<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 1998
REGISTRATION NO. 333-59557
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CELL PATHWAYS HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2834 23-246900
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
CELL PATHWAYS HOLDINGS, INC.
702 ELECTRONIC DRIVE
HORSHAM, PENNSYLVANIA 19044
TELEPHONE: (215) 706-3800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT J. TOWARNICKI
CHIEF EXECUTIVE OFFICER
CELL PATHWAYS HOLDINGS, INC.
702 ELECTRONIC DRIVE
HORSHAM, PENNSYLVANIA 19044
TELEPHONE: (215) 706-3800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
JAMES C.T. LINFIELD, ESQ. RICHARD H. TROY STEPHEN M. GOODMAN, ESQ.
REX R. O'NEAL, ESQ. SENIOR VICE PRESIDENT -- CORPORATE MICHAEL J. SHIM, ESQ.
COOLEY GODWARD LLP DEVELOPMENT AND GENERAL COUNSEL MORGAN, LEWIS & BOCKIUS LLP
2595 CANYON BOULEVARD, SUITE 250 CELL PATHWAYS HOLDINGS, INC. 2000 ONE LOGAN SQUARE
BOULDER, COLORADO 80302 702 ELECTRONIC DRIVE PHILADELPHIA, PENNSYLVANIA 19103
(303) 546-4000 HORSHAM, PENNSYLVANIA 19044 (215) 963-5000
(215) 706-3800
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement and the
effective time of (i) the proposed merger (the "Tseng Merger") of Tseng Sub,
Inc. with and into Tseng Labs, Inc. ("Tseng") and (ii) the proposed merger (the
"CPI Merger") of CPI Sub, Inc. with and into Cell Pathways, Inc. ("CPI"), as
described in the Agreement and Plan of Reorganization, dated as of June 23, 1998
(the "Reorganization Agreement"), attached as Appendix A to the Joint Proxy
Statement/Prospectus forming a part of this Registration Statement. The CPI
Merger and the Tseng Merger are referred to herein together as the
"Transactions."
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(a) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
SEPTEMBER 22, 1998
LOGO
CELL PATHWAYS, INC.
702 ELECTRONIC DRIVE
HORSHAM, PENNSYLVANIA 19044
Dear Stockholder:
As previously announced, Cell Pathways, Inc., a Delaware corporation
("CPI"), and Tseng Labs, Inc., a Utah corporation ("Tseng"), have entered into
an Agreement and Plan of Reorganization, dated June 23, 1998 (the
"Reorganization Agreement"), in order to provide further financing of the
programs of CPI. Through the reorganization, the shareholders of Tseng will
exchange their Tseng capital stock for approximately 23% of the outstanding
equity of a newly-formed holding company of CPI and CPI will obtain the benefit
of the substantial cash assets of Tseng.
The Reorganization Agreement provides for (i) the formation of Cell
Pathways Holdings, Inc., a Delaware corporation ("CPHI"), (ii) the merger of
Tseng Sub, Inc., a wholly-owned subsidiary of CPHI, with and into Tseng (the
"Tseng Merger"), (iii) the merger of CPI Sub, Inc., a wholly-owned subsidiary of
CPHI, with and into CPI (the "CPI Merger" and, together with the Tseng Merger,
the "Transactions") and (iv) the issuance of approximately 23% of the
outstanding shares of the common stock of CPHI ("CPHI Common Stock") to the
Tseng shareholders and approximately 77% of the outstanding shares of CPHI
Common Stock to the CPI stockholders. As a result of the Transactions, Tseng and
CPI would become wholly-owned subsidiaries of CPHI. Effective upon the
consummation of the Transactions, CPHI will change its name to Cell Pathways,
Inc. Application has been made to list the Common Stock of the new Cell
Pathways, Inc. on the Nasdaq National Market. Upon completion of the
Transactions, the shares of Tseng common stock will no longer be traded on the
Nasdaq National Market and the shares of the new Cell Pathways, Inc. Common
Stock will be listed for trading on the Nasdaq National Market under the trading
symbol "CLPA".
A special meeting of the stockholders of CPI will be held at the offices of
CPI, located at 702 Electronic Drive, Horsham, Pennsylvania, on November 2, 1998
at 10:00 a.m., local time (including any adjournments or postponements thereof,
the "CPI Special Meeting"). Stockholders of record of CPI as of September 18,
1998 will be entitled to attend and vote at the CPI Special Meeting. At the CPI
Special Meeting, you will be asked to consider and vote upon a proposal to adopt
and approve the Reorganization Agreement and the transactions contemplated
thereby (including the CPI Merger) (the "CPI Merger Proposal"). As a result of
the CPI Merger, each outstanding share of CPI common stock and preferred stock
will be converted into the right to receive one share of the CPHI Common Stock
and all outstanding options and warrants to acquire CPI common stock or
preferred stock will become options and warrants to acquire CPHI Common Stock.
The number of shares of CPHI Common Stock to be issued in the CPI Merger in
exchange for the outstanding shares of CPI common stock and preferred stock
will, based upon shares currently outstanding, be approximately 18.7 million
shares. The Transactions and the Reorganization Agreement are described more
fully in the accompanying Joint Proxy Statement/Prospectus.
After careful consideration, the Board of Directors of CPI (the "CPI
Board") has unanimously approved the Reorganization Agreement and the CPI
Merger, and has concluded that they are fair to, and in the best interests of,
CPI and its stockholders. The CPI Board unanimously recommends that you vote in
favor of the CPI Merger Proposal.
<PAGE> 3
At the CPI Special Meeting, you will also be asked to consider and vote
upon a proposal to approve and adopt an amendment to the CPI Sixth Amended and
Restated Certificate of Incorporation which provides that the holders of CPI
preferred stock will receive only the consideration for their shares set forth
in the Reorganization Agreement (the "CPI Certificate Proposal"). Consummation
of the Transactions is contingent upon approval of the CPI Certificate Proposal.
The CPI Board unanimously recommends a vote in favor of the adoption and
approval of the CPI Certificate Proposal.
In the materials accompanying this letter, you will find a Notice of
Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to
the proposals to be voted upon at the CPI Special Meeting and a proxy card. The
Joint Proxy Statement/Prospectus more fully describes the CPI Merger Proposal,
the CPI Certificate Proposal and the actions contemplated thereby.
All stockholders are cordially invited to attend the CPI Special Meeting in
person. If you attend the CPI Special Meeting, you may vote in person if you
wish even though you have previously returned your completed proxy. WHETHER OR
NOT YOU PLAN TO ATTEND THE CPI SPECIAL MEETING, IT IS IMPORTANT THAT YOUR SHARES
BE REPRESENTED AND VOTED, REGARDLESS OF HOW MANY SHARES YOU HOLD. THEREFORE,
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE.
PLEASE DO NOT SEND IN THE STOCK CERTIFICATE(S) REPRESENTING YOUR CPI COMMON
STOCK OR PREFERRED STOCK AT THIS TIME.
On behalf of the CPI Board, I thank you for your support and ask you to
vote in favor of the CPI Merger Proposal and the CPI Certificate Proposal.
Sincerely,
/s/ Robert J. Towarnicki
Robert J. Towarnicki
Chief Executive Officer
YOUR VOTE IS IMPORTANT -- PLEASE RETURN YOUR PROXY PROMPTLY
<PAGE> 4
[CELL PATHWAYS LOGO]
CELL PATHWAYS, INC.
702 ELECTRONIC DRIVE
HORSHAM, PENNSYLVANIA 19044
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 2, 1998
------------------------
TO THE STOCKHOLDERS OF CELL PATHWAYS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Cell
Pathways, Inc., a Delaware corporation ("CPI"), will be held on November 2, 1998
at 10:00 a.m. local time at the offices of CPI located at 702 Electronic Drive,
Horsham, Pennsylvania (including any adjournments or postponements thereof, the
"CPI Special Meeting") to consider and vote upon the following proposals:
1. To (i) approve and adopt the Agreement and Plan of Reorganization,
dated as of June 23, 1998 (the "Reorganization Agreement"), between CPI and
Tseng Labs, Inc., a Utah corporation, (ii) approve the merger of CPI Sub,
Inc., a wholly-owned subsidiary of Cell Pathways Holdings, Inc., a Delaware
corporation ("CPHI"), with and into CPI (the "CPI Merger") and (iii)
approve the other transactions contemplated by the Reorganization
Agreement. Pursuant to the CPI Merger, CPI would become a wholly-owned
subsidiary of CPHI and the stockholders of CPI would receive shares
representing approximately 77% of the outstanding shares of CPHI Common
Stock in exchange for their CPI common stock and preferred stock. A copy of
the Reorganization Agreement is attached as Appendix A to the Joint Proxy
Statement/Prospectus accompanying this Notice.
2. To adopt and approve an amendment to the CPI Sixth Amended and
Restated Certificate of Incorporation which provides that the holders of
CPI preferred stock will receive only the consideration for their shares
set forth in the Reorganization Agreement (the "CPI Certificate Proposal").
3. To transact such other business as may properly come before the CPI
Special Meeting.
The Reorganization Agreement, the proposed CPI Merger, the CPI Certificate
Proposal and other related matters are more fully described in the attached
Joint Proxy Statement/Prospectus.
Stockholders of record at the close of business on September 18, 1998 are
entitled to notice of, and to vote at, the CPI Special Meeting and any
adjournments or postponements thereof.
Commencing ten days prior to November 2, 1998, a list of stockholders
entitled to vote at the CPI Special Meeting shall be open to examination by any
CPI stockholder for any purpose germane to the CPI Special Meeting at CPI's
offices at 702 Electronic Drive, Horsham, Pennsylvania 19044.
All stockholders are cordially invited to attend the CPI Special Meeting in
person. Whether or not you plan to attend, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the CPI Board
/s/ Richard H. Troy
Richard H. Troy
Secretary
Horsham, Pennsylvania
September 22, 1998
<PAGE> 5
SEPTEMBER 22, 1998
[TSENG LABS, INC. LOGO]
TSENG LABS, INC.
18 WEST AIRY STREET
SUITE 100
NORRISTOWN, PENNSYLVANIA 19401
Dear Shareholder:
As previously announced, Tseng Labs, Inc., a Utah corporation ("Tseng"),
and Cell Pathways, Inc., a Delaware corporation ("CPI"), have entered into an
Agreement and Plan of Reorganization, dated June 23, 1998 (the "Reorganization
Agreement"). Through the reorganization, the shareholders of Tseng will exchange
their Tseng common stock for approximately 23% of the total outstanding equity
of a newly-formed holding company of CPI.
The Reorganization Agreement provides for (i) the formation of Cell
Pathways Holdings, Inc., a Delaware corporation ("CPHI"), (ii) the merger of
Tseng Sub, Inc., a wholly-owned subsidiary of CPHI, with and into Tseng (the
"Tseng Merger"), (iii) the merger of CPI Sub, Inc., a wholly-owned subsidiary of
CPHI, with and into CPI (the "CPI Merger" and, together with the Tseng Merger,
the "Transactions") and (iv) the issuance of approximately 23% of the
outstanding shares of the common stock of CPHI ("CPHI Common Stock") to the
Tseng shareholders and approximately 77% of the outstanding shares of CPHI
Common Stock to the CPI stockholders. Effective upon the consummation of the
Transactions, Tseng will become a wholly-owned subsidiary of CPHI and CPHI will
change its name to Cell Pathways, Inc. Application has been made to list the
Common Stock of the new Cell Pathways, Inc. on the Nasdaq National Market. Upon
completion of the Transactions, the shares of Tseng common stock will no longer
be traded on the Nasdaq National Market and the shares of the new Cell Pathways,
Inc. Common Stock will be listed for trading on the Nasdaq National Market under
the trading symbol "CLPA".
A special meeting of the shareholders of Tseng will be held at the Hotel
DuPont, 11th and Market Streets, Wilmington, Delaware 19801 on November 3, 1998
at 10:00 a.m., local time (including any adjournments or postponements thereof,
the "Tseng Special Meeting"). The Tseng Board has set September 21, 1998 as the
record date of the Tseng Special Meeting for purposes of determining the
shareholders entitled to attend and vote at the Tseng Special Meeting. At the
Tseng Special Meeting, you will be asked to consider and vote upon a proposal to
approve and adopt the Reorganization Agreement and approve the transactions
contemplated thereby (including the Tseng Merger) (the "Tseng Merger Proposal").
As a result of the Tseng Merger, each outstanding share of common stock of Tseng
will be converted into the right to receive shares of CPHI Common Stock and all
outstanding options to acquire Tseng common stock will become options to acquire
CPHI Common Stock. The number of shares of CPHI Common Stock to be issued in the
Tseng Merger in exchange for the outstanding shares of Tseng common stock will,
based upon shares currently outstanding, be approximately 5.478 million shares,
or .3631326 per share of Tseng common stock. The Tseng Merger and the
Reorganization Agreement are described more fully in the accompanying Joint
Proxy Statement/Prospectus.
The By-Laws of Tseng and the rules of the Nasdaq National Market require
that the Tseng Merger Proposal be approved by a majority of the outstanding
shares having voting power. Consummation of the Transactions is conditioned
upon, among other things, the receipt of such shareholder approval. After
careful consideration, the Board of Directors of Tseng (the "Tseng Board") has
unanimously approved the Reorganization Agreement and the Tseng Merger and has
concluded that they are fair to, and in the best interests of, Tseng and its
shareholders. The Tseng Board unanimously recommends that you vote in favor of
the Tseng Merger Proposal.
<PAGE> 6
In the materials accompanying this letter, you will find a Notice of
Special Meeting of Shareholders, a Joint Proxy Statement/Prospectus relating to
the proposals to be voted upon at the Tseng Special Meeting and a proxy card.
The Joint Proxy Statement/Prospectus more fully describes the proposed
Transactions and the proposals before the shareholders.
All stockholders are cordially invited to attend the Tseng Special Meeting
in person. If you attend the Tseng Special Meeting, you may vote in person if
you wish even though you have previously returned your completed proxy. WHETHER
OR NOT YOU PLAN TO ATTEND THE TSENG SPECIAL MEETING, IT IS IMPORTANT THAT YOUR
SHARES BE REPRESENTED AND VOTED, REGARDLESS OF THE NUMBER OF SHARES YOU HOLD.
THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED
ENVELOPE. PLEASE DO NOT SEND IN THE STOCK CERTIFICATE(S) REPRESENTING YOUR TSENG
COMMON STOCK AT THIS TIME.
On behalf of the Tseng Board, we thank you for your support and ask you to
vote in favor of the Tseng Merger Proposal.
Sincerely,
/s/ John J. Gibbons
John J. Gibbons
Chairman of the Board of Directors
YOUR VOTE IS IMPORTANT -- PLEASE RETURN YOUR PROXY PROMPTLY
<PAGE> 7
[TSENG LABS, INC. LOGO]
TSENG LABS, INC.
18 WEST AIRY STREET
SUITE 100
NORRISTOWN, PENNSYLVANIA 19401
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 3, 1998
------------------------
TO THE SHAREHOLDERS OF TSENG LABS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Tseng
Labs, Inc., a Utah corporation ("Tseng"), will be held on November 3, 1998, at
10:00 a.m., local time, at the Hotel DuPont, 11th and Market Streets,
Wilmington, Delaware 19801 (including any adjournments or postponements thereof,
the "Tseng Special Meeting") to consider and vote upon the following proposals:
1. To (i) approve and adopt the Agreement and Plan of Reorganization,
dated as of June 23, 1998, (the "Reorganization Agreement"), between Tseng
and Cell Pathways, Inc., a Delaware corporation, (ii) approve the merger of
Tseng Sub, Inc., a wholly-owned subsidiary of Cell Pathways Holdings, Inc.,
a Delaware corporation ("CPHI"), with and into Tseng (the "Tseng Merger")
and the filing of Articles of Merger with the Secretary of State of Utah
and (iii) approve the other transactions contemplated by the Reorganization
Agreement. Pursuant to the Tseng Merger, Tseng will become a wholly-owned
subsidiary of CPHI and the shareholders of Tseng will receive shares of
CPHI Common Stock in exchange for their Tseng Common Stock. A copy of the
Reorganization Agreement is attached as Appendix A to the Joint Proxy
Statement/Prospectus accompanying this Notice.
2. To vote upon and authorize the adjournment of the Tseng Special
Meeting, if necessary, to allow for the collection of additional
shareholder votes to obtain a quorum or in order to obtain more votes in
favor of the approval and adoption of the Reorganization Agreement and the
approval of the Tseng Merger.
3. To transact such other business as may properly come before the
Tseng Special Meeting.
The Reorganization Agreement, the proposed Tseng Merger and other related
matters are more fully described in the attached Joint Proxy
Statement/Prospectus.
Shareholders of record at the close of business on September 21, 1998 are
entitled to notice of, and to vote at, the Tseng Special Meeting and any
adjournments or postponements thereof.
Commencing ten days prior to November 3, 1998, a list of shareholders
entitled to vote at the Tseng Special Meeting shall be open to examination by
any Tseng shareholder for any purpose germane to the Tseng Special Meeting at
Tseng's office at 18 West Airy Street, Suite 100, Norristown, Pennsylvania
19401.
All shareholders are cordially invited to attend the Tseng Special Meeting
in person. Whether or not you plan to attend, WE URGE YOU TO SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the Tseng Board
/s/ Barbara J. Hawkins
Barbara J. Hawkins
Secretary
Norristown, Pennsylvania
September 22, 1998
<PAGE> 8
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 21, 1998
TSENG LABS, INC.
AND
CELL PATHWAYS, INC.
JOINT PROXY STATEMENT
FOR SPECIAL MEETINGS TO BE HELD ON NOVEMBER 2 AND NOVEMBER 3, 1998
------------------------
CELL PATHWAYS HOLDINGS, INC.
(TO BE RENAMED "CELL PATHWAYS, INC."
UPON CONSUMMATION OF THE TRANSACTIONS DESCRIBED HEREIN)
PROSPECTUS
FOR UP TO 26,000,000 SHARES OF COMMON STOCK
PAR VALUE $0.01 PER SHARE
This Joint Proxy Statement/Prospectus is being furnished to holders of
common stock, $0.005 par value per share ("Tseng Common Stock"), of Tseng Labs,
Inc., a Utah corporation ("Tseng"), in connection with the solicitation of
proxies by the Board of Directors of Tseng (the "Tseng Board") for use at a
special meeting of the shareholders of Tseng to be held on November 3, 1998, as
well as at any adjournments or postponements thereof (the "Tseng Special
Meeting"). This Joint Proxy Statement/Prospectus is also being furnished to
holders of common stock, $0.01 par value per share ("CPI Common Stock"), and
preferred stock, $0.01 par value per share ("CPI Preferred Stock" and, together
with CPI Common Stock, "CPI Capital Stock"), of Cell Pathways, Inc., a Delaware
corporation ("CPI"), in connection with the solicitation of proxies by the Board
of Directors of CPI (the "CPI Board") for use at a special meeting of the
stockholders of CPI to be held on November 2, 1998, as well as at any
adjournments or postponements thereof (the "CPI Special Meeting").
The Tseng Special Meeting is being called to consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Reorganization dated as
of June 23, 1998 between CPI and Tseng (the "Reorganization Agreement") and
approve the merger of Tseng Sub, Inc., a Utah corporation ("Tseng Sub") and
wholly-owned subsidiary of Cell Pathways Holdings, Inc. ("CPHI"), with and into
Tseng (the "Tseng Merger"). The CPI Special Meeting is being called to consider
and vote upon a proposal to (i) approve and adopt the Reorganization Agreement
and the merger of CPI Sub, Inc., a Delaware corporation and wholly-owned
subsidiary of CPHI ("CPI Sub"), with and into CPI as set forth in the
Reorganization Agreement (the "CPI Merger") and (ii) approve and adopt an
amendment to the CPI Sixth Amended and Restated Certificate of Incorporation
(the "CPI Certificate of Incorporation") which provides that the holders of CPI
Preferred Stock will receive only the consideration for their shares set forth
in the Reorganization Agreement (the "CPI Certificate Proposal"). In each case,
approval of the Reorganization Agreement includes approval of the transactions
contemplated thereby, as described in greater detail under "The CPI Merger,"
"The Tseng Merger" and "The Reorganization Agreement." The stockholders of CPI
and Tseng also will consider and vote upon other proposals at the CPI Special
Meeting and the Tseng Special Meeting, respectively. Such proposals are
discussed more fully elsewhere in this Joint Proxy Statement/Prospectus.
Upon consummation of the proposed Tseng Merger and proposed CPI Merger
(together, the "Transactions"), (i) Tseng will become a wholly-owned subsidiary
of CPHI, each outstanding share of Tseng Common Stock will be converted into the
right to receive .3631326 of a share of CPHI Common Stock (the "Tseng Exchange
Ratio") and all outstanding options to acquire Tseng Common Stock will become
options to acquire CPHI Common Stock (subject to adjustment based upon the Tseng
Exchange Ratio), and (ii) CPI will become a wholly-owned subsidiary of CPHI,
each outstanding share of CPI Capital Stock will be converted into the right to
receive one share of CPHI Common Stock and all outstanding options and warrants
to acquire CPI Capital Stock will become options and warrants to acquire CPHI
Common Stock. The number
<PAGE> 9
of shares of CPHI Common Stock to be outstanding after consummation of the
Transactions will be approximately 24.2 million, based upon the number of shares
currently outstanding.
The obligations of CPI and Tseng to effect the Transactions contemplated by
the Reorganization Agreement are subject to the satisfaction or waiver of
various conditions, including (i) approval of the CPI Merger by holders of a (a)
majority of the shares of CPI Common Stock, (b) majority of the shares of CPI
Series A Preferred Stock and CPI Series B Preferred Stock, voting together as a
single class, and (c) majority of the shares of CPI Series C Preferred Stock,
CPI Series D Preferred Stock, CPI Series E Preferred Stock, CPI Series F
Preferred Stock and CPI Series G Preferred Stock, voting together as a single
class, (ii) approval of the Tseng Merger by the holders of a majority of the
outstanding shares of Tseng Common Stock and (iii) the approval of the CPI
Certificate Proposal by the holders of a (a) majority of the shares of CPI
Common Stock and CPI Preferred Stock, voting together as a single class, and (b)
majority of the shares of each series of CPI Preferred Stock, each such series
voting as a separate class. The Transactions are expected to be consummated
within ten business days after such approvals are obtained and the other
conditions to the consummation of the Transactions are satisfied or waived. It
is currently anticipated that the Transactions will be consummated in November
1998.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of CPHI
included as a part of a registration statement filed with the Securities and
Exchange Commission relating to up to 26,000,000 shares of CPHI Common Stock
issuable in connection with the Transactions.
All information contained herein concerning CPHI has been furnished by
CPHI, all information contained herein concerning CPI has been furnished by CPI
and all information contained herein concerning Tseng has been furnished by
Tseng.
This Joint Proxy Statement/Prospectus does not cover any resales of the
CPHI Common Stock issuable in the Transactions by any stockholders deemed to be
affiliates of CPI or Tseng, if registration of such resales is required. No
person is authorized to make use of this Joint Proxy Statement/Prospectus in
connection with any such resale.
Holders of CPI Capital Stock will be entitled to appraisal rights with
respect to the proposed CPI Merger by complying with the procedures set forth in
Section 262 of the Delaware General Corporation Law ("DGCL"). Holders of Tseng
Common Stock have no appraisal rights in connection with the Tseng Merger.
This Joint Proxy Statement/Prospectus and the accompanying forms of proxies
are first being mailed to stockholders of CPI and Tseng on or about September
22, 1998.
------------------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. STOCKHOLDERS OF CPI AND TSENG ARE STRONGLY URGED TO READ
AND CONSIDER CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS, INCLUDING THE
MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING AT PAGE 19.
------------------------
THE SHARES OF CPHI COMMON STOCK TO BE ISSUED IN THE TRANSACTIONS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS SEPTEMBER 21, 1998.
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 1
SUMMARY..................................................... 2
The Companies............................................. 2
Cell Pathways, Inc. ................................... 2
Tseng Labs, Inc. ...................................... 4
Cell Pathways Holdings, Inc. .......................... 4
CPI Sub, Inc. ......................................... 4
Tseng Sub, Inc. ....................................... 4
The CPI Special Meeting................................... 4
Time, Date, Place and Purpose.......................... 4
Record Date and Vote Required.......................... 5
The Tseng Special Meeting................................. 5
Time, Date, Place and Purpose.......................... 5
Record Date and Vote Required.......................... 5
The CPI Merger............................................ 6
General................................................ 6
Stock Ownership Following the CPI Merger............... 6
Exchange of CPI Stock Certificates..................... 6
CPI's Reasons for the CPI Merger....................... 7
Recommendation of the CPI Board........................ 7
Appraisal Rights....................................... 7
The Tseng Merger.......................................... 7
General................................................ 7
Stock Ownership Following the Tseng Merger............. 8
Exchange of Tseng Stock Certificates................... 8
Tseng's Reasons for the Tseng Merger................... 8
Recommendation of the Tseng Board...................... 8
Opinion of Financial Advisor to Tseng.................. 9
Appraisal Rights....................................... 9
Interests of Certain Parties........................... 9
The Transactions.......................................... 9
Effective Time; Closing Date........................... 9
Non-Solicitation....................................... 9
Conduct of Business.................................... 9
Composition of the CPHI Board.......................... 10
Conditions to the Transactions......................... 10
Termination............................................ 11
Expenses and Termination Fees.......................... 11
Interests of Certain Persons in the Transactions....... 12
Registration Rights.................................... 12
Comparison of Stockholder Rights....................... 12
Material Federal Income Tax Consequences............... 12
Accounting Treatment................................... 12
Risk Factors........................................... 13
Markets and Market Prices.............................. 13
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
The CPI Certificate Proposal.............................. 13
CPI and CPHI Summary Financial Information................ 14
COMPARATIVE PER SHARE DATA.................................. 16
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 17
RISK FACTORS................................................ 18
Risks Related to the Transactions and CPHI................ 18
Risks Related to the Business and Operations of CPI....... 19
Risks Related to the Business and Operations of Tseng..... 29
INTRODUCTION................................................ 30
THE CPI SPECIAL MEETING..................................... 30
Purpose of the CPI Special Meeting........................ 30
Date, Time and Place of Meeting........................... 30
Record Date; Voting Rights and Outstanding Shares......... 30
Solicitation of Proxies; Expenses......................... 30
Quorum; Vote Required..................................... 31
Effect of Abstentions..................................... 31
Voting and Revocability of Proxies........................ 31
THE TSENG SPECIAL MEETING................................... 32
Purpose of the Tseng Special Meeting...................... 32
Date, Time and Place of Meeting........................... 32
Record Date; Voting Rights and Outstanding Shares......... 32
Solicitation of Proxies; Expenses......................... 32
Quorum; Vote Required..................................... 32
Effect of Abstentions and Broker Nonvotes................. 32
Voting and Revocability of Proxies........................ 33
STOCK PRICE AND DIVIDEND INFORMATION........................ 34
APPROVAL OF THE TRANSACTIONS................................ 35
Background of the Transactions............................ 35
CPI's Reasons for the Transactions........................ 36
CPI Board Recommendation.................................. 37
Tseng's Reasons for the Transactions...................... 37
Tseng Board Recommendation................................ 38
Report of Louis M. Weiner, M.D............................ 38
Opinion of Financial Advisor to Tseng..................... 38
Interests of Certain Persons in the Transactions.......... 41
Market Stand-Off Agreements............................... 42
Material Federal Income Tax Consequences.................. 42
Anticipated Accounting Treatment.......................... 45
Regulatory Matters........................................ 45
Rights of Dissenting Stockholders......................... 45
Resale of CPHI Common Stock............................... 46
Nasdaq National Market Listing............................ 47
THE REORGANIZATION AGREEMENT................................ 48
General................................................... 48
Transaction Consideration................................. 48
No Fractional Shares...................................... 48
Stock Options and Warrants................................ 48
Stock Ownership Following the Transactions................ 49
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
Conversion of Shares; Procedures for Exchange of
Certificates........................................... 49
Effect on Certificates.................................... 50
Corporate Matters; Composition of the CPHI Board.......... 50
Conditions to the Transactions............................ 50
Representations and Warranties............................ 53
Covenants................................................. 54
Termination............................................... 59
Expenses and Termination Fees............................. 60
AMENDMENT OF THE CPI CERTIFICATE OF INCORPORATION........... 61
Effect of Amendment....................................... 61
Required Vote............................................. 61
CPHI UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION............................................... 62
CPHI'S BUSINESS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 66
CPI BUSINESS................................................ 67
Overview.................................................. 67
Business Strategy......................................... 67
Carcinogenesis............................................ 68
CPI Technology............................................ 69
Products in Development................................... 71
National Cancer Institute and Other Third-Party
Arrangements........................................... 75
Scientific Advisory Board................................. 76
Patents and Proprietary Technology........................ 77
Competition............................................... 79
Government Regulation..................................... 80
Manufacturing............................................. 83
Marketing and Sales....................................... 84
Employees................................................. 84
Facilities................................................ 84
Legal Proceedings......................................... 84
CPI AND CPHI SELECTED FINANCIAL INFORMATION................. 85
CPI AND CPHI CAPITALIZATION................................. 87
CPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 89
Overview.................................................. 89
Results of Operations..................................... 89
Liquidity and Capital Resources........................... 90
Inflation................................................. 91
Income Taxes.............................................. 91
Recent Accounting Pronouncements.......................... 91
Risks Associated with the Year 2000....................... 92
MANAGEMENT OF CPHI AND EXECUTIVE COMPENSATION............... 93
Executive Officers and Directors.......................... 93
Director Nominees......................................... 95
Key Employees............................................. 95
Compensation of Directors................................. 96
Compensation of Executive Officers of CPI................. 97
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C>
Employment Agreements of CPI Executive Officers........... 97
Stock Option Grants and Exercises of CPI Executive
Officers............................................... 98
SECURITY OWNERSHIP OF CPI AND CPHI.......................... 100
CERTAIN TRANSACTIONS........................................ 104
DESCRIPTION OF CPHI CAPITAL STOCK........................... 107
CPHI Authorized Capital Stock............................. 107
CPHI Common Stock......................................... 107
CPHI Preferred Stock...................................... 107
Certain Anti-Takeover Provisions.......................... 108
Listing................................................... 108
Transfer Agent and Registrar.............................. 108
TSENG BUSINESS.............................................. 109
Overview.................................................. 109
Prior Operations.......................................... 109
Employees................................................. 110
Properties................................................ 110
Legal Proceedings......................................... 110
TSENG STOCK PRICE AND DIVIDEND INFORMATION.................. 111
TSENG SELECTED FINANCIAL DATA............................... 112
TSENG MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 113
Overview.................................................. 113
Results of Operations..................................... 113
Liquidity and Capital Resources........................... 115
TSENG PRINCIPAL SHAREHOLDERS................................ 116
COMPARISON OF STOCKHOLDER RIGHTS............................ 117
Comparison of Stockholder Rights with Respect to CPHI and
CPI.................................................... 117
Comparison of Stockholder Rights with Respect to CPHI and
Tseng.................................................. 121
STOCKHOLDER PROPOSAL........................................ 128
EXPERTS..................................................... 128
LEGAL MATTERS............................................... 128
REPRESENTATIVES OF INDEPENDENT ACCOUNTANTS.................. 128
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A -- Agreement and Plan of Reorganization.......... A-1
APPENDIX B -- Proposed Amendments to CPHI Certificate of
Incorporation............................................. B-1
APPENDIX C -- Opinion of Janney Montgomery Scott Inc. ...... C-1
APPENDIX D -- Section 262 of the Delaware General
Corporation Law........................................... D-1
</TABLE>
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<PAGE> 14
AVAILABLE INFORMATION
Tseng is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information filed with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the Commission's regional offices at CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material may
also be obtained from the Commission at prescribed rates by writing to the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. Tseng Common Stock is listed on the Nasdaq National Market and
reports and other information concerning Tseng may be inspected at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
Under the rules and regulations of the Commission, the vote on the CPI
Merger Proposal by holders of CPI Capital Stock and the vote on the Tseng Merger
Proposal by holders of Tseng Common Stock constitute offerings of the CPHI
Common Stock to be issued in connection with the Transactions. Accordingly, CPHI
has filed with the Commission a Registration Statement on Form S-4 (together
with all amendments and exhibits thereto, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to such CPHI Common Stock. This Joint Proxy Statement/Prospectus
does not contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted pursuant to the rules and
regulations of the Commission and to which portions reference is hereby made.
