3 clinical trial comparing the safety and efficacy of MT
100 against its individual components. We believe the results of the trial
indicate a statistically significant increase in sustained response, which was
the primary clinical trial endpoint, in patients receiving MT 100, as
4
<PAGE>
compared to patients receiving the individual components of MT 100. Sustained
response is a clinical
measure that attempts to capture both speed of onset and duration of migraine
pain relief. Before seeking FDA marketing approval for MT 100, the results of
this Phase 3 trial must be confirmed by a second Phase 3 component comparison
trial, and we must also successfully complete two placebo controlled studies.
Additional toxicology and carcinogenicity studies may also be required.
We are developing MT 300 to provide safe, convenient and long-lasting pain
relief for patients needing an injectable therapy for severe migraines. MT 300
is a proprietary injectable formulation of the commercially available compound
dihydroergotamine mesylate, or DHE. In November 1998, we completed a 291
patient Phase 2 clinical trial of MT 300 comparing three dosing levels and a
placebo. In this clinical trial, MT 300 was well tolerated and at the highest
dosing level MT 300 demonstrated a statistically significant improvement in the
percentage of patients achieving sustained response when compared to placebo.
We plan to initiate an initial Phase 3 clinical trial of MT 300 by the end of
2000.
Pursuant to an agreement signed in September 1999 with F. Hoffmann-La Roche
Ltd, we are developing MT 500 for the prophylactic treatment, or prevention, of
migraine pain. MT 500 is a novel, orally active agent that blocks a type of
serotonin brain receptor thought to be involved in the initiation of migraine
attacks. The prophylactic market is currently composed of drugs that were
developed primarily for conditions other than migraine. Many of those drugs
have side effects, including fatigue, sexual dysfunction, weight gain, insomnia
and liver toxicity. We intend to initiate a Phase 2 clinical trial of MT 500 in
the first half of 2001.
We are developing MT 400 as a co-active migraine therapy, which combines the
activity of a commercially approved triptan drug with that of a commercially
approved long-acting, non-steroidal, anti-inflammatory drug. We believe that
the effective treatment of migraine requires targeted, specific and
complementary co-active therapy to achieve maximum therapeutic benefit with the
fewest side effects. We believe that MT 400 will prove to offer a faster onset
of action and a longer duration of migraine symptom relief than monotherapy
with either agent. In addition, since lower doses of the triptan components
could be used in certain MT 400 formulations relative to triptan monotherapy,
we believe that the potential risks of triptan-related side effects may also be
reduced with MT 400.
In addition to migraine, members of our management team have significant
experience developing drugs for diseases of the gastrointestinal and
respiratory tracts, oncology and infectious diseases. We intend to leverage our
development expertise in these therapeutic areas, as well as in migraine, to
become a leading pharmaceutical development company. The principal elements of
our strategy are to:
.develop and commercialize our portfolio of migraine product candidates;
.build a product pipeline through innovation, in-licensing and acquisition;
.form collaborations for the commercialization of our product candidates;
and
.leverage our development effort through strategic outsourcing.
5
<PAGE>
Office Location
Our offices are located at 6330 Quadrangle Drive, Suite 240, Chapel Hill, North
Carolina 27514, and our telephone number is (919) 490-0012.
The Offering
<TABLE>
<C> <S>
Common stock offered........................ shares
Common stock outstanding after this
offering................................... shares
Offering price.............................. $ per share
Use of proceeds............................. We intend to use the net
proceeds of this offering to
fund the cost of development,
approval and commercialization
of our product candidates, to
acquire or in-license additional
product candidates and for
working capital and general
corporate purposes. See the
discussion under the caption
"Use of Proceeds" for a more
detailed description.
Proposed Nasdaq National Market symbol...... POZN
</TABLE>
The number of shares of our common stock outstanding after this offering is
based on shares outstanding as of March 31, 2000, and does not take into
account:
. 1,029,583 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $1.23 per share;
. 347,327 shares of preferred stock issuable upon exercise of outstanding
warrants, which will convert immediately prior to consummation of this
offering into warrants to purchase 347,327 shares of our common stock,
at a weighted average exercise price of $2.28 per share; and
. shares of common stock issuable upon the exercise of the
underwriters' over-allotment option.
Corporate Information
We were incorporated in Delaware in September 1996. We have trademark
protection for POZEN(TM) and our logo. All other trademarks, trade names or
service marks appearing in this prospectus belong to its holder.
6
<PAGE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
September 26, 1996 Three Months Ended
Year Ended December 31, (inception) March 31,
-------------------------- through December -----------------------
1997 1998 1999 31, 1999 1999 2000
------- ------- -------- ------------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating expenses:
General and
administrative........ $ 954 $ 1,401 $ 2,310 $ 4,727 $ 362 $ 959
Research and
development........... 2,950 7,244 9,023 19,238 1,636 2,074
------- ------- -------- -------- ------- --------
Total operating
expenses............... 3,904 8,645 11,333 23,965 1,998 3,033
Interest income, net.... 315 309 82 716 31 49
------- ------- -------- -------- ------- --------
Net loss................ (3,589) (8,336) (11,251) (23,249) (1,967) (2,984)
Non-cash preferred stock
charge................. -- -- -- -- -- (16,875)
------- ------- -------- -------- ------- --------
Net loss attributable to
common
stockholders........... $(3,589) $(8,336) $(11,251) $(23,249) $(1,967) $(19,859)
======= ======= ======== ======== ======= ========
Basic and diluted net
loss per common share.. $ (0.83) $ (1.93) $ (2.60) $ (0.45) $ (4.57)
======= ======= ======== ======= ========
Shares used in computing
basic and diluted net
loss per common share.. 4,310 4,326 4,333 4,332 4,344
======= ======= ======== ======= ========
Pro forma net loss per
common share--basic and
diluted (unaudited).... $ (1.26) $ (1.81)
Pro forma weighted
average common shares
outstanding--basic and
diluted (unaudited).... 8,902 10,976
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------
Actual As Adjusted
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $18,671 $
Total assets............................................ 18,848
Redeemable preferred stock.............................. 16,875
Accumulated (deficit) surplus........................... (26,233)
Total stockholders' equity (deficit).................... (642)
</TABLE>
. Pro forma net loss per share assumes all of our preferred stock had been
converted into common stock issued on an one-for-one basis on the date
of original issue.
. The as adjusted balance sheet data gives effect to the conversion of all
our outstanding shares of preferred stock and to the issuance of
shares of common stock in this offering at an assumed offering price of
$ per share.
7
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before you decide to
buy our common stock. If any of these risks actually occur, our business
prospects, financial condition, operating results or cash flows could be
materially adversely affected. This could cause the trading price of our common
stock to decline, and you may lose part or all of your investment.
Risks Related to Our Business
We depend heavily on the success of our lead product candidate, MT 100, which
is still in clinical trials and may never be approved for commercial use. If we
are unable to develop, gain approval of or commercialize MT 100, our business
and results of operations will be harmed.
We have invested a significant portion of our time and financial resources
since our inception in the development of MT 100 and anticipate that for the
foreseeable future our ability to achieve profitability will be dependent on
its successful development, approval and commercialization. Many factors could
negatively affect the success of our efforts to develop and commercialize MT
100, including:
. negative, inconclusive or otherwise unfavorable results from our
toxicology or carcinogenicity studies or from our clinical trials;
. an inability to obtain, or delay in obtaining, regulatory approval
for the commercialization of MT 100;
. an inability to establish collaborative arrangements with third
parties for the manufacture and commercialization of MT 100, or any
disruption of any of these arrangements, if established;
. a failure to achieve market acceptance of MT 100;
. significant delays in our ongoing clinical trials and toxicology
studies; and
. significant increases in the costs of our clinical trials and
toxicology studies.
We have incurred losses since inception and anticipate that we will incur
continued losses for the foreseeable future. We do not have a current source of
product revenue and may never be profitable.
We have incurred losses in each year since our inception and we currently have
no source of product revenue. As of March 31, 2000, we had an accumulated
deficit of approximately $26.2 million. We expect to incur significant and
increasing operating losses and do not know when or if we will generate product
revenue. We expect that the amount of our operating losses will fluctuate
significantly from quarter to quarter as a result of increases and decreases in
development efforts, the timing of payments that we may receive from others,
and other factors. Our ability to achieve profitability is dependent on a
number of factors, including our ability to:
. develop and obtain regulatory approvals for our product candidates;
. receive upfront and milestone payments;
. successfully commercialize our product candidates, which may include
entering into collaborative agreements for product development and
commercialization; and
. secure contract manufacturing and distribution services.
We do not know if we will complete our product development efforts, receive
regulatory approval of any of our product candidates or successfully
commercialize any approved products. As a result, we are unable to predict the
extent of any future losses or when, if ever, we will achieve profitability.
8
<PAGE>
None of our product candidates is approved for commercial use or sale. If we
are unable to obtain regulatory approval of our product candidates, or if we
are unable to maintain regulatory compliance, we will be unable to
commercialize our product candidates, we will be unable to generate revenues
and our business and results of operations will be harmed.
Our product candidates under development are subject to extensive domestic and
foreign regulation. The FDA regulates, among other things, the development,
testing, manufacture, safety, efficacy, recordkeeping, labeling, storage,
approval, advertisement, promotion, sale and distribution of pharmaceutical
products. If we market our products abroad, they are also subject to extensive
regulation by foreign governments. None of our product candidates, including MT
100, has been approved for sale in the United States or any foreign market.
Most of our product candidates are in the early stages of development. We will
need to successfully complete clinical testing and toxicology studies for each
of our product candidates, including MT 100, before submitting a New Drug
Application, or NDA, to the FDA for approval to market the product candidate.
Any NDA which we submit would require FDA approval before we could distribute
or commercialize the product candidate described in the NDA.
The regulatory review and approval process takes years, requires the
expenditure of substantial resources, involves post-marketing surveillance and
may involve ongoing requirements for post-marketing studies. All statutes,
regulations and guidelines governing the approval of our product candidates are
subject to change in the future. These changes may further increase the time or
cost of regulatory approval, limit approval or prevent it completely. Even if
we believe that our clinical data demonstrate the safety and efficacy of any of
our product candidates, regulators may disagree with us, which could delay,
limit or even prevent the approval of our product candidates. The FDA may also
require data in certain subpopulations, such as pediatric use, prior to NDA
approval, unless we can obtain a waiver to delay such a study. Further, we may
not obtain the labeling claims we believe are necessary or desirable for the
promotion of our product candidates.
Approval of a product candidate may be conditioned upon certain limitations and
restrictions as to the drug's use, or upon the conduct of further studies, and
is subject to continuous review. The FDA may also require us to conduct
additional post-approval clinical trials. The later discovery of previously
unknown problems with the product, manufacturer or manufacturing facility, may
result in restrictions on marketing or withdrawal of the product from the
market. After approval of a product candidate, we will have significant ongoing
regulatory compliance obligations, and if we fail to comply with these
requirements, we could be subject to penalties, including:
. warning letters;
. fines;
. product seizures;
. product recalls;
. withdrawal of regulatory approval;
. operating restrictions;
. injunctions; and
. criminal prosecution.
We and our contract manufacturers are required to comply with the applicable
FDA current Good Manufacturing Practices, or cGMP, regulations, which include
requirements relating to quality control and quality assurance, as well as the
corresponding maintenance of records and documentation. Further, manufacturing
facilities must be approved by the FDA before they can be used to manufacture
9
<PAGE>
our product candidates, and are subject to additional FDA inspection. We or our
third-party manufacturers may not be able to comply with cGMP regulations or
other FDA regulatory requirements, resulting in delay or inability to
manufacture the products.
Labeling and promotional activities are subject to scrutiny by the FDA and
state regulatory agencies and, in some circumstances, the Federal Trade
Commission. FDA enforcement policy prohibits the marketing of approved products
for unapproved, or off-label, uses. These regulations and the FDA's
interpretation of them may impair our ability to effectively market products
for which we gain approval. Failure to comply with these requirements can
result in regulatory enforcement action by the FDA.
Problems or failures with the products of others, including our competitors,
could have an adverse effect on our ability to obtain regulatory approval for
any of our product candidates. If we have disagreements with any of our
collaborative parties as to the ownership of clinical trial results or
regulatory approvals, and the FDA refuses to recognize us as holding the
regulatory approvals necessary to commercialize our products, we may experience
delays in or be precluded from marketing products that we develop. Delays or
limitations in obtaining regulatory approvals may materially adversely affect
our business, financial condition and results of operations.
We need to conduct preclinical, toxicology and carcinogenicity studies and
clinical trials of all of our product candidates. These studies and trials are
costly, time consuming and unpredictable. Any unanticipated costs or delays in
these studies or trials, or the need to conduct additional trials, could harm
our business, financial condition and results of operations.
Seeking approval of our product candidates is subject to many risks, including
the risk that:
. the product candidate is found to be ineffective or unsafe;
. the clinical trial results for a product candidate delay or prevent
regulatory approval; and
. we or our third-party manufacturers are unable to meet the cGMP
regulations.
Generally, we must demonstrate the efficacy and safety of our product
candidates, including MT 100, before approval to market can be obtained from
the FDA. To demonstrate efficacy in a combination product candidate like
MT 100, which combines two previously approved component products, we must
demonstrate in clinical trials that it is both superior to each of its
individual components and effective for symptoms of migraine when compared to a
placebo. Generally, two successful clinical trials are required to demonstrate
that the product meets each of these standards for approval.
We will need to complete at least three additional Phase 3 studies prior to
submitting an NDA for MT 100. Based on discussions with the FDA after
completion of the initial Phase 3 trial, we believe that, in addition to
showing a statistically significant increase in patients achieving sustained
response in all of our trials, our trials comparing MT 100 to placebo must also
demonstrate that MT 100 is superior to placebo in three additional endpoints to
obtain FDA approval. These additional endpoints are nausea, sensitivity to
noise and sensitivity to light.
Additionally, the FDA may require us to complete long-term carcinogenicity
studies prior to NDA submission, which would delay the NDA submission for MT
100 and could cause at least a one year delay in commercialization.
Even if we determine that the data from these clinical trials and toxicology
and carcinogenicity studies are positive, we cannot assure you that the FDA,
after completing its analysis, will not determine that these trials should have
been conducted or analyzed differently, and thus reach a different conclusion
from that reached by us, or request that further trials or analysis be
conducted. Additional trials would likely be time-consuming and expensive.
10
<PAGE>
We have other product candidates in clinical development. We must complete
significant preclinical, toxicology and carcinogenicity studies as well as
clinical trials on these product candidates before we submit marketing
applications in the United States and abroad. These studies and trials can be
very costly and time-consuming. In addition, we rely on third parties to
perform significant aspects of our studies and clinical trials, introducing
additional sources of risk into our development programs. Results from
preclinical testing and early clinical trials are not necessarily predictive of
results obtained in later clinical trials involving large scale testing of
patients in comparison to control groups.
The completion of clinical trials depends upon many factors, including the rate
of enrollment of patients. If we are unable to accrue sufficient clinical
patients during the appropriate period, we may need to delay our clinical
trials and incur significant additional costs. In addition, FDA or
Institutional Review Boards may require us to delay, restrict or discontinue
our clinical trials on various grounds, including a finding that the subjects
or patients are being exposed to an unacceptable health risk. Even if we
complete our clinical trials, we may be unable to submit an NDA to the FDA as
scheduled. Once submitted, an NDA would require FDA approval before we could
distribute or commercialize the product described in the application. Even if
we determine that data from our clinical trials and toxicology studies are
positive, we cannot assure you that the FDA, after completing its analysis,
will not determine that the trials should have been conducted or analyzed
differently, and thus reach a different conclusion from that reached by us, or
request that further trials or analysis be conducted. Additional trials would
be time consuming and expensive.
Our costs associated with our human clinical trials vary based on a number of
factors, including:
. the order and timing of clinical indications pursued;
. the extent of development and financial support from collaborative
parties, if any;
. the number of patients required for enrollment;
. the difficulty in obtaining sufficient patient populations and
clinicians;
. the difficulty of obtaining clinical supplies of our product
candidates; and
. governmental and regulatory delays.
All statutes and regulations governing the conduct of clinical trials are
subject to change in the future, which could affect the cost of our clinical
trials. Any unanticipated costs or delays in our clinical studies could harm
our business, financial condition and results of operations.
Even if we obtain positive preclinical or clinical study results initially,
future clinical trial results may not be similarly positive. As a result,
ongoing and contemplated clinical testing and other studies, if permitted by
governmental authorities, may not demonstrate that a product candidate is safe
and effective in the patient population and for the disease indications for
which we believe it will be commercially advantageous to market the product.
The failure of our clinical trials to demonstrate the safety and efficacy of
our desired indications could harm our business, financial condition and
results of operations.
We depend on collaborations with third parties, which may reduce our product
revenues or restrict our ability to commercialize products.
Our ability to develop, manufacture, commercialize and obtain regulatory
approval of our existing and any future product candidates depends upon our
ability to enter into and maintain contractual and collaborative arrangements
with others. We have and intend in the future to retain contract manufacturers
and clinical trial investigators. In addition, the identification of new
compounds or product candidates for development may require us to enter into
licensing or other collaborative agreements with others, including
pharmaceutical companies and research institutions. We currently
11
<PAGE>
intend to market and commercialize our products through others, which will
require us to enter into sales, marketing and distribution arrangements with
third parties. These arrangements may reduce our product revenues.
Our third party contractual or collaborative arrangements may require us to
grant rights, including marketing rights, to one or more parties. These
arrangements may also contain covenants restricting our product development or
business efforts in the future, or other terms which are burdensome to us, and
may involve the acquisition of our equity securities. Collaborative agreements
for the acquisition of new compounds or product candidates may require us to
pay license fees, make milestone payments and/or pay royalties.
We cannot be sure that we will be able to maintain our existing or future
collaborative or contractual arrangements, or that we will be able to enter
into future arrangements with third parties on terms acceptable to us, or at
all. If we fail to maintain our existing arrangements or to establish new
arrangements when and as necessary, we could be required to undertake these
activities at our own expense, which would significantly increase our capital
requirements and may delay the development, manufacture and commercialization
of our product candidates.
We are subject to a number of risks associated with our dependence on
contractual and collaborative arrangements with others:
. We may not have day-to-day control over the activities of our
contractors or collaborators.
. Third parties may not fulfill their obligations to us.
. We may not realize the contemplated or expected benefits from
collaborative or other arrangements.
. Business combinations and changes in the contractual or collaborative
party's business strategy may adversely affect its willingness or
ability to complete its obligations to us.
. The contractor or collaborative party may have the right to terminate
its arrangements with us on limited or no notice and for reasons
outside of our control.
. The contractual or collaborative party may develop or have rights to
competing products or product candidates and withdraw support or
cease to perform work on our products.
. Disagreements may arise regarding breach of the arrangement or
ownership of proprietary rights.
These factors could lead to delays in the development or commercialization of
our product candidates, and disagreements with our contractors or collaborators
could require or result in litigation or arbitration, which would be time-
consuming and expensive. Our ultimate success may depend upon the success and
performance on the part of these third parties. If we fail to maintain these
relationships or establish new relationships as required, our business
prospects, financial condition and results of operations could be harmed.
We currently depend and will in the future depend on third parties to
manufacture our product candidates, including MT 100. If these manufacturers
fail to meet our requirements and the requirements of regulatory authorities,
our business, financial condition and results of operations will be harmed.
We do not have, and have no plans to develop, the internal capability to
manufacture either clinical trial or commercial quantities of products that we
may develop or are under development. We rely upon third party manufacturers to
supply us with MT 100 and our other product candidates. We are negotiating a
contract with the manufacturer of our clinical trial materials to manufacture
MT 100
12
<PAGE>
commercially; however, we may not be able to reach agreement on terms agreeable
to us. Even if we are able to negotiate a commercial supply contract with our
current manufacturer, there is no guarantee that this manufacturer will be a
financially viable entity going forward. If any of the foregoing occurs, or if
our current manufacturer is unable to satisfy our requirements, and we are
required to find an alternative source of supply, there may be additional cost
and delays in product development and commercialization of our product
candidates, including MT 100.
Any third-party manufacturers that we may use must adhere to cGMP regulations,
which are enforced by the FDA through its facilities inspection program. The
facilities of any third-party manufacturers retained by us must pass a plant
inspection before the FDA will issue a pre-market approval of the product they
manufacture. The manufacture of product at these facilities will be subject to
strict quality control, testing and recordkeeping requirements. Even though we
have no current plans to do so, if we choose or are required for any reason in
the future to manufacture products internally, we have no experience in the
manufacture of pharmaceutical products for clinical trials or commercial
purposes. If we decide to manufacture products, we would also be subject to the
regulatory requirements described above. In addition, we would require
substantial additional capital and would be subject to delays or difficulties
encountered in manufacturing pharmaceutical products. Regardless of the
manufacturer of our products, we will be subject to continuing obligations
regarding the submission of safety reports and other post-market information.
If we encounter delays or difficulties with contract manufacturers, packagers
or distributors, market introduction and subsequent sales of our products could
be delayed. In addition, we may need to seek alternative sources of supply. If
so, we may incur additional costs or delays in product commercialization. If we
change the source or location of supply or modify the manufacturing process for
our product candidates or products, regulatory authorities, including the FDA,
will require us to demonstrate that the product produced by the new source or
from the modified process is equivalent to the product used in any clinical
trials that we had conducted. In order to demonstrate this to the FDA, we will
likely be required to conduct further studies which would result in additional
costs and would also likely result in delay of market introduction and
subsequent commercial sales of our products, and harm our business.
We do not have marketing or sales experience or capabilities.
We intend to enter into agreements with third parties to market and sell any of
our product candidates approved by the FDA for commercial sale. We may not be
able to enter into marketing and sales agreements with others on terms
acceptable to us, if at all. To the extent that we enter into marketing and
sales agreements with others, our revenues, if any, will be effected by the
sales and marketing efforts of others. We may also retain the right, where
possible, to co-promote our products in conjunction with our collaborative
parties. If we are unable to enter into third-party sales and marketing
agreements, or if we are exercising our rights to co-promote a product, then we
will be required to develop internal marketing and sales capabilities. We may
not successfully establish marketing and sales capabilities or have sufficient
resources to do so. If we fail to establish marketing and sales capabilities or
enter into marketing agreements with third parties, our business, financial
condition and results of operations may be harmed.
We face intense competition and rapid technological change.
We are engaged in a rapidly changing and highly competitive field. Other
products and therapies that currently exist or are being developed will compete
with the product candidates which we are seeking to develop and market.
A variety of oral, injectable and intranasal therapies are used to treat
different types of migraine attacks. Many patients use a personal, individually
developed, step-care approach to their attacks.
13
<PAGE>
Attacks are often treated initially with simple over-the-counter analgesics,
particularly if the patient is unable to determine if the attack is a migraine
or some other type of headache. If over-the-counter remedies are unsuccessful,
patients often turn to more potent prescription drugs, including triptans,
narcotics and drugs containing analgesic/narcotic combinations. Our product
candidates will have to compete with all of these therapies.
There are numerous competitors working on products to treat migraine and the
other diseases and conditions for which we may seek to develop products in the
future. Developments by competitors may render our product candidates or
technologies obsolete or non-competitive. We face, and will continue to face,
intense competition from other companies for collaborations with pharmaceutical
companies, establishing relationships with academic and research institutions,
and licenses to proprietary technology. These competitors, either alone or with
collaborative parties, may succeed with technologies or products that are more
effective than any of our current or future technologies or products. Many of
our actual or potential competitors, either alone or together with
collaborative parties, have substantially greater financial resources, and
almost all of our competitors have larger numbers of scientific and
administrative personnel than we do. Many of these competitors, either alone or
together with their collaborative parties, also have significantly greater
experience than we do in:
. developing product candidates;
. undertaking preclinical testing and human clinical trials;
. obtaining FDA and other regulatory approvals of product candidates;
and
. manufacturing and marketing products.
Accordingly, our actual or potential competitors may succeed in obtaining
patent protection, receiving FDA approval or commercializing products before we
do. If commercial product sales of our product candidates commence, we will be
competing against companies with greater marketing and manufacturing
capabilities, areas in which we have limited or no experience.
We also face, and will continue to face, competition from academic
institutions, government agencies and research institutions.
We depend on patents and proprietary rights. If we are unable to protect our
patents or proprietary rights, or if we are unable to operate our business
without infringing the patents and proprietary rights of others, our business,
financial condition and results of operations will be harmed.
The pharmaceutical industry places considerable importance on obtaining patent
and trade secret protection for new technologies, products and processes. Our
technology will be protected from unauthorized use by others only to the extent
that it is covered by valid and enforceable patents or effectively maintained
as trade secrets. As a result, our success depends in part on our ability to:
. obtain patents;
. license technology rights from others;
. protect trade secrets;
. operate without infringing upon the proprietary rights of others; and
. prevent others from infringing on our proprietary rights.
We cannot be certain that our patents or patents that we license from others
will be enforceable and afford protection against competitors. The patent
positions of pharmaceutical companies are highly uncertain and involve complex
legal and factual questions. Therefore, we cannot predict the breadth of claims
that will be allowed under either our patent applications or the patent
applications of our collaborative parties, or the enforceability of any
resulting patents.
14
<PAGE>
Our patents or patent applications, and those of our collaborative parties,
issued or pending, respectively, may be challenged, invalidated or
circumvented. Our patent rights may not provide us with proprietary protection
or competitive advantages against competitors with similar technologies. Others
may independently develop technologies similar to ours or independently
duplicate our technologies. Due to the extensive time required for development,
testing and regulatory review of our potential products, our patents may expire
or remain in existence for only a short period following commercialization.
This would reduce or eliminate any advantage the patents may give us.
We cannot be certain that we were the first to make the inventions covered by
each of our issued or pending patent applications or that we were the first to
file patent applications for such inventions. We may need to license the right
to use third-party patents and intellectual property to continue development
and marketing of our product candidates. We may not be able to acquire such
required licenses on acceptable terms, if at all. If we do not obtain such
licenses, we may need to design around other parties' patents, or we may not be
able to proceed with the development, manufacture or sale of our product
candidates. We may face litigation to defend against claims of infringement,
assert claims of infringement, enforce our patents, protect our trade secrets
or know-how, or determine the scope and validity of others' proprietary rights.
Patent litigation is costly. In addition, we may require interference
proceedings declared by the United States Patent and Trademark Office to
determine the priority of inventions relating to our patent applications.
Litigation or interference proceedings could have a material adverse effect on
our business, financial condition and results of operations, and we could be
unsuccessful in our efforts to enforce our intellectual property rights.
We have entered into confidentiality agreements with our employees,
consultants, contractors, advisors and collaborators. However, these parties
may not honor these agreements and we may not be able to successfully protect
our rights to unpatented trade secrets and know-how. Others may independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets and know-how. Many of our scientific
and management personnel were previously employed by competing companies. As a
result, such companies may allege trade secret violations and similar claims
against us.
Our business strategy depends on our ability to identify and acquire product
candidates or approved products.
As part of our business strategy we plan to identify and acquire product
candidates or approved products in areas in which we possess particular
knowledge. If we fail to acquire, develop and commercialize additional products
or product candidates, or fail to promote or market commercially successful
products, our future business and results of operations could be harmed.
Because we do not directly engage in basic research or drug discovery, we must
rely upon third parties to sell or license product opportunities to us. Other
companies, including some with substantially greater financial, marketing and
sales resources, are competing with us to acquire such products. We may not be
able to acquire rights to additional products on acceptable terms, if at all.
In addition, we may acquire new products with different marketing strategies,
distribution channels and bases of competition than those of our current
products. Therefore, we may not be able to compete favorably in those product
categories.
Any of our future products, including MT 100, may not be accepted by the
market, which would harm our business and results of operations.
Even if approved by the FDA and other regulatory authorities, our product
candidates, including MT 100, may not achieve market acceptance and we may not
receive revenues from these products as anticipated. The degree of market
acceptance will depend upon a number of factors, including:
. the receipt and timing of regulatory approvals;
. the availability of third-party reimbursement;
15
<PAGE>
. indications for which the product is approved;
. rate of adoption by health care providers;
. rate of product acceptance by target patient population;
. price of product relative to alternative therapies;
. availability of alternative therapies;
. extent of marketing efforts by us and third-party distributors and
agents;
. publicity regarding our products or similar products; and
. extent and severity of side effects as compared to alternative
therapies.
We may not be able to successfully manufacture and market our products even if
they perform successfully in clinical trials. Furthermore, physicians or the
medical community in general may not accept and utilize any of our products.
We may not receive third-party reimbursement for any of our future products,
which may harm our results of operations.
Our ability to commercialize our product candidates successfully will depend,
in part, on the extent to which reimbursement for the costs of such products
and related treatments will be available from government health administration
authorities, such as Medicare and Medicaid in the United States, private health
insurers and other organizations. Significant uncertainty exists as to the
reimbursement status of a newly approved health care product particularly for
indications for which there is no current effective treatment or for which
medical care is typically not sought. Adequate third-party coverage may not be
available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product research and development. If
adequate coverage and reimbursement levels are not provided by government and
third-party payors for use of our products, our products may fail to achieve
market acceptance and our results of operations will be harmed.
Our future revenues, profitability and access to capital will be affected by
the continuing efforts of governmental and private third-party payors to
contain or reduce the costs of health care through various means. We expect a
number of federal, state and foreign proposals will seek to control the cost of
drugs through governmental regulation. We are unsure of the form that any
health care reform legislation may take or what actions federal, state, foreign
and private payors may take in response to the proposed reforms. Therefore, we
cannot predict the effect of any implemented reform on our business.
If product liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may be required to limit commercialization of our
product candidates.
The testing and marketing of pharmaceutical products entails an inherent risk
of product liability. Product liability claims might be brought against us by
consumers, health care providers or by pharmaceutical companies or others
selling our future products. If we cannot successfully defend ourselves against
such claims, we may incur substantial liabilities or be required to limit the
commercialization of our product candidates. We have obtained limited product
liability insurance coverage only for our human clinical trials. However,
insurance coverage is becoming increasingly expensive, and no assurance can be
given that we will be able to maintain insurance coverage at a reasonable cost
or in sufficient amounts to protect us against losses due to liability. A
successful product liability claim in excess of our insurance coverage could
have a material adverse effect on our business, financial condition and results
of operations. We may not be able to obtain commercially reasonable product
liability insurance for any products approved for marketing.
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<PAGE>
We may need substantial additional funding and may not have access to capital.
If we are unable to raise capital when needed, we may need to delay, reduce or
eliminate our product development or commercialization efforts, which would
harm our business.
We may need to raise additional funds to execute our business strategy. We have
incurred losses from operations since inception and we expect to incur
additional operating losses. In particular, we believe that we will require
additional capital to fund the acquisition of new product candidates. Our
actual capital requirements will depend upon numerous factors, including:
. the progress of our research and development programs;
. the progress of preclinical studies and clinical testing;
. the time and cost involved in obtaining regulatory approvals;
. the costs of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
. the effect of competing technological and market developments;
. the effect of changes and developments in our collaborative,
licensing and other relationships; and
. the terms and timing of any new collaborative, licensing and other
arrangements that we may establish.
We may be unable to raise sufficient funds to execute our business strategy.
Potential funding sources include:
. public and private securities offerings;
. debt financing, such as bank loans; and
. collaborative, licensing and other arrangements with third parties.
We may not be able to find sufficient debt or equity funding on acceptable
terms. If we cannot, we may need to delay reduce or eliminate research and
development programs. The sale by us of additional equity securities or the
expectation that we will sell additional equity securities may have an adverse
effect on the price of our common stock. In addition, collaborative
arrangements may require us to grant product development programs or licenses
to third parties for products that we might otherwise seek to develop or
commercialize ourselves.
We depend on key personnel and may not be able to retain these employees or
recruit additional qualified personnel, which would harm our business.
We are highly dependent on the efforts of our key management and scientific
personnel, especially John Plachetka, our President, Chief Executive Officer
and Chief Scientist. There is intense competition for qualified scientific
personnel. Since our business is very science-oriented, we need to continue to
attract and retain such people. We may not be able to continue to attract and
retain the qualified personnel necessary for developing our business. If we
lose the services of, or fail to recruit, key scientific personnel, our
business would be harmed. Furthermore, the loss of any or our key management
would harm our business. We do not maintain key man insurance for any of our
employees.
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<PAGE>
Risks Related to this Offering
If the market price of our common stock after this offering is lower than the
price you paid, you may not be able to sell your shares without incurring a
loss.
Prior to this offering, there has been no public market for our common stock.
If you purchase shares of our common stock in this offering, you will not pay a
price that was established in a competitive market. Rather, you will pay a
price that we negotiated with the representatives of the underwriters. After
this offering, an active trading market in our stock might not develop or
continue.
If our stock is highly volatile, the value of your investment may fluctuate
significantly.
The market prices for securities of early-stage pharmaceutical and
biotechnology companies have been particularly volatile. Some of the factors
that may cause the market price of our common stock to fluctuate include:
. results of preclinical studies and clinical trials conducted by us or
on our behalf, or by our competitors;
. announcements of technological innovations or new commercial products
by us, by third parties with respect to strategic relationships
maintained with us, or by our competitors;
. regulatory developments in both the United States and foreign
countries;
. changes in reimbursement policies;
. developments or disputes concerning patents or other proprietary
rights;
. fluctuations in our operating results;
. changes in financial estimates or recommendations by security
analysts;
. public concern as to the safety and efficacy of products developed by
us, our collaborators or our competitors;
. lack of adequate trading liquidity as a public company;
. future sales or distributions of our common stock; and
. general market conditions.
In the past, following periods of volatility in the marketplace of a particular
company's securities, securities class action litigation has often been brought
against the company. We may become involved in this type of litigation in the
future. Litigation of this type is often extremely expensive and diverts
management's attention and resources.
We may allocate the net proceeds from this offering in ways which you and other
stockholders may not approve.
We will have significant flexibility in applying the net proceeds of this
offering and could use these proceeds for purposes other than those
contemplated at the time of the offering.
Existing stockholders own a large percentage of our voting stock and thus you
will have minimal influence on stockholder decisions.
Upon completion of this offering, we anticipate that our executive officers,
directors and greater than five percent stockholders, along with their
affiliates, will, in the aggregate, own approximately % of our outstanding
common stock. As a result, such persons, acting together, will have the ability
to substantially influence all matters submitted to the stockholders for
approval, including the election and
18
<PAGE>
removal of directors and any merger, consolidation or sale of all or
substantially all of our assets. These persons will also have the ability to
control our management and affairs. Accordingly, such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control, impending a merger, consolidation, takeover or other business
combination involving us or discouraging a potential acquirer from making a
tender offer or otherwise attempting to obtain control of our business, even if
such transactions would be beneficial to other stockholders.
You will incur immediate and substantial dilution of the stock value of your
shares.
The offering price of our common stock is substantially higher than the net
tangible pro forma book value per share of our outstanding common stock. As a
result, investors purchasing common stock in this offering will incur immediate
and substantial dilution in the net tangible book value of their common stock
of $ per share on a pro forma basis as of March 31, 2000. In the past, we
issued options and warrants to acquire capital stock at prices significantly
below the assumed offering price. There will be further dilution to investors
when any of these outstanding options and warrants are exercised.
Future sales of our common stock could cause the market price of our common
stock to decline.
The market price of our common stock could decline due to sales of a large
number of shares in the market after this offering or the perception that such
sales could occur, including sales or distributions of shares by our large
stockholders. These sales could also make it more difficult for us to sell
equity securities in the future.
Because our certificate of incorporation and bylaws and Delaware law contain
provisions that could discourage a takeover, the market price of our common
stock could decline.
We are subject to the Delaware anti-takeover laws regulating corporate
takeovers. These anti-takeover laws prevent Delaware corporations from engaging
in a merger or sale of more than 10% of its assets with any stockholder,
including all affiliates and associates of the stockholder, who owns 15% or
more of the corporation's outstanding voting stock, for three years following
the date that the stockholder acquired 15% or more of the corporation's stock
unless:
. the board of directors approved the transaction where the stockholder
acquired 15% or more of the corporation's stock;
. after the transaction where the stockholder acquired 15% or more of the
corporation's stock, the stockholder owned at least 85% of the
corporation's outstanding voting stock, excluding shares owned by
directors, officers and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held under the plan will be tendered in a tender or exchange
offer; or
. on or after this date, the merger or sale is approved by the board of
directors and the holders of at least two-thirds of the outstanding
voting stock that is not owned by the stockholder.
As such, these laws could prohibit or delay mergers or a change of control of
us and may discourage attempts by other companies to acquire us. These
restrictions are not, however, applicable to any of our existing stockholders.
Our certificate of incorporation and bylaws include a number of provisions that
may deter or impede hostile takeovers or changes of control or management.
These provisions include:
. our Board of Directors is classified into classes of directors with
staggered three year-terms;
. the authority of our Board of Directors to issue up to 10,000,000 shares
of preferred stock and to determine the price, rights, preferences and
privileges of these shares, all without stockholder approval;
19
<PAGE>
. all stockholder actions must be effected at a duly called meeting of
stockholders and not by written consent;
. special meetings of the stockholders may be called only by the chairman
of our Board of Directors, the chief executive officer or our Board of
Directors;
. a supermajority (75%) vote of our stockholders is required to remove a
member of our Board of Directors, and then only for cause; and
. no cumulative voting.
These provisions may have the effect of delaying or preventing a change of
control, even at stock prices higher than the then current price of our stock.
20
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements under the captions
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These forward-
looking statements include statements about the following:
. our product development efforts;
. anticipated regulatory requirements and clinical trial initiation dates
for our product candidates;
. our clinical trials;
. future collaborative agreements;
. status of our regulatory process for MT 100 and other product
candidates;
. plans for manufacturing, sales and marketing;
. competitive factors;
. patent and proprietary rights;
. our intentions to identify and acquire product candidates or approved
products;
. market acceptance of our approved products;
. royalty, license and other revenues;
. technological change;
. implementation of corporate strategy;
. financial performance; and
. governmental regulation.
When used in this prospectus, we intend the words "believe," "anticipate,"
"estimate," "expect," "seek," "intend," and "may" to identify "forward-looking
statements." Our forward-looking statements involve uncertainties and other
factors that may cause our actual results, performances or achievements, to be
far different from that suggested by our forward-looking statements. We discuss
these factors in more detail elsewhere in this prospectus, including under the
captions "Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." You should not
place undue reliance on our forward-looking statements. We do not intend to
update any of these factors or to publicly announce the result of any revisions
to any of these forward-looking statements.
The safe harbor for forward-looking statements contained in the Securities
Litigation Reform Act of 1995 protects companies from liability for their
forward-looking statements if they comply with the requirements of the Act. The
Act does not provide this protection for initial public offerings.
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<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from the sale of shares of common stock in
this offering will be approximately $ , after deducting the underwriting
discount and estimated offering expenses payable by us. Our net proceeds are
estimated to be approximately $ if the underwriters exercise their over-
allotment option in full.
We intend to use the net proceeds from the offering to fund the cost of
development, approval and commercialization of our product candidates, to
acquire or in-license additional product candidates and for working capital and
general corporate purposes. Although we may have discussions regarding
potential acquisitions that are complementary to our business and may use a
portion of the net proceeds for this purpose, we currently have no agreements
or commitments in this regard. We reserve the right, at the discretion of our
Board of Directors, to reallocate the use of proceeds in response to these and
other factors. Pending these uses, we intend to invest the net proceeds from
this offering in interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend to
retain all of our futures earnings to finance the growth and development of our
business. We do not intend to pay cash dividends on our common stock in the
foreseeable future.
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<PAGE>
CAPITALIZATION
(in thousands, except share and per share data)
The following table sets forth our capitalization as of March 31, 2000 on an
actual and as adjusted basis to reflect the sale of shares of our common
stock in the offering at an assumed offering price of $ per share, after
deducting underwriting discounts and estimated offering expenses payable by us
and the conversion of outstanding shares of preferred stock into common stock.
The following table should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 2000
-----------------------
Actual As Adjusted
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash and cash equivalents.......................... $ 18,671 $
======== ====
Redeemable convertible Series E preferred stock,
$0.001 par value; 3,167,260 shares designated,
2,589,927 shares issued and outstanding, actual,
no shares issued and outstanding, as adjusted..... $ 16,875 $
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 10,000,000
shares authorized, 6,402,102 shares issued and
outstanding, actual, no shares issued and
outstanding, as adjusted......................... 7
Common stock, $0.001 par value; 90,000,000 shares
authorized, 4,353,372 shares issued and
outstanding, actual, shares issued and
outstanding, as adjusted......................... 4
Additional paid-in capital......................... 29,846
Deferred compensation.............................. (4,266)
Accumulated (deficit) surplus ..................... (26,233)
-------- ----
Total stockholders' equity (deficit)............. (642)
-------- ----
Total capitalization........................... $ 16,233 $
======== ====
</TABLE>
This table is based on the number of outstanding shares as of March 31, 2000
and does not include the following:
. 1,029,583 shares of common stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of
$1.23 per share; and
. 347,327 shares of preferred stock issuable upon exercise of
outstanding warrants, which will convert immediately prior to
consummation of this offering into warrants to purchase 347,327
shares of our common stock, at a weighted average exercise price of
$2.28 per share.
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DILUTION
Our pro forma net tangible book value as of March 31, 2000, was approximately
$ , or $ per share of common stock. Pro forma net tangible book value per
share represents the amount of our net total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding. After
giving effect to the sale of the shares of common stock offered hereby at
an assumed initial public offering price of $ per share less underwriting
discounts and estimated offering expenses, our pro forma net tangible book
value at March 31, 2000, would have been approximately $ million, or $ per
share of common stock. This represents an immediate increase in net tangible
book value of $ per share to existing stockholders and an immediate decrease
in net tangible book value of $ per share to new investors. The following
table illustrates this unaudited per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
----
Net tangible book value per share before this offering............. $
----
Increase in net tangible book value per share attributable to new
investors......................................................... $
----
Pro forma net tangible book value per share after this offering...... $
----
Dilution per share to new investors.................................. $
====
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option, our
adjusted pro forma net tangible book value after this offering at March 31,
2000 would have been approximately $ per share, representing an immediate
increase in pro forma 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 purchasers in this offering.
The following table sets forth, as of March 31, 2000, the number of shares of
common stock previously issued by us, the total consideration reflected in our
accounts and the average price per share to the existing stockholders and new
investors, assuming the sale by us of shares of common stock at an
assumed initial public offering price of $ per share, and before
deducting the estimated underwriting discounts and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 13,345,401 $41,920,251 $
New investors.............
---------- ---- ----------- ----
Total................. 100% $ 100%
========== ==== =========== ==== ===
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option, the
percentage of shares held by existing shareholders would be % of the total
number of shares of common stock to be outstanding after the offering, and the
number of shares held by new stockholders would be increased to shares,
or % of the total number of shares of common stock to be outstanding after
the offering.
As of March 31, 2000, there were outstanding options to acquire 1,029,583
shares of common stock, at a weighted average exercise price of $1.23 per
share, and warrants to acquire 347,327 shares of preferred stock were
outstanding, which will convert immediately prior to consummation of this
offering into warrants to acquire 347,327 shares of common stock, at a weighted
average exercise price of $2.28 per share.
24
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share data)
In the table below, we provide you with our summary historical financial data.
We have prepared this information using our financial statements for the three
years ended December 31, 1999, the period from September 26, 1996 (inception)
through December 31, 1999 and the three-month periods ended March 31, 2000 and
1999. The financial statements for the three years ended December 31, 1999 and
the period from September 26, 1996 (inception) through December 31, 1999 have
been audited by Ernst & Young LLP, independent auditors. The financial
statements for the three-month periods ended March 31, 2000 and 1999 have not
been audited.
When you read this summary historical financial data, it is important that you
read along with it the historical financial statements and related notes
included herein, as well as the sections of this prospectus titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Period from
September 26,
1996
(inception) Three Months Ended
Year Ended December 31, through March 31,
-------------------------- December 31, -----------------------
1997 1998 1999 1999 1999 2000
------- ------- -------- ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating expenses:
General and
administrative........ $ 954 $ 1,401 $ 2,310 $ 4,727 $ 362 $ 959
Research and
development........... 2,950 7,244 9,023 19,238 1,636 2,074
------- ------- -------- -------- ------- --------
Total operating
expenses............... 3,904 8,645 11,333 23,965 1,998 3,033
Interest income, net.... 315 309 82 716 31 49
------- ------- -------- -------- ------- --------
Net loss................ (3,589) (8,336) (11,251) (23,249) (1,967) (2,984)
Non-cash preferred stock
charge ................ -- -- -- -- -- (16,875)
------- ------- -------- -------- ------- --------
Net loss attributable to
common stockholders.... $(3,589) $(8,336) $(11,251) $(23,249) $(1,967) $(19,859)
======= ======= ======== ======== ======= ========
Basic and diluted net
loss per
common share........... $ (0.83) $ (1.93) $ (2.60) $ (0.45) $ (4.57)
======= ======= ======== ======= ========
Shares used in computing
basic and diluted net
loss per common share.. 4,310 4,326 4,333 4,332 4,344
======= ======= ======== ======= ========
Pro forma net loss per
common share--basic and
diluted (unaudited).... $ (1.26) $ (1.81)
Pro forma weighted
average common shares
outstanding--basic and
diluted (unaudited).... 8,902 10,976
<CAPTION>
As of December 31, As of March 31,
----------------------------------------- -----------------------
1996 1997 1998 1999 1999 2000
------- ------- -------- ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 5,656 $ 8,089 $ 2,986 $ 4,171 $ 3,822 $ 18,671
Total assets............ 5,656 8,291 3,113 4,325 3,947 18,848
Redeemable preferred
stock.................. -- -- -- -- -- 16,875
Accumulated (deficit)
surplus................ (73) (3,662) (11,998) (23,249) (13,965) (26,233)
Total stockholders'
equity (deficit)....... 5,402 7,154 1,047 1,965 (906) (642)
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of the financial condition and results
of operations in conjunction with our financial statements and the notes to
those financial statements included elsewhere in this prospectus.
Overview
We are a pharmaceutical company engaged in the development of products in
targeted therapeutic areas. Since our inception in 1996, our business
activities have primarily been associated with the development and acquisition
of four pharmaceutical product candidates. Our lead product candidate is MT
100, an orally delivered therapeutic in Phase 3 clinical trials for the
treatment of migraine. To date, we have devoted substantially all our resources
to the research and clinical development of MT 100 and of MT 300, our
injectable product candidate for severe migraine that is intended to begin
Phase 3 trials by the end of 2000. Our other migraine therapeutic product
candidates include MT 500, a migraine prophylactic, and MT 400, an orally
delivered co-active therapy. Specifically, our business activities have
included:
. product candidate research and development;
. designing and funding clinical trials for our product candidates;
. regulatory and clinical affairs;
. intellectual property prosecution and expansion; and
. business development including product acquisition or in-licensing.
We have incurred significant losses since our inception and we have not
generated any revenue. As of March 31, 2000, our accumulated deficit was
$26,232,582. Our historical operating losses have resulted principally from our
research and development activities, including Phase 3 and Phase 2 clinical
trial activities for our product candidates MT 100 and MT 300, respectively,
and general and administrative expenses. We expect to continue to incur
operating losses over the next several years as we complete our MT 100 clinical
trials, apply for regulatory approval, continue development of our other
migraine therapeutic product candidates, and acquire and develop product
portfolios in other therapeutic areas. Our results may vary depending on many
factors, including:
. the progress of MT 100 and MT 300 in the regulatory process;
. the acceleration of our other product candidates in the regulatory
process;
. the establishment of collaborations for the development and
commercialization of any of our migraine product candidates; and
. acquisition or in-licensing of other therapeutic product candidates.
Our ability to generate revenue is dependent upon our ability, alone or with
others, to successfully develop MT 100 or our other migraine product
candidates, obtain regulatory approvals and, alone or with others, successfully
manufacture and market our future products. To date, we have been dependent on
funding from the private placement of preferred stock to finance our business
activities. In March 2000, we closed a private placement of preferred stock in
which we raised net proceeds of $16,875,115 after commission and expenses.
In connection with this offering, we recorded a non-cash charge of $16,875,115
during March 2000 related to the beneficial conversion feature of the preferred
stock we sold in March 2000.
26
<PAGE>
In connection with the grant of stock options to employees, we recorded
deferred compensation of $2,672,720 in the quarter ended March 31, 2000 and
$2,133,607 in the year ended December 31, 1999, respectively. These amounts
were recorded as a component of stockholders' equity and are being amortized as
charges to operations over the vesting period of the options using the straight
line method. The vesting period of the options is generally three years.