Statements contained in this Joint Proxy Statement/Prospectus as to the contents
of any contract or other document are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. For further information with respect to CPHI,
CPI, Tseng, the Transactions, the securities offered hereby and related matters,
reference is made to the Registration Statement. The Registration Statement and
the exhibits thereto may be inspected, without charge, at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the
Commission's regional offices at CitiCorp Center, 500 West Madison Street, N.W.,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300,
New York, New York 10048. Copies may be obtained from the Commission at
prescribed rates.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
------------------------
This Joint Proxy Statement/Prospectus is being furnished to CPI's
stockholders in connection with the solicitation of proxies by the CPI Board for
use at the CPI Special Meeting and to Tseng's stockholders in connection with
the solicitation of proxies by the Tseng Board for use at the Tseng Special
Meeting. Each copy of this Joint Proxy Statement/Prospectus mailed to the CPI
stockholders is accompanied by a form of proxy for use at the CPI Special
Meeting and each copy of this Joint Proxy Statement/Prospectus mailed to the
Tseng stockholders is accompanied by a form of proxy for use at the Tseng
Special Meeting. This Joint Proxy Statement/Prospectus is also being furnished
by CPHI to holders of CPI Capital Stock and holders of Tseng Common Stock as a
prospectus in connection with the shares of CPHI Common Stock to be issued upon
consummation of the Transactions.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE OFFERING AND THE SOLICITATION MADE HEREBY AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY CPHI, CPI OR TSENG. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY INFERENCE THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH
HEREIN OR IN THE AFFAIRS OF CPHI, CPI OR TSENG SINCE THE DATE HEREOF.
------------------------
This Joint Proxy Statement/Prospectus contains trademarks of CPI, including
PREVATAC(TM) and FGN-1(TM), as well as trademarks of other companies.
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<PAGE> 15
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement/ Prospectus. This summary is not, and is not intended
to be, complete by itself. This Joint Proxy Statement/ Prospectus contains
forward-looking statements that involve risks and uncertainties. CPI's, Tseng's
and CPHI's actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Joint Proxy
Statement/Prospectus. This summary is qualified in its entirety by reference to
the more detailed information contained elsewhere in this Joint Proxy
Statement/Prospectus and the appendices attached hereto. Stockholders of CPI and
Tseng are urged to review carefully all of the information contained in this
Joint Proxy Statement/Prospectus, the Reorganization Agreement attached hereto
as Appendix A and the other appendices attached hereto. Upon consummation of the
Transactions, CPHI will change its name to Cell Pathways, Inc.
THE COMPANIES
CELL PATHWAYS, INC.
CPI is a pharmaceutical company focused on the development and
commercialization of products to prevent and treat cancer. CPI has ongoing
clinical trials of its lead compound PREVATAC(TM) exisulind (also known as
FGN-1(TM) exisulind) in five indications and is planning clinical trials in
three additional indications. In January 1998, CPI completed enrollment of 74
patients for its ongoing pivotal Phase III clinical trial for Adenomatous
Polyposis Coli ("APC"), a disease characterized by numerous precancerous polyps
of the colon. CPI anticipates filing a New Drug Application ("NDA") with the
U.S. Food and Drug Administration ("FDA") in the first quarter of 1999, which
will seek approval to market PREVATAC(TM) exisulind for the prevention of
precancerous adenomatous polyps in APC patients. There can be no assurance that
such filing will not be delayed or that the Phase III studies will show that
PREVATAC(TM) exisulind is sufficiently safe and effective for marketing approval
by the FDA. In July 1998, the FDA granted PREVATAC(TM) exisulind Fast Track
designation for expedited review for this indication. In December 1997, CPI
initiated Phase II/III trials of PREVATAC(TM) exisulind for sporadic adenomatous
colonic polyps and for the prevention of prostate cancer recurrence as well as a
pilot study in lung cancer. In February 1998, CPI initiated a Phase II/III trial
of PREVATAC(TM) exisulind for the prevention of breast cancer recurrence. CPI
also plans to initiate Phase II trials for the treatment of Barrett's Esophagus
and bronchial dysplasia in the fourth quarter of 1998. CPI's technology is based
upon its discovery of a novel mechanism which CPI believes, based on its
research, can be targeted to induce selective apoptosis, or programmed cell
death, in precancerous and cancerous cells without affecting normal cells.
Utilizing this proprietary knowledge, CPI has created over 450 new chemical
compounds, over 200 of which display significantly greater apoptotic potency
than PREVATAC(TM) exisulind.
CPI's objectives are to be a leader in cancer chemoprevention and to build
an integrated pharmaceutical company focused on the oncology market. To meet
these objectives, CPI intends to: (i) pursue accelerated clinical development of
PREVATAC(TM) exisulind; (ii) leverage CPI's technology to develop additional
agents for cancer therapy and chemoprevention; (iii) commercialize products
directly to focused physician groups; (iv) develop strategic collaborations for
selected indications and geographical markets; and (v) acquire technology and
products focused in cancer treatment and prevention.
CPI's clinical trial strategy for its targeted indications is to identify
subsets of larger patient populations in which clinical endpoints occur in high
frequency and in a relatively short time frame. CPI plans to utilize data
obtained in its completed clinical trials in its initial indications to provide
a basis for commencing more advanced clinical trials in other indications. CPI
believes that this strategy may allow it to reduce the size and duration of
clinical trials, thereby generating statistically significant clinical results
more quickly and cost-effectively.
Adenomatous Polyposis Coli. Consistent with its clinical trial strategy,
CPI has chosen APC, a genetically inherited disease characterized by the
formation of hundreds to thousands of precancerous polyps of the colon usually
by young adulthood, as its initial indication and has obtained Orphan Drug
status and Fast Track designation for PREVATAC(TM) exisulind in the treatment of
APC. In a Phase I/II study completed in
2
<PAGE> 16
January 1997, 18 APC patients were treated with PREVATAC(TM) exisulind for six
months. At the end of the study, all patients elected to continue in an open
label extension of the study, and the majority of patients have exceeded 30
months on the drug. In this study and its extension, nearly all patients have
been observed to experience a dose-related reduction in the number and size of
exophytic (i.e., raised over the surface) precancerous rectal polyps that were
six millimeters or less in diameter at the beginning of the study. In the
extended study, no progressive increase in polyp size or volume was observed in
13 of the 14 patients who have remained in the study and have been maintained on
the optimal dose. There have been no withdrawals from the study or its extension
attributable to serious adverse events. After reviewing the results of the Phase
I/II trial with the FDA, CPI initiated a pivotal Phase III study in the second
quarter of 1997 at 12 centers worldwide in which it enrolled 74 patients. CPI
has also initiated a concurrent Phase III study in patients with high rates of
polyp formation who otherwise would have been excluded from the first Phase III
study. There can be no assurance that the results of the Phase I/II study will
be indicative of results in the Phase III studies or that the Phase III studies
will show that PREVATAC(TM) exisulind is sufficiently safe and effective for
marketing approval by the FDA or other regulatory authorities.
Sporadic Adenomatous Colonic Polyps. Sporadic adenomatous colonic polyps
occur in more than 30% of people in the U.S. over the age of 50 and are
characterized by the sporadic formation of a smaller number of precancerous
polyps than in APC. These precancerous polyps of the colon may occur every one
to three years and are histologically and genetically indistinguishable from the
polyps of APC. In September 1997, CPI completed a Phase IB safety and
pharmacokinetic study in 18 patients with a history of sporadic adenomatous
colonic polyps and/or cervical dysplasia. CPI initiated a multi-center, pivotal
Phase II/III trial in the fourth quarter of 1997 to evaluate the safety and
efficacy of different doses of PREVATAC(TM) exisulind in the treatment of
existing sporadic adenomatous colonic polyps.
Prostate, Breast and Lung Cancers. CPI is testing PREVATAC(TM) exisulind
for certain cancers, including prostate, breast and lung cancer. It is estimated
that in 1997 there were approximately 209,000 new cases of prostate cancer and
approximately 181,000 new cases of breast cancer in the U.S. In August 1998, CPI
completed enrollment of 90 patients for its ongoing Phase II/III clinical trial
to evaluate the safety and efficacy of different doses of PREVATAC(TM) exisulind
in the prevention of recurrence of prostate cancer. CPI initiated a Phase II/III
clinical study in the first quarter of 1998 to evaluate the safety and efficacy
of different doses of PREVATAC(TM) exisulind in preventing the recurrence of
breast cancer. It is estimated that in 1997 there were approximately 178,000 new
cases of lung cancer in the U.S. In the fourth quarter of 1997, the Company
initiated a pilot study of the safety and efficacy of PREVATAC(TM) exisulind in
patients with advanced lung cancer.
Additional Indications. CPI plans to commence clinical trials of
PREVATAC(TM) exisulind for other precancerous indications. CPI plans to initiate
Phase II/III studies in the fourth quarter of 1998 to evaluate the safety and
efficacy of different doses of PREVATAC(TM) exisulind for the treatment of
Barrett's Esophagus and bronchial dysplasia. Barrett's Esophagus is a
precancerous condition of the lower esophagus. An estimated 2 million people in
the U.S. have Barrett's Esophagus. Up to two-thirds of heavy smokers develop
bronchial dysplasia, a precancerous condition of the lower respiratory tract.
CPI is also designing a clinical trial to evaluate the safety and efficacy of
PREVATAC(TM) exisulind for the treatment of cervical dysplasia, a relatively
common precancerous lesion of the cervix that is easily diagnosed by Pap smears.
CPI has, to date, retained all rights to PREVATAC(TM) exisulind and its
other compounds, and plans to establish its own sales force to promote
PREVATAC(TM) exisulind for indications treated by relatively small well-defined
groups of clinical specialists. To reach larger physician groups, such as
gynecologists, CPI may enter into marketing agreements with pharmaceutical or
biotechnology companies. CPI also plans to seek partners for international
development and commercialization of its products in all indications. See "CPI
Business".
The business of CPI began operating in partnership form in 1990. CPI was
incorporated in Delaware in November 1992, and served as the general partner of
the partnership until September 1993, when it acquired the partnership's assets.
CPI's principal executive offices are located at 702 Electronic Drive, Horsham,
Pennsylvania 19044. CPI's telephone number is (215) 706-3800.
3
<PAGE> 17
TSENG LABS, INC.
Tseng, until the sale of substantially all of its graphics development
assets to ATI Technologies, Inc. in December 1997, was a supplier of high
performance video graphic controller chips. These chips were designed to enhance
the personal computer's performance by off-loading the graphics and video
functions from the central processing unit to the graphics accelerator chip.
It is anticipated that, after consummation of the Transactions, Tseng will
have no continuing operations. Currently, Tseng expects limited future revenues
and expenses from its operations as it supports existing customers through
third-party agreements through March 1999, and offers customers the opportunity
to purchase additional quantities of Tseng's product necessary to support their
ongoing product requirements, if any.
Following the sale of its development assets in December 1997, Tseng
pursued the acquisition of or investment in a growth-stage company or companies.
Tseng evaluated investment and/or acquisition opportunities with nearly 100
companies in addition to CPI. As a result of its search, Tseng entered into the
Reorganization Agreement with CPI on June 23, 1998.
Tseng was incorporated in Utah in 1983. The principal executive offices of
Tseng are located at 18 West Airy Street, Suite 100, Courthouse Plaza,
Norristown, Pennsylvania 19041. Tseng's telephone number is (610)313-9388.
CELL PATHWAYS HOLDINGS, INC.
CPHI is a corporation recently organized by CPI for the purpose of
effecting the Transactions. CPHI has no material assets and has not engaged in
any activities except in connection with the Transactions. As a result of the
Transactions, CPI and Tseng will become wholly-owned subsidiaries of CPHI. The
business of CPHI will be the business currently conducted by CPI. Effective upon
the consummation of the Transactions, CPHI will change its name to Cell
Pathways, Inc.
The principal executive offices of CPHI are located at 702 Electronic
Drive, Horsham, Pennsylvania 19044. CPHI's telephone number is (215)706-3800.
CPI SUB, INC.
CPI Sub is a corporation recently organized as a wholly-owned subsidiary of
CPHI for the purpose of effecting the CPI Merger. CPI Sub has no material assets
and has not engaged in any activities except in connection with the CPI Merger.
The principal executive offices of CPI Sub are located at 702 Electronic
Drive, Horsham, Pennsylvania 19044. CPI Sub's telephone number is (215)706-3800.
TSENG SUB, INC.
Tseng Sub is a corporation recently organized as a wholly-owned subsidiary
of CPHI for the purpose of effecting the Tseng Merger. Tseng Sub has no material
assets and has not engaged in any activities except in connection with the Tseng
Merger.
The principal executive offices of Tseng Sub are located at 702 Electronic
Drive, Horsham, Pennsylvania 19044. Tseng Sub's telephone number is
(215)706-3800.
THE CPI SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The CPI Special Meeting will be held at the offices of CPI, located at 702
Electronic Drive, Horsham, Pennsylvania, on November 2, 1998, at 10:00 a.m.
local time. The purpose of the CPI Special Meeting is to vote upon proposals to
(i) approve and adopt the Reorganization Agreement, attached hereto as Appendix
A,
4
<PAGE> 18
and the transactions contemplated thereby (including the CPI Merger) (the "CPI
Merger Proposal") and (ii) approve an amendment of the CPI Certificate of
Incorporation, attached hereto as Appendix B, which provides that the holders of
CPI Preferred Stock will receive only the consideration for their shares as set
forth in the Reorganization Agreement (the "CPI Certificate Proposal"). Approval
of the CPI Certificate Proposal is a condition to consummation of the
Transactions and will be implemented only if the Transactions are consummated.
Holders of CPI Capital Stock may also consider and vote upon such other matters
as may be properly brought before the CPI Special Meeting or any postponements
or adjournments thereof.
RECORD DATE AND VOTE REQUIRED
Only CPI stockholders of record at the close of business on September 18,
1998 (the "CPI Record Date") are entitled to vote at the CPI Special Meeting.
Approval of the CPI Merger Proposal will require approval by the affirmative
vote of each of (i) a majority of the shares of CPI Common Stock, (ii) a
majority of the shares of CPI Series A Preferred Stock and CPI Series B
Preferred Stock, voting together as a single class, and (iii) a majority of the
shares of CPI Series C Preferred Stock, CPI Series D Preferred Stock, CPI Series
E Preferred Stock, CPI Series F Preferred Stock and CPI Series G Preferred
Stock, voting together as a single class (the "Required CPI Merger Stockholder
Vote"). Approval of the CPI Certificate Proposal requires the affirmative vote
of (i) a majority of the shares of CPI Common Stock and CPI Preferred Stock,
voting together as a single class, and (ii) a majority of the shares of each
series of CPI Preferred Stock, each such series voting as a separate class (the
"Required CPI Certificate Stockholder Vote").
This Joint Proxy Statement/Prospectus and accompanying CPI Notice of
Special Meeting of Stockholders are being mailed to all of the holders of record
of CPI Capital Stock as of the CPI Record Date and constitute notice of the CPI
Special Meeting in conformity with the requirements of the DGCL.
THE TSENG SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The Tseng Special Meeting will be held at the Hotel DuPont, 11th and Market
Streets, Wilmington, Delaware 19801 on November 3, 1998, at 10:00 a.m. local
time. The purpose of the Tseng Special Meeting is to vote upon (i) the proposal
to approve and adopt the Reorganization Agreement, attached hereto as Appendix
A, and the transactions contemplated thereby (including the Tseng Merger) (the
"Tseng Merger Proposal") and (ii) the proposal to authorize the adjournment of
the Tseng Special Meeting for the collection of additional votes, if necessary
(the "Tseng Adjournment Proposal"). Tseng stockholders may also consider and
vote upon such other matters as may be properly brought before the Tseng Special
Meeting or any postponements or adjournments thereof.
RECORD DATE AND VOTE REQUIRED
Only Tseng stockholders of record at the close of business on September 21,
1998 (the "Tseng Record Date") are entitled to vote at the Tseng Special
Meeting. The Tseng Merger Proposal will require approval by the affirmative vote
of the holders of a majority of the outstanding shares of Tseng Common Stock
(the "Required Tseng Merger Stockholder Vote"). The Tseng Adjournment Proposal
will require approval by the affirmative vote of the holders of a majority of
the shares of Tseng Common Stock present at the Tseng Special Meeting and
entitled to vote thereon.
This Joint Proxy Statement/Prospectus and accompanying Notice of Special
Meeting of Stockholders are being mailed to all Tseng stockholders of record as
of the Tseng Record Date and constitute notice of the Tseng Special Meeting in
conformity with the requirements of the Utah Business Corporation Act ("UBCA").
5
<PAGE> 19
THE CPI MERGER
GENERAL
At the Effective Time (as defined below), CPI Sub will merge with and into
CPI, the separate existence of CPI Sub will cease and CPI will become a
wholly-owned subsidiary of CPHI. It is currently anticipated that the Effective
Time will occur during November 1998. In addition, the Reorganization Agreement
provides that, subject to the terms and conditions thereof, at the Effective
Time, the following will occur:
Conversion of CPI Capital Stock. Subject to the provisions contained in
the Reorganization Agreement relating to the payment of cash in lieu of
fractional shares and CPI Dissenting Shares (defined below), each share of CPI
Capital Stock then outstanding will be converted into the right to receive one
share of CPHI Common Stock. Based upon the numbers of shares of CPI Capital
Stock currently outstanding, the number of shares of CPHI Common Stock to be
issued in the CPI Merger in exchange for the outstanding shares of CPI Capital
Stock will be approximately 18.7 million shares. Each share of CPI Capital Stock
issued and outstanding immediately prior to the Effective Time (other than any
shares held by a holder who has not voted in favor of approval and adoption of
the CPI Merger Proposal, who has demanded and perfected appraisal rights for
such shares in accordance with the applicable provisions of the DGCL and who has
not withdrawn or lost such rights ("CPI Dissenting Shares")) will be canceled
and extinguished and be converted automatically into the right to receive one
share of CPHI Common Stock, upon surrender of the certificate representing such
share of CPI Capital Stock in the manner provided in a letter of transmittal to
be sent to each record holder of CPI Capital Stock promptly following the
Effective Time.
CPI Stock Plans. CPHI will assume the 1997 Equity Incentive Plan, the 1997
Non-Employee Director Stock Option Plan, the Employee Stock Purchase Plan and
the 1995 Stock Award Plan of CPI (the "CPI Plans"). Each unexpired and
unexercised option to purchase shares of CPI Common Stock granted under the CPI
Plans or outside such plans (collectively, "CPI Options") will be assumed by
CPHI and become exercisable for CPHI Common Stock. Each CPI Option so assumed by
CPHI will continue to have, and be subject to, substantially the same terms and
conditions set forth in the documents governing such CPI Option immediately
prior to the Effective Time. As promptly as possible after the Effective Time,
CPHI will file a Registration Statement on Form S-8 to register the shares of
CPHI Common Stock issuable upon an exercise of the CPI Options. See "The
Reorganization Agreement -- Stock Options and Warrants".
CPI Warrants. CPI has outstanding warrants to purchase shares of CPI
Series E Preferred Stock, CPI Series F Preferred Stock, CPI Series G Preferred
Stock and CPI Common Stock ("CPI Warrants"). Each CPI Warrant will be assumed by
CPHI and become exercisable for CPHI Common Stock, except for the warrants to
purchase CPI Series E Preferred Stock which will expire if not exercised prior
to the consummation of the Transactions. Each CPI Warrant so assumed by CPHI
will continue to have, and be subject to, substantially the same terms and
conditions set forth in the documents governing such CPI Warrants immediately
prior to the Effective Time. See "The Reorganization Agreement -- Stock Options
and Warrants".
STOCK OWNERSHIP FOLLOWING THE CPI MERGER
Based on the number of shares of CPI Capital Stock outstanding as of August
31, 1998 and the anticipated redemption of the Redeemable Preferred Stock,
18,687,093 shares of CPHI Common Stock will be issued to holders of CPI Capital
Stock upon consummation of the Transactions. CPI Warrants will be exercisable
for 427,188 shares of CPHI Common Stock. CPI has outstanding options that, if
and when fully vested, will be exercisable for 1,231,255 shares of CPHI Common
Stock. Assuming exercise and non-forfeiture of all CPI Warrants and CPI Options,
a maximum of 20,345,536 shares of CPHI Common Stock may be issued to holders of
CPI Capital Stock, CPI Warrants and CPI Options.
EXCHANGE OF CPI STOCK CERTIFICATES
As soon as reasonably practicable after the Effective Time, an exchange
agent to be selected by CPHI (the "Exchange Agent") will mail to the holders of
CPI Capital Stock (i) a letter of transmittal (the "CPI
6
<PAGE> 20
Letter of Transmittal") with respect to the surrender of valid certificates
representing shares of CPI Capital Stock ("CPI Stock Certificates") in exchange
for certificates representing CPHI Common Stock and (ii) instructions for use of
the CPI Letter of Transmittal. CPI STOCKHOLDERS SHOULD NOT SURRENDER THEIR CPI
STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A CPI LETTER OF TRANSMITTAL.
See "The Reorganization Agreement -- Conversion of Shares; Procedures for
Exchange of Certificates".
CPI'S REASONS FOR THE CPI MERGER
In approving the Reorganization Agreement and the CPI Merger, the CPI Board
considered a number of factors, including that: (i) the combination of CPI's
technology, research, development, clinical programs and organization combined
with Tseng's cash resources (see "Unaudited Pro Forma Condensed Consolidated
Financial Information") would offer CPI's stockholders an opportunity to realize
appropriate value from their investment in CPI; (ii) consummation of the
Transactions would provide CPI's stockholders with liquidity;(iii) the
Transactions compare favorably with other means of financing the continuing
research and development programs of CPI; and (iv) the Transactions are expected
to provide CPI with substantially greater resources, including cash and a
publicly traded security, to fund internal research and clinical development
work, leverage CPI's technology platform and pursue strategic transactions on an
opportunistic basis, including acquisitions of businesses or technologies and
strategic partnerships. See "Approval of the Transactions -- CPI's Reasons for
the Transactions" and "Approval of the Transactions -- CPI Board
Recommendation".
RECOMMENDATION OF THE CPI BOARD
The CPI Board has unanimously approved the Reorganization Agreement and the
CPI Merger and has unanimously recommended a vote FOR approval of the CPI Merger
Proposal and the CPI Certificate Proposal.
APPRAISAL RIGHTS
Holders of CPI Capital Stock are generally entitled to appraisal rights
with respect to the CPI Merger under the DCGL. If the CPI Merger Proposal is
approved by the Required CPI Merger Stockholder Vote and is not terminated in
accordance with the Reorganization Agreement, CPI's stockholders who do not vote
for the CPI Merger Proposal and who comply with all applicable provisions of the
DCGL will have the right to exercise appraisal rights and receive the "fair
value" of their shares of CPI Capital Stock for cash. A dissenting stockholder
of CPI must follow the appropriate procedures under the DGCL or suffer the
termination or waiver of such appraisal rights. For a more detailed description
of the procedures applicable to the exercise of appraisals rights, see "Approval
of the Transactions -- Rights of Dissenting Stockholders". The full text of the
pertinent statutory provisions of the DCGL relating to the proper exercise of
such appraisal rights is attached hereto as Appendix D and should be read
carefully and in its entirety.
THE TSENG MERGER
GENERAL
At the Effective Time, Tseng Sub will merge with and into Tseng, the
separate existence of Tseng Sub will cease and Tseng will become a wholly-owned
subsidiary of CPHI. It is currently anticipated that the Effective Time will
occur during November 1998. In addition, the Reorganization Agreement provides
that, subject to the terms and conditions thereof, at the Effective Time, the
following will occur:
Conversion of Tseng Common Stock. Subject to the provisions contained in
the Reorganization Agreement relating to the payment of cash in lieu of
fractional shares, each share of Tseng Common Stock then outstanding will be
converted into the right to receive .3631326 shares of CPHI Common Stock (the
"Tseng Exchange Ratio"). Based upon the number of shares of Tseng Common Stock
currently outstanding, the number of shares of CPHI Common Stock to be issued in
the Tseng Merger in exchange for the
7
<PAGE> 21
outstanding shares of Tseng Common Stock will be approximately 5.478 million.
Each share of Tseng Common Stock issued and outstanding immediately prior to the
Effective Time will be canceled and extinguished and be converted automatically
into the right to receive a fraction of a share of CPHI Common Stock equal to
the Tseng Exchange Ratio, upon surrender of the certificate representing such
share of Tseng Common Stock in the manner provided in a letter of transmittal to
be sent to each record holder of Tseng Common Stock promptly following the
Effective Time.
Tseng Stock Plans. CPHI will assume the 1991 Stock Option Plan, the 1995
Stock Option Plan and the 1991 Special Directors Stock Option Plan of Tseng (the
"Tseng Plans"). Each unexpired and unexercised option to purchase shares of
Tseng Common Stock granted under the Tseng Plans (the "Tseng Options") will be
assumed by CPHI and become exercisable for CPHI Common Stock. Each Tseng Option
so assumed by CPHI will continue to have, and be subject to, substantially the
same terms and conditions set forth in the documents governing such Tseng
Options immediately prior to the Effective Time (subject to appropriate
adjustments to the exercise price and number of shares subject thereto based
upon the Tseng Exchange Ratio). Upon the consummation of the Tseng Merger, CPHI
will file a Registration Statement on Form S-8 to register the shares of CPHI
Common Stock issuable upon the exercise of Tseng Options. See "The
Reorganization Agreement -- Stock Options and Warrants".
STOCK OWNERSHIP FOLLOWING THE TSENG MERGER
Based on the number of shares of Tseng Common Stock outstanding as of
August 31, 1998, 5,477,614 shares of CPHI Common Stock will be issued to holders
of Tseng Common Stock. Tseng has outstanding options that upon consummation of
the Transactions will be exercisable for 516,559 shares of CPHI Common Stock.
Assuming exercise of all Tseng Options, a maximum of 5,994,173 shares of CPHI
Common Stock will be issued to holders of Tseng Common Stock and Tseng Options.
EXCHANGE OF TSENG STOCK CERTIFICATES
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail to the holders of Tseng Common Stock (i) a letter of transmittal
(the "Tseng Letter of Transmittal") with respect to the surrender of valid
certificates representing shares of Tseng Common Stock ("Tseng Stock
Certificates") in exchange for certificates representing CPHI Common Stock and
(ii) instructions for use of the Tseng Letter of Transmittal. TSENG STOCKHOLDERS
SHOULD NOT SURRENDER THEIR TSENG STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY
RECEIVE A TSENG LETTER OF TRANSMITTAL. See "The Reorganization
Agreement -- Conversion of Shares; Procedures for Exchange of Certificates".
TSENG'S REASONS FOR THE TSENG MERGER
In approving the Reorganization Agreement and the Tseng Merger, the Tseng
Board considered a number of factors, including that: (i) the Transactions
presented Tseng's stockholders with the highest potential return relative to
other transactions evaluated; (ii) the terms and conditions of the
Reorganization Agreement, including the amount and form of the consideration,
represented the most favorable transaction relative to the terms and conditions
of other transactions evaluated; (iii) the respective businesses, patent
portfolios, prospects, financial performance, financial condition and operations
of CPI and Tseng as a combined entity were favorable relative to other
alternatives for Tseng; and (iv) the structure of the Transactions would permit
the holders of Tseng Common Stock to exchange their shares on a tax-free basis.
See "Approval of the Transactions -- Tseng's Reasons for the Transactions" and
"Approval of the Transactions -- Tseng Board Recommendation."
RECOMMENDATION OF THE TSENG BOARD
The Tseng Board has unanimously approved the Reorganization Agreement and
the Tseng Merger and has unanimously recommended a vote FOR approval of the
Tseng Merger Proposal and the Tseng Adjournment Proposal.
8
<PAGE> 22
OPINION OF FINANCIAL ADVISOR TO TSENG
Janney Montgomery Scott Inc. ("JMS") delivered its opinion dated June 23,
1998 (the "JMS Opinion") to the Tseng Board that, as of the date of such opinion
and subject to the various considerations set forth therein, the Tseng Exchange
Ratio is fair to the holders of Tseng Common Stock. The full text of the JMS
Opinion, which sets forth, among other things, assumptions made, matters
considered and limitations on the scope of the review undertaken in connection
with the JMS Opinion, is attached hereto as Appendix C and is incorporated
herein by reference. Holders of Tseng Common Stock are urged to, and should,
read the JMS Opinion in its entirety. See "Approval of the
Transactions -- Opinion of Financial Advisor to Tseng".
APPRAISAL RIGHTS
Pursuant to the UBCA, holders of Tseng Common Stock will not be entitled to
exercise appraisal rights with respect to the Tseng Merger.
INTERESTS OF CERTAIN PARTIES
Tseng is a party to a severance agreement with each of John J. Gibbons and
Mark Karsch, Chief Executive Officer and Chief Financial Officer of Tseng,
respectively. It is expected that neither Mr. Gibbons nor Mr. Karsch will be
employed by CPHI, CPI or Tseng after the consummation of the Transactions.
Therefore, as a result of the Transactions, severance payments under such
severance agreements will be triggered and Mr. Gibbons and Mr. Karsch shall
receive $350,000 and $290,000, respectively.