Approximately $373,000 and $168,000 of the deferred compensation was charged to
operations in the quarter ended March 31, 2000 and in the year ended December
31, 1999, respectively.
Historical Results of Operations
Three months ended March 31, 2000 compared to the three months ended March 31,
1999
Revenue: We generated no revenue during the three months ended March 31, 2000
or the three months ended March 31, 1999. In the future, we intend to generate
revenue from upfront and milestone payments connected to potential
collaborations for development and commercialization and from product royalty
revenue.
Research and Development: Research and development expenses increased 26.8% to
$2,074,132 for the three months ended March 31, 2000 from $1,635,544 for the
three months ended March 31, 1999. This net increase was primarily due to a
$509,000 increase in toxicology study costs, primarily for MT 500, a $98,000
increase resulting from additional research and development personnel costs,
partially offset by a $168,000 decrease in pharmaceutical development
activities related to MT 100. We expect research and development expenditures
to continue to increase during 2000 due to the continuation and expansion of
Phase 3 trials for MT 100 and MT 300, the commencement of the MT 400 proof-of-
concept trial, and the expansion of MT 500 pharmaceutical development and
toxicology study expenditures. Research and development expenses included the
personnel costs related to our research activities and clinical trial
preparations and monitoring expenses, and any regulatory matters.
General and Administrative: General and administrative expenses increased
164.7% to $958,945 for the three months ended March 31, 2000 from $362,322 for
the three months ended March 31, 1999 and reflects a $158,000 increase in
professional fees, travel costs and other increases related to our expanded
operational infrastructure, a $66,000 increase in personnel and related
benefits and $373,000 of amortization of deferred stock compensation. We expect
general and administrative expenditures to continue to increase during 2000 and
subsequent years due to increasing fees and expenses associated with the growth
in our market research, business development and commercialization efforts. An
expansion in general and administrative expenditures is also expected to
accompany our infrastructure growth associated with our public company
reporting activities. General and administrative expenses consisted primarily
of the costs of administrative personnel and related facility costs along with
legal, accounting and professional fees.
Interest Income, net: Interest income, net increased 58.8% to $49,075 for the
three months ended March 31, 2000 from $30,900 for the three months ended March
31, 1999. The increase is attributable to increased levels of cash and cash
equivalents available for investing in the three months ended March 31, 2000 as
compared to the three months ended March 31, 1999 primarily due to the issuance
of preferred stock in March 2000.
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenue: We generated no revenue during the year ended December 31, 1999 or the
year ended December 31, 1998.
Research and Development: Research and development expenses increased 24.6% to
$9,023,320 for the year ended December 31, 1999 from $7,244,202 for the year
ended December 31, 1998. This increase was primarily due to the $352,000
increase in toxicology studies and clinical trial costs
27
<PAGE>
associated with the Phase 3 clinical trial of MT 100, an increase of $427,000
in research and development personnel and benefits cost, and one-time licensing
costs.
General and Administrative: General and administrative expenses increased 64.8%
to $2,309,990 for the year ended December 31, 1999 from $1,401,285 for the year
ended December 31, 1998 and primarily reflects a $909,000 increase in personnel
and related benefits, travel costs and professional fees.
Interest Income, net: Interest income, net decreased 73.3% to $82,718 for the
year ended December 31, 1999 from $309,324 for the year ended December 31,
1998. The decrease is attributable to lower interest income offset by higher
interest expense. Interest income decreased to $219,000 for the year ended
December 31, 1999 from $345,000 for the year ended December 31, 1998 due to
lower levels of cash and cash equivalents available for investing in 1999 as
compared to 1998. Interest expense in the same periods was $136,000 and
$36,000, respectively. The increase in interest expense is primarily due to
interest paid upon the conversion of a promissory note.
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenue: We generated no revenue during the year ended December 31, 1998 or the
year ended December 31, 1997.
Research and Development: Research and development expenses increased 145.6% to
$7,244,202 for the year ended December 31, 1998 from $2,949,632 for the year
ended December 31, 1997. Of this $4,294,570 increase, approximately $3,227,000
or 75% was due to increased clinical trial activities for MT 100 and MT 300.
The remaining increase was primarily due to an increase in preclinical and
clinical activities along with an increase in personnel.
General and Administrative: General and administrative expenses increased 46.8%
to $1,401,285 for the year ended December 31, 1998 from $954,307 for the year
ended December 31, 1997 primarily due to a 1998 increase in personnel and other
operational infrastructure expenses over those of the 1997 start-up period.
Interest Income, net: Interest income, net remained relatively constant at
$309,324 for the year ended December 31, 1998 compared to $315,181 for the year
ended December 31, 1997.
Income Taxes
As of March 31, 2000, we had federal and state net operating loss carryforwards
of approximately $24,000,000 and research and development credit carryforwards
of approximately $807,000. These federal net operating loss carryforwards and
research and development credit carryforwards begin to expire in 2012. State
net operating loss carryforwards begin to expire in 2001. The utilization of
the loss carryforwards to reduce future income taxes will depend on our ability
to generate sufficient taxable income prior to the expiration of the net loss
carryforwards. In addition, the maximum annual use of net loss carryforwards is
limited in certain situations where changes occur in our stock ownership.
Liquidity and Capital Resources
Since our inception, we have financed our operations and internal growth
primarily through private placements of preferred stock resulting in aggregate
net proceeds to us of $41,914,170. As of March 31, 2000, cash and cash
equivalents were $18,671,295. The majority of the proceeds raised since
inception have funded our operating activities.
28
<PAGE>
Financing activities provided cash in an aggregate amount of approximately
$41,925,013 million since inception. These amounts represent the net proceeds
we received from the sale of preferred stock and common stock. In March 2000,
we closed a private placement of preferred stock financing that raised net
proceeds of $16,875,115 after commission and expenses.
Net cash used in investing activities included primarily additions of
equipment. Since inception through March 31, 2000, approximately $234,000 was
spent on equipment. We expect to continue to make purchases of equipment at
similar levels to support our expanding administrative operations.
We believe that the net proceeds from this offering, together with our current
cash balances and potential funding received from partnering license fees and
clinical development milestones will be sufficient to satisfy our anticipated
cash needs for operating expenses, working capital and capital expenditures
through the next 18 months. However, we cannot be certain that additional
funding will not be required and, if required, will be available on acceptable
terms, or at all. Further, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants.
Disclosure About Market Risk
Our exposure to market risk is currently confined to our cash and cash
equivalents which have maturities of less than three months, and our short-term
investments which have maturities of less than one year. We maintain an
investment portfolio of commercial paper and short-term U.S. government
securities. The securities in our investment portfolio are not leveraged, are
classified as available-for-sale and are, due to their short-term nature,
subject to minimal interest rate risk. We currently do not hedge interest rate
exposure. Because of the short-term maturities of our investments, we do not
believe that an increase in market rates would have any significant negative
impact on the realized value of our investment portfolio but may negatively
impact the interest expense associated with our long-term debt.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Investments
and Hedging Activities," SFAS 133 establishes a new model for accounting for
derivatives and hedging activities and supercedes several existing standards.
SFAS 133, as amended by SFAS 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company does not expect that
the adoption of SFAS 133 will have a material impact on its financial
statements.
29
<PAGE>
BUSINESS
Overview
We are a commercially focused pharmaceutical development company committed to
building a portfolio of products in targeted therapeutic areas through a
combination of innovation and in-licensing. Our initial therapeutic focus is on
the migraine market. In December 1999, we completed the first Phase 3 clinical
trial for our lead product candidate, MT 100, which we are developing as an
oral first-line therapy for the treatment of migraine. In order to compile data
to support an NDA for MT 100, we are currently conducting three Phase 3
clinical trials of MT 100 and plan to initiate three more Phase 3 clinical
trials for MT 100 by the end of 2000. We also intend to initiate a Phase 3
trial by the end of 2000 for MT 300, which we are designing as an injectable
treatment for severe migraine attacks. Our migraine portfolio also contains one
additional product candidate for the treatment of migraine and a prophylactic
agent set to enter a Phase 2 clinical trial in the first half of 2001.
We intend to leverage our pharmaceutical product development expertise by
acquiring or in-licensing and developing commercially attractive products in
several areas outside of migraine. In addition, we plan to enter into
collaborations with established pharmaceutical companies to commercialize and
manufacture our product candidates.
Business Strategy
Our goal is to become a leading pharmaceutical development company. The
principal elements of our strategy are to:
Develop and commercialize our portfolio of migraine product candidates
A substantial portion of our efforts over the next few years will be devoted
to the further development, approval and commercialization of our portfolio
of migraine product candidates. We intend to conduct clinical trials with our
four migraine product candidates in order to obtain marketing approvals that
will allow us to provide therapeutic alternatives for all segments of
migraine patients. We intend to form collaborations with established
pharmaceutical companies for the worldwide commercialization of our migraine
product candidates.
Build a product pipeline through innovation, in-licensing and acquisition
We intend to build our product pipeline through innovation, in-licensing and
acquisition of select proprietary product candidates. We will focus primarily
on therapeutic areas with significant commercial potential in which members
of our management team have development expertise. These areas of expertise
include gastrointestinal disease, respiratory disease, infectious disease and
oncology. We plan to develop novel products that exhibit distinct advantages
over currently marketed products, as well as innovative combinations of
already approved products in more convenient or more therapeutically
appropriate formulations. We plan to identify and pursue product candidates
with the following attributes:
. significant commercial potential;
. sound scientific basis;
. established preclinical safety and efficacy data at a minimum;
. readily measurable clinical endpoints previously accepted by the FDA;
. clinical development timelines generally under four years; and
. cost-effective development programs.
30
<PAGE>
We believe pursuing product candidates with these attributes will enable us
to develop commercially viable product candidates with lower development and
financial risk than traditional pharmaceutical drugs.
One of the strategies we will use to gain access to product candidates is to
employ our license back option model. We believe this model differs from a
traditional in-licensing arrangement in that it affords us improved access to
commercially attractive compounds, by providing the licensor with an option
to license back the product candidate at various stages of development and on
set terms and conditions. We used this model to in-license our MT 500 product
candidate from F. Hoffmann-La Roche Ltd in 1999.
Form collaborations for the commercialization of our product candidates
We plan to establish collaborative relationships with pharmaceutical
companies for the commercialization of our existing and future product
candidates. In general, we intend to license our product candidates to
pharmaceutical companies for commercialization once we have established
substantial evidence of safety and efficacy, at which point we believe we can
obtain favorable economic terms. In addition, under our license back option
model, if the licensor chooses not to license back the rights to the product
candidate, we may pursue a collaboration with another third party for
commercialization of the product or commercialize the product ourselves.
Leverage development efforts through strategic outsourcing
While maintaining overall control of the planning, development and regulatory
processes, we seek to enter into strategic outsourcing relationships to
develop and commercialize our product candidates in a cost-effective manner.
We have contracted and plan to contract with third parties for product
candidate testing, development and manufacturing.
31
<PAGE>
Products Under Development
All of our migraine product candidates are being developed for the acute, or
episodic, treatment of migraine, except for MT 500, which is being developed as
a migraine prophylactic. If approved for commercial sale, all products in our
migraine portfolio will be sold by prescription. The following chart sets forth
information regarding our ongoing and currently planned clinical studies:
<TABLE>
<CAPTION>
Product Candidate Indication Trial Description Status
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MT 100 Oral tablet Migraine MT 100 vs. components Phase 3 complete
First-line therapy Long-term safety study Phase 3 ongoing
Multiple dosing regimen study Phase 3 ongoing
vs. placebo
Pilot study-- Phase 3 ongoing
MT 100 vs. Imitrex and placebo
MT 100 vs. components Phase 3 planned
MT 100 vs. placebo Phase 3 planned
MT 100 vs. placebo Phase 3 planned
Pharmacokinetic trials Phase 1 planned
- -----------------------------------------------------------------------------------------------
MT 300 Migraine Dose response study-- Phase 2 complete
Injection Severe attacks MT 300 vs. placebo
MT 300 vs. placebo Phase 3 planned
MT 300 vs. placebo Phase 3 planned
Pharmacokinetic trials Phase 1 planned
- -----------------------------------------------------------------------------------------------
MT 500 Migraine Single and repeat dose Phase 1 complete
Oral tablet Prophylaxis tolerance study
Extended tolerance study Phase 1 planned
MT 500 vs. placebo Phase 2 planned
- -----------------------------------------------------------------------------------------------
MT 400 Oral tablet Migraine Pilot study-- Phase 2 complete
First-line therapy MT 400 vs. component
MT 400 vs. component and placebo Phase 2 planned
</TABLE>
Migraine Market
Migraine is characterized by recurring attacks of headache, often associated
with visual, auditory or gastrointestinal disturbances. While the precise
mechanism of migraine is unknown, researchers believe migraine attacks are
caused by acute inflammation surrounding selected blood vessels in the head.
The average migraine sufferer experiences the first attack during the early
teen years, and the attacks generally continue throughout adulthood. We
estimate that global sales of prescription pharmaceuticals for the treatment of
migraine will exceed $2 billion by 2001.
32
<PAGE>
Not all migraine attacks are of the same severity. Consequently, a variety of
oral, injectable and intranasal therapies are used to treat different types of
migraine attacks. Many patients use a personal, individually developed, step-
care approach to treat their attacks. Attacks are often treated initially with
simple over-the-counter analgesics, particularly if the patient is unable to
determine if the attack is a migraine or some other type of headache. If over-
the-counter remedies are unsuccessful, patients often turn to more potent
prescription drugs, including narcotics, analgesic/narcotic drug combinations
and triptans.
Currently, we are aware of no narcotics approved specifically for the treatment
of migraine. However, narcotics are prescribed outside their approved
indications to treat severe migraine attacks due to their ability to mask
migraine headache pain. The use of narcotics for the treatment of migraine has
been limited because they do not address the non-pain symptoms of migraine such
as nausea and vomiting, they can cause side effects such as drowsiness,
dizziness and constipation, and because of their potential to cause addiction.
In addition, analgesics such as acetaminophen and aspirin are generally used to
treat only mild migraine attacks, and, similarly to narcotics, do not address
the non-pain symptoms of migraines such as nausea and vomiting.
Triptans are the family of drugs most commonly prescribed for the treatment of
migraine attacks. Triptans have demonstrated the ability to constrict blood
vessels and stimulate receptors in the brain associated with migraine attacks.
Although triptans can be effective in treating migraine symptoms, they are
often associated with significant side effects and other disadvantages that
include:
. the occurrence of cardiovascular related events, including chest
pain/discomfort, throat discomfort and warm/cold sensations;
. the potential for serious cardiovascular events, including death;
. difficulty in producing sustained pain relief with a single dose in a
majority of patients;
. the occurrence of nausea and dizziness during treatment; and
. the need for cardiovascular evaluations before initially prescribing
triptans to patients with cardiovascular disease risk factors.
Despite these shortcomings, in 1999, according to IMS Health's Retail and
Provider Perspective, or IMS, total triptan sales in the U.S. were
approximately $1.1 billion. Imitrex(R), marketed by Glaxo Wellcome, is the
dominant triptan product, with, according to IMS, total U.S. sales of
approximately $855 million in 1999. There are currently three triptan
formulations commercially available: oral, intranasal and injectable. Oral
triptans are often prescribed as a first-line treatment for migraine pain.
Intranasal triptans are often prescribed for patients requiring faster relief
than oral drugs can provide or for patients who cannot take oral medications.
For the most severe attacks, patients sometimes use an injectable form of a
triptan.
Because of the problems associated with triptans, narcotics and analgesics, we
believe an opportunity exists in all migraine therapeutic segments for products
designed to deliver an improved onset and duration of relief with reduced side
effects, especially those related to cardiovascular events.
MT 100
MT 100 is being developed as an oral first-line therapy for the treatment of
migraine pain and associated symptoms. Oral therapies are currently the most
prevalent form of migraine therapy. According to IMS, existing oral therapies
accounted for approximately $883 million in sales in the U.S. in 1999, of which
Imitrex's oral dosage form accounted for approximately $593 million.
MT 100 is a proprietary formulation that combines metoclopramide hydrochloride,
a commercially available agent that relieves nausea and enhances gastric
emptying, and naproxen sodium, a commercially available anti-inflammatory and
analgesic agent. MT 100 is designed to release a set
33
<PAGE>
amount of metoclopramide hydrochloride initially, followed by a set amount of
naproxen sodium. The initial release of metoclopramide is intended to
accelerate the absorption of naproxen and to reduce nausea. Results from our
pharmacokinetic study in normal volunteers indicated that peak naproxen blood
levels were approximately 15% higher and were obtained approximately 30 minutes
faster following administration of MT 100 than with naproxen sodium alone. We
believe MT 100 may enhance the speed, effectiveness and duration of migraine
symptom relief provided by each component alone, with fewer adverse side
effects than other migraine therapies.
MT 100 Clinical Trials
Generally, we must demonstrate the efficacy and safety of our product
candidates, including MT 100, before seeking marketing approval from the FDA.
To demonstrate efficacy in a combination product candidate like MT 100, which
combines two previously approved component products, we must demonstrate in
clinical trials that it is both superior to each of its individual components,
and more effective in treating symptoms of migraine when compared to a placebo.
Generally, the FDA requires two successful clinical trials to demonstrate that
the product candidate meets each of these standards for approval.
We have completed two Phase 2 clinical trials and one Phase 3 clinical trial
and have three Phase 3 clinical trials ongoing for MT 100. To date, more than
2,500 patients or volunteers have participated in Phase 2 and Phase 3 clinical
trials with MT 100, more than 1,500 of whom have received some form of MT 100.
In August 1998, we completed a randomized, double-blind, placebo controlled,
Phase 2 clinical trial designed to evaluate different dose combinations of
metoclopramide hydrochloride and naproxen sodium in the treatment of migraine.
The trial involved 514 patients at 34 centers in the U.S. Patients treated in
this study remained in the physician's office for two hours after dosing and
then were discharged to record any change in symptoms for the remainder of the
24-hour study period. The results of the study indicated that the optimal dose
of MT 100 would include 16mg of metoclopramide hydrochloride and 500mg of
naproxen sodium. While the study was not designed to demonstrate differences
between the MT 100 combination and its components, preliminary evidence
suggested that MT 100 might represent an improvement over its components on a
sustained response basis.
Sustained response is a clinical measure used to capture both speed of onset
and duration of migraine pain relief. Sustained response is defined as:
. the reduction of moderate or severe pain at baseline to mild or no
pain without the use of rescue medication at two hours; and
. no return to either moderate or severe pain, or the use of rescue
medicine, over the next 22 hours.
In September 1998, we completed a randomized, double-blind, placebo controlled
Phase 2 clinical trial involving two different doses of MT 100. The 181 patient
trial was conducted at 19 centers in Germany and was similar in design to the
Phase 2 clinical trial conducted in the United States. While the study was not
designed to distinguish efficacy differences between doses, a dose-response
relationship was observed both on measures of acute relief and sustained
response.
In December 1999, we completed a 1,064 patient randomized, double-blind,
single-dose, Phase 3 clinical trial designed to compare the safety and efficacy
of MT 100 with its individual components, naproxen sodium and metoclopramide
hydrochloride, for the treatment of migraine. In contrast to the design of our
Phase 2 clinical trials in which patients were treated at the physician's
office, eligible patients in this Phase 3 clinical trial were provided a sealed
packet of study medication and a diary card. At the time of their next migraine
attack, patients called their physician and were instructed to take the study
medication if their headache pain was moderate or severe, and to record
migraine symptoms for 24 hours after ingesting the dose.
34
<PAGE>
The primary efficacy endpoint for this Phase 3 trial was sustained response.
Using the statistical analysis methodology specified in the trial protocol, MT
100 demonstrated superiority over only one of its two components. However,
statistical significance in favor of MT 100 over both components was
demonstrated when the results of this trial were analyzed using an ordered
logistic regression, which was a refinement of the primary analysis method of
logistic regression that was originally specified in the protocol.
The ordered logistic regression analysis of this trial indicated that the
percentage of patients that achieved the primary endpoint of sustained response
using MT 100 was a statistically significant 19% greater than the percentage of
patients who achieved sustained response using naproxen sodium, and a
statistically significant 81% greater than the percentage of those using
metoclopramide hydrochloride. In addition, MT 100 demonstrated a statistically
significant benefit over its components in five out of ten secondary endpoints,
including sustained pain free for 24 hours. The secondary endpoints that did
not achieve statistical significance included relief of nausea, sensitivity to
light and sensitivity to sound.
Based on our discussions with the FDA, we have designed our planned second
Phase 3 trial comparing MT 100 to its components using ordered logistic
regression as the primary analysis method. Based on those discussions, we
believe that, if the results of this second trial are also statistically
significant based on an ordered logistic regression methodology, the FDA will
accept the initial trial results, and we will have satisfied the FDA
requirement for the successful completion of two Phase 3 clinical trials
comparing MT 100 with its components.
In the Phase 3 trial, there was no statistically significant difference in the
occurrence of adverse events for MT 100 relative to naproxen sodium or
metoclopramide hydrochloride. No single adverse event occurred from MT 100 in
more than 2.4% of the patient population. Adverse events included drowsiness,
diarrhea, abdominal pain, dizziness, infection and nervousness.
In October 1999, we initiated a Phase 3 open label, long-term safety study for
MT 100. Migraine patients in this trial receive a supply of MT 100 for use in
the treatment of any migraine attack that occurs. Adverse events are recorded
by each patient. Patients are evaluated every three months and may be treated
for up to 12 months. To date, over 1,000 patients have been recruited into this
trial, with approximately 800 having completed three months of treatment. The
trial will continue until 300 patients have been treated for at least six
months and 100 patients have been treated for at least 12 months.
We are currently conducting a Phase 3 multiple dosing study. In this trial,
patients with migraine randomly receive either placebo or a single tablet of MT
100. Those patients who continue to have moderate or severe headache pain at
two hours randomly receive a second tablet of either a placebo or MT 100. In
order to determine if multiple doses of MT 100 have beneficial effects, we will
compare the response rate of patients receiving two doses of MT 100 over four
hours with the response rate of patients receiving just one dose of MT 100
initially.
We are also conducting a Phase 3 pilot study of MT 100 as compared to Imitrex
and placebo. Patients with migraine randomly receive a single tablet of MT 100,
two tablets of MT 100, a 50mg tablet of Imitrex or placebo. The sustained
response endpoint as well as secondary endpoints will be observed for each
treatment option and compared against each other.
In addition to the ongoing or completed trials described above, we intend to
complete at least the following clinical trials prior to submitting an NDA for
MT 100:
. one Phase 3 clinical trial comparing MT 100 with each of its
components; and
. two Phase 3 clinical trials comparing MT 100 to placebo.
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Based on discussions with the FDA after completion of our initial Phase 3 trial
comparing MT 100 with its components, we believe that, in addition to showing a
statistically significant increase in patients achieving sustained response in
all of our trials, our planned Phase 3 placebo controlled trials must also
demonstrate that MT 100 is superior to placebo in three additional endpoints to
obtain FDA approval for the entire label that we intend to seek in migraine.
These additional endpoints are relief of nausea, sensitivity to light and
sensitivity to sound.
Even though the individual components of MT 100 have been available for many
years, we believe that we will also be required to complete toxicology studies
of MT 100, and we may be required to complete long-term carcinogenicity studies
of MT 100. The carcinogenicity studies, which are conducted with laboratory
animals, typically take approximately two and a half years to complete. Because
of the long history of usage of the individual components of MT 100, we
believe, that if these studies are required, they will be permitted to be
completed on a post-marketing basis. However, if the FDA requires long-term
carcinogenicity studies to be completed prior to approval of the NDA, it could
delay our planned commercialization of MT 100 in the U.S. for at least a year.
MT 300
MT 300 is being developed to provide long-lasting pain relief for patients
needing a convenient injectable therapy for severe migraine, with a reduced
side effect profile compared to existing injectable products. Currently,
patients often use an injectable form of triptans or other drugs such as
dihydroergotamine mesylate, or DHE, to alleviate the symptoms of the most
severe migraine attacks quickly and effectively. However, many patients are
unable to tolerate the injections, especially those sensitive to the vascular
side effects associated with injectable Imitrex. Nevertheless, according to
IMS, injectable migraine therapeutics represented approximately $188 million in
1999 U.S. sales.
MT 300 is a proprietary formulation of injectable DHE that we intend to package
in an easy-to-use, sterile, pre-filled syringe that can be administered alone
or with an auto-injector. Compared to the existing injectable DHE products, MT
300 appears to possess improved solubility and stability at room temperature.
We believe that these characteristics will allow us to supply patients in our
future clinical trials with MT 300 in pre-filled syringes, rather than the
difficult snap-ring glass ampoules that are used to supply injectable DHE.
Injectable DHE is currently approved for use in the treatment of migraine and
cluster headache episodes. Based upon recently published clinical trial
results, injectable DHE has been shown to provide comparable efficacy to
injectable Imitrex three hours after administration. Importantly, only 18% of
injectable DHE patients experienced headache recurrence within 24 hours as
compared to 45% of injectable Imitrex patients. In addition, injectable
Imitrex's acute vascular side effects were reported by 23% of the patients
receiving injectable Imitrex, but by only 2% of the patients receiving
injectable DHE.
MT 300 Clinical Trials
In November 1998, we completed a placebo controlled, dose-response Phase 2
clinical trial of MT 300. In this trial, eligible patients with an acute
migraine attack were treated in the physician's office, monitored for two hours
after the dose, and then discharged to record their symptoms on a diary card
for the remainder of the 24-hour study period. Participants in the study were
divided into four dosing groups, with three receiving varying doses of MT 300
and one receiving placebo. A total of 291 patients received a single
subcutaneous dose of MT 300 or placebo in this study. In this clinical trial,
MT 300 at the highest dosing level demonstrated a statistically significant
improvement in the percentage of patients achieving four-hour sustained
response when compared to placebo. MT 300 was well tolerated and no serious
adverse events were reported. The most commonly reported side effect
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was nausea, reported by 4% of patients in the high dose group. The four-hour
sustained response rate used in this trial differs from the sustained response
measure used thus far in our clinical trials of MT 100 and MT 400, in that the
four-hour rate measures pain reduction after four hours, without return to
moderate or severe pain or rescue over the next 20 hours.
We plan to initiate a 300 patient placebo controlled Phase 3 clinical trial of
a single, subcutaneous dose of MT 300 in patients with moderate to severe
migraine by the end of 2000. It is likely that we will be required to conduct
an additional Phase 3 trial prior to submitting an NDA for MT 300.
MT 500
MT 500 is being developed as an orally administered drug for the prophylactic
treatment of migraine pain. The prophylaxis market is currently composed of
drugs such as anticonvulsants, beta-blockers and anti-depressants, which were
developed primarily for uses outside of migraine. Many have side effects
including fatigue, sexual dysfunction, weight gain, insomnia and liver
toxicity. Studies of the migraine patient population indicate that
approximately 25% of migraine patients experience four or more migraine attacks
per month. We believe these patients may benefit from the prophylactic
treatment of their migraine attacks.
In September 1999, utilizing our license back option model, we obtained an
exclusive worldwide license for MT 500, a novel serotonin (5-HT\\2\\B) receptor
antagonist discovered by Roche. We believe that MT 500 is the first orally
administered, highly selective 5-HT\\2\\B receptor antagonist being developed
specifically for the prophylactic treatment of migraine in patients suffering
frequent and debilitating attacks. At the onset of a migraine attack, 5-
HT\\2\\B receptors are believed to be activated by a mobilization of serotonin,
provoking inflammation of the nerves in cerebral blood vessels and leading
ultimately to the pain and associated symptoms of migraine. By selectively
blocking the 5-HT\\2\\B receptor, MT 500 may prevent or reduce the occurrence
of migraine without producing the unwanted side effects associated with
currently used prophylactic migraine therapies.
MT 500 Clinical Trials
MT 500 has been evaluated in five Phase 1 clinical trials and one Phase 2
clinical trial conducted by Roche. The Phase 2 trial was for an indication
unrelated to migraine. In all studies, MT 500 was generally well tolerated.
There were no serious adverse events reported, and side effects were generally
mild or moderate.
We intend to initiate a Phase 1 tolerance study of MT 500 in the third quarter
of 2000. In addition, at the conclusion of longer term toxicology studies
currently underway, we intend to initiate a placebo controlled Phase 2 proof-
of-concept study in migraine prophylaxis in the first half of 2001.
MT 400
We are developing MT 400 as a co-active migraine therapy, which combines the
activity of a commercially approved triptan drug with that of a commercially
approved long-acting, non-steroidal, anti-inflammatory drug. We believe that
the effective treatment of migraine requires targeted, specific and
complementary co-active therapy to achieve maximum therapeutic benefit with the
fewest side effects. We believe that MT 400 will prove to offer a faster onset
of action and a longer duration of migraine symptom relief than monotherapy
with either agent. In addition, since lower doses of the triptan components
could be used in certain MT 400 formulations relative to triptan monotherapy,
we believe that the potential risks of triptan-related side effects may also be
reduced with MT 400.
MT 400 represents a commercially attractive opportunity to create multiple
products based on different combinations of triptans and long acting, non-
steroidal, anti-inflammatory drugs. We believe these MT 400 products will be
attractive to pharmaceutical companies due to their potential to expand the
reach
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of the existing triptan brands to patients with less severe migraine, offer
maximum oral therapy for severe attacks, provide an effective route for the
over-the-counter transfer of the triptan brand and potentially expand the
proprietary life of most triptan brands.
MT 400 Clinical Trials
In 1998, we completed an open label pilot study for MT 400. In this study, MT
400 had a 74% higher sustained response rate and a substantially lower relapse
rate compared to triptan monotherapy. Based on these positive results, we plan
to initiate double-blind Phase 2 clinical trials of MT 400 during 2000. In
order to commercialize MT 400, we will need to license the rights to a triptan.
Product In-Licensing
In order to continue to expand our product pipeline, we intend to complement
our internal product innovations by in-licensing additional product candidates.
Our in-licensing strategy to obtain new product candidates will include using
our license back option model, which we believe provides us with improved
access to promising compounds. Specifically, the major elements of our license
back option model are:
. We in-license a product candidate at the late preclinical or Phase 1
development stage.
. We grant the licensor an option to license back the product candidate at
various stages of development.
. We assume all development and funding responsibility.
. If the licensor exercises its option to license back the product
candidate, we receive certain milestone payments and a royalty on sales
of the product candidate.
. If the licensor foregoes its option, we have the right to license the
product candidate to another third party or commercialize the product
ourselves, with sublicense royalties in both cases being paid to the
original licensor.
. All financial terms are set when the original license agreement is
signed.
We believe our license back option model offers advantages to both us and the
licensor and will be an effective tool in expanding our product portfolio
successfully. The advantages of this model for the licensor include:
. realization of value from product candidates whose development would
otherwise be delayed or never undertaken;
. delayed commitment of resources and capital until the product
candidate's technical risk and commercial potential are better defined;
and
. utilization of our product development and regulatory expertise.
We believe the advantages of our license back option model for us include:
. improving our access to attractive product candidates;
. limiting our financial exposure to product candidate development
expenses due to low upfront costs compared to traditional in-licensing
structures; and
. in-licensing product candidates with substantial preclinical development
risk removed.
We used our license back option model to acquire the migraine prophylactic
agent, MT 500, from Roche in September 1999. In exchange for an upfront
payment, Roche granted us a royalty-bearing,
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exclusive, worldwide license to develop and commercialize MT 500. Under the
terms of the agreement, Roche can exercise its right to license back MT 500
following completion of either the Phase 2 or Phase 3 clinical trials in
exchange for set milestone payments. If Roche does not exercise either of its
options to license back MT 500, we have the right to sublicense to a third
party the commercialization rights for MT 500 or to commercialize the product
ourselves in exchange for fixed royalties payable to Roche. If we sublicense
MT 500, we are obligated to pay Roche a set percentage of any milestone
payments and royalties we receive from the third party sublicensees.
Sales and Marketing
We currently have no sales or distribution capabilities. We intend to
commercialize our products through other pharmaceutical companies in exchange
for upfront and milestone payments, proceeds from the manufacturing of drug
substance and royalties. In the future, we may retain the right to co-promote
our products.
Manufacturing
We currently have no manufacturing capability and we currently do not intend to
establish internal manufacturing capabilities. To date, we have entered into
arrangements with third party manufacturers for the supply of formulated and
packaged MT 100 clinical trial materials. Use of third party manufacturing
enables us to focus on our clinical development strengths, minimize fixed costs
and capital expenditures and gain access to advanced manufacturing process
capabilities and expertise.
We believe our current supply of compounds and product candidates, together
with our current suppliers' capacity, should be sufficient to complete both our
ongoing and planned clinical trials.
We intend to enter into agreements with third party manufacturers for the
commercial scale manufacturing of our products. We are negotiating a contract
with the manufacturer of our clinical trial materials to manufacture MT 100
commercially.
Competition
Not all migraine attacks are of the same severity. Consequently, a variety of
oral, injectable and intranasal therapies are used to treat different types of
migraine attacks. Attacks are often treated initially with simple over-the-
counter analgesics, particularly if the patient is unable to determine if the
attack is a migraine or some other type of headache. These analgesics include
Excedrin Migraine(R), which is approved for the pain associated with migraine.
If over-the-counter remedies are unsuccessful, patients often turn to more
potent prescription drugs, including triptans. According to IMS, in 1999, total
triptan sales in the U.S. were approximately $1.1 billion. Imitrex, marketed by
Glaxo Wellcome, is the dominant triptan product, with total U.S. sales of
approximately $855 million in 1999, according to IMS.
Narcotics such as codeine and drugs containing analgesic/narcotic combinations,
along with other non-narcotic pain medications, are also used for the treatment
of migraine. If approved, our migraine product candidates will most likely
compete with one or more of the existing migraine therapeutics, as well as any
therapies developed in the future.
The pharmaceutical and biopharmaceutical industries are intensely competitive
and are characterized by rapid technological progress. Certain pharmaceutical
and biopharmaceutical companies and academic and research organizations
currently engage in, or have engaged in, efforts related to the discovery and
development of new medicines for the treatment of migraine symptoms.
Significant levels of research in chemistry and biotechnology occur in
universities and other nonprofit research institutions. These entities have
become increasingly active in seeking patent protection and licensing revenues
for their research results. They also compete with us in recruiting skilled
scientific talent.
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Our ability to compete successfully will be based on our ability to create and
maintain scientifically advanced technology, develop proprietary products,
attract and retain scientific personnel, obtain patent or other protection for
our products, obtain required regulatory approvals and manufacture and
successfully market our products either alone or through outside parties. Some
of our competitors have substantially greater financial, research and
development, manufacturing, marketing and human resources and greater
experience in product discovery, development, clinical trial management, FDA
regulatory review, manufacturing and marketing than we do.
Patents and Proprietary Information
We intend to actively seek, when appropriate, protection for our products and
proprietary technology by means of U.S. and foreign patents, trademarks and
contractual arrangements. In addition, we plan to rely upon trade secrets and
contractual agreements to protect certain of our proprietary technology and
products.
We own or have exclusive rights to four issued U.S. patents, two allowed U.S.
patent applications, three pending U.S. patent applications and one pending
U.S. provisional application. In addition, we presently have pending foreign
patent applications or issued foreign patents relating to MT 100, MT 400 and MT
500. Applications have been filed under the Patent Cooperation Treaty, or PCT,
and are in international phase which relate to MT 300 and MT 400. There can be
no assurance that our patent applications will issue as patents or, with
respect to our issued patents, that they will provide us with significant
protection. The following provides a general description of our patent
portfolio and is not intended to represent an assessment of claim limitations
or claim scope.
MT 100
We have one allowed U.S. application with claims to dosage forms that can be
used in administering metoclopramide and a long acting non-steroidal anti-
inflammatory drug to a patient with migraine headache. There are also claims to
a method of manufacturing a specific type of dosage form. We have one pending
U.S. patent application with claims directed to various pharmaceutical
compositions and treatment methods that can be used for migraine patients. In
addition, there are applications relating to MT 100 that are pending in
Australia, Canada, Europe and Japan.
MT 300
With respect to MT 300, we presently have one pending U.S. application and one
pending international application filed under the PCT. Both of these have
claims directed to liquid pharmaceutical compositions for treating migraine
which contain concentrated dihydroergotamine. There are also claims to treating
patients for migraine using these compositions and to therapeutic packages
which include the compositions.
MT 500
Through our license agreement with Roche, we have exclusive worldwide rights to
patents and patent applications relating to MT 500. In the U.S., we have
exclusive rights to three issued patents. These have claims directed to certain
chemical compounds and to various treatment methods involving the use of the
compounds. Related non-U.S. applications are pending or have issued in numerous
countries including Australia, Canada, Europe and Japan.
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MT 400
We have one issued U.S. patent with claims directed to methods and compositions
relating to the use of the combination of a 5-HT receptor agonist and an
analgesic in treating patients with migraine. We also have an allowed U.S.
application with claims to methods, compositions and therapeutic packages
involving the use of certain non-steroidal anti-inflammatory drugs and 5-HT
receptor agonists. Outside of the U.S., we have applications relating to MT 400
pending in Australia, Canada, Europe and Japan. In addition there is one
pending U.S. application and one pending international application with claims
to dosage forms and methods of treatment involving a 5-HT receptor agonist and
a particular subset of NSAIDs.
Other Intellectual Property
Much of the know-how of importance to us is dependent upon the knowledge,
experience and skills of key scientific and technical personnel. To protect our
rights to proprietary know-how and technology, we require employees,
consultants and advisors to enter into confidentiality agreements which
prohibit the disclosure of confidential information to anyone outside of the
Company. There can be no assurance that these agreements will effectively
prevent disclosure of our confidential information. In the absence of effective
patent or other protection of intellectual property, our business may be
adversely affected by competitors who develop substantially equivalent or
superior technology or know-how.
We also have one international application filed under the PCT which is
entitled "Prophylaxis and Treatment of Migraine Headaches with Thromboxane
Synthetase Inhibitors and/or Receptor Antagonists."
The patent and other intellectual property positions of pharmaceutical
companies are highly uncertain and involve complex legal and factual questions.
We cannot assure you that:
. our patent rights will provide us with proprietary protection or
competitive advantages against our competitors;
. our patent applications will not be challenged, invalidated or
circumvented;
. others will not independently develop technologies similar to ours or
duplicate our technologies; or
. the patents issued to or licensed by us will not be infringed or
challenged.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions and
in foreign countries impose substantial requirements on the clinical
development, manufacture and marketing of pharmaceutical product candidates.
These agencies and other federal, state and local entities regulate research
and development activities and the testing, manufacture, quality control,
safety, effectiveness, labeling, storage, record-keeping, approval and
promotion of our product candidates. All of our product candidates will require
regulatory approval before commercialization. In particular, therapeutic
product candidates for human use are subject to rigorous preclinical and
clinical testing and other requirements of the Federal Food, Drug, and Cosmetic
Act (FFDCA), implemented by the FDA, as well as similar statutory and
regulatory requirements of foreign countries. Obtaining these marketing
approvals and subsequently complying with ongoing statutory and regulatory
requirements is costly and time-consuming. Any failure by us or our
collaborators, licensors or licensees to obtain, or any delay in obtaining,
regulatory approvals or in complying with other requirements could adversely
affect the commercialization of product candidates then being developed by us
and our ability to receive product or royalty revenues.
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The steps required before a new drug product candidate may be distributed
commercially in the U.S. generally include:
. conducting appropriate preclinical laboratory evaluations of the
product candidate's chemistry, formulation and stability and
preclinical studies to assess the potential safety and efficacy of
the product candidate;
. submitting the results of these evaluations and tests to the FDA,
along with manufacturing information and analytical data, in an
investigational new drug application, or IND;
. initiating clinical trials under the IND after the resolution of any
safety or regulatory concerns of the FDA;
. obtaining approval of Institutional Review Boards, or IRBs, to
introduce the drug into humans in clinical studies;
. conducting adequate and well-controlled human clinical trials that
establish the safety and efficacy of the product candidate for the
intended use, typically in the following three sequential, or
slightly overlapping stages;
Phase 1: The product is initially introduced into human subjects
or patients and tested for safety, dose tolerance, absorption,
metabolism, distribution and excretion;
Phase 2: The product candidate is studied in patients to
identify possible adverse effects and safety risks, to determine
dosage tolerance and the optimal dosage, and to collect some
efficacy data;
Phase 3: The product candidate is studied in an expanded patient
population at multiple clinical study sites, to confirm efficacy
and safety at the optimized dose, by measuring a primary
endpoint established at the outset of the study;
. submitting the results of preclinical studies, and clinical trials as
well as chemistry, manufacturing and control information on the
product candidate to the FDA in an NDA; and
. obtaining FDA approval of the NDA prior to any commercial sale or
shipment of the product candidate.
This process can take a number of years and require substantial financial
resources. The results of preclinical studies and initial clinical trials are
not necessarily predictive of the results from large-scale clinical trials, and
clinical trials may be subject to additional costs, delays or modifications due
to a number of factors, including the difficulty in obtaining enough patients,
clinical investigators, product candidate supply, or financial support. The FDA
may also require testing and surveillance programs to monitor the effect of
approved product candidates that have been commercialized, and the agency has
the power to prevent or limit further marketing of a product candidate based on
the results of these post-marketing programs. Upon approval, a product
candidate may be marketed only in those dosage forms and for those indications
approved in the NDA.
In addition to obtaining FDA approval for each indication to be treated with
each product candidate, each domestic product candidate manufacturing
establishment must register with the FDA, list its product with the FDA, comply
with cGMP regulations and permit and pass manufacturing plant inspections by
the FDA. Moreover, the submission of applications for approval may require
additional time to complete manufacturing stability studies. Foreign
establishments manufacturing product for distribution in the U.S. also must
list their product candidates with the FDA and comply with cGMP regulations.
They are also subject to periodic inspection by the FDA or by local authorities
under agreement with the FDA.
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Any product candidates manufactured or distributed by us pursuant to FDA
approvals are subject to extensive continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the
product candidate. In addition to continued compliance with standard regulatory
requirements, the FDA may also require post-marketing testing and surveillance
to monitor the safety and efficacy of the marketed product. Adverse experiences
with the product candidate must be reported to the FDA. Product approvals may
be withdrawn if compliance with regulatory requirements is not maintained or if
problems concerning safety or efficacy of the product are discovered following
approval.
The FFDCA also mandates that products be manufactured consistent with cGMP
regulations. In complying with the FDA's regulations on cGMP regulations,
manufacturers must continue to spend time, money and effort in production,
record-keeping quality control, and auditing to ensure that the marketed
product meets applicable specifications and other requirements. The FDA
periodically inspects manufacturing facilities to ensure compliance with cGMP
regulations. Failure to comply subjects the manufacturer to possible FDA
action, such as warning letters, suspension of manufacturing, seizure of the
product, voluntary recall of a product or injunctive action, as well as
possible civil penalties. We currently rely on, and intend to continue to rely
on, third parties to manufacture our compounds and product candidates. These
third parties will be required to comply with cGMP regulations.
Even after the FDA approval has been obtained, further studies, including post-
marketing studies, may be required. Results of post-marketing studies may limit
or expand the further marketing of the products. If we propose any
modifications to a product, including changes in indication, manufacturing
process, manufacturing facility or labeling, a supplement to our NDA may be
required to be submitted to the FDA.
Products manufactured in the U.S. for distribution abroad will be subject to
FDA regulations regarding export, as well as to the requirements of the country
to which they are shipped. These latter requirements are likely to cover the
conduct of clinical trials, the submission of marketing applications, and all
aspects of manufacturing and marketing. Such requirements can vary
significantly from country to country.
We are also subject to various federal, state and local laws, rules,
regulations and policies relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use of and
disposal of hazardous or potentially hazardous substances used in connection
with our research work. Although we believe that our safety procedures for
handling and disposing of such materials comply with current federal, state and
local laws, rules, regulations and policies, the risk of accidental injury or
contamination from these materials cannot be entirely eliminated.
The extent of government regulation which might result from future legislation
or administrative action cannot be accurately predicted. In this regard,
although the Food and Drug Administration Modernization Act of 1997 modified
and created requirements and standards under the FFDCA Act with the intent of
facilitating product development and marketing, the FDA is still in the process
of developing regulations implementing the Food and Drug Administration
Modernization Act of 1997. Consequently, the actual effect of these
developments on our own business is uncertain and unpredictable.
Legal Proceedings
We are not a party to any material legal proceeding.
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Employees
As of December 31, 1999, we had a total of 17 full-time employees. All 17
employees are based at our headquarters in Chapel Hill, North Carolina. Twelve
of the 17 employees hold advanced degrees, including five Pharm.D. or Ph.D.
degrees.
Facilities
Our leased corporate facilities, located in Chapel Hill, North Carolina,
currently occupy approximately 6,000 square feet. This lease expires in
February of 2003. We believe that our existing facility is adequate for our
current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms.
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MANAGEMENT
Set forth below is certain information regarding our executive officers,
directors and key employees, including their age as of March 31, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
John R. Plachetka, Pharm.D. .. 46 President, Chief Executive Officer,
Chief Scientist and Director
Matthew E. Czajkowski......... 50 Chief Financial Officer, Senior Vice
President, Finance and Administration
Andrew L. Finn, Pharm.D. ..... 50 Executive Vice President, Product
Development
Kristina M. Adomonis.......... 45 Senior Vice President, Business
Development
Mark B. Zimmerman, Ph.D. ..... 48 Senior Vice President, Scientific
Affairs and Acquisitions
John E. Barnhardt............. 50 Vice President, Finance and
Administration
Donna L. Gilbert, Ph.D. ...... 40 Vice President, Pharmaceutical
Development
Dennis L. McNamara............ 34 Vice President, Business Development
Jacques F. Rejeange (/1/)..... 58 Director, Chairman of the Board of
Directors
Joseph J. Ruvane, Jr. ........ 74 Director
Bruce A. Tomason (/1/)........ 52 Director
Peter J. Wise, M.D.(/1/)...... 65 Director
</TABLE>
-------------------------------
(/1/Member)of the Compensation Committee.
John R. Plachetka, Pharm.D., is a co-founder and President, Chief Executive
Officer, Chief Scientist and a member of the Board of Directors of POZEN. Prior
to founding POZEN, Dr. Plachetka was Vice President of Development at Texas
Biotechnology Corporation from 1993 to 1995 and was President and Chief
Executive Officer of Clinical Research Foundation-America, a leading clinical
research organization, from 1990 to 1992. From 1981 to 1990, he was employed at
Glaxo, Inc. Dr. Plachetka received his B.S. in Pharmacy from the University of
Illinois College of Pharmacy and his Doctor of Pharmacy from the University of
Missouri-Kansas City.
Matthew E. Czajkowski joined POZEN in March 2000 as Chief Financial Officer and
Senior Vice President of Finance and Administration. Prior to joining POZEN,
Mr. Czajkowski was an investment banker. From 1997 through 1998, he was a
Managing Director of Mergers and Acquisitions at Societe Generale. From 1992 to
1997, he was a Managing Director in charge of Corporate Finance at Wheat First
Butcher Singer, Inc. From 1983 to 1991, he was employed with, and served as a
Vice President beginning in 1987 at Goldman, Sachs & Co. Mr. Czajkowski
received his B.A. from Harvard University and his M.B.A. from Harvard Business
School.
Andrew L. Finn, Pharm.D. joined POZEN in January 2000 as Executive Vice
President of Product Development. Prior to joining POZEN, Dr. Finn co-founded
enVision Sciences, a specialized clinical research and regulatory services
company, in 1996. From 1991 to 1996, he was Vice President of U.S. Clinical
Research and Biometrics for Solvay Pharmaceuticals. He joined Glaxo Inc. in
1981 as Assistant Director of Anti-Infective Development. Dr. Finn received his
B.S. in Pharmacy from the University of North Carolina, Chapel Hill and his
Doctor of Pharmacy from the University of Michigan.
Kristina M. Adomonis joined POZEN in June 1999 as Senior Vice President of
Business Development. Prior to joining POZEN, Ms. Adomonis was Vice President
of Global Business Development & Licensing, OTC at Novartis Consumer Health
from 1997 to 1999. From 1994 to 1997, she was Director of Business Development
in Glaxo Wellcome's U.S. operations. Prior to Glaxo, she served on the Canadian
Executive Committees of Burroughs Wellcome and Abbott Laboratories, where she
managed the Business Development Units of these two respective operations. She
joined the industry in
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1980 with F. Hoffman-La Roche Ltd. Ms. Adomonis received a B.S. in Chemistry
from Tufts University and an M.B.A. from McGill University.