THE TRANSACTIONS
EFFECTIVE TIME; CLOSING DATE
The Transactions will become effective at the later of (i) the filing of a
Certificate of Merger with the Secretary of State of the State of Delaware and
(ii) the filing of Articles of Merger with the Secretary of State of Utah (the
"Effective Time"). The consummation of the transactions contemplated by the
Reorganization Agreement will take place on a date to be agreed upon by CPI and
Tseng (the "Closing Date"), which will be no later than the tenth business day
after the satisfaction or waiver of all of the conditions of the Transactions
set forth in the Reorganization Agreement. Assuming that all of the conditions
to the Transactions are satisfied or waived, it is anticipated that the
Transactions will be consummated in November 1998. See "The Reorganization
Agreement -- Conditions to the Transactions".
NON-SOLICITATION
Pursuant to the Reorganization Agreement, CPI and Tseng each have agreed
not to directly or indirectly solicit or initiate discussions or negotiations
relating to a substitute transaction involving a merger, consolidation, sale or
similar transaction involving a significant portion of the stock or assets of
CPI or Tseng, respectively and, in the case of CPI, CPI shall not engage in any
offering of CPI Capital Stock that is registered under Section 5 of the
Securities Act. However, CPI and Tseng may each furnish information and enter
into discussions or negotiations in response to a bona fide, unsolicited
acquisition proposal if and only to the extent that the board of directors of
the company receiving the proposal determines in good faith (i) after
consultation with its outside counsel, that the acquisition proposal is
reasonably likely to result in an offer superior to the one proposed in the
Reorganization Agreement and (ii) after consultation with its outside counsel,
that such actions are required in order for such board of directors to comply
with its fiduciary obligations. See "The Reorganization
Agreement -- Covenants -- Non-Solicitation".
CONDUCT OF BUSINESS
Pursuant to the Reorganization Agreement, each of CPI and Tseng has made
certain covenants regarding the conduct of its respective business during the
period from the date of the execution of the Reorganization Agreement through
the Effective Time, including, without limitation, covenants to: (i) conduct its
business
9
<PAGE> 23
and operations (a) in the ordinary course and in accordance with the operating
plans of such company and (b) in compliance with all applicable legal
requirements and material contracts; (ii) use all reasonable efforts to preserve
its business organization and the services of its current officers and employees
and maintain its relations and goodwill with suppliers, customers, landlords,
creditors, licensors, licensees, employees and other persons; (iii) maintain
insurance policies; (iv) provide all reasonable notices, assurances and support
required by any material contract relating to proprietary assets; and (v) cause
its officers to report regularly concerning the status of its business to the
other party. See "The Reorganization Agreement -- Covenants -- Conduct of
Tseng's Business" and "The Reorganization Agreement -- Covenants -- Conduct of
CPI's Business".
COMPOSITION OF THE CPHI BOARD
The CPHI Board consists of all of the members of the current CPI Board and,
upon consummation of the Transactions, will include two designees of Tseng. The
CPI Board members are Robert J. Towarnicki, Richard H. Troy, William A. Boeger,
Thomas M. Gibson, Judith A. Hemberger, Roger J. Quy, Bruce R. Ross, Peter G.
Schiff and Randall M. Toig. Tseng expects its two designees to the CPHI Board to
be John J. Gibbons and Louis M. Weiner. Tseng's designees to the CPHI Board will
initially serve until the stockholder meeting of CPHI that will be held in the
year 2000. See "Management of CPHI and Executive Compensation".
CONDITIONS TO THE TRANSACTIONS
The obligations of CPI to effect the CPI Merger and otherwise consummate
the transactions contemplated by the Reorganization Agreement are subject to the
satisfaction or waiver of certain conditions relating to, among other things:
(i) the accuracy of the representations and warranties of Tseng contained in the
Reorganization Agreement (subject to certain materiality limitations); (ii) the
performance in all material respects by Tseng of certain covenants and
obligations contained in the Reorganization Agreement; (iii) the effectiveness
of this Registration Statement; (iv) the approval of the CPI Merger Proposal by
CPI's stockholders, the approval of the Tseng Merger by Tseng's stockholders and
the approval of the CPI Certificate Proposal by CPI's stockholders; (v) the
receipt of certain certificates and legal opinions; (vi) the absence of any
material adverse change to Tseng; (vii) the absence of restraining orders,
injunctions and other orders preventing the consummation of the Transactions;
(viii) the delivery of affiliate agreements by certain directors and officers of
Tseng and CPI; (ix) the receipt of all material consents required to be obtained
in connection with the Transactions as contemplated by the Reorganization
Agreement, of which there are none other than those listed in this paragraph;
(x) the receipt of all necessary approvals by state securities commissions; (xi)
the receipt of all approvals for the listing of the CPHI Common Stock on the
Nasdaq National Market; and (xii) the absence of certain litigation or
administrative actions or proceedings.
The obligations of Tseng to effect the Tseng Merger and otherwise
consummate the transactions contemplated by the Reorganization Agreement are
subject to the satisfaction or waiver of certain conditions relating to, among
other things: (i) the accuracy of the representations and warranties of CPI
contained in the Reorganization Agreement (subject to certain materiality
limitations); (ii) the performance in all material respects by CPI of certain
covenants and obligations contained in the Reorganization Agreement; (iii) the
effectiveness of this Registration Statement; (iv) the approval of the CPI
Merger Proposal by CPI's stockholders, the approval of the Tseng Merger by
Tseng's stockholders and the approval of the CPI Certificate Proposal by CPI's
stockholders; (v) the receipt of all material consents required to be obtained
in connection with the Transactions as contemplated by the Reorganization
Agreement, of which there are none other than those listed in this paragraph;
(vi) the receipt of certain legal opinions and certificates; (vii) the absence
of any material adverse change to CPI; (viii) the taking of all actions
necessary by CPI to cause the CPHI Board to consist of the individuals specified
in the Reorganization Agreement; (ix) the receipt of all necessary approvals by
state securities commissions; (x) the receipt of all approvals for the listing
of the CPHI Common Stock on the Nasdaq National Market; (xi) the delivery of
affiliate agreements by certain officers and directors of CPI and Tseng; (xii)
the absence of restraining orders, injunctions and other orders preventing the
consummation of the Transactions; (xiii) the absence of certain litigation or
administrative actions or proceedings; and (xiv) the delivery of market
stand-off agreements by certain officers and directors
10
<PAGE> 24
of CPI. See "The Reorganization Agreement -- Covenants" and "The Reorganization
Agreement -- Conditions to the Transactions".
TERMINATION
The Reorganization Agreement may be terminated prior to the Effective Time
(whether before or after approval of the CPI Merger Proposal by the Required CPI
Merger Vote and the approval of the Tseng Merger Proposal by the Required Tseng
Stockholder Vote): (i) by mutual written consent of CPI and Tseng; (ii) subject
to certain exceptions, by either CPI or Tseng, if the Transactions shall not
have been consummated by November 30, 1998; (iii) by either CPI or Tseng, in
connection with certain legal or governmental actions having the effect of
permanently restraining, enjoining or otherwise prohibiting the Transactions;
(iv) by CPI or Tseng, if the CPI Special Meeting shall have been held and the
CPI Merger Proposal and the CPI Certificate Proposal shall not have been
approved by CPI's stockholders; (v) by CPI or Tseng, if the Tseng Special
Meeting shall have been held and the Tseng Merger Proposal shall not have been
approved by the Required Tseng Stockholder Vote; (vi) by Tseng, if (a) the CPI
Board shall have failed to recommend or shall have withdrawn or amended in a way
adverse to Tseng its unanimous recommendation in favor of the CPI Merger,
approval of the Reorganization Agreement and approval of the CPI Certificate
Proposal, (b) CPI shall have failed to include in this Joint Proxy
Statement/Prospectus such recommendation of its board, (c) the CPI Board fails
to reaffirm its unanimous recommendation within five business days of Tseng's
request, (d) the CPI Board shall have approved, endorsed or recommended a
proposal (other than the CPI Merger) for the acquisition of CPI, (e) CPI shall
have entered into any letter of intent relating to such an acquisition, (f) CPI
shall have failed to timely hold the CPI Special Meeting, (g) subject to certain
limitations, a tender or exchange offer for CPI securities shall have been
commenced and CPI does not within five days recommend rejection of such tender
or exchange offer or (h) a proposal (other than the CPI Merger) to acquire CPI
is publicly announced and CPI does not issue a press release announcing its
opposition to the proposal within five days or otherwise fails actively to
oppose such proposal (any such event, a "CPI Triggering Event"); (vii) by CPI,
if (a) the Tseng Board shall have failed to recommend or shall have withdrawn or
amended in a way adverse to CPI its unanimous recommendation in favor of the
Tseng Merger and approval of the Reorganization Agreement, (b) Tseng shall have
failed to include in this Joint Proxy Statement/Prospectus such recommendation
of its board, (c) the Tseng Board fails to reaffirm its unanimous recommendation
within five business days of CPI's request, (d) the Tseng Board shall have
approved, endorsed or recommended a proposal (other than the Tseng Merger) for
the acquisition of Tseng, (e) Tseng shall have entered into any letter of intent
relating to such an acquisition, (f) Tseng shall have failed to timely hold the
Tseng Special Meeting, (g) subject to certain limitations, a tender or exchange
offer for Tseng's securities shall have been commenced and Tseng does not within
five business days recommend rejection of such tender or exchange offer or (h) a
proposal (other than the Tseng Merger) to acquire Tseng is publicly announced
and Tseng does not issue a press release announcing its opposition to the
proposal within five business days or otherwise fails actively to oppose such
proposal (any such event, a "Tseng Triggering Event"); (viii) by Tseng, subject
to certain limitations, if any of CPI's representations and warranties contained
in the Reorganization Agreement shall be or shall have become materially
inaccurate or if any of CPI's covenants in the Reorganization Agreement shall
have been breached; or (ix) by CPI, subject to certain limitations, if any of
Tseng's representations and warranties contained in the Reorganization Agreement
shall be or shall have become materially inaccurate or if any of Tseng's
covenants contained in the Reorganization Agreement shall have been breached.
See "The Reorganization Agreement -- Termination".
EXPENSES AND TERMINATION FEES
Pursuant to the Reorganization Agreement, except as set forth below, all
fees and expenses incurred in connection with the Reorganization Agreement and
the transactions contemplated by the Reorganization Agreement shall be paid by
the party incurring such expenses, whether or not the Transactions are
consummated; provided, however, that CPI and Tseng shall share equally all fees
and expenses, other than attorneys' fees, incurred in connection with the
printing, filing and mailing of this Joint Proxy Statement/ Prospectus and the
Registration Statement of which this Joint Proxy Statement/Prospectus is a part.
In the event that the Reorganization Agreement is terminated by (i) Tseng
following the occurrence of a CPI
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<PAGE> 25
Triggering Event or (ii) CPI or Tseng following the failure of the CPI
stockholders to approve the CPI Merger Proposal and the CPI Certificate
Proposal, then CPI shall pay Tseng a termination fee of $1,500,000 plus the
amount of professional fees and expenses (not to exceed $250,000) incurred by
Tseng in connection with the Transactions. Similarly, in the event that the
Reorganization Agreement is terminated by (i) CPI following the occurrence of a
Tseng Triggering Event or (ii) CPI or Tseng following the failure of the Tseng
stockholders to approve the Tseng Merger Proposal, then Tseng shall pay CPI a
termination fee of $1,500,000 plus the amount of professional fees and expenses
(not to exceed $250,000) incurred by CPI in connection with the Transactions.
See "The Reorganization Agreement -- Expenses and Termination Fees".
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
In considering the recommendations of the CPI Board and the Tseng Board
with respect to the Reorganization Agreement and transactions contemplated
thereby, CPI and Tseng stockholders should be aware that certain members of
CPI's management, the CPI Board, Tseng's management and the Tseng Board have
interests in the Transactions that are in addition to the interests of each
corporation's stockholders generally. These interests arise from, among other
things, directorships and employment with CPHI, CPI and/or Tseng, directors and
officers insurance, stock option programs, employment agreements, severance
agreements and registration rights. FOR A DISCUSSION AND QUANTIFICATION OF THESE
INTERESTS, SEE "APPROVAL OF THE TRANSACTIONS -- INTERESTS OF CERTAIN PERSONS IN
THE TRANSACTIONS".
REGISTRATION RIGHTS
CPHI will assume CPI's obligations to persons who have registration rights
with CPI under the CPI Fourth Amended and Restated Stockholders' Agreement (the
"CPI Stockholders' Agreement"). CPI shall, however, use all reasonable efforts
to provide that any Holder (as defined in the CPI Stockholders' Agreement) shall
not request any registration until the earlier of (i) 90 days after the
effective date of a registration statement for the first public offering of
securities of CPHI following the Effective Time and (ii) the first anniversary
of the Effective Time. FOR A DISCUSSION OF THESE REGISTRATION RIGHTS, SEE "THE
REORGANIZATION AGREEMENT -- COVENANTS".
COMPARISON OF STOCKHOLDER RIGHTS
In the event that the Transactions are consummated, holders of CPI Capital
Stock and holders of Tseng Common Stock will become holders of shares of CPHI
Common Stock. The rights of stockholders of CPHI differ from the rights of CPI
stockholders and Tseng stockholders with respect to certain matters. FOR A
SUMMARY OF THESE DIFFERENCES, SEE "COMPARISON OF STOCKHOLDER RIGHTS".
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
It is the opinion of counsel to CPI and counsel to Tseng that the
Transactions will qualify as tax-deferred transactions under the Internal
Revenue Code of 1986, as amended (the "Code"), so that no gain or loss will be
recognized by CPI stockholders on the exchange of CPI Capital Stock for CPHI
Common Stock or by the Tseng stockholders on the exchange of Tseng Common Stock
for CPHI Common Stock, except to the extent that any such stockholders receive
cash pursuant to the exercise of appraisal rights or in lieu of fractional
shares. The obligations of CPI and Tseng to consummate the Transactions are
conditioned on receipt by CPI of an opinion from Cooley Godward LLP, counsel to
CPI, and by Tseng of an opinion from Morgan, Lewis & Bockius LLP, counsel to
Tseng, in each case based on certain factual representations and assumptions set
forth in such opinions, that the Transactions so qualify. See "Approval of the
Transactions -- Material Federal Income Tax Consequences."
ACCOUNTING TREATMENT
As it is anticipated that Tseng will have no operations after the
consummation of the Transactions, the Transactions will be accounted for as a
reorganization of CPI into CPHI with the sale of approximately 23% of CPHI
Common Stock in exchange for Tseng's cash and other net assets. CPI's historical
financial statements
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<PAGE> 26
will be the financial statements of the combined company. See "Approval of the
Transactions -- Anticipated Accounting Treatment".
RISK FACTORS
The Transactions and an investment in securities of CPHI involve certain
risks and uncertainties, including risks related to the respective businesses of
CPI and Tseng and other risks and uncertainties discussed under "Risk Factors"
and elsewhere in this Joint Proxy Statement/Prospectus. See "Risk Factors".
MARKETS AND MARKET PRICES
CPI is privately held and no established trading market exists for the CPI
Capital Stock. Information with respect to the market price of CPI Capital Stock
on a historical and equivalent per share basis has been omitted.
Tseng Common Stock is listed on the Nasdaq National Market under the symbol
"TSNG". On June 23, 1998, the last trading day before the announcement by CPI
and Tseng that they had entered into the Reorganization Agreement, the closing
sale price of Tseng Common Stock as reported on the Nasdaq National Market was
$2.6875 per share. On September 3, 1998, the closing sale price of Tseng Common
Stock as reported on the Nasdaq National Market was $2.3125. There can be no
assurance as to the actual market price of Tseng Common Stock prior to or at the
Effective Time.
Pursuant to the Reorganization Agreement, CPHI will apply to have the CPHI
Common Stock issuable upon the consummation of the Transactions in exchange for
CPI Capital Stock and Tseng Common Stock approved for quotation by the Nasdaq
National Market under the symbol "CLPA". There can be no assurance as to the
actual market price of CPHI Common Stock at or any time following the Effective
Time.
THE CPI CERTIFICATE PROPOSAL
The CPI Certificate Proposal, which would be implemented only if the
Transactions are consummated, would amend the CPI Certificate of Incorporation
to provide that holders of CPI Preferred Stock will receive only the
consideration for their shares set forth in the Reorganization Agreement.
Consummation of the Transactions is contingent upon approval of the CPI
Certificate Proposal. Approval of the CPI Certificate Proposal allows the sole
consideration for conversion of CPI Preferred Stock in connection with the CPI
Merger to be limited to the consideration set forth in the Reorganization
Agreement, rather than any additional consideration set forth in the CPI
Certificate of Incorporation. See "Amendment of the CPI Certificate of
Incorporation".
The CPI Board has unanimously approved the proposed change to the CPI
Certificate of Incorporation and has unanimously recommended a vote FOR approval
of the CPI Certificate Proposal.
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<PAGE> 27
CPI AND CPHI SUMMARY FINANCIAL INFORMATION
The following tables set forth certain summary financial data of CPI and
CPHI. This data is derived from and should be read in conjunction with, and is
qualified in its entirety by, the financial statements, including the notes
thereto, of CPI appearing elsewhere in this Joint Proxy Statement/Prospectus.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of results to be expected for the full year of any future
period. No cash dividends have ever been declared or paid on CPI Common Stock.
The summary financial data set forth below should be read in conjunction with
the financial statements, including the notes attached thereto, and "CPI
Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the "Unaudited Pro Forma Condensed Consolidated Financial
Information".
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CPI STATEMENT OF OPERATIONS DATA:
Expenses:
Research and development....... $ 1,623 $ 2,429 $ 2,575 $ 4,163 $ 8,757 $ 3,224 $ 6,898
General and administrative..... 698 705 644 663 950 342 1,966
Provision for redemption of CPI
Redeemable Preferred Stock... -- -- -- -- 1,017 -- --
--------- --------- --------- --------- ---------- --------- ----------
Total expenses........... 2,321 3,134 3,219 4,826 10,724 3,566 8,864
Interest income.................. 52 24 28 91 427 123 244
--------- --------- --------- --------- ---------- --------- ----------
Net loss......................... $ (2,269) $ (3,110) $ (3,191) $ (4,735) $ (10,297) $ (3,443) $ (8,620)
========= ========= ========= ========= ========== ========= ==========
Basic and diluted net loss per
common share(1)................ $ (1.00) $ (1.36) $ (1.39) $ (1.83) $ (3.63) $ (1.27) $ (2.88)
========= ========= ========= ========= ========== ========= ==========
Shares used in computing basic
and diluted net loss per common
share.......................... 2,279,500 2,291,306 2,296,167 2,587,552 2,838,814 2,718,845 2,990,095
========= ========= ========= ========= ========== ========= ==========
Pro forma basic and diluted net
loss per common share(2)....... $ (.82) $ (.56)
========== ==========
Shares used in computing pro
forma basic and diluted net
loss per common share.......... 12,526,620 15,524,145
========== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------------
CPHI CPHI
PRO FORMA PRO FORMA
CPI BEFORE AFTER
ACTUAL TSENG MERGER(3) TRANSACTIONS(4)
-------- --------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 20,349 $ 20,020 $ 44,639
Working capital........................................... 18,747 18,418 41,993
Total assets.............................................. 22,332 22,003 50,080
Redeemable Preferred Stock................................ 1,092 -- --
Accumulated deficit....................................... (34,605) (34,605) (34,605)
Total stockholders' equity................................ 19,200 19,963 46,021
</TABLE>
- ---------------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of basic and diluted net loss per common share.
(2) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma basic and diluted net loss per common share.
(3) Includes the (i) conversion of all shares of outstanding CPI Series A, B, C,
D, E, F and G Preferred Stock into the rights to receive 15,614,266 shares
of CPHI Common Stock, (ii) redemption of all shares
14
<PAGE> 28
of the CPI Redeemable Preferred Stock for $546,000 of cash consideration and
82,732 shares of CPI Common Stock which shares will be converted into rights
to receive an equivalent number of shares of CPHI Common Stock and (iii) the
exercise of all warrants to purchase Series E Preferred Stock into 69,044
shares of CPI Series E Preferred Stock at $3.15 per share which shares will
be converted into rights to receive an equivalent number of shares of CPHI
Common Stock. All of the shares of CPI Common Stock then outstanding will be
converted into the same number of shares of CPHI Common Stock. See "The
Transactions" and "Unaudited Pro Forma Condensed Consolidated Financial
Information."
(4) Includes the sale of 5,477,614 shares of CPHI Common Stock in exchange for
Tseng's cash and other net assets less estimated Transactions costs of
approximately $1,850,000 consisting principally of investment banking and
other professional fees and the payment of $640,000 related to severance to
be triggered by the Transactions and paid to Tseng employees after
consummation of the Transactions, as it is anticipated that the affected
Tseng employees will not be employed by CPHI, CPI or Tseng. The pro forma
information is subject to the assumptions set forth in the notes to the
Unaudited Pro Forma Condensed Consolidated Financial Information appearing
elsewhere in this Joint Proxy Statement/ Prospectus. See "The Transactions"
and "Unaudited Pro Forma Condensed Consolidated Financial Information."
15
<PAGE> 29
COMPARATIVE PER SHARE DATA
The following table shows comparative per share data. The table should be
read in conjunction with the CPI and Tseng financial statements and related
notes thereto and the "Unaudited Pro Forma Condensed Consolidated Financial
Information" included elsewhere in this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- ---------------------
<S> <C> <C>
Actual CPI Per Share:
Historical basic and diluted net loss(1).............. $(3.63) $ (2.88)
Pro forma basic and diluted net loss(1)............... (.82) (.56)
Dividends............................................. -- --
Book deficit(2)....................................... (8.85) (11.95)
Pro Forma After Transactions Book Value Per Share(2).... N/A 1.90
Equivalent Pro Forma After Transactions
Book Value Per Share(3)............................... N/A .69
Tseng Historical Book Value Per Share(4)................ 1.88 1.89
</TABLE>
- ---------------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of historical and pro forma basic and diluted net loss per
share.
(2) Book deficit per share is computed by dividing stockholders' equity less the
Series A, B, C, D, E, F and G Preferred Stock at the higher of stated,
redemption or liquidation value, as well as the increase of the Redeemable
Preferred Stock to redemption value by the number of shares of CPI Common
Stock outstanding. Pro forma after transactions book value per share is
computed by dividing the pro forma after transactions stockholders' equity
by the pro forma after transactions number of estimated shares of CPHI
Common Stock outstanding at June 30, 1998. The calculations exclude Common
Stock equivalents as they would be anti-dilutive. The pro forma after
transactions information is subject to the assumptions set forth in the
notes to the Unaudited Pro Forma Condensed Consolidated Financial
Information appearing elsewhere in this Joint Proxy Statement/Prospectus.
See "The Transactions" and "Unaudited Pro Forma Condensed Consolidated
Financial Information".
(3) The equivalent pro forma after transactions book value per share represents
the CPHI pro forma after transactions book value per share multiplied by the
Tseng Exchange Ratio.
(4) Tseng's historical basic and diluted net income (loss) per share was ($.60)
and $.02 for the year ended December 31, 1997 and the six months ended June
30, 1998, respectively. Tseng paid no dividends in 1997 or in the six months
ended June 30, 1998. See Tseng consolidated financial statements and related
notes thereto included elsewhere in this Joint Proxy Statement/Prospectus.
It is anticipated that upon consummation of the Transactions, Tseng will
have no continuing operations. Consequently, neither CPHI, CPI nor Tseng
believe that Tseng's per share data is indicative of future results.
16
<PAGE> 30
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in the "Summary," "Risk Factors," "CPI
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "CPHI Business and Management's Discussion and Analysis of
Financial Condition and Results of Operations," "CPI Business," "Tseng
Business," and "Tseng Management's Discussion and Analysis of Financial
Condition and Results of Operations," including statements regarding the
anticipated development and expansion of the business of CPI or CPHI, the
products which CPI or CPHI expects to offer, anticipated research and
development expenditures and regulatory reform, the intent, belief or current
expectations of CPI, Tseng or CPHI, their directors or their officers, primarily
with respect to the future operating performance of CPI or CPHI, and other
statements contained herein regarding matters that are not historical facts are
forward-looking statements. Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause results to
differ materially from those expressed or implied by such forward-looking
statements include, but are not limited to, the factors set forth in "Risk
Factors," "CPI Management's Discussion and Analysis of Financial Condition and
Results of Operations," "CPHI's Business and Management's Discussion and
Analysis of Financial Condition and Results of Operations," "CPI Business,"
"Tseng Business," and "Tseng Management's Discussion and Analysis of Financial
Condition and Results of Operations."
17
<PAGE> 31
RISK FACTORS
The following factors should be considered carefully in evaluating the
proposals to be voted upon by the stockholders of CPI and Tseng and in
evaluating an investment in the CPHI Common Stock offered hereby. For periods
following the Transactions, references to the products, businesses, results of
operations or financial condition of CPHI should be considered to refer to CPHI
and its subsidiaries, including CPI and Tseng, unless the context otherwise
requires.
RISKS RELATED TO THE TRANSACTIONS AND CPHI
Dependence Upon CPI Business, Operations and Management. Following the
Transactions, CPHI's business, operations and management will consist of the
business, operations and management of CPI as existing prior to the
Transactions. Tseng stockholders should be aware that the Transactions represent
the investment of all of Tseng's existing resources into a new and different
line of business, and that CPHI's future performance will be almost entirely
dependent upon (and subject to the risks relating to) CPI's business, strategy,
operations, management and personnel. There can be no assurance that the
combined company will be able to realize value from CPI's and Tseng's tangible
and intangible assets after the Transactions. In addition, there can be no
assurance that stockholders of CPI and Tseng would not achieve greater returns
on their investment if CPI and Tseng were to remain independent companies.
Potential Market Effect to Tseng Stockholders. After the Transactions,
CPHI will report a net loss per share whereas Tseng currently reports net income
per share. After consummation of the Transactions and the conversion of the
Tseng Common Stock, the market price of CPHI Common Stock could be less than the
market price of Tseng Common Stock on an as-converted basis.
Absence of Prior Trading Market; Potential Volatility of Stock Price; No
Dividends. Prior to the Transactions, there has been no direct public market
for CPHI Common Stock. There can be no assurance that an active market in CPHI
Common Stock will develop or, if one develops, that it will be maintained. The
consideration given in connection with the Transactions may not be indicative of
prices that will prevail in the market subsequent to the consummation of the
Transactions. The market price of CPHI Common Stock, like that of the common
stock of many other early-stage pharmaceutical and biotechnology companies, is
likely to be highly volatile. Factors such as the fluctuation in CPHI's
operating results, comments by research analysts, announcements of technological
innovations or new commercial products by CPHI (or its subsidiaries) or its
competitors, progress with clinical trials, governmental regulations, changes in
reimbursement policies, developments in patent or other proprietary rights of
CPHI (or its subsidiaries) or its competitors, including litigation,
developments in CPHI's (or its subsidiaries') relationships with collaborative
partners, if any, public concern as to the safety and efficacy of drugs
developed by CPHI (or its subsidiaries) and its competitors, general market
conditions and market conditions affecting the pharmaceutical and biotechnology
sectors particularly may have a significant effect on the market price of CPHI
Common Stock. CPI has never paid any cash dividends and Tseng has not paid any
cash dividends since 1995. CPHI does not anticipate paying cash dividends in the
foreseeable future.
Shares Eligible for Future Sale. If the Transactions are consummated, CPHI
will issue to securityholders of CPI and securityholders of Tseng approximately
24.2 million shares of CPHI Common Stock. Substantial sales of such shares of
CPHI Common Stock could occur after the Transactions. Immediately upon
consummation of the Transactions, all of the shares will be freely-tradable
under the securities laws, although the shares of certain stockholders may be
subject to 180-day lock-up provisions, as further described below. Based on the
number of CPI Options, CPI Warrants and Tseng Options outstanding as of August
31, 1998, assuming full vesting and non-forfeiture, approximately two million
additional shares of CPHI Common Stock will be issuable upon the exercise of
outstanding CPI Options, CPI Warrants and Tseng Options to be assumed by CPHI in
the Transactions.
Under the CPI Stockholders' Agreement, holders of CPI Warrants (which will
be assumed by CPHI pursuant to the Transactions) have certain rights, when
certain conditions are met, to require that a registration statement be filed
with the Commission with respect to their shares. Pursuant to the Reorganization
Agreement, CPHI will assume these obligations. The Reorganization Agreement,
however, requires that
18
<PAGE> 32
CPI use all reasonable efforts to provide that no Holder (as defined in the CPI
Stockholders' Agreement) shall require registration or participation in a
registration statement of CPHI Common Stock until the earlier of (a) a date 90
days after the effective date of a registration statement for the first public
offering of CPHI Common Stock following the Effective Time and (b) the first
anniversary of the Effective Time. See "Comparison of Stockholder Rights".
Pursuant to the Reorganization Agreement and as a condition to Tseng's
obligation to close the Transactions, CPI shall obtain the agreement of each
director and executive officer of CPI that such person shall not directly or
indirectly sell, offer to sell, contract to sell (including, without limitation,
any short sale), grant any option to purchase or otherwise transfer or dispose
of (other than to donees who agree to be similarly bound) any CPHI Common Stock
beneficially owned by such person for 180 days from the Effective Time.
Furthermore, CPI shall use reasonable best efforts to obtain the agreement of
each of the remaining holders of CPI Capital Stock that such CPI stockholder
shall not directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any CPHI Common Stock beneficially owned by such person for 90 days from
the Effective Time.
Future sales of a substantial number of such shares of CPHI Common Stock
could adversely affect or cause substantial fluctuations in the market price of
CPHI Common Stock.
Ownership by Directors and Executive Officers; Anti-Takeover
Provisions. Upon the closing of the Transactions, CPHI's directors and
executive officers will, in the aggregate, beneficially own approximately 23.1%
of the outstanding shares of CPHI Common Stock. Accordingly, these stockholders,
if they act in concert with others, might be able to control many matters
requiring approval by the stockholders of CPHI, including the election of
directors. Moreover, CPHI's Certificate of Incorporation does not provide for
cumulative voting with respect to the election of directors. Consequently, the
directors and executive officers will be able to exercise substantial influence
over the election of the members of the CPHI Board. Such concentration of
ownership could have an adverse effect on the price of the CPHI Common Stock or
have the effect of delaying or preventing a change in control of CPHI. In
addition, certain provisions of Delaware law and the CPHI Certificate of
Incorporation, including the provision in the Certificate for a classified board
of directors could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of CPHI. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of CPHI Common Stock. These provisions
of Delaware law and the CPHI Certificate of Incorporation may also have the
effect of discouraging or preventing certain types of transactions involving an
actual or threatened change of control of CPHI (including unsolicited takeover
attempts) even though such a transaction may offer CPHI's stockholders the
opportunity to sell their stock at a price above the prevailing market price.
Certain of these provisions allow CPHI to issue preferred stock without any vote
or further action by the stockholders, require stockholders to provide advance
notice prior to bringing proposals before a meeting and prevent or eliminate
cumulative voting in the election of directors. These provisions may make it
more difficult for stockholders to take certain corporate actions and could have
the effect of delaying or preventing a change in control of CPHI. See
"Description of CPHI Capital Stock".
RISKS RELATED TO THE BUSINESS AND OPERATIONS OF CPI
History of Operating Losses; Accumulated Deficit; Expected Future
Losses. CPI and its predecessor have experienced significant operating losses
since inception in 1990. CPI has not received any revenue from the sale of
products and no product candidate of CPI has been approved for marketing. As of
June 30, 1998, CPI had an accumulated deficit of approximately $34.6 million.
CPI expects to incur additional operating losses over the next several years and
expects cumulative losses to increase substantially as CPI's research and
development efforts and preclinical and clinical testing expand. CPI's ability
to achieve profitability is dependent on its ability, alone or with others, to
complete the development of its proposed products successfully, obtain the
required regulatory approvals, manufacture and market its proposed products
successfully or have such products manufactured and marketed by others and gain
market acceptance for such products. There can be no assurance if or when CPI
will achieve profitability. See "CPI Management's Discussion and Analysis of
Financial Condition and Results of Operations".
19
<PAGE> 33
Early Stage of Development; Absence of Developed Products; Uncertainty of
Clinical Trials. CPI is at an early stage of development and must be evaluated
in light of the uncertainties and complications present in a development stage
company. CPI has no products approved for sale in any country and does not
expect to have any products available to be marketed in the near future. CPI has
only one product candidate in clinical trials, PREVATAC(TM) exisulind. CPI has
completed only limited human clinical trials designed to demonstrate the safety
and efficacy of PREVATAC(TM) exisulind and has not commenced such trials for any
other compounds. CPI has not generated any revenue from product sales to date
and no product candidate of CPI has been approved for marketing. Accordingly,
CPI's income has been limited to interest income from investments and CPI's
primary source of capital has been the sale of equity securities.
Before obtaining regulatory approval for the commercial sale of any of its
product candidates, CPI must demonstrate through preclinical and clinical trials
that the product is safe and effective for use in each target indication. The
results from preclinical and early clinical trials may not be predictive of
results that will be obtained in later stage clinical trials. There can be no
assurance that clinical trials of CPI's product candidates will demonstrate
sufficient safety and efficacy to obtain the requisite regulatory approvals or
will result in marketable products. Clinical trials are often conducted with
patients who are critically ill. During the course of treatment these patients
may die or suffer other adverse medical events for reasons that may not be
related to the pharmaceutical agent being tested, but which can nevertheless
affect clinical trial results. A number of companies in the pharmaceutical and
biotechnology industries have suffered significant setbacks in advanced clinical
trials, even after achieving promising results in earlier trials.
The completion of clinical trials of CPI's product candidates could be
delayed by many factors and there can be no assurance that such delays or
terminations will not occur. One such factor is the rate of enrollment of
patients, which generally varies throughout the course of a clinical trial and
which depends on the size of the patient population, the number of clinical
trial sites, the proximity of the patients to clinical trial sites, the
eligibility criteria for the clinical trial and the existence of competitive
clinical trials. CPI cannot control the rate at which patients present
themselves for enrollment, and there can be no assurance that the rate of
patient enrollment will be consistent with CPI's expectations or be sufficient
to enable clinical trials of CPI's product candidates to be completed in a
timely manner. CPI has completed a Phase I/II trial in APC (as defined below)
and in January 1998 completed enrollment of 74 patients for its ongoing pivotal
Phase III study of PREVATAC(TM) exisulind for APC. In addition, CPI continues to
enroll patients in other APC studies and has initiated clinical trials in four
other indications. CPI has limited experience managing clinical trials and any
delays or terminations of such trials could have a material adverse effect on
CPI's business, financial condition and results of operations.
Trials to date have involved only a limited number of patients. No
assurance can be given as to the ability of CPI to submit an NDA to the FDA or
the foreign equivalent with respect to PREVATAC(TM) exisulind on a timely basis,
if at all, for APC or any other indication. In addition, results obtained in
clinical trials for the treatment of APC may not be predictive of results of
clinical trials for other indications. If CPI's product candidates are not shown
to be safe and effective in clinical trials for one or more indications, there
would be a material adverse effect on CPI's business, financial condition and
results of operations.
In the fields of cancer therapy and the prevention of precancerous and
cancerous lesions, other products are being developed that may compete directly
with the products that CPI is seeking to develop and market. CPI is aware of
clinical trials in which a number of pharmaceutical and nutritional agents are
being examined for their potential usefulness in the treatment of precancerous
lesions and cancer. These include studies of nonsteroidal anti-inflammatory
drug-like (or "NSAID-like") compounds, cyclooxygenase inhibitors,
difluoromethylornithine ("DFMO") and natural nutrients in the treatment of APC
and sporadic colonic polyps, studies of retinoids and DFMO in the treatment of
cervical dysplasia and studies of tamoxifen for the prevention of breast cancer.
Additional compounds being tested in various epithelial lesions include
compounds related to aspirin, various vitamins and nutritional supplements,
oltipraz, N-acetyl cysteine and compounds that interfere with hormone
activities. The studies are being conducted by pharmaceutical and biotechnology
companies, major academic institutions and government agencies. There can be no
assurance that such existing or new agents will not ultimately be found to be
useful, and therefore competitive with any future products of CPI.
20
<PAGE> 34
No assurance can be given that CPI will be able to submit an
Investigational New Drug ("IND") application or foreign equivalents with respect
to any new chemical entities or follow-on compounds, that CPI will be permitted
to undertake human clinical testing of such additional compounds, or, if
permitted, that such compounds will be demonstrated to be safe and effective.
CPI's compounds may prove to have undesirable and unintended side effects or
other characteristics that may prevent or limit their commercial use. Products,
if any, resulting from CPI's research and development programs may not be
commercially available for a number of years even if they are successfully
developed and proven to be safe and effective. Thus, there can be no assurance
that any of CPI's product development efforts will be successfully completed,
that regulatory approvals will be obtained or will be as broad as sought, that
CPI's products will be capable of being produced in commercial quantities at a
reasonable cost or that any products, if introduced, will achieve market
acceptance. The failure of CPI to complete clinical trials, obtain regulatory
approval or successfully market its products, if approved, would have a material
adverse effect on CPI's business, financial condition and results of operations.
See "CPI Business -- Products in Development" and "CPI Business -- Government
Regulation".
Dependence on PREVATAC(TM) exisulind. CPI has one compound, PREVATAC(TM)
exisulind, in clinical trials, and does not expect to have additional compounds
in clinical trials until it is able to file an IND as described in the preceding
paragraph. PREVATAC(TM) exisulind has not been approved for marketing by the FDA
for any indication and trials to date have involved only a limited number of
patients. There can be no assurance that marketing approval for PREVATAC(TM)
exisulind will be obtained. If approved for marketing, there can be no assurance
that PREVATAC(TM) exisulind will gain market acceptance. In addition,
competition to PREVATAC(TM) exisulind may develop from other new or existing
products. The failure of PREVATAC(TM) exisulind to be approved for marketing or
to gain market acceptance would have a material adverse effect on CPI's
business, financial condition and results of operations.
The number of APC patients in the U.S. is limited and may be as few as
25,000. In order to increase the potential applications for which PREVATAC(TM)
exisulind may be used, CPI must successfully complete lengthy clinical trials
and thereafter receive marketing clearance from the FDA for each additional
indication. There can be no assurance that CPI will successfully complete these
clinical trials and receive appropriate regulatory clearance on a timely basis,
if at all. The inability to achieve marketing clearance of PREVATAC(TM)
exisulind for at least one indication in addition to APC would be expected to
materially limit the commercial potential of PREVATAC(TM) exisulind and thereby
have a materially limiting and adverse effect upon CPI's business, financial
condition and results of operations. There can be no assurance that the Orphan
Drug or Fast Track designations will provide any meaningful competitive
advantage to CPI. See "CPI Business -- Government Regulation".
Technological Uncertainty. To date, the FDA has not approved any drug for
the prevention of precancerous lesions or cancer, and there can be no assurance
that CPI will be able to develop successfully such a chemoprevention drug, that
such drug could be developed within CPI's proposed timeline or that such drug
will be commercially viable or will achieve market acceptance. CPI's area of
focus, oncology in general and chemoprevention in particular, is not thoroughly
understood and there can be no assurance that the products CPI is seeking to
develop will prove to be safe and effective in preventing or treating
precancerous lesions or cancer.
CPI believes that PREVATAC(TM) exisulind and its other compounds
selectively induce apoptosis through a novel mechanism. Additional research by
CPI or others may cause CPI to revise or abandon this approach, adversely
affecting CPI's ability to develop products on a timely basis, if at all. There
can be no assurance that the use of CPI's technology will lead to the
development and approval of commercial pharmaceutical products that are safe and
efficacious or that CPI's competitors will not develop safer and more effective
products, obtain patent protection or intellectual property rights that limit
CPI's ability to commercialize products that may be developed or commercialize
products earlier than CPI. See "CPI Business -- CPI Technology".
Future Capital Needs; Uncertainty of Additional Funding. Development of
CPI's initial product candidate, PREVATAC(TM) exisulind, and additional
compounds will require substantial additional funds to conduct research,
development and clinical trials necessary to bring such products to market and
to establish
21
<PAGE> 35
manufacturing, marketing and distribution capabilities. CPI's future capital
requirements will depend on many factors, including, among others: scientific
progress in its research and development programs; progress with preclinical and
clinical trials; progress in obtaining regulatory approvals; the costs involved
in preparing, filing, prosecuting, maintaining and enforcing patent claims;
competing technological efforts and market developments; changes in CPI's
existing research relationships; the ability of CPI to establish sales and
marketing capabilities; the extent of competition; and the ability of CPI to
establish collaborative arrangements to the extent necessary. Based on current
projections, CPI estimates that its existing capital resources, and the
additional proceeds made available pursuant to the Transactions, together with
facility and equipment financing, will be sufficient to fund CPI's capital
requirements through approximately the end of 2000, although there can be no
assurance that CPI will not require additional financing earlier. There is a
risk of delay or failure at any stage of developing a product candidate, and the
time required and costs involved in successfully accomplishing CPI's objectives
cannot be predicted. Actual drug research and development costs could
substantially exceed budgeted amounts, which could have a material adverse
effect on CPI's business, financial condition and results of operations.
There can be no assurance that CPI's revenue and expense forecasts will
prove to be accurate. To the extent necessary, CPI will need to seek additional
funding through public or private equity or debt financings, collaborative
relationships, capital lease transactions or other available financing
transactions. However, there can be no assurance that additional financing will
be available on acceptable terms, if at all, and such financings could be
dilutive to stockholders. Moreover, in the event that additional funds are
obtained through arrangements with collaborative partners, such arrangements may
require CPI to relinquish rights to certain of its technologies, product
candidates or products that CPI would otherwise seek to develop or commercialize
itself. If adequate funds are not available, CPI may be required to delay,
reduce the scope of or eliminate one or more of its research or development
programs. The failure of CPI to obtain adequate financing when needed and on
acceptable terms would have a material adverse effect on CPI's business,
financial condition and results of operations. See "CPI Management's Discussion
and Analysis of Financial Condition and Results of Operations".
Uncertainty of Protection of Patents and Proprietary Rights. CPI's success
will depend, in part, on its ability to obtain patents, operate without
infringing the proprietary rights of others and maintain trade secrets, both in
the U.S. and other countries. Patent matters in the pharmaceutical industry can
be highly uncertain and involve complex legal and factual questions.
Accordingly, the validity, breadth, and enforceability of CPI's patents and the
existence of potentially blocking patent rights of others cannot be predicted,
either in the U.S. or in other countries.
As of August 1998, CPI held title or exclusive licenses to two issued U.S.
patents and six other pending U.S. patent applications relating to the
therapeutic use of PREVATAC(TM) exisulind in the treatment of neoplasia,
precancerous lesions and/or other indications. A neoplasm is a cancerous or
precancerous growth. Cancerous growths also contain precancerous growths. The
sulfone derivative of sulindac, now named exisulind, was described in the
scientific and patent literature over 20 years ago and, as a result, CPI is
unable to obtain a composition of matter patent on PREVATAC(TM) exisulind. Thus,
CPI's current patent rights relating to PREVATAC(TM) exisulind are limited to a
series of patents and patent applications pertaining to various specific uses of
PREVATAC(TM) exisulind. CPI has also been issued or holds exclusive licenses to
13 foreign patents (including patents in various European countries, Australia,
Canada and Japan), as well as one other pending patent application in South
Korea relating to the use of PREVATAC(TM) exisulind in pharmaceutical
compositions for the treatment of neoplasia and/or precancerous lesions. In
Europe, CPI's patent rights relating to PREVATAC(TM) exisulind are directed to
the use of PREVATAC(TM) exisulind in the manufacture of pharmaceutical
compositions for the treatment of precancerous lesions. CPI also holds title or
exclusive licenses to three U.S. patents, two U.S. patent applications which
have been allowed, 33 other pending U.S. patent applications, five issued
foreign patents and 18 pending foreign applications on other compounds, or
therapeutic methods involving such compounds, for the treatment of colonic
polyps, precancerous lesions, and/or neoplasia. CPI also has filed two U.S. and
13 foreign patent applications on methods for screening compounds for their
usefulness in selectively inducing apoptosis involving an apoptosis
22
<PAGE> 36
regulatory element ("ARE"). CPI intends to file additional applications, as
appropriate, for patents on new compounds, products, or processes discovered or
developed through application of CPI's technology.
Beyond the patents granted to date, there can be no assurance that CPI will
discover or develop patentable products or processes, that patents will issue
from any of the currently pending patent applications, or that claims granted on
issued patents will be sufficient to protect CPI's technology. Potential
competitors or other researchers in the field may have filed patent
applications, been issued patents, published articles or otherwise created prior
art that could restrict or block CPI's efforts to obtain additional patents.
There also can be no assurance that CPI's issued patents or pending patent
applications, if issued, will not be challenged, invalidated or circumvented or
that the rights granted thereunder will provide proprietary protection or
competitive advantages to CPI. CPI's patent rights also depend on its compliance
with technology and patent licenses upon which its patent rights are based and
upon the validity of assignments of patent rights from consultants and other
inventors that were, or are, not employed by CPI.
In addition, competitors may manufacture and sell CPI's potential products
in those foreign countries where CPI has not filed for patent protection or
where patent protection may be unavailable, not obtainable or ultimately not
enforceable. The ability of such competitors to sell such products in the U.S.
or in foreign countries where CPI has obtained patents is usually governed by
the patent laws of the countries in which the product is sold.
To the extent that clinical uses of PREVATAC(TM) exisulind are discovered
beyond those set forth in CPI's patent claims, CPI may not be able to enforce
its patent rights against companies marketing PREVATAC(TM) exisulind for such
other clinical uses.
The success of CPI also will depend, in part, on CPI's not infringing
patents issued to others. Pharmaceutical companies, biotechnology companies,
universities, research institutions and others may have filed patent
applications or have received, or may obtain, issued patents in the U.S. or
elsewhere relating to aspects of CPI's technology. It is uncertain whether the
issuance of any third-party patents will require CPI to alter its products or
processes, obtain licenses or cease certain activities. Some third-party
applications or patents may conflict with CPI's issued patents or pending
applications. Such conflict could result in a significant reduction of the
coverage of CPI's issued or licensed patents. In addition, if patents are issued
to other companies which contain blocking, dominating or conflicting claims and
such claims are ultimately determined to be valid, CPI may be required to obtain
licenses to these patents or to develop or obtain alternative technology. If any
licenses are required, there can be no assurance that CPI will be able to obtain
any such licenses on commercially favorable terms, if at all, and if these
licenses are not obtained, CPI might be prevented from pursuing the development
of certain of its potential products. CPI's failure to obtain a license to any
technology that it may require to commercialize its products may have a material
adverse impact on CPI's business, financial condition and results of operations.
Litigation, which could result in substantial costs to CPI, may also be
necessary to enforce any patents issued or licensed to CPI or to determine the
scope and validity of the proprietary rights of others. In this connection,
under the Abbreviated New Drug Application provisions of U.S. law, after four
years from the date marketing approval is granted to CPI by the FDA for a
patented drug, a generic drug company may submit an Abbreviated New Drug
Application to the FDA to obtain approval to market in the U.S. a generic
version of the drug patented by CPI. If approval is given to the generic drug
company, CPI would be required to promptly initiate patent litigation to prevent
the marketing of such a generic version prior to the normal expiration of the
patent. There can be no assurance that CPI's issued or licensed patents would be
held valid by a court of competent jurisdiction. In addition, if competitors of
CPI file patent applications in the U.S. that claim technology also claimed by
CPI, CPI may have to participate in interference proceedings to determine
priority of invention. These proceedings, if initiated by the U.S. Patent and
Trademark Office, could result in substantial cost to CPI, even if the eventual
outcome is favorable to CPI. An adverse outcome with respect to a third-party
claim or in an interference proceeding could subject CPI to significant
liabilities, require disputed rights to be licensed from third parties, or
require CPI to cease using such technology, any of which could have a material
adverse effect on CPI's business, financial condition and results of operations.
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<PAGE> 37
CPI also relies on trade secrets to protect technology, especially where
patent protection is not believed to be appropriate or obtainable or where
patents have not issued. CPI attempts to protect its proprietary technology and
processes, in part, by confidentiality agreements and assignment of invention
agreements with its employees and confidentiality agreements with its
consultants and certain contractors. There can be no assurance that these
agreements will not be breached, that CPI would have adequate remedies for any
breach, or that CPI's trade secrets will not otherwise become known or be
independently discovered by competitors. Such trade secrets or other
intellectual property of CPI, should they become known to its competitors, could
result in a material adverse effect on CPI's business, financial condition and
results of operations. To the extent that CPI or its consultants or research
collaborators use intellectual property owned by others in their work for CPI,
disputes may also arise as to the rights to related or resulting know-how and
inventions.
Intense Competition; Rapid Technological Change. The industry in which CPI
competes is characterized by extensive research and development efforts and
rapid technological progress. New developments occur and are expected to
continue to occur at a rapid pace, and there can be no assurance that
discoveries or commercial developments by CPI's competitors will not render some
or all of CPI's potential products obsolete or non-competitive, which would have
a material adverse effect on CPI's business, financial condition and results of
operations. CPI's competitive position also depends on its ability to attract
and retain qualified scientific and other personnel, develop effective
proprietary products, implement development and marketing plans, obtain patent
protection and secure adequate capital resources.
In the fields of cancer therapy and the prevention of precancerous and
cancerous lesions, other products are being developed that may compete directly
with the products that CPI is seeking to develop and market. CPI is aware of
clinical trials in which a number of pharmaceutical and nutritional agents are
being examined for their potential usefulness in the treatment of precancerous
lesions and cancer. These include studies of NSAID-like compounds,
cyclooxygenase inhibitors, DFMO and natural nutrients in the treatment of APC
and sporadic colonic polyps, studies of retinoids and DFMO in the treatment of
cervical dysplasia and studies of tamoxifen for the prevention of breast cancer.
Additional compounds being tested in various epithelial lesions include
compounds related to aspirin, various vitamins and nutritional supplements,
oltipraz, N-acetyl cysteine and compounds that interfere with hormone
activities. The studies are being conducted by pharmaceutical and biotechnology
companies, major academic institutions and government agencies. There are other
agents, including certain prescription drugs, that have been observed to have an
effect on the ARE. There can be no assurance that such existing or new agents
will not ultimately be found to be useful, and therefore competitive with any
future products of CPI.
Near-term competition from fully integrated and more established
pharmaceutical and biotechnology companies is expected. Most of these companies
have substantially greater financial, research and development, manufacturing
and marketing experience and resources than CPI and represent substantial
long-term competition for CPI. Such companies may succeed in discovering and
developing pharmaceutical products more rapidly than CPI or pharmaceutical
products that are safer, more effective or less costly than any that may be
developed by CPI. Such companies also may be more successful than CPI in
production and marketing. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical and established biotechnology companies. Academic institutions,
governmental agencies and other public and private research organizations also
conduct clinical trials, seek patent protection and establish collaborative
arrangements for the development of oncology products.
CPI will face competition based on product efficacy and safety, the timing
and scope of regulatory approvals, availability of supply, marketing and sales
capabilities, reimbursement coverage, price and patent position. There can be no
assurance that CPI's competitors will not develop safer and more effective
products or obtain patent protection or intellectual property rights that limit
CPI's ability to commercialize products that may be developed or commercialize
products earlier than CPI. There can be no assurance that CPI's issued patents
or pending patent applications, if issued, will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide proprietary
protection or competitive advantage to CPI.
Dependence on Third-Party Relationships. CPI's development and clinical
testing efforts are dependent on third-party contractors, such as contractors
for animal toxicology studies and contract research
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organizations. Loss, failure or delay in respect of any material portion of such
contracting activity could delay CPI's development efforts and could have a
material adverse effect on CPI's business, financial condition and results of
operations.
CPI has entered into a Clinical Trials Agreement (the "Agreement") with the
National Cancer Institute (the "NCI"), pursuant to which the NCI has agreed to
sponsor clinical trials of PREVATAC(TM) exisulind for the prevention of
precancerous colonic polyps and for at least one other cancer prevention
indication. To date, the NCI has sponsored one trial. When the NCI sponsors a
trial, the NCI contracts directly with third parties to conduct such trials. The
NCI has the right to conduct as many additional clinical trials with
PREVATAC(TM) exisulind in any cancer prevention treatment indication as it would
like, and CPI is obligated to provide PREVATAC(TM) exisulind for such trials. In
the event that CPI elects to have the NCI conduct trials needed for regulatory
approval, there can be no assurance that the NCI procedures or changes in policy
will not cause such trials or regulatory filings to be completed on a slower
schedule than if CPI were directly conducting such trials. See "CPI
Business -- National Cancer Institute and Other Third-Party Arrangements".
CPI's strategy for commercialization of its proposed products for certain
indications and markets includes collaborating with corporate partners and
others, and, to the extent that such corporate partnerships may be entered into,
is dependent upon the subsequent success of these outside parties in performing
their responsibilities. CPI currently does not have any collaborations for the
commercialization of products. There can be no assurance that CPI will be able
to negotiate any collaborative arrangements in the future on acceptable terms,
if at all, or that such collaborative arrangements will be maintained or be
successful. To the extent that such arrangements are negotiated, the amount and
timing of resources to be devoted to these activities are not within the
complete control of CPI. There can be no assurance that such partners will
perform their obligations as expected or that CPI will derive any revenue from
such arrangements. There can be no assurance that CPI's future collaborators
will not pursue their existing or alternative technologies or product candidates
in preference to those being developed in collaboration with CPI. In addition,
there can be no assurance that CPI's future collaborators will pay license fees
to CPI, that they will develop and market any products under the agreements or
that they will commit to fund product development costs. To the extent that CPI
chooses not to enter into collaborative relationships, or is unable to establish
such arrangements, CPI would be required to continue to undertake research,
development and marketing of its proposed products at its own expense. In
addition, CPI may encounter significant delays in introducing its proposed
products into certain markets or find that the development, manufacture or sale
of its proposed products in such markets is adversely affected by the absence of
such collaborative agreements. See "CPI Business -- Products in Development",
"CPI Business -- Manufacturing" and "CPI Business -- Marketing and Sales".
Extensive Government Regulation; No Assurance of Necessary FDA and Other
Regulatory Approvals. The research, design, testing, manufacturing, labeling,
marketing, distribution and advertising of pharmaceutical products such as CPI's
proposed products are subject to extensive regulation by governmental regulatory
authorities in the U.S. and other countries. The drug development and approval
process is generally lengthy, expensive and subject to unanticipated delays.
Data obtained from preclinical and clinical testing are subject to varying
interpretations that could delay, limit or prevent FDA approval. In addition,
delays or rejections may be encountered based upon changes in FDA policy for
drug approval during the period of development and FDA regulatory review of each
submitted NDA. Satisfaction of such regulatory requirements, which includes
demonstrating to the satisfaction of the FDA that the relevant product is both
safe and effective, typically takes several years or more depending upon the
type, complexity and novelty of the product and requires the expenditure of
substantial resources. There can be no assurance that CPI will not encounter
problems in clinical trials which would cause CPI or the FDA to delay or suspend
clinical trials or that CPI will not encounter delays in the FDA approval
process. Any such delay or suspension could have a material adverse effect on
CPI's business, financial condition and results of operations. See "CPI
Business -- Products in Development" and "CPI Management's Discussion and
Analysis of Financial Condition and Results of Operations".
CPI has not completed testing any of its products for safety or efficacy in
humans. The pivotal Phase III study of PREVATAC(TM) exisulind for APC, and the
additional trials of PREVATAC(TM) exisulind for sporadic adenomatous colonic
polyps, prevention of breast cancer recurrence, prevention of prostate cancer
recurrence,
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lung cancer and other indications (if and when initiated) will seek efficacy
data as well as additional safety data and will require substantial time and
significant funding. There can be no assurance that clinical studies for any of
CPI's compounds currently under development will be completed successfully
within any specified time period, if at all. Further, there can also be no
assurance that such testing will show PREVATAC(TM) exisulind or any other
product to be safe or effective. There can be no assurance that CPI will not
encounter problems in clinical trials that will cause CPI to delay or suspend
clinical trials. See "CPI Business -- Products in Development".
CPI's current clinical trial strategy for the development of drugs for the
prevention of precancerous lesions assumes that the FDA will accept reduction in
the formation of precancerous lesions as an endpoint for precancer trials. To
date, the FDA has not approved any chemoprevention compounds and there can be no
assurance that the FDA will approve such compounds in the future. Should the FDA
require CPI to demonstrate the efficacy of PREVATAC(TM) exisulind in the
reduction of certain cancers or in overall mortality rates resulting from
certain cancers, CPI's clinical trial strategy would be materially and adversely
affected, as significant additional time and funding would be required to
demonstrate such efficacy. There can be no assurance that CPI will be able to
successfully develop a safe and effective chemoprevention product or that such
product will be commercially viable or will achieve market acceptance.
CPI has obtained Orphan Drug status for PREVATAC(TM) exisulind for the
treatment of APC. In order to obtain the benefits of Orphan Drug status, the
applicant must be the sponsor of the first NDA approved for that drug and
indication. Moreover, amendment of the Orphan Drug Act by the U.S. Congress and
reinterpretation by the FDA are frequently discussed. Therefore, there can be no
assurance as to the precise scope of protection that may be afforded by Orphan
Drug status in the future, or that the current level of exclusivity will remain
in effect.
CPI has been granted Fast Track designation for PREVATAC(TM) exisulind for
the treatment of APC. However, there can be no assurance that PREVATAC(TM)
exisulind will be approved for marketing sooner than would be traditionally
expected. In addition, the FDA may require post-marketing studies for a Fast
Track drug. If such studies were required as a condition of approval of
PREVATAC(TM) exisulind and the studies showed that PREVATAC(TM) exisulind is not
safe or effective or failed to demonstrate any clinical benefit, it is likely
that PREVATAC(TM) exisulind would be required to be withdrawn from the market
for such an indication.
There can be no assurance even after such time has been expended and
expenses incurred that regulatory approval will be obtained for any therapeutic
products being developed by CPI. Further, even if such regulatory approval is
obtained, CPI, its products, its contract manufacturers and its commercial
collaborators are subject to continual regulatory review in both the U.S. and
other countries, and later discovery of previously unknown problems with regard
to such a product, distributor or manufacturer may result in restrictions on
such product or manufacturer, including withdrawal of the product from the
market and disqualification or decertification of the distributor or
manufacturer.
CPI cannot predict when, if ever, it might submit for regulatory review
additional compounds currently under development. Once CPI submits its potential
products for review, there can be no assurance that FDA or other regulatory
approvals for any pharmaceutical products developed by CPI will be granted on a
timely basis, if at all. The FDA and comparable agencies in foreign countries
impose substantial requirements on the introduction of new pharmaceutical
products through lengthy and detailed preclinical and clinical testing
procedures, sampling activities and other costly and time-consuming compliance
procedures. Clinical trials are vigorously regulated and must meet requirements
for FDA review and oversight and requirements under Good Clinical Practice
("GCP") guidelines. A new drug may not be marketed in the U.S. until it has been
approved by the FDA. There can be no assurance that CPI will not encounter
delays or rejections or that the FDA will not make policy changes during the
period of product development and FDA regulatory review of each submitted NDA. A
delay in obtaining or failure to obtain such approvals would have a material
adverse effect on CPI's business, financial condition and results of operations.
Even if regulatory approval is obtained, it would be limited as to the indicated
uses for which the product may be promoted or marketed. A marketed product, its
manufacturer and the facilities in which it is manufactured are subject to
continual review and
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periodic inspections. If marketing approval is granted, CPI would be required to
comply with FDA requirements for manufacturing, labeling, advertising, record
keeping and reporting of adverse experiences and other information. In addition,
CPI would be required to comply with federal and state anti-kickback and other
health care fraud and abuse laws that pertain to the marketing of
pharmaceuticals. Failure to comply with regulatory requirements and other
factors could subject CPI to regulatory or judicial enforcement actions,
including, but not limited to, product recalls or seizures, injunctions,
withdrawal of the product from the market, civil penalties, criminal
prosecution, refusals to approve new products and withdrawals of existing
approvals, as well as enhanced product liability exposure, any of which could
have a material adverse effect on CPI's business, financial condition and
results of operations. Sales of CPI's products outside the U.S. will be subject
to foreign regulatory requirements governing clinical trials, marketing
approval, manufacturing and pricing. Non-compliance with these requirements
could result in enforcement actions or penalties or could delay introduction of
CPI's products in certain countries. See "CPI Business -- Manufacturing" and
"CPI Business -- Marketing and Sales".
Potential Limitations on Third-Party Reimbursement and Health Care
Reform. In both U.S. and foreign markets, sales of CPI's proposed products will
depend in part on the availability of reimbursement from third-party payors such
as government health administration authorities, private health insurers and
other organizations. The levels of revenues and profitability of pharmaceutical
companies may be affected by the continuing efforts of governmental and
third-party payors to contain or reduce the costs of health care. CPI cannot
predict the effect that private sector or governmental health care reforms may
have on its business, and there can be no assurance that any such reforms will
not have a material adverse effect on CPI's business, financial condition and
results of operations. In addition, in both the U.S. and elsewhere, sales of
prescription drugs are dependent in part on the availability of reimbursement to
the consumer from third-party payors, such as government and private insurance
plans. Third-party payors are increasingly challenging the price and
cost-effectiveness of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products.