Mark B. Zimmerman, Ph.D. joined POZEN in August 1997 and is Senior Vice
President of Scientific Affairs and Acquisitions. Prior to joining POZEN, Dr.
Zimmerman was International Director of Metabolic Diseases in Clinical
Pharmacology at Glaxo Wellcome from 1995 to 1997. Previously, he was Director
of Migraine Clinical Research at Glaxo. Dr. Zimmerman received his M.S. and
Ph.D. from the University of Pittsburgh.
John E. Barnhardt joined POZEN in March 1997 as Vice President of Finance and
Administration. Prior to joining POZEN, Mr. Barnhardt was Chief Financial
Officer and Principal Accounting Officer of Medco Research, Inc. from 1993 to
1996 and Microwave Laboratories, Inc. from 1988 to 1993. Mr. Barnhardt received
a B.S. from North Carolina State University, and while employed at Ernst &
Young LLP, received his CPA certification.
Donna L. Gilbert, Ph.D. joined POZEN in October 1998 as Director of
Pharmaceutical Development and was promoted to Vice President in 1999. Prior to
joining POZEN, Dr. Gilbert held various scientific positions at DuPont
Pharmaceuticals from 1993 to 1998 and Hoechst Marion Roussel, Inc. (formerly
Marion Laboratories, Inc. and Marion Merrell Dow, Inc.) from 1988 to 1993,
including Principal Research Scientist and Project Leader. Dr. Gilbert received
her M.S. and Ph.D. from the University of Utah.
Dennis L. McNamara joined POZEN in December 1998 as Vice President of Business
Development. Prior to joining POZEN, Mr. McNamara was at AlphaVax, Inc. from
1997 to 1998. From 1995 to 1996, he was at Sequana Therapeutics, Inc., a public
genomics company. Previously, he managed business development activities for
Apex Bioscience and held positions with Abbott Laboratories and Merck. From
1987 to 1990, he conducted receptor pharmacology research at the University of
North Carolina, Chapel Hill. Mr. McNamara received his A.B. from Duke
University and his M.B.A. from the University of Michigan.
Jacques F. Rejeange was elected to the Board of Directors of POZEN in April
1997 and as Chairman of the Board of Directors in December 1999. Mr. Rejeange
is currently President of Florham Consulting S.A. based in Areuse, Switzerland.
From 1991 to 1994, he was initially Chief Operating Officer and later President
and Chief Executive Officer of Sterling Winthrop, Inc. From 1989 to 1991, he
was President and Chief Executive Officer of Sandoz Pharmaceuticals Corporation
USA.
Joseph J. Ruvane, Jr. is a co-founder and serves as a member of the Board of
Directors of POZEN. Mr. Ruvane was President and Chief Executive Officer of
Glaxo Inc. from 1981 to 1988. He was Vice-Chairman of the Board of Directors of
Glaxo and a Director of Glaxo Holdings, plc.
Bruce A. Tomason was elected to the Board of Directors of POZEN in 1997 and is
currently providing corporate financial consulting services. From 1996 to 1998,
Mr. Tomason was President and Chief Executive Officer of One Call Medical,
Inc., a medical management company specializing in workers' compensation. From
1991 to 1995, he was President of Apollo Capital Corporation, a healthcare
investment banking and venture capital company. From 1984 to 1990, he was Vice
President of Evans Medical Inc. and Finance and Commercial Director of Evans
Healthcare Ltd., a privately owned biopharmaceutical company in Horsham,
England. He joined the pharmaceutical/healthcare industry in 1971 with Organon
Inc. where he was Manager of Corporate Development and General Manager of the
Nutritional Products Division. Mr. Tomason received an M.B.A. in Economics and
Finance from Columbia University.
Peter J. Wise, M.D. is a co-founder and serves as Senior Medical Affairs
Advisor and as a member of the Board of Directors of POZEN. Prior to founding
POZEN, Dr. Wise was President and Chief
46
<PAGE>
Operating Officer at Pharmaceutical Product Development, Inc. from 1993 to
1996. From 1979 to 1993, he was Senior Vice President of Medical Operations and
Chief Medical Officer at Glaxo Inc.
Audit Committee
We intend to establish an audit committee which will report to the Board of
Directors with regard to the selection of our independent auditors, the scope
of our annual audits, fees to be paid to the auditors, the performance of our
independent auditors, compliance with our accounting and financial policies,
and management's procedures and policies relative to the adequacy of our
internal accounting controls.
Compensation Committee
The compensation committee reviews and makes recommendations to the Board of
Directors regarding our executive compensation policies and programs and all
forms of compensation to be provided to our senior management. The compensation
committee also administers our stock option plan. The members of the
compensation committee are Jacques F. Rejeange, Bruce A. Tomason and Peter J.
Wise.
Executive Compensation
The following table summarizes the compensation paid to or earned during the
fiscal year ended December 31, 1999 by our chief executive officer and all of
our other executive officers whose salary and bonus exceeded $100,000. We refer
to these persons as the named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
1999 Annual
Compensation Shares
------------------ Underlying All Other
Name and Principal Position Salary($) Bonus($) Options(#) Compensation
- --------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
John R. Plachetka, Pharm.D. ...... $240,000 $60,000 -- --
Chief Executive Officer,
President and Chief Scientist
John E. Barnhardt................. $108,200 $21,640 25,000 --
Vice President, Finance and
Administration
Kristina M. Adomonis(/1/)......... $ 94,800 $18,960 75,000 --
Senior Vice President, Business
Development
</TABLE>
- -------------------------------
(/1/) Kristina M. Adomonis' employment began on June 15, 1999, and the table
above reflects only compensation paid to her since this date.
47
<PAGE>
1999 Option Grants
The following table contains certain information regarding stock option grants
during the twelve months ended December 31, 1999 by us to our named executive
officers.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Number of Percentage of Appreciation for
Securities Total Options Option Term Option Term(/2/)
Underlying Granted to -------------------------- ------------------
Options Employees in Exercise Expiration
Name Granted(#)(/1/) Fiscal Year Price ($/share) Date 5%($) 10%($)
- ---- --------------- ------------- --------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
John R. Plachetka,
Pharm.D................ -- -- -- -- -- --
John E. Barnhardt....... 25,000 6.4% $1.20 3/09 $ $
Kristina M. Adomonis.... 75,000 19.2% $1.20 6/09 $ $
</TABLE>
- -------------------------------
(/1/)These options were granted with an exercise price equal to the fair market
value of the common stock on the date of grant as determined by the Board
of Directors.
(/2/)The dollar amounts under these columns are the result of calculations at
rates set by the SEC and, therefore, are not intended to forecast possible
future appreciation, if any, in the price of the underlying common stock.
The potential realizable values are calculated by assuming an initial
public offering price of $ per share and assuming that the market
price appreciates from this price at the indicated rate for the entire
term of each option and that each option is exercised and sold on the last
day of its term at the appreciated price.
Option Exercises and Year-End Option Values
The following table provides information about the number of shares issued upon
option exercises by the named executive officers during the year ended December
31, 1999, and the value realized by the named executive officers. The table
also provides information about the number and value of options held by the
named executive officers at December 31, 1999. As our common stock is not
publicly traded, a readily ascertainable market value is not available.
Aggregated Option Exercises In Last Fiscal Year And
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-the-Money Options
Underlying Unexercised at Fiscal Year-
Shares Options at Fiscal Year-End(#) End($)(/1/)
Acquired Value --------------------------------- -------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- ----------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John R. Plachetka,
Pharm.D................ -- -- -- -- -- --
John E. Barnhardt....... -- -- 35,416 70,834 -- --
Kristina M. Adomonis.... -- -- -- 75,000 -- --
</TABLE>
- -------------------------------
(/1/)Based on the difference between the option exercise price and an assumed
initial public offering price of $ per share of common stock.
48
<PAGE>
Stock Option and Other Compensation Plans
We adopted our stock option plan in November 1996. We authorized a total of
1,190,000 shares of our common stock for issuance under our stock option plan.
At March 31, 2000, options to purchase 1,029,583 shares of common stock at a
weighted average exercise price of $1.23 per share were outstanding and options
convertible into 117,045 shares of common stock remain available for future
grant. Options to purchase an aggregate of 43,372 shares of common stock have
been exercised under our stock option plan.
Our stock option plan provides for grants of stock options to our employees and
directors and to our consultants and advisors who perform valuable services for
us. Our stock option plan is intended to further our growth and success by
enabling our employees, directors, consultants and advisors to acquire shares
of our common stock, thereby increasing their personal interest in our growth
and success.
Our stock option plan may be administered by our Board of Directors or a
committee appointed by our Board of Directors. In accordance with the
provisions of our stock option plan, the Board of Directors has the authority
to determine the persons to whom stock options will be granted, the number of
shares to be covered by each stock option, and the exercise price per share.
The Board of Directors also has the authority to prescribe, amend and rescind
rules and regulations relating to our stock option plan, to determine the
conditions that must be satisfied in order for a stock option to vest and
become exercisable, to accelerate the vesting or exercise date of any stock
option, and to interpret our stock option plan or any agreement entered into
with respect to a stock option under the plan.
The exercise price of options granted under the plan is determined by our Board
of Directors; however, the exercise price of incentive stock options granted
under the plan must be equal to at least the fair market value of common stock
on the date of grant (or 110% of the fair market value if the grant is made to
a 10% or more stockholder). Other restrictions on the terms applicable to
incentive stock options are imposed under the plan to ensure compliance with
the requirements for incentive stock options under Section 422 of the Internal
Revenue Code.
The exercise price for shares of our common stock subject to an option under
our stock plan may, at the discretion of the Board of Directors or the
committee, be paid in cash, by check or with cash equivalents.
In the event that:
. we merge with or consolidate into another corporation, which results in
our stockholders owning less than 50% of the voting power of the voting
securities of the surviving corporation, or
. we sell, lease or otherwise dispose of all or substantially all of our
assets,
then any unvested options become fully vested as of a date prior to the merger,
consolidation, sale, lease or other disposition of assets. Any option that
becomes vested and exercisable solely because of this provision is conditioned
upon the consummation of the transaction that gave rise to the accelerated
vesting. Our Board of Directors may, in its discretion, terminate any
unexercised options that become vested and exercisable solely because of this
provision.
Our Board of Directors may suspend, amend or terminate our stock option plan,
subject to any required approval by our stockholders.
401(k) Profit Sharing Plan
We maintain a 401(k) Profit Sharing Plan which is intended to be a tax-
qualified defined contribution plan under Section 401(k) of the Code. In
general, all of our employees are eligible to participate. The 401(k) Plan
includes a salary deferral arrangement pursuant to which participants may
contribute,
49
<PAGE>
subject to certain Code limitations, a maximum of 15% of their salary on a pre-
tax basis, up to a maximum of $10,000. We do not currently make any
contributions to the Plan. Distributions from the 401(k) Plan may be made in
the form of a lump-sum cash payment or in installment payments.
Other Employment Arrangements
Our principal employees, including executive officers, are required to sign an
agreement restricting solicitation of customers and employees following
employment with us and providing for ownership and assignment of intellectual
property rights to us.
Under an executive employment agreement dated April 1, 1999, we agreed to
employ John R. Plachetka as our Chief Executive Officer for three years at an
annual base salary of $240,000, which is subject to performance and merit based
increases. The agreement automatically renews for successive one year terms
thereafter, unless either party terminates the agreement.
On January 1, 2000, we hired Andrew L. Finn as our Executive Vice President,
Product Development. In connection with his employment, we granted him options
to purchase 100,000 shares of common stock at an exercise price of $2.00 per
share. These options vest in equal installments over a three-year period.
On March 20, 2000, we hired Matthew E. Czajkowski as our Senior Vice President
and Chief Financial Officer. In connection with his employment, we granted him
options to purchase 110,000 shares of common stock at an exercise price of
$2.72 per share. These options vest in equal installments over a three-year
period.
Limitation of Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits the personal liability of directors for
breach of fiduciary duty to the maximum extent permitted by the Delaware
General Corporation Law. Our certificate of incorporation provides that no
director will have personal liability to us or to our stockholders for monetary
damages for breach of fiduciary duty or other duty as a director. However,
these provisions do not eliminate or limit the liability of any of our
directors:
. for any breach of their duty of loyalty to us or our stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for voting or assenting to unlawful payments of dividends or other
distributions; or
. for any transaction from which the director derived an improper
personal benefit.
Any amendment to or repeal of these provisions will not eliminate or reduce the
effect of these provisions in respect of any act or failure to act, or any
cause of action, suit or claim that would accrue or arise prior to any
amendment or repeal or adoption of an inconsistent provision. If the Delaware
General Corporation Law is subsequently amended to provide for further
limitations on the personal liability of directors of corporations, then the
personal liability of our directors will be further limited to the greatest
extent permitted by the Delaware General Corporation Law.
Our certificate of incorporation provides that we will indemnify our directors
and executive officers and may indemnify our other corporate agents to the
fullest extent permitted by law. We believe that indemnification under our
certificate of incorporation covers at least negligence and gross negligence on
the part of indemnified parties.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 2000, as part of our sale of 2,589,927 shares of our series E
convertible preferred stock at a price of $6.95 per share:
. We sold an aggregate of 708,633 shares of our series E convertible
preferred stock to Canaan Equity II L.P., Canaan Equity II L.P. (QP) and
Canaan Equity II Entrepreneurs LLC, which own in the aggregate
approximately 5.3% of our outstanding capital stock before this
offering. The general partner of each of these entities is Canaan Equity
Partners II LLC. These entities acquired these shares on the same terms
as other purchasers in this transaction.
. We sold 35,971 shares of our series E convertible preferred stock to
Matthew E. Czajkowski, our Senior Vice President and Chief Financial
Officer. Mr. Czajkowski acquired these shares on the same terms as the
other purchasers in this transaction.
In December 1996 and December 1997, respectively, as part of our sale of
2,105,931 shares of our series A convertible preferred stock at a price of
$3.15 per share and 1,139,377 shares of our series B convertible preferred
stock at a price of $4.00 per share, we sold an aggregate of 284,690 shares of
series A convertible preferred stock and series B convertible preferred stock
to Florham Holdings Ltd., an affiliate of Jacques F. Rejeange, one of our
directors. These shares were purchased on the same terms as the other
purchasers in this transaction.
On May 25, 1997 and July 28, 1997, respectively, we granted options to purchase
20,000 shares of common stock at an exercise price of $0.25 per share to each
of Jacques F. Rejeange and Bruce A. Tomason, in consideration for their
services as directors. On December 31, 1999, we granted options to purchase an
additional 20,000 shares of common stock at an exercise price of $2.00 per
share to each of Jacques F. Rejeange and Bruce A. Tomason, in consideration of
their continued services as directors.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 31, 2000, and as adjusted
to reflect the sale of shares of common stock in this offering, by:
. each person, or group of affiliated persons, who is known by us to
beneficially own more than 5% of our common stock;
. each of our directors;
. each of our named executive officers; and
. all of our directors and current executive officers as a group.
Except as otherwise noted, the persons or entities in this table have sole
voting and investing power with respect to all the shares of common stock
beneficially owned by them, subject to community property laws, where
applicable.
The "Number of Shares Beneficially Owned" column is based on an assumed
13,345,401 shares of common stock outstanding before the offering, and
shares of common stock outstanding after the offering. For purposes of the
table below, we deem shares of common stock subject to options that are
currently exercisable or exercisable within 60 days of March 31, 2000, to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of the person but we do not
treat them as outstanding for the purpose of computing the percentage ownership
of any other person.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Owned
Number of Shares -----------------
Beneficially Before After
Name of Beneficial Owner(/1/) Owned(/2/) Offering Offering
- ----------------------------- ---------------- -------- --------
<S> <C> <C> <C> <C>
Canaan Equity II L.P................... 708,633(/3/) 5.3%
105 Rowayton Avenue
Rowayton, CT 06853
MEDGROWTH S.A. ........................ 2,377,083(/4/) 17.8%
Bellevue Asset Management AG
Grafenauweg 4
CH-6301 Zug
Switzerland
John R. Plachetka...................... 2,887,700(/5/) 21.6%
John E. Barnhardt...................... 62,500(/6/) *
Matthew E. Czajkowski.................. 35,971 *
Andrew L. Finn......................... 5,000(/7/) *
Joseph J. Ruvane, Jr. ................. 468,200 3.5%
Peter J. Wise.......................... 429,100 3.2%
Jacques F. Rejeange.................... 304,690(/8/) 2.3%
All current directors and executive
officers
as a group (8 persons)................ 4,130,661(/9/) 31%
</TABLE>
- -------------------------------
* Less than one percent.
(/1/)Unless otherwise set forth herein, the street address of the named
beneficial owner is c/o POZEN Inc., Suite 240, 6330 Quadrangle Drive,
Chapel Hill, North Carolina 27514.
(/2/)For purposes of calculating the percentage beneficially owned, the number
of shares of common stock deemed outstanding prior to the offering
includes (i) 13,345,401 shares outstanding as of March 31, 2000, and (ii)
shares issuable by the Company pursuant to options held by the respective
person or group which may be exercised within 60 days following
52
<PAGE>
March 31, 2000 ("Presently Exercisable Options"). The number of shares of
common stock deemed outstanding after this offering includes an additional
shares that are being offered for sale by us in this offering.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially owned
by any person or group who has or shares voting and investment power with
respect to such shares. Presently Exercisable Options are deemed to be
outstanding and to be beneficially owned by the person or group holding such
options for the purpose of computing the percentage ownership of such person
or group but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person or group.
(/3/)Includes shares owned by Canaan Equity II Entrepreneurs LLC and Canaan
Equity II L.P. (QP), affiliates of Canaan Equity II L.P.
(/4/)Includes 200,000 shares subject to warrants that are currently
exercisable owned by BB Medtech AG, an affiliate of MEDGROWTH S.A.
(/5/)Consists of 2,887,700 shares owned by Silver Hill Investments, LLC, which
is 50% owned by the John R. Plachetka Irrevocable Trust, 40% owned by
John R. Plachetka and 10% owned by his wife, Clare Plachetka. John R.
Plachetka may be deemed a beneficial owner of these shares.
(/6/)Consists of 62,500 shares issuable pursuant to options exercisable within
60 days.
(/7/)Consists of 5,000 shares issuable pursuant to options exercisable within
60 days.
(/8/)Includes 284,690 shares owned by Florham Holdings Ltd. Mr. Rejeange is
president of Florham Consulting SA, an affiliated entity of Florham
Holdings Ltd. and may be deemed to be a beneficial owner of these shares.
Mr. Rejeange disclaims beneficial ownership. Also includes 20,000 shares
issuable pursuant to options exercisable within 60 days.
(/9/)Includes 25,000 shares issuable pursuant to options exercisable within 60
days.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, our capital stock will be as described
below.
Our Authorized Capital Stock
. 90,000,000 shares of common stock, par value $0.001 per share
. 10,000,000 shares of preferred stock, par value $0.001 per share
. immediately after the sale of the shares of common stock in this
offering, we will have shares of common stock outstanding and no
shares of preferred stock outstanding
Common Stock
Voting:
. one vote for each share held of record on all matters submitted to a
vote of stockholders
. no cumulative voting rights
. election of directors by plurality of votes cast; removal of
directors (only for cause) by 75% of all eligible votes
. all other matters by majority of votes cast
Dividends:
. subject to preferential dividend rights of outstanding shares of
preferred stock, if any, common stockholders are entitled to receive
ratably declared dividends
. our Board of Directors may only declare dividends out of legally
available funds
Additional Rights:
. subject to the preferential liquidation rights of outstanding shares
of preferred stock, if any, common stockholders are entitled to
receive ratably net assets, available after the payment of all debts
and liabilities, upon our liquidation, dissolution or winding up
. no preemptive rights
. no subscription rights
. no redemption rights
. no sinking fund rights
. no conversion rights
The rights and preferences of common stockholders are subject to the right of
any series of preferred stock we may issue in the future.
Preferred Stock
We may, by resolution of our Board of Directors, and without any further vote
or action by our stockholders, authorize and issue, subject to limitations
prescribed by law, up to an aggregate of 10,000,000 shares of preferred stock.
The preferred stock may be issued in one or more classes or series of shares of
any class or series. With respect to any classes or series, our Board of
Directors may determine the designation and the number of shares, preferences,
limitations and special rights,
54
<PAGE>
including dividend rights, conversion rights, voting rights, redemption rights
and liquidation preferences. Because of the rights that may be granted, the
issuance of preferred stock may delay, defer or prevent a change of control.
Prior to this offering, we had 2,105,931 shares of series A preferred stock,
1,139,377 shares of series B preferred stock, 563,044 shares of series C
preferred stock, 2,593,750 shares of series D preferred stock and 2,589,927
shares of series E preferred stock issued and outstanding. Upon the completion
of this offering, all of our outstanding shares of preferred stock will
automatically convert into a total of 8,992,029 shares of common stock.
Warrants
As of March 31, 2000, we had outstanding warrants to purchase 23,217 shares of
series E preferred stock, at an exercise price of $6.95 per share, 200,000
warrants to purchase shares of series D preferred stock, at an exercise price
of $3.15 per share, and warrants to purchase 8,884 shares of series C preferred
stock, warrants to purchase 36,450 series B preferred stock and warrants to
purchase 78,776 shares of series A preferred stock, respectively, all at an
exercise price of $.001 per share. All outstanding warrants provide for anti-
dilution adjustments in the event of certain mergers, consolidations,
reorganizations, recapitalizations, stock dividends, stock splits or other
changes in our corporate structure. The warrants to purchase series E preferred
stock also provide for net issuance exercise. All of our warrants become
exercisable for an equivalent number of shares of our common stock immediately
prior to the completion of this offering.
Options
As of March 31, 2000, a total of 1,146,628 shares of common stock were reserved
for future issuance pursuant to our stock option plan. Options to purchase
1,029,583 shares of common stock at a weighted average exercise price of $1.23
per share were outstanding and options exercisable for 117,045 shares of common
stock remain available for future grant. Options to purchase an aggregate of
43,372 shares of common stock have been exercised under our stock option plan
as of March 31, 2000.
Anti-Takeover Provisions
Under Delaware law, all stockholder actions must be effected at a duly called
annual or special meeting. Our bylaws provide that, except as otherwise
required by law, special meetings of the stockholders can only be called by our
Chairman of the Board, President or any two members of the Board of Directors.
In addition, our bylaws establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders, including
proposed nominations of persons for election to the board. Stockholders at an
annual meeting may only consider proposals or nominations specified in the
notice of meeting or brought before the meeting by or at the direction of the
board of directors or by a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has delivered timely
written notice in proper form to our Secretary of the stockholder's intention
to bring such business before the meeting. The holders of a majority of our
outstanding shares will constitute a quorum for the transaction of business.
Each stockholder has one vote per share of stock. Except as explained below or
provided by Delaware law, approval of a majority of those stockholders who are
present is required to take any action.
Our certificate of incorporation and our bylaws provide that a director may be
removed from office only with cause by the affirmative vote of shareholders
holding 75% of the outstanding shares entitled to vote at an election of
Directors. Our bylaws may only be amended by our Board of Directors or by an
affirmative vote of shareholders holding 75% of our outstanding shares of
voting stock.
These provisions of our certificate of incorporation and bylaws are intended to
discourage types of transactions that may involve an actual or threatened
change of control of POZEN. Such provisions
55
<PAGE>
are designed to reduce the vulnerability of POZEN to an unsolicited acquisition
proposal and, accordingly, could discourage potential acquisition proposals and
could delay or prevent a change in control of POZEN. Such provisions are also
intended to discourage tactics that may be used in proxy fights but could,
however, have the effect of discouraging others from making tender offers for
our shares and, consequently, may also inhibit fluctuations in the market price
of our shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
POZEN.
We are subject to Section 203 of the Delaware General Corporation Law, or the
anti-takeover law, which regulates corporate acquisitions. The anti-takeover
law prevents certain Delaware corporations, including those whose securities
are listed for trading on the Nasdaq National Market, from engaging under
certain circumstances in a "business combination" with any "interested
stockholder" for three years following the date that such stockholder became an
interested stockholder. For purposes of the anti-takeover law, a "business
combination" includes, among other things, a merger or consolidation involving
POZEN, and the "interested stockholder" and the sale of more than 10% of
POZEN's assets. In general, the anti-takeover law defines an "interested
stockholder" as any entity or person beneficially owning 15% or more the
outstanding voting stock of POZEN and any entity or person affiliated with or
controlling or controlled by such entity or person. In addition, the
restrictions contained in Section 203 are not applicable to any of our existing
stockholders. A Delaware corporation may "opt out" of the anti-takeover law
with an express provision in its original certificate of incorporation or an
express provision in its certificate of incorporation or bylaws resulting from
amendments approved by the holders of at least a majority of the corporation's
outstanding voting shares. We have not "opted out" of the provisions of the
anti-takeover law.
Registration Rights
Upon the completion of this offering, holders of 8,968,677 shares of our common
stock and 23,217 warrants will be entitled to certain rights with respect to
the registration of these shares under the Securities Act.
If we register any of our common stock, either for our own account or for the
account of other security holders, the holders of all of these shares are
entitled to notice of the registration and to include their shares of common
stock in the registration. All of these rights to register securities in
connection with this offering have been waived as required by the respective
agreements granting these rights.
Beginning 180 days after the completion of this offering, subject to specified
limitations, holders of 5,183,677 shares of common stock, representing shares
issued in conversion of our series D and E convertible preferred stock, and
23,217 shares issuable upon exercise of our warrants to purchase series E
preferred stock, may require that we register all or part of these securities
for sale under the Securities Act. Until we are entitled to register our shares
on Form S-3, a short form registration statement, these holders may only make
two such demands. Once we are entitled to use Form S-3, which may be as early
as , 2001, holders of 2,613,144 of these shares may make such demands for
registrations on Form S-3 on an unlimited number of occasions and holders of
2,593,750 of these shares may make such demands for registrations on Form S-3
on up to two occasions.
Other than in a demand registration, a holder's right to include shares in a
registration is subject to the ability of the underwriters to limit the number
of shares included in the offering. All fees, costs and expenses of any demand
registrations and up to three registrations on Form S-3 all of these
registrations will be paid by us, and all selling expenses will be paid by the
holders of the securities being registered.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and we
cannot assure you that a liquid trading market for our common stock will
develop or be sustained after this offering. Future sales of substantial
amounts of common stock, including shares issued upon exercise of outstanding
options and warrants, in the public market after this offering or the
anticipation of those sales could adversely affect market prices prevailing
from time to time and could impair our ability to raise capital through sales
of our equity securities.
After the closing of this offering, we will have outstanding shares of
common stock, which assumes the underwriters do not exercise their over-
allotment option and holders do not exercise any outstanding options or
warrants. Of these shares, the shares sold in this offering will be freely
tradable without restriction under the Securities Act unless purchased by our
"affiliates", as that term is defined in Rule 144 under the Securities Act.
Substantially all the remaining 13,345,401 restricted shares held by existing
stockholders are subject to various lock-up agreements providing that, with
limited exceptions, the stockholder will not offer, sell, contract to sell,
grant an option to purchase, effect a short sale or otherwise dispose of or
engage in any hedging or other transaction that is designed or reasonably
expected to lead to a disposition of any shares of common stock or any option
to purchase common stock or any securities exchangeable for or convertible into
common stock for a period of 180 days after the date of this prospectus. Though
these shares may be eligible for earlier sale under the provisions of the
Securities Act, none of these shares will be saleable until 180 days after the
date of this prospectus as a result of these lock-up agreements.
In general, under Rule 144 as currently in effect, a person, or persons whose
shares are aggregated, who has beneficially owned restricted shares for at
least one year is entitled to sell within any three-month period up to that
number of shares that does not exceed the greater of: (1) 1% of the number of
shares of common stock then outstanding, which will be approximately
shares immediately after this offering, or (2) the average weekly trading
volume of the common stock during the four calendar weeks preceding the filing
of a Form 144 with respect to the sale. Sales under Rule 144 are also subject
to certain "manner of sale" provisions and notice requirements and to the
requirement that we have made current public information about POZEN available.
Under Rule 144(k), a person who is not deemed to have been an affiliate of the
issuer at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of qualified shares held by some affiliates in
reliance upon Rule 144 but without compliance with some restrictions, including
the holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased his or her shares pursuant to a written
compensatory plan or contract prior to the completion of this offering may be
entitled to rely on the resale provisions of Rule 701. Rule 701 further
provides that non-affiliates may sell shares in reliance on Rule 144 without
having to comply with the holding period, public information, volume limitation
or notice provisions of Rule 144. All holders of Rule 701 shares of common
stock are required to wait until 90 days after the date of this prospectus
before selling shares. However, substantially all shares issued pursuant to
Rule 701 are subject to lock-up agreements and will only become eligible for
sale at the expiration of the 180 day lock-up.
Upon the completion of this offering, the holders of 8,968,677 shares of our
common stock and 23,217 warrants will be entitled to certain registration
rights under the Securities Act. See "Description of Capital Stock--
Registration Rights." After registration pursuant to these rights, these shares
will become freely tradable without restriction under the Securities Act.
57
<PAGE>
As of March 31, 2000, we had outstanding options to purchase 1,029,583 shares
of common stock. In addition, as of March 31, 2000, we had outstanding warrants
to purchase an aggregate of 347,327 shares of series A convertible preferred
stock, series B convertible preferred stock, series C convertible preferred
stock, series D convertible preferred stock and series E convertible preferred
stock, respectively, all of which will convert immediately prior to the
consummation of this offering into warrants to purchase an aggregate of 347,327
shares of common stock. Substantially all of such shares are subject to the
lock-up agreements described above. As of March 31, 2000, an additional 117,045
shares of common stock were available for future grants under our stock option
plan.
Following this offering, we intend to file a registration statement on Form S-8
under the Securities Act to register all shares of common stock subject to
outstanding stock options and options issuable pursuant to our stock option
plan. Subject to the lock-up agreements, shares covered by this registration
statement will be eligible for sale in the public markets, other than shares
owned by our affiliates, which may be sold in the public market if they qualify
for an exemption from registration under Rule 144 or 701.
58
<PAGE>
UNDERWRITING
Subject to certain terms and conditions contained in an underwriting agreement,
the underwriters named below, for whom U.S. Bancorp Piper Jaffray Inc. is
acting as representative, have severally agreed to purchase the number of
shares of common stock from us set forth opposite their names below:
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
U.S. Bancorp Piper Jaffray Inc. ............................
Prudential Securities Incorporated..........................
Pacific Growth Equities, Inc. ..............................
Total.....................................................
=======
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase shares of common stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of common stock are purchased by the underwriters pursuant to the
underwriting agreement, all such shares of common stock (other than the shares
of common stock covered by the over-allotment option described below) must be
so purchased.
We have been advised by U.S. Bancorp Piper Jaffray Inc. that the underwriters
propose to offer the shares of common stock to the public initially at the
price to the public set forth on the cover page of this prospectus and to
certain dealers (who may include the underwriters) at such price less a
concession not to exceed $ per share. The underwriters may allow, and such
dealers may reallow, discounts not in excess of $ per share to any other
underwriter and certain other dealers.
We have granted to the underwriters an option to purchase up to additional
shares of common stock at the initial public offering price less the
underwriting discount solely to cover over-allotments. Such option may be
exercised in whole or in part from time to time during the 30-day period after
the date of this prospectus. To the extent that the underwriters exercise such
option, each of the underwriters will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
underwriter's initial commitment as indicated in the preceeding table. If the
underwriters exercise their option in full, the total price to the public would
be $ , the total underwriting discount would be $ and total proceeds to
us would be $ .
We, together with certain of our stockholders and our executive officers and
directors, have agreed not to directly or indirectly offer, pledge, sell,
contract to sell, sell any option or contract to purchase or grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock, or enter into any swap or other arrangement that transfers
all or a portion of the economic consequences associated with the ownership of
such common stock, or to cause a registration statement covering any shares of
common stock to be filed, for a period of 180 days after the date of this
prospectus without the prior written consent of the underwriters, subject to
limited exceptions. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no established trading market for the
common stock. The initial price to the public for the common stock offered by
us will be determined by negotiation among the underwriter representatives and
us. The factors to be considered in determining the initial price to the public
will include the history of and the prospects for the industry in which we
compete, the ability of our management, our past and present operations, our
prospects for future earnings, the general condition of the securities markets
at the time of this offering and the recent market prices of securities of
generally comparable companies. We will apply to list our common stock on the
Nasdaq National Market.
The underwriters do not intend to make sales to accounts over which they
exercise discretionary authority in excess of 5% of the number of shares of
common stock offered hereby.
59
<PAGE>
To facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain, or otherwise affect the price of the common stock during
and after the offering. Specifically, the underwriters may over-allot or
otherwise create a short position in the common stock for their own account by
selling more shares of common stock than have been sold to them by us. The
underwriters may elect to cover any such short position by purchasing shares of
common stock in the open market or by exercising the over-allotment option
granted to the underwriters. In addition, the underwriters may stabilize or
maintain the price of the common stock by bidding for or purchasing shares of
common stock in the open market and may impose penalty bids. If penalty bids
are imposed, selling concessions allowed to syndicate members or other broker-
dealers participating in the offering are reclaimed if shares of common stock
previously distributed in the offering are repurchased, whether in connection
with stabilization transactions or otherwise. The effect of these transactions
may be to stabilize or maintain the market price of the common stock at a level
above that which might otherwise prevail in the open market. The impositions of
a penalty bid may also effect the price of the common stock to the extent that
it discourages resale of the common stock. The magnitude or effect of any
stabilization or other transactions is uncertain. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
U.S. Bancorp Piper Jaffray Inc. beneficially owns warrants to purchase 23,217
shares of our series E convertible preferred stock, which will convert
immediately prior to consummation of this offering into warrants to purchase
23,217 shares of our common stock, at an exercise price of $6.95 per share.
These warrants were acquired by U.S. Bancorp Piper Jaffray in connection with a
private placement of our series E preferred stock which was completed in March
2000. U.S. Bancorp Piper Jaffray received reasonable and customary compensation
for their placement services in connection with the private placement,
including the warrants and a right of first refusal to act as lead manager in
connection with this offering. The Company also reimbursed U.S. Bancorp Piper
Jaffray for reasonable out-of-pocket expenses incurred in connection with the
private placement and indemnified it against certain liabilities.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
AdvisorSM, a full service brokerage firm program, may view offer terms and a
prospectus online and place orders through their financial advisors.
LEGAL MATTERS
Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania will pass upon the
validity of the common stock offered by this prospectus for us. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Ballard Spahr Andrews & Ingersoll LLP, Baltimore, Maryland.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial statements
at December 31, 1999 and 1998, for each of the three years in the period ended
December 31, 1999, and for the period from September 26, 1996 (inception)
through December 31, 1999, as set forth in their report. We have included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
60
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the stock
we are offering by this prospectus. This prospectus does not include all of the
information contained in the registration statement. You should refer to the
registration statement and its exhibits for additional information. While we
have disclosed the material terms of any of our contracts, agreements or other
documents referenced in this prospectus, you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. When we complete this offering, we will also be
required to file annual, quarterly and special reports, proxy statements and
other information with the SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at
450 Fifth Street, NW, Washington, DC 20549, 7 World Trade Center, Suite 1300,
New York, NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference facilities.
Our SEC filings are also available at the office of the Nasdaq National Market.
For further information on obtaining copies of our public filings at the Nasdaq
National Market you should call (212) 656-5060.
You should rely only on the information contained in the registration
statement, including its exhibits. We have not, and the underwriters have not,
authorized any other person to provide you with different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, the
securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date in the
front, but the information may have changed since that date.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Report of Independent Auditors.............................................. F-2
<S> <C>
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements 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 AUDITORS
The Board of Directors
POZEN Inc.
We have audited the accompanying balance sheets of POZEN Inc. (a development
stage company) as of December 31, 1998 and 1999, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years ended December 31, 1999, and for the period from September 25, 1996
(inception) through December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of POZEN Inc. (a development
stage company) at December 31, 1998 and 1999 and the results of its operations
and its cash flows for each of the three years ended December 31, 1999, and for
the period from September 25, 1996 (inception) through December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 4, 2000, except for Note 3,
as to which the date is March 24, 2000
F-2
<PAGE>
POZEN Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------------- March 31,
1998 1999 2000
ASSETS ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents......... $ 2,986,080 $ 4,171,086 $ 18,671,295
Prepaid expenses.................. 9,037 14,720 51,599
Accrued interest receivable....... 9,558 19,297 --
Other current assets.............. 8,928 9,553 9,091
------------ ------------ ------------
Total current assets............ 3,013,603 4,214,656 18,731,985
Equipment, net of accumulated
depreciation of
$64,718, $108,533 and $117,865 at
December 31, 1998 and 1999 and
March 31, 2000, respectively..... 99,490 110,351 115,795
------------ ------------ ------------
Total assets.................... $ 3,113,093 $ 4,325,007 $ 18,847,780
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.................. $ 841,535 $ 359,370 $ 403,373
Accrued expenses.................. 1,224,936 2,000,927 2,211,365
------------ ------------ ------------
Total current liabilities....... 2,066,471 2,360,297 2,614,738
Redeemable convertible Series E
preferred stock, $0.001 par
value, 3,167,260 shares
designated, 2,589,927 shares
issued and outstanding at March
31, 2000; aggregate liquidation
preference of $17,999,993 ....... -- -- 16,875,115
Stockholders' equity (deficit):
Series A preferred stock, $0.001
par value, 2,750,000 shares
designated, 2,105,931 shares
issued and outstanding at
December 31, 1998 and 1999 and
March 31, 2000; aggregate
liquidation preference of
$6,633,683 ...................... 2,106 2,106 2,106
Series B preferred stock, $0.001
par value, 4,000,000 shares
designated, 1,139,377 shares
issued and outstanding at
December 31, 1998 and 1999 and
March 31, 2000; aggregate
liquidation preference of
$4,557,508 ...................... 1,139 1,139 1,139
Series C preferred stock, $0.001
par value, 2,839,507 shares
designated, 563,044 shares issued
and outstanding at December 31,
1998 and 1999 and March 31, 2000;
aggregate liquidation preference
of $2,280,328 ................... 563 563 563
Series D preferred stock, $0.001
par value, 6,000,000 shares
designated, 2,593,750 shares
issued and outstanding at
December 31, 1999 and March 31,
2000; aggregate liquidation
preference of $12,450,000 ....... -- 2,594 2,594
Common stock, $0.001 par value,
30,000,000 shares authorized,
issued and outstanding 4,332,222,
4,334,722 and 4,353,372 shares at
December 31, 1998 and 1999 and
March 31, 2000, respectively..... 4,332 4,335 4,354
Additional paid-in capital.......... 13,036,470 27,168,105 29,845,469
Deferred compensation............... -- (1,965,552) (4,265,716)
Deficit accumulated during the
development stage................ (11,997,988) (23,248,580) (26,232,582)
------------ ------------ ------------
Total stockholders' equity
(deficit).................... 1,046,622 1,964,710 (642,073)
------------ ------------ ------------
Total liabilities and
stockholders' equity
(deficit).................... $ 3,113,093 $ 4,325,007 $ 18,847,780
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
POZEN Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
Period from
September 26,
1996
(inception) Three Months Ended March
Year Ended December 31, through 31,
-------------------------------------- December 31, -------------------------
1997 1998 1999 1999 1999 2000
----------- ----------- ------------ ------------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
General and
administrative....... $ 954,307 $ 1,401,285 $ 2,309,990 $ 4,727,312 $ 362,322 $ 958,945
Research and
development.......... 2,949,632 7,244,202 9,023,320 19,237,850 1,635,544 2,074,132
----------- ----------- ------------ ------------ ----------- ------------
Total operating
expenses............. 3,903,939 8,645,487 11,333,310 23,965,162 1,997,866 3,033,077
Interest income, net.... 315,181 309,324 82,718 716,582 30,900 49,075
----------- ----------- ------------ ------------ ----------- ------------
Net loss................ (3,588,758) (8,336,163) (11,250,592) (23,248,580) (1,966,966) (2,984,002)
Non-cash preferred stock
charge................. -- -- -- -- -- (16,875,115)
----------- ----------- ------------ ------------ ----------- ------------
Net loss attributable to
common stockholders.... $(3,588,758) $(8,336,163) $(11,250,592) $(23,248,580) $(1,966,966) $(19,859,117)
=========== =========== ============ ============ =========== ============
Basic and diluted net
loss per common share.. $ (0.83) $ (1.93) $ (2.60) $ (0.45) $ (4.57)
=========== =========== ============ =========== ============
Shares used in computing
basic and diluted net
loss per common share.. 4,310,000 4,325,525 4,333,064 4,332,222 4,343,840
=========== =========== ============ =========== ============
Pro forma net loss per
common share--basic and
diluted (unaudited).... $ (1.26) $ (1.81)
Pro forma weighted
average common shares
outstanding--basic and
diluted (unaudited).... 8,901,776 10,976,158
</TABLE>
See accompanying notes.
F-4
<PAGE>
POZEN Inc.
(a development stage company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Series A Series B Series C Series D Additional Receivable
Date of Preferred Preferred Preferred Preferred Common Paid-In From Deferred
Transaction Stock Stock Stock Stock Stock Capital Stockholders Compensation
------------------ --------- --------- --------- --------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
4,310,000
shares of
common stock
at $0.001 per September
share......... 1996 $ -- $ -- $-- $ -- $4,310 $ -- $ (4,310) $ --
Issuance of
2,105,931
shares of
preferred
stock at $3.15 December
per share..... 1996 2,106 -- -- -- -- 6,473,314 (1,000,000) --
Net loss........ -- -- -- -- -- -- -- --
------ ------ ---- ------ ------ ----------- ----------- -----------
BALANCE AT
DECEMBER 31,
1996........... 2,106 -- -- -- 4,310 6,473,314 (1,004,310) --
Proceeds from
stockholders'
receivables... -- -- -- -- -- -- 1,004,310 --
Issuance of
1,135,000
shares of
preferred
stock at $4.00 December
per share..... 1997 -- 1,135 -- -- -- 4,334,865 -- --
Net loss........ -- -- -- -- -- -- -- --
------ ------ ---- ------ ------ ----------- ----------- -----------
BALANCE AT
DECEMBER 31,
1997........... 2,106 1,135 -- -- 4,310 10,808,179 -- --
Issuance of
4,377 shares
of preferred
stock at $4.00 March
per share..... 1998 -- 4 -- -- -- 17,508 -- --
Issuance of
563,044 shares
of preferred
stock at $4.05 March
per share..... 1998 -- -- 563 -- -- 2,205,250 -- --
Exercise of
22,222 stock
options at
$0.25 per
share......... -- -- -- -- 22 5,533 -- --
Net loss........ -- -- -- -- -- -- -- --
------ ------ ---- ------ ------ ----------- ----------- -----------
BALANCE AT
DECEMBER 31,
1998........... 2,106 1,139 563 -- 4,332 13,036,470 -- --
Issuance of July and September
2,593,750 1999
shares of
preferred
stock at $4.80
per share..... -- -- -- 2,594 -- 11,997,406 -- --
Exercise of
2,500 stock
options at
$0.25 per
share......... -- -- -- -- 3 622 -- --
Deferred
compensation.. -- -- -- -- -- 2,133,607 -- (2,133,607)
Amortization of
deferred
compensation.. -- -- -- -- -- -- -- 168,055
Net Loss........ -- -- -- -- -- -- -- --
------ ------ ---- ------ ------ ----------- ----------- -----------
BALANCE AT
DECEMBER 31,
1999........... 2,106 1,139 563 2,594 4,335 27,168,105 -- (1,965,552)
Exercise of
18,650 stock
options at
$0.25 per
share......... -- -- -- -- 19 4,644 -- --
Deferred
compensation.. -- -- -- -- -- 2,672,720 -- (2,672,720)
Amortization of
deferred
compensation.. -- -- -- -- -- -- -- 372,556
Net Loss........ -- -- -- -- -- -- -- --
------ ------ ---- ------ ------ ----------- ----------- -----------
BALANCE AT MARCH
31, 2000
(unaudited).... $2,106 $1,139 $563 $2,594 $4,354 $29,845,469 $ -- $(4,265,716)
====== ====== ==== ====== ====== =========== =========== ===========
<CAPTION>
Deficit
Accumulated Total
During the Stockholders'
Development Equity
Stage (Deficit)
------------- -------------
<S> <C> <C>
Issuance of
4,310,000
shares of
common stock
at $0.001 per
share......... $ -- $ --
Issuance of
2,105,931
shares of
preferred
stock at $3.15
per share..... -- 5,475,420
Net loss........ (73,067) (73,067)
------------- -------------
BALANCE AT
DECEMBER 31,
1996........... (73,067) 5,402,353
Proceeds from
stockholders'
receivables... -- 1,004,310
Issuance of
1,135,000
shares of
preferred
stock at $4.00
per share..... -- 4,336,000
Net loss........ (3,588,758) (3,588,758)
------------- -------------
BALANCE AT
DECEMBER 31,
1997........... (3,661,825) 7,153,905
Issuance of
4,377 shares
of preferred
stock at $4.00
per share..... -- 17,512
Issuance of
563,044 shares
of preferred
stock at $4.05
per share..... -- 2,205,813
Exercise of
22,222 stock
options at
$0.25 per
share......... -- 5,555
Net loss........ (8,336,163) (8,336,163)
------------- -------------
BALANCE AT
DECEMBER 31,
1998........... (11,997,988) 1,046,622
Issuance of
2,593,750
shares of
preferred
stock at $4.80
per share..... -- 12,000,000
Exercise of
2,500 stock
options at
$0.25 per
share......... -- 625
Deferred
compensation.. -- --
Amortization of
deferred
compensation.. -- 168,055
Net Loss........ (11,250,592) (11,250,592)
------------- -------------
BALANCE AT
DECEMBER 31,
1999........... (23,248,580) 1,964,710
Exercise of
18,650 stock
options at
$0.25 per
share......... -- 4,663
Deferred
compensation.. -- --
Amortization of
deferred
compensation.. -- 372,556
Net Loss........ (2,984,002) (2,984,002)
------------- -------------
BALANCE AT MARCH
31, 2000
(unaudited).... $(26,232,582) $ (642,073)
============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
POZEN Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
September 26,
1996
(inception) Three Months Ended
Year Ended December 31, through March 31,
-------------------------------------- December 31, ------------------------
1997 1998 1999 1999 1999 2000
----------- ----------- ------------ ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(3,588,758) $(8,336,163) $(11,250,592) $(23,248,580) $(1,966,966) $(2,984,002)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation........... 21,738 42,980 43,815 108,533 8,956 9,332
Amortization of
deferred
compensation.......... -- -- 168,055 168,055 13,854 372,556
Changes in operating
assets and liabilities:
Prepaid expenses and
accrued interest
receivable............ (95,174) 76,579 (15,422) (34,017) (545) (17,582)
Other assets........... (8,907) (21) (625) (9,553) -- 462
Accounts payable and
accrued expenses...... 958,019 929,529 293,826 2,360,297 (213,442) 254,441
----------- ----------- ------------ ------------ ----------- -----------
Net cash used in
operating activities.. (2,713,082) (7,287,096) (10,760,943) (20,655,265) (2,158,143) (2,364,793)
Investment activities
Purchase of equipment.. (119,874) (44,334) (54,676) (218,884) (5,998) (14,776)
----------- ----------- ------------ ------------ ----------- -----------
Net cash used in
investing activities.. (119,874) (44,334) (54,676) (218,884) (5,998) (14,776)
Financing activities
Proceeds from issuance
of preferred stock.... 4,336,000 2,223,325 12,000,000 24,034,745 -- 16,875,115
Proceeds from issuance
of common stock....... -- 5,555 625 6,180 -- 4,663
Proceeds from
stockholders'
receivables........... 1,004,310 -- -- 1,004,310 -- --
Proceeds from notes
payable............... -- -- -- -- 3,000,000 --
Repayments on notes
payable to related
parties............... (75,000) -- -- -- -- --
----------- ----------- ------------ ------------ ----------- -----------
Net cash provided by
financing activities.. 5,265,310 2,228,880 12,000,625 25,045,235 3,000,000 16,879,778
----------- ----------- ------------ ------------ ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... 2,432,354 (5,102,550) 1,185,006 4,171,086 835,859 14,500,209
Cash and cash
equivalents at
beginning of period.... 5,656,276 8,088,630 2,986,080 -- 2,986,080 4,171,086
----------- ----------- ------------ ------------ ----------- -----------
Cash and cash
equivalents at end of
period................. $ 8,088,630 $ 2,986,080 $ 4,171,086 $ 4,171,086 $ 3,821,939 $18,671,295
=========== =========== ============ ============ =========== ===========
Supplemental schedule of
cash flow information
Cash paid for
interest.............. $ 5,095 $ 35,630 $ 136,318 $ 178,644 $ 346 $ 38
=========== =========== ============ ============ =========== ===========
Supplemental schedule of
noncash investing and
financing activities
Conversion of notes
payable to preferred
stock................. $ -- $ -- $ -- $ -- $ 3,000,000 $ --
=========== =========== ============ ============ =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Development Stage Company--The Company is a pharmaceutical company committed to
building a portfolio of products with significant commercial potential in
select therapeutic areas. The Company's initial area of focus is migraine,
where it has built a portfolio of four product candidates through a combination
of innovation and in-licensing. The Company's lead product candidate is MT 100,
which is being developed as an oral first-line therapy for the treatment of
migraine. The Company has completed its initial Phase 3 clinical trial of MT
100 and intends to initiate three additional Phase 3 clinical trials of MT 100
by the end of 2000. In addition to the MT 100 trials, the Company expects to
begin two additional Phase 3 or Phase 2 clinical trials for two other migraine
product candidates by the end of 2000.