There can be no assurance that CPI's proposed products will be considered
cost-effective or that adequate third-party reimbursement will be available to
enable CPI to maintain price levels sufficient to realize an appropriate return
on its investment in product development. Legislation and regulations affecting
the pricing of pharmaceuticals may change before any of CPI's proposed products
are approved for marketing. Adoption of such legislation could further limit
reimbursement for medical products and services. As a result, CPI may elect not
to market future products in certain markets.
Lack of Manufacturing Experience; Reliance on Contract Manufacturers and
Suppliers. CPI does not have facilities to manufacture and produce its
compounds for preclinical, clinical or commercial purposes. CPI's product
candidates have never been manufactured for commercial purposes and there can be
no assurance that such products can be manufactured at a cost or in quantities
necessary to make them commercially viable, although CPI's lead compound,
PREVATAC(TM) exisulind, has been manufactured by CPI's contractors at commercial
scale. If CPI is unable to manufacture or contract for a sufficient supply of
its compounds on acceptable terms, or if it should encounter delays or
difficulties in its relationships with manufacturers, CPI's preclinical and
human clinical testing schedule would be delayed, resulting in delay of the
submission of products for regulatory approval or delay of the market
introduction and subsequent sales of such products, which would have a material
adverse effect on CPI's business, financial condition and results of operations.
Furthermore, CPI or contract manufacturers must supply all necessary
documentation in support of CPI's NDA on a timely basis and must adhere to Good
Laboratory Practice ("GLP") and current Good Manufacturing Practice ("cGMP")
regulations enforced by the FDA through its facilities inspection program. If
these facilities cannot pass a pre-approval plant inspection, the FDA approval
of the products will not be granted.
CPI currently does not have long term supply agreements. There can be no
assurance that CPI's current suppliers will continue to make available to CPI
the required quantities of PREVATAC(TM) exisulind on reasonable terms, if at
all. If CPI's current manufacturing sources are unable or unwilling to make
PREVATAC(TM) exisulind available to CPI in required quantities, there can be no
assurance that CPI will be able to identify and contract with alternative
contract manufacturers. CPI would incur significant costs and
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delays to qualify an alternative manufacturer, which could have a material
adverse effect on CPI's business, financial condition and results of operations.
The availability and price of PREVATAC(TM) exisulind may be subject to
curtailment or change due to limitations that may be imposed under governmental
regulations, suppliers' allocations to meet the demand of other purchasers,
interruptions in production by suppliers and market and other events and
conditions, which could have a material adverse effect on CPI's business,
financial condition and results of operations. See "CPI
Business -- Manufacturing".
Absence of Sales and Marketing Experience; Dependence on Third
Parties. CPI has no experience in sales, marketing or distribution. Depending
upon the marketing strategy ultimately adopted with respect to each relevant
market, CPI intends either to market its products, if developed and approved, on
its own or through relationships with pharmaceutical companies that have
established distribution systems and direct sales forces. To market any of its
products directly, CPI must develop a marketing and sales force with technical
expertise and with supporting distribution capabilities. There can be no
assurance that CPI will be able to establish in-house sales, marketing and
distribution capabilities or relationships with third parties, or that it will
be successful in gaining market acceptance for its products. To the extent that
CPI enters into co-promotion or other licensing arrangements, any revenues
received by CPI will depend upon the efforts of third parties, and there can be
no assurance that such efforts will be successful. See "CPI
Business -- Marketing and Sales".
Need to Attract and Retain Key Employees and Consultants. Because of the
specialized scientific nature of CPI's business, its success is highly dependent
upon its ability to attract and retain qualified scientific and technical
personnel. CPI is highly dependent on the principal members of its scientific
and management staff and the loss of any of their services might significantly
delay or prevent the achievement of research, development or business
objectives. CPI does not maintain key-man life insurance with respect to any of
its employees, nor does it intend to secure such insurance. CPI also relies on
consultants and advisors, including the members of its Scientific Advisory
Board, to assist CPI in formulating its research and development strategy.
Retaining and attracting qualified personnel, consultants and advisors is
critical to CPI's success. In order to pursue its product development and
marketing and sales plans, CPI will be required to hire additional qualified
scientific personnel to perform research and development, as well as personnel
with expertise in clinical testing, government regulation, manufacturing and
marketing and sales. CPI faces competition for qualified individuals from
numerous pharmaceutical and biotechnology companies, universities and other
research institutions. There can be no assurance that CPI will be able to
attract and retain such individuals on acceptable terms, if at all, and the
failure to do so could have a material adverse effect on CPI's business,
financial condition and results of operations.
Risks Associated with Acquisition Strategy. CPI may seek to acquire and
further develop complementary technologies, products and/or companies focused in
the prevention, diagnosis and treatment of cancer, consistent with the objective
of building an integrated pharmaceutical company focused in oncology. However,
there can be no assurance that CPI will be successful in completing any such
transactions. In addition, to the extent that CPI undertakes or completes any
such acquisitions, such activities may place a strain on CPI's financial and
management resources, which could have a material adverse effect on CPI's
business, financial condition and results of operations.
Potential Product Liability; Possible Insufficiency of Insurance. CPI's
business will expose it to potential product liability risks that are inherent
in the testing, manufacturing and marketing of human therapeutic products.
Clinical research involves the testing of new drugs on human volunteers pursuant
to a research plan, and such testing involves a risk of liability for personal
injury or death to patients due to, among other reasons, possible unforeseen
adverse side effects or improper administration of the new drug. Many of these
patients are already seriously ill and are at risk of further illness or death.
CPI currently has clinical trial liability insurance in the amount of $10
million, but there can be no assurance that it will be able to maintain such
insurance. CPI could be materially and adversely affected if it were required to
pay damages or incur defense costs: (i) in connection with a claim outside the
scope of indemnity or insurance coverage; (ii) if the indemnity, although
applicable, is not performed in accordance with the terms of the relevant
contract; or (iii) if CPI's liability exceeds the amount of applicable
insurance. Similar risks would exist upon the commercialization or marketing of
any products by CPI or its partners.
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Handling and Disposal of Hazardous Materials. CPI's research and
development involves the controlled use of hazardous materials, chemicals and
various radioactive compounds. Although CPI believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, CPI could be held liable for any damages that
result and any such liability could exceed the resources of CPI. CPI may incur
substantial costs to comply with environmental regulations if it develops
manufacturing capacity.
RISKS RELATED TO THE BUSINESS AND OPERATIONS OF TSENG
Risks Associated with Acquisition or Investment Strategy. In the event
that the Transactions are not consummated, Tseng will continue its strategic
focus on the acquisition of or investment in growth-stage companies. The
competition to identify and acquire or invest in such target companies is
intense. Many competitors for such target companies, including venture capital
firms, corporate strategic partners and investment banks, have greater financial
resources and experience in identifying and closing such transactions than
Tseng. There can be no assurance that Tseng will be able to identify one or more
of such transactions on terms acceptable to Tseng, if at all. In addition, Tseng
may require additional capital financing to consummate such transactions. There
can be no assurance that financing will be available on terms satisfactory to
Tseng, if at all.
Potential Claims Related to Prior Operations. In December 1997, Tseng sold
substantially all of its graphics development assets. Prior to that time, Tseng
was a supplier of high performance video graphic controller chips and therefore
remains subject to claims, if any, which may be asserted by third parties
related to such operations. In the event that the Transactions are consummated,
CPHI and CPI might, depending upon future facts and circumstances, become
subject to exposure to such claims as the successor to Tseng. An adverse outcome
of a claim asserted against Tseng after the consummation of the Transactions
could have a material adverse effect on CPHI's business, financial condition and
results of operations.
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INTRODUCTION
This Joint Proxy Statement/Prospectus is furnished in connection with the
solicitation of proxies by the CPI Board to be used at the CPI Special Meeting
and the Tseng Board to be used at the Tseng Special Meeting. This Joint Proxy
Statement/Prospectus is also furnished by CPHI to CPI stockholders and Tseng
stockholders in connection with the issuance of shares of CPHI Common Stock in
connection with the Transactions described herein.
The information set forth herein concerning CPHI has been furnished by
CPHI, the information set forth herein concerning CPI has been furnished by CPI
and the information set forth herein concerning Tseng has been furnished by
Tseng.
THE CPI SPECIAL MEETING
PURPOSE OF THE CPI SPECIAL MEETING
The purpose of the CPI Special Meeting is to consider and vote upon (i) the
approval and adoption of the Reorganization Agreement, attached hereto as
Appendix A, and the transactions contemplated thereby (including the CPI Merger)
and (ii) the approval of an amendment to the CPI Certificate of Incorporation to
provide for the conversion of the CPI Preferred Stock in connection with the
Transactions such that the holders of CPI Preferred Stock will receive only the
consideration for their shares set forth in the Reorganization Agreement (the
"CPI Certificate Proposal"). The CPI Certificate Proposal will be implemented
only if the Transactions are consummated. Approval of the CPI Certificate
Proposal is a condition to the consummation of the Transactions. CPI
stockholders will also consider and vote upon such other matters, if any, as may
be properly brought before the CPI Special Meeting.
THE CPI BOARD HAS UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT, THE
CPI MERGER AND THE CPI CERTIFICATE PROPOSAL AND HAS UNANIMOUSLY RECOMMENDED A
VOTE FOR ADOPTION AND APPROVAL OF THE CPI MERGER PROPOSAL AND THE CPI
CERTIFICATE PROPOSAL.
DATE, TIME AND PLACE OF MEETING
The CPI Special Meeting will be held at the offices of CPI, located at 702
Electronic Drive, Horsham, Pennsylvania, on November 2, 1998, at 10:00 a.m.,
local time.
RECORD DATE; VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of CPI Common Stock and CPI Preferred Stock at the
close of business on September 18, 1998 (the "CPI Record Date") will be entitled
to notice of and to vote at the CPI Special Meeting. On that date, there were
2,990,095 shares of CPI Common Stock and 15,614,265 shares of CPI Preferred
Stock (comprised of 872,400 shares of CPI Series A Preferred Stock, 848,100
shares of CPI Series B Preferred Stock, 700,000 shares of CPI Series C Preferred
Stock, 616,808 shares of CPI Series D Preferred Stock, 3,121,642 shares of CPI
Series E Preferred Stock, 4,809,437 shares of CPI Series F Preferred Stock and
4,645,879 shares of CPI Series G Preferred Stock) outstanding and entitled to
vote. Except for the stockholders identified herein under "Security Ownership of
CPI and CPHI," as of the CPI Record Date, to the knowledge of CPI, no other
person beneficially owned more than five percent of the outstanding CPI Capital
Stock or any series of CPI Preferred Stock. See "Security Ownership of CPI and
CPHI."
Each holder of record of CPI Capital Stock on the CPI Record Date will be
entitled to one vote for each share held on all matters to be voted upon at the
CPI Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of proxies from holders of CPI Capital Stock
and all related costs will be borne by CPI. In addition, CPI may reimburse
brokerage firms and other persons representing beneficial
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owners of shares for their expenses in forwarding solicitation materials to such
beneficial owners. Original solicitation of proxies by mail may be supplemented
by telephone, telegram or personal solicitation by directors, officers or other
regular employees of CPI. No additional compensation will be paid to directors,
officers or other regular employees for such services.
QUORUM; VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the issued and outstanding shares of CPI Capital Stock entitled to
vote at the CPI Special Meeting is necessary to constitute a quorum.
Approval of the CPI Merger Proposal requires the affirmative vote of each
of (i) a majority of the shares of CPI Common Stock, (ii) a majority of the
shares of CPI Series A Preferred Stock and CPI Series B Preferred Stock, voting
together as a single class, and (iii) a majority of the shares of CPI Series C
Preferred Stock, CPI Series D Preferred Stock, CPI Series E Preferred Stock, CPI
Series F Preferred Stock and CPI Series G Preferred Stock, voting together as a
single class (the "Required CPI Merger Stockholder Vote").
Approval of the CPI Certificate Proposal requires the affirmative vote of
(i) a majority of the shares of CPI Common Stock and CPI Preferred Stock, voting
together as a class, and (ii) a majority of the shares of each series of CPI
Preferred Stock, each such series voting as a separate class (the "Required CPI
Certificate Stockholder Vote").
EFFECT OF ABSTENTIONS
Abstentions may be specified on the CPI Merger Proposal and the CPI
Certificate Proposal. If an executed CPI proxy is returned and the stockholder
has specifically abstained from voting on the CPI Merger Proposal or the CPI
Certificate Proposal, the shares represented by such proxy will be considered
present at the CPI Special Meeting for purposes of determining a quorum, but
will not be considered to have been voted in favor of such matter. Accordingly,
abstentions will have the effect of a negative vote with respect to the CPI
Merger Proposal and the CPI Certificate Proposal.
VOTING AND REVOCABILITY OF PROXIES
All shares of CPI Capital Stock that are entitled to vote and are
represented at the CPI Special Meeting, either in person or by properly executed
proxies received prior to or at the CPI Special Meeting and not duly and timely
revoked, will be voted at the CPI Special Meeting in accordance with the
instructions indicated on such proxies. If no such instructions are indicated,
such proxies will be voted FOR approval of the CPI Merger Proposal and FOR
approval of the CPI Certificate Proposal.
If any other matters are properly presented for consideration at the CPI
Special Meeting (or any adjournments or postponements thereof) including, among
other things, consideration of a motion to adjourn or postpone the CPI Special
Meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies), the persons named in the enclosed
forms of proxy and voting thereunder will have the discretion to vote on such
matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of CPI, at or before the taking of the vote at the CPI
Special Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of CPI before the taking of the vote at the CPI
Special Meeting or (iii) attending the CPI Special Meeting and voting in person
(although attendance at the CPI Special Meeting will not in and of itself
constitute a revocation of proxy). Any written notice of revocation or
subsequent proxy should be sent so as to be delivered to Cell Pathways, Inc. at
702 Electronic Drive, Horsham, Pennsylvania 19044, Attention: Corporate
Secretary, or hand-delivered to the Secretary at CPI, in each case at or before
the taking of the vote at the CPI Special Meeting.
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THE TSENG SPECIAL MEETING
PURPOSE OF THE TSENG SPECIAL MEETING
The purpose of the Tseng Special Meeting is to consider and vote upon (i)
the Tseng Merger Proposal and (ii) the Tseng Adjournment Proposal. Tseng
stockholders will also consider and vote upon such other matters, if any, as may
be properly brought before the Tseng Special Meeting.
THE TSENG BOARD UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT AND THE
TSENG MERGER AND HAS UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL OF THE TSENG
MERGER PROPOSAL AND THE TSENG ADJOURNMENT PROPOSAL.
DATE, TIME AND PLACE OF MEETING
The Tseng Special Meeting will be held at the Hotel DuPont, 11th and Market
Streets, Wilmington, Delaware 19801 on November 3, 1998, at 10:00 a.m., local
time.
RECORD DATE; VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Tseng Common Stock at the close of business on
September 21, 1998 (the "Tseng Record Date") will be entitled to notice of and
to vote at the Tseng Special Meeting. On that date, there were
shares of Tseng Common Stock outstanding and entitled to vote. Except as
previously disclosed on documents incorporated herein by reference, as of the
Tseng Record Date, to the knowledge of Tseng, no other person beneficially owns
more than five percent of the outstanding Tseng Common Stock.
Each holder of record of Tseng Common Stock on the Tseng Record Date will
be entitled to one vote for each share held on all matters to be voted upon at
the Tseng Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of proxies from holders of Tseng Common Stock
and all related costs will be borne by Tseng. In addition, Tseng may reimburse
brokerage firms and other persons representing beneficial owners of shares for
their expenses in forwarding solicitation materials to such beneficial owners.
Original solicitation of proxies by mail may be supplemented by telephone,
telegram or personal solicitation by directors, officers or other regular
employees of Tseng or, at Tseng's request, Mackenzie Partners, Inc. No
additional compensation will be paid to directors, officers or other regular
employees for such services, but Mackenzie Partners, Inc. will be paid its
customary fee, estimated to be approximately $6,500 plus reasonable expenses, to
assist in the solicitation of proxies.
QUORUM; VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Tseng Common Stock entitled to vote at the
Tseng Special Meeting is necessary to constitute a quorum.
Approval of the Tseng Merger Proposal will require approval by the
affirmative vote of the holders of a majority of the outstanding shares of Tseng
Common Stock. Approval of the Tseng Adjournment Proposal will require approval
by the affirmative vote of the holders of a majority of Tseng Common Stock
present at the Tseng Special Meeting and entitled to vote thereon.
EFFECT OF ABSTENTIONS AND BROKER NONVOTES
Abstentions may be specified on the Tseng Merger Proposal and the Tseng
Adjournment Proposal. If an executed Tseng proxy is returned and the stockholder
has specifically abstained from voting, the shares represented by such proxy
will be considered present at the Tseng Special Meeting for purposes of
determining a quorum, but will not be considered to have been voted in favor of
such matter. Abstentions will have the
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<PAGE> 46
effect of a negative vote with respect to the Tseng Merger Proposal. Abstentions
will have no effect with respect to the Tseng Adjournment Proposal.
Brokerage firms who hold shares in street name for customers have authority
to vote those shares with respect to certain matters if they do not receive
instructions from a beneficial owner. Brokers will not have the authority to
vote Tseng Common Stock with respect to the Tseng Merger Proposal if they have
not received instructions from the beneficial owners of such shares. If a broker
fails to vote shares because the broker has not received instructions from the
beneficial owner (a "broker nonvote"), such shares will be considered present
for purposes of determining a quorum. Broker nonvotes will have the effect of a
negative vote with respect to the Tseng Merger Proposal, but will have no effect
with respect to the Tseng Adjournment Proposal.
VOTING AND REVOCABILITY OF PROXIES
All shares of Tseng Common Stock that are entitled to vote and are
represented at the Tseng Special Meeting either in person or by properly
executed proxies received prior to or at the Tseng Special Meeting and not duly
and timely revoked will be voted at the Tseng Special Meeting in accordance with
the instructions indicated on such proxies. If no such instructions are
indicated, such proxies will be voted for the approval of the Tseng Merger
Proposal and the Tseng Adjournment Proposal.
If any other matters are properly presented for consideration at the Tseng
Special Meeting (or any adjournments or postponements thereof) including, among
other things, consideration of a motion to adjourn or postpone the Tseng Special
Meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies), the persons named in the enclosed
forms of proxy and voting thereunder will have the discretion to vote on such
matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Tseng, at or before the taking of the vote at the Tseng
Special Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of Tseng before the taking of the vote at the
Tseng Special Meeting or (iii) attending the Tseng Special Meeting and voting in
person (although attendance at the Tseng Special Meeting will not in and of
itself constitute a revocation of proxy). Any written notice of revocation or
subsequent proxy should be sent so as to be delivered to Tseng Labs, Inc. at 18
West Airy Street, Suite 100, Norristown, Pennsylvania 19401, Attention:
Corporate Secretary, or hand-delivered to the Secretary at Tseng, in each case
at or before the taking of the vote at the Tseng Special Meeting.
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STOCK PRICE AND DIVIDEND INFORMATION
No established trading market exists for CPI Capital Stock. Until
consummation of the Transactions and the listing of CPHI Common Stock on the
Nasdaq National Market, no established trading market will exist for CPHI Common
Stock. Information with respect to the market price of CPI Capital Stock and
CPHI Common Stock has been omitted.
The last sales price per share of Tseng Common Stock, as reported by the
Nasdaq National Market, was $2.6875 on June 23, 1998, the last trading day
preceding the public announcement of the proposed Transactions on June 24, 1998.
On August 31, 1998, the last reported sales price per share of Tseng Common
Stock on the Nasdaq National Market was $2.4375.
Additional information with respect to the stock price of, and dividend
information relating to, Tseng Common Stock is included under the caption "Tseng
Stock Price and Dividend Information."
As of the CPI Record Date and the Tseng Record Date respectively, there
were approximately 177 record holders of CPI Capital Stock, and approximately
1,000 record holders of Tseng Common Stock. CPI has never paid cash dividends on
its capital stock. Tseng has not paid a cash dividend on its capital stock since
1995. The policies of CPI and Tseng are to retain earnings for use in their
respective businesses. It is expected that CPHI will not, for the foreseeable
future, pay cash dividends with respect to the CPHI Common Stock.
CPI STOCKHOLDERS AND TSENG SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR TSENG CAPITAL STOCK.
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APPROVAL OF THE TRANSACTIONS
BACKGROUND OF THE TRANSACTIONS
During 1997, CPI made preparations for an Initial Public Offering ("IPO")
of its Common Stock. In October 1997, market conditions led CPI to defer its
plans for an IPO. As a result, CPI began to consider alternative financing
strategies, including the acquisition of companies which had substantially
discontinued operations, but which had substantial cash assets.
In October 1997, Tseng publicly announced that it would explore
opportunities to utilize its cash and stock to make acquisitions of, or
investments in, a growth-stage company or companies, including but not limited
to those that are technology-based. In December 1997, Tseng sold substantially
all of its graphics design assets and reaffirmed its focus on its
investment/acquisition strategy. From October 1997 through June 1998, Tseng
evaluated nearly 100 potential investment or acquisition transactions.
In February 1998, the possibility of engaging in a transaction between CPI
and Tseng was brought to the attention of Robert Towarnicki, CPI's President and
Chief Executive Officer, by an outside advisor to CPI. Mr. Towarnicki contacted
Tseng's legal counsel and expressed an interest in discussing with Tseng a
possible transaction between CPI and Tseng.
On March 3, 1998, Mr. Towarnicki and John Gibbons, Tseng's Chief Executive
Officer, met to discuss the possibility of CPI and Tseng entering into an
investment or combination transaction. On March 4, 1998 and March 5, 1998, the
parties entered into nondisclosure agreements for the purpose of facilitating
the exchange of certain confidential information in order that each party could
better assess the desirability of entering into such a transaction. While
evaluating a possible transaction with CPI, Tseng continued to explore possible
transactions with other companies. Between mid-March 1998 and late-March 1998,
Tseng explored the possibility of entering into a transaction with another
company. After conducting preliminary negotiations with such company and a
preliminary due diligence review of the business of such company, the board of
directors of Tseng determined that entering into the proposed transaction on the
terms discussed was not in the best interest of Tseng and its shareholders at
such time.
In late March 1998, the Tseng Board determined to continue its
consideration of transactions with other companies. On April 1, 1998, Tseng
contacted CPI to express its interest in further discussions with CPI regarding
a possible transaction. On April 6, 1998, at the request of Tseng, Mr.
Towarnicki and Dr. Rifat Pamukcu, Chief Scientific Officer of CPI, met with a
research analyst and other members of the investment banking group at JMS to
discuss the status of CPI's clinical trials and product development programs.
JMS, which was not formally engaged as Tseng's financial advisor until after
April 17, 1998, informally advised Mr. Gibbons of its preliminary evaluation of
the status of CPI's business. JMS had previously provided financial advisory
services to CPI for which JMS earned no compensation.
On April 13, 1998, Brian Hayden and Richard Troy, CPI's Chief Financial
Officer and General Counsel, respectively, visited Tseng's offices to commence
CPI's due diligence investigation of Tseng. On April 17, 1998, certain members
of CPI's management team provided the Tseng Board with an overview of CPI's
business, operations, prospects and strategy at a meeting of the Tseng Board.
Following the April 17th meeting, Tseng formally engaged scientific,
intellectual property and financial advisors to assist Tseng in its evaluation
of the business of CPI.
On April 27, 1998, Messrs. Towarnicki and Gibbons met to discuss proposed
terms of a possible transaction.
In late May 1998, the scientific and intellectual property advisors to
Tseng met and commenced discussions with Dr. Pamukcu and Robert Stevenson, Vice
President of Intellectual Property of CPI, to conduct due diligence with regard
to the status of CPI's technology and intellectual property. In addition, JMS
conducted other financial and business due diligence interviews with Mr.
Towarnicki, Dr. Pamukcu and members of CPI's Scientific Advisory Board. In late
May 1998, the parties provided additional disclosure to each other and commenced
the preparation and negotiation of the Reorganization Agreement. On June 10,
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1998, the advisors to Tseng met with the Tseng Board and advised the Tseng Board
of the initial results of their review of CPI's business.
During this period and through June 23, 1998, the date of execution of the
Reorganization Agreement, Tseng continued exploring potential transactions with
other companies. On June 19, 1998 and June 22, 1998, respectively, the Tseng
Board and the CPI Board approved the Reorganization Agreement. On June 23, 1998,
the parties entered into the Reorganization Agreement.
CPI'S REASONS FOR THE TRANSACTIONS
In the course of reaching its decision to approve the Reorganization
Agreement and the Transactions, the CPI Board consulted with CPI's legal and
financial advisors, as well as with CPI's management and others, and considered
a number of factors, including that:
(1) The combination of CPI's technology, research, development,
clinical programs and organization with Tseng's cash resources (See
"Unaudited Pro Forma Condensed Consolidated Financial Information") would
offer CPI's stockholders an opportunity to realize appropriate value from
their investment in CPI;
(2) CPI's stockholders will receive CPHI Common Stock in which there
will be a public market, in contrast to the illiquid nature of their
present holdings in CPI;
(3) The Transactions compare favorably with other means of financing
the continuing research and development programs of CPI; and
(4) The Transactions are expected to provide CPI with substantially
greater resources, including cash and a publicly traded security, to fund
internal research and clinical development work, leverage CPI's technology
platform and pursue strategic transactions on an opportunistic basis,
including acquisitions of businesses and/or technologies and strategic
partnerships.
In the course of its deliberations, the CPI Board reviewed and considered a
number of other factors relevant to the Transactions and the Reorganization
Agreement, including:
(a) Information concerning the business, financial position, results
of operations, product development schedules and future expenses,
technologies and prospects of CPI;
(b) The current economic, financial and business climate, including
the states of the relevant segments of the healthcare industry, including
current and future competition, and consolidations within the industry
segments;
(c) Analysis from management concerning due diligence conducted with
respect to Tseng's previous business and operations and Tseng's financial
statements and condition;
(d) Presentations from management and legal representatives concerning
the specific terms of the Reorganization Agreement and related documents,
including the obligations of CPI to refrain from soliciting or encouraging
other proposals with respect to a substitute transaction, provisions
relating to the possible payment of a termination fee, the possible
circumstances under which the Reorganization Agreement could be terminated
and the conditions precedent to a closing of the Transactions;
(e) The historical price and trading volume for Tseng Common Stock as
well as the composition of Tseng's stockholder base;
(f) Other alternatives available to CPI in both the near-term and
long-term to achieve CPI's funding, liquidity and other strategic
objectives;
(g) The expectation that the CPI Merger will be tax free for federal
income tax purposes to CPI's stockholders; and
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(h) The requirements that the CPI Merger Proposal and the CPI
Certificate Proposal be approved by votes of the CPI stockholders and that
the Tseng Merger Proposal be approved by vote of the Tseng stockholders.
The CPI Board also considered certain potentially negative factors in its
deliberations concerning the Transactions, including (i) the possibility that
the anticipated benefits of the Transactions would not be realized, (ii) the
risk associated with the integration into a combined company, (iii) the risk of
unknown contingent liabilities associated with the act of acquiring another
company, (iv) the possibility that the Transactions would not be consummated and
(v) other risks described above under "Risk Factors." The CPI Board concluded
that the potential benefits of the Transactions to CPI and its stockholders
substantially outweighed the potential risks.
The foregoing discussion of the information and factors considered by the
CPI Board is not intended to be exhaustive, but is believed to include the
material information and factors considered by the CPI Board. In reaching a
determination whether to approve the Reorganization Agreement and the
Transactions, in view of the variety of factors considered, the CPI Board did
not find it practicable to, and did not, quantify or otherwise attempt to assign
relative or specific weights to the information and factors considered in
reaching its determinations, and individual directors may have given differing
weights to different factors.
CPI BOARD RECOMMENDATION
FOR THE REASONS DISCUSSED ABOVE, THE CPI BOARD HAS DETERMINED THAT THE
TERMS OF THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS ARE FAIR TO, AND IN
THE BEST INTERESTS OF, CPI AND THE CPI STOCKHOLDERS. ACCORDINGLY, THE CPI BOARD
HAS UNANIMOUSLY RECOMMENDED THAT CPI STOCKHOLDERS VOTE FOR THE APPROVAL OF THE
CPI MERGER PROPOSAL AND THE CPI CERTIFICATE PROPOSAL.
TSENG'S REASONS FOR THE TRANSACTIONS
In reaching its determination to approve the Tseng Merger Proposal, the
Tseng Board consulted with its legal counsel and financial advisor and gave
significant consideration to a number of factors, including the factors referred
to below:
(1) The opinion of the Tseng Board that the Transactions presented
Tseng's stockholders with the highest potential return based upon the
evaluation of nearly 100 other investment opportunities, in addition to the
Transactions.
(2) The terms and conditions of the Reorganization Agreement,
including the amount and form of the consideration, which the Tseng Board
believed represented the most favorable transaction with CPI for the Tseng
stockholders.
(3) The respective businesses, patent portfolios, prospects, financial
performance, financial condition and operations of CPI and Tseng.
(4) A financial presentation by JMS, including (1) certain
quantitative analyses of factors relating to the financial implications of
the Transactions and the prospects for CPI and (2) the written opinion of
JMS to the effect that, as of June 23, 1998 and based on, and subject to,
the assumptions, limitations and qualifications set forth in such opinion
letter, the Tseng Exchange Ratio was fair to the holders of Tseng Common
Stock from a financial point of view (see "-- Opinion of Financial Advisor
to Tseng").
(5) Reports from the management of Tseng and the financial and legal
advisors to Tseng as to the results of their due diligence investigation of
CPI.
(6) The favorable report of Louis M. Weiner, M.D., Chairman of the
Department of Medical Oncology, Division of Medical Science at Fox Chase
Cancer Center, which is one of 31 NCI-designated Comprehensive Cancer
Centers in the United States, regarding the properties and potential of
PREVATAC(TM) exisulind, particularly with regard to its mechanism of action
and potential for use as an agent in the chemoprevention and chemotherapy
of cancer. The report prepared by Dr. Weiner, which
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<PAGE> 51
was presented to the Tseng Board, corroborated the information provided by
CPI to Tseng regarding PREVATAC(TM) exisulind. Such information is
discussed in "CPI Business."
(7) The report of Panitch Schwarze Jacobs & Nadel, P.C. regarding due
diligence investigations of the patent portfolio of CPI performed on behalf
of the Tseng Board. The report prepared by Panitch Scharze Jacobs & Nadel,
P.C., which was presented to the Tseng Board, corroborated the information
provided by CPI to Tseng regarding the status of CPI's proprietary
technology. Such information is discussed in "CPI Business -- Patents and
Proprietary Technology."
(8) The structure of the Transactions, which will permit the holders
of Tseng Common Stock to exchange their shares for CPHI Common Stock on a
tax-free basis.
The Tseng Board also considered a number of potential risks in its
deliberations concerning the Transactions. In particular, the Tseng Board
considered, among other things (i) the risk that the technological potential of
PREVATAC(TM) exisulind and other products currently under development by CPI
shall not prove efficacious or economically feasible in clinical trials or the
marketplace, (ii) the risk that the Transactions would not be consummated due to
the failure of the parties to satisfy conditions to the Transactions, (iii) the
risk that litigation against the CPI's patent portfolio may be initiated by
competitors of CPI and (iv) the other risks described above under "Risk
Factors."
The Tseng Board concluded that the benefits of the Transactions to Tseng
and its shareholders outweighed the risks associated with the foregoing factors.
The foregoing discussion of the factors considered by the Tseng Board is
not intended to be exhaustive but is intended to include the material factors
considered by the Tseng Board. In view of the complexity and variety of factors
considered by the Tseng Board, the Tseng Board did not consider it practical to
quantify or otherwise attempt to assign any relative or specific weights to the
specific factors considered, and individual directors may have given differing
weights to different factors.
TSENG BOARD RECOMMENDATION
FOR THE REASONS DISCUSSED ABOVE, THE TSENG BOARD HAS DETERMINED THAT THE
TERMS OF THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS ARE FAIR TO, AND IN
THE BEST INTERESTS OF, TSENG AND THE TSENG SHAREHOLDERS. ACCORDINGLY, THE TSENG
BOARD HAS UNANIMOUSLY RECOMMENDED THAT TSENG STOCKHOLDERS VOTE FOR THE APPROVAL
OF THE TSENG MERGER PROPOSAL.
REPORT OF LOUIS M. WIENER, M.D.
Tseng engaged Louis M. Weiner, M.D., Chairman of the Department of Medical
Oncology, Division of Medical Science at Fox Chase Cancer Center, to evaluate
CPI's technology. Tseng received Dr. Weiner's report dated June 23, 1998 and
paid Dr. Weiner a fee of $10,000 for services in preparing his report. On July
9, 1998, Tseng approached Dr. Weiner regarding his nomination as a director of
CPHI. As a director of CPHI, Dr. Wiener will be entitled to receive the
compensation available to CPHI directors as set forth herein. (See "Management
of CPHI and Executive Compensation -- Compensation of Directors.") On July 10,
1998, CPI named Dr. Weiner to its Scientific Advisory Board. As a member of the
Scientific Advisory Board, Dr. Weiner will be entitled to compensation of $4,000
per quarter and stock options to purchase 13,750 shares of CPI stock. The
exercise price of such options will be equal to the fair market value of CPI
Common Stock on the date of grant. The options will vest in three equal annual
installments commencing on the first anniversary of the date of the grant of the
option. (See "CPI Business -- Scientific Advisory Board.")
OPINION OF FINANCIAL ADVISOR TO TSENG
Tseng retained JMS to act as its financial advisor in connection with the
Transactions. JMS rendered to the Tseng Board on June 23, 1998 its written
opinion (the "JMS Opinion") that, as of such date and based on, and subject to,
the assumptions, limitations and qualifications set forth in the JMS Opinion,
the Tseng Exchange Ratio was fair to Tseng's stockholders from a financial point
of view.
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THE FULL TEXT OF THE JMS OPINION IS INCLUDED AS APPENDIX C TO THIS JOINT
PROXY STATEMENT/PROSPECTUS. TSENG'S STOCKHOLDERS ARE URGED TO READ THE JMS
OPINION FOR A DISCUSSION OF ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN BY JMS IN RENDERING THE JMS OPINION. THE SUMMARY OF THE
JMS OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE JMS OPINION.
The JMS Opinion was prepared for the Tseng Board and is directed only to
the fairness of the Tseng Exchange Ratio to Tseng and Tseng's stockholders from
a financial point of view. The JMS Opinion does not constitute a recommendation
to any stockholder of Tseng as to how such stockholder should vote at the Tseng
Special Meeting nor does it constitute an opinion as to the price at which CPHI
Common Stock will actually trade at any time. In arriving at its opinion, JMS
did not ascribe a specific range of value to CPI, but rather JMS made its
determination as to the fairness, from a financial point of view, of the Tseng
Exchange Ratio to be offered to Tseng's stockholders on the basis of the
financial and comparative analyses described below. JMS was not requested to and
did not make any recommendation as to the form or amount of the consideration to
be received by Tseng's stockholders in the Transactions, which was determined
through arm's-length negotiations between the parties. Tseng imposed no
restrictions or limitations upon JMS with respect to the investigations made or
the procedures followed by JMS in rendering its opinion.
In arriving at its opinion, JMS reviewed and analyzed (i) the
Reorganization Agreement and the specific terms of the Transactions, (ii) the
confidential private placement memorandum for CPI dated April 1998, which
included audited financial statements of CPI for fiscal years 1995, 1996 and
1997, (iii) financial and operating information with respect to the business,
operations and prospects of CPI furnished to JMS by CPI, (iv) a comparison of
the historical financial results and present financial condition of CPI with
those of other companies that JMS deemed relevant and (v) a comparison of the
financial terms of the Transactions with the financial terms of other
transactions that JMS deemed relevant. In addition, JMS had discussions with the
management of CPI concerning business, operations, assets, financial conditions
and prospects and undertook such other studies, analyses and investigations, as
JMS deemed appropriate.
In arriving at its opinion, JMS assumed and relied upon the accuracy and
completeness of the financial and other information that was available from
public sources and that was provided to it by Tseng, CPI and their
representatives without assuming any responsibility for independent verification
of such information. Further, JMS relied upon the assurances of the management
of CPI that they were not aware of any facts or circumstances that would make
such information materially inaccurate or misleading. With respect to the
financial projections of CPI, JMS assumed that such projections were reasonably
prepared on a basis reflecting the best currently available estimates and
judgment of the management of CPI as to the future financial performance of CPI
and that CPI will perform substantially in accordance with such projections. JMS
did not conduct a physical inspection of the properties and facilities of CPI
and did not make or obtain any evaluations or appraisals of the assets or
liabilities of CPI. Upon the advice of Tseng and its legal and accounting
advisors, JMS assumed that the Transactions would qualify as a tax-free
reorganization under the Code to Tseng's stockholders and CPI.
In connection with the preparation of the JMS Opinion, JMS performed a
variety of financial and comparative analyses described below. The preparation
of a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial and comparative analysis and the application
of those methods to the particular circumstances, and therefore such an opinion
is not readily susceptible to summary description. Furthermore, in arriving at
its opinion, JMS did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. JMS did not form a
conclusion as to whether any individual analysis, considered in isolation,
supported or failed to support an opinion as to the fairness from a financial
point of view. Accordingly, JMS believes that its analyses must be considered as
a whole and that considering any portion of such analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying its opinion. The JMS Opinion is necessarily based
on economic, market, financial and other conditions as they existed on, and on
the information made available to it as of, the
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date of the JMS Opinion. It should be understood that, although subsequent
developments may have affected its opinion, JMS is not obligated to update,
review or reaffirm the JMS Opinion.
Comparable Public Company Analysis. JMS compared the historical financial
and operating performance of certain publicly traded companies that it
considered relevant with the historical financial and operating performance of
CPI, based upon information provided to JMS by the management of CPI and
information that was publicly available. In particular, these companies were
analyzed with respect to their technology value (defined as market
capitalization plus debt minus cash and equivalents). JMS also made qualitative
judgments with respect to the corporate collaborations and the stage of
development of each of the companies.
JMS included the following companies in its universe of comparable
biotechnology companies: Celgene Corporation, Cell Therapeutics, Inc., Entremed,
Inc., LXR Biotechnology Inc., Magainin Pharmaceuticals Inc., Medarex, Inc., Onyx
Pharmaceuticals, Inc. and SUGEN, Inc. (collectively, the "Comparable
Companies"). As of June 23, 1998, the average and median technology values for
the Comparable Companies were $120.2 million and $103.5 million, respectively.
Based on the stage of development of CPI, the limited nature of its
collaborations and the lack of historical earnings, JMS deemed this valuation
methodology to have limited importance.
Analysis of Selected Comparable Transactions. JMS compared the financial
and operating performance of certain companies that had engaged in recent merger
transactions, and that JMS considered relevant, with the historical financial
and operating performance of CPI, based upon information provided to JMS by the
management of CPI and information that was publicly available. JMS analyzed the
tender/merger price per share for each of these transactions, including the
transaction technology value (defined as purchase consideration plus debt minus
cash and equivalents). The following transactions (the "Comparable
Transactions") that JMS considered comparable to the Transactions were as
follows (target/acquiror): Transcell Technologies, Inc./Intercardia, Inc.;
GenPharm International, Inc./Medarex Inc.; Sequana Therapeutics, Inc./Arris
Pharmaceutical Corporation; ChemGenics Pharmaceuticals Inc./Millennium
Pharmaceuticals, Inc.; Somatix Therapy Corporation/Cell Genesys, Inc.; Athena
Neurosciences, Inc./Elan Corporation, plc; Viagene, Inc./Chiron Corporation; and
Synergen, Inc./Amgen Inc. The average and median transaction technology values
for the Comparable Transactions were $142.3 million and $89.3 million,
respectively. JMS also analyzed the ratio of transaction technology value to
capital invested in each company (defined as stockholders' equity excluding
accumulated deficits) as of the date of the transaction (the "Technology Value
Ratio"). The average and median Technology Value Ratios for the Comparable
Transactions were 1.4x and 1.2x, respectively.
Based on the transaction structures, stage of development, core
technologies and corporate collaborations at the time of the transactions, JMS
deemed this valuation methodology to be relevant.
Initial Public Offerings. JMS analyzed initial public offerings for
companies in the biotechnology industry, which were completed since January 1,
1997 (the "Comparable IPOs"). JMS included the following companies in its
universe of Comparable IPOs: Aastrom Biosciences, Inc., Ascent Pediatrics, Inc.,
Cell Therapeutics, Inc., Corixa Corporation, ILEX Oncology, Inc., Leukosite,
Inc., Megabios Corp., Nanogen, Inc., Progenics Pharmaceuticals, Inc., Transcend
Therapeutics, Inc., Trimeris, Inc. and ZymeTx, Inc. JMS compared the
pre-offering valuation for the Comparable IPOs to the post-offering valuations
after the last round of private financing for each of the Comparable IPOs in
order to determine the annualized return. The Comparable IPOs had adjusted
average, high and low annualized returns (eliminating the high and low values
before calculating the average) of 95%, 441.8% and 18.3%, respectively.
Based on the transaction structures, stage of development, core
technologies and corporate collaborations at the time of the transactions, JMS
deemed this valuation methodology to be relevant.
Discounted Cash Flow Analysis. JMS examined the financial projections of
CPI provided to JMS by CPI's management and performed a discounted cash flow
analysis utilizing the adjusted present value method. JMS noted that the
projections were prepared based on assumptions that included, among other
things, the success of each of its products in human clinical trials and in the
marketplace. JMS informed the Tseng Board that any forecast in the biotechnology
industry is subject to a number of variables, which present significant
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obstacles. These variables include the ability to secure adequate funding to
bring the products to market, the technological feasibility of the products, the
receipt of marketing approval from relevant governmental regulatory agencies,
market acceptance of the products and the competitive risk presented by other
biotechnology companies with similar products and/or better resources.
JMS discounted to present value the projected stream of after-tax
unleveraged cash flows and the terminal year value (the "Terminal Value") of
CPI. The Terminal Value for the discounted cash flow analysis of the projections
was based upon a range of 6.5 to 8.5 times projected revenue in 2002. JMS used
discount rates ranging from 40 to 50 percent, which were based on such factors
as the inherent business risk of CPI and the biotechnology industry, the private
status of CPI and the cost of capital to CPI. The discounted cash flow analysis
yielded values ranging from $59.7 million to $114.5 million.
Due to the high unpredictability of future revenues from products currently
in clinical trials, JMS determined that this analysis does not fully reflect the
value of CPI's technology and intangible assets, such as intellectual property
rights and related expertise in apoptosis mechanisms. Therefore, this analysis
was deemed to be not meaningful.
JMS is a nationally recognized investment banking firm and, as part of its
investment banking activities, is regularly engaged in the evaluation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
The Tseng Board selected JMS because of its expertise, reputation and
familiarity with CPI in particular and the biotechnology industry in general and
because its investment banking professionals have substantial experience in
transactions similar to the Transactions.
Pursuant to an engagement letter with JMS dated April 24, 1998, Tseng has
paid JMS a $25,000 retainer fee and a fee of $25,000 for rendering its opinion
and has agreed to pay a fee of $50,000 upon consummation of the Transactions.
Tseng has also agreed to reimburse JMS for reasonable out-of-pocket expenses,
and to indemnify JMS, its affiliates, and their directors, agents, employees and
controlling persons against certain liabilities, including liabilities under
federal securities laws.
JMS is acting as financial advisor to Tseng in connection with the
Transactions. In the ordinary course of its business, JMS may actively trade in
the equity securities of Tseng for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities. JMS expects to make a market in the shares of CPHI.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
Certain members of CPI's and Tseng's management and boards of directors may
be deemed to have certain interests in the Transactions that are in addition to
their interests as stockholders of CPI or Tseng generally. The Tseng Board and
the CPI Board were each aware of these interests and considered them, among
other matters, in approving the Reorganization Agreement and the transactions
contemplated thereby.
Directors and Officers of CPHI. All of the current directors of CPI are
directors of CPHI and, upon consummation of the Transactions, it is anticipated
that one current director of Tseng and an additional nominee of Tseng will
become directors of CPHI. See "The Reorganization Agreement -- Corporate
Matters; Composition of the CPHI Board". In addition, the executive officers of
CPI will become executive officers of CPHI. See "Management of CPHI and
Executive Compensation".
Directors and Officers Insurance. Under the Reorganization Agreement, the
parties have agreed that Tseng will continue directors and officers insurance
coverage in respect of acts prior to the Effective Time for the benefit of
Tseng's officers and directors for a period of five years after the Effective
Time.
Stock Option Programs. At the Effective Time, each outstanding CPI Option,
CPI Warrant and Tseng Option shall be assumed by CPHI in such a manner that it
is converted into an option to purchase shares of CPHI Common Stock (subject to
certain adjustments). As of August 31, 1998, directors and executive officers of
CPI held outstanding CPI Options to purchase 656,569 shares of CPI Common Stock
and
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outstanding CPI Warrants to purchase 25,232 shares of CPI Preferred Stock. As of
that same date, the directors of Tseng who will become directors of CPHI held
outstanding Tseng Options, which will become options to purchase 108,032 shares
of CPHI Common Stock. See "The Reorganization Agreement -- Stock Options and
Warrants".
Employment Agreements. Certain directors and executive officers of CPI
have entered into employment agreements with CPI which will continue after
consummation of the Transactions. In addition, it is expected that certain of
those individuals will enter into employment agreements with CPHI after
consummation of the Transactions.
Severance Agreements. Tseng is a party to a severance agreement with each
of John J. Gibbons and Mark Karsch. Each severance agreement provides that, in
the event of Mr. Gibbons' or Mr. Karsch's termination of employment (on account
of death or disability, a reduction in authorities, duties or compensation, or
any reason other than cause), such executive will receive: (i) all earned but
unpaid compensation and benefits; (ii) a lump sum cash payment equal to the
annual base salary (twelve times the highest monthly base salary) for a two year
period after the termination date, paid no more than 15 days after a notice of
termination is received; (iii) continued benefits for employee and spouse or
dependents for two years after termination or a lump sum equal to the cost of
acquiring such coverage; (iv) COBRA health coverage after the two years after
termination; (v) full vesting of options and privilege to exercise options for
three years after termination (except as provided in the Tseng 1991 and 1995
Stock Option Plans); and (vi) a $10,000 cash payment or reimbursement for
outplacement services, including tax costs. Each severance agreement also
provides for a payment of compounded interest on amounts due and the payment of
expenses associated with enforcement should Tseng fail to make any severance
payments in the amount and time period as provided in the severance agreement.
In addition, the severance agreements provide for certain payments should it be
determined that the distributions pursuant to the severance agreements
constitute excess parachute payments. It is anticipated that following
consummation of the Transactions, neither Mr. Gibbons nor Mr. Karsch will be
employed by CPHI, CPI or Tseng and therefore upon consummation of the
Transactions shall receive $350,000 and $290,000, respectively.
Registration Rights. Pursuant to the Reorganization Agreement, CPHI shall
assume CPI's obligations under the CPI Stockholders' Agreement pursuant to which
certain CPI warrantholders, including certain directors and officers of CPI,
have rights to require the registration of the shares that they own pursuant to
such CPI Stockholders' Agreement. See "The Reorganization
Agreement -- Covenants".
MARKET STAND-OFF AGREEMENTS
Pursuant to the Reorganization Agreement, CPI has agreed that it shall
obtain the agreement of each director and executive officer of CPI that each
such person shall not, directly or indirectly, sell, offer to sell, contract to
sell, grant any option to purchase or otherwise transfer or dispose of (other
than to persons who agree to be similarly bound) any CPHI Common Stock
beneficially owned by such person for 180 days from the Effective Time. CPI has
also agreed that it shall use reasonable best efforts to obtain the agreement of
each of the remaining holders of CPI Common Stock and CPI Preferred Stock that
such person shall not, directly or indirectly, sell, offer to sell, contract to
sell, grant any option to purchase or otherwise transfer or dispose of (other
than to persons who agree to be similarly bound) any CPHI Common Stock
beneficially owned by such person for 90 days from the Effective Time.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences of the Transactions that are generally applicable to CPI, Tseng,
the CPI stockholders and the Tseng stockholders. The summary is based on
currently existing provisions of the Code, existing Treasury Regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change. Any such change, which may or may not be retroactive,
could alter the tax consequences to CPI, Tseng, CPI stockholders and Tseng
stockholders.
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CPI stockholders and Tseng stockholders should be aware that the summary
does not purport to be a comprehensive description of all of the tax
consequences that may be relevant to particular stockholders in light of their
particular circumstances. For example, the summary does not address the tax
treatment to stockholders subject to special tax rules, such as banks, insurance
companies, tax-exempt organizations, dealers in securities, stockholders who are
subject to the alternative minimum tax provisions of the Code, stockholders who
are non-United States persons, stockholders who acquired their stock pursuant to
the exercise of employee stock options or otherwise as compensation or
stockholders who hold their shares as a hedge or as part of a hedging, straddle,
conversion or other risk reduction transaction. In addition, the summary only
applies to a holder who holds shares of CPI Capital Stock or Tseng Common Stock
as capital assets. Moreover, the summary does not address the tax consequences
of the Transactions under foreign, state or local laws or the tax consequences
of transactions effectuated prior to or after the Transactions (whether or not
such transactions are in connection with the Transactions). ACCORDINGLY, CPI AND
TSENG STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THEM OF THE TRANSACTIONS AND AS
TO THE FOREIGN, STATE, LOCAL AND OTHER TAX CONSEQUENCES THEREOF.
It is the opinion of Cooley Godward LLP, counsel to CPI ("Cooley Godward"),
and Morgan, Lewis & Bockius LLP, counsel to Tseng ("Morgan, Lewis"), that the
Transactions will qualify as tax-deferred transactions under the Code
(collectively, the "Tax Opinions"). Specifically, Cooley Godward has provided a
Tax Opinion to CPI to the effect that neither CPI nor any of its stockholders
will recognize gain or loss for United States federal income tax purposes as a
result of the CPI Merger except to the extent that any CPI stockholders receive
cash pursuant to the exercise of appraisal rights, and accordingly that the CPI
Merger will have the consequences set forth below under "-- Material Tax
Consequences of the CPI Merger" to CPI and its stockholders. Morgan, Lewis has
provided an opinion to Tseng to the effect that, under current law, the transfer
of Tseng Common Stock by the stockholders of Tseng to CPHI pursuant to the Tseng
Merger in exchange for the CPHI Common Stock will qualify as a tax-deferred
transaction under the Code, and accordingly that the Tseng Merger will have the
tax consequences set forth below under "-- Material Tax Consequences of the
Tseng Merger" to Tseng and its stockholders. Each of such opinions is subject to
the conditions, assumptions and qualifications set forth below and has been
filed as an exhibit to the Registration Statement.
In addition, the obligations of CPI and Tseng to consummate the
Transactions are conditioned on receipt by CPI of an opinion from Cooley Godward
that the CPI Merger qualifies as a tax-deferred transaction, and by Tseng of an
opinion from Morgan, Lewis, that the Tseng Merger qualifies as a tax-deferred
transaction (collectively, the "Closing Opinions"). The condition that CPI
receive a Closing Opinion and the condition that Tseng receive a Closing Opinion
will not be waived without a resolicitation of their respective stockholders'
consent. The Tax Opinions and the Closing Opinions (i) will not be binding on
the Internal Revenue Service ("IRS") nor preclude the IRS from adopting a
contrary position, (ii) will be based on assumptions discussed below, as well as
representations received from CPHI, Tseng and CPI, (iii) will be based on the
assumption that the Transactions will be consummated in accordance with the
terms of the Reorganization Agreement and (iv) will be subject to the
limitations discussed below. Neither CPI nor Tseng has requested, or will
request, a ruling from the IRS with regard to any of the federal income tax
consequences of the Transactions. The Tax Opinions and Closing Opinions assume
and are conditioned upon the following: (i) the truth and accuracy of the
statements, covenants, representations and warranties contained in the
Reorganization Agreement, in the representations received from CPHI, Tseng and
CPI to support the Tax Opinions and Closing Opinions (the "Tax Representations")
and in all other instruments and documents related to the formation,
organization and operation of CPHI, Tseng and CPI examined by and relied upon by
Cooley Godward and Morgan, Lewis in connection with the Transactions; (ii) that
original documents submitted to such counsel are authentic, documents submitted
to such counsel as copies conform to original documents, and that all such
documents have been (or will be by the Effective Time) duly and validly executed
and delivered where due execution and delivery are a prerequisite to the
effectiveness thereof; (iii) that all covenants contained in the Reorganization
Agreement and in the Tax Representations are
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performed without waiver or breach of any material provision thereof; and (iv)
that any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification.
Material Tax Consequences of the CPI Merger
Tax Consequences to CPI Stockholders. Subject to the discussion below
concerning appraisal rights, CPI stockholders will not recognize income, gain or
loss upon the receipt of shares of CPHI Common Stock solely in exchange for
their shares of CPI Capital Stock in the CPI Merger. The tax basis of the shares
of CPHI Common Stock received by CPI stockholders will be the same as the tax
basis of the shares of CPI Capital Stock exchanged therefor. The holding period
of the shares of CPHI Common Stock received by CPI stockholders will include the
holding period of the shares of CPI Capital Stock surrendered in exchange
therefor.
Tax Consequences to CPI and CPHI. No income, gain or loss will be
recognized by CPI or CPHI pursuant to the CPI Merger.
Tax Consequences to CPI Stockholders upon Exercise of Appraisal Rights. A
holder of CPI Capital Stock who exercises and perfects appraisal rights with
respect to a share of CPI Capital Stock and receives a cash payment for such
share generally will recognize capital gain or loss equal to the difference
between the amount of cash received (other than in respect of any interest
awarded by a court) and such stockholder's tax basis in his, her or its share of
stock and the amount of cash received for such share, provided that such payment
is not "essentially equivalent to a dividend" within the meaning of Section 302
of the Code nor has the effect of a distribution of a dividend within the
meaning of Section 356(a)(2) of the Code after giving effect to the constructive
ownership rules of the Code (collectively, a "Dividend Equivalent Transaction").
A sale of shares pursuant to an exercise of appraisal rights generally will not
be a Dividend Equivalent Transaction if, as a result of such exercise, the
stockholder exercising the appraisal rights owns no shares of capital stock of
CPHI (either actually or constructively within the meaning of Section 318 of the
Code) immediately after the CPI Merger.
Material Tax Consequences of the Tseng Merger
Tax Consequences to Tseng Stockholders. Subject to the discussion below
concerning fractional shares, Tseng stockholders will not recognize income, gain
or loss upon the receipt of shares of CPHI Common Stock solely in exchange for
their shares of Tseng Common Stock in the Tseng Merger. The tax basis of the
shares of CPHI Common Stock received by Tseng stockholders (including any
fractional shares of CPHI Common Stock not actually received) will be the same
as the tax basis of the shares of Tseng Common Stock exchanged therefor. The
holding period of the shares of CPHI Common Stock received by Tseng stockholders
will include the holding period of the shares of Tseng Common Stock surrendered
in exchange therefor.
Cash payments received by holders of Tseng Common Stock in lieu of
fractional shares of common stock of CPHI will be treated as if such fractional
shares had been issued in the Tseng Merger and then redeemed by CPHI. A Tseng
stockholder receiving such cash will recognize gain or loss upon such payment,
measured by the difference (if any) between the amount of the cash received and
the basis allocated to such fractional share. The gain or loss should be capital
gain or loss, provided that each such fractional share of common stock of CPHI
was held as a capital asset at the Effective Time of the Tseng Merger.
Tax Consequences to Tseng. No income, gain or loss will be recognized by
Tseng pursuant to the Tseng Merger.
Other Matters
Backup Withholding. Certain noncorporate holders may be subject to backup
withholding at a rate of 31% on payments of any cash with respect to fractional
shares. Backup withholding will not apply, however, to a stockholder who
furnishes a correct taxpayer identification number ("TIN") and certifies that
he, she or it is not subject to backup withholding on Form W-9, who provides a
certificate of foreign status on Form W-8 or
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who is otherwise exempt from backup withholding. A stockholder who fails to
provide the correct TIN on Form W-9 may be subject to a $50 penalty imposed by
the IRS.
Reporting Requirements. Each Tseng stockholder and each CPI stockholder
(other than stockholders who exercise and perfect appraisal rights) will be
required to retain records and consult with their tax advisor regarding
information to be included in their federal and state income tax returns.
ANTICIPATED ACCOUNTING TREATMENT
As it is anticipated that Tseng will have no operations after the
consummation of the Transactions, the Transactions will be accounted for as a
reorganization of CPI into CPHI with the sale of approximately 23% of CPHI
Common Stock in exchange for Tseng's cash and other net assets. CPI's historical
financial statements will be the financial statements of the combined company.
REGULATORY MATTERS
Antitrust. CPI and Tseng do not believe that any governmental filings with
the Federal Trade Commission ("FTC") are required with respect to the
Transactions. However, the FTC or the United States Department of Justice
Antitrust Division could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, including seeking to enjoin
consummation of the Transactions or seeking to cause divestiture of significant
assets of CPI or Tseng. There can be no assurance that a challenge to the
Transactions on antitrust grounds will not be made, or, if such challenge is
made, of what the result would be. Consummation of the Transactions is
conditioned upon, among other things, the absence of any temporary restraining
order, preliminary or permanent injunction, or other order issued by any federal
or state court in the United States which prevents the consummation of the
Transactions.
Filing with the Delaware Secretary of State. A Certificate of Merger must
be filed with the Secretary of State of the State of Delaware in order to
consummate the CPI Merger.
Filing with the Utah Secretary of State. Articles of Merger must be filed
with the Secretary of State of Utah in order to consummate the Tseng Merger.
Securities Laws. CPI and Tseng must comply with the federal securities
laws and applicable securities laws of various states.
RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders of CPI may, under certain circumstances and by following the
procedure prescribed by the DGCL, exercise appraisal rights and receive cash for
their shares of CPI Capital Stock. The stockholders exercising appraisal rights
under the DGCL must follow the appropriate procedures under the DGCL or suffer
the termination or waiver of such rights.
If a holder of CPI Capital Stock exercises appraisal rights in connection
with the CPI Merger under Section 262 of the DGCL ("Section 262"), any shares of
CPI Capital Stock in respect of which such rights have been exercised and
perfected will not be converted into CPHI Common Stock but instead will be
converted into the right to receive such consideration as may be determined by
the Delaware Court of Chancery (the "Court") to be due with respect to such
shares pursuant to the laws of the State of Delaware.
The following summary of the provisions of Section 262 is not intended to
be a complete statement of such provisions and is qualified in its entirety by
reference to the full text of Section 262, a copy of which is attached to this
Joint Proxy Statement/Prospectus as Appendix D and incorporated herein by
reference.
Holders of shares of CPI Capital Stock who object to the CPI Merger
Proposal and who follow the procedures in Section 262 will be entitled to have
their shares of CPI Capital Stock appraised by the Court and to receive payment
of the "fair value" of such shares as of the Effective Time of the CPI Merger.
A stockholder of CPI electing to exercise appraisal rights must, prior to
the CPI Special Meeting, perfect his, her or its appraisal rights by demanding
in writing from CPI the appraisal of his, her or its shares of CPI
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Capital Stock, as provided in Section 262. A holder who elects to exercise
appraisal rights should mail or deliver his, her or its written demand to CPI at
702 Electronic Drive, Horsham, Pennsylvania 19044, Attn: Corporate Secretary.
The demand should specify the holder's name and mailing address, the number of
shares of CPI Capital Stock owned and that such holder is demanding appraisal of
his, her or its shares. Only a holder of record of shares of CPI Capital Stock
(or his, her or its duly appointed representative) is entitled to assert
appraisal rights for the shares registered in that holder's name.
Within 120 days after the Effective Time of the CPI Merger, any stockholder
who has made a valid written demand and who has not voted in favor of approval
and adoption of the Reorganization Agreement and approval of the CPI Merger may
(i) file a petition in the Court demanding a determination of the value of
shares of CPI Capital Stock and (ii) upon written request, receive from CPI a
statement setting forth the aggregate number of shares of CPI Capital Stock not
voted in favor of approval and adoption of the Reorganization Agreement and
approval of the CPI Merger Proposal and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such statement must be mailed within ten days after the written request therefor
has been received by CPI.
If a petition for an appraisal is timely filed, at a hearing on such
petition, the Court is required to determine the holders of CPI Capital Stock
entitled to appraisal rights and will determine the "fair value" of such CPI
Capital Stock exclusive of any element of value arising from the accomplishment
or expectation of the CPI Merger, together with a fair rate of interest, if any,
to be paid upon the value of such CPI Capital Stock. In determining the "fair
value" of such CPI Capital Stock, the Court is required to take into account all
relevant factors, including the market value of CPI Capital Stock and the net
asset and earnings value of CPI. In determining the fair value of interest, the
Court may consider all relevant factors including the rate of interest which CPI
would have had to pay to borrow money during the pendency of the proceedings.
Upon application by a stockholder, the Court may also order that all or a
portion of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorney's fees
and the fees and expenses of experts utilized in the appraisal proceeding, be
charged pro rata against the value of all the shares of CPI Capital Stock
entitled to appraisal.
Any holder of CPI Capital Stock who has duly demanded an appraisal under
Section 262 will not, after the Effective Time of the CPI Merger, be entitled to
vote the shares subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on such CPI Capital Stock (except
dividends or other distributions payable to stockholders of record as of a date
prior to the Effective Time of the CPI Merger).