In order to continue to expand its product pipeline, the Company intends to
complement its internal product innovations by in-licensing additional product
candidates. The Company intends to commercialize its product candidates through
other pharmaceutical companies in exchange for upfront and milestone payments,
proceeds from the manufacturing of drug substance and royalties. In the future,
the Company may retain the right to co-promote its products.
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 in the financial statements
and accompanying notes. Actual results could differ from the estimates and
assumptions used.
Cash and Cash Equivalents--The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Cash is invested in interest-bearing investment-grade securities.
Equipment--Equipment consists primarily of furniture and fixtures and is
recorded at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets ranging from five to seven years.
Research and Development Costs--Research and development costs are charged to
operations as incurred.
Income Taxes--The Company accounts for income taxes using the liability method.
Deferred income taxes are provided for temporary differences between financial
reporting and tax bases of assets and liabilities.
Unaudited Financial Information--The accompanying financial statements and
related notes to the financial statements as of March 31, 2000 and for the
three months ended March 31, 1999 and 2000 are unaudited, but in the opinion of
management, include all adjustments consisting of normal recurring adjustments
necessary for a fair presentation of results for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted for the March 31 periods, although the Company believes that
the disclosures included are adequate to make the information presented not
misleading. Results for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
F-7
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Non-Cash Preferred Stock Charge--In accordance with EITF 98-5, the Company has
recorded a non-cash preferred stock charge on the Series E which represents the
excess of the fair market value of the underlying common stock and warrants
issued to the Series E holders over the sale price of the securities.
Net Loss Per Share--Basic and diluted net loss per common share are presented
in conformity with the Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), for all periods presented. Following the
guidance given by the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock that has been
issued or granted for nominal consideration prior to the anticipated effective
date of the initial public offering must be included in the calculation of
basic and diluted net loss per common shares as if these shares had been
outstanding for all periods presented. To date, the Company has not issued or
granted shares for nominal consideration.
In accordance with SFAS 128, basic and diluted net loss per common share has
been computed using the weighted-average number of shares of common stock
outstanding during the period. Pro forma basic and diluted net loss per common
share, as presented in the statements of operations, has been computed for the
year ended December 31, 1999 and the three months ended March 31, 2000 as
described above, and also gives effect to the conversion of the convertible
preferred stock that will automatically convert to common stock immediately
prior to the completion of the Company's initial public offering (using the if-
converted method) from the original date of issuance.
F-8
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table presents the calculation of basic, diluted and pro forma
basic and diluted net loss per common share (in thousands except per share da-
ta):
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
-------------------------- -----------------------
1997 1998 1999 1999 2000
------- ------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net loss attributable to
common stockholders....... $(3,589) $(8,336) $(11,251) $(1,967) $(19,859)
======= ======= ======== ======= ========
Basic and diluted:
Weighted-average shares
of common stock
outstanding............. 4,310 4,326 4,333 4,332 4,344
======= ======= ======== ======= ========
Weighted-average shares
used in computing basic
and diluted net loss per
common share............ 4,310 4,326 4,333 4,332 4,344
======= ======= ======== ======= ========
Basic and diluted net loss
per common share.......... $ (0.83) $ (1.93) $ (2.60) $ (0.45) $ (4.57)
======= ======= ======== ======= ========
Pro forma:
Shares used above........ 4,333 4,344
Pro forma adjustment to
reflect weighted effect
of conversion of
convertible preferred
stock (unaudited)....... 4,569 6,632
-------- --------
Shares used in computing
pro forma basic and
diluted net loss per
common share
(unaudited)............. 8,902 10,976
======== ========
Pro forma basic and
diluted net loss per
common share
(unaudited)............. $ (1.26) $ (1.81)
======== ========
</TABLE>
The Company has excluded all convertible preferred stock, outstanding stock
options, and warrants from the calculation of net loss per common share because
such securities are antidilutive for all periods presented. Had the Company
been in a net income position, these securities would have been included in the
calculation. These potentially dilutive securities consist of the following:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------- -----------------------
1997 1998 1999 1999 2000
--------- --------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Convertible preferred
stock.................. 2,152,575 3,693,313 4,568,712 3,808,352 6,632,317
Outstanding common stock
options................ 258,351 404,248 669,578 535,150 948,960
Outstanding warrants.... 80,274 122,309 182,740 124,110 326,174
--------- --------- --------- --------- ---------
Total................. 2,491,200 4,219,870 5,421,030 4,467,612 7,907,451
========= ========= ========= ========= =========
</TABLE>
Stock Based Compensation--The Company accounts for stock options issued to
employees in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, no
compensation expense is recognized for stock or stock options issued with an
exercise price equivalent to the fair value of the Company's Common Stock.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation." For companies that continue to account for stock
based compensation arrangements under APB 25, SFAS 123 requires
F-9
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
disclosure of the pro forma effect on net income (loss) as if the fair value
based method prescribed by SFAS 123 had been applied. The Company has adopted
the pro forma disclosure requirements of SFAS 123.
Comprehensive Income--As of January 1, 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income." SFAS 130 established new rules for the
reporting and display of comprehensive income or loss and its components;
however, the adoption of this statement had no impact on the Company's
operating results or stockholders' equity (deficit).
Segment Reporting--As of January 1, 1998, the Company adopted SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS 131
establishes standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company has determined that it does not have any separately
reportable operating segments as of December 31, 1999.
Recently Issued Accounting Standards--In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Investments and Hedging Activities," SFAS 133
establishes a new model for accounting for derivatives and hedging activities
and supersedes several existing standards. SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The Company does not expect that the adoption of SFAS 133 will have a
material impact on its financial statements.
2. STOCKHOLDERS' EQUITY (DEFICIT)
In December 1996, the Company completed a private placement of 2,105,931 of its
Series A Convertible Preferred Stock ("Series A") and received cash of
$5,475,420 and notes receivable of $1,000,000, net of offering costs. The notes
receivable were collected during 1997. The terms of the Series A provide for
conversion into common shares by dividing $3.15 by the conversion price at any
time. The conversion price is initially $3.15 subject to increases or decreases
based on certain defined events. Holders of Series A shall have the number of
votes based on the number of common shares that would be obtained from
conversion. Series A shall be paid dividends in any year in which dividends on
common shares have been declared and paid. In conjunction with the issuance of
the Series A, in January 1997, the Company issued warrants to purchase 78,776
shares of Series A at a purchase price of $0.001 per share to certain key
advisors. The value of the warrants is reflected in additional paid-in capital.
In December 1997 and March 1998, the Company completed a private placement of
1,135,000 of its Series B Convertible Preferred Stock ("Series B") and received
cash of $4,336,000, net of offering costs. The terms of the Series B provide
for similar conversion, voting and dividend rights as those defined in the
Series A. At December 31, 1997, the Company was obligated to issue warrants to
purchase 36,450 shares of Series B at a purchase price of $0.001 per share to
certain key advisors. The value of the warrants is reflected in additional
paid-in capital.
In March 1998, the Company issued an additional 4,377 shares of its Series B
for $17,512 interest accrued on the funds received prior to the December 1997
Series B private placement.
On March 4, 1998, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock, par value $.001, from
10,000,000 shares to 20,000,000 shares.
F-10
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In March 1998, the Company completed a private placement of 563,044 of its
Series C Convertible Preferred Stock ("Series C") and received cash of
$2,205,813, net of offering costs. The terms of the Series C provide for
similar conversion, voting and dividend rights as those defined in the Series A
and Series B. In conjunction with the issuance of the Series C, the Company
issued warrants to purchase 8,884 shares of Series C at a purchase price of
$0.001 per share to certain key advisors. The value of the warrants is
reflected in additional paid-in capital.
In July 1999, the Company amended its Certificate of Incorporation to increase
the number of authorized shares of common stock, par value $0.001 per share,
from 20,000,000 shares to 30,000,000 shares and the number of authorized shares
of preferred stock, par value $0.001 per share, from 10,000,000 shares to
20,000,000 shares.
In July and September 1999, the Company completed a private placement of
2,593,750 of its Series D Convertible Preferred Stock ("Series D") and received
cash of $12,000,000. The terms of the Series D provide for similar conversion,
voting and dividend rights as those defined in the Series A, Series B and
Series C. In conjunction with the issuance of the Series D, the Company issued
warrants to purchase 200,000 shares of Series D at a purchase price of $3.15
per share to BB Medtech AG related to $3 million in bridge financing funded by
MEDGROWTH S.A. ("MEDGROWTH") in March 1999 through a Convertible Promissory
Note. The value of the warrants is reflected in additional paid-in capital. The
Convertible Promissory Note was converted into Series D at completion of the
private placement noted above. MEDGROWTH received Series D valued at $450,000
as an origination fee upon conversion of the Convertible Promissory Note.
In the event of any liquidation, dissolution or winding up of the Company, the
holders of the preferred stock are entitled to receive an amount equal to their
initial purchase price per share, plus any accrued but unpaid dividends. After
payments have been made to the holders of preferred stock, any remaining assets
of the Company will be distributed to holders of the common stock.
At March 31, 2000, shares of common stock reserved for future issuance are as
follows:
Shares available for grant under stock option plan..... 117,045
Shares granted under stock option plan................. 1,029,583
Series A Preferred Stock............................... 2,105,931
Series B Preferred Stock............................... 1,139,377
Series C Preferred Stock............................... 563,044
Series D Preferred Stock............................... 2,593,750
Series E Preferred Stock............................... 2,589,927
Warrants............................................... 347,327
----------
Total reserved......................................... 10,485,984
==========
3. REDEEMABLE PREFERRED STOCK
On March 24, 2000, the Company completed a private placement of 2,589,927 of
its Series E Convertible Preferred Stock ("Series E") and received cash of
$16,875,115, net of offering costs. The terms of the Series E provide for
similar conversion, voting and dividend rights and liquidation preference as
those defined in the Series A, Series B, Series C and Series D. In addition,
the terms of conversion provide for an increase in conversion price if the
Company is unable to complete a qualified public offering or to effect a merger
or acquisition of the Company that would entitle the holders of the Series E to
receive $10.43 or more per share. At the date of issuance, the Company believes
the per
F-11
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
share price of $6.95 represented the fair value of the preferred stock and was
in excess of the deemed fair value of its common stock. Subsequent to the
commencement of the Company's initial public offering process, the Company re-
evaluated the deemed fair market value of its common stock as of March 2000 and
determined it to be $15.00 per share. Accordingly, the incremental fair value
is deemed to be the equivalent of a preferred stock dividend. The Company
recorded the non-cash preferred stock charge at the date of issuance by
offsetting charges and credits to additional paid-in capital of $16,875,115,
without any effect on total stockholders' equity.
The terms of the Series E also provide for a mandatory redemption commencing on
March 23, 2005, March 23, 2006 and March 23, 2007, respectively, and continuing
for a period of 60 days after each such date or at a earlier date as a majority
or more of the capital stock is sold in a single transaction or a series of
related transactions when the holders of 75% of the issued and outstanding
shares of the Series E elect to cause a redemption. The redemption price is the
greater of the appraised value as defined or the original purchase price of the
Series E plus any accrued but unpaid dividends. Default in the payment of any
required redemption of Series E entitles the holders of Series E to elect a
majority of the Board of Directors and receive special voting rights.
In conjunction with the issuance of the Series E, the Company issued warrants
to purchase 23,217 shares of Series E at a purchase price of $6.95 per share to
certain key advisors. The value of the warrants is reflected in additional
paid-in capital.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
--------------------- -----------
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Clinical trial contract costs......... $1,127,177 $1,832,551 $ 889,975
Commissions related to Series E
Preferred Stock...................... -- -- 1,074,876
Other................................. 97,759 168,376 246,514
---------- ---------- ----------
$1,224,936 $2,000,927 $2,211,365
========== ========== ==========
</TABLE>
5. INCOME TAXES
At December 31, 1998 and 1999 and March 31, 2000, the Company had federal and
state net operating loss carryforwards of approximately $11 million, $22
million and $24 million, respectively, for income tax purposes. At December 31,
1998 and 1999 and March 31, 2000, the Company had research and development
credit carryforwards of approximately $490,000, $685,000 and $807,000,
respectively. The federal net operating loss carryforwards and research and
development credit carryforwards begin to expire in 2012. State net operating
loss carryforwards begin to expire in 2001. For financial reporting purposes, a
valuation allowance has been recognized to offset the deferred tax assets
related to the carryforwards. When, and if recognized, the tax benefit for
those items will be reflected in current operations of the period in which the
benefit is recorded as a reduction of income tax expense. The utilization of
the loss carryforwards to reduce future income taxes will depend on the
Company's ability to generate sufficient taxable income prior to the expiration
of the net operating loss carryforwards. In addition, the maximum annual use of
net operating loss carryforwards is limited in certain situations where changes
occur in stock ownership.
F-12
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31, March 31,
------------------------ ------------
1998 1999 2000
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward... $ 4,719,000 $ 9,040,000 $ 9,600,000
Research and development costs.... 490,000 685,000 807,000
----------- ----------- ------------
Total deferred tax assets........... 5,209,000 9,725,000 10,407,000
Valuation allowance................. (5,209,000) (9,725,000) (10,407,000)
----------- ----------- ------------
Net deferred tax asset.............. $ -- $ -- $ --
=========== =========== ============
</TABLE>
6. STOCK OPTION PLAN
On November 20, 1996, the Company established a Stock Option Plan and
authorized the issuance of up to 1,190,000 options to attract and retain
quality employees and to allow such employees to participate in the growth of
the Company. Awards may be made to participants in the form of incentive and
nonqualified stock options. Eligible participants under the Plan include
executive or key employees of the Company. The vesting period ranges from
immediate vesting at issuance to three years or immediately upon a significant
change in ownership as defined by the plan document. The exercise price for
incentive stock options may not be less than 100% of the fair market value of
the common stock on the date of grant (110% with respect to incentive stock
options granted to optionees who are 10% or more stockholders of the Company).
A summary of the Company's stock option activity, and related information is as
follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
--------- ---------
<S> <C> <C>
Options granted...................................... 65,650 $0.25
--------- -----
Balance at December 31, 1996......................... 65,650 0.25
Options granted.................................... 348,500 0.25
Forfeited.......................................... (7,500) 0.25
--------- -----
Balance at December 31, 1997......................... 406,650 0.25
Options granted.................................... 144,250 0.45
Exercised.......................................... (22,222) 0.25
Forfeited.......................................... (77,778) 0.25
--------- -----
Balance at December 31, 1998......................... 450,900 0.31
Options granted.................................... 453,833 1.51
Exercised.......................................... (2,500) 0.25
Forfeited.......................................... (78,000) 1.19
--------- -----
Balance at December 31, 1999......................... 824,233 0.89
Options granted.................................... 224,000 2.40
Exercised.......................................... (18,650) 0.25
Forfeited.......................................... -- --
--------- -----
Balance at March 31, 2000 (unaudited)................ 1,029,583 $1.23
========= =====
</TABLE>
F-13
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Exercise prices for options outstanding as of December 31, 1997, 1998 and 1999
were $0.25-$2.00. The weighted-average fair value of options granted for all
periods presented is $3.23 per share. The weighted-average remaining
contractual life of the options is nine years. At December 31, 1997, 1998 and
1999, 51,761, 129,450 and 260,734 options were exercisable, respectively.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("Statement 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options.
During the year ended December 31, 1999, in connection with the grant of
certain share options to employees, the Company recorded deferred compensation
of $2.1 million, representing the difference between the exercise price and the
deemed fair value of the Company's common stock for financial reporting
purposes on the date such stock options were granted. Deferred compensation is
included as a reduction of stockholders' equity and is being amortized to
expense according to the vesting method. During the year ended December 31,
1999, the Company recorded amortization of deferred compensation of
approximately $168,000.
During the period March 31, 2000, in connection with the grant of certain share
options to employees, the Company recorded deferred compensation of $2.7
million, representing the difference between the exercise price and the deemed
fair value of the Company's common stock for financial reporting purposes on
the date such stock options were granted. During the period ended March 31,
2000, the Company recorded amortization of deferred compensation of
approximately $373,000.
Pro forma information regarding net income is required by Statement 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the minimum value option
pricing model with the following weighted-average assumptions: risk-free
interest rates of 6.4%; dividend yields of 0%; and a weighted-average expected
life of the option of 10 years.
The minimum value option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions. Because the Company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting periods. The Company's pro forma
net loss information is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss available to common
stockholders--as reported............ $(3,588,758) $(8,336,163) $(11,250,592)
=========== =========== ============
Net loss available to common
stockholders--SFAS 123 pro forma..... $(3,596,402) $(8,352,474) $(11,454,956)
=========== =========== ============
Net loss per common share--SFAS 123
pro forma............................ $ (0.83) $ (1.93) $ (2.64)
=========== =========== ============
</TABLE>
F-14
<PAGE>
POZEN Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. LEASES
The Company leases its office space and certain equipment under cancelable and
noncancelable operating lease agreements. Rent expense incurred by the Company
was approximately $95,000, $115,791, $106,884 and $412,675 and for the years
ended December 31, 1997, 1998 and 1999 and for the period September 25, 1996
(inception) through December 31, 1999, respectively. The following is a
schedule of future minimum lease payments for operating leases at December 31,
1999:
<TABLE>
<CAPTION>
2000............................................................ $114,554
<S> <C>
2001............................................................ 117,523
2002............................................................ 120,492
2003............................................................ 50,720
--------
$403,289
========
</TABLE>
8. RETIREMENT SAVINGS PLAN
In July 1997, the Company began a defined contribution 401(k) pension plan (the
"Plan") covering substantially all employees who are at least 21 years of age.
Based upon management's discretion, the Company may elect to make contributions
to the Plan. For the years ended December 31, 1997, 1998 and 1999, and for the
period September 25, 1996 (inception) through December 31, 1999, the Company
did not make any contributions to the Plan.
9. SUBSEQUENT EVENTS (unaudited)
In April 2000, the Board of Directors authorized the filing of a registration
statement with the Securities and Exchange Commission to register shares of its
common stock in connection with a proposed Initial Public Offering (the
"Offering"). If the Offering is consummated, the preferred stock outstanding as
of the closing date will be converted into shares of the Company's common
stock. Pro forma net loss per common share is computed as if the outstanding
preferred stock had been converted into common stock on the date of issuance.
F-15
<PAGE>
Shares
POZEN INC.
Common Stock
[LOGO]
---------------------
PROSPECTUS
---------------------
Until , all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
U.S. Bancorp Piper Jaffray
Prudential Vector Healthcare
a unit of Prudential Securities
Pacific Growth Equities, Inc.
, 2000
<PAGE>
PART II
Item 13. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $
National Association of Securities Dealers, Inc. fee................ $
Nasdaq Stock Market listing fee..................................... $
Accountants' fees and expenses...................................... $
Legal fees and expenses............................................. $
Blue Sky fees and expenses.......................................... $
Transfer Agent's fees and expenses.................................. $
Printing and engraving expenses..................................... $
Miscellaneous....................................................... $
-----
Total Expenses.................................................. $
=====
</TABLE>
Item 14. Indemnification of Directors and Officers
The Registrant's Certificate of Incorporation permits indemnification to the
fullest extent permitted by Delaware law and require the Registrant to
indemnify any person who was or is an authorized representative of the
Registrant, and who was or is a party or is threatened to be made a party to
any corporate proceeding, by reason of the fact that such person was or is an
authorized representative of the Registrant, against expenses, judgments,
penalties, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such third party proceeding if such
person acted in good faith and in a manner such person reasonably believed to
be in, or not opposed to, the best interests of the Registrant and, with
respect to any criminal third party proceeding (including any action or
investigation which could or does lead to a criminal third party proceedings
had no reasonable cause to believe such conduct was unlawful. The Registrant
shall also indemnify any person who was or is an authorized representative of
the Registrant and who was or is a party or is threatened to be made a party to
any corporate proceeding by reason of the fact that that such person was or is
an authorized representative of the Registrant, against expenses actually and
reasonably incurred by such person in connection with the defense or settlement
of such corporate action if such person acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Registrant unless and only to the extent that the Delaware Court
of Chancery or the court in which such corporate proceeding was pending shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such authorized representative is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper. Such indemnification is
mandatory as to expenses actually and reasonably incurred to the extent that an
authorized representative of the Registrant had been successful on the merits
or otherwise in defense of any third party or corporate proceeding or in
defense of any claim, issue or matter therein. The determination of whether an
individual is entitled to indemnification may be made by a majority of
disinterested directors, independent legal counsel in a written legal opinion
or the stockholders. Delaware law also permits indemnification in connection
with a proceeding brought by or in the right of the Registrant to procure a
judgment in its favor. Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable.
II-1
<PAGE>
The Underwriting Agreement provides that the underwriter is obligated, under
certain circumstances, to indemnify directors, officers, and controlling
persons of the Registrant against certain liabilities, including liabilities
under the Act. Reference is made to Section of the form of Underwriting
Agreement which will be filed by amendment as Exhibit 1.1 hereto.
Item 15. Recent Sales of Unregistered Securities
The share numbers presented below are provided with respect to our shares of
common stock and series A convertible preferred stock, series B convertible
preferred stock, series C convertible preferred stock, series D convertible
preferred stock and series E convertible preferred stock, and reflect the
conversion of our series A convertible preferred stock, series B convertible
preferred stock, series C convertible preferred stock, series D convertible
preferred stock and series E convertible preferred stock into common stock,
which will occur immediately prior to completion of this offering.
Except as described below, there have been no securities sold by us within the
last three years that were not registered under the Securities Act.
(a) Issuances of Securities
On March 24, 2000, we (i) issued an aggregate of 2,589,927 shares of series
E convertible preferred stock to certain of our existing stockholders and
new investors, at an aggregate offering price of $18,000,000. In connection
with this transaction, we also issued warrants to purchase 23,217 shares of
series E convertible preferred stock at an exercise price of $6.95 per
share.
On March 1, 1999, we issued a convertible promissory note to an investor in
the principal amount of $3,000,000, which was converted into a total of
625,000 shares of series D convertible preferred stock in July 1999. In
connection with this transaction, we also issued warrants to purchase
200,000 shares of series D convertible preferred stock at an exercise price
of $3.15 per share. In July and September 1999, we sold an aggregate of
1,968,750 additional shares of series D convertible preferred stock to
certain new investors and to the holder of the convertible promissory note,
at an aggregate offering price of $9,450,000.
In March 1998, we issued an aggregate of 563,044 shares of our series C
convertible preferred stock to certain existing stockholders and new
investors, at an aggregate offering price of $2,280,328. In connection with
this transaction, we also issued warrants to purchase 8,884 shares of
series C convertible preferred stock at an exercise price of $0.001 per
share.
In December 1997 and March 1998, we issued an aggregate of 1,139,377 shares
of series B convertible preferred stock to certain existing stockholders
and new investors, at an aggregate offering price of $4,557,508. In
connection with these transactions, we also issued warrants to purchase
36,450 shares of series B convertible preferred stock at an exercise price
of $0.001 per share.
Since November 1996, we have issued options to certain employees, consultants
and others to purchase an aggregate of 1,236,233 shares of common stock. As of
March 31, 2000, 43,372 of such options have been exercised, 163,278 of such
options have been terminated and 1,029,583 of such options remain outstanding
at a weighted average exercise price of $1.23 per share.
(b) U.S. Bancorp Piper Jaffray Inc. served as placement agent in connection
with the offer and sale by us of our series E convertible preferred stock and
has received a commission in the amount of $995,867 and warrants for such
services. Punk Ziegel was engaged as placement agent in connection with the
offer and sale by us of our series D convertible preferred stock but did not
earn any commissions or discounts in connection with the offering. Burton
Advisors Ltd. served as placement agent in connection with the offer and sale
by us of our series B and series C convertible preferred stock and has received
commissions in the aggregate amount of $278,516 and warrants to purchase an
II-2
<PAGE>
aggregate of 45,334 shares of series A or series B convertible preferred stock
at an exercise price of $0.001 per share. for such services. Except as so
noted, no underwriters were involved in connection with the sales of securities
referred to in paragraph (a) of this Item 15.
(c) The convertible promissory note, the warrants and the shares of common
stock, series A convertible preferred stock, series B convertible preferred
stock, series C convertible preferred stock, series D convertible preferred
stock and series E convertible preferred stock described in paragraph (a) of
this Item 15 were issued in reliance on the exemption provided by Section 4(2)
and/or Rule 506 of Regulation D promulgated pursuant to the Securities Act. The
issuances of stock options and the shares of common stock issuable upon the
exercise of the options as described in paragraph (a) of this Item 15 were
issued in reliance on the exemption provided by Section 3(b) of the Securities
Act and Rule 701 promulgated thereunder, as well as Section 4(2) of the
Securities Act. Appropriate legends are affixed to the stock certificates
issued in the aforementioned transactions. All recipients either received
adequate information about us or had access, through employment or other
relationships, to such information.
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Certificate of Incorporation and Amended and Restated
Bylaws of the Registrant defining rights of the holders of Common
Stock of the Registrant.
4.2* Specimen Stock Certificate.
5.1* Opinion of Morgan, Lewis & Bockius LLP as to the legality of the
offered shares.
10.1 Sublease Agreement between Quintiles, Inc. and the Registrant,
dated April 7, 1997.
10.2 Stock Option Plan of the Registrant.
10.3 First Amendment to Stock Option Plan dated February 14, 1997.
10.4 Executive Employment Agreement with John R. Plachetka dated April
1, 1999.
10.5** License Agreement dated September 24, 1999 between the Registrant
and F. Hoffman-La Roche Ltd.
10.6 Investor Rights Agreement dated July 28, 1999 between the
Registrant and the holders of the Series D Preferred Stock.
10.7 Investor Rights Agreement dated March 24, 2000 between the
Registrant and the holders of the Series E Preferred Stock.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2* Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
-------------------------------
* To be filed by amendment
** Confidential Treatment is being requested with respect to portions of
these documents. The omitted portions of these documents have been
filed separately with the Securities and Exchange Commission.
II-3
<PAGE>
Item 17. Undertakings
(a) 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.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the 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 the
Registration Statement as of the time it was declared effective.
(ii) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chapel Hill, State of
North Carolina on the 28th day of April, 2000.
POZEN Inc.
/s/ John R. Plachetka
By: _________________________________
John R. Plachetka
Chief Executive Officer
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears below
constitutes and appoints John R. Plachetka and Matthew E. Czajkowski, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and any subsequent
registration statements pursuant to Rule 462 of the Securities Act 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 and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorney-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jacques F. Rejeange Chairman of the Board April 28, 2000
______________________________________
Jacques F. Rejeange
/s/ John R. Plachetka President, Chief Executive April 28, 2000
______________________________________ Officer and Director
John R. Plachetka
/s/ Matthew E. Czajkowski Chief Financial Officer April 28, 2000
______________________________________
Matthew E. Czajkowski
/s/ Joseph J. Ruvane, Jr. Director April 28, 2000
______________________________________
Joseph J. Ruvane, Jr.
/s/ Peter J. Wise Director April 28, 2000
______________________________________
Peter J. Wise
/s/ Bruce A. Tomason Director April 28, 2000
______________________________________
Bruce A. Tomason
</TABLE>
II-5
<PAGE>
EXHIBIT 10.1
SUBLEASE
This Sublease, made as of this 7th day of April, 1997, by and between
Quintiles, Inc. a North Carolina corporation, having an address at 1007 Slater
Road, Chelsea Place, Durham, North Carolina 27703, successor in interest to
Biometric Research Institute, Inc. ("Sublessor"), and POZEN Inc., a Delaware
corporation, with its principal place of business at 2605 Meridian Parkway,
Suite 200, Durham, North Carolina 27713 ("Sublessee"), and Property Reserve,
Inc., a Utah corporation ("Landlord").
RECITALS:
The background to this Sublease is as follows:
NOW, THEREFORE R-l. Sublessor is the Tenant pursuant to a Lease dated
December 14, 1995 between I40 Properties, a North Carolina partnership ("1-40
Properties"), as Lessor, and Sublessor as Tenant (the "Principal Lease") for
premises located at 6330 Quadrangle Drive, Suite 240, Durham County, North
Carolina, known as the Quadrangle Office Park, and being more fully described
in the Principal Lease (the "Premises"). A true and correct copy of the
Principal Lease is attached hereto as Exhibit A and incorporated herein by
------- -
reference.
R-2. As of December 3, 1996, Landlord succeeded to 1-40 Properties'
interest in the Lease as Landlord pursuant to an assignment and assumption of
lease from 1-40 Properties to Property Reserve, Inc. (the "Assignment"); and
R-3. Sublessor and Sublessee have negotiated for Sublessee to sublease
(upon the terms and conditions set forth herein) certain space designated as
Suite 240, comprising approximately 5,938. rentable square feet of office
space of the Premises (the "Sublet Premises"), and being more particularly
described on Exhibit B attached hereto and incorporated herein by reference.
------- -
, the parties hereto, in consideration of the mutual promises
contained herein and other good and, valuable consideration, the receipt of
which are hereby acknowledged and intending to be legally bound, promise,
covenant and agree follows:
1. Recitals. The Recitals set forth above are incorporated herein by
--------
reference.
2. Sublease. Sublessor hereby leases to Sublessee the Sublet
--------
Premises, upon the terms and conditions set forth in the Principal Lease, to
the extent not expressly herein modified. With respect to the Sublet Premises
and except as expressly modified by this Sublease, Sublessee (i) shall have
all of the rights and privileges of the Sublessor, as Tenant, pursuant to the
Principal Lease, and (ii) shall perform all of the duties and obligations of
the Sublessor, as Tenant, pursuant to the Principal Lease. Notwithstanding
the foregoing, it is understood and agreed that this is a Sublease and that
Sublessor shall remain obligated to Landlord for the performance of
- any and all remaining obligations of Sublessor under the Principal Lease.
The Sublessor shall perform or shall cause the Landlord to perform, with
respect to the Sublet Premises, all duties and obligations of the Landlord
pursuant to the Principal Lease.
<PAGE>
SUBLEASE
3. Term. The initial term of this Sublease shall be 68 months, beginning
----
on June 1, 1997 (the "Commencement Date") and ending on February 28, 2003.
4. Rent/Measurement of Sublet Premises. Subject to the rent abatement
-----------------------------------
provisions of Paragraph 15 of the Principal Lease, beginning with the
Commencement Date, Sublessee shall pay to Sublessor at the office of
Sublessor a rental payment due and payable as provided in the Principal
Lease in the amount and according to the schedule listed below.
Term Rate Per Rentable Square Foot
---- -----------------------------
(full Service)
--------------
June 1, 1997 through May 31, 1998 $18.00
June 1, l998 through May 3l, 1999 $18.50
June 1, l999 through May 3l, 2000 $19.00
June 1, 2000 through May 31, 2001 $19.50
June 1, 2001 through May 31, 2002 $20.00
June 1, 2002 through February 28, 2003. $20.50
Sublessee shall have no liability to Sublessor or Landlord for the rental
payments provided in Paragraph 3 of the Principal Lease or for any of the
additional rent or operating expense passthroughs ("Base Rent Adjustments")
provided in Paragraph 5 of the Principal Lease, all such sums being included in
the gross rental payments provided in this Section 4.
5. Improvements by Sublessor. Sublessee shall be entitled to receive from
-------------------------
Sublessor up to $15,000.00, to be used by Sublessee for improvements to the
Sublet Premises which shall be made in the Sublessee's reasonable discretion.
Any costs incurred by Sublessee for such improvements in excess of $15,000.00 or
incurred after September 30, 1997 shall be borne by Sublessee. Sublessee shall
provide to Sublessor written receipts or other statements itemizing any costs
incurred by Sublessee for such improvements on or before September 30, 1997.
Sublessor shall pay to Sublessee the amounts of all such receipts or statements
within twenty (20) days of Sublessor's receipt of same. Except as set forth
herein, Sublessee shall take possession and occupy the Premises in "as is"
condition, including all telecommunications and local area network wiring that
is currently in the Sublet Premises.
6. Parking. Subject to the terms of the Principal Lease, Sublessee shall
-------
have free non-exclusive use of parking facilities at the Premises for its
employees, business invitees and agents.
7. Insurance. Sublessee presently maintains and will, during the term of
---------
this sublease maintain a master insurance policy which complies with all
requirements in Paragraph 16 of the Principal Lease. Sublessee shall add to the
master policy Sublessor and Landlord as
<PAGE>
additional insureds with regard to the Sublet Premises and prior to the
Commencement Date provide evidence of same to the reasonable satisfaction of
Sublessor and Landlord.
8. Security Deposit. Sublessee shall deposit with Sublessor on the
----------------
signing of this Sublease the sum of $8,907.00 as security for performance of
Sublessee's obligations under this Sublease. Sublessee shall have no further
liability or obligation to Sublessor or Landlord under Paragraph 7 of the
Principal Lease.
9. Secretary's Certificate. Sublessee shall, following the execution
-----------------------
and delivery of this Sublease, but prior to the Commencement Date, deliver to
Sublessor a certificate of Sublessee's corporate secretary that the corporate
officer signing this Sublease on behalf of the Sublessee is empowered and
authorized to execute this Sublease and bind Sublessee hereto.
10. Warranties of Sublessee. Sublessee represents and warrants to the
-----------------------
Sublessor as follows:
(a) Sublessee is a corporation duly formed and validly existing
under the laws of the State of Delaware;
(b) Upon execution and delivery by Sublessee, this Sublease
shall be a valid and binding obligation of Sublessee, and the
execution and delivery of this Sublease has been fully authorized
by Sublessee.
11. Warranties of Sublessor. Sublessor represents and warrants to the
------------- ---------
Sublessee as follows:
(a) Sublessor is a corporation duly formed and validly existing
under the laws of the State of North Carolina, and is qualified to
do business in North Carolina.
(b) Upon execution and delivery by Sublessor, this Sublease
shall be a valid and binding obligation upon Sublessor, and the
execution and delivery of this Sublease has been fully authorized
by Sublessor.
(c) The Principal Lease is in full force and effect and has not
been modified, in writing, orally or by conduct of either Landlord
or Sublessor.
(d) Sublessor has, to the best of its knowledge paid rent and
all other charges due and payable to the Landlord pursuant to the
Principal Lease through the date hereof; further, Sublessor has, to
the best of its knowledge fully complied with all terms and
conditions of the Principal Lease, and will, during the term of
this Sublease, continue its full compliance with all terms and
conditions of the Principal Lease; further, Sublessor has not, to
the best of its knowledge committed a default under the Principal
Lease and is not aware of any act by or omission of Sublessor which
in and of itself, or with the passage of time, would become a
default.
<PAGE>
(e) Sublessor has sought, and Landlord has given. (or, by
execution of this Sublease, shall be deemed to have given), in
accordance with Paragraph 10 of the Principal Lease, Landlord's
written consent to sublet the Sublet Premises pursuant to the terms
and conditions of this Sublease.
(f) Landlord has fully complied with all terms and conditions of
the Principal Lease.
(g) Sublessor has not received any notice that the Landlord has
assigned the Principal Lease, nor, to the best of Sublessor's
knowledge, has the Landlord sold the Building.
(h) The Commencement Date of the Principal Lease is January 15,
1996 and the Expiration Date is February 28, 2003.
12. Warranties of Landlord. Landlord represents and warrants to
----------------------
Sublessor and Sublessee as follows:
(a) Landlord has succeeded to all of 1-40 Properties' interest
in the Lease, the Lease has been properly assigned to and assumed
by Landlord, and Landlord has complete power and authority to enter
into this Sublease.
(b) The Lease is in full force and effect and there are no
defaults presently existing under the Principal Lease, and there
are no presently existing circumstances known to Landlord which,
with the giving of notice or passage of time or both, would
constitute a default under the Principal Lease.
(c) The Assignment in no way adversely affects or impairs
Sublessor's rights under the Principal Lease or Sublessor's right
to enter into this Sublease.
(d) The Commencement Date of the Principal Lease is January 15,
1996 and the Expiration Date is February 28. 2003.
13. Landlord's Consent. In the event of a default by Sublessor under the
------------------
Principal Lease, and provided that Sublessee shall not be in default in its
obligations under this Sublease, after written notice thereof from Landlord to
Sublessee, Sublessee shall make its rental payments directly to Landlord and
shall otherwise attorn to Landlord, and Sublessee shall not be disturbed from
its use and occupancy of the Sublet Premises; and Landlord shall not evict,
eject or otherwise remove Sublessee from the Sublet Premises; but rather, shall
recognize this Sublease and each of the terms and conditions hereof as valid,
binding and in full force and effect for the remainder of the term of this
Sublease and any renewals thereof.
14. Notice. Any notice required hereunder shall be hand delivered, sent by
------
certified United States mail, postage prepaid, or sent by overnight delivery
service requiring receipt (such Federal Express or UPS) to the parties, and
shall be deemed to have been given upon actual receipt or refusal of such
notice, at the addresses set forth below:
<PAGE>
To Sublessee at:
POZEN Inc.
6330 Quadrangle Drive, Suite 240
Chapel Hill, North Carolina 27514
Attn: John Barnhardt
With a copy to Sublessee's Agent:
Corporate Realty Advisors
4000 Westchase Boulevard, Suite 390
Raleigh, North Carolina 27607
Attn: Paul Munana
To Sublessor at:
Quintiles Transnational Corp.
P.O. Box 13979
Research. Triangle Park, North Carolina 27709-3979
Attn: Greg Porter, Chief Legal Officer
With a copy to Sublessor's Agent:
Corporate Realty Advisors
4000 Westchase Boulevard, Suite 390
Raleigh, North Carolina 27607
Attn: Howard Sadkin
To Landlord at:
Property Reserve, Inc.
10 East South Temple St., Suite 400
Salt Lake City, Utah 84133
Attn: Mr. Alan Aubrey
With a copy to Landlord's Agent:
Goodman Segar Hogan Hoffler
6320 Quadrangle Drive, Suite 360
Chapel Hill, North Carolina 27514
15. Commission. Sublessor and Sublessee respectively represent and warrant
----------
to each other that neither of them has consulted or negotiated with any broker
or finder with regard to the Demised Premises except as identified below in this
Section 15. If none, indicate "none." Each such party shall indemnify the other
against and hold the other harmless from any claims for fees or commissions from
anyone with whom the indemnifying party has consulted or negotiated with regard
the Demised Premises not identified herein. Sublessor has agreed to pay all
commissions associates with this transaction to the party listed below:
Corporate Realty Advisors.
- --------- ---------------
16. Records. Sublessor shall provide to Sublessee, upon the execution of
-------
this Sublease or within a reasonable period of time thereafter, all documents
and other records
<PAGE>
pertaining to the Sublet Premises, including without limitation any
construction, drawings, wiring diagrams, documents or other records relating to
the telecommunications and local area network wiring in the Sublet Premises, to
the extent such documents and records are in Sublessor's possession or Sublessor
can reasonably obtain the same.
17. Miscellaneous.
-------------
(a) The headings of the various articles of this Agreement are
intended only for convenience and are not intended to limit, define or
construe the scope of any article of this Agreement, nor offset the
provisions thereof.
(b) Neither the method of computation of rent nor any other provision
of this Agreement shall be deemed to create any relationship between
the parties hereto other than that of Sublessor and Sublessee.
(c) In the event that there is any conflict between the provisions of
this Sublease and the provisions of the Principal Lease, the parties
agree that the provisions of the Sublease shall control.
(d) This Agreement shall be governed by and construed in accordance
with the laws of North Carolina
(e) This Agreement may be modified or amended only by written
agreement of the parties hereto.
(f) If any provision of this Agreement shall be deemed to be in
contravention of any law, then the court rendering such determination
shall have the authority to strike the contravening provision from
this Agreement, with the remaining provisions of this Agreement
remaining in full force and effect.
(g) This Agreement, and the covenants, conditions, warranties and
agreements made and entered into by the parties hereto are declared
binding on their respective heirs, successors, representatives and
assigns.
[The remainder of this page is intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed and delivered this
Sublease as of the day and year first above written.
SUBLESSOR:
Quintiles, Inc.
---------- ----
ATTEST: By /s/ David C. Hood
--------------------------
Name: David C. Hood
Title: VP Finance
/s/ Bonnie Griffin
-------------------
Secretary
(CORPORATE SEAL)
SUBLESSEE:
POZEN Inc.
ATTEST: By: /s/ Peter J. Wise
--------------------------
Name: Peter J. Wise
---------------
Title: Senior VP-Medical Affairs
-----------------------------
/s/ Fred D. Hutchison
- ----------------------
Assistant Secretary
(CORPORATE SEAL)
LANDLORD:
Property Reserve, Inc.
ATTEST: By: /s/ Wayne G. Facer
--------------------------
Name: Wayne G. Facer
------------------------
Title: Vice President
-----------------------
/s/ C. Eugene Gronning
- ----------------------
Secretary
C. Eugene Gronning Secretary
CORPORATE SEAL)
<PAGE>
Exhibit B
------- -
[Description of "Sublet Premises']
<PAGE>
Exhibit A
------- -
["Principal Lease"]
<PAGE>
LEASE AGREEMENT
for
BIOMETRIC RESEARCH INSTITUTE, INC.
(as Tenant)
and
1-40 PROPERTIES
(as Landlord)
<PAGE>
BIOMETRIC RESEARCH INSTITUTE, INC.
LEASE AGREEMENT
TABLE OF CONTENTS
PARAGRAPH
1. Use and Acceptance of Demised Premises
2. Term of Lease
3. Covenant to Pay Rent
4. Landlord's and Tenant's Work
5. Additional Rent - Operating Expense Pass Throughs
6. Landlord's Services
7. Security Deposit
8. Repair, Preservation, and Maintenance
9. Tenant's General Indemnity
10. Assignment
11. Stock In Trade and Fixtures
12. Alterations, Additions, and Signs
13. Unlawful Improper or Offensive Use
14. Common Areas and Parking
15. Damage to Premises by Fire or Casualty
16. Insurance
17. Waiver of Subrogation
18. Tenant's Obligation at the End of Term and Holding Over
19. Removal of Fixtures
20. Landlord's Entry
21. Rules and Regulations
22. Quiet Enjoyment
23. Subordination and Tenant's Estoppel
24. Curing Defaults and Late Charges
25. Events of Default
26. Landlord's Rights on Termination of Term or Possession
27. No Waiver
28. Notices
29. Relocation of Demised Premises
30. Legal Costs
31. Liability of Landlord
32. Entire Agreement
33. Amendments
34. Controlling Law
35. Successors and Assigns
36. No Agency
37. Severability
<PAGE>
Table of Contents continued
Biometric Research Institute, Inc.
Lease Agreement
PARAGRAPH
38. Force Majeure
39. Recordation and Lease Memorandum
40. Assignment by Landlord
41. Due Authorization
42. Brokers
43. ADA Compliance
44. Exhibits
45. Renewal Option
46. Right to Expand
EXHIBIT A
EXHIBIT A-1 Site Plan
EXHIBIT B Floor Plan
EXHIBIT B-1 Space Plan
EXHIBIT C Tenant Improvements
EXHIBIT D Rules and Regulations
<PAGE>
NORTH CAROLINA
DURHAM COUNTY LEASE AGREEMENT
This Lease Agreement is made and entered into as of 199_, the day the last
party executed this agreement as shown on the signature page of this lease, by
and between 1-40 Properties, a North Carolina Partnership (Landlord") and
--------------- --------------------------
Biometric Research Institute, Inc., a Virginia Corporation, ("Tenant").
--------------------
WITNESSETH:
----------
WHEREAS, Landlord owns certain real property located at 6330 Quadrangle
Drive in Durham County, North Carolina ("Tract") and the building and other
improvements on the same ("Building") more fully described in Exhibit A, "Legal
Description", attached hereto and incorporated herein by reference; and
WHEREAS, Tenant is desirous of leasing a portion of such Building as more
fully described below and Landlord is willing to lease said property to Tenant.
NOW, THEREFORE in consideration of the foregoing and the mutual covenants,
conditions and agreements herein contained, the parties hereby agree as follows:
DEMISED PREMISES
Landlord hereby demises and leases unto Tenant those premises located in
the Building and more fully described in Exhibit B- 1, "Space Plan", attached
hereto and incorporated herein by reference ("Demised Premises"). The parties
agree that the total building rentable square foot is 94,461 and that the
Demised Premises contain not less than 5,938 rentable square feet and that this
represents 6.29% of the Building.
1.
USE AND ACCEPTANCE OF DEMISED PREMISES
The Demised Premises shall be used by Tenant for general office purposes
and for no other purpose or use without Landlord's prior written consent, which
consent Landlord may grant or withhold in Landlord's sole discretion. Tenant
shall keep in permitted use one hundred percent (100%) of the Demised Premises
during each Standard Work Week (as defined in this Lease of the term, any
extended term or any holdover period. Tenant shall not vacate or abandon the
Demised Premises. By accepting possession of the Demised Premises, Tenant agrees
that the Demised Premises are in proper condition and are in all respects
suitable for Tenant's use.
<PAGE>
2.
TERM OF LEASE
The term of this lease shall commence on the date Landlord delivers to
Tenant a certificate of occupancy for the space, ("Commencement Date")
approximately January 15, 1996, and shall end at Midnight on, the last day of
the 84th full calendar month after the commencement date ("Initial Termination
Date").
3.
COVENANT TO PAY RENT
(a) Throughout the term hereof and any extensions or any holdover periods,
Tenant shall pay, without demand and without counterclaim, deduction of set-off,
monthly minimum rent as follows, payable on or before the first day of each
calendar month:
<TABLE>
<CAPTION>
YEAR PRSF MONTHLY MINIMUM RENT YEARLY MINIMUM RENT
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 $17.75 $ 8,783.29 $105,399.50
2 $18.35 $ 9,080.19 $108,962.30
3 $18.95 $ 9,377.09 $112,525.10
4 $19.55 $ 9,673.99 $116,087.90
5 $20.15 $ 9,970.89 $119,650.70
6 $20.75 $10,267.79 $123,213.50
7 $21.35 $10,564.69 $126,776.30
*All rents calculated based on 5.938 RSF Total Aggregate Minimum Rent: $8l2.615.30
</TABLE>
(b) Tenant shall furthermore pay any additional rent required under this
lease when due without demand and without counterclaim, deduction or setoff.
4.
LANDLORD'S AND TENANT'S WORK
Landlord and Tenant shall, at their own respective expense, perform the
additional work described in Exhibit C, "Tenant Improvements", attached hereto
and incorporated herein by reference. It is expressly understood and agreed that
Landlord's obligation with respect to the construction and finishing of the
Demised Premises shall be limited to the scope of work described as Landlord's
Work in Exhibit C and shall in no event include any work not described in
Exhibit C. All Landlord's Work and Tenant's Work shall constitute improvements
to the Demised Premises which shall become sole property of Landlord and shall
remain at the Demised Premises upon expiration of this Lease Agreement or
termination of Tenant's right to possession of the Demised Premises unless
Landlord notifies Tenant otherwise in writing. Landlord and Tenant shall
complete their work on or before the Commencement Date, subject to extension for
all work delays resulting from causes beyond their reasonable control.
Possession of the Demised
<PAGE>
Premises shall be delivered to Tenant on or before the Commencement Date,
subject to extension for all delays resulting from causes beyond the reasonable
control of Landlord. All work by Tenant or Landlord shall be performed in a
lawful and workmanlike manner in accordance with all ordinances, building codes
or other governing law and in accordance with plans and specifications prepared
by Landlord, agreed to by Landlord and Tenant, and accepted and verified by
Tenant's initialing of drawings. Tenant shall take no action which may result in
a claim of lien against the Tract, Building or Demised Premises and Tenant shall
liquidate and discharge the same as provided in Section 13.