If any holder of shares of CPI Capital Stock who demands appraisal under
Section 262 effectively withdraws or loses his, her or its right to appraisal,
the shares of such holder will be converted into a right to receive that number
of shares of CPHI Common Stock as is determined in accordance with the
Reorganization Agreement. A holder will effectively lose his right to appraisal
if he, she or it votes in favor of approval and adoption of the Reorganization
Agreement and approval of the CPI Merger, if no petition for appraisal is filed
within 120 days after the Effective Time of the CPI Merger or if the holder
delivers to CPI a written withdrawal of such holder's demand for an appraisal
and an acceptance of the CPI Merger, except that any such attempt to withdraw
made more than 60 days after the Effective Time of the CPI Merger requires the
written approval of CPI. A holder of stock represented by certificates may also
lose his, her or its right of appraisal if he, she or it fails to comply with
the Court's direction to submit such certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings.
Holders of Tseng Common Stock are not entitled to appraisal rights under
the UBCA because Tseng Common Stock is listed on the Nasdaq National Market.
RESALE OF CPHI COMMON STOCK
CPHI Common Stock issued in connection with the Transactions will be freely
transferable, except that shares issued to any CPI stockholders or Tseng
stockholders who execute Market Stand-Off Agreements are subject to certain
restrictions on resale. Such Market Stand-off Agreements prohibit the sale,
transfer or other disposition of CPHI Common Stock received by such stockholders
in the Transactions, except under certain
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circumstances. See "Approval of the Transactions -- Market Stand-Off
Agreements". Certain stockholders of CPI and Tseng will have delivered to CPHI
certificates certifying that such stockholders have no present intention to
dispose of certain of the shares of CPHI Common Stock to be received by such
stockholders in the Transactions in order to comply with the requirements of
certain United States federal tax laws. See "-- Material Federal Income Tax
Consequences".
NASDAQ NATIONAL MARKET LISTING
Pursuant to the Reorganization Agreement, CPHI has applied for the listing
of CPHI Common Stock on the Nasdaq National Market under the symbol "CLPA". It
is a condition to the consummation of the Transactions that the shares of CPHI
Common Stock to be issued pursuant to the Transactions shall have been approved
for listing on the Nasdaq National Market, subject only to official notice of
the issuance.
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THE REORGANIZATION AGREEMENT
The following is a summary of the material provisions of the Reorganization
Agreement, a copy of which is attached as Appendix A to this Joint Proxy
Statement/Prospectus and is incorporated herein by reference. The following is
not a complete statement of all provisions of the Reorganization Agreement and
related agreements. Statements made in this Joint Proxy Statement/Prospectus
with respect to the terms of the Reorganization Agreement and such related
agreements are qualified in their respective entireties by reference to the more
detailed information set forth in the Reorganization Agreement and such related
agreements.
GENERAL
The Reorganization Agreement provides for the merger of CPI Sub with and
into CPI and the merger of Tseng Sub with and into Tseng. As a result of the
Transactions, both CPI Sub and Tseng Sub will cease to exist, CPI and Tseng will
become wholly-owned subsidiaries of CPHI and the former stockholders of CPI and
Tseng will become stockholders of CPHI. CPI and Tseng will continue as the
surviving corporations of the Transactions (in the case of CPI, the "CPI
Surviving Corporation," in the case of Tseng, the "Tseng Surviving Corporation"
and, together, the "Surviving Corporations"). The Transactions will become
effective upon the filing of a Certificate of Merger with the Secretary of State
of the State of Delaware and the filing of Articles of Merger with the Secretary
of State of Utah. Such filings are anticipated to take place as soon as
practicable after the receipt of all required regulatory approvals and the
satisfaction or waiver of the other conditions to the Transactions, including
the approval of the CPI Merger Proposal by the stockholders of CPI, approval of
the Tseng Merger Proposal by the stockholders of Tseng and approval of the CPI
Certificate Proposal by the stockholders of CPI. It is currently anticipated
that the Effective Time will occur in November 1998. There can be no assurance,
however, that the required regulatory approvals will be obtained, that the other
conditions to the Transactions will be satisfied by such date, or at all, or
that the Reorganization Agreement will not be terminated. See "-- Conditions to
the Merger" and "Approval of the Transactions -- Regulatory Matters".
TRANSACTION CONSIDERATION
At the Effective Time, each share of CPI Capital Stock then outstanding
will be converted into the right to receive one share of CPHI Common Stock and
each share of Tseng Common Stock then outstanding will be converted into the
right to receive CPHI Common Stock based on the Tseng Exchange Ratio.
NO FRACTIONAL SHARES
No fractional shares of CPHI Common Stock will be issued in connection with
the Transactions, and no certificates for any such fractional shares will be
issued. In lieu of such fractional shares, any holder of Tseng Common Stock
(after aggregating all fractional shares of CPHI Common Stock issuable to such
holder) will, upon surrender of such holder's stock certificate(s) representing
Tseng Common Stock to the Exchange Agent, be paid in cash the dollar amount
(rounded to the nearest whole cent), without interest, determined by multiplying
(i) the fractional share interest to which such holder would otherwise be
entitled by (ii) the closing price of a share of Tseng Common Stock on the
Nasdaq National Market on the trading day immediately preceding the Effective
Time divided by the Tseng Exchange Ratio.
STOCK OPTIONS AND WARRANTS
At the Effective Time, CPHI will assume CPI's 1997 Equity Incentive Plan,
1997 Non-Employee Directors Stock Option Plan, Employee Stock Purchase Plan and
1995 Stock Award Plan, as well as Tseng's 1991 Stock Option Plan, 1995 Stock
Option Plan and 1991 Special Directors Stock Option Plan. At the Effective Time,
each unexpired and unexercised CPI Option and Tseng Option shall be assumed by
CPHI and will continue to have, and be subject to, substantially the same terms
and conditions set forth in the documents governing such options immediately
prior to the Effective Time, except that (i) such options will be exercisable
for that number of shares of CPHI Common Stock, (a) in the case of CPI Options,
equal to the number of shares of CPI Capital Stock subject to such CPI Option
immediately prior to the Effective
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Time, and (b) in the case of Tseng Options, equal to the number of shares of
Tseng Common Stock subject to such Tseng Option immediately prior to the
Effective Time multiplied by the Tseng Exchange Ratio (rounded down to the
nearest whole share of CPHI Common Stock) and (ii) the per share exercise price
of (a) CPI Options shall be the exercise price set forth in the documents
governing such CPI Options and (b) Tseng Options shall be equal to the exercise
price per Tseng share immediately prior to the Effective Time divided by the
Tseng Exchange Ratio (rounded up to the nearest whole cent). As soon as
practicable after the Effective Time, CPHI shall issue to each holder of a CPI
Option or Tseng Option assumed in connection with the Transactions a notice
evidencing the stock option assumption by CPHI. After the Transactions, CPHI
will file a Form S-8 Registration Statement to register shares subject to the
CPI Options and the Tseng Options. After consummation of the Transactions, all
formerly unvested Tseng Options will become fully vested CPHI options. Approval
of the Reorganization Agreement constitutes approval of these Plans and of the
assumption of these Plans, options and warrants by CPHI.
Each CPI Warrant, with the exception of warrants to purchase Series E
Preferred Stock, shall be assumed by CPHI in connection with the Transactions.
Each warrant so assumed by CPHI under the Reorganization Agreement shall
continue to have, and be subject to, the same terms and conditions set forth in
the respective warrant agreement governing such warrant immediately prior to the
Effective Time, except that each such warrant shall, following the Effective
Time, be exercisable only for shares of CPHI Common Stock at the exercise price
set forth in the applicable warrant agreement.
STOCK OWNERSHIP FOLLOWING THE TRANSACTIONS
In connection with the Transactions, 18,687,093 shares of CPHI Common Stock
will be issued to holders of CPI Capital Stock and 5,477,614 shares of CPHI
Common Stock will be issued to holders of Tseng Common Stock. In addition,
427,188 shares of CPHI Common Stock will be issued or issuable upon exercise of
outstanding CPI Warrants, 1,231,255 shares of CPHI Common Stock will be issued
or issuable upon exercise of the CPI Options, if and when vested and not
forfeited, and 516,559 shares of CPHI Common Stock will be issued or issuable
upon exercise of the Tseng Options, all of which will be fully vested upon
consummation of the Transactions.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
As soon as practicable after the Effective Time, the Exchange Agent will
mail to the registered holders of CPI Capital Stock (i) a CPI Letter of
Transmittal and (ii) instructions for the use of the CPI Letter of Transmittal
in effecting the surrender of the CPI Stock Certificates in exchange for
certificates representing CPHI Common Stock. As soon as practicable after the
Effective Time, the Exchange Agent will mail to the registered holders of Tseng
Common Stock (i) a Tseng Letter of Transmittal and (ii) instructions for the use
of the Tseng Letter of Transmittal in effecting the surrender of the Tseng Stock
Certificates in exchange for certificates representing CPHI Common Stock. Upon
surrender of a CPI Stock Certificate or Tseng Stock Certificate to the Exchange
Agent for exchange, together with a duly executed CPI Letter of Transmittal or
Tseng Letter of Transmittal, as the case may be, and such other documents as may
reasonably be required by the Exchange Agent or CPHI, the holder of such CPI
Stock Certificate or Tseng Stock Certificate shall be entitled to receive in
exchange therefor a certificate representing the whole number of shares of CPHI
Common Stock that such holder has the right to receive. No fractional shares of
CPHI Common Stock will be issued in connection with the Transactions, and no
certificates for any such fractional shares will be issued.
If any CPI Stock Certificate or Tseng Stock Certificate has been lost,
stolen or destroyed, CPHI may require the owner of such lost, stolen or
destroyed CPI Stock Certificate or Tseng Stock Certificate, as the case may be,
to provide an appropriate affidavit and to deliver a bond as indemnity against
any claim that may be made against the Exchange Agent, CPHI or Tseng with
respect to such CPI Stock Certificate or Tseng Stock Certificate.
CPI STOCKHOLDERS AND TSENG STOCKHOLDERS SHOULD NOT SURRENDER THEIR STOCK
CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A CPI LETTER OF TRANSMITTAL OR
TSENG LETTER OF TRANSMITTAL, RESPECTIVELY, FROM THE EXCHANGE AGENT.
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EFFECT ON CERTIFICATES
At the Effective Time, (i) all shares of CPI Capital Stock and Tseng Common
Stock outstanding immediately prior to the Effective Time will automatically be
canceled and retired and will cease to exist, (ii) all holders of certificates
representing shares of CPI Capital Stock or Tseng Common Stock that were
outstanding immediately prior to the Effective Time will cease to have any
rights as stockholders of CPI or Tseng, respectively, and (iii) the stock
transfer books of CPI and Tseng will be closed with respect to all shares of CPI
Capital Stock and Tseng Common Stock, respectively, outstanding immediately
prior to the Effective Time. No further transfer of any such shares of CPI
Capital Stock and Tseng Common Stock will be made on such stock transfer books
after the Effective Time. If, after the Effective Time, a CPI Stock Certificate
or a Tseng Stock Certificate is presented to the Exchange Agent (or to CPHI, CPI
or Tseng), such CPI Stock Certificate or Tseng Stock Certificate will be
canceled and will be exchanged as provided above under the caption
"-- Conversion of Shares; Procedures for Exchange of Certificates".
CORPORATE MATTERS; COMPOSITION OF THE CPHI BOARD
As of the Effective Time, the Certificate of Incorporation of CPI Sub will
become the Certificate of Incorporation of the CPI Surviving Corporation and the
Bylaws of CPI Sub will become the Bylaws of the CPI Surviving Corporation. As of
the Effective Time, the Articles of Incorporation of Tseng Sub will become the
Articles of Incorporation of the Tseng Surviving Corporation and the Bylaws of
Tseng Sub will become the Bylaws of the Tseng Surviving Corporation.
In addition to all of the directors of CPI, who also serve on the CPHI
Board, CPI has agreed to use all reasonable efforts to nominate and appoint two
persons, designated by Tseng in consultation with CPI, to join the CPHI Board to
serve in such capacity until CPHI's annual stockholder meeting in 2000. The
current members of the CPI Board and CPHI Board are Robert J. Towarnicki,
Richard H. Troy, William A. Boeger, Thomas M. Gibson, Judith A. Hemberger, Roger
J. Quy, Bruce R. Ross, Peter G. Schiff and Randall M. Toig. Tseng expects its
two designees to the CPHI Board to be John J. Gibbons and Louis M. Weiner.
CONDITIONS TO THE TRANSACTIONS
CPI. The obligations of CPI to effect the Transactions and otherwise
consummate the transactions contemplated by the Reorganization Agreement are
subject to the satisfaction, at or prior to the consummation of the transactions
contemplated by the Reorganization Agreement (the "Closing"), of each of the
following conditions:
(i) the representations and warranties of Tseng contained in the
Reorganization Agreement shall be true and correct in all material respects
as of the date of the Closing (the "Closing Date") with the same force and
effect as if made as of the Closing Date; provided, however, that such
representations and warranties shall be deemed true and correct unless the
failure or failures of such representations and warranties to be so true
and correct (without regard to materiality qualifiers contained therein),
individually or in the aggregate, results or would reasonably be expected
to result in a Material Adverse Effect (as defined below) on Tseng;
(ii) all of the covenants and obligations that Tseng is required to
comply with or to perform at or prior to the Closing shall have been
complied with and performed in all material respects;
(iii) this Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
shall have been issued by the Commission with respect to this Registration
Statement;
(iv) the CPI Merger Proposal shall have been approved by the Required
CPI Merger Stockholder Vote, the Tseng Merger Proposal shall have been
approved by the Required Tseng Merger Stockholder Vote and the CPI
Certificate Proposal shall have been approved by the Required CPI
Certificate Stockholder Vote;
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(v) CPI shall have received the following documents: (a) a legal
opinion of Morgan, Lewis, dated as of the Closing Date, in the form
reasonably satisfactory to CPI and its legal counsel, (b) a legal opinion
of Cooley Godward dated as of the Closing Date to the effect that the
Transactions will qualify as transfers subject to the provisions of Section
351(a) of the Code; and (c) a certificate executed on behalf of Tseng by
its Chief Executive Officer confirming that the conditions set forth in
clauses (i), (ii), (iv), (vi) and (xi) have been duly satisfied;
(vi) there shall have been no material adverse change in the business,
financial condition, assets, liabilities, operations or financial
performance of Tseng since the date of the Reorganization Agreement, it
being understood that a decline in Tseng's stock price shall not
constitute, in and of itself, a material adverse change;
(vii) no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Transactions
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any legal requirement enacted or deemed
applicable to the Transactions that makes consummation of the Transactions
illegal;
(viii) the affiliate agreements referred to in the Reorganization
Agreement shall have been delivered;
(ix) all material consents required to be obtained in connection with
the Transactions and the other transactions contemplated by the
Reorganization Agreement shall have been obtained and shall be in full
force and effect;
(x) all regulatory approvals needed to ensure that the CPHI Common
Stock to be issued in the Transactions will be registered or qualified
under the securities law of every jurisdiction of the United States in
which any registered holder of CPI Common Stock or CPI Preferred Stock has
an address of record on the CPI Record Date shall have been obtained;
(xi) all regulatory approvals needed to ensure that the CPHI Common
Stock to be issued in the Transactions will be approved for quotation at
the Effective Time on the Nasdaq National Market shall have been obtained;
and
(xii) there shall not be (i) pending or threatened any legal
proceeding in which a governmental body is or is threatened to become a
party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Transactions or any of the other
transactions contemplated by the Reorganization Agreement; (b) relating to
the Transactions and seeking to obtain from Tseng or any of its
subsidiaries any damages that may be material to Tseng; (c) seeking to
prohibit or limit in any material respect CPHI's ability to vote, receive
dividends with respect to or otherwise exercise ownership rights with
respect to the stock of either Surviving Corporation; or (d) which would
materially and adversely affect the right of CPHI or either Surviving
Corporation to own the assets or operate the business of CPI, or (ii)
pending any legal proceeding in which there is a reasonable probability of
an outcome that would have a Material Adverse Effect on CPHI, CPI or Tseng:
(a) challenging or seeking to restrain or prohibit the consummation of the
Transactions or any of the other transactions contemplated by the
Reorganization Agreement; (b) relating to the Transactions and seeking to
obtain from Tseng or any of its subsidiaries any damages that may be
material to Tseng; (c) seeking to prohibit or limit in any material respect
CPHI's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporations; or (d) resulting in Tseng as constituted after the Effective
Time not containing all of the assets and business of Tseng as constituted
immediately prior to the Effective Time.
Tseng. The obligations of Tseng to effect the Transactions and otherwise
consummate the transactions contemplated by the Reorganization Agreement are
subject to the satisfaction, at or prior to the Closing, of each of the
following conditions:
(i) the representations and warranties of CPI contained in the
Reorganization Agreement shall have been true and correct in all material
respects as of the date of the Reorganization Agreement and, except
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to the extent such representations and warranties speak as of an earlier
date, shall also be true and correct on and as of the Closing Date with the
same force and effect as if made on and as of the Closing Date; provided,
however, that such representations and warranties shall be deemed to be
true and correct unless the failure or failures of such representations and
warranties to be so true and correct (without regard to materiality
qualifiers contained therein), individually or in the aggregate, results or
would reasonably be expected to result in a Material Adverse Effect on CPI
or CPHI;
(ii) CPI shall have complied with and performed in all material
respects each covenant contained in the Reorganization Agreement that is
required to be performed by CPI on or prior to the Closing Date;
(iii) this Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
shall have been issued by the Commission with respect to this Registration
Statement;
(iv) the CPI Merger Proposal shall have been approved by the Required
CPI Merger Stockholder Vote, the Tseng Merger Proposal shall have been duly
approved by the Required Tseng Stockholder Vote and the CPI Certificate
Proposal shall have been approved by the Required CPI Certificate
Stockholder Vote;
(v) all material consents required to be obtained in connection with
the Transactions and the other transactions contemplated by the
Reorganization Agreement shall have been obtained and shall be in full
force and effect;
(vi) Tseng shall have received the following legal documents, each of
which shall be in full force and effect: (a) a legal opinion of Cooley
Godward, dated as of the Closing Date, in a form reasonably satisfactory to
Tseng and its legal counsel; (b) a legal opinion of Morgan, Lewis, dated as
of the Closing Date and addressed to Tseng, to the effect that the
Transactions will qualify as transfers subject to the provisions of Section
351(a) of the Code; and (c) a certificate executed on behalf of CPI by its
Chief Executive Officer, confirming that conditions set forth in Sections
(i), (ii), (iv), (v) and (vii) have been duly satisfied;
(vii) there shall have been no material adverse change in CPI's
business, financial condition, capitalization, assets, liabilities,
operations or financial performance since the date of the Reorganization
Agreement, it being understood that material adverse change shall be deemed
to include any event, circumstance or occurrence, individually or in the
aggregate, causing, resulting in or reasonably likely to have a material
adverse effect upon CPI's business, results of operations or financial
condition (i) arising from or relating to any clinical trials or studies
conducted by CPI or (ii) arising from or related to the development or
commercialization of technology, processes or products relating to
adenomatous colonic polyps that are (or may reasonably be expected to be)
superior to CPI's technology, processes or products, and that a material
adverse change shall not include any event, circumstance or occurrence,
individually or in the aggregate, causing, resulting in, or reasonably
likely to have a material adverse effect upon CPI's business, results of
operations or financial condition (i) arising from or relating to general
business or economic conditions, (ii) relating to or affecting the
biotechnology industry generally or (iii) relating to or affecting the
colonic cancer therapeutics industry generally;
(viii) CPI and Tseng shall have taken all actions necessary to cause
the CPHI Board following the Effective Time to consist of those certain
individuals as set forth in the Reorganization Agreement;
(ix) all regulatory approvals needed to ensure that the CPHI Common
Stock to be issued in the Transactions will be registered or qualified
under the securities laws of every jurisdiction of the United States in
which any holder of Tseng Common Stock has an address of record on the
Tseng Record Date shall have been obtained;
(x) all regulatory approvals needed to ensure that the CPHI Common
Stock to be issued in the Transactions will be approved for quotation at
the Effective Time on the Nasdaq National Market shall have been obtained;
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(xi) the affiliate agreements referred to in the Reorganization
Agreement shall have been executed and delivered to CPI;
(xii) no temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Transactions
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any legal requirement enacted or deemed
applicable to the Transactions that makes consummation of the Transactions
illegal;
(xiii) there shall not be (i) pending or threatened any legal
proceeding to which a governmental body is or is threatened to become a
party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of the Transactions or any of the other
transactions contemplated by the Reorganization Agreement; (b) relating to
the Transactions and seeking to obtain from Tseng or any of its
subsidiaries any damages that may be material to Tseng; (c) seeking to
prohibit or limit in any material respect CPHI's ability to vote, receive
dividends with respect to or otherwise exercise ownership rights with
respect to the stock of either Surviving Corporation; or (d) that would
materially and adversely affect the right of CPHI or either Surviving
Corporation to own the assets or operate the business of CPI, or (ii)
pending any legal proceeding in which there is a reasonable probability of
an outcome that would have a Material Adverse Effect on CPHI, CPI or Tseng:
(a) challenging or seeking to restrain or prohibit the consummation of the
Transactions or any of the other transactions contemplated by the
Reorganization Agreement; (b) relating to the Transactions and seeking to
obtain from CPHI or Tseng or any of its subsidiaries any damages that may
be material to Tseng; (c) seeking to prohibit or limit in any material
respect CPHI's ability to vote, receive dividends with respect to or
otherwise exercise ownership rights with respect to the stock of the
Surviving Corporations; or (d) that would affect adversely the right of
CPHI or the Surviving Corporations to own assets or operate the business of
CPI; and
(xiv) each of CPI's directors and executive officers shall have
executed and delivered the Market Stand-off Agreements referred to in the
Reorganization Agreement.
For purposes of the Reorganization Agreement, an event, violation,
inaccuracy, circumstance or other matter will be deemed to have a "Material
Adverse Effect" on CPI if such event, violation, inaccuracy, circumstance or
other matter would have a material adverse effect on (i) the business, financial
condition, capitalization, assets, liabilities, operations or financial
performance of the CPI or (ii) the ability of the company to consummate the
Transactions or any of the other transactions contemplated by the Reorganization
Agreement or to perform obligations under the Reorganization Agreement. An
event, violation, inaccuracy, circumstance or other matter will be deemed to
have a "Material Adverse Effect" on Tseng if such event, violation, inaccuracy,
circumstance or other matter would have a material adverse effect on (i) the
business, financial condition, assets, liabilities, operations or financial
performance of Tseng and its subsidiaries (the "Tseng Corporations") taken as a
whole or (ii) the ability of Tseng to consummate the Transactions or any of the
other transactions contemplated by the Reorganization Agreement or to perform
its obligations under the Reorganization Agreement.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains certain representations and
warranties by Tseng as to: (i) due organization and subsidiaries; (ii) Tseng's
Articles of Incorporation and Bylaws; (iii) capitalization; (iv) filings with
the Commission and financial statements; (v) absence of certain changes; (vi)
title to assets; (vii) real property, equipment and leaseholds; (viii)
proprietary assets; (ix) material contracts; (x) liabilities; (xi) compliance
with legal requirements; (xii) certain business practices; (xiii) governmental
authorizations; (xiv) tax matters; (xv) employee and labor matters and benefit
plans; (xvi) environmental matters; (xvii) insurance; (xviii) transactions with
affiliates; (xix) legal proceedings and orders; (xx) authority and binding
nature of the Reorganization Agreement; (xxi) absence of existing discussions or
negotiations concerning other acquisition proposals; (xxii) vote required;
(xxiii) non-contravention and consents; (xxiv) fairness opinion; (xxv) valid
insurance and reservation of shares; (xxvi) financial advisor; and (xxvii) full
disclosure.
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The Reorganization Agreement also contains certain representations and
warranties by CPI as to: (i) organization, good standing and qualification; (ii)
the CPI Certificate of Incorporation and Bylaws; (iii) CPHI; (iv)
capitalization; (v) financial statements; (vi) absence of certain changes; (vii)
valid issuance; (viii) title to assets; (ix) real property, equipment and
leaseholds; (x) proprietary assets; (xi) material contracts; (xii) liabilities;
(xiii) compliance with legal requirements; (xiv) certain business practices;
(xv) governmental authorizations; (xvi) tax matters; (xvii) employee and labor
matters and benefit plans; (xiii) environmental matters; (xix) insurance; (xx)
transactions with affiliates; (xxi) legal proceedings and orders; (xxii)
authority and binding nature of the Reorganization Agreement; (xxiii) absence of
discussions or negotiations concerning other acquisition proposals; (xxiv) vote
required; (xxv) non-contravention and consents; (xxvi) financial advisor; and
(xxvii) full disclosure.
COVENANTS
Conduct of Tseng's Business. The Reorganization Agreement requires that,
during the period from the date of the Reorganization Agreement through the
Effective Time (the "Pre-Closing Period"): (i) Tseng shall ensure that each of
the Tseng Corporations conducts its business and described operations (A) in the
ordinary course and in accordance with the operating plan previously described
by Tseng to CPI and (B) in compliance with all applicable legal requirements and
the requirements of all Tseng material contracts; (ii) Tseng shall use all
reasonable efforts to ensure that each of the Tseng Corporations preserves
intact its current business organization, keeps available the services of its
current officers and employees and maintains its relations and goodwill with all
suppliers, customers, landlords, creditors, licensors, licensees, employees and
other persons having business relationships with the respective Tseng
Corporation; (iii) Tseng shall keep in full force certain insurance policies or
replace any such policies that terminate with comparable or superior policies;
(iv) Tseng shall provide all notices, assurances and support required by any
Tseng Contract relating to any proprietary asset in order to ensure that no
condition under such Tseng Contract occurs which could result in, or could
increase the likelihood of, any transfer or public disclosure by any Tseng
Corporation of any proprietary asset (where "Tseng Contract" shall mean any
contract: (a) to which any Tseng Corporation is a party; (b) by which any Tseng
Corporation or any asset of a Tseng Corporation may become bound or under which
any Tseng Corporation has, or may become subject to, any obligation; or (c)
under which any Tseng Corporation has or may acquire any right or interest); and
(v) Tseng shall (to the extent requested by CPI) cause its officers to report
regularly to CPI concerning the status of Tseng's business.
During the Pre-Closing Period, Tseng shall not and shall not permit any
other Tseng Corporation to:
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities, except for repurchases at less than fair market value pursuant
to employment or consulting agreements in effect prior to the date of the
Reorganization Agreement;
(ii) hire any new employees whose annual salary exceeds $80,000,
excluding those persons hired to replace employees who terminate their
employment with a Tseng Corporation during the Pre-Closing Period;
(iii) sell, issue, grant or authorize the issuance or grant of (a) any
capital stock or other security (except Tseng Common Stock upon the valid
exercise of Tseng Options), (b) any option, call, warrant or right to
acquire any capital stock or other security or (c) any instrument
convertible into or exchangeable for any capital stock or other security;
(iv) except as contemplated by the Reorganization Agreement, amend or
waive any of its rights under, or accelerate the vesting under, any
provision of any plan pursuant to which any Tseng Option was issued, any
provision of any agreement evidencing any outstanding stock option or any
restricted stock purchase agreement, or otherwise modify any of the terms
of any outstanding option, warrant or other security or any related
contract;
(v) take any action to permit holders of Tseng Options to receive cash
payments in connection with the transactions contemplated in the
Reorganization Agreement;
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(vi) except as contemplated by the Reorganization Agreement, amend or
permit the adoption of any amendment to the Tseng Certificate of
Incorporation or Bylaws or other charter or organizational documents, or
effect or become a party to any merger, consolidation, share exchange,
business combination, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;
(vii) except as contemplated by the Reorganization Agreement, form any
subsidiary or acquire any equity interest or other interest in any other
entity;
(viii) make any capital expenditure, except capital expenditures in an
aggregate amount of no more than $50,000;
(ix) establish, adopt or amend any employee benefit plan, pay any
bonus or make any profit sharing or similar payment greater than $10,000 in
any individual case or $50,000 in the aggregate, or increase the amount of
the wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees
greater than $10,000 in any individual case or $50,000 in the aggregate;
(x) change any of its methods of accounting or accounting practices in
any respect;
(xi) make any material tax election;
(xii) commence or settle any material legal proceeding;
(xiii) materially amend or otherwise modify any of the terms of its
engagement of the financial advisor set forth in the Reorganization
Agreement;
(xiv) enter into any material transaction or take any other material
action in each case either inconsistent with the operating plan previously
provided by Tseng to CPI, or outside the ordinary course of business; or
(xv) agree or commit to take any of the actions described in clauses
(i) through (xiv).
During the Pre-Closing Period, Tseng must promptly notify CPI in writing
of: (i) the discovery by Tseng of any event, condition, fact or circumstance
that occurred or existed on or prior to the date of the Reorganization Agreement
and that caused or constitutes a material inaccuracy in any representation or
warranty made by Tseng in the Reorganization Agreement; (ii) any event,
condition, fact or circumstance that occurs, arises or exists after the date of
the Reorganization Agreement and that would cause or constitute a material
inaccuracy in any representation or warranty made by Tseng in the Reorganization
Agreement if (a) such representation or warranty had been made as of the time of
the occurrence, existence or discovery of such event, condition, fact or
circumstance, or (b) such event, condition, fact or circumstance had occurred,
arisen or existed on or prior to the date of the Reorganization Agreement; (iii)
any material breach of any covenant or obligation of Tseng; and (iv) any event,
condition, fact or circumstance that would make the timely satisfaction of any
of the conditions to closing set forth in the Reorganization Agreement
impossible or unlikely or that has had or could reasonably be expected to have a
Material Adverse Effect on the Tseng Corporations. No notification given to CPI
will limit or otherwise affect any of the representations, warranties, covenants
or obligations of Tseng contained in the Reorganization Agreement.
Conduct of CPI's Business. The Reorganization Agreement further provides
that during the Pre-Closing Period: (i) CPI shall conduct its business and
operations (A) in the ordinary course and in accordance with the operating plan
previously described by CPI to Tseng and (B) in compliance with all applicable
legal requirements and the requirements of all material contracts; (ii) CPI
shall use reasonable efforts to ensure that CPI preserves intact its current
business organization, keeps available the services of its current officers and
employees and maintains its relations and goodwill with all suppliers,
customers, landlords, creditors, licensors, licensees, employees and other
persons having business relationships with CPI; (iii) CPI shall keep in full
force all insurance policies or replace such policies that terminate with
comparable or superior policies; (iv) CPI shall provide all notices, assurances
and support required by any CPI Contract relating to any CPI proprietary asset
in order to ensure that no condition under such CPI Contract occurs which could
result in, or
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<PAGE> 69
could increase the likelihood of, any transfer or public disclosure by CPI of
any proprietary asset (where "CPI Contract" shall mean any contract: (a) to
which CPI is a party; (b) by which CPI or any asset of CPI is or may become
bound or under which CPI has, or may become subject to, any obligation; or (c)
under which CPI has or may acquire any right or interest); and (v) CPI shall (to
the extent required by Tseng) cause its officers to report periodically to Tseng
concerning the status of CPI's business.