5.
ADDITIONAL RENT- OPERATING EXPENSE PASS THROUGHS
Tenant agrees to pay to Landlord, as additional rent, each year after the first
complete twelve (12) month period of occupancy ("Base Year"), in a lump sum,
Tenant's proportionate share of any increase in direct expenses incurred on
account of the operation or maintenance of the building in which the Demised
Premises are situated, above such direct expense paid or incurred by Landlord
for the Base Year.
Commencing with the first month of the second lease year, and each lease year
thereafter, there shall be added to Tenant's monthly payments an amount to cover
Tenant's pro rata share of operational pass throughs as estimated by Landlord to
have increased during the previous year, which figure (so estimated by Landlord)
shall be paid by Tenant until such time as actual figures are available (after
the end of the second and successive years), when the monthly increment for pass
throughs shall be adjusted to reflect the prior year's experience. Landlord
shall send to Tenant, in writing, a statement of the amount of any additional
rent plus any applicable sales or use taxes payable by Tenant hereunder on or
before one hundred and twenty (120) days after the end of the lease year with
respect to which the rent adjustment is due, and within thirty (30) days
thereafter Tenant shall pay any additional rent shown to be due Landlord, or
Landlord shall adjust Tenant's payments if any credit is shown to be due Tenant.
Tenant shall remain liable after the end of the term for any amount of
operational pass throughs for the final year if such exceeded Tenant's payments
for the pass throughs and Tenant shall be entitled to a refund if such payments
exceeded Tenant's payments for the pass throughs and Tenant shall be entitled to
a refund if such payments exceeded the pass throughs.
Tenant's proportionate share shall be calculated by dividing the 5,938 rentable
square feet of the Demised Premises by the 94.461 rentable square feet of the
building, which equals 6.29%.
The term "direct expense" as used herein shall include direct costs of
operation, repair and maintenance as determined by standard accounting practices
and shall include by way of illustration, but is not limited to ad valorem real
and personal property taxes, hazard and liability insurance premiums. utilities,
heat, air conditioning, janitorial services, labor, materials, supplies,
equipment. and tools, permits, licenses, inspection fees, management fees, and
common area expenses. The term "direct expense" shall not
<PAGE>
include depreciation on the building in which the Demised Premises are situated
or equipment therein, interest, executive salaries, real estate brokers'
commissions marketing costs or principal and interest payments, or other
expenses that do not relate to the operation of the building. The annual
statement of said direct expense, accounted for and reported in accordance with
generally accepted accounting principles, shall be available to Tenant upon
written request.
For purposes of verifying Landlord's computation and proration of Direct
Expenses, including the computation of Controllable Expenses. and to verify
Landlord's compliance with this Lease with respect to which items of expense
appropriately constitute Direct Expenses. Tenant or its authorized agents. at
its sole cost and expense, except as set forth below, during normal business
hours. may inspect, audit and copy the books and records of Landlord and its
agents. If any such audit reveals an error by Landlord with respect to Direct
Expenses, Landlord shall promptly reimburse Tenant for the amount erroneously
overcharged to Tenant. In the event such error exceeds 6% of the total average
amount then Landlord shall reimburse Tenant for reasonable costs of the audit.
6.
LANDLORD'S SERVICES
(a) Landlord shall cause to be furnished to the Demised Premises in common
with other Tenants from 8:00 a.m. to 6:00 p.m. Monday through Friday and from
---- ----
8:00 a.m. to 1:00 p.m. on Saturdays excluding national or state holidays (herein
- ---- ----
called the "Standard Work Week"), the following services: maintenance of
casualty insurance by Landlord on the Building in such form and amount as is
satisfactory to Landlord, water to the extent available, electricity to the
extent available for normal general office use, removal of trash from site
receptacles in accordance with city schedules, normal heating and air
conditioning for the reasonably comfortable use and occupancy of the Demised
Premises (provided heating and cooling to any governmental regulation
prescribing limitations thereon shall be deemed to comply with this service),
Building repair and maintenance as set forth in Section 8 below, and Common Area
Maintenance as set forth in Section 14 below. All costs resulting from Tenant's
extraordinary usage of water, heating, air conditioning, electricity, trash
removal, or other services provided by Landlord shall be paid by Tenant as
additional rent within thirty (30) days of billing by Landlord. Tenant shall not
install equipment with unusual demands for any of Landlord's services without
Landlord's prior written consent which Landlord may withhold if Landlord
reasonably determines that such equipment is not suitable for the Building or
may not safely be used therein. Notwithstanding anything herein to the contrary,
upon Tenant's request, Landlord shall provide after hours heating and air
conditioning to the Demised Premises at a current charge of $25.00 per hour as
------
additional rent, which charge shall be subject to upward adjustment from time to
time as Landlord shall reasonably determine to cover its costs and expenses.
Landlord shall not be responsible for any failure of or interruption in utility
or other services to the Building or Demised Premises.
<PAGE>
(b) Tenant shall pay or cause to be paid all charges for telephone or any
other communication or utility service used in or rendered or supplied to the
Demised Premises throughout the initial and any extended term of this Lease
Agreement or any holdover period which Landlord does not provide above and
Tenant shall indemnify the Landlord and hold Landlord harmless against any
liability or damages (including Landlord's reasonable attorneys' fees and
expenses) on such account.
7.
SECURITY DEPOSIT
Tenant shall deposit with Landlord on the signing of this Lease Agreement
the sum of Eight Thousand Seven Hundred Eighty Four ($ 8,784.00) as security for
the performance of Tenant's obligations under this Lease Agreement, including
without limitation, the surrender of possession of the Demised Premises to
Landlord as herein provided. If from time to time Landlord applies any part of
said deposit to cure any default of Tenant, Tenant shall upon demand immediately
deposit funds with the Landlord sufficient to restore the full initial balance
of the security deposit. This deposit shall bear interest at a pass book savings
rate which interest shall accrue to the Tenant, and unless the Landlord uses the
same to cure a default of Tenant including restoring the Demised Premises to the
condition that Tenant is required to leave them at the conclusion of the Term,
Landlord shall within thirty (30) days of the termination of the Lease Agreement
refund to Tenant so much of the deposit as Landlord continues to hold.
8.
REPAIR, PRESERVATION AND MAINTENANCE OF THE DEMISED PREMISES
(a) Landlord at Landlord's sole cost and expense shall keep and maintain
the roof, foundation and the structural soundness of the exterior walls of the
Building and Demised Premises in good repair exclusive of matters due to
Tenant's willful misconduct or gross neglect, which Tenant shall promptly remedy
and repair. Tenant at Tenant's sole risk, cost and expense shall maintain the
remainder of the Demised Premises in good, clean and sanitary condition and
repair. Tenant furthermore shall not injure, deface, overload or waste the
Demised Premises or any part thereof or permit the same to occur, nor shall
Tenant engage in or permit any action which would threaten to injure, deface,
overload or waste the Demised Premises or any part thereof. Tenant shall not
permit the accumulation of waste or refuse matter in or on the Demised Premises
or adjacent thereto.
(b) Tenant shall return the Demised Premises to Landlord at the end of the
initial or any extended term of any holdover period in such condition as they
were in as of the Commencement Date or the date of completion with respect to
any improvements made after the Commencement Date, ordinary wear and tear only
excepted. Tenant shall hold Landlord harmless from any loss, cost or damage
(including Landlord's reasonable attorneys' fees and expenses) caused by
Tenant's failure to comply with Tenant's maintenance obligations under this
Lease Agreement or caused by the maintenance or
<PAGE>
repairs made by Tenant or Tenant's agents, servants or employees,, or by persons
coming on the Demised Premises at the express or implied invitation of the
Tenant.
9.
TENANT'S GENERAL INDEMNITY
Landlord shall not be liable to Tenant, or to any other person or entity
whatsoever, for any injury, loss or damage to any person or property in or upon
the Demised Premises or otherwise resulting from Tenant's use of the Demised
Premises or of the Building, the Tract or any Common Areas designated from time
to time by Landlord as below provided. Tenant furthermore hereby covenants and
agrees to assume all liability for or on account of any injury, loss or damage
above described or resulting from any breach by Tenant or any of Tenant's
obligations under this Lease Agreement (including Landlord's reasonable
attorneys' fees and legal expenses), and Tenant shall save and hold Landlord
harmless therefrom except as otherwise provided in Section 18 of this Lease
Agreement.
10.
ASSIGNMENT
Tenant shall neither assign, mortgage, pledge nor otherwise encumber this
Lease Agreement, nor sublet the whole or any part of the Demised Premises
without first obtaining the written consent of Landlord, which consent Landlord
shall not unreasonably withhold. Such consent by Landlord shall not relieve
Tenant of any of Tenant's obligations under this Lease Agreement.
11.
STOCK IN TRADE AND FIXTURES AND INSURANCE THEREON
Tenant's stock in trade and fixtures and all other property of Tenant or
any third parties in or on the Demised Premises shall be at the sole risk of
Tenant or such third parties. Landlord shall not be liable to Tenant or any
third parties for any damage to personalty or fixtures at the Demised Premises
or Building or Tract for any reason, including but not limited to loss or theft
or damage due to leakage of water, gas, sewage or steam due to electrical or
other utility failure. At all times during the initial and extended term hereof
and any hold over period Tenant, for the benefit of both Landlord and Tenant as
their interest may appear, shall maintain insurance against loss or damage by
fire and such other risks and hazards as are insurable under present and future
standard forms of fire and extended coverage insurance policies, on the personal
property, furniture, furnishings and fixtures of Tenant or any other person or
entity located in the Demised Premises, which insurance shall be for the actual
replacement cost of the property insured. All such insurance policies shall
provide for not less than thirty (30) days written notice to Landlord prior to
the expiration of any such policy and shall furthermore contain provisions that
any such policies will not be canceled or the coverage changed without thirty
(30) days prior written notice to Landlord.
<PAGE>
12.
ALTERATIONS, ADDITIONS AND SIGNS
(a) Tenant shall not make any alterations or additions to the Demised
Premises without first obtaining the written consent of Landlord, which consent
Landlord shall not unreasonably withhold. All alterations, additions and
improvements to the Demised Premises (whether made by Landlord or Tenant) shall
become the property of the Landlord and shall remain upon and become a part of
the Demised Premises at the termination of this Lease Agreement or Tenant's
right to possession of the Demised Premises unless Landlord otherwise notifies
Tenant in writing. Any alterations performed by Tenant and approved by Landlord
shall be in accordance with all applicable statutes, ordinances, regulations and
applicable law and shall be performed in a workmanlike manner with materials and
contractors approved by Landlord. Tenant in the event of any construction work
shall procure and maintain in force until completion and acceptance of any
completed improvements all risks builder's risk insurance, including vandalism
and malicious mischief, in form and amount reasonably acceptable to Landlord
covering improvements in place and all material and equipment at the job site
and Tenant shall deliver to Landlord satisfactory proof that worker's
compensation insurance has been procured to cover all persons employed in
connection with the construction.
Tenant furthermore shall not in any event do anything that may create or be the
foundation for any lien upon the Demised Premises or the Building or Tract, or
upon any of the improvements on the foregoing; and should any such lien be
created or filed, Tenant at Tenant's own cost and expense shall liquidate and
discharge the same in full within ten (10) days after the earlier of the notice
or filing thereof.
(b) Signs - Tenant shall not place, paint or otherwise affix any signs
visible on any of the exterior portions of the Demised Premises or Building. All
signs must comply with all applicable municipal or other governmental rules and
regulations. Landlord will pay for one directory and one suite sign. Future
changes or modifications at Tenant's sole cost.
13.
UNLAWFUL, IMPROPER OR OFFENSIVE USE
Tenant shall not make nor allow to be made any use of the Demised Premises
or Common Areas designated from time to time by Landlord as below provided which
is unlawful or which in Landlord's judgment is improper, dangerous or offensive.
Tenant shall furthermore promptly comply with all ordinances, regulations, rules
or orders of any federal, state, county or municipal authority applicable to the
Demised Premises and Tenant shall not bring hazardous materials or waste upon
the Demised Premises or permit the same to occur without Landlord's prior
written consent which consent Landlord may
<PAGE>
grant or withhold in Landlord's sole discretion. Tenant shall use, store or
dispose of any hazardous materials to which Landlord consents in a safe and
reasonable mariner and in full compliance with all applicable federal, state,
municipal, county and other governmental laws, rules, and regulations. Tenant
shall be responsible for and shall pay all damages and charges to the state or
city government or any other persons or entities of any nuisance made or
suffered during the term of this Lease Agreement on or from the Demised Premises
or any such Common Areas resulting from the activities of Tenant or its agents,
licensees or invitees or otherwise.
14.
COMMON AREAS AND PARKING
Landlord hereby grants Tenant and Tenant's invitees, licensees and agents
the right, in common with other tenants of the Building, to use such areas of
the Tract, including parking areas, as Landlord may designate from time to time
to be common areas (the "Common Areas"). Tenant's use of available parking shall
not exceed the limit specified by Landlord for Tenant from time to time. Any
such usage by Tenant and Tenant's invitees, licensees and agents of the Common
Areas shall be incident to Tenant's business activities hereunder, shall be
lawful and reasonable, and shall be subject to Landlord's rule making authority
in Section 17. Landlord shall have exclusive control over the operation and
maintenance of any such Common Areas. Landlord and its agents' costs and
expenses incurred in operating and maintaining the Common Areas shall be
Operating Expense reimbursable to Landlord as provided in Section 6 above.
15.
DAMAGES TO PREMISES BY FIRE OR CASUALTY AND TAKING FOR PUBLIC USE
(a) If the Demised Premises shall be damaged by fire or other casualty,
which damage can reasonably be corrected within one hundred and eighty (180)
days and for a sum not exceeding the insurance proceeds actually received
therefor by Landlord, Landlord shall be entitled to retain any excess insurance
proceeds. In the event the Demised Premises cannot reasonably be so repaired or
replaced, either Landlord or Tenant may terminate this Lease Agreement by
written notice to the other provided, however, that (i) Tenant may not terminate
this Lease Agreement after Landlord has begun to repair or reconstruct the
Demised Premises and (ii) any obligations of the parties existing under this
Lease Agreement at the time of such termination shall be unaffected by such
termination, provided however there shall be an equitable abatement of rent
proportionate to the demised premises damaged by fire or casualty and (iii) in
the event such casualty occurs during the last twelve (12) calendar months of
------
the term or any extended term, Landlord may elect not to rebuild and may retain
the insurance proceeds received.
(b) In the event the whole of the Demised Premises shall be taken by any
public authority under the power of eminent domain or like power or by a deed in
lieu
<PAGE>
thereof, this Lease Agreement shall terminate as of the date that possession of
the Demised Premises shall be delivered to the appropriate authority. In the
event of only a partial such taking, this Lease Agreement shall not terminate
(unless either party, by written notice to the other party, chooses to terminate
the same) but there shall be an equitable abatement of rent proportionate to the
part of the Demised Premises taken. Any termination of the Lease Agreement shall
not affect the obligations of the parties existing under the Lease Agreement up
to the time of termination. Tenant shall not be eligible to receive any part of
any award or awards from any eminent domain proceeds or deed in lieu thereof,
and Tenant hereby assigns all of its right, title and interest in and to any
such award or awards to Landlord. However, Tenant may, to the extent permitted
by law, and at Tenant's own expense and cost, take independent or related
proceedings against the public authority exercising the power of eminent domain
to pursue and establish any damages Tenant may have incurred for the taking of
Tenant's property and for business interruption or relocation expenses resulting
from the exercise of power of eminent domain (including any deed in lieu
thereof) provided that any such action by Tenant shall not reduce or adversely
affect the amount of Landlord's award.
16.
INSURANCE
(a) Throughout the term of this Lease Agreement and any extended term or
terms, Landlord shall provide fire and extended insurance coverage for the
Demised Premises and the Building for 100% of the replacement value (defined as
actual replacement cost excluding the costs of excavation, foundation and
footings) in a form and amount satisfactory to Landlord as provided in Section 6
above. The costs of such insurance (as well as the costs of any other insurance
of any nature that Landlord shall choose to obtain for the Building, Common
Areas, Tract or any part thereof) shall be one of Landlord's Operating Expenses
re-imbursable to Landlord in accordance with Section 6 above. Throughout the
term of this Lease Agreement and any extended term or hold over period, Tenant
shall provide, at Tenant's sole cost and expense, in addition to the fire and
extended insurance coverage for Tenant's property at the Demised Premises
required by Section 11 public liability insurance for the Demised Premises,
including property damage with no less than One Million Dollars $1,000,000.00
limit per occurrence and death and personal injury coverage with no less than
One Million Dollars $1,000,000.00 limit per person. Such policy shall name
Landlord as an additional insured. Tenant shall also maintain all worker's
compensation and similar insurance required by applicable law.
(b) With respect to all policies of insurance required to be carried by
either party under this Lease Agreement, either party shall provide the other
party with copies of the certificates of such insurance at or prior to their
effective dates. All such policies of either party shall provide that the same
may not be modified or canceled without at least thirty (30) days prior written
notice to the other party and either party shall provide the other party with
copies of the certificates for all modified, renewed or new insurance policies
on or before their effective dates.
<PAGE>
(c) To the extent possible without additional cost, each party shall
obtain, for each policy of insurance, provisions permitting waiver of any claim
against the other party for loss or damage within the scope of the insurance.
Such waiver coverage at an additional premium shall be obtained by either party
upon written notice from the other party seeking the same accompanied by
reimbursement by such other party for the additional expense.
(d) Tenant shall not take any action or permit anything to be done which
will increase the rate of fire or other insurance coverage on the Demised
Premises or any part thereof or adjacent thereto or on the Building or the
Tract. However, in the event the Tenant shall take any such action then, in
addition to any other rights Landlord might have under this Lease Agreement or
otherwise, Landlord may require Tenant, upon demand, separately to pay or
reimburse Landlord as additional rent the amount of any increased insurance
premiums attributable to such action which are in excess of those charged at the
date of this Lease Agreement
17.
WAIVER OF SUBROGATION
(a) Landlord hereby releases Tenant, but only to the extent of Landlord's
insurance coverage and only to the extent payment is actually received under
such coverage by Landlord, from any liability for loss or damage covered by any
insurance policies which the Landlord carries with respect to the Demised
Premises, Building or Tract or any interest or property therein or thereon
whether or not such insurance is required by this Lease Agreement and even if
the insured peril shall be brought about by the default, negligence or other
action of the Tenant, Tenant's agents, employees or any of them; provided, this
release shall be in effect only with respect to an insured loss only so long as
Landlord's policy applicable to such loss contains a clause to the effect that
this release shall not affect the right of Landlord to recover under such
policy. Landlord does not waive and hereby reserves the right to secure
compensation from Tenant for any uninsured loss, any amounts not paid because of
deductibles and other amounts not paid for any reason whatsoever.
(b) Tenant hereby releases Landlord, but only to the extent of Tenant's
insurance coverage and only to the extent payment is actually received under
such coverage, from any liability for loss or damage covered by any insurance
policies which the Tenant carries with respect to the Demised Premises, Building
or Tract or any interest or property therein or thereon whether or not such
insurance is required by this Lease Agreement and even if the insured peril
shall be brought about by the default, negligence or other action of the
Landlord, Landlord's agents, employees or any of them; provided, this release
shall be in effect only with respect to an insured loss and only so long as
Tenant's policy applicable to such loss contains a clause to the effect that
this release shall not affect the right of Tenant to recover under such policy.
Tenant does not waive and hereby reserves the right to secure compensation from
Landlord to which Tenant is otherwise entitled for an uninsured loss, any
amounts not paid because of deductibles and
<PAGE>
other amounts not paid for any reason whatsoever. This section does not modify
the limitations of Landlords liability to Tenant provided under any other
sections of this Lease Agreement.
18.
TENANT'S OBLIGATIONS AT THE END OF TERM AND HOLDING OVER
(a) Tenant shall, at the expiration of the initial or any extended term of
this Lease Agreement or hold over period, peaceably surrender the Demised
Premises to Landlord in the condition required in Section 8 above. At such time,
in addition to any other obligations of Tenant under this Lease Agreement.
Tenant shall leave the Demised Premises room clean, shall fasten and lock all
doors and windows, shall return to Landlord all keys to the Demised Premises,
and shall notify Landlord of the address to which any balance of the Security
Deposit should be sent.
(b) Any holding over by Tenant at the Demised Premises after the expiration
of the term of this Lease Agreement or any final extended term shall at most
result in a tenancy from month to month, terminable at will by Landlord. All of
the obligations of Tenant under this Lease Agreement shall apply to any such
hold over period, except that the monthly portion of the Base Rent shall be one
hundred fifty percent (150%).
19.
REMOVAL OF FIXTURES AND OTHER ITEMS AT END OF LEASE
To the extent consistent with other terms of this Lease Agreement, Tenant
at the expiration of this Lease Agreement shall remove all furniture and other
personal property, including fixtures, trade or otherwise. which Tenant or any
other third parties have installed upon or placed within the Demised Premises
during the term of this Lease Agreement or any extended term or holdover period
and to which Landlord is not entitled if such items can be removed without
material injury to the Demised Premises; provided, however, all repairs to the
Demised Premises required by such removal must be properly and promptly made by
Tenant at Tenant's sole cost and expense incident to such removal. All property
of Tenant remaining at the Demised Premises after the last day of the term of
this Lease Agreement or any extended term or holdover period shall conclusively
be deemed abandoned and may be removed by Landlord at Tenant's expense or
retained by Landlord.
20.
LANDLORD'S ENTRY
Landlord at all reasonable times may enter to view or inspect the Demised
Premises and to make repairs which Landlord may see fit to make in accordance
with Section 8 or otherwise. During a reasonable period not less than six (6)
months preceding the expiration of the initial or any extended term and
throughout any holdover period Tenant will permit Landlord to place and keep
upon and about the Demised Premises a
<PAGE>
notice that the Demised Premises are for rent and during such period Landlord
may enter the Demised Premises to show them to prospective tenants.
21.
RULES AND REGULATIONS
Tenant shall comply with the rules and regulations attached as Exhibit D as
Landlord may prescribe from time to time for the use, safety, care and
cleanliness of the Demised Premises, the Building, the Tract, and any Common
Areas; provided the same are applicable equally to all occupants of the
Building.
22.
QUIET ENJOYMENT
Landlord agrees that if Tenant shall pay the rent as aforesaid and perform
the covenants and agreements herein contained on Tenant's part to be paid and
performed, Tenant shall peaceably hold and enjoy the Demised Premises without
hindrance or interruption by the Landlord or by any other person or persons
claiming through Landlord.
23.
SUBORDINATION AND TENANT'S ESTOPPEL
(a) This Lease Agreement shall be deemed subject and subordinate to any
mortgage or deed of trust which may heretofore or hereafter be executed by
Landlord covering the Demised Premises or any part thereof or the Building or
the Tract and to all renewals, modifications or extensions thereof. The
Landlord's interest in this Lease Agreement may be assigned as security for any
financing now or hereafter required by Landlord. In the event any proceedings
are brought or notice given for foreclosure of any mortgage or deed of trust on
the Demised Premises or the Building or for the exercise of any rights pursuant
to any mortgage, deed of trust or assignment Tenant will attorn to the holder of
the deed of trust, mortgagee, assignee or purchaser at a foreclosure sale, as
the case may be and will recognize such holder, assignee, mortgagee or purchaser
as Landlord, providing such holder, assignee, mortgagee or purchaser agrees not
to disturb Tenant's possession so long as Tenant is not in default under the
terms of this Lease Agreement.
(b) Tenant shall execute and deliver to Landlord at Landlord's request from
time to time, and within seven (7) days thereof (i) instruments evidencing the
subordination position of this Lease Agreement and/or (ii) estoppel certificates
setting forth the date Tenant accepted possession of the Demised Premises, that
Tenant occupies the Demised Premises, the termination date of the Lease
Agreement. the date to which rent has been paid, and the amount of monthly rent
in effect as of such certification, whether or not Tenant has any defense to the
enforcement of Tenant's lease, any knowledge Tenant has of any default or breach
by Landlord, any other matters requested
<PAGE>
by Landlord and that the Lease Agreement is in full force and effect except as
to modifications, agreements or amendments thereto, copies of each of which
including the Lease Agreement shall be attached. Failure by Tenant to comply
with any such request within such seven (7) day period shall be deemed a
conclusive admission by Tenant that this Lease Agreement remains in full force
and effect, that Tenant has no defense thereto and that Landlord is not in
breach thereunder.
24.
CURING DEFAULTS AND LATE CHARGES
(a) If Tenant is required to perform or comply with any agreement or
provision hereof and shall fail to do so within the time provided therefor (or
if no time is provided therefor then within ten (10) days after demand for
compliance shall have been provided to Tenant) then, in each such case, upon the
expiration of the time provided in this Lease Agreement (except in the case of
emergency situations in which event the time frame may be shortened as
appropriate) Landlord may perform and comply therewith for the account and at
the expense of Tenant: and Tenant upon receipt of an itemized invoice of the
cost and expense thereof, agrees to pay as additional rent within thirty (30)
days of billing by Landlord the cost and expense incurred by Landlord.
(b) Tenant shall pay a late charge of the lesser of four percent (4%) of
all sums past due more then fifteen (15) days or the maximum amount allowed by
law and interest at the lesser rate of eighteen percent (18%) per annum on all
past due sums from the due date to the date payment is received or the maximum
amount allowed by law.
25.
EVENTS OF DEFAULT
(a) For purposes of this Lease Agreement, the occurrence of any one or
more of the following shall constitute an "Event of Default" hereunder:
(i) Tenant fails to pay any rent or additional rent as and when due and
such failure continues for a period of seven (7) business days after
written notice thereof is delivered to Tenant by Landlord.
Notwithstanding the foregoing, Landlord shall only be obligated to
give such written notice 3 times in any 12 month period and then upon
the 4th failure of Tenant to make timely payment, such failure shall
constitute an Event of Default.
(ii) Tenant breaches any other agreement or obligation herein set forth and
shall fail to cure such breach within thirty (30) days after written
notice is sent by Landlord; provided that if such cure by its nature
takes more than 30 days and Tenant is diligently pursuing such cure,
then Tenant shall not be in breach of this Lease so long as Tenant
promptly commences the cure thereof and diligently prosecutes such
cure until completion.
<PAGE>
(iii) The commencement in any court or tribunal of any proceeding,
voluntary or involuntary, to declare Tenant insolvent or unable to
pay its debts as and when due:
(iv) The assignment by Tenant of all or any part of Tenant's property or
assets for the benefit of creditors,
(v) The levy or execution, attachment, or taking of property, assets, or
the leasehold interest of Tenant by process of law or otherwise in
satisfaction of any judgment, debt, or claim;
(vi) Tenant files any petition or action for relief under any creditor's
law (including bankruptcy, reorganization, or similar actions),
either in state or federal court:
(vii) Any petition or action for relief under any creditor's law
(including bankruptcy, reorganization, or similar actions), either
in state or federal court is filed against Tenant;
(viii) Tenant conveys away substantially all of Tenant's assets without
adequate consideration; or
(ix) Tenant is dissolved, liquidated, ceases to exist or do business or
becomes insolvent.
(b) Upon the occurrence of any Event of Default, Landlord shall be
entitled, by written notice to the Tenant, to accelerate all rents and other
sums due for the remainder of the Lease, and shall be further entitled to either
(i) to terminate the term hereof or (ii) to terminate Tenant's right to
possession or occupancy only, without terminating the term of this Lease
Agreement. Unless the term is specifically terminated by notice in writing, it
shall be assumed that the Landlord has elected to terminate possession only,
without terminating the term. Any termination of the term or of possession only
shall not affect Tenant's obligations to pay accelerated rent, unaccelerated
rent or any other sums due for the remainder of the Lease.
(c) The remedies of terminating the term, of terminating possession or
otherwise as provided in this Lease Agreement shall be cumulative and in
addition to and not in limitation of any rights and remedies otherwise available
to the Landlord and the exercise of any rights and remedies on default shall not
preclude the exercise of any other rights and remedies available to the Landlord
at law or in equity or otherwise.
<PAGE>
26.
LANDLORD'S RIGHTS ON TERMINATION OF TERM OR POSSESSION
(a) Upon any termination of the initial or extended term hereof, whether by
lapse of time or otherwise, or upon any termination of Tenant's right to
possession or occupancy only, without terminating the term hereof, Tenant shall
surrender possession and vacate the Demised Premises and shall deliver
possession thereof to the Landlord; and Tenant hereby grants to Landlord full
and free license to enter into and upon the Demised Premises in such event to
repossess the Demised Premises as of Landlord's former estate and to expel or
remove Tenant and any others who may be occupying the Demised Premises and to
remove therefrom any and all property, without being guilty of or liable for
trespass, eviction or forcible entry or detainer and without relinquishing
Landlord's right to rent or any other right given to Landlord hereunder or by
operation of the laws of the State of North Carolina.
(b) If Landlord elects to terminate Tenant's right to possession only as
above provided, without terminating the term hereof. Landlord at its option may
enter into the Demised Premises, remove Tenant's property and other evidences of
tenancy and take and hold possession thereof without such entry and possession
terminating the term hereof and without releasing Tenant from its obligation to
pay rents or accelerated rent and other monetary obligations herein reserved for
the full term hereof. Upon and after entry into possession without terminating
such obligations, Landlord shall use reasonable efforts to relet the Demised
Premises, or any part for the account of Tenant to any person, firm or
corporation other than Tenant for such reasonable rent, for such time, and upon
such reasonable terms as Landlord in its sole discretion shall determine. If any
rent is to be collected by Landlord upon any such reletting for Tenant's Account
is not sufficient to pay the full amount of accelerated rent or any other rent
herein reserved (including additional rents and other charges) and any other
monetary obligations hereunder, and not heretofore paid by Tenant, together with
the reasonable costs of retaking possession and any repairs, alterations, or
redecoration necessary for such reletting, Tenant shall pay to Landlord the
amount of the entire deficiency upon demand, and if the rent to be collected
from such reletting is more than enough to pay the full amount of accelerated
rent or the rents reserved hereunder and all of the aforementioned costs,
Landlord shall be entitled to retain such excess. Notwithstanding any
termination of the right to possession without termination of the term, the
Landlord expressly reserves the right, at any time after the termination of
possession, to terminate the term of this Lease Agreement by notice of such
termination to Tenant.
(c) The foregoing rights and remedies of Landlord are in addition to any
other rights and remedies Landlord may have at law or in equity.
<PAGE>
27.
NO WAIVER
The acceptance of rentals and other payments by Landlord for any period or
periods after a default under any of the terms, covenants, and conditions herein
contained to be performed, kept and observed by Tenant shall not be deemed a
waiver of any rights on the part of the Landlord to terminate this Lease
Agreement for any other failure or for the continued failure by Tenant to so
perform, keep or observe its covenants, terms and conditions to be kept,
performed and observed by it. No waiver by Landlord of any of the terms or
conditions of this Lease Agreement shall be construed as a waiver by Landlord of
any subsequent default on the part of Tenant.
28.
NOTICES
All notices, demands and requests to be given hereunder by either party
shall be in writing and must be hand delivered or sent by registered mail or by
certified mail, return receipt requested, and shall be deemed properly given
when hand delivered or sent to the following addresses or at such other address
as either party shall designate by written notice to the other.
*Landlord: 1-40 Properties
P.O. Drawer 850
Burlington, NC 27216-0850
Attn: Mr. Milt Petty
Tenant: Biometric Research Institute, Inc.
1300 North 17th Street, Suite 300
Arlington, Virginia 22209-3801
Attn: Mr. James T. Ogle
*With a copy to
Landlord's Agent: Vanguard . ONCOR International
6320 Quadrangle Drive
Suite 360
Chapel Hill, North Carolina 27514
29.
RELOCATION OF DEMISED PREMISES.
Landlord reserves the right to relocate the Demised Premises to comparable
space within the Park. This right may be exercised by the Landlord one time
during the initial
<PAGE>
lease term. Landlord shall give Tenant written notice of Landlords intention to
relocate the Demised Premises and Tenant shall complete such relocation within
sixty (60) days following giving of such notice by Landlord. Upon such
relocation by Tenant, then effective as of the date of such relocation, this
Lease will be amended by deleting the description of the original Demised
Premises and substituting therefor a description of such comparable space.
Landlord shall provide Tenant one month rent abatement and shall reimburse
Tenant for Tenant's actual reasonable moving costs, (including new stationery,
phone and computer relocation costs).
30.
LEGAL COSTS
Should either party institute any legal proceedings against the other party
for breach of any provision herein contained, and prevail in such action, the
non-prevailing party shall be liable for the reasonable costs and expenses of
the other party, including the other party's reasonable attorney's fees and
expenses.
31.
LIABILITY OF LANDLORD
In the event Landlord shall fail to perform any covenant, term or condition
of this Lease Agreement upon Landlord's part required to be performed, or if
Tenant shall make any claim arising out of Tenant's occupancy or use of the
Demised Premises based upon any action or omission of Landlord, Tenant covenants
and agrees to look solely to Landlord's interest in the Building for any
recovery of money judgment from Landlord from and after the date of this Lease
Agreement. In no event shall the stockholders, partners, directors, officers,
agents or employees of Landlord (either individually or severally) be personally
liable for any such judgment. Furthermore, in no event shall Tenant be entitled
to an award of incidental or consequential damages arising out of any breach by
Landlord including but not limited to any award for damage or destruction of
Tenant's or any other person or entity's personalty or fixtures located in or
about the Demised Premises, moving expenses, storage expenses, alternative
leasing costs and expenses and costs and expenses of locating and procuring
alternative leased space.
32.
ENTIRE AGREEMENT
This Lease Agreement is executed with the express intent and understanding
that it shall supersede any and all prior discussions and/or agreements between
the parties hereto, it being understood and agreed that this Lease Agreement
contains the entire understanding and agreement concerning the Lease Agreement
of the Demised Premises.
<PAGE>
33.
AMENDMENTS
Changes and amendments to this Lease Agreement shall be in writing and
signed by the parties affected by such change or amendment.
34.
CONTROLLING LAW
The Lease Agreement shall be governed by the laws of the State of North
Carolina.
35.
SUCCESSORS AND ASSIGNS
All of the covenants, agreements and conditions of this Lease Agreement
shall accrue to the benefit of and be binding upon the respective parties hereto
and their heirs, successors and assigns.
36.
NO AGENCY
The execution of this Lease Agreement or the performance of any act
pursuant thereto shall not be deemed or construed to create between Landlord and
Tenant the relationship of principal or agent, or of a partnership or joint
venture.
37.
SEVERABILITY
In the event any provision of this Lease Agreement shall be determined to
be invalid or unenforceable, the remaining provisions of this Lease Agreement
shall continue in full force and effect.
38.
FORCE MAJEURE
In the event Landlord or Tenant is unable to perform any actions or
obligations required hereunder by virtue of acts of God or other events beyond
Landlord's or Tenant's control, Landlord or Tenant shall not be in breach
hereunder but shall use due diligence to perform such act or obligation when and
to the extent possible. Notwithstanding the foregoing, this shall not excuse
Tenant from the prompt payment of rent or other monies due under the Lease.
<PAGE>
39.
RECORDATION AND LEASE MEMORANDUM
This Lease Agreement may not be recorded without both parties' prior
written consent, but each party agrees on request of the other to execute a
memorandum hereof for recording purposes.
40.
ASSIGNMENT BY LANDLORD
Landlord may sell the Tract, Building or any portion thereof at any time
and this Lease Agreement may be assigned by Landlord. In the event of any such
assignment, the assignee shall be deemed the Landlord hereunder as of the
effective date of any such assignment, Tenant shall attorn to the same, and the
undersigned Landlord shall have no further liability hereunder for matters
arising after the effective date of any such assignment.
41.
DUE AUTHORIZATION
Tenant warrants that all necessary corporate and/or other action has been
taken by Tenant to authorize Tenant's execution of this Lease Agreement.
42.
BROKERS
Landlord and Tenant respectively represent and warrant to each other that
neither of them has consulted or negotiated with any broker or finder with
regard to the Demised Premises except as identified below in this Section 42. If
none, indicate "none." Each such party shall indemnify the other against and
hold the other harmless from any claims for fees or commissions from anyone with
whom the indemnifying party has consulted or negotiated with regard to the
Demised Premises not identified herein.
Vanguard . ONCOR International
------------------------------
43.
ADA COMPLIANCE
Americans with Disabilities Act compliance is a responsibility of the landlord.
<PAGE>
44.
EXHIBITS
The contents and provisions set Out in any Exhibits attached hereto are
incorporated herein by reference and made a part hereof. If any provision or
provisions set out in said Exhibits are in conflict with any other provisions of
this Lease, the provision or provisions set forth in said Exhibit shall be
controlling.
45.
RENEWAL OPTION
If no uncured Event of Default has occurred, Tenant shall have the option
to renew the term of this Lease for one (1) period of five (5) years. To
exercise such option, Tenant shall give Landlord written notification of its
exercise not later than two hundred seventy (270) days prior to the expiration
of the Initial Lease Term. If Tenant exercises such option, it shall be under
the same terms and conditions as this Lease, and the rent shall be calculated
based on the total rentable square feet then occupied by Tenant and the rental
rate during the last year of the Initial Term Lease, including an extension of
the annual increases of Sixty Cents ($0.60) per rentable square foot per year
through and until the expiration of the extended Lease term.
46.
RIGHT TO EXPAND
If Tenant has not been in default of this lease, Tenant shall have the
Right to expand into Suite 260 (Expansion Space) as shown in Exhibit B, Floor
Plan. Tenant shall give Landlord written notice of Tenant's desire to expand
during the month of January, 1998, or this right will become null and void.
If Tenant exercises this right, Landlord shall provide such space to Tenant
within 180 days of such notice. Landlord shall provide space on an "as is"
basis. Tenant to incur all costs of expansion. The rental rate psf shall be the
same as the current rent rate and schedule under this lease.
<PAGE>
IN WITNESS WHEREOF. Landlord and Tenant have executed and sealed this Lease
Agreement in triplicate originals, all as of the day and year first above
written
LANDLORD:
1-40 PROPERTIES
By: /s/ Maurice Koury
----------------------
Authorized Signatory
ATTEST: Date of Execution: 12/14/95
/s/ Milton Petty ----------
- --------------------------
(CORPORATE SEAL)
- ----------------
TENANT:
BIOMETRIC RESEARCH INSTITUTE, INC. (seal)
By: /s/ John Stewart Marr
----------------------
ATTEST: Authorized Signatory
/s/ Diane R. Dixon Date of Execution: 12/14/95
- ------------------ ----------
(CORPORATE SEAL) Tax ID#: 52-1021604
----------
<PAGE>
STATE OF VIRGINIA
COUNTY OF ARLINGTON
I, Beverly J. Smith , a Notary Public for said County and State, do
----------------
hereby certify that John Stewart Marr personally appeared before me this day and
-----------------
acknowledged the due execution of the foregoing instrument.
Witness my hand and official seal, this the 27th day of November, 1995
----
/s/ Beverly J. Smith
- --------------------
Notary Public
My commission expires: My Commission Expires June 30, 1998
---------------------
STATE OF NORTH CAROLINA
COUNTY OF ALAMANCE
I, Susan B. Stout, a Notary Public for said County and State, do hereby
certify that Maurice Koury personally appeared before me this day and
acknowledged the due execution of the foregoing instrument.
Witness my hand and official seal, this the 14th day of December, 1995
----
/s/ Susan B. Stout
- --------------------
Notary Public
My commission expires: 8-10-99
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION
Quadrangle Five
A certain tract or parcel of realty, lying and being in Triangle Township Durham
County, North Carolina being more fully described as follows:
BEGINNING at an from pipe marking the common corner of Lot 1 and Lot 4 of
Flat Book 109 the centerpoint of Quadrangle Drive cul-de-sac and being located
on the right of way line of Quadrangle Drive; thence with the line of lands of
USA (Jordan Lake Project), a course of S 21 deg 00' 53" E for a distance of
903.70 feet to an existing iron pipe; thence continuing with the line of lands
of USA Jordan Lake Project), a course of E 76 deg 16' 11" W for a distance of
168.77 feet to existing iron pipe in the eastern right of way line of Interstate
Highway 40 (1-40); thence with the line of the eastern right of way of I-40, a
course of N 46 deg 47' 58" W for a distance of 457.59 feet to an existing iron
pipe; thence with the line of the eastern right of way of I-40, a course of N 39
deg 33' 43" W for a distance of 286.16 feet to an existing iron pipe; thence
with the line of the eastern right of way of I-40, a course of N 33 deg 48' 21"
W for a distance of 182.06 feet to an existing iron pipe marking the
southernmost corner of Lot 2 of Plat Book 109 page 188; thence with the line of
Lot 2 of Plat Book 109 page 151, a course of N 50 deg 41' 41" E for a distance
of 373.11 feet to an existing iron pipe in the right of way line of Quadrangle
Drive; thence with the right of way of Quadrangle Drive, along the arc of a
circular curve with a radius of 140.00 feet and a delta angle of 76 deg 03' 06"
for an arc length of 185.81 feet, a chord bearing of S 77 deg 19' 52" E and
chord length of 172.48 feet to an existing iron pipe, the point and place of
BEGINNING and containing 335,525 square feet or 7.703 acres, more or less.
<PAGE>
EXHIBIT A-1
SITE PLAN
<PAGE>
<PAGE>
EXHIBIT B
[FLOOR PLAN]
<PAGE>
EXHIBIT B-1
[SPACE PLAN]
<PAGE>
EXHIBIT C
TENANT IMPROVEMENTS
LANDLORD'S WORK
DESCRIPTION OF SHELL BUILDING
-----------------------------
Landlord, at Landlord's cost and before the application of Tenant
improvement allowance, will complete the shell building with finished
lobby, bathrooms core areas, and deliver Tenant space with a concrete slab,
installed trunkline HVAC distribution system through medium pressure
ductwork, including low pressure VAV boxes and thermostats, electrical
capacity with sufficient power to support 1.5 watts of connected load per
usable square foot for Tenant's convenience outlets and to support light
fixtures at the ratio of 1 (4) tube fluorescent fixture per 85 usable
square feet, window blinds installed, installed 2' x 2' ceiling splines
only and sheet rock and insulation on the exterior of the corridor walls.
Landlord will complete the parking areas serving the Building. Landlord's
completion of shell building shall be evidenced by delivery to Tenant of
copies of the certificate of occupancy for the building issued by the
governmental authority with jurisdiction over such work.
UPFIT ALLOWANCE
---------------
Landlord shall provide an upfit "allowance" of $90,653 for improvements to
the Premises. In addition, Landlord will also, at Landlord's expense,
provide for 24 hour HVAC through building standard systems in computer
room. In the event the costs for improvements to the premises do not exceed
$90,653, Tenant may use the actual cost differential between the allowance
and the actual costs as a rental credit in the first month of the lease
term.
TENANT'S WORK
Tenant responsible for all costs of Tenant improvements above allowance
provided by Landlord. Tenant responsible for all phones, computer systems
and furniture shown on Exhibit B-I Space Plan.
<PAGE>
EXHIBIT D
RULES AND REGULATIONS
1. The sidewalks, entrances, passages, courts, corridors, or halls shall not be
encumbered by any Tenant or used for any purpose other than ingress and egress
to and from Demised Premises.
2. No awnings or other projections shall be attached to the outside walls of
buildings without the prior written consent of the Landlord. No curtains,
blinds, shades or screens other than Landlord's standard shall be attached to,
hung in, or used in connection with any window or door of the Demised Premises.
No bottles, parcels, or other articles may be placed on window ledges.
3. No sign, advertisement, notice, or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
Premises. In the event of the violation of the foregoing by any Tenant, Landlord
may remove the same without any liability, and may charge removal expense to
Tenant. Landlord reserves the right to install and maintain a sign or signs on
the exterior of the Premises.
4. The water, wash closets, and other plumbing fixtures shall not be used for
any other purpose other than those for which they were constructed, and no
sweeping, rubbish, rags, or other substances shall be thrown therein.
5. No Tenant shall mark, paint drill into, or in any way deface any part of the
Demised Premises or Premises without Landlord's written consent. No boring,
cutting, or stringing of wires shall be permitted without prior written consent
of Landlord. No Tenant shall lay linoleum, or other similar floor covering, so
that the same shall come into contact with the floor of the Demised Premises,
and if linoleum or other similar floor covering is desired to be used, consent
in writing by Landlord is required. The use of cement or other similar adhesive
material being expressly prohibited.
6. No bicycles, vehicles, birds, or animals or any kind shall be brought into
or kept in or about the Premises. No cooking shall be done or permitted by any
Tenant on said Premises without prior written consent of Landlord. However, this
does not prevent Tenant from using a microwave, or having coffee, soft drinks,
and other items for use of Tenant's employees, agents, or visitors. Tenant shall
not cause or permit any unusual or objectionable odors to be produced upon or
permeate from the Demised Premises.
7. No space in Premises shall be used for the sale of property of any kind at
auction.
8. No Tenant shall make, or permit to be made, any unseemly or disturbing
noises or disturb or interfere with occupants of the Premises or neighboring
buildings or those having business with them. No Tenant shall throw anything out
of the doors or down the passageways.
<PAGE>
9. No additional locks or bolts or any kind shall be placed upon door or
windows by any Tenant, nor shall any changes be made in existing locks or the
mechanisms thereof, without the prior written consent of Landlord. Tenant will
be supplied at move-in a reasonable number of keys to the exterior door of the
Demised Premises. Additional keys may be supplied solely and exclusively by
Landlord at a reasonable charge to Tenant. Each Tenant must upon termination of
Lease, return to Landlord all keys of offices, toilet rooms, either furnished to
or otherwise procured by Tenant.
10. All removals or the carrying in or out of any safes, freight, furniture, or
bulky matter of any description must take place during such hours, on such
elevators and in such a manner as designated by Landlord. Business machines and
mechanical equipment shall be placed and maintained by Tenant in settings
sufficient, in Landlord's judgment, to absorb and prevent vibration, noise and
annoyance. Tenant agrees not place a load upon any floor of the Premises
exceeding, the floor load capacity which such floor was (and is) designed to
carry.
11. No Tenant shall open, or permit windows in the Demised Premises to be
opened at any time.
12. No part of the Premises or Demised Premises shall be used for lodging or
sleeping, or any illegal purpose.
13. The requirements of Tenant will be attended to only upon application at the
office of the Landlord. Landlord's employees shall not perform any work on the
Demised Premises or do anything outside of their regular duties unless prior
written approval is given by Landlord.
14. Canvassing, soliciting, and peddling on Premises is prohibited and each
Tenant shall cooperate to prevent same.
15. All Tenants shall cooperate to prevent excessive use or abuse of parking
privileges. Parking is permitted only during time of typical office use or at
time of emergency or with prior written consent of Landlord.
16. Any extraordinary use of HVAC, water, or electricity shall be charged to
Tenant at reasonable rates. Tenant shall not install equipment with unusual
demands for any of the foregoing without prior written consent of Landlord.
17. No Tenant shall employ any person or persons other than the janitor of
Landlord for the purpose of cleaning the Premises unless otherwise agreed to by
Landlord in writing. Except with the written consent of Landlord, no person or
persons, other than those approved by Landlord, shall be permitted to enter the
Building for the purpose of cleaning same. No Tenant shall cause any unnecessary
labor by reason of such Tenant's
<PAGE>
carelessness or indifference in the preservation of good order and cleanliness
of the Premises.
18. Tenant shall not waste electricity, water, or air-conditioning and agrees
to cooperate fully with Landlord to assure the most effective operation of the
Building's heating and air-conditioning and observe energy conservation
recommendations.
19. No Tenant shall use or keep in its Demised Premises or the Building any
kerosene, gasoline, or inflammable or combustible fluid or material other than
limited quantities necessary for the operation or maintenance of office
equipment. No Tenant shall use any method of heating or air-conditioning other
than that supplied by Landlord.
20. Each Tenant shall store all its trash and garbage within the interior of
its premises.
No materials shall be placed in the trash boxes or receptacles if such material
is of such nature that it may not be disposed of in the ordinary and customary
manner of removing and disposing of trash and garbage in this area without
violation of any law or ordinance governing such disposal All trash, garbage and
refuse disposal shall be made only through entryways and elevators provided for
such purposes and at such times as Lessor may designate. All bulk trash other
than that contained in normal office trash containers (moving boxes, etc...) are
Tenant's responsibility to remove.
21. Landscaping: No Tenant or guest will walk through flower or other plant
beds, cut or break off flowers, twigs or other foliage, or in any way destroy
landscaping.
22. Smoking is not permitted in any interior common areas of the Building.
Interior common areas are defined by way of illustration but not limitation as
lobbies, entrances, hallways, corridors, stairs and stairwells, elevators,
mailrooms, restrooms and other such facilities used in common with and/or for
the benefit of all Tenants. The term "Tenants" shall be deemed to include the
individual/company of record in the Lease together with it's agents, licensees,
contractors, guests, customers, clients, invitees, and assignees. Smoking in the
Building is permitted only within individual Tenant suites (as determined by
Tenant's policy).
23. These Rules and Regulations are in addition to, and shall not be construed
or in any way modify, alter or amend, in whole or in part, the terms, covenants
agreements and conditions or any lease of premises in the Building.
<PAGE>
EXHIBIT 10.2
STRATEGIC PHARMACEUTICAL DEVELOPMENT, INC.
STOCK OPTION PLAN
1. Purpose. The Strategic Pharmaceutical Development, Inc. Stock Option Plan
-------
(the "Plan") is established to create an additional incentive for key
employees, directors and consultants or advisors of Strategic
Pharmaceutical Development, Inc. and any successor corporations thereto
(collectively referred to as the "Company"), and any present or future
parent and/or subsidiary corporations of such corporation (all of whom
along with the Company being individually referred to as a "Participating
Company" and collectively referred to as the "Participating Company
Group"), to promote the financial success and progress of the Participation
Company Group. For purposes of the Plan, a parent corporation and a
subsidiary corporation shall be as defined in Sections 424(e) and 424(f) of
the Internal Revenue Code of 1986, as amended (the "Code").
2. Administration. The Plan shall be administered by the Board of Directors
--------------
of the Company (the "Board") and/or by a duly appointed committee of the
Board having such powers as shall be specified by the Board. Any
subsequent references herein to the Board shall also mean the committee if
such committee has been appointed and, unless the powers of the committee
have been specifically limited, the committee shall have all of the powers
of the Board granted herein, other than power to terminate or amend the
Plan as provided in section 12 hereof, subject to the terms of the Plan and
any applicable limitations imposed by law. All questions of interpretation
of the Plan or of any option granted under the Plan (an "Option") shall be
determined by the Board, and such determinations shall be final and binding
upon all persons having an interest in the Plan and/or any Option. Options
may be either incentive stock options as defined in Section 422 of the Code
("Incentive Stock Options") or nonqualified stock options. Any officer of
a Participating Company shall have the authority to act on behalf of the
Company with respect to any matter, right, obligation, or election which is
the responsibility of or which is allocated to the Company herein, provided
the officer has apparent authority with respect to such matter, right,
obligation, or election.
3. Eligibility. The Options may be granted only to employees (including
-----------
officers) and directors of the Participating Company Group or to
individuals who are rendering services as consultants, advisors or other
independent contractors to the Participating Company Group. The Board, in
its sole discretion, shall determine which persons shall be granted Options
(an "Optionee"). A director of the Company shall be eligible to be granted
only a nonqualified stock option unless the director is also an employee of
the Company. An individual who is rendering services as a consultant,
advisor, or other independent contractor shall be eligible to be granted
only a nonqualified stock option. An Optionee may, if otherwise eligible,
be granted additional Options.
4. Shares Subject to Option. Options shall be options for the purchase of the
------------------------
authorized but unissued common stock of the Company (the "Stock"), subject
to adjustment as provided in paragraph 10 below. The maximum number of
shares of Stock which may be issued
<PAGE>
under the Plan shall be One Million, One Hundred Ninety Thousand
(1,190,000) shares. In the event that any outstanding Option for any reason
expires or is terminated or cancelled and/or shares of Stock subject to
repurchase are repurchased by the Company, the shares allocable to the
unexercised portion of such Option, or such repurchased shares, may again
be subject to an Option grant. It is intended that the Plan shall
constitute a written compensatory benefit plan within the meaning of Rule
701 promulgated under the Securities Act of 1933, as amended ("Rule 701"),
and that the Plan shall otherwise be administered in compliance with the
requirements of Rule 701. To ensure such compliance, the Board shall
maintain a record of shares subject to outstanding Options under the Plan
and the exercise price of such Options, plus a record of all shares of
Common Stock issued upon the exercise of such Options and the exercise
price of such Options.
5. Time for Granting Options. All Options shall be granted, if at all, within
-------------------------
ten (10) years from the earlier of the date the Plan is adopted by the
Board or the date the Plan is duly approved by the shareholders of the
Company.
6. Terms, Conditions and Form of Options. Subject to the provisions of the
-------------------------------------
Plan, the Board shall determine for each Option (which need not be
identical) the number of shares of Stock for which the Option is granted,
whether the Option is to be treated as an Incentive Stock Option or as a
nonqualified stock option and all other terms and conditions of the Option
not inconsistent with the Plan. Options granted pursuant to the Plan shall
comply with and be subject to the following terms and conditions:
(a) Option Price. The option price for each Option shall be established
------------
in the sole discretion of the Board; provided, however, that (i) the
option price per share for an Incentive Stock Option shall be not less
than the fair market value of a share of Stock on the date of the
granting of the Incentive Stock Option and (ii) the option price per
share of an Incentive Stock Option granted to an Optionee who at the
time the Incentive Stock Option is granted owns stock possessing more
than ten percent (10%) of the total combined voting power of all
classes of stock of a Participating Company within the meaning of
section 422(b)(6) of the Code (a "Ten Percent Owner Optionee") shall
be not less than one hundred ten percent (110%) of the fair market
value of a share of Stock on the date the Option is granted. For this
purpose, "fair market value" means the value assigned to the stock for
a given day by the Board, as determined pursuant to a reasonable
method established by the Board that is consistent with the
requirements of sections 422 and 424 of the Code and the regulations
thereunder (which method may be changed from time to time).
Notwithstanding the foregoing, an Option (whether an Incentive Stock
Option or a nonqualified stock option) may be granted by the Board in
its discretion with an exercise price lower than the minimum exercise
price set forth above if such Option is granted pursuant to an
assumption or substitution for another option in a manner qualifying
with the
2
<PAGE>
provisions of section 424(a) of the Code. Nothing hereinabove shall
require that any such assumption or modification will result in the
Option having the same characteristics, attributes or tax treatment as
the Option for which it is substituted.
(b) Exercise Period of Options. The Board shall have the power to set the
--------------------------
time or times within which each Option shall be exercisable or the
event or events upon the occurrence of which all or a portion of each
Option shall be exercisable and the term of each Option; provided,
however, that (i) no Incentive Stock Option shall be exercisable after
the expiration of ten (10) years after the date such Incentive Stock
Option is granted, (ii) no Incentive Stock Option granted to a Ten
Percent Owner Optionee shall be exercisable after the expiration of
five (5) years after the date such Incentive Stock Option is granted
and (iii) no Incentive Stock Option shall be exercisable after the
date the Optionee's employment with the Participating Company Group is
terminated for cause (as determined in the sole discretion of the
Board); and provided, further, an Option shall terminate and cease to
be exercisable no later than three (3) months after the date on which
the Optionee terminates employment with the Participating Company
Group, unless the Optionee's employment with the Participating Company
Group shall have terminated as a result of the Optionee's death or
disability (within the meaning of Section 22(e)(3) of the Code), in
which event the Option shall terminate and cease to be exercisable no
later than twelve (12) months from the date on which the Optionee's
employment terminated. For this purpose, an Optionee's employment
shall be deemed to have terminated on account of death if the Optionee
dies within three (3) months following the Optionee's termination of
employment.
(c) Payment of Option Price. Payment of the option price for the number
-----------------------
of shares of Stock being purchased pursuant to any Option shall be
made in cash, by check or cash equivalent.
(d) $100,000 Limitation. The aggregate fair market value, determined as
-------------------
of the date on which an Incentive Stock Option is granted, of the
shares of Stock with respect to which incentive stock options
(determined without regard to this subsection) are first exercisable
during any calendar year (under this Plan or under any other plan of
the Participating Company Group) by any Optionee shall not exceed
$100,000. If such limitation would be exceeded with respect to an
Optionee for a calendar year, the Incentive Stock Option shall be
deemed a nonqualified stock option to the extent of such excess.
7. Standard Form of Stock Option Agreement. All Options shall be evidenced by
---------------------------------------
a written award agreement in the form of the nonqualified stock option
agreement attached hereto as Exhibit A or the incentive stock option award
---------
agreement attached hereto as Exhibit B, as applicable, both of which are
---------
incorporated herein by reference (the "Standard Option Agreements").
3
<PAGE>
8. Transfer of Control. Upon a merger, consolidation, corporate
--------------------
reorganization, or any transaction in which all or substantially all of the
assets of the Company are sold, leased, transferred or otherwise disposed
of (other than a mere reincorporation transaction or one in which the
holders of capital stock of the Company immediately prior to such merger or
consolidations continue to hold at least a majority of the voting power of
the surviving corporation) (a "Transfer of Control"), then any
unexercisable portion of an outstanding Option shall become immediately
exercisable as of a date prior to the Transfer of Control, which date shall
be determined by the Board. The exercise of any Option that was
permissible solely by reason of this paragraph 8 shall be conditioned upon
the consummation of the Transfer of Control. The Board may further elect,
in its sole discretion to provide that any Options which became exercisable
solely by reason of this paragraph 8 and which are not exercised as of the
date of the Transfer of Control shall terminate effective as of the date of
the Transfer of Control.
9. Authority to Vary Terms. The Board shall have the authority from time to
-----------------------
time to vary the terms of the Standard Option Agreements either in
connection with the grant of an individual Option or in connection with the
authorization of a new standard form or forms; provided, however, that the
terms and conditions of such revised or amended standard form or forms of
stock option agreement shall be in accordance with the terms of the Plan.
Such authority shall include, but not by way of limitation, the authority
to grant Options which are not immediately exercisable.
10. Effect of Change in Stock Subject to Plan. The Board shall make
-----------------------------------------
appropriate adjustments in the number and class of shares of Stock subject
to the Plan and to any outstanding Options and in the option price of any
outstanding Options in the event of a stock dividend, stock split, reverse
stock split, combination, reclassification or like change in the capital
structure of the Company.
11. Options Non-Transferable. During the lifetime of the Optionee, the Option
------------------------
shall be exercisable only by the Optionee. No Option shall be assignable
or transferable by the Optionee, except by will or by the laws of descent
and distribution.
12. Termination or Amendment of Plan. The Board may terminate or amend the
--------------------------------
Plan at any time; provided however, that without the approval of the
Company's shareholders, there shall be (a) no increase in the total number
of shares of Stock covered by the Plan (except by operation of the
provisions of paragraph 10 above), (b) no change in the class of persons
eligible to receive Incentive Stock Options, and (c) no extension of the
period during which Incentive Stock Options may be granted beyond the date
which is ten (10) years following the date the Plan is adopted by the
Company or the date the Plan is approved by the shareholders of the
Company. In any event, no amendment may adversely affect any then
outstanding Option or any unexercised portion thereof, without the consent
of the Optionee, unless such amendment is required to enable an Option
4
<PAGE>
designated as an Incentive Stock Option to qualify as an Incentive Stock
Option.
13. Miscellaneous
-------------
(a) Nothing in this Plan or any Option granted hereunder shall confer upon
any Optionee any right to continue in the employ of the Participating
Company Group, or to serve as a director thereof, or interfere in any
way with the right of a Participating Company to terminate his or her
employment at any time. Unless specifically provided otherwise, no
grant of an Option shall be deemed salary or compensation for the
purpose of computing benefits under any employee benefit plan or other
arrangement of a Participating Company for the benefit of its
employees unless the Participating Company shall determine otherwise.
No Optionee shall have any claim to an Option until it is actually
granted under the Plan. To the extent that any person acquires a
right to receive payments from the Company under the Plan, such right
shall, except as otherwise provided by the Board, be no greater than
the right of an unsecured general creditor of the Company. All
payments to be made hereunder shall be paid from the general funds of
the Company, and no special or separate fund shall be established and
no segregation of assets shall be made to assure payment of such
amounts, except as otherwise provided by the Committee.
(b) The Plan and the grant of Options hereunder shall be subject to all
applicable federal and state laws, rules, and regulations and to such
approvals by any United States government or regulatory agency as may
be required.
(c) The terms of the Plan shall be binding upon the Company, and its
successors and assigns.
(d) This Plan and all actions taken hereunder shall be governed by the
laws of the State of North Carolina.
(e) With respect to any payments not yet made to a Optionee by the
Company, nothing contained herein shall give any such Optionee any
rights that are greater than those of a general creditor of the
Company.
(f) If any provision of this Plan or a Standard Option Agreement is or
becomes or is deemed invalid, illegal or unenforceable in any
jurisdiction, or would disqualify the Plan or any Standard Option
Agreement under any law deemed applicable by the Board, such provision
shall be construed or deemed amended to conform to applicable laws or
if it cannot be construed or deemed amended without, in the
determination of the Board, materially altering the intent of the Plan
or the Standard Option Agreement, it shall be stricken and the
remainder of the Plan or the Standard Option Agreement shall remain in
full force and effect.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing Plan was duly adopted by the Board of Directors of the Company on
the 20th day of November, 1996.
STRATEGIC PHARMACEUTICAL
DEVELOPMENT, INC.
By: /s/ Peter J. Wise
------------------------
Peter J. Wise, Secretary
6
<PAGE>
EXHIBIT 10.3
FIRST AMENDMENT TO STOCK OPTION PLAN
OF
STRATEGIC PHARMACEUTICAL DEVELOPMENT, INC.
This AMENDMENT to the Strategic Pharmaceutical Development, Inc. Stock
Option Plan, dated November 20, 1996 (the "Plan"), adopted and approved by the
Board of Directors, is dated as of February 14, 1997.
WHEREAS, Strategic Pharmaceutical Development, Inc. (the "Corporation")
changed its name from Strategic Pharmaceutical Development, Inc. to POZEN Inc.
by filing a Certificate of Amendment of Certificate of Incorporation with the
Delaware Secretary of State on February 14, 1997.
NOW, THEREFORE, the Plan is hereby amended as set forth below:
1. The name "Strategic Pharmaceutical Development, Inc. Stock Option
Plan", as it appears in the title and in the first sentence of
Paragraph 1 of the Plan, shall be changed to "POZEN Inc. Stock
Option Plan."
2. The name "Strategic Pharmaceutical Development, Inc.", as it
appears throughout the Plan, and all exhibits thereto, shall be
changed to "POZEN Inc."
3. Except as herein amended, the terms and provisions of the Plan
shall remain in full force and effect as originally executed.
STRATEGIC PHARMACEUTICAL
DEVELOPMENT, INC. which has
changed its name to POZEN Inc.
/s/ John R. Plachetka
-----------------------------
John R. Plachetka, President
<PAGE>
EXHIBIT 10.4
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement"), is entered into as of
April 1, 1999, by and between POZEN Inc. (the "Company") located at 3660
Quadrangle Drive, Suite 240, Chapel Hill, NC, and John R. Plachetka (the
"Employee") whose address is 321 Silver Creek Trail, Chapel Hill, NC, 27514.
WITNESSETH:
WHEREAS, the Company is engaged in certain pharmaceutical research, development,
and marketing activities; and
WHEREAS, the Company has employed and wishes to continue to employ the Employee
in the position of President, Chief Executive Officer, and Chief Scientist, and
the Employee desires to continue in the employment with the Company.
NOW THEREFORE, in consideration of the foregoing and the provisions and mutual
promises herein contained and other good and valuable consideration, the parties
hereby agree as follows:
1. EMPLOYMENT. The Company hereby engages and employs the Employee, and the
Employee hereby accepts engagement and employment as the President, Chief
Executive Officer and Chief Scientist of the Company, based in the Research
Triangle Park region, with principal responsibilities as described in
Exhibit "A" attached hereto and such other responsibilities as may be
assigned to him from time to time by the Board of Directors of the Company.
2. TERM. The Employee's employment shall be for a term of three years from the
date of execution of this Agreement, and thereafter shall be automatically
renewed with additional one year terms to follow consecutively, subject to
the termination and severance provisions herein later provided, unless
amended or modified by mutual agreement of the parties.
3. EXCLUSIVE SERVICE. The Employee agrees to devote his full time and
attention to the performance of his duties and responsibilities on behalf
of the Company and to comply with all policies and regulations of the
Company.
4. COMPENSATION. During the Term of this Agreement, the Employee's
compensation shall be determined and paid as follows:
(a) Base Salary. The Employee shall receive an annual base salary of at
least $240,000, payable in accordance with the Company's payroll
practices. Annual increases will be made, if any, based upon
performance, such increases to be effective as of January 1 of each
year during the Term.
(b) Incentive Pay. The Employee shall be eligible for an annual cash
incentive payment of up to 25% of his annual base salary, or such
greater
1
<PAGE>
amount as set by the Compensation Committee of the Board of Directors
by March 31 each year. The determination of the actual bonus earned,
if any, shall be at the sole discretion of the Compensation Committee
of the Board of Directors and based upon their assessment of the
Employee's performance and the achievement of certain objectives which
shall be set and mutually agreed from time to time. The Employee's
performance shall be evaluated by the Compensation Committee on an
annual basis, and the Compensation Committee shall adjust the
Employee's salary at its sole discretion. Nothing in this section
shall be construed to guarantee the Employee's incentive payment.
(c) Employee shall be eligible for future stock options as shall be
awarded in the discretion of the Compensation Committee of the Board
of Directors.
(d) Benefits. The Employee shall be eligible to participate in the
Company's standard employee benefit program made available to
employees of the Company from time to time, subject to appropriate
premium contributions, benefit elections, etc. In addition, the
Employee shall receive four (4) weeks of paid vacation per year.
(e) Disability. The Company will pay the Employee as additional salary for
the premium costs of an individual long term disability insurance
plan. The plan shall provide for a benefit indemnity payment schedule
equal to no more than 70% (typically 60%) of the Employee's annual
base salary rate. The Company shall pay the Employee as additional
salary for such long term disability plan and the additional income
taxes owed on the salary payments.
(f) Business Expenses. The Company shall reimburse the Employee for all
reasonable expenses incurred in the furtherance of the Company's
business and interests, including travel and entertainment. The
Employee agrees to comply with the expense reporting policies and
procedures of the Company.
(g) Adequate Office Space. The Company shall provide to the Employee
adequate office space, facilities, and administrative support
appropriate to the Employee's position.
(h) Estate Planning Costs. The Company will reimburse Executive for
---------------------
estate planning legal fees and expenses incurred by him in calendar
year 1999 up to a maximum of $15,000.
5. TERMINATION. This Agreement shall or may be terminated, as the case may
be, upon the terms and conditions hereinafter provided.
2
<PAGE>
(a) Severance Period. In the event of termination of employment for
reasons other than for cause or voluntary termination (as defined
below) or in the event that the office from which the Employee
performs his principal duties is moved more that 50 miles from the
outer boundaries of Wake, Orange and Durham County, North Carolina, or
in the event that the Employee's duties and responsibilities as Chief
Executive Officer are substantially reduced, the Employee shall
receive severance pay in an amount equal to one years' base salary
plus the annual average bonus awarded over the previous two years. The
Employee shall also receive all company benefits on which the Employee
was a participant as of the date of termination, at the same average
level, and in the same terms and conditions which applied immediately
prior to the date of the Employee's termination of employment for one
year following the date of termination or until the Employee obtains
comparable coverage from another employer. At any time during the
severance period, the Company may elect to pay a lump sum amount to
the Employee which represents the reasonable value of such benefits
reduced to their present value in lieu of continuing payment of
benefits.
(b) Voluntary Termination. This Agreement shall be considered voluntarily
terminated by the parties if either party provides written notice of
his/its intent to not renew this Agreement, provided that such party
provides at least ninety (90) days written notice to the other party
prior to the last day of the initial term or any renewal term.
(c) Involuntary Termination. The Company may terminate this Agreement upon
written notice to the Employee (or his representative) in any of the
following events:
(I) In the event of death of the Employee,
(II) In the event that the Employee becomes permanently disabled; or
(III) "For cause" which shall include breach of the terms of this
Agreement; breach of the Nondisclosure, Invention, Non-
Competition Agreement (described in Section 6 below); material
failure by the Employee to comply with the policies or
directives of the Board of Directors; any illegal or dishonest
action that is materially detrimental to the Company; or failure
to faithfully carry out the duties of his position, provided
that the Company shall provide at least thirty (30) days written
notice of such failure to perform during which time the employee
may remedy the situation.
For purposes of this Agreement, the Employee shall be considered
permanently disabled when a qualified medical doctor mutually acceptable to
the Company and the Employee or his personal representative shall have
certified in writing that: (i) he is unable because of medically
determinable physical or mental disability to perform substantially all of
his duties for more than one hundred eighty (180) calendar days measured
from the last full day of work; or (ii) by reason of mental or physical
disability, it is unlikely that he will be able, within
3
<PAGE>
one hundred eighty (180) calendar days, to resume substantially all
business duties and responsibilities in which he was previously engaged and
otherwise discharge his duties under this Agreement.
In the event that the Employee is terminated pursuant to this Section 5 or
upon termination of the Agreement, the Employee agrees to tender his
resignation as a member of the Board of Directors of the Company as of the
date of such termination.
6. NON-DISCLOSURE, INVENTION, AND NON COMPETITION. The Employee shall execute
the standard non-disclosure, invention, and non competition agreement,
which is hereby made a part of this Agreement as Exhibit B attached hereto.
7. NOTICES. Any notice required to be given shall be in writing personally
delivered by certified mail or registered mail or by facsimile (receipt
confirmed) to the address last shown in the Company's records.
8. SEVERABILITY. The provisions of this Agreement shall be deemed severable,
and the invalidity or unenforceability of any provision (or part thereof)
of this Agreement shall in no way affect the validity or enforceability of
any other provision (or remaining part thereof).
9. GOVERNING LAW. This Agreement shall be governed by and construed according
to the laws of the State of North Carolina, without reference to the choice
of law provisions of such laws.
10. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof, and the parties hereto have
made no agreements, representations, or warranties relating to the subject
matter of this Agreement which are not set forth herein. No modification of
this Agreement shall be valid unless made in writing and signed by the
parties hereto.
11. BENEFIT. This Agreement shall be binding upon and shall inure to the
benefit of each of the parties hereto, and to their respective
representatives. This Agreement shall be binding upon the Company and upon
any successor Company. The Employee may not assign any of his rights or
obligations under this Agreement without the written consent of the Board
of Directors.
12. The Employee understands and agrees that the Company will suffer
irreparable harm in the event that the Employee breaches any of his
obligations under this Agreement and that monetary damages will be
inadequate to compensate the Company for such breach. Accordingly, the
Employee agrees that, in the event of a breach or threatened breach by the
Employee of any of the provisions of this Agreement, the Company, in
addition to and not in limitation of any other rights, remedies, or damages
available to the Company at law or in equity, shall be
4
<PAGE>
entitled to a permanent injunction in order to prevent or to restrain any
such breach by the Employee, or by the Employee's partners, agents,
representatives, servants, employers, employees and/or any and all persons
directly or indirectly acting for or with him; provided such injunction
shall not affect the Employee's ownership rights in the Company or
compensation earned or due the Employee.
IN WITNESS WHEREOF, the parties hereto have executed this Executive Employment
Agreement and affixed their seals as of the day and year first above written.
SIGNATURES:
/s/ John R. Plachetka
- -----------------------------------
John R. Plachetka, Pharm.D.
President & CEO
/s/ Joseph J. Ruvane, Jr.
- -----------------------------------
Joseph J. Ruvane, Jr.
Chairman
________________________________________________________________________________
5
<PAGE>
Exhibit A
President and Chief Executive Officer
-------------------------------------
Responsibilities
Report to: Board of Directors
Supervise: Executive Staff
1. Provides leadership to the Company and its employees with final
responsibility for the achievement of the Company's annual and long-term
strategic goals.
2. Set Company strategy, including long and short-term objectives, in
accordance with guidance from the Board of Directors.
3. Select and develop a first-rate executive staff. Set corporate standards
and expectations for executive staff performance. Delegate appropriate
levels of authority and responsibility to senior staff. Establish a culture
of high achievement and team rewards and recognition for all Company
employees.
4. Approve Company's drug development strategy and product portfolio. Approve
internal Company operating policies and procedures to insure compliance
with all appropriate laws and regulations, in accordance with sound
business practices.
5. Responsible for approving and achieving annual budget targets for expense,
revenue, and capital investment.
6. Represent the Company to key outside contacts, including investment
community, regulatory agencies, potential strategic partners and customers.
6
<PAGE>
Exhibit B
NON-DISCLOSURE, INVENTION AND NON-COMPETITION AGREEMENT
THIS NON-DISCLOSURE, INVENTION AND NON-COMPETITION AGREEMENT (the
"Agreement") is effective for all purposes and in all respects, by and between
POZEN Inc., a Delaware corporation (hereinafter referred to as "Employer"), and
John R. Plachetka, Pharm.D. (hereinafter referred to as "Employee").
WHEREAS, Employer is about to employ Employee in a position of trust and
confidence to aid Employer in its business; and
WHEREAS, Employer desires to receive from Employee a covenant not to
disclose certain information relating to Employer's business and certain other
covenants; and
WHEREAS, as a material inducement to Employer to employ Employee and to pay
to Employee compensation for such services, Employee has agreed to such
covenants; and
WHEREAS, Employer and Employee desire to set forth in writing the terms and
conditions of their agreements and understandings.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises
herein contained, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending
legally to be bound, hereby agree as follows:
1. Disclosure of Information. Employee acknowledges that, in and as a
-------------------------
result of his employment by Employer, he will be making use of, acquiring and/or
adding to confidential information of a special and unique nature and value,
including, without limitation, Employer's trade secrets, products, systems,
programs, procedures, manuals, guides (as periodically updated or supplemented),
confidential reports and communications (including, without limitation, customer
site information, technical information on the performance and reliability of
Employer's products and the development or acquisition of future products or
product enhancements by Employer) and lists of customers, as well as the nature
and type of the services rendered by Employer and the fees paid by Employer's
customers. Employee further acknowledges that any information and materials
received by Employer from third parties in confidence (or subject to non-
disclosure covenants) shall be deemed to be and shall be confidential
information within the meaning of this Section 1. As a material inducement to
Employer to employ Employee and to pay to Employee compensation for such
services to be rendered to Employer by Employee (it being understood and agreed
by the parties hereto that such compensation shall also be paid and received in
consideration hereof), Employee covenants and agrees that he shall not, except
with the prior written consent of the Board of Directors of Employer, at any
time during or following the term of his
7
<PAGE>
employment with Employer, directly or indirectly, divulge, reveal, report,
publish, transfer or disclose, for any purpose whatsoever, any of such
confidential information which has been obtained by or disclosed to him as a
result of his employment with Employer, including, without limitation, any
Proprietary Information, as defined in Section 2 hereof. The aforementioned
obligation of confidentiality and non-disclosure shall not apply when:
(a) Public Domain. The information disclosed to Employee was in the
-------------
public domain at the time of disclosure, or at any time after disclosure has
become a part of the public domain by publication or otherwise through sources
other than Employee, directly or indirectly, and without fault on the part of
Employee in failing to keep such information confidential; or
(b) Requirement of Law or Order. Disclosure is required by law or
---------------------------
court order, provided Employee gives Employer prior written notice of any such
disclosure; or
(c) Agreement. Disclosure is made with the prior written agreement of
---------
the Board of Directors of Employer; or
(d) Prior Information. The information is encompassed by the ideas and
-----------------
inventions listed on Schedule A hereto or was in Employee's possession at the
----------
time of disclosure, as shown by written records in existence prior to such time,
and such information has not been transferred to Employer, and was not acquired,
directly or indirectly, from the Employer; or
(e) Third Party Disclosure. The information is lawfully disclosed to
----------------------
Employee after the termination of his employment by a third party who is under
no obligation of confidentiality to Employer with respect to such information;
or
(f) Independently Developed. Such information is independently
-----------------------
developed by Employee subsequent to the termination of his active participation
in the business of Employer, as demonstrated by written records of Employee
which are contemporaneously maintained.
2. Definition of Proprietary Information. For purposes of this
-------------------------------------
Agreement, the term "Proprietary Information" shall mean all of the following
materials and information (whether or not reduced to writing and whether or not
patentable or protectable by copyright) which Employee receives, receives access
to, conceives of or develops, in whole or in part, as a direct or indirect
result of his employment with Employer, in the course of his employment with
Employer (in any capacity, whether executive, managerial, planning, technical,
sales, research, development, manufacturing, engineering or otherwise) or
through the use of any of Employer's facilities or resources:
(i) Manufactured products, assembled or unassembled, and any
related goods or systems and any and all future products, software or systems
developed or derived therefrom;
8
<PAGE>
(ii) With respect to the items described in Section 2(i) above,
all hardware and software relating to design or manufacture; all source and
object codes to such hardware and software; all specifications, design concepts,
documents and manuals; all security systems relating to the product or
procedures, including, without limitation, software security systems;
(iii) Trade secrets, production processes, marketing techniques,
mailing lists, purchasing information, price lists, pricing policies, quoting
procedures, financial information, customer and prospect names and requirements,
customer data, customer site information and other materials or information
relating to the manner in which Employer does business;
(iv) Discoveries, concepts and ideas, whether or not patentable
or protectable by copyright, including, without limitation, the nature and
results of research and development activities, technical information on product
or program performance and reliability, processes, formulas, techniques, "know-
how", source codes, object codes, designs, drawings and specifications;
(v) Any other material or information related to the business
or activities of Employer which is not generally known to others engaged in
similar businesses or activities;
(vi) Any other material or information that has been created,
discovered or developed, or otherwise becomes known to Employer which has
commercial value in the business in which Employer is engaged; and
(vii) All ideas which are derived from or relate to Employee's
access to or knowledge of any of the above-enumerated materials and information.
Failure to mark any of the Proprietary Information as confidential shall
not affect its status as part of the Proprietary Information under the terms of
this Agreement.
3. Ownership of Information.
------------------------
(i) Employee hereby assigns to Employer all of Employee's right,
title and interest in any idea (whether or not patentable or protectable by
copyright), product, invention, discovery, computer software program or other
computer-related equipment or technology, conceived or developed in whole or in
part, or in which Employee may have aided in its development, while employed by
Employer, including, without limitation, any Proprietary Information. If any one
or more of the aforementioned are deemed in any way to fall within the
definition of "work made for hire", as such term is defined in 17 U.S.C. (S)
101, such work shall be considered "work made for hire", the copyright of which
shall be owned solely, completely and exclusively by Employer. If any of the
aforementioned are considered to be work not included in the categories of work
covered by the "work made for hire" definition contained in 17 U.S.C. (S) 101,
such work shall be
9
<PAGE>
owned solely by, or assigned or transferred completely and exclusively to,
Employer. Employee agrees to execute any instruments and to do all other things
reasonably requested by Employer (both during and after Employee's employment
with Employer) in order to more fully vest in Employer all ownership rights in
those items thereby transferred by Employee to Employer. Employee further agrees
to disclose immediately to Employer all Proprietary Information conceived of or
developed in whole or in part by him during the term of his employment with
Employer and to assign to Employer any right, title or interest he may have in
such Proprietary Information.
(ii) Employee hereby represents and warrants that Employee has fully
disclosed to Employer on Schedule A hereto any idea, invention, product,
----------
improvement, computer software program or other equipment or technology related
to therapeutic pharmaceuticals (an "Invention") not covered in Section 3(i)
above which, prior to his employment with Employer, Employee conceived of or
developed, wholly or in part, and in which Employee has any right, title or
proprietary interest and which directly relate to Employer's business, but which
has not been published or filed with the United States Patent or Copyright
Offices or assigned or transferred to Employer. If there is no such list of
Schedule A, Employee represents that Employee has made no such Inventions at the
- ----------
time of signing this Agreement or Employee hereby assigns such Inventions to
Employer.
(iii) Notwithstanding anything in this Agreement to the contrary, the
obligation of Employee to assign or offer to assign his rights in an Invention
to Employer shall not extend or apply to an Invention that Employee developed
entirely on his own time without using Employer's equipment, supplies, facility
or trade secret information unless such Invention (a) relates to Employer's
business or actual or demonstrably anticipated research or development, or (b)
results from any work performed by Employee for Employer. Employee shall bear
the burden of proof in establishing that his Invention qualifies for exclusion
under this Section 3(iii). With respect to Section 3(iii), it is agreed and
acknowledged that during Employee's employment, Employer may enter other lines
of business, which are related or unrelated to its current lines of business, in
which case this Agreement would be expanded to cover such new lines of business.
4. Injunctive Relief. Employee understands and agrees that Employer will
-----------------
suffer irreparable harm in the event that Employee breaches any of his
obligations under this Agreement and that monetary damages will be inadequate to
compensate Employer for such breach. Accordingly, Employee agrees that, in the
event of a breach or threatened breach by Employee of any of the provisions of
this Agreement, Employer, in addition to and not in limitation of any other
rights, remedies or damages available to Employer at law or in equity, shall be
entitled to a permanent injunction in order to prevent or to restrain any such
breach by Employee, or any of employee's partners, agents, representatives,
servants, employers, employees and/or any and all persons directly or indirectly
acting for or with him.
5. Records. All notes, data, tapes, reference materials, sketches,
-------
drawings, memoranda, models and records in any way relating to any of the
information referred to
10
<PAGE>
in Sections 1, 2 and 3 hereof (including, without limitation, any Proprietary
Information) or to Employer's business shall belong exclusively to Employer, and
Employee agrees to turn over to Employer all such materials and all copies of
such materials in his possession or then under his control at the request of
Employer or, in the absence of such a request, upon the termination of
Employee's employment with Employer.
6. Accounting for Profits. Employee covenants and agrees that, if he
----------------------
shall violate any of his covenants or agreements under this Agreement, Employer
shall be entitled to an accounting and repayment of all profits, compensation,
commissions, remunerations or benefits which Employee directly or indirectly has
realized and/or may realize as a result of, growing out of or in connection with
any such violation; such remedy shall be in addition to and not in limitation of
any injunctive relief or other rights or remedies to which Employer is or may be
entitled at law, in equity or under this Agreement.
7. Covenant Not to Compete. It is recognized and understood by the
-----------------------
parties hereto that Employee, through Employee's association with Employer as an
employee, shall acquire a considerable amount of knowledge and goodwill with
respect to the business of Employer, which knowledge and goodwill are extremely
valuable to Employer and which would be extremely detrimental to Employer if
used by Employee to compete with Employer. It is, therefore, understood and
agreed by the parties hereto that, because of the nature of the business of
Employer, it is necessary to afford fair protection to Employer from such
competition by Employee. Consequently, as a material inducement to employ
Employee in the aforementioned positions, Employee covenants and agrees to the
following:
(a) Except as otherwise approved in writing by Employer, Employee
agrees:
(i) that Employee will not, directly or indirectly, with or
through any family member or former director, officer or employee of Employer,
or acting along or as a member of a partnership or as an officer, holder of or
investor in as much as 5% of any security of any class, director, employee,
consultant or representative of any corporation or other business entity:
(ii) at any time while engaged as an employee of Employer and for
a period of one (1) year following termination as an employee, interfere with,
or seek to interfere with, the relationship between Employer or any affiliate of
Employer and the following: (a) any of the employees of such entities; (b) any
of the customers of such entities then existing or existing at any time within
three (3) years prior to termination of Employee's employment by Employer; or
(c) any of the suppliers of such entities then existing or existing at any time
within three (3) years prior to termination of Employee's employment by
Employer.
(b) The parties hereto agree that in the event that either the length
of time or the geographic area set forth in paragraph (a) is deemed too
restrictive in any
11
<PAGE>
court proceeding, that the court may reduce such restrictions to those which it
deems reasonable under the circumstances.
(c) Employee agrees and acknowledges that Employer does not have any
adequate remedy at law for the breach or threatened breach by him of this
covenant and agrees that Employer may in addition to the other remedies which
may be available to it under this Agreement, file a suit in equity to enjoin
Employee from such breach or threatened breach.
8. Reasonableness of Restrictions.
------------------------------
(a) Employee has carefully read and considered the provisions of
Sections 1 through 7 hereof and, having done so, agrees that the restrictions
set forth therein are fair and reasonable and are reasonably required for the
protection of the interests of Employer, its officers, directors, stockholders
and employees.
(b) In the event that, notwithstanding the foregoing, any part of the
covenants set forth in Sections 1 through 7 hereof shall be held to be invalid
and unenforceable, the court so deciding may reduce or limit the terms of such
provision to allow such provision to be enforced.
9. Burden and Benefit. This Agreement shall be binding upon, and shall
------------------
inure to the benefit of, Employer and Employee, and their respective heirs,
personal and legal representatives, and, in the case of Employer, its successors
and assigns.
10. Governing Law. In view of the fact that the principal office of
-------------
Employer is located in the State of North Carolina, it is understood and agreed
that the construction and interpretation of this Agreement shall at all times
and in all respects be governed by the laws of the State of North Carolina.
11. Severability. The provisions of this Agreement shall be deemed
------------
severable, and the invalidity or unenforceability of any one or more of the
provisions hereof shall not affect the validity or enforceability of the other
provisions hereof.
12. Employer. As used herein, the term "Employer" shall also include any
--------
corporation which is at any time the parent or a subsidiary of Employer, or any
corporation or entity which is an affiliate of Employer by virtue of common
(although not identical) ownership, and for which Employee is providing services
in any form during his employment with Employer or any such other corporation or
entity.
13. Notices. Any notice required to be given hereunder shall be
-------
sufficient if in writing, and sent by certified or registered mail, return
receipt requested, first-class postage prepaid, in the case of Employee, to his
address as shown on Employer's records, and in the case of Employer, to its
principal office in the State of North Carolina.
12
<PAGE>
14. Entire Agreement. This Agreement contains the entire agreement and
----------------
understandings by and between Employer and Employee with respect to the
covenants herein described, and no representations, promises, agreements or
understandings, written or oral, not herein contained shall be of any force or
effect. Nothing contained in this Agreement shall be deemed or construed to
constitute an agreement by Employer to employ or continue to employ Employee. No
change or modification hereof shall be valid or binding unless the same is in
writing and signed by the parties hereto. No waiver of any provision of this
Agreement shall be valid unless the same is in writing and signed by the party
against whom such waiver is sought to be enforced; moreover, no valid waiver of
any provision of this Agreement at any time shall be deemed a waiver of any
other provision of this Agreement at such time nor will it be deemed a valid
waiver of such provision at any other time.
15. Headings. The headings and other captions in this Agreement are for
--------
convenience and reference only and shall not be used in interpreting, construing
or enforcing any of the provisions of this Agreement.
16. Effective Date. This Agreement shall be effective as of the April 1,
--------------
1999.
IN WITNESS WHEREOF, Employer and Employee have duly executed this Agreement
as of the day and year first above written.
EMPLOYER:
POZEN INC.
/s/ John E. Barnhardt
-------------------------------------------
John E. Barnhardt
Vice President, Finance & Administration
EMPLOYEE:
/s/ John R. Plachetka
-------------------------------------------
John R. Plachetka, Pharm.D.
President & CEO
13
<PAGE>
SCHEDULE A
Inventions, Ideas, Products, Etc. Not Covered in Section 3(i) of the
Agreement
[Note: If Employee has no such items to disclose, write "NONE" on this line:
___________.]
________________________________________________________________________________
14
<PAGE>
EXHIBIT 10.6
POZEN INC.
INVESTOR RIGHTS AGREEMENT
This Investor Rights Agreement (the "Agreement") is entered into as of July
28, 1999, by and among, POZEN Inc., a Delaware corporation (the "Company"), the
holders of the Company's Series D Preferred Stock listed on Exhibit A attached
---------
hereto (the "Investors"), and those persons listed on Exhibit B attached hereto
---------
(each individually a "Common Holder" and, collectively, the "Common Holders").
WHEREAS, in connection with the issuance and sale of shares of Company's
Series D Preferred Stock (the "Series D Stock") to the Investors pursuant to
that certain Series D Preferred Stock Purchase Agreement, dated as of the date
hereof, by and between the Company and the Investors (the "Series D Agreement"),
the Company desires to provide the Investors certain rights with respect to
registration of the shares of stock held by them and certain other rights with
respect to such shares as an inducement to the Investors to purchase shares of
the Series D Stock;
NOW, THEREFORE, in consideration of the mutual agreements, covenants and
conditions contained herein, the Company, the Investors and the Common Holders
hereby agree as follows.
Section 1.
RESTRICTIONS ON TRANSFER
------------------------
1.1 Restrictive Legend. Each certificate representing (i) the Series D
------------------
Stock, (ii) the Common Stock of the Company (the "Common Stock") issued upon
conversion of the Series D Stock, and (iii) any other securities issued in
respect of the Series D Stock or Common Stock issued upon conversion of the
Series D Stock upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of Section 1.2 below) be stamped or otherwise imprinted with a legend
in substantially the following form (in addition to any legend required under
applicable state securities laws).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR THE
AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS.
COPIES OF THE STOCK PURCHASE AGREEMENT AND INVESTOR RIGHTS AGREEMENT
<PAGE>
PROVIDING FOR RESTRICTIONS ON TRANSFER OF THESE SECURITIES MAY BE OBTAINED
UPON WRITTEN REQUEST BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
CORPORATION."
Each Holder (as defined below) consents to the Company's making a notation
on its records and giving instructions to any transfer agent of the Series D
Stock or the Common Stock in order to implement the restrictions on transfer
established in this Section 1. Such legend shall be removed by the Company from
any certificate at such time as the holder of the shares represented by the
certificate satisfies the requirements of Rule 144(k) under the Securities Act
of 1933, as amended (the "1933 Act"), provided that Rule 144(k) as then in
effect does not differ substantially from Rule 144(k) as in effect as of the
date of this Agreement, and provided further that the Company has received from
the Holder a written representation that (i) such Holder is not an affiliate of
the Company and has not been an affiliate during the preceding three months,
(ii) such Holder has beneficially owned the shares represented by the
certificate for a period of at least two years, (iii) such Holder otherwise
satisfies the requirements of Rule 144(k) as then in effect with respect to such
shares, and (iv) such Holder will submit the certificate for any such shares to
the Company for reapplication of the legend at such time as the holder becomes
an affiliate of the Company or otherwise ceases to satisfy the requirements of
Rule 144(k) as then in effect.
1.2 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Registrable Securities (as defined below) by acceptance thereof
agrees to comply in all respects with the provisions of this Section 1.2. Prior
to any proposed sale, assignment, transfer or pledge of any Registrable
Securities, unless there is in effect a registration statement under the 1933
Act covering the proposed transfer, the holder thereof shall give written notice
to the Company of such holder's intention to effect such transfer, sale,
assignment or pledge. Each such notice shall describe the manner and
circumstances of the proposed transfer, sale, assignment or pledge in sufficient
detail, and shall be accompanied at such holder's expense by either (i) a
written opinion of legal counsel who shall, and whose legal opinion shall, be
reasonably satisfactory to the Company addressed to the Company, to the effect
that the proposed transfer of the Registrable Securities may be effected without
registration under the 1933 Act or (ii) a "no action" letter from the SEC to the
effect that the transfer of such securities without registration will not result
in a recommendation by the staff of the Securities and Exchange Commission (the
"SEC") that action be taken with respect thereto, whereupon the holder of such
Registrable Securities shall be entitled to transfer such Registrable Securities
in accordance with the terms of the notice delivered by the holder to the
Company. The Company will not require such a legal opinion or "no action"
letter (a) in any transaction in compliance with Rule 144, or (b) in any
transaction in which an Investor that is a partnership, limited liability
company or corporation distributes Series D Stock or Common Stock issuable upon
conversion thereof after six months after the purchase of such securities
hereunder solely to partners, members or stockholders (as the case may be)
thereof for no consideration, provided that each transferee agrees in writing to
be subject to the terms of this Section 1.2. Each certificate evidencing the
Registrable Securities transferred as above provided shall bear, except if such
transfer is made pursuant to Rule 144, the appropriate restrictive legend set
forth in Section 1.1 above, except that such certificate shall not
2
<PAGE>
bear such restrictive legend if in the opinion of counsel for such holder and
the Company such legend is not required in order to establish compliance with
any provisions of the 1933 Act.
Section 2.
REGISTRATION RIGHTS
-------------------
The Company hereby grants to each of the Holders (as defined below) the
registration rights set forth in this Section 2, with respect to the Registrable
Securities (as defined below) owned by such Holders. The Company and the
Holders agree that the registration rights provided herein set forth the sole
and entire agreement, and supersede any prior agreement, between the Company and
the Holders with respect to registration rights for the Company's securities.
2.1 Certain Definitions. As used in this Section 2:
-------------------
(a) The terms "register," "registered" and "registration" refer to a
registration effected by filing with the SEC a registration statement (the
"Registration Statement") in compliance with the 1933 Act, and the declaration
or ordering by the SEC of the effectiveness of such Registration Statement.
(b) The term "Registrable Securities" means (i) Common Stock issued or
issuable upon conversion of the shares of Series D Stock held by Investors or
any transferee as permitted by Section 2.8 hereof, and (ii) any Common Stock
issued as (or issuable upon the conversion or exercise of any warrant, right or
other security that is issued as) a dividend or other distribution with respect
to, or in exchange or in replacement of, such Registrable Securities; provided,
however, that shares of Common Stock or other securities shall only be treated
as Registrable Securities if and so long as (A) they have not been sold to or
through a broker or dealer or underwriter in a public distribution or a public
securities transaction, (B) they have not been sold in a transaction exempt from
the registration and prospectus delivery requirements of the 1933 Act under
Section 4(1) thereof so that all transfer restrictions and restrictive legends
with respect thereto are removed upon the consummation of such sale, and (C) the
registration rights associated with such securities have not been terminated
pursuant to Section 2.16 hereof.
(c) The term "Holder" (collectively, "Holders") means each Investor
and any transferee, as permitted by Section 2.8 hereof, holding Registrable
Securities, securities exercisable or convertible into Registrable Securities or
securities exercisable for securities convertible into Registrable Securities.
(d) The term "Initiating Holders" means any Holder or Holders of at
least fifty percent (50%) of the Registrable Securities then outstanding and not
registered at the time of any request for registration made pursuant to Section
2.2 of this Agreement.
3
<PAGE>
2.2 Demand Registration.
-------------------
(a) Demand for Registration. If the Company shall receive from
-----------------------
Initiating Holders a written demand that the Company effect any registration (a
"Demand Registration") of at least 25% of the Registrable Securities (other than
a registration on Form S-3 or any related form of registration statement, such a
request being provided for under Section 2.9 hereof) having an aggregate
offering amount, net of underwriting discounts and commissions, in excess of
$10,000,000, the Company will:
(i) promptly (but in any event within 10 days) give written
notice of the proposed registration to all other Holders; and
(ii) use its best efforts to effect such registration as soon as
practicable and as will permit or facilitate the sale and distribution of all or
such portion of such Initiating Holders' Registrable Securities as are specified
in such demand, together with all or such portion of the Registrable Securities
of any Holder or Holders joining in such demand as are specified in a written
demand received by the Company within 15 days after such written notice is
given, provided that the Company shall not be obligated to take any action to
effect any such registration pursuant to this Section 2.2:
(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 1933 Act;
(B) after the Company has effected one (1) such
registration pursuant to this Section 2.2 and the sales of the shares of Common
Stock under such registration have closed;
(C) if 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 seriously
detrimental to the Company and its stockholders for such Registration Statement
to be filed at the date filing would be required, in which case the Company
shall have an additional period or periods of not more than 90 days within which
to file such Registration Statement; provided, however, that the Company shall
not use this right to delay the filing for more than 180 days in the aggregate
in any 12-month period; or
(D) prior to the earlier of (1) the second anniversary of
the date of this Agreement or (2) the date 180 days after the effective date of
the initial public offering of the Company's securities.
(b) Underwriting. If reasonably required to maintain an orderly
------------
market in the Common Stock, the Holders shall distribute the Registrable
Securities covered by their demand by means of an underwriting. If the
Initiating Holders intend to distribute the Registrable Securities covered by
their demand by means of an underwriting, they shall so advise the Company as
part of their demand made pursuant to this Section 2.2, including the identity
of
4
<PAGE>
the managing underwriter; and the Company shall include such information in the
written notice referred to in Section 2.2(a)(i). In such event, the right of any
Holder to registration pursuant to this Section 2.2 shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein.
The Company shall, together with all holders of capital stock of the
Company proposing to distribute their securities through such underwriting,
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected by a majority-in-interest of the Initiating Holders and
reasonably satisfactory to the Company. Notwithstanding any other provision of
this Section 2.2, if the underwriter shall advise the Company that marketing
factors (including, without limitation, an adverse effect on the per share
offering price) require a limitation of the number of shares to be underwritten,
then the Company shall so advise all Holders of Registrable Securities that have
requested to participate in such offering, and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated pro rata among such Holders thereof in proportion, as nearly
as practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the Registration Statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration.
If any Holder disapproves of the terms of the underwriting, such Holder may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the Initiating Holders. The Registrable Securities so withdrawn shall also
be withdrawn from registration.
If the underwriter has not limited the number of Registrable Securities to
be underwritten, the Company may include securities for its own account (or for
the account of other stockholders) in such registration if the underwriter so
agrees and if the number of Registrable Securities would not thereby be limited.
2.3 Piggyback Registration.
----------------------
(a) Company Registration. If at any time or from time to time the
--------------------
Company shall determine to register any of its securities, either for its own
account or for the account of security holders, other than a registration
relating solely to employee benefit plans, a registration on Form S-4 relating
solely to an SEC Rule 145 transaction or a registration pursuant to Section 2.2
or 2.9 hereof, the Company will:
(i) promptly (but in any event within 10 days) give to each
Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under state securities laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within 15 days after receipt of such written notice from the
Company, by any Holder or Holders, except as set forth in Section 2.3(b) below.
5
<PAGE>
Such Registrable Securities shall only be included to the extent that
inclusion will not diminish the number of securities included by the Company.
(b) Underwriting. 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 as a part of the written notice given
pursuant to Section 2.3(a)(i). In such event the right of any Holder to
registration pursuant to this Section 2.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein.
All Holders proposing to distribute their Registrable Securities through
such underwriting shall, together with the Company and the other parties
distributing their securities through such underwriting, enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section 2.3, if the underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
underwriter may limit the number of Registrable Securities to be included in the
registration and underwriting, or may exclude Registrable Securities entirely
from such registration and underwriting subject to the terms of this Section
2.3. The Company shall so advise all holders of the Company's securities that
would otherwise be registered and underwritten pursuant hereto, and the number
of shares of such securities, including Registrable Securities, that may be
included in the registration and underwriting shall be allocated in the
following manner: shares, other than Registrable Securities and other securities
that have contractual rights with respect to registration similar to those
provided for in this Section 2.3, requested to be included in such registration
by stockholders shall be excluded, and if a limitation on the number of shares
is still required, the number of Registrable Securities and other securities
that have contractual rights with respect to registration that may be included
shall be allocated among the holders thereof in proportion, as nearly as
practicable, to the amounts of Registrable Securities and such other securities
with such contractual rights held by each such holder at the time of filing the
Registration Statement. For purposes of any such underwriter cutback, all
Registrable Securities and other securities held by any holder that is a
partnership, limited liability company or corporation shall also include any
Registrable Securities held by the partners, retired partners, members,
stockholders or affiliated entities of such holder, or the estates and family
members of any such partners, retired partners, members and any trusts for the
benefit of any of the foregoing persons, and such holder and other persons shall
be deemed to be a single "selling holder," and any pro rata reduction with
respect to such "selling holder" shall be based upon the aggregate amount of
shares carrying registration rights owned by all entities and individuals
included in such "selling holder", as defined in this sentence. No securities
excluded from the underwriting by reason of the underwriters marketing
limitation shall be included in such registration. Nothing in this Section
2.3(b) is intended to diminish the number of securities to be included by the
Company in the underwriting.
If any Holder disapproves of the terms of the underwriting, it may elect to
withdraw therefrom by written notice to the Company and the underwriter. The
Registrable Securities so withdrawn shall also be withdrawn from registration.
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to
6
<PAGE>
terminate or withdraw any registration initiated by it under this Section 2.3
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration.
2.4 Expenses of Registration. All expenses incurred in connection with
------------------------
all registration effected pursuant to Sections 2.2, 2.3 and 2.9, including
without limitation all registration, filing and qualification fees (including
state securities law fees and expenses), printing expenses, escrow fees, fees
and disbursements of counsel for the Company and expenses of any special audits
incidental to or required by such registration shall be borne by the Company;
provided, however, that the Company shall not be required to pay stock transfer
taxes or underwriters' discounts or selling commissions relating to Registrable
Securities; and provided, further, that the Company shall not be required to pay
for any expenses of any registration pursuant to Section 2.9 after the Company
has effected two (2) registrations pursuant to Section 2.9 or any registration
pursuant to Section 2.2 after the Company has effected one (1) registration
pursuant to Section 2.2, in which event the Holders of Registrable Securities to
be registered shall bear all such expenses pro rata on the basis of Registrable
Securities to be registered. Notwithstanding anything to the contrary above,
the Company shall not be required to pay for any expenses of any registration
proceeding under Section 2.2 if the registration request is subsequently
withdrawn at the request of the Holders of a majority of the Registrable
Securities to have been registered, in which event the Holders of Registrable
Securities to have been registered shall bear all such expenses pro rata on the
basis of the Registrable Securities to have been registered. Notwithstanding the
preceding sentence, however, if at the time of the withdrawal, the Holders have
learned of a materially adverse change in the condition, business or prospects
of the Company from that known to the Holders at the time of their request, then
the Holders shall not be required to pay any of said expenses and shall retain
their rights pursuant to Section 2.2.
2.5 Obligations of the Company. Whenever required under this Section 2 to
--------------------------
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) prepare and file with the SEC a Registration Statement with
respect to such Registrable Securities and use its diligent efforts to cause
such Registration Statement to become effective, and keep such Registration
Statement effective for the lesser of 180 days or until the Holder or Holders
have completed the distribution relating thereto provided however that the
Company shall have the right to terminate such Registration Statement, or to
place a stop-transfer order with respect to the shares for which registration
has been requested thereunder, upon notice to the participating Holders to the
extent necessary, in the sole discretion of the Company upon the advice of
counsel, to avoid any requirement that the Company disclose material, nonpublic
information, the disclosure of which would be seriously detrimental to the
Company and its stockholders.
(b) prepare and file with the SEC such amendments and supplements to
such Registration Statement and the prospectus used in connection with such
Registration Statement as may be necessary to keep such Registration Statement
effective and to comply with the
7
<PAGE>
provisions of the 1933 Act with respect to the disposition of all securities
covered by such registration statement.
(c) furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) use its diligent efforts to register or otherwise qualify the
securities covered by such Registration Statement under such other securities
laws of such states and other jurisdictions as shall be reasonably requested by
the Holders or the managing underwriter, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
(e) in the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) notify each Holder of Registrable Securities covered by such
Registration Statement, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, of the happening of any event as a
result of which the prospectus included in such Registration Statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) use its diligent efforts to list the Registrable Securities
covered by such Registration Statement with any securities exchange on which the
Common Stock is then listed.
(h) make available for inspection by each Holder including
Registrable Securities in such registration, any underwriter participating in
any distribution pursuant to such registration, and any attorney, accountant or
other agent retained by such Holder or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, as such
parties may reasonably request, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such Holder,
underwriter, attorney, accountant or agent in connection with such Registration
Statement.
(i) cooperate with Holders including Registrable Securities in such
registration and the managing underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold, such certificates to be in such denominations and registered in such
names as such Holders or the managing underwriters may request at least two
business days prior to any sale of Registrable Securities.
(j) permit any Holder, which Holder, in the sole and exclusive
judgment, exercised in good faith, of such Holder, might be deemed to be a
controlling person of the
8
<PAGE>
Company, to participate in good faith in the preparation of such Registration
Statement and to require the insertion therein of material, furnished to the
Company in writing, that in the reasonable judgment of such Holder and its
counsel should be included.
2.6 Indemnification.
---------------
(a) The Company will, and does hereby undertake to, indemnify and
hold harmless each Holder of Registrable Securities, each of such Holder's
officers, directors, managers, partners, members and agents, and each person
controlling such Holder, with respect to any registration, qualification or
compliance effected pursuant to this Section 2, and each underwriter, if any,
and each person who controls any underwriter, of the Registrable Securities held
by or issuable to such Holder, against all claims, losses, damages and
liabilities (or actions in respect thereto) to which they may become subject
under the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934
Act"), or other federal or state law arising out of or based on (i) any untrue
statement (or alleged untrue statement) of a material fact contained in any
prospectus, offering circular or other similar 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 in light of the
circumstances in which they were made, (ii) any violation or alleged violation
by the Company of any federal, state or common law rule or regulation applicable
to the Company in connection with any such registration, qualification or
compliance, or (iii) any failure to register or qualify Registrable Securities
in any state where the Company or its agents have affirmatively undertaken or
agreed in writing that the Company (the undertaking of any underwriter chosen by
the Company being attributed to the Company) will undertake such registration or
qualification on behalf of the Holders of such Registrable Securities (provided
that in such instance the Company shall not be so liable if it has undertaken
its best efforts to so register or qualify such Registrable Securities) and will
reimburse, as incurred, each such Holder, each such underwriter and each such
director, manager, officer, partner, member, agent and controlling person, for
any legal and any other expenses reasonably incurred in connection with
investigating or defending 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 made in conformity with written information
furnished to the Company by an instrument duly executed by such Holder or
underwriter and stated to be specifically for use therein.
9
<PAGE>
(b) Each Holder will, and if Registrable Securities held by or
issuable to such Holder are included in such registration, qualification or
compliance pursuant to this Section 2, does hereby undertake to indemnify and
hold harmless the Company, each of its directors and officers, and each person
controlling the Company, each underwriter, if any, and each person who controls
any underwriter, of the Company's securities covered by such a Registration
Statement, and each other Holder, each of such other Holder's officers,
directors, managers, partners, members and agents and each person controlling
such other Holder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on (i) any failure of such
Holder or its agents or representatives to comply with the prospectus delivery
requirements of the 1933 Act or any other applicable securities or Blue Sky law,
or (ii) 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 in light of the circumstances in which they were made,
and will reimburse, as incurred, the Company, each such underwriter, each such
other Holder, and each such director, officer, manager, partner, member and
controlling person of the foregoing, 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) was made in such Registration Statement,
prospectus, offering circular or other document, in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein;
provided, however, that the liability of each Holder hereunder (unless such
Holder's liability hereunder is based upon such Holder's willful misconduct as
determined by the nonappealable final decision of a court) shall be limited to
the proportion of any such claim, loss, damage or liability that is equal to the
proportion that the public offering price of the shares sold by such Holder
under such Registration Statement bears to the total public offering price of
all securities sold thereunder, but in any event not to exceed the net proceeds
received by such Holder from the sale of securities under such Registration
Statement. It is understood and agreed that the indemnification obligations of
each Holder pursuant to any underwriting agreement entered into in connection
with any Registration Statement shall be limited to the obligations contained in
this subsection 2.6(b).
(c) Each party entitled to indemnification under this Section 2.6
(the "Indemnified Party") shall give notice to the party required to provide
such indemnification (the "Indemnifying Party") of any claim as to which
indemnification may be sought promptly after such Indemnified Party has actual
knowledge thereof, and shall permit the Indemnifying Party to assume the defense
of any such claim or any litigation resulting therefrom; provided that counsel
for the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be subject to approval by the Indemnified Party (whose
approval shall not be unreasonably withheld) and the Indemnified Party may
participate in such defense at the Indemnifying Party's expense if
representation of such Indemnified Party would be inappropriate due to actual or
potential differing interests between such Indemnified Party and any other party
represented by such counsel in such proceeding; 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 2, except
to the extent that such failure to give notice shall materially adversely
10
<PAGE>
affect the Indemnifying Party in the defense of any such claim or any such
litigation. An Indemnifying Party, in the defense of any such claim or
litigation, may, without the consent of each Indemnified Party, consent to entry
of any judgment or enter into any settlement that includes as an unconditional
term thereof the giving by the claimant or plaintiff therein, to such
Indemnified Party, of a release from all liability with respect to such claim or
litigation.
(d) In order to provide for just and equitable contribution to joint
liability under the 1933 Act in any case in which either (i) any Holder
exercising rights under this Agreement, or any controlling person of any such
Holder, makes a claim for indemnification pursuant to this Section 2.6 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 2.6 provides for indemnification in
such case, or (ii) contribution under the 1933 Act may be required on the part
of any such Holder or any such controlling person in circumstances for which
indemnification is provided under this Section 2.6; then, and in each such case,
the Company and such Holder will contribute to the aggregate claims, losses,
damages or liabilities to which they may be subject (after contribution from
others) in such proportion so that such Holder is responsible for the portion
represented by the percentage that the public offering price of the securities
offered by such Holder pursuant to the Registration Statement bears to the
public offering price of all securities offered by such Registration Statement,
and the Company will be responsible for the remaining portion (without prejudice
as to the Company's right to contributions from any other responsible parties);
provided, however, that, in any case, (A) no such Holder will be required to
contribute any amount in excess of the public offering price of all securities
offered by it pursuant to such Registration Statement, after deduction of
underwriting discounts and commissions (unless such Holder's liability hereunder
is based upon such Holder's willful misconduct as determined by the
nonappealable final decision of a court); and (B) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 11 (f) of the 1933
Act) will be entitled to contribution from any person or entity who was not
guilty of such fraudulent misrepresentation.
(e) The indemnities provided in this Section 2.6 shall survive the
transfer of any Registrable Securities by such Holder.
2.7 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may reasonably request in writing and as
shall be required in connection with any registration, qualification or
compliance referred to in this Section 2.
2.8 Transfer of Rights. The rights contained in Section 2 hereof may be
------------------
assigned or otherwise conveyed to transferees or assignees of Registrable
Securities, who shall be considered a `"Holder" for purposes hereof, provided
that such transfer is effected in compliance with Section 1.2 hereof and such
transfer is a "Permitted Transfer" as defined herein.
(b) For purposes of this Agreement, a "Permitted Transfer" shall mean: (i)
a transaction not involving a change in beneficial ownership; (ii) transactions
involving
11
<PAGE>
distribution without consideration by a stockholder that is a partnership,
limited liability company or corporation to any of its partners, members or
stockholders (as the case may be), retired partners, members or stockholders, or
to the estate of any of its partners, members or stockholders; (iii) transaction
involving distribution without consideration by a stockholder that is a
corporation to any of its stockholders; (iv) transfers by any stockholder who is
an individual to a trust for the benefit of such stockholder or his family; (v)
a transfer in which the transferee acquires at least 50,000 shares of
Registrable Securities, subject to adjustments for combinations, consolidations,
recapitalizations, stock splits, stock dividends and the like; or (vi) transfers
by gift, will or intestate succession to the spouse, lineal descendants or
ancestors of any stockholder or spouse of a stockholder.
2.9 Form S-3. The Company shall use its diligent efforts to qualify for
--------
registration on Form S-3 and to that end the Company shall register the Common
Stock under the 1934 Act within 12 months following the effective date of the
first registration of any securities of the Company on Form S-1. After the
Company has qualified for the use of Form S-3 and the lapse of one year from the
closing of the Company's initial public offering, the Holders of Registrable
Securities shall have the right to request registrations on Form S-3 thereafter
under this Section 2.9. The Company shall give notice to all Holders of
Registrable Securities of the receipt of a request for registration pursuant to
this Section 2.9 and shall provide a reasonable opportunity for other Holders to
participate in the registration. Subject to the foregoing, the Company will use
its best efforts to effect as soon as practicable the registration of all shares
of Registrable Securities on Form S-3 to the extent requested by the Holder or
Holders thereof for purposes of disposition; provided, however, that the Company
shall not be obligated to effect any such registration (A) 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) at an aggregate price to the public of less than
$2,000,000 or (B) at any time when the Company has effected two (2)
registrations pursuant to this Section 2.9. Notwithstanding the foregoing,
nothing herein shall restrict, prohibit or limit in any way a Holder's ability
to exercise its registration rights under Sections 2.2 or 2.3 hereof. The
Company shall have no obligation to take any action to effect any registration
pursuant to this Section 2.9 for any of the reasons set forth in Section
2.2(a)(ii)(A), (B), (C) or (D), (which shall be deemed to apply to the
obligations under this Section 2.9 with equal force). In addition, any
registration pursuant to this Section 2.9 shall be subject to the provisions of
Section 2.2(b), which shall be deemed to apply to the obligations under this
Section 2.9 with equal force, except that any reference therein to Section 2.2
or a subsection thereof shall, for these purposes only, be deemed to be a
reference to this Section 2.9.
2.10 Delay of Registration. No Holder shall have any right to obtain or
---------------------
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 2.
2.11 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 a majority of the Registrable Securities then
outstanding and not registered, enter into any agreement with any holder or
prospective holder of any securities of the Company that would allow such holder
or prospective holder to (i) require the Company to effect a registration or
(ii)
12
<PAGE>
include any securities in any registration filed under Section 2.2, 2.3 or 2.9
hereof, unless, under the terms of such agreement, such holder or prospective
holder may include such securities in any such registration only to the extent
that the inclusion of such securities will not diminish the amount of
Registrable Securities that are included in such registration.
2.12 Rule 144 Reporting. With a view to making available to the Holders
------------------
the benefits of certain rules and regulations of the SEC that may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its diligent efforts to:
(a) Make and keep current public information available, within the
meaning of SEC Rule 144 or any similar or analogous rule promulgated under the
1933 Act, at all times after it has become subject to the reporting requirements
of the 1934 Act;
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the 1933 Act and 1934 Act (after it has
become subject to such reporting requirements);
(c) So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time
commencing 90 days after the effective date of the first registration filed by
the Company for an offering of its securities to the general public), the 1933
Act and the 1934 Act (at any time after it has become subject to such reporting
requirements); a copy of the most recent annual or quarterly report of the
Company; and such other reports and documents as a Holder may reasonably request
in availing itself of any rule or regulation of the SEC allowing it to sell any
such securities without registration.
2.13 "Market Stand-Off" Agreement. Each Holder that is a "One Percent
---------------------------
Stockholder," as defined below, hereby agrees that during a period, not to
exceed 180 days, following the effective date of the initial, effective
registration statement of the Company filed under the 1933 Act, it shall not, to
the extent requested by the Company and any underwriter, sell, pledge, transfer,
make any short sale of, loan, grant any option for the purchase of, or otherwise
transfer or dispose of (other than to donees who agree to be similarly bound)
any Common Stock held by it at any time during such period except Common Stock
included in such registration; provided, however, that all other "One Percent
Stockholders" with registration rights (whether or not pursuant to this
Agreement) and all officers and directors of the Company enter into similar
agreements and such agreement shall be applicable only to the first such
registration statement of the Company that covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten offering.
For purposes of this Section 2.13, the term "One Percent Stockholder" shall
mean a stockholder of the Company who holds at least one percent of the
outstanding Common Stock of the Company (assuming conversion of all outstanding
Series D Stock of the Company).
In order to enforce the foregoing covenant, the Company may impose stop
transfer instructions with respect to the Registrable Securities of each Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
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<PAGE>
2.14 Amendment of Registration Rights. Any provision of this Section 2 may
---------------------------------
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of at least a majority of the
Registrable Securities then outstanding and not registered. Any amendment or
wavier effected in accordance with this Section shall be binding upon each
Holder, each future Holder of Registrable Securities and the Company.
2.15 Inclusion of Stock Held by Common Holders. In connection with any
-----------------------------------------
registration effected pursuant to Section 2.3 hereof, the Common Holders shall
be entitled to include in such registration (on the same terms and conditions as
Holders selling their Registrable Securities in such registration) shares of
Common Stock held by such Common Holders; provided that any limitation by the
underwriter on the number of shares to be underwritten in connection with such
registration shall first be applied to the shares so included by such Common
Holders, as provided in Section 2.3(b), and provided further that each such
Common Holder's right to include shares of Common Stock in a registration
pursuant to this Section 2.15 is contingent upon such Common Holder's execution
of an indemnification and hold harmless agreement substantially in accordance
with Section 2.6(b) and an agreement to be bound by all other applicable
restrictions contained in this Section 2.
2.16 Termination of Rights. The rights of any particular Holder to cause
---------------------
the Company to register securities under Section 2.2, 2.3 or 2.9 hereof shall
terminate as to any Holder on the earlier of (a) the date such Holder is able to
dispose of all of its Registrable Securities in any 90-day period pursuant to
SEC Rule 144 (or any similar or analogous rule promulgated under the 1933 Act),
or (b) the fifth anniversary of the closing of the Company's initial public
offering of stock.
Section 3.
COMPANY COVENANTS
-----------------
The Company hereby covenants and agrees as follows:
3.1 Financial Information.
---------------------
(a) So long as any Investor or any subsidiary, affiliate or partner
of such Investor shall own at least 50,000 shares of Investor Stock or any
shares of Common Stock issued upon conversion thereof, subject to adjustment for
combinations, consolidations, recapitalizations, stock splits, stock dividends
and the like, the Company will furnish each Holder, subject to Section 3.1(b)
below, the following reports:
(i) As soon as practicable after the end of each fiscal year,
and in any event within 90 days thereafter, (1) audited consolidated balance
sheets of the Company and its subsidiaries, if any, as at the end of such fiscal
year, and audited consolidated statements of income and losses, stockholders'
equity and cash flows of the Company and its subsidiaries, if any, for such
fiscal year, prepared in accordance with generally accepted accounting
principles
14
<PAGE>
and setting forth in each case in comparative form the figures for the previous
fiscal year, if any, all in reasonable detail and accompanied by a report and
opinion thereon by independent auditors selected by the Company's Board of
Directors; and (2) a copy of such auditors' management letter prepared in
connection therewith, if any, (as soon as such management letter is available,
which may be greater than the aforesaid 90-day period);
(ii) As soon as practicable after the end of each of the first
three quarters of the fiscal year, but in any event within 45 days after the end
of each such quarter, the unaudited consolidated balance sheets of the Company
and its subsidiaries, if any, as of the end of such quarter, and its unaudited
consolidated statements of income and losses, stockholders' equity and cash
flows for such quarter, setting forth in each case in comparative form the
figures for the corresponding period of the preceding fiscal year, all in
reasonable detail and prepared in accordance with generally accepted accounting
principles, except that such financial statements may not contain notes and will
be subject to year-end adjustment, and certified by the principal financial or
accounting officer of the Company. Such quarterly report shall include a
narrative, summary description of the Company's operations for such quarter,
indicating whether the Company is materially in compliance with this Agreement
and other material agreements and discussing any material variances from the
Company's operating plan; and
(iii) With reasonable promptness, such other information
respecting the business, properties or the condition or operations, financial or
other, of the Company or any subsidiary as any Holder may from time to time
reasonably request.
(b) The Company shall not be obligated pursuant to this Section 3.1 to
provide financial information to any person whom the Company reasonably believes
is a competitor of the Company.
(c) The rights granted pursuant to this Section 3.1 may not be
assigned or otherwise conveyed by any Investor or by any subsequent transferee
of any such rights without the written consent of the Company, which consent
shall not be unreasonably withheld; provided that the Company may refuse such
written consent if the proposed transferee is reasonably believed by the Company
to be a competitor of the Company.
3.2 Inspection. The Company shall permit each Investor and each
----------
transferee in a Permitted Transfer (as defined in Section 2.8(b) hereof)
(provided such transfer is effected in compliance with Section 1.2 hereof), its
attorney or its other representative to visit and inspect the Company's
properties, to examine the Company's books of account and other records, to make
copies or extracts therefrom and to discuss the Company's affairs, finances and
accounts with its officers, management, employees and independent auditors all
at such reasonable times and as often as such Investor or transferee may
reasonably request; provided, however, that the Company shall not be obligated
pursuant to this Section 3.2 to provide trade secrets or confidential
information or to provide information to any person whom the Company reasonably
believes is a competitor of the Company; provided, further, that such Investor
shall bear any costs or expenses of such investigations or inquiries.
15
<PAGE>
3.3 Additional Affirmative Covenants. Without limiting any other covenant
--------------------------------
or provision hereof, the Company covenants and agrees that, so long as at least
50,000 shares of Series D Stock remain outstanding, it will, and will cause each
subsidiary (to the extent applicable thereto) of the Company, if and when such
subsidiary exists, to:
(a) Payment of Taxes. Pay, and cause each subsidiary to pay, and
----------------
discharge all taxes, assessments and governmental charges or levies imposed upon
it or upon its income, profits or business, or upon any properties belonging to
it, prior to the date on which penalties attach thereto, and all lawful claims
that, if unpaid, might become a lien or charge upon any properties of the
Company or any subsidiary, provided that neither the Company nor any subsidiary
shall be required to pay any such tax, assessment, charge, levy or claim that is
being contested in good faith and by appropriate proceedings if the Company or
any subsidiary shall have set aside on its books sufficient reserves, if any,
with respect thereto;
(b) Payment of Trade Debt. Pay, and cause each subsidiary to pay,
---------------------
when due, or in conformity with customary trade terms but not later than ninety
(90) days from the due date, all lease obligations, all trade debt, and all
other indebtedness incident to the operations of the Company or its
subsidiaries, except such as are being contested in good faith and by proper
proceedings if the Company or subsidiary concerned shall have set aside on its
books sufficient reserves, if any, with respect thereto;
(c) Maintenance of Insurance. Maintain, and cause each subsidiary to
------------------------
maintain, insurance with responsible and reputable insurance companies or
associations in such amounts and covering such risks as is customarily carried
by companies engaged in similar businesses and owning similar properties in the
same general areas in which the Company or such subsidiary operates;
(d) Preservation of Corporate Existence. Preserve and maintain, and,
-----------------------------------
unless the Company reasonably deems it not to be in its best interests, cause
each subsidiary to preserve and maintain, its corporate existence, rights,
franchises and privileges in the jurisdiction of its incorporation, and qualify
and remain qualified, and cause each subsidiary to qualify and remain qualified,
as a foreign corporation in each jurisdiction in which such qualification is
necessary or desirable in view of its business and operations or the ownership
or lease of its properties, except when the failure to be so qualified would not
have a material adverse effect on the Company and its subsidiaries taken as a
whole; provided that nothing in this Section 3.3(d) shall prohibit the Company
or any of its subsidiaries from engaging in a corporate transaction in
connection with the acquisition of another corporation or business entity by the
Company or one or more of its wholly owned subsidiaries by merger,
consolidation, share exchange, purchase of substantially all the assets or other
reorganization whereby the stockholders of the Company immediately prior to the
transaction own in the aggregate more than 50% of the voting power of the
Company or other surviving entity after the transaction;
(e) Intellectual Property. Secure, preserve and maintain, and cause
---------------------
each subsidiary to secure, preserve and maintain, all licenses and other rights
to use patents, processes, licenses, permits, trademarks, trade names,
inventions, intellectual property rights or copyrights
16
<PAGE>
owned or used by it to the extent necessary to the conduct of its business or
the business of any subsidiary;
(f) Compliance with Laws. Comply, and cause each subsidiary to
--------------------
comply, with the requirements of all applicable laws, rules, regulations and
orders of any governmental authority, noncompliance with which could materially
adversely affect its business or condition, financial or otherwise;
(g) Records and Books of Account. Keep, and cause each subsidiary to
----------------------------
keep, adequate records and books of account in which complete entries will be
made in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company and any
subsidiary, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, returns of merchandise, obsolescence, amortization,
taxes, bad debts and other purposes in connection with its business shall be
made;
(h) Maintenance of Properties. Maintain and preserve, and cause each
-------------------------
subsidiary to maintain and preserve, all of its properties and assets necessary
for the proper conduct of its business, in good repair, working order and
condition, ordinary wear and tear excepted;
(i) Regulatory Compliance. Comply, and cause each subsidiary to
---------------------
comply, with all minimum funding requirements applicable to any pension,
employee benefit plans, or employee contribution plans that are subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or to the
Internal Revenue Code of 1986, as amended (the "Code"), and comply, and cause
each subsidiary to comply, in all other material respects with the provisions of
ERISA and the Code, and the rules and regulations thereunder, which are
applicable to any such plan; provided further that neither the Company nor any
subsidiary will permit any event or condition to exist that would permit any
such plan to be terminated under circumstances that would cause any material
lien provided for in section 4068 of ERISA to attach to the assets of the
Company or any subsidiary;
(j) Financings. Promptly, fully and in detail, inform the Board of
----------
Directors of any discussions, offers or contracts relating to possible
financings of any nature for the Company, whether initiated by the Company or
any other person, except for arrangements with trade creditors in the ordinary
course of business; and
(k) Nature of Business. Continue to conduct its business without
------------------
material change from the nature of the business as conducted or contemplated as
of the date of this Agreement or enter into material transactions not in the
ordinary course of business, except as approved by the Board of Directors.
3.4 Expiration of Covenants. The covenants set forth in this Section 3
-----------------------
shall expire and be of no further force or effect upon the effectiveness of a
Qualified Public Offering (as defined below). A "Qualified Public Offering"
shall mean an effective registration statement for the sale of the Company's
shares of Common Stock in a firm commitment underwritten public offering
registered under the 1933 Act generating proceeds (before deducting
underwriters'
17
<PAGE>
commissions and discounts) to the Company of $15,000,000 or more and the price
per share to the public is not less than $10.00 per share, subject to adjustment
for stock splits, stock dividends and the like (other that a registration
relating solely to employee benefit plans or to a transaction under Rule 145
under the 1933 Act or any successor rule thereto). After such time, the
Investors shall be entitled to receive such annual and quarterly reports as the
Company shall distribute to its stockholders generally.
Section 4.
VOTING AGREEMENT
----------------
4.1 Election of Directors. The Board of Directors of the Company will,
---------------------
effective on the Series D Closing, consist of no less than three (3) and no more
than seven (7) persons. Each time the stockholders of the Company meet, or act
by written consent in lieu of meeting, for the purpose of electing the directors
to serve on the Company's Board of Directors, each Common Holder and each
Investor shall vote the shares of the Company's capital stock owned by it in
order to cause the election of one designee of the holders of a majority of the
shares of the Company's Series D Stock held by the Investors.
4.2 Binding Effect of Voting Agreement. The voting agreement set forth in
----------------------------------
this Section 4 shall be binding upon any transferee of shares of the Company's
stock held by the Investors and Common Holders. Each such transferee shall
execute documents assuming the obligations of the transferor under this Section
4 prior to the completion of such transfer.
4.3 Legends. Each certificate held by or now issued to the Investors or
-------
the Common Holders, whether now outstanding or subsequently issued, shall be
surrendered to the Company for endorsement or be endorsed by the Company prior
to its issuance with substantially the following legend.
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
VOTING AGREEMENT AMONG THE HOLDER OF THESE SECURITIES AND CERTAIN
OTHER HOLDERS OF THE ISSUER'S SECURITIES. BY ACCEPTING ANY INTEREST
IN SUCH SECURITIES, THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED
TO AGREE TO AND SHALL BECOME BOUND BY ALL OF THE PROVISIONS OF SUCH
AGREEMENT. COPIES OF SUCH VOTING AGREEMENT MAY BE OBTAINED UPON
WRITTEN REQUEST BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE
CORPORATION."
4.4 Termination of Voting Agreement. The covenants set forth in this
-------------------------------
Section 4 shall terminate upon the earliest of (a) the closing of a Qualified
Public Offering (as defined in Section 3.4 hereof), (b) such time as the Company
shall be subject to the reporting requirements arising under the 1934 Act, or
any successor statute and any applicable rules promulgated thereunder by the SEC
or (c) the date ten years from the date hereof.
18
<PAGE>
Section 5.
MISCELLANEOUS
-------------
5.1 Governing Law. This Agreement shall be governed by, and construed and
-------------
interpreted in accordance with the laws of the State of Delaware as applied to
agreements among Delaware residents made and to be performed entirely within the
State of Delaware.
5.2 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.
5.3 Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement among the parties with regard to the subjects
hereof. Nothing in this Agreement, express or implied, is intended to confer
upon any party, other than the parties hereto and their successors and assigns,
any rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided herein.
5.4 Severability. Any invalidity, illegality or limitation of the
------------
enforceability with respect to any Holder of any one or more of the provisions
of this Agreement, or any part thereof, whether arising by reason of the law of
any such person's domicile or otherwise, shall in no way affect or impair the
validity, legality or enforceability of this Agreement with respect to any other
Holder. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, it shall to the extent practicable, be modified so as to make it
valid, legal and enforceable and to retain as nearly as practicable the intent
of the parties, and the validity, legality, and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
5.5 Amendment and Waiver. Except as otherwise expressly provided herein,
--------------------
any term of this Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance, either
retroactively or prospectively and either for a specified period of time or
indefinitely) with the written consent of the Company and the Investors, or
their transferees holding at least a majority of the shares of Series D Stock,
voting together as a single group (treated as if converted at the conversion
rate then in effect and including, for such purposes shares of Common Stock into
which any shares of Series D Stock shall have been converted that are held by a
Holder); provided, however, that no such amendment or waiver shall reduce the
aforesaid percentage of Series D Stock and Common Stock issued upon conversion
thereof, the holders of which are required to consent to any waiver or
supplemental agreement, without the consent of the holders of all of such Series
D Stock and Common Stock; provided, further, that any amendment to Section 2.14
(or to Section 2.3 that would affect the rights under Section 2.14) shall also
require the consent of the holders of at least a majority of the shares of
Common Stock issued to, or issuable upon exercise of options held by, the Common
Holders. Any amendment or waiver effected in accordance with this Section 5.5
shall be binding upon each Common Holder, each Investor and each transferee of
the Registrable Securities. Upon the effectuation of each such amendment or
waiver, the Company shall promptly give written notice thereof to the Investors
and Common Holders who have not
19
<PAGE>
previously consented thereto in writing. Notwithstanding anything to the
contrary in this Section 5.5, the Company shall be entitled to include
additional purchasers of its Series D Stock pursuant to the Series D Agreement
as parties to this Agreement, and to treat such purchasers as "Investors" and
"Holders" hereunder, by amending Exhibit A attached hereto and providing such
---------
Exhibit A, as amended, to the other parties to this Agreement.
- ---------
5.6 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to the Company, the Investors, or any transferees upon
any breach, default or noncompliance of the Investors or any transferee or the
Company under this Agreement, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of any similar breach, default or
noncompliance thereafter occurring. It is further agreed that any waiver,
permit, consent or approval of any kind or character on the part of the Company
or the Investors of any breach, default or noncompliance under this Agreement or
any waiver on the Company's or the Investors' part of any provisions or
conditions of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in such writing and that all remedies, either
under this Agreement, by law, or otherwise afforded to the Company and the
Investors, shall be cumulative and not alternative.
5.7 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery or upon confirmed delivery by facsimile or telecopy, or
on the fifth day (or the tenth day if to a party with an address outside of the
United States) following mailing by registered or certified mail, return receipt
requested, postage prepaid, addressed: (a) if to the Company, at:
POZEN Inc.
6330 Quadrangle Drive, Suite 240
Chapel Hill, North Carolina 27514
Attention: John E. Barnhardt
Phone: (919) 490-0012
Fax: (919) 490-5552
20
<PAGE>
With a copy to:
Fred D. Hutchison, Esq.
Hutchison & Mason PLLC
4011 Westchase Boulevard, Suite 400
Raleigh, North Carolina 27607
Phone: (919) 829-9600
Fax: (919) 829-9696
or at such other address as the Company shall have furnished to the Investors in
writing, and
(b) if to the Investors, at the addresses of such Investors specified on
Exhibit A hereto, or at such other addresses as the Investors shall have
- --------
furnished to the Company in writing.
(c) if to a Holder other than the Investors, at such Holder's address as
shall have been furnished to the Company in writing.
5.8 Titles and Subtitles. The titles of the sections and subsections of
--------------------
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
5.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
21
<PAGE>
IN WITNESS WHEREOF, this Investor Rights Agreement has been duly executed
and delivered by the parties as of the date first above written.
POZEN INC.
By: /s/ John R. Plachetka
--------------------------------------
Title:President and Chief Executive Officer
--------------------------------------
Investors
MEDGROWTH S.A.
By:/s/ Philipp Mekler
-----------------------------------------
Dr. Philipp Mekler
By:/s/ Cyrill Zimmermann
-----------------------------------------
Dr. Cyrill Zimmermann
Common Holders:
/s/ John R. Plachetka
--------------------------------------------
John R. Plachetka
/s/ Joseph J. Ruvane
--------------------------------------------
Joseph J. Ruvane, Jr.
/s/ Peter J. Wise
--------------------------------------------
Peter J. Wise
22
<PAGE>
EXHIBIT A
---------
Schedule of Investors
---------------------
MEDGROWTH S.A.
23
<PAGE>
EXHIBIT B
---------
Schedule of Common Holders
--------------------------
John R. Plachetka
Joseph J. Ruvane, Jr.
Peter J. Wise
24
<PAGE>
EXHIBIT 10.7
POZEN INC.
INVESTOR RIGHTS AGREEMENT
This Investor Rights Agreement (the "Agreement") is entered into as of
March 24, 2000, by and among POZEN Inc., a Delaware corporation (the "Company"),
the holders of the Company's Series E Preferred Stock listed on Exhibit A
---------
attached hereto (the "Investors"), certain other holders of capital stock of the
Company listed on Exhibit A-1 attached hereto (the "Other Holders") and those
-----------
persons listed on Exhibit B attached hereto (each individually a "Common Holder"
---------
and, collectively, the "Common Holders").
WHEREAS, in connection with the issuance and sale of shares of Company's
Series E Preferred Stock (the "Series E Stock") to the Investors pursuant to
that certain Series E Preferred Stock Purchase Agreement, dated as of the date
hereof, by and between the Company and the Investors (the "Series E Agreement"),
the Company desires to provide the Investors certain rights with respect to
registration of the shares of stock held by them and certain other rights with
respect to such shares as an inducement to the Investors to purchase shares of
the Series E Stock;
NOW, THEREFORE, in consideration of the mutual agreements, covenants and
conditions contained herein, the Company, the Investors and the Common Holders
hereby agree as follows.
Section 1.
RESTRICTIONS ON TRANSFER
------------------------
1.1 Restrictive Legend. Each certificate representing (i) the Series E
------------------
Stock, (ii) the Common Stock of the Company (the "Common Stock") issued upon
conversion of the Series E Stock, and (iii) any other securities issued in
respect of the Series E Stock or Common Stock issued upon conversion of the
Series E Stock upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of this Section 1.1. or Section 1.2 below) be stamped or otherwise
imprinted with a legend in substantially the following form (in addition to any
legend required under applicable state securities laws).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR THE
AVAILABILITY OF AN EXEMPTION FROM THE REGISTRATION PROVISIONS OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS.
COPIES OF THE
<PAGE>
STOCK PURCHASE AGREEMENT AND INVESTOR RIGHTS AGREEMENT PROVIDING FOR
RESTRICTIONS ON TRANSFER OF THESE SECURITIES MAY BE OBTAINED UPON WRITTEN
REQUEST BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE
CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION."
Each Holder (as defined below) consents to the Company's making a notation
on its records and giving instructions to any transfer agent of the Series E
Stock or the Common Stock in order to implement the restrictions on transfer
established in this Section 1. Such legend shall be removed by the Company from
any certificate at such time as the holder of the shares represented by the
certificate satisfies the requirements of Rule 144(k) under the Securities Act
of 1933, as amended (the "1933 Act"), provided that Rule 144(k) as then in
effect does not differ substantially from Rule 144(k) as in effect as of the
date of this Agreement, and provided further that the Company has received from
the Holder a written representation that (i) such Holder is not an affiliate of
the Company and has not been an affiliate during the preceding three months,
(ii) such Holder has beneficially owned the shares represented by the
certificate for a period of at least two years, (iii) such Holder otherwise
satisfies the requirements of Rule 144(k) as then in effect with respect to such
shares, and (iv) such Holder will submit the certificate for any such shares to
the Company for reapplication of the legend at such time as the holder becomes
an affiliate of the Company or otherwise ceases to satisfy the requirements of
Rule 144(k) as then in effect.
1.2 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Registrable Securities (as defined below) by acceptance thereof
agrees to comply in all respects with the provisions of this Section 1.2. Prior
to any proposed sale, assignment, transfer or pledge of any Registrable
Securities, unless there is in effect a registration statement under the 1933
Act covering the proposed transfer, the holder thereof shall give written notice
to the Company of such holder's intention to effect such transfer, sale,
assignment or pledge. Each such notice shall describe the manner and
circumstances of the proposed transfer, sale, assignment or pledge in sufficient
detail, and shall be accompanied at such holder's expense by either (i) a
written opinion of legal counsel who shall, and whose legal opinion shall, be
reasonably satisfactory to the Company addressed to the Company, to the effect
that the proposed transfer of the Registrable Securities may be effected without
registration under the 1933 Act or (ii) a "no action" letter from the SEC to the
effect that the transfer of such securities without registration will not result
in a recommendation by the staff of the Securities and Exchange Commission (the
"SEC") that action be taken with respect thereto, whereupon the holder of such
Registrable Securities shall be entitled to transfer such Registrable Securities
in accordance with the terms of the notice delivered by the holder to the
Company. The Company will not require such a legal opinion or "no action"
letter (a) in any transaction in compliance with Rule 144, or (b) in any
transaction in which an Investor that is a partnership, limited liability
company or corporation distributes Series E Stock or Common Stock issuable upon
conversion thereof after six months after the purchase of such securities
hereunder solely to partners, members or stockholders (as the case may be)
thereof for no consideration, provided that each transferee agrees in writing to
be subject to the terms of this Section 1.2. Each certificate evidencing the
Registrable Securities transferred as above provided shall bear, except if such
transfer is made pursuant to Rule 144, the appropriate restrictive legend set
forth in Section 1.1 above, except that such certificate shall not
2
<PAGE>
bear such restrictive legend if in the opinion of counsel for such holder and
the Company such legend is not required in order to establish compliance with
any provisions of the 1933 Act.
Section 2.
REGISTRATION RIGHTS
-------------------
The Company hereby grants to each of the Holders (as defined below) the
registration rights set forth in this Section 2, with respect to the Registrable
Securities (as defined below) owned by such Holders. The Company and the
Holders agree that the registration rights provided herein set forth the sole
and entire agreement, and supersede any prior agreement, between the Company and
the Holders with respect to registration rights for the Company's securities.
2.1 Certain Definitions. As used in this Section 2:
-------------------
(a) The terms "register," "registered" and "registration" refer to a
registration effected by filing with the SEC a registration statement (the
"Registration Statement") in compliance with the 1933 Act, and the declaration
or ordering by the SEC of the effectiveness of such Registration Statement.
(b) The term "Registrable Securities" means (i) Common Stock issued or
issuable upon conversion of the shares of Series E Stock held by Investors or
any transferee as permitted by Section 2.8 hereof, and (ii) any Common Stock
issued as (or issuable upon the conversion or exercise of any warrant, right or
other security that is issued as) a dividend or other distribution with respect
to, or in exchange or in replacement of, such Registrable Securities; provided,
however, that shares of Common Stock or other securities shall only be treated
as Registrable Securities if and so long as (A) they have not been sold to or
through a broker or dealer or underwriter in a public distribution or a public
securities transaction, (B) they have not been sold in a transaction exempt from
the registration and prospectus delivery requirements of the 1933 Act under
Section 4(1) thereof so that all transfer restrictions and restrictive legends
with respect thereto are removed upon the consummation of such sale, and (C) the
registration rights associated with such securities have not been terminated
pursuant to Section 2.16 hereof.
(c) The term "Holder" (collectively, "Holders") means each Investor
and any transferee, as permitted by Section 2.8 hereof, holding Registrable
Securities, securities exercisable or convertible into Registrable Securities or
securities exercisable for securities convertible into Registrable Securities.
(d) The term "Initiating Holders" means any Holder or Holders of at
least fifty percent (50%) of the Registrable Securities then outstanding and not
registered at the time of any request for registration made pursuant to Section
2.2 of this Agreement.
2.2 Demand Registration.
-------------------
3
<PAGE>
(a) Demand for Registration. If the Company shall receive from
-----------------------
Initiating Holders a written demand that the Company effect any registration (a
"Demand Registration") (other than a registration on Form S-3 or any related
form of registration statement, such a request being provided for under Section
2.9 hereof), the Company will:
(i) promptly (but in any event within 10 days) give written
notice of the proposed registration to all other Holders; and
(ii) use its best efforts to effect such registration as soon as
practicable and as will permit or facilitate the sale and distribution of all or
such portion of such Initiating Holders' Registrable Securities as are specified
in such demand, together with all or such portion of the Registrable Securities
of any Holder or Holders joining in such demand as are specified in a written
demand received by the Company within 15 days after such written notice is
given, provided that the Company shall not be obligated to take any action to
effect any such registration pursuant to this Section 2.2:
(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 1933 Act;
(B) after the Company has effected two (2) such
registrations pursuant to this Section 2.2 and the sales of the shares of Common
Stock under such registrations have closed;
(C) if 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 seriously
detrimental to the Company and its stockholders for such Registration Statement
to be filed at the date filing would be required, in which case the Company
shall have an additional period or periods of not more than 90 days within which
to file such Registration Statement; provided, however, that the Company shall
not use this right to delay the filing for more than 180 days in the aggregate
in any 12-month period; or
(D) prior to the earlier of (1) the second anniversary of
the date of this Agreement or (2) the date 180 days after the effective date of
the initial public offering of the Company's securities.
(b) Underwriting. If reasonably required to maintain an orderly
------------
market in the Common Stock, the Holders shall distribute the Registrable
Securities covered by their demand by means of an underwriting. If the
Initiating Holders intend to distribute the Registrable Securities covered by
their demand by means of an underwriting, they shall so advise the Company as
part of their demand made pursuant to this Section 2.2, including the identity
of the managing underwriter; and the Company shall include such information in
the written notice referred to in Section 2.2(a)(i). In such event, the right of
any Holder to registration pursuant to this Section 2.2 shall be conditioned
upon such Holder's participation in such underwriting and
4
<PAGE>
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein.
The Company shall, together with all holders of capital stock of the
Company proposing to distribute their securities through such underwriting,
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected by a majority-in-interest of the Initiating Holders and
reasonably satisfactory to the Company. Notwithstanding any other provision of
this Section 2.2, if the underwriter shall advise the Company that marketing
factors (including, without limitation, an adverse effect on the per share
offering price) require a limitation of the number of shares to be underwritten,
then the Company shall so advise all Holders of Registrable Securities that have
requested to participate in such offering, and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated pro rata among such Holders thereof in proportion, as nearly
as practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the Registration Statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration.
If any Holder disapproves of the terms of the underwriting, such Holder may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the Initiating Holders. The Registrable Securities so withdrawn shall also
be withdrawn from registration.
If the underwriter has not limited the number of Registrable Securities to
be underwritten, the Company may include securities for its own account (or for
the account of other stockholders) in such registration if the underwriter so
agrees and if the number of Registrable Securities would not thereby be limited.
2.3 Piggyback Registration.
----------------------
(a) Company Registration. If at any time or from time to time the
--------------------
Company shall determine to register any of its securities, either for its own
account or for the account of security holders, other than a registration
relating solely to employee benefit plans, a registration on Form S-4 relating
solely to an SEC Rule 145 transaction or a registration pursuant to Section 2.2
or 2.9 hereof, the Company will:
(i) promptly (but in any event within 10 days) give to each
Holder written notice thereof; and
(ii) include in such registration (and any related qualification
under state securities laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within 15 days after receipt of such written notice from the
Company, by any Holder or Holders, except as set forth in Section 2.3(b) below.
Such Registrable Securities shall only be included to the extent that
inclusion will not diminish the number of securities included by the Company.
5
<PAGE>
(b) Underwriting. 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 as a part of the written notice given
pursuant to Section 2.3(a)(i). In such event the right of any Holder to
registration pursuant to this Section 2.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein.
All Holders proposing to distribute their Registrable Securities through
such underwriting shall, together with the Company and the other parties
distributing their securities through such underwriting, enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section 2.3, if the underwriter determines that marketing
factors require a limitation of the number of shares to be underwritten, the
underwriter may limit the number of Registrable Securities to be included in the
registration and underwriting, or may exclude Registrable Securities entirely
from such registration and underwriting subject to the terms of this Section
2.3. The Company shall so advise all holders of the Company's securities that
would otherwise be registered and underwritten pursuant hereto, and the number
of shares of such securities, including Registrable Securities, that may be
included in the registration and underwriting shall be allocated in the
following manner: shares, other than Registrable Securities and other securities
that have contractual rights with respect to registration similar to those
provided for in this Section 2.3, requested to be included in such registration
by stockholders shall be excluded; if a limitation on the number of shares is
still required, securities, other than the Registrable Securities, that have
contractual rights with respect to registration shall be reduced in proportion,
as nearly as practicable, to the amounts of such securities with such
contractual rights held by each such holder at the time of filing the
Registration Statement; and after excluding all such securities, if a limitation
on the number of shares is still required, the number of Registrable Securities
that may be included shall be reduced in proportion, or as nearly as
practicable, to the amounts of Registrable Securities held by each such holder
at the time of filing the Registration Statement. For purposes of any such
underwriter cutback, all Registrable Securities and other securities held by any
holder that is a partnership, limited liability company or corporation shall
also include any Registrable Securities held by the partners, retired partners,
members, stockholders or affiliated entities of such holder, or the estates and
family members of any such partners, retired partners, members and any trusts
for the benefit of any of the foregoing persons, and such holder and other
persons shall be deemed to be a single "selling holder," and any pro rata
reduction with respect to such "selling holder" shall be based upon the
aggregate amount of shares carrying registration rights owned by all entities
and individuals included in such "selling holder", as defined in this sentence.
No securities excluded from the underwriting by reason of the underwriters
marketing limitation shall be included in such registration. Nothing in this
Section 2.3(b) is intended to diminish the number of securities to be included
by the Company in the underwriting.
If any Holder disapproves of the terms of the underwriting, it may elect to
withdraw therefrom by written notice to the Company and the underwriter. The
Registrable Securities so withdrawn shall also be withdrawn from registration.
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to
6
<PAGE>
terminate or withdraw any registration initiated by it under this Section 2.3
prior to the effectiveness of such registration whether or not any Holder has
elected to include securities in such registration.
2.4 Expenses of Registration. All expenses incurred in connection with
------------------------
all registrations effected pursuant to Sections 2.2, 2.3 and 2.9, including
without limitation all registration, filing and qualification fees (including
state securities law fees and expenses), printing expenses, escrow fees, fees
and disbursements of counsel for the Company and expenses of any special audits
incidental to or required by such registration shall be borne by the Company;
provided, however, that the Company shall not be required to pay stock transfer
taxes or underwriters' discounts or selling commissions relating to Registrable
Securities; provided, further, that the Company shall not be required to pay for
any expenses of any registration pursuant to Section 2.9 after the Company has
effected three (3) registrations pursuant to Section 2.9, in which event the
Holders of Registrable Securities to be registered shall bear all such expenses
pro rata on the basis of Registrable Securities to be registered; and provided,
further that only in connection with any registration effected pursuant to
Section 2.2, the Company shall be obligated to pay the legal expenses of one
legal counsel designated by the Investors participating in the registration in
an amount not to exceed $25,000 per registration. Notwithstanding anything to
the contrary above, the Company shall not be required to pay for any expenses of
any registration proceeding under Section 2.2 if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to have been registered, in which event the Holders of
Registrable Securities to have been registered shall bear all such expenses pro
rata on the basis of the Registrable Securities to have been registered.
Notwithstanding the preceding sentence, however, if at the time of the
withdrawal, the Holders have learned of a materially adverse change in the
condition, business or prospects of the Company from that known to the Holders
at the time of their request, then the Holders shall not be required to pay any
of said expenses and shall retain their rights pursuant to Section 2.2.
2.5 Obligations of the Company. Whenever required under this Section 2 to
--------------------------
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) prepare and file with the SEC a Registration Statement with
respect to such Registrable Securities and use its diligent efforts to cause
such Registration Statement to become effective, and keep such Registration
Statement effective for the lesser of 180 days or until the Holder or Holders
have completed the distribution relating thereto provided however that the
Company shall have the right to terminate such Registration Statement, or to
place a stop-transfer order with respect to the shares for which registration
has been requested thereunder, upon notice to the participating Holders to the
extent necessary, in the sole discretion of the Company upon the advice of
counsel, to avoid any requirement that the Company disclose material, nonpublic
information, the disclosure of which would be seriously detrimental to the
Company and its stockholders.
(b) prepare and file with the SEC such amendments and supplements to
such
7
<PAGE>
Registration Statement and the prospectus used in connection with such
Registration Statement as may be necessary to keep such Registration Statement
effective and to comply with the provisions of the 1933 Act with respect to the
disposition of all securities covered by such registration statement.
(c) furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(d) use its diligent efforts to register or otherwise qualify the
securities covered by such Registration Statement under such other securities
laws of such states and other jurisdictions as shall be reasonably requested by
the Holders or the managing underwriter, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions.
(e) in the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(f) notify each Holder of Registrable Securities covered by such
Registration Statement, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act, of the happening of any event as a
result of which the prospectus included in such Registration Statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) use its diligent efforts to list the Registrable Securities
covered by such Registration Statement with any securities exchange on which the
Common Stock is then listed.
(h) make available for inspection by each Holder including Registrable
Securities in such registration, any underwriter participating in any
distribution pursuant to such registration, and any attorney, accountant or
other agent retained by such Holder or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, as such
parties may reasonably request, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such Holder,
underwriter, attorney, accountant or agent in connection with such Registration
Statement.
(i) cooperate with Holders including Registrable Securities in such
registration and the managing underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold, such certificates to be in such denominations and registered in such
names as such Holders or the managing underwriters may request at least two
business days prior to any sale of Registrable Securities.
8
<PAGE>
(j) permit any Holder, which Holder, in the sole and exclusive
judgment, exercised in good faith, of such Holder, might be deemed to be a
controlling person of the Company, to participate in good faith in the
preparation of such Registration Statement and to require the insertion therein
of material, furnished to the Company in writing, that in the reasonable
judgment of such Holder and its counsel should be included.
(k) use its best efforts (if the offering is underwritten) to furnish,
at the request of any Holder, on the date that Restricted Securities are
delivered to the underwriters for sale pursuant to such registration: (i) an
opinion dated such date of counsel representing the Company for the purposes of
such registration, addressed to the underwriters and to such Holder, stating
that such Registration Statement has become effective under the 1933 Act and
that (A) to the best knowledge of such counsel, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the 1933 Act, (B) the
Registration Statement, the related prospectus, and each amendment or supplement
thereof, comply as to form in all material respects with the requirements of the
1933 Act and the applicable rules and regulations of the Securities and Exchange
Commission thereunder (except that such counsel need express no opinion as to
financial statements, the notes thereto, and the financial schedules and other
financial and statistical data contained therein) and (C) to such other effects
as may reasonably be requested by counsel for the underwriters or by such Holder
or its counsel and (ii) a letter dated such date from the independent public
accountants retained by the Company, addressed to the underwriters, stating that
they are independent public accountants within the meaning of the 1933 Act and
that, in the opinion of such accountants, the financial statements of the
Company included in the registration statement or the prospectus, or any
amendment or supplement thereof, comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to the registration in respect of which such letter is being given
as such underwriters or Holder may reasonably request.
2.6 Indemnification.
---------------
(a) The Company will, and does hereby undertake to, indemnify and hold
harmless each Holder of Registrable Securities, each of such Holder's officers,
directors, managers, partners, members and agents, and each person controlling
such Holder, with respect to any registration, qualification or compliance
effected pursuant to this Section 2, and each underwriter, if any, and each
person who controls any underwriter, of the Registrable Securities held by or
issuable to such Holder, against all claims, losses, damages and liabilities (or
actions in respect thereto) to which they may become subject under the 1933 Act,
the Securities Exchange Act of 1934, as amended (the "1934 Act"), or other
federal or state law arising out of or based on (i) any untrue statement (or
alleged untrue statement) of a material fact contained in any prospectus,
offering circular or other similar 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 in light of the circumstances in which
they were made, (ii) any violation or alleged violation by the Company
9
<PAGE>
of any federal, state or common law rule or regulation applicable to the Company
in connection with any such registration, qualification or compliance, or (iii)
any failure to register or qualify Registrable Securities in any state where the
Company or its agents have affirmatively undertaken or agreed in writing that
the Company (the undertaking of any underwriter chosen by the Company being
attributed to the Company) will undertake such registration or qualification on
behalf of the Holders of such Registrable Securities (provided that in such
instance the Company shall not be so liable if it has undertaken its best
efforts to so register or qualify such Registrable Securities) and will
reimburse, as incurred, each such Holder, each such underwriter and each such
director, manager, officer, partner, member, agent and controlling person, for
any legal and any other expenses reasonably incurred in connection with
investigating or defending 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 made in conformity with written information
furnished to the Company by an instrument duly executed by such Holder or
underwriter and stated to be specifically for use therein.
(b) Each Holder will, and if Registrable Securities held by or
issuable to such Holder are included in such registration, qualification or
compliance pursuant to this Section 2, does hereby undertake to indemnify and
hold harmless the Company, each of its directors and officers, and each person
controlling the Company, each underwriter, if any, and each person who controls
any underwriter, of the Company's securities covered by such a Registration
Statement, and each other Holder, each of such other Holder's officers,
directors, managers, partners, members and agents and each person controlling
such other Holder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on (i) any failure of such
Holder or its agents or representatives to comply with the prospectus delivery
requirements of the 1933 Act or any other applicable securities or Blue Sky law,
or (ii) 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 in light of the circumstances in which they were made,
and will reimburse, as incurred, the Company, each such underwriter, each such
other Holder, and each such director, officer, manager, partner, member and
controlling person of the foregoing, 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) was made in such Registration Statement,
prospectus, offering circular or other document, in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein;
provided, however, that the liability of each Holder hereunder (unless such
Holder's liability hereunder is based upon such Holder's willful misconduct as
determined by the nonappealable final decision of a court) shall be limited to
the proportion of any such claim, loss, damage or liability that is equal to the
proportion that the public offering price of the shares sold by such Holder
under such Registration Statement bears to the total public offering price of
all securities sold thereunder, but in any event not to exceed the net proceeds
received by such Holder from the sale of securities under such Registration
Statement. It is understood and agreed that the indemnification obligations of
each Holder pursuant to any underwriting
10
<PAGE>
agreement entered into in connection with any Registration Statement shall be
limited to the obligations contained in this subsection 2.6(b).
(c) Each party entitled to indemnification under this Section 2.6 (the
"Indemnified Party") shall give notice to the party required to provide such
indemnification (the "Indemnifying Party") of any claim as to which
indemnification may be sought promptly after such Indemnified Party has actual
knowledge thereof, and shall permit the Indemnifying Party to assume the defense
of any such claim or any litigation resulting therefrom; provided that counsel
for the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be subject to approval by the Indemnified Party (whose
approval shall not be unreasonably withheld) and the Indemnified Party may
participate in such defense at the Indemnifying Party's expense if
representation of such Indemnified Party would be inappropriate due to actual or
potential differing interests between such Indemnified Party and any other party
represented by such counsel in such proceeding; 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 2, except
to the extent that such failure to give notice shall materially adversely affect
the Indemnifying Party in the defense of any such claim or any such litigation.
An Indemnifying Party, in the defense of any such claim or litigation, may,
without the consent of each Indemnified Party, consent to entry of any judgment
or enter into any settlement that includes as an unconditional term thereof the
giving by the claimant or plaintiff therein, to such Indemnified Party, of a
release from all liability with respect to such claim or litigation.
(d) In order to provide for just and equitable contribution to joint
liability under the 1933 Act in any case in which either (i) any Holder
exercising rights under this Agreement, or any controlling person of any such
Holder, makes a claim for indemnification pursuant to this Section 2.6 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 2.6 provides for indemnification in
such case, or (ii) contribution under the 1933 Act may be required on the part
of any such Holder or any such controlling person in circumstances for which
indemnification is provided under this Section 2.6; then, and in each such case,
the Company and such Holder will contribute to the aggregate claims, losses,
damages or liabilities to which they may be subject (after contribution from
others) in such proportion so that such Holder is responsible for the portion
represented by the percentage that the public offering price of the securities
offered by such Holder pursuant to the Registration Statement bears to the
public offering price of all securities offered by such Registration Statement,
and the Company will be responsible for the remaining portion (without prejudice
as to the Company's right to contributions from any other responsible parties);
provided, however, that, in any case, (A) no such Holder will be required to
contribute any amount in excess of the public offering price of all securities
offered by it pursuant to such Registration Statement, after deduction of
underwriting discounts and commissions (unless such Holder's liability hereunder
is based upon such Holder's willful misconduct as determined by the
nonappealable final decision of a court); and (B) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 11 (f) of the 1933
Act) will be entitled to contribution from any person or entity who was not
guilty of such fraudulent misrepresentation.
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<PAGE>
(e) The indemnities provided in this Section 2.6 shall survive the
transfer of any Registrable Securities by such Holder.
2.7 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may reasonably request in writing and as
shall be required in connection with any registration, qualification or
compliance referred to in this Section 2.
2.8 Transfer of Rights. The rights contained in Section 2 hereof may be
------------------
assigned or otherwise conveyed to transferees or assignees of Registrable
Securities, who shall be considered a "Holder" for purposes hereof, provided
that such transfer is effected in compliance with Section 1.2 hereof and such
transfer is a "Permitted Transfer" as defined herein.
(b) For purposes of this Agreement, a "Permitted Transfer" shall mean:
(i) a transaction not involving a change in beneficial ownership; (ii)
transactions involving distribution without consideration by a stockholder that
is a partnership, limited liability company or corporation to any of its
partners, members or stockholders (as the case may be), retired partners,
members or stockholders, or to the estate of any of its partners, members or
stockholders; (iii) transaction involving distribution without consideration by
a stockholder that is a corporation to any of its stockholders; (iv) transfers
by any stockholder who is an individual to a trust for the benefit of such
stockholder or his family; (v) a transfer in which the transferee acquires at
least 50,000 shares of Registrable Securities, subject to adjustments for
combinations, consolidations, recapitalizations, stock splits, stock dividends
and the like; or (vi) transfers by gift, will or intestate succession to the
spouse, lineal descendants or ancestors of any stockholder or spouse of a
stockholder.
2.9 Form S-3. The Company shall use its diligent efforts to qualify for
--------
registration on Form S-3 and to that end the Company shall register the Common
Stock under the 1934 Act within 12 months following the effective date of the
first registration of any securities of the Company on Form S-1. After the
Company has qualified for the use of Form S-3, the Holders of Registrable
Securities shall have the right to request registrations on Form S-3 thereafter
under this Section 2.9. The Company shall give notice to all Holders of
Registrable Securities of the receipt of a request for registration pursuant to
this Section 2.9 and shall provide a reasonable opportunity for other Holders to
participate in the registration. Subject to the foregoing, the Company will use
its best efforts to effect as soon as practicable the registration of all shares
of Registrable Securities on Form S-3 to the extent requested by the Holder or
Holders thereof for purposes of disposition; provided, however, that the Company
shall not be obligated to effect any such registration (A) 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) at an aggregate price to the public of less than
$2,500,000 or (B) at any time when the Company has effected one (1) registration
pursuant to this Section 2.9 in the previous six (6) months. Notwithstanding
the foregoing, nothing herein shall restrict, prohibit or limit in any way a
Holder's ability to exercise its registration rights under Sections 2.2 or 2.3
hereof. The Company shall have no obligation to take any action to effect any
registration pursuant to this Section 2.9 for any of the reasons set forth in
Section 2.2(a)(ii)(A) or (C), (which
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<PAGE>
shall be deemed to apply to the obligations under this Section 2.9 with equal
force). In addition, any registration pursuant to this Section 2.9 shall be
subject to the provisions of Section 2.2(b), which shall be deemed to apply to
the obligations under this Section 2.9 with equal force, except that any
reference therein to Section 2.2 or a subsection thereof shall, for these
purposes only, be deemed to be a reference to this Section 2.9.
2.10 Delay of Registration. No Holder shall have any right to obtain or
---------------------
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 2.
2.11 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 75% of the Registrable Securities then outstanding
and not registered, enter into any agreement with any holder or prospective
holder of any securities of the Company that would allow such holder or
prospective holder to (i) require the Company to effect a registration or (ii)
include any securities in any registration filed under Section 2.2, 2.3 or 2.9
hereof, unless, under the terms of such agreement, such holder or prospective
holder may include such securities in any such registration only to the extent
that the inclusion of such securities will not diminish the amount of
Registrable Securities that are included in such registration.
2.12 Rule 144 Reporting. With a view to making available to the Holders
------------------
the benefits of certain rules and regulations of the SEC that may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its diligent efforts to:
(a) Make and keep current public information available, within the
meaning of SEC Rule 144 or any similar or analogous rule promulgated under the
1933 Act, at all times after it has become subject to the reporting requirements
of the 1934 Act;
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the 1933 Act and 1934 Act (after it has
become subject to such reporting requirements);
(c) So long as a Holder owns any Registrable Securities, furnish to
such Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time
commencing 90 days after the effective date of the first registration filed by
the Company for an offering of its securities to the general public), the 1933
Act and the 1934 Act (at any time after it has become subject to such reporting
requirements); a copy of the most recent annual or quarterly report of the
Company; and such other reports and documents as a Holder may reasonably request
in availing itself of any rule or regulation of the SEC allowing it to sell any
such securities without registration.
2.13 "Market Stand-Off" Agreement. Each Holder that is a "One Percent
----------------------------
Stockholder," as defined below, hereby agrees that during a period, not to
exceed 180 days, following the effective date of the initial, effective
registration statement of the Company filed under the 1933 Act, it shall not, to
the extent requested by the Company and any underwriter, sell, pledge, transfer,
make any short sale of, loan, grant any option for the purchase of, or
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<PAGE>
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound or, subject to underwriter approval, for Holders that are entities, to
such Holders' members or partners (as applicable) who agree to be similarly
bound, or other than any sales under such registration statement) any Common
Stock held by it at any time during such period except Common Stock included in
such registration; provided, however, that all other "One Percent Stockholders"
with registration rights (whether or not pursuant to this Agreement) and all
officers and directors of the Company enter into similar agreements and such
agreement shall be applicable only to the first such registration statement of
the Company that covers Common Stock (or other securities) to be sold on its
behalf to the public in an underwritten offering.
For purposes of this Section 2.13, the term "One Percent Stockholder" shall
mean a stockholder of the Company who holds at least one percent of the
outstanding Common Stock of the Company (assuming conversion of all outstanding
Series E Stock of the Company and all other convertible securities of the
Company).
In order to enforce the foregoing covenant, the Company may impose stop
transfer instructions with respect to the Registrable Securities of each Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
2.14 Amendment of Registration Rights. Any provision of this Section 2
---------------------------------
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Holders of at least 66 2/3% of the
Registrable Securities then outstanding and not registered. Any amendment or
wavier effected in accordance with this Section shall be binding upon each
Holder, each future Holder of Registrable Securities and the Company.
2.15 Inclusion of Stock Held by Common Holders. In connection with any
-----------------------------------------
registration effected pursuant to Section 2.3 hereof, the Common Holders shall
be entitled to include in such registration (on the same terms and conditions as
Holders selling their Registrable Securities in such registration) shares of
Common Stock held by such Common Holders; provided that any limitation by the
underwriter on the number of shares to be underwritten in connection with such
registration shall first be applied to the shares so included by such Common
Holders, as provided in Section 2.3(b), and provided further that each such
Common Holder's right to include shares of Common Stock in a registration
pursuant to this Section 2.15 is contingent upon such Common Holder's execution
of an indemnification and hold harmless agreement substantially in accordance
with Section 2.6(b) and an agreement to be bound by all other applicable
restrictions contained in this Section 2.
2.16 Termination of Rights. The rights of any particular Holder to cause
---------------------
the Company to register securities under Section 2.2, 2.3 or 2.9 hereof shall
terminate as to any Holder on the earlier of (a) the date (and during such
period) that such Holder is able to dispose of all of its Registrable Securities
in any 90-day period pursuant to SEC Rule 144 (or any similar or analogous rule
promulgated under the 1933 Act), or (b) the third anniversary of the closing of
the Company's initial public offering of stock.
Section 3.
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RIGHT OF FIRST REFUSAL;
-----------------------
RIGHT OF CO-SALE
----------------
3.1 Certain Definitions. As used in this Section 3:
-------------------
(a) The term "New Securities" shall mean any capital stock of the
Company, whether now authorized or not, and rights, options or warrants to
purchase capital stock, and securities of any type whatsoever that are, or may
become, convertible into capital stock; provided that the term "New Securities"
does not include: (i) the Series E Stock; (ii) securities issuable upon
conversion of or with respect to Series E Stock or up to 6,402,102 shares (which
number shall be appropriately adjusted for any stock splits, stock dividends,
recapitalizations or similar events) issuable upon conversion of any other
preferred stock or equity or debt security of the Company issued on or prior to
the date hereof; (iii) up to [1,165,278] shares of Common Stock (which number
shall be appropriately adjusted for any stock splits, stock dividends,
recapitalizations or similar events), and options, warrants or rights
convertible into such Common Stock, issued or issuable to employees, consultants
or directors of the Company pursuant to any incentive agreement or arrangement
approved by the Board of Directors of the Company; (iv) up to 112,500 shares
(which number shall be appropriately adjusted for any stock splits, stock
dividends, recapitalizations or similar events) of capital stock or securities
exercisable for or convertible into such capital stock issued in connection with
any equipment leases or borrowings, direct or indirect, from financial or other
institutions regularly engaged in such business; (v) up to 349,999 shares (which
number shall be appropriately adjusted for any stock splits, stock dividends,
recapitalizations or similar events) issuable upon exercise of warrants to
purchase the Company's preferred stock; or (vi) securities issued pursuant to
any stock dividend, stock split, combination or other reclassification by the
Company of any of its capital stock.
(b) The term "Pro Rata Share" means the ratio (A) the numerator of
which is the number of shares of Common Stock held by such Holder, or issuable
to such Holder upon the conversion or exercise of all securities convertible
into or exercisable for Common Stock of the Company held by such Holder, on the
date of the written notice pursuant to Section 3.2 hereof, and (B) the
denominator of which is (i) with respect to the right of first refusal set forth
in Section 3.2, the number of shares of Common Stock outstanding, assuming for
this purpose conversion or exercise of all securities convertible into or
exercisable for Common Stock of the Company or (ii) with respect to the right of
co-sale set forth in Section 3.3, the number of shares of Common Stock held by
or issuable to all Holders who intend to exercise co-sale rights with respect to
such sale and by the Common Holder desiring to sell or transfer Common Stock
pursuant to Section 3.3.
3.2 Right of First Refusal. The Company hereby grants to each Holder,
----------------------
subject to the terms and conditions specified in this Section 3.2, the right of
first refusal to purchase, on the terms and conditions set forth in the
Company's notice pursuant to this Section 3.2, up to its Pro Rata Share of all
New Securities that the Company may, from time to time, propose to sell and
issue. In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Holder written notice (the "Election Notice") of
its intention, describing the type of
15
<PAGE>
New Securities, the price and the general terms upon which the Company proposes
to issue the same. Each Holder shall have 15 days from the date of any such
notice to exercise its right of first refusal under this Section 3.2 for the
price and upon the general terms specified in the notice by giving written
notice to the Company and stating therein the quantity of New Securities to be
purchased. Each Holder shall also have the option, exercisable by so specifying
in the Election Notice, to purchase such Holder's pro rata portion of any
remaining New Securities not purchased by other Holders, in which case the
Holders exercising such further option shall be deemed to have elected to
purchase such Holder's pro rata portion of such remaining New Securities, up to
an aggregate maximum number of New Securities which such Holder shall have
specified in the Election Notice. The Company shall have 90 days after the 15-
day period described in this Section 3.2 to sell all such New Securities
respecting which the Holders' rights of first refusal hereunder were not
exercised, at a price and upon terms no more favorable in any material respect
to the purchasers thereof than specified in the Company's notice. In the event
the Company has not sold all such New Securities within such 90-day period, the
Company shall not thereafter issue or sell any New Securities without first
notifying the Investors in the manner provided herein.
3.3 Right of Co-Sale. If at any time a Common Holder or Other Holder
----------------
desires (or is required) to sell or transfer in any manner any shares of capital
stock of the Company or securities convertible or exercisable into capital stock
of the Company pursuant to the terms of a bona fide offer received from a third
party (the "Buyer"), each Holder shall have the right to require, as a condition
to such sale or transfer, that the Buyer purchase from such Holder at the same
price per share and on the same terms and conditions as involved in such sale or
disposition by such Common Holder or Other Holder that percentage of the number
of shares of capital stock proposed to be acquired by the Buyer from such Common
Holder or Other Holder (the "Offered Shares") equal to such Holder's Pro Rata
Share. Each Holder shall act upon the Buyer's offer to buy within twenty (20)
days after receipt of the written notice delivered by such Common Holder or
Other Holder to the Company and each Holder that fully describes the offer. In
the event that one or more Holders shall elect to participate in such sale or
transfer, each such Holder shall communicate in writing such election to such
Common Holder or Other Holder.
3.4 Expiration of Right. The rights of first refusal and rights of co-
-------------------
sale granted under this Section 3 shall not apply to, and shall expire upon, the
closing of a Qualified Public Offering (as defined in Section 4.4 below).
3.5 No Waiver. The exercise or non-exercise by a Holder of its or his
---------
rights under this Section 3 shall not adversely affect its right to exercise
such rights in connection with future transfers or sales.
Section 4.
COMPANY COVENANTS
-----------------
The Company hereby covenants and agrees as follows:
4.1 Financial Information.
---------------------
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(a) So long as any Investor or any subsidiary, affiliate or partner of
such Investor shall own at least 50,000 shares of Investor Stock or any shares
of Common Stock issued upon conversion thereof, subject to adjustment for
combinations, consolidations, recapitalizations, stock splits, stock dividends
and the like, the Company will furnish each Holder, subject to Section 4.1(b)
below, the following reports:
(i) As soon as practicable after the end of each fiscal year,
and in any event within 90 days thereafter, (1) audited consolidated balance
sheets of the Company and its subsidiaries, if any, as at the end of such fiscal
year, and audited consolidated statements of income and losses, stockholders'
equity and cash flows of the Company and its subsidiaries, if any, for such
fiscal year, prepared in accordance with generally accepted accounting
principles and setting forth in each case in comparative form the figures for
the previous fiscal year, if any, all in reasonable detail and accompanied by a
report and opinion thereon by independent auditors selected by the Company's
Board of Directors; and (2) a copy of such auditors' management letter prepared
in connection therewith, if any, (as soon as such management letter is
available, which may be greater than the aforesaid 90-day period);
(ii) As soon as practicable after the end of each of the first
three quarters of the fiscal year, but in any event within 30 days after the end
of each such quarter, the unaudited consolidated balance sheets of the Company
and its subsidiaries, if any, as of the end of such quarter, and its unaudited
consolidated statements of income and losses, stockholders' equity and cash
flows for such quarter, setting forth in each case in comparative form the
figures for the corresponding period of the preceding fiscal year and such
quarter's operating budget, all in reasonable detail and prepared in accordance
with generally accepted accounting principles, except that such financial
statements may not contain notes and will be subject to year-end adjustment, and
certified by the principal financial or accounting officer of the Company. Such
quarterly report shall include a narrative, summary description of the Company's
operations for such quarter, indicating whether the Company is materially in
compliance with this Agreement and other material agreements and discussing any
material variances from the Company's operating plan;
(iii) Within 30 days prior to the end of each fiscal year, an
operating budget, prepared on a quarterly basis, for the succeeding fiscal year;
and
(iv) With reasonable promptness, such other information
respecting the business, properties or the condition or operations, financial or
other, of the Company or any subsidiary as any Holder may from time to time
reasonably request.
(b) The Company shall not be obligated pursuant to this Section 4.1 to
provide financial information to any person whom the Company reasonably believes
is a competitor of the Company.
(c) The rights granted pursuant to this Section 4.1 may be assigned or
otherwise conveyed by any Investor or by any subsequent transferee of any such
rights, provided that the Company is given prior written notice of any such
proposed assignment or conveyance;
17
<PAGE>
and provided further that the Company may refuse to permit such assignment or
conveyance if the proposed transferee is reasonably believed by the Company to
be a competitor of the Company.
4.2 Inspection. The Company shall permit each Investor and each
----------
transferee in a Permitted Transfer (as defined in Section 2.8(b) hereof)
(provided such transfer is effected in compliance with Section 1.2 hereof), its
attorney or its other representative to visit and inspect the Company's
properties, to examine the Company's books of account and other records, to make
copies or extracts therefrom and to discuss the Company's affairs, finances and
accounts with its officers, management, employees and independent auditors all
at such reasonable times and as often as such Investor or transferee may
reasonably request; provided, however, that the Company shall not be obligated
pursuant to this Section 4.2 to provide trade secrets or confidential
information or to provide information to any person whom the Company reasonably
believes is a competitor of the Company; provided, further, that such Investor
shall bear any costs or expenses of such investigations or inquiries.
4.3 Additional Affirmative Covenants. Without limiting any other covenant
--------------------------------
or provision hereof, the Company covenants and agrees that, so long as at least
50,000 shares of Series E Stock remain outstanding, it will, and will cause each
subsidiary (to the extent applicable thereto) of the Company, if and when such
subsidiary exists, to:
(a) Payment of Taxes. Pay, and cause each subsidiary to pay, and
----------------
discharge all taxes, assessments and governmental charges or levies imposed upon
it or upon its income, profits or business, or upon any properties belonging to
it, prior to the date on which penalties attach thereto, and all lawful claims
that, if unpaid, might become a lien or charge upon any properties of the
Company or any subsidiary, provided that neither the Company nor any subsidiary
shall be required to pay any such tax, assessment, charge, levy or claim that is
being contested in good faith and by appropriate proceedings if the Company or
any subsidiary shall have set aside on its books sufficient reserves, if any,
with respect thereto;
(b) Payment of Trade Debt. Pay, and cause each subsidiary to pay,
---------------------
when due, or in conformity with customary trade terms but not later than ninety
(90) days from the due date, all lease obligations, all trade debt, and all
other indebtedness incident to the operations of the Company or its
subsidiaries, except such as are being contested in good faith and by proper
proceedings if the Company or subsidiary concerned shall have set aside on its
books sufficient reserves, if any, with respect thereto;
(c) Maintenance of Insurance. Maintain, and cause each subsidiary to
------------------------
maintain, insurance with responsible and reputable insurance companies or
associations in such amounts and covering such risks as is customarily carried
by companies engaged in similar businesses and owning similar properties in the
same general areas in which the Company or such subsidiary operates;
(d) Preservation of Corporate Existence. Preserve and maintain, and,
-----------------------------------
unless the Company reasonably deems it not to be in its best interests, cause
each subsidiary to preserve and maintain, its corporate existence, rights,
franchises and privileges in the jurisdiction of its
18
<PAGE>
incorporation, and qualify and remain qualified, and cause each subsidiary to
qualify and remain qualified, as a foreign corporation in each jurisdiction in
which such qualification is necessary or desirable in view of its business and
operations or the ownership or lease of its properties, except when the failure
to be so qualified would not have a material adverse effect on the Company and
its subsidiaries taken as a whole; provided that nothing in this Section 4.3(d)
shall prohibit the Company or any of its subsidiaries from engaging in a
corporate transaction in connection with the acquisition of another corporation
or business entity by the Company or one or more of its wholly owned
subsidiaries by merger, consolidation, share exchange, purchase of substantially
all the assets or other reorganization whereby the stockholders of the Company
immediately prior to the transaction own in the aggregate more than 50% of the
voting power of the Company or other surviving entity after the transaction;
(e) Intellectual Property. Secure, preserve and maintain, and cause
---------------------
each subsidiary to secure, preserve and maintain, all licenses and other rights
to use patents, processes, licenses, permits, trademarks, trade names,
inventions, intellectual property rights or copyrights owned or used by it to
the extent necessary to the conduct of its business or the business of any
subsidiary;
(f) Compliance with Laws. Comply, and cause each subsidiary to
--------------------
comply, with the requirements of all applicable laws, rules, regulations and
orders of any governmental authority, noncompliance with which could materially
adversely affect its business or condition, financial or otherwise;
(g) Records and Books of Account. Keep, and cause each subsidiary to
----------------------------
keep, adequate records and books of account in which complete entries will be
made in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company and any
subsidiary, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, returns of merchandise, obsolescence, amortization,
taxes, bad debts and other purposes in connection with its business shall be
made;
(h) Maintenance of Properties. Maintain and preserve, and cause each
-------------------------
subsidiary to maintain and preserve, all of its properties and assets necessary
for the proper conduct of its business, in good repair, working order and
condition, ordinary wear and tear excepted;
(i) Regulatory Compliance. Comply, and cause each subsidiary to
---------------------
comply, with all minimum funding requirements applicable to any pension,
employee benefit plans, or employee contribution plans that are subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or to the
Internal Revenue Code of 1986, as amended (the "Code"), and comply, and cause
each subsidiary to comply, in all other material respects with the provisions of
ERISA and the Code, and the rules and regulations thereunder, which are
applicable to any such plan; provided further that neither the Company nor any
subsidiary will permit any event or condition to exist that would permit any
such plan to be terminated under circumstances that would cause any material
lien provided for in section 4068 of ERISA to attach to the assets of the
Company or any subsidiary;
19
<PAGE>
(j) Financings. Promptly, fully and in detail, inform the Board of
----------
Directors of any discussions, offers or contracts relating to possible
financings of any nature for the Company, whether initiated by the Company or
any other person, except for arrangements with trade creditors in the ordinary
course of business;
(k) Nature of Business. Continue to conduct its business without
------------------
material change from the nature of the business as conducted or contemplated as
of the date of this Agreement or enter into material transactions not in the
ordinary course of business, except as approved by the Board of Directors; and
(l) Employee Agreements. Cause its future employees to execute a
-------------------
nondisclosure, assignment of inventions and non-competition agreement in the
form attached as Exhibit D to the Series E Agreement.
---------
4.4 Expiration of Covenants. The covenants set forth in this Section 4
-----------------------
shall expire and be of no further force or effect upon the effectiveness of a
Qualified Public Offering (as defined below). A "Qualified Public Offering"
shall mean an effective registration statement for the sale of the Company's
shares of Common Stock in a firm commitment underwritten public offering
registered under the 1933 Act generating proceeds (before deducting
underwriters' commissions and discounts) to the Company of $40,000,000 or more
and the price per share to the public is not less than 150% of the Series E
purchase price per share, subject to adjustment for stock splits, stock
dividends and the like (other that a registration relating solely to employee
benefit plans or to a transaction under Rule 145 under the 1933 Act or any
successor rule thereto). After such time, the Investors shall be entitled to
receive such annual and quarterly reports as the Company shall distribute to its
stockholders generally.
Section 5.
OBSERVATION RIGHTS
------------------
Until such time as the Company shall have consummated a Qualified Public
Offering (as defined in Section 4.4 hereof), the Investors shall have the right
to appoint one (1) observer to the Board of Directors of the Company, as
designated by Canaan Partners, who initially shall be Dr. Seth Rudnick. Such
observer will be allowed to participate in all discussions of the Board of
Directors but will not be a voting member of the Board of Directors. The
Company shall reimburse the observer appointed by the Investors for reasonable
expenses incurred to attend meetings of the Board of Directors.
Section 6.
PROHIBITED TRANSFERS
--------------------
Until the closing of a Qualified Public Offering or the closing of a
transaction that results in liquidation rights for the Series E Preferred under
the Company's Certificate of Incorporation, no Common Holder may sell, pledge or
otherwise transfer more than 10% of such Common
20
<PAGE>
Holder's shares of the Company held at the Closing of the Series E Agreement
without the written consent of 66 2/3% of the shares (on an as-converted basis)
held by the Investors. Notwithstanding the previous provision, transfers to the
following persons (each a "Permitted Transferee") do not require consent of the
Investors: (i) a member of the Common Holder's immediate family (defined to
include his parents, children and lineal descent (whether by birth or adoption),
spouse, siblings and the children of siblings (whether by birth or adoptions))
or (ii) a trust or family limited partnership established by the Common Holder
for the benefit of himself or his immediate family (each such Transfer a
"Permitted Transfer"). No Permitted Transfer shall be effective unless and until
the Permitted Transferee shall have executed such documentation, in form and
substance satisfactory to the Company, evidencing agreement by the Permitted
Transferee to be bound by the provisions of this Agreement.
Section 7.
MISCELLANEOUS
-------------
7.1 Governing Law. This Agreement shall be governed by, and construed and
-------------
interpreted in accordance with the laws of the State of Delaware as applied to
agreements among Delaware residents made and to be performed entirely within the
State of Delaware.
7.2 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.
7.3 Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement among the parties with regard to the subjects
hereof. Nothing in this Agreement, express or implied, is intended to confer
upon any party, other than the parties hereto and their successors and assigns,
any rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided herein.
7.4 Severability. Any invalidity, illegality or limitation of the
------------
enforceability with respect to any Holder of any one or more of the provisions
of this Agreement, or any part thereof, whether arising by reason of the law of
any such person's domicile or otherwise, shall in no way affect or impair the
validity, legality or enforceability of this Agreement with respect to any other
Holder. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, it shall to the extent practicable, be modified so as to make it
valid, legal and enforceable and to retain as nearly as practicable the intent
of the parties, and the validity, legality, and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
7.5 Amendment and Waiver. Except as otherwise expressly provided herein,
--------------------
any term of this Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance, either
retroactively or prospectively and either for a specified period of time or
indefinitely) with the written consent of the Company and the Investors, or
their transferees holding at least 66 2/3% of the shares of Series E Stock,
voting together as a single group (treated as if converted at the conversion
rate then in effect and
21
<PAGE>
including, for such purposes shares of Common Stock into which any shares of
Series E Stock shall have been converted that are held by a Holder); provided,
however, that no such amendment or waiver shall reduce the aforesaid percentage
of Series E Stock and Common Stock issued upon conversion thereof, the holders
of which are required to consent to any waiver or supplemental agreement,
without the consent of the holders of all of such Series E Stock and Common
Stock; provided, further, that any amendment to Section 2.15 (or to Section 2.3
that would affect the rights under Section 2.15) shall also require the consent
of the holders of at least a majority of the shares of Common Stock issued to,
or issuable upon exercise of options held by, the Common Holders; and provided
further, that no amendment to Section 5 hereof shall be effective without the
written consent of the Company and the Investors, or their transferees, holding
at least 75% of the shares of Series E Stock, voting together as a single group
(treated as if converted at the conversion rate then in effect and including,
for such purposes shares of Common Stock into which any shares of Series E Stock
shall have been converted that are held by a Holder). Any amendment or waiver
effected in accordance with this Section 7.5 shall be binding upon each Common
Holder, each Investor and each transferee of the Registrable Securities. Upon
the effectuation of each such amendment or waiver, the Company shall promptly
give written notice thereof to the Investors and Common Holders who have not
previously consented thereto in writing. Notwithstanding anything to the
contrary in this Section 7.5, the Company shall be entitled to include
additional purchasers of its Series E Stock pursuant to the Series E Agreement
as parties to this Agreement, and to treat such purchasers as "Investors" and
"Holders" hereunder, by amending Exhibit A attached hereto and providing such
---------
Exhibit A, as amended, to the other parties to this Agreement.
- ---------
7.6 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to the Company, the Investors, or any transferees upon
any breach, default or noncompliance of the Investors or any transferee or the
Company under this Agreement, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of any similar breach, default or
noncompliance thereafter occurring. It is further agreed that any waiver,
permit, consent or approval of any kind or character on the part of the Company
or the Investors of any breach, default or noncompliance under this Agreement or
any waiver on the Company's or the Investors' part of any provisions or
conditions of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in such writing and that all remedies, either
under this Agreement, by law, or otherwise afforded to the Company and the
Investors, shall be cumulative and not alternative.
7.7 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery or upon confirmed delivery by facsimile or telecopy, or
on the fifth day (or the tenth day if to a party with an address outside of the
United States) following mailing by registered or certified mail, return receipt
requested, postage prepaid, addressed: (a) if to the Company, at:
POZEN Inc.
6330 Quadrangle Drive, Suite 240
Chapel Hill, North Carolina 27514
Attention: John E. Barnhardt
22
<PAGE>
Phone: (919) 490-0012
Fax: (919) 490-5552
With a copy to:
Fred D. Hutchison, Esq.
Hutchison & Mason PLLC
3110 Edwards Mill Road, Suite 100
Raleigh, North Carolina 27612
Phone: (919) 829-9600
Fax: (919) 829-9696
or at such other address as the Company shall have furnished to the Investors in
writing, and
(b) if to the Investors, at the addresses of such Investors specified on
Exhibit A hereto, or at such other addresses as the Investors shall have
- ---------
furnished to the Company in writing.
(c) if to a Common Holder other than the Investors, at such Common
Holder's address as shall have been furnished to the Company in writing.
7.8 Titles and Subtitles. The titles of the sections and subsections of
--------------------
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
7.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
23
<PAGE>
IN WITNESS WHEREOF, this Investor Rights Agreement has been duly executed
and delivered by the parties as of the date first above written.
COMPANY:
POZEN INC.
By: /s/ John R. Plachetka
--------------------------------
Name: John R. Plachetka
Title: President and CEO
INVESTORS:
CANAAN EQUITY II L.P.
By: CANAAN EQUITY PARTNERS II LLC
By: /s/ Harry T. Rein
--------------------------------
Name: Harry T. Rein
Title: Member/Manager
CANAAN EQUITY II L.P. (QP)
By: CANAAN EQUITY PARTNERS II LLC
By: /s/ Harry T. Rein
--------------------------------
Name: Harry T. Rein
Title: Member/Manager
CANAAN EQUITY II ENTREPRENEURS LLC
By: CANAAN EQUITY PARTNERS II LLC
By: /s/ Harry T. Rein
--------------------------------
Name: Harry T. Rein
Title: Member/Manager
/s/ Seth Rudnick
--------------------------------------
Seth Rudnick
24
<PAGE>
CLEVELAND CLINIC FOUNDATION
By: /s/ Dean Turner
----------------------------------
Name: Dean R. Turner
Title: Chief Financial Officer
/s/ Jacob Goldfield
----------------------------------------
Jacob Goldfield
/s/ Alexis Borisy
----------------------------------------
Alexis Borisy
VECTOR LATER-STAGE EQUITY FUND II, L.P.
By: VECTOR FUND MANAGEMENT II, L.L.C.
Its: General Partner
By /s/ Barclay Phillips
------------------------------------
Name: Barclay Phillips
Title: Managing Director
VECTOR LATER-STAGE EQUITY FUND II (Q.P.), L.P.
By: VECTOR FUND MANAGEMENT II, L.L.C.
Its: General Partner
By /s/ Barclay Phillips
------------------------------------
Name: Barclay Phillips
Title: Managing Director
25
<PAGE>
BANK VON ERNST & CIE AG
By: /s/ F. Hoff
----------------------------------
Name: F. Hoff
Title: Authorized Officer
By: /s/ M. Angst
----------------------------------
Name: M. Angst
Title: Assistant Vice President
/s/ Anthony Francis Cobden
---------------------------------------
Anthony Francis Cobden
UNITED OPPORTUNITIES FUND, LLC
By: United Management Company, LLC
Its: Managing Member
By: /s/ Ronald E. Oliver
----------------------------------
Name: Ronald E. Oliver
Title: Executive Vice President and Assistant
Treasurer
ALIMENTARIA INTERNATIONAL INC.
By: /s/ Georges Muller
----------------------------------
Name: Georges Muller
---------------------------
Title: Power-of-Attorney
NEW MEDICAL TECHNOLOGIES AG
By: /s/ Lukas R. Alioth
----------------------------------
Name: Dr. Lukas R. Alioth
Title: Attorney in Fact
/s/ Matthew E. Czajkowski
---------------------------------------
Matthew E. Czajkowski
26
<PAGE>
The undersigned hereby executes this Agreement solely
for the purpose of agreeing to the provisions of
Section 3 hereof:
MEDGROWTH, S.A.
By: /s/ Graf
----------------------------------
Graf
By: /s/ Cyrill Zimmerman
----------------------------------
Cyrill Zimmerman
27
<PAGE>
COMMON HOLDERS:
/s/ Joseph J. Ruvane, Jr.
---------------------------------------
Joseph J. Ruvane, Jr.
/s/ Peter J. Wise
---------------------------------------
Peter J. Wise
SILVER HILL INVESTMENTS, LLC
By: /s/ John R. Plachetka
----------------------------------
Name: John R. Plachetka
Title: Manager
-------------------------------
28
<PAGE>
EXHIBIT A
---------
Schedule of Investors
---------------------
Schedule of Investors
---------------------
Name and Address
----------------
Canaan Equity II L.P.
105 Rowayton Avenue
Rowayton, CN 06853
Canaan Equity II L.P. (QP)
105 Rowayton Avenue
Rowayton, CN 06853
Canaan Equity II Entrepreneurs LLC
105 Rowayton Avenue
Rowayton, CN 06853
Seth Rudnick
74005 Harvey
Chapel Hill, NC 27514
Cleveland Clinic Foundation
Dr. Delos Cosgrove
9500 Euclid Avenue, F-25
Cleveland, OH 44195
Jacob Goldfield
33 Union Square West
New York, NY 10003
Alexis Borisy
31 Revere St. #2
Boston MA 02114
Vector Later-Stage Equity Fund II, L.P.
1751 Wake Cook Road, 3d Floor
Deerfield, IL 60015
Vector Later-Stage Equity Fund II (Q.P.), L.P.
1751 Wake Cook Road, 3d Floor
Deerfield, IL 60015
29
<PAGE>
Bank von Ernst & Cie AG
Stellvertretender Direcktor
Stauffacherplatz 6
Postfach
CH-8026 Zurich
SWITZERLAND
Anthony Francis Cobden
159A Copeland Road
Beecroft NSW 2119 Australia
United Opportunities Fund, LLC
1005 Glenway Avenue
Bristol, VA 24201
Alimentaria International Inc
Georges Muller
Av des Tilleuls 8
1006 Lausanne
Switzerland
MVI Medical Venture Investments Limited
c/o NMT Management AG
Dr. Lukas R. Alioth
Elisabethenstrasse 23
CH-4051 Basel
Switzerland
Matthew E. Czajkowski
1020 Pinehurst Drive
Chapel Hill, NC 27514
30
<PAGE>
EXHIBIT A-1
-----------
Other Holders
-------------
Name and Address
- ----------------
MEDGROWTH, S.A.
Dr. Cyrill Zimmermann
Bellevue Asset Management AG
Grafenauweg 4
CH-6301 Zug
Switzerland
31
<PAGE>
EXHIBIT B
---------
Schedule of Common Holders
--------------------------
Joseph J. Ruvane, Jr.
Peter J. Wise
Silver Hill Investments, LLC
32
<PAGE>
EXHIBIT 21.1
POZEN INC.
LIST OF SUBSIDIARIES
None.
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Selected Financial
Data" and "Experts" and to the use of our report dated February 4, 2000 (except
for Note 3, as to which the date is March 24, 2000) in the Registration
Statement (Form S-1) and the related Prospectus of POZEN Inc. dated April 28,
2000.
/s/ Ernst & Young LLP
Raleigh, North Carolina
April 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR YEAR YEAR 3-MOS
<FISCAL-YEAR-END> MAR-31-2000 DEC-31-1999 DEC-31-1998 DEC-31-1997 MAR-31-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999 JAN-01-1998 JAN-01-1997 JAN-01-1999
<PERIOD-END> MAR-31-2000 DEC-31-1999 DEC-31-1998 DEC-31-1997 MAR-31-1999
<CASH> 18,671,295 4,171,086 2,986,080 0 0
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 0 0 0 0 0
<ALLOWANCES> 0 0 0 0 0
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 18,731,985 4,214,656 3,013,603 0 0
<PP&E> 233,660 218,884 164,208 0 0
<DEPRECIATION> 117,865 108,533 64,718 0 0
<TOTAL-ASSETS> 18,847,780 4,325,007 3,113,093 0 0
<CURRENT-LIABILITIES> 2,614,738 2,360,297 2,066,471 0 0
<BONDS> 0 0 0 0 0
16,875,115 0 0 0 0
6,402 6,402 3,808 0 0
<COMMON> 4,354 4,335 4,332 0 0
<OTHER-SE> (652,829) 1,953,973 1,038,482 0 0
<TOTAL-LIABILITY-AND-EQUITY> (642,073) 1,964,710 1,046,622 0 0
<SALES> 0 0 0 0 0
<TOTAL-REVENUES> 49,075 82,718 309,324 315,181 30,900
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 3,033,077 11,333,310 8,645,487 3,903,939 1,997,866
<OTHER-EXPENSES> 0 0 0 0 0
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 38 136,318 35,630 5,095 346
<INCOME-PRETAX> (2,984,002) (11,250,592) (8,336,163) (3,588,758) (1,966,966)
<INCOME-TAX> 0 0 0 0 0
<INCOME-CONTINUING> (2,984,002) (11,250,592) (8,336,163) (3,588,758) (1,966,966)
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> (2,984,002) (11,250,592) (8,336,163) (3,588,758) (1,966,966)
<EPS-BASIC> (4.57) (2.60) (1.93) (0.83) (0.45)
<EPS-DILUTED> (4.57) (2.60) (1.93) (0.83) (0.45)
</TABLE>