During the Pre-Closing Period, CPI shall not (without the prior written
consent of Tseng):
(i) declare, accrue, set aside or pay any dividend or make any other
distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other
securities, except for repurchases at less than fair market value pursuant
to employment or consulting agreements in effect prior to the date hereof
and except for the redemption, prior to the Effective Time, of the CPI
Redeemable Preferred Stock pursuant to the terms set forth in the
Reorganization Agreement;
(ii) sell, issue, grant or authorize the issuance or grant of any
capital stock or other security except: (a) CPI Common Stock or CPI
Preferred Stock upon the valid exercise of CPI Options or CPI Warrants
outstanding on the date of the Reorganization Agreement; (b) CPI Common
Stock or CPI Warrants issued pursuant to equipment lease financings and
similar transactions or otherwise in the ordinary course of business; (c)
CPI Series G Preferred Stock and CPI Warrants in completion of the Series G
financing; (d) stock options (and stock issuable upon exercise thereof) to
employees and directors under its existing stock option plans and in the
ordinary course of business with an exercise price of not less than $6.60
per share of CPI Common Stock; and (e) shares of CPI Common Stock, if any,
issued in connection with the redemption of the CPI Redeemable Preferred
Stock;
(iii) except as contemplated by the Reorganization Agreement, amend or
waive any of its rights under, or accelerate the vesting under, any
provision of any plan pursuant to which any CPI Stock Option was issued,
any provision of any agreement evidencing any outstanding stock option or
any restricted stock purchase agreement, or otherwise modify any of the
terms of any outstanding option, warrant or other security or any related
contract; provided that CPI shall be entitled to make any changes that do
not materially increase CPI's obligations under any agreement evidencing
any outstanding stock option, restricted stock purchase agreement, warrant
or other security or any related contract;
(iv) except as contemplated by the Reorganization Agreement, amend or
permit the adoption of any amendment to its Certificate of Incorporation or
Bylaws or other charter or organizational documents, or effect or become a
party to any merger, consolidation, share exchange, business combination,
recapitalization, reclassification of shares, stock split, reverse stock
split or similar transaction which would materially adversely affect the
transactions provided in the Reorganization Agreement;
(v) except as discussed or projected in discussions with or
presentations to Tseng, enter into or become bound by, or permit any of the
assets owned or used by it to become bound by, any CPI material contract,
or amend or terminate, or waive or exercise any material right or remedy
under, any CPI material contract, provided that CPI shall be entitled to
make any changes that do not materially increase CPI's obligations under
any CPI material contract;
(vi) change any of its methods of accounting or accounting practices
in any respect;
(vii) make any material tax election;
(viii) amend or otherwise modify any of the terms of any CPI Warrants,
except to the extent necessary to terminate such warrants or reduce the
number of shares exercisable thereunder; or
(ix) agree or commit to take any of the actions described in clause
(i) through (viii).
During the Pre-Closing Period, CPI shall promptly notify Tseng in writing
of: (i) the discovery by CPI of any event, condition, fact or circumstance that
occurred or existed on or prior to the date of the Reorganization Agreement and
that caused or constitutes a material inaccuracy in any representation or
warranty made by CPI in the Reorganization Agreement; (ii) any event, condition,
fact or circumstance that occurs, arises or exists after the date of the
Reorganization Agreement and that would cause or constitute a material
inaccuracy in any representation or warranty made by CPI in the Reorganization
Agreement if (a) such representation or warranty had been made as of the time of
the occurrence, existence or discovery of such event, condition, fact or
circumstance, or (b) such event, condition, fact or circumstance had occurred,
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<PAGE> 70
arisen or existed on or prior to the date of the Reorganization Agreement; (iii)
any material breach of any covenant or obligation of CPI; and (iv) any event,
condition, fact or circumstance that would make the timely satisfaction of any
of the conditions to closing impossible or unlikely or that has had or could
reasonably be expected to have a Material Adverse Effect on CPI. No notification
given to Tseng shall limit or otherwise affect any of the representations,
warranties, covenants or obligations of CPI contained in the Reorganization
Agreement.
Non-Solicitation. Pursuant to the Reorganization Agreement, Tseng has
agreed that it shall not, and shall not authorize or permit any of the other
Tseng Corporations or any representative of any of the Tseng Corporations, and
CPI has agreed that it shall not, and shall not authorize or permit any
representative of CPI, directly or indirectly, to (i) solicit, initiate,
knowingly encourage or induce the making, submission or announcement of any
Acquisition Proposal (as defined below) or take any similar action, (ii) furnish
any non-public information regarding any of the Tseng Corporations or CPI,
respectively, to any person in connection with or in response to an Acquisition
Proposal, (iii) engage in discussions or negotiations with any person with
respect to any Acquisition Proposal, (iv) approve, endorse or recommend any
Acquisition Proposal or (v) enter into any letter of intent or similar document
or any contract contemplating or otherwise relating to any Acquisition
Transaction (as such term is defined below). Tseng, CPI and their respective
boards of directors are not prevented, however, from (i) furnishing information
regarding any of the Tseng Corporations or CPI, respectively, to any person in
connection with or in response to a bona fide, unsolicited Acquisition Proposal
or engaging in discussions or negotiations with respect thereto if and only to
the extent that (a) the relevant board of directors determines in good faith,
after consultation with its financial advisor that such Acquisition Proposal is
reasonably likely to result in an offer for acquisition superior to the one
provided for in the Reorganization Agreement, (b) the relevant board of
directors determines in good faith, after consultation with its outside counsel,
including discussions of applicable legal standards under relevant state
corporate law, that such action is required in order for such board of directors
to comply with its fiduciary duties under applicable law, (c) the person who has
requested such information has executed and delivered to the relevant company a
non-disclosure agreement that is not less restrictive than the non-disclosure
agreement in effect between Tseng and CPI, and (d) Tseng or CPI, as the case may
be, has not breached its obligations concerning non-solicitation set forth
herein or (ii) complying with Exchange Act Rules 14e-2 and 14d-9.
Notwithstanding the foregoing, the CPI Board or the Tseng Board may recommend a
superior offer to its stockholders, if the relevant board of directors
determines, after consultation with its outside counsel, including discussions
of applicable legal standards under relevant state corporate law, that, in light
of such superior offer, such recommendation is required in order for the
relevant board of directors to comply with its fiduciary obligations to its
relevant stockholders under applicable law (which determination shall be made in
light of a revised proposal, if any, made by CPI or Tseng, as the case may be,
prior to the date of such determination); provided, however, that the relevant
party (i) shall provide the other party with at least 48 hours prior written
notice of its intentions to hold any meeting at which its board of directors is
reasonably expected to consider an Acquisition Proposal, or such lesser amount
of time as has been given to the relevant board of directors in relation to such
meeting, and (ii) shall not recommend to its stockholders a superior offer for
at least two (2) business days after such party has provided the other with the
material terms of such superior offer.
In addition, each of Tseng and CPI shall promptly advise the other orally
and in writing of any Acquisition Proposal (including the identity of the person
making or submitting such Acquisition Proposal and the terms thereof) that is
made or submitted by any person during the Pre-Closing Period. Each of Tseng and
CPI shall keep the other informed with respect to material changes to the terms
of any such Acquisition Proposal and any material modification or proposed
modifications thereto. Tseng and CPI shall both immediately cease and cause to
be terminated any existing discussions with any person that relate to any
Acquisition Proposal and shall request the return or destruction of any
confidential information previously disclosed to such person and shall use
commercially reasonable efforts to ensure that such information is destroyed or
returned.
An "Acquisition Proposal" is any offer or proposal (other than an offer or
proposal between CPI and Tseng) contemplating or otherwise relating to any
Acquisition Transaction in substitution for the transactions provided in the
Reorganization Agreement. An "Acquisition Transaction" shall mean any
transaction or series of related transactions involving: (i) any merger,
consolidation, share exchange, business combination, tender
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<PAGE> 71
offer, exchange offer or other similar transaction in which a person or "group"
(as defined in the Exchange Act and the rules promulgated thereunder) of persons
directly or indirectly acquires CPI or Tseng or more than 50% of CPI's business
or Tseng's business, as the case may be; (ii) any sale, lease, exchange,
transfer, license, acquisition or disposition of more than 50% of the assets of
Tseng or CPI; (iii) any offering of CPI Capital Stock that is registered under
Section 5 of the Securities Act; or (iv) any liquidation or dissolution of Tseng
or CPI.
Meetings of Stockholders. Pursuant to the Reorganization Agreement, CPI
will take all action necessary in accordance with applicable law to convene and
hold the CPI Special Meeting to vote upon the approval of the CPI Merger
Proposal and the CPI Certificate Proposal. CPI's obligation to call, give notice
of, convene and hold the CPI Special Meeting will not be limited or otherwise
affected by the withdrawal, amendment or modification of the recommendation of
the CPI Board with respect to the Transactions, except as is required by
applicable law. Pursuant to the Reorganization Agreement, Tseng will take all
action necessary in accordance with applicable law to convene and hold the Tseng
Special Meeting to vote upon the approval of the Tseng Merger Proposal. Tseng's
obligation to call, give notice of, convene and hold the Tseng Special Meeting
will not be limited or otherwise affected by any withdrawal, amendment or
modification of the recommendation of the Tseng Board with respect to the
Transactions, except as is required by applicable law.
Election of Directors. CPI must use all reasonable efforts to nominate and
appoint two persons, designated by Tseng in consultation with CPI, to join the
CPHI Board. See "-- Corporate Matters; Composition of the CPHI Board".
Directors and Officers Insurance. Under the Reorganization Agreement,
Tseng has agreed to provide for the continuance of current Tseng directors and
officers insurance in respect of acts prior to the Effective Time for the
benefit of Tseng officers and directors for a period of five years after the
Effective Time.
Registration Rights. Pursuant to the Reorganization Agreement, CPHI shall
assume all of CPI's obligations to certain CPI stockholders under the CPI Fourth
Amended and Restated Stockholders' Agreement, dated as of April 1998, as amended
(the "Stockholders' Agreement"); provided, however, that CPI shall use all
reasonable efforts to provide that no Holder (as defined in the Stockholders'
Agreement) shall require registration or participation in a registration of CPHI
Common Stock until the earlier of (a) the date 90 days after the effective date
of a registration statement for the first public offering of CPHI's shares
following the Effective Time and (b) the first anniversary of the Effective
Time.
Market Stand-Off Agreements. CPI shall obtain the agreement of each
director and executive officer of CPI that such person shall not directly or
indirectly sell, offer to sell, contract to sell (including, without limitation,
any short sale), grant any option to purchase or otherwise transfer or dispose
of (other than to donees who agree to be similarly bound) any CPHI Common Stock
beneficially owned by such person for 180 days from the Effective Time.
Furthermore, CPI shall use reasonable best efforts to obtain the agreement of
each of the remaining holders of CPI Capital Stock that such CPI stockholder
shall not directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any CPHI Common Stock beneficially owned by such person for 90 days from
the Effective Time.
CPI Redeemable Preferred Stock. Prior to the Effective Time, CPI shall
redeem all outstanding shares of CPI Redeemable Preferred Stock in accordance
with the Reorganization Agreement.
Nasdaq National Market Listing. CPI and Tseng shall obtain, prior to the
Effective Time, the approval for listing on the Nasdaq National Market,
effective upon official notice of issuance, of the shares of CPHI Common Stock
issuable in connection with the Transactions and which will be issuable upon
exercise of options assumed pursuant to the Reorganization Agreement.
Certain Other Covenants. The Reorganization Agreement contains certain
other covenants including covenants relating to (i) information and access, (ii)
preparation and filing of the Registration Statement, (iii) obtaining regulatory
approvals, (iv) public announcements, (v) tax qualification and opinion back-up
certificates, (vi) resignation of Tseng's officers and directors, (vii) the
Foreign Investment in Real Property Tax Act, (viii) affiliate agreements, (ix)
further action and (x) obtaining required consents.
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<PAGE> 72
TERMINATION
The Reorganization Agreement may be terminated prior to the Effective Time
(whether before or after approval of the CPI Merger Proposal by the CPI Merger
Required Stockholder Vote and the Tseng Merger Proposal by the Required Tseng
Stockholder Vote):
(i) by mutual written consent of CPI and Tseng;
(ii) by either CPI or Tseng if the Transactions shall not have been
consummated by November 30, 1998 (unless the failure to consummate the
Transactions is attributable to a failure on the part of the party seeking
to terminate the Reorganization Agreement to perform any material
obligation required to be performed by such party at or prior to the
Effective Time);
(iii) by either CPI or Tseng if a court of competent jurisdiction or
other governmental body shall have issued a final and nonappealable order,
decree or ruling, or shall have taken any other action, having the effect
of permanently restraining, enjoining or otherwise prohibiting the
Transactions;
(iv) by either CPI or Tseng if (i) the CPI Special Meeting shall have
been held and completed and (ii) the CPI Certificate Proposal shall not
have been approved at such meeting by the CPI Certificate Required Vote and
the CPI Merger Proposal shall not have been approved at such meeting by the
Required CPI Merger Stockholder Vote;
(v) by either CPI or Tseng if (i) the Tseng Special Meeting shall have
been held and completed and (ii) the Tseng Merger Proposal shall not have
been approved at such meeting by the Required Tseng Stockholder Vote;
(vi) by Tseng (at any time prior to the approval of the CPI Merger
Proposal by the Required CPI Merger Stockholder Vote and approval of the
Tseng Merger Proposal by the Required Tseng Stockholder Vote) if a CPI
Triggering Event (as such term is defined below) shall have occurred;
(vii) by CPI (at any time prior to the approval of the CPI Merger
Proposal by the Required CPI Merger Stockholder Vote and approval of the
Tseng Merger Proposal by the Tseng Required Stockholder Vote) if a Tseng
Triggering Event (as such term is defined below) shall have occurred;
(viii) by Tseng if any of CPI's representations and warranties
contained in the Reorganization Agreement shall be or shall have become
materially inaccurate, or if any of CPI's covenants contained in the
Reorganization Agreement shall have been breached, and such inaccuracy or
breach would cause the condition set forth in clauses (i) or (ii) under
"-- Conditions to the Transactions" to not be satisfied; provided, however,
that if an inaccuracy in CPI's representations and warranties or a breach
of a covenant by CPI is curable by CPI and CPI is continuing to exercise
all reasonable efforts to cure such inaccuracy or breach, then Tseng may
not terminate the Reorganization Agreement on account of such inaccuracy or
breach until 20 days after delivery of written notice of the inaccuracy or
breach to CPI by Tseng; or
(ix) by CPI if any of Tseng's representations and warranties contained
in the Reorganization Agreement shall be or shall have become materially
inaccurate, or if any of Tseng's covenants contained in the Reorganization
Agreement shall have been breached, and such inaccuracy or breach would
cause the condition set forth in clauses (i) or (ii) under "-- Conditions
to the Transactions" to not be satisfied; provided, however, that if an
inaccuracy in Tseng's representations and warranties or a breach of a
covenant by Tseng is curable by Tseng and Tseng is continuing to exercise
all reasonable efforts to cure such inaccuracy or breach, then CPI may not
terminate the Reorganization Agreement on account of such inaccuracy or
breach until 20 days after delivery of written notice of the breach or
inaccuracy to Tseng by CPI.
A "Triggering Event" of a party shall be deemed to have occurred if: (i)
the board of directors of the party shall have failed to recommend, or shall for
any reason have withdrawn or shall have amended or modified in a manner adverse
to the other party, its unanimous recommendation in favor of the Transactions or
approval of the Reorganization Agreement and, in the case of CPI, the CPI
Certificate Proposal; (ii) the party shall have failed to include in this Joint
Proxy Statement/Prospectus the unanimous recommendation of
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its board of directors in favor of approval of the Reorganization Agreement and
the Transactions; (iii) the board of directors of the party fails to unanimously
reaffirm its recommendation in favor of approval of the Reorganization Agreement
and the Transactions within five business days after the other party requests in
writing that such recommendation be reaffirmed; (iv) the board of directors of
the party shall have approved, endorsed or recommended any Acquisition Proposal;
(v) the party shall have entered into any letter of intent or similar document
or any contract relating to any Acquisition Proposal; (vi) the party shall have
failed to hold the relevant stockholders' meeting as promptly as practicable and
in any event within 45 days after this registration statement is declared
effective under the Securities Act; (vii) a tender or exchange offer relating to
securities of the party shall have been commenced and the party shall not have
sent to its security holders, within five business days after the commencement
of such tender or exchange offer, a statement disclosing that the party
recommends rejection of such tender or exchange offer; or (viii) an Acquisition
Proposal is publicly announced, and the party (A) fails to issue a press release
announcing its opposition to such Acquisition Proposal within five business days
after such Acquisition Proposal is announced or (B) otherwise fails to actively
oppose such Acquisition Proposal.
EXPENSES AND TERMINATION FEES
Pursuant to the Reorganization Agreement, except as provided below, all
fees and expenses incurred in connection with the Reorganization Agreement and
the transactions contemplated by the Reorganization Agreement shall be paid by
the party incurring such expenses, whether or not the Transactions are
consummated; provided, however, that CPI and Tseng shall share equally all fees
and expenses, other than attorneys' fees, incurred in connection with the
filing, printing and mailing of this registration statement and this Joint Proxy
Statement/Prospectus and any amendments or supplements thereto.
The Reorganization Agreements provides that if it is terminated by Tseng
following the occurrence of a CPI Triggering Event or by CPI or Tseng following
the failure of the CPI stockholders to approve the CPI Merger Proposal and the
CPI Certificate Proposal, then CPI must pay to Tseng, in cash, a termination fee
in the amount of $1,500,000 plus the amount of professional fees and expenses
which Tseng has incurred in connection with the Transactions, up to $250,000. If
the Reorganization Agreement is terminated by CPI following the occurrence of
Tseng Triggering Event or by CPI or Tseng following the failure of the Tseng
stockholders to approve the Tseng Merger Proposal, then Tseng shall pay to CPI,
in cash, a termination fee in the amount of $1,500,000, plus the amount of
professional fees and expenses which CPI has incurred in connection with the
Transactions, up to $250,000.
JMS has acted as a financial advisor to the Tseng Board in connection with
the Transactions. Pursuant to the terms of an engagement letter agreement with
JMS dated April 24, 1998, Tseng has paid a $25,000 retainer fee and a fee of
$25,000 for rendering its opinion that the Tseng Exchange Ratio is fair to the
Tseng stockholders from a financial viewpoint and has agreed to pay a fee of
$50,000 upon consummation of the Transactions. In addition, Tseng has agreed to
reimburse JMS for its reasonable out-of-pocket expenses and to indemnify JMS and
certain related persons against certain liabilities, including liabilities under
the federal securities laws, relating to or arising out of its engagement.
Salomon Smith Barney Inc. has acted as financial advisor to the CPI Board
in connection with the Transactions and is anticipated to receive a fee of
approximately $750,000 upon consummation of the Transactions.
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AMENDMENT OF THE CPI CERTIFICATE OF INCORPORATION
The CPI Board has approved and submitted for a vote with the CPI
stockholders an amendment of the CPI Certificate of Incorporation ("CPI
Certificate of Amendment"). A copy of the proposed amendment is attached as
Exhibit C to the Reorganization Agreement attached hereto as Appendix A.
Conditioned upon the satisfaction or waiver of the various conditions to
closing the Transactions in the Reorganization Agreement, the CPI Certificate of
Amendment provides that the holders of CPI Preferred Stock will receive only the
consideration for their shares set forth in the Reorganization Agreement.
The Transactions are conditioned upon approval of the CPI Certificate
Proposal by the CPI stockholders. If the CPI Certificate Proposal is not
approved, then the Transactions will not be implemented.
EFFECT OF AMENDMENT
Holders of CPI Preferred Stock are entitled, under certain circumstances,
to receive payment of a preferential amount prior to any payments or
distributions in respect of CPI Common Stock, together with a pro-rata portion
of the remaining assets of CPI, if any, pro-rated on the basis of common stock
and common stock equivalents. Under the CPI Certificate of Incorporation, this
preferred stock preference is available upon any acquisition of CPI by means of
a merger, consolidation or other form of corporate reorganization in which all
of the outstanding shares of CPI Capital Stock are exchanged for securities (or
other consideration issued) by the acquiring corporation. The CPI Certificate of
Incorporation also provides, however, that the preferred stock preference is not
available upon any other merger of CPI with or into any other corporation.
Because of the legal structure of the Transactions, there may be uncertainty as
to whether the preferred stock preference applies to the Transactions.
The CPI Certificate of Amendment clarifies that, despite the legal
structure of the Transactions, holders of CPI Preferred Stock will not receive,
in connection with the Transactions, any payments or amounts in preference to
the CPI Common Stock, but will receive only the consideration for their shares
specified in the Reorganization Agreement. Were the Transactions to constitute a
liquidation of CPI, holders of CPI Preferred Stock would be entitled to receive
the following per share liquidation preferences: Series A, $1.16; Series B,
$1.24; Series C, $2.20; Series D, $3.0156; Series E, $3.15; Series F, $3.70;
Series G, $4.75; together with a pro-rata portion of the remaining assets of
CPI, if any. The value of the consideration received by the holders of preferred
stock in lieu of the preferred stock preference cannot be determined, as it will
depend upon the trading price of CPHI Common Stock on the Nasdaq National
Market.
REQUIRED VOTE
Approval and adoption of the CPI Certificate Proposal require the
affirmative vote of the holders of (i) a majority of the shares of CPI Common
Stock and CPI Preferred Stock, voting together as a single class, and (ii) a
majority of the shares of each outstanding series of CPI Preferred Stock, each
such series voting as a separate class. The effect of an abstention or broker
nonvote on the proposal is the same as a vote against the proposal.
THE CPI BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE CPI
CERTIFICATE PROPOSAL.
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CPHI UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On June 23, 1998, CPI and Tseng, entered into the Reorganization Agreement
to provide further financing of CPI's programs. Through the reorganization, the
stockholders of Tseng will exchange their Tseng Common Stock for an
approximately 23% equity interest in CPHI and CPI will obtain the benefit of the
substantial cash assets of Tseng. Effective upon the consummation of the
Transactions, CPHI will change its name to Cell Pathways, Inc. For financial
reporting purposes, the Transactions will be accounted for as a reorganization
of CPI into CPHI, together with the sale of CPHI Common Stock in exchange for
Tseng's cash and other net assets. CPI's historical financial statements will be
the financial statements of the combined company.
The following unaudited pro forma condensed consolidated balance sheet
gives effect to the consummation of the Transactions as if they had occurred
June 30, 1998. The unaudited condensed consolidated financial information and
notes thereto do not purport to represent the financial position of CPHI if the
Transactions had occurred on such date.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that CPI and Tseng management believe are
reasonable. The unaudited pro forma condensed consolidated financial information
and accompanying notes should be read in conjunction with the financial
statements and related notes thereto to both CPI and Tseng, and other financial
information pertaining to CPI and Tseng, including "CPI Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Joint Proxy Statement/Prospectus or incorporated herein by
reference.
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CPHI AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(A DEVELOPMENT STAGE COMPANY)
AS OF JUNE 30, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
TRANSACTIONS CPHI TSENG MERGER CPHI
ADJUSTMENTS PRO FORMA TRANSACTIONS PRO FORMA
CPI EXCLUDING BEFORE TSENG PRO FORMA AFTER
HISTORICAL TSENG MERGER TSENG MERGER HISTORICAL ADJUSTMENTS TRANSACTIONS
---------- ------------ ------------ ---------- ------------ ------------
(NOTE 3) (NOTE 4)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 20,349 $ (329) $ 20,020 $ 27,109 $ (2,490) $ 44,639
Other current assets................. 438 -- 438 975 -- 1,413
-------- -------- -------- -------- -------- --------
Total current assets.......... 20,787 (329) 20,458 28,084 (2,490) 46,052
PROPERTY AND EQUIPMENT, net............ 1,027 -- 1,027 48 -- 1,075
LAND AND BUILDING UNDER LEASE.......... -- -- -- 2,435 -- 2,435
RESTRICTED CASH........................ 401 -- 401 -- -- 401
OTHER ASSETS........................... 117 -- 117 -- -- 117
-------- -------- -------- -------- -------- --------
$ 22,332 $ (329) $ 22,003 $ 30,567 $ (2,490) $ 50,080
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................... $ 947 $ -- $ 947 $ 336 $ -- $ 1,283
Accrued liabilities.................. 1,093 -- 1,093 1,683 -- 2,776
-------- -------- -------- -------- -------- --------
Total current liabilities..... 2,040 -- 2,040 2,019 -- 4,059
-------- -------- -------- -------- -------- --------
REDEEMABLE PREFERRED STOCK............. 1,092 (1,092) -- -- -- --
-------- -------- -------- -------- -------- --------
STOCKHOLDERS' EQUITY:
Preferred Stock (CPHI pro forma after
Transactions) $0.01 par value,
5,000,000 shares authorized, none
issued and outstanding............. 53,571 (53,571) -- -- -- --
Common Stock (CPHI pro forma after
Transactions) $0.01 par value,
70,000,000 shares authorized,
24,233,751 shares issued and
outstanding........................ 30 158 188 98 (43) 243
Additional paid-in capital........... 456 54,176 54,632 11,009 14,994 80,635
Stock subscription receivable........ (252) -- (252) -- -- (252)
Accumulated earnings (deficit)....... (34,605) -- (34,605) 27,459 (27,459) (34,605)
-------- -------- -------- -------- -------- --------
19,200 763 19,963 38,566 (12,508) 46,021
Less--Treasury stock at cost......... -- -- -- (10,018) 10,018 --
-------- -------- -------- -------- -------- --------
Total stockholders' equity.... 19,200 763 19,963 28,548 (2,490) 46,021
-------- -------- -------- -------- -------- --------
$ 22,332 $ (329) $ 22,003 $ 30,567 $ (2,490) $ 50,080
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this pro forma balance sheet.
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CPHI AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
1. HISTORICAL
The historical balances represent the financial statements of CPI and Tseng
appearing elsewhere in this Joint Proxy Statement/Prospectus.
2. TRANSACTIONS ACCOUNTING TREATMENT
As it is anticipated that Tseng will have no operations after the
consummation of the Transactions, the Transactions will be accounted for as a
reorganization of CPI into CPHI with the sale of approximately 23% of the
outstanding shares of CPHI Common Stock in exchange for Tseng's cash and other
net assets. CPI's historical financial statements will be the financial
statements of the combined company. Note that CPI's management will be the
management of CPHI and the CPI Board will hold 9 seats of the 11 seats on CPHI
Board after the Transactions.
3. TRANSACTIONS PRO FORMA ADJUSTMENTS EXCLUDING TSENG MERGER
Excluding the Tseng Merger, upon consummation of the Transactions, (i) all
of the outstanding shares of CPI Series A, B, C, D, E, F and G Preferred Stock
will be converted into the rights to receive 15,614,266 shares of CPHI Common
Stock, (ii) all of the outstanding shares of CPI Redeemable Preferred Stock will
have been redeemed for $546,000 of cash consideration and 82,732 shares of CPI
Common Stock which shares will be converted into rights to receive an equivalent
number of shares of CPHI Common Stock and (iii) all warrants to purchase Series
E Preferred Stock will have been exercised into 69,044 shares of CPI Series E
Preferred Stock at $3.15 per share and which shares will be converted into
rights to receive an equivalent number of shares of CPHI Common Stock. All of
the shares of CPI Common Stock then outstanding will be converted into the same
number of shares of CPHI Common Stock. The CPI Redeemable Preferred Stock is
required to be redeemed by CPI. The allocation between cash and Common Stock is
at the discretion of the Board of Directors. The allocation assumed herein is
based upon the stated intention of the Board of Directors. The Series E warrants
discussed above expire upon the consummation of the Transactions. The exercise
price of the warrants is below market and thus the warrants have been assumed to
be exercised.
The following pro forma adjustments are reflected as if the above
transactions had occurred as of June 30, 1998:
(A) Conversion of CPI Preferred Stock into shares of CPHI Common Stock.
(B) Redemption of CPI Redeemable Preferred Stock including ultimate
conversion of CPI Common Stock into shares of CPHI Common Stock.
(C) Exercise of warrants to purchase Series E Preferred Stock including
ultimate conversion into shares of CPHI Common Stock.
<TABLE>
<CAPTION>
DEBIT (CREDIT)
------------------------------------------------------------------------
REDEEMABLE ADDITIONAL
CASH AND CASH PREFERRED PREFERRED COMMON PAID-IN
ADJUSTMENT EQUIVALENTS STOCK STOCK STOCK CAPITAL TOTAL
---------- ------------- ---------- ----------- ------ ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
A........................ $ -- $ -- $53,571 $(156) $(53,415) $ --
B........................ (546) 1,092 -- (1) (545) --
C........................ 217 -- -- (1) (216) --
----- ------ ------- ----- -------- -------
$(329) $1,092 $53,571 $(158) $(54,176) $ --
===== ====== ======= ===== ======== =======
</TABLE>
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4. TSENG MERGER PRO FORMA ADJUSTMENTS
Upon consummation of the Transactions, each share of Tseng Common Stock
will be converted into .3631326 shares of CPHI Common Stock. Assuming the
transaction occurred on June 30, 1998, the number of shares of CPHI Common Stock
to be issued to the Tseng shareholders would be 5,477,614 shares. In addition,
existing Tseng Options will be exchanged for options to purchase 516,559 shares
of CPHI Common Stock with an average exercise price of $7.67 per share. As
discussed in Note 2, the Transactions will be accounted for as a reorganization
of CPI into CPHI with the sale of approximately 23% of the shares of outstanding
CPHI Common Stock in exchange for Tseng's cash and other net assets. The most
significant non-cash asset is Tseng's former operating facility (approximately
$2.4 million net book value at June 30, 1998.) On August 25, 1998, Tseng's
management entered into a definitive agreement for the sale of the facility at a
price of approximately $2.8 million. The agreement is subject to the completion
of due diligence and is expected to close in October 1998.
The following pro forma adjustments are reflected as if the above
transaction had occurred as of June 30, 1998:
(D) Exchange of shares of Tseng Common Stock for CPHI Common Stock, less
estimated Transactions costs of approximately $1,850,000 consisting
principally of investment banking and other professional fees.
(E) The payment of $640,000 related to severance to be triggered by the
Transactions to be paid to Tseng employees after consummation of the
Transactions, as it is anticipated that the affected Tseng employees
will not be employed by CPHI, CPI, or Tseng.
<TABLE>
<CAPTION>
DEBIT (CREDIT)
--------------------------------------------------------------------------------
ADDITIONAL
CASH AND CASH COMMON PAID-IN ACCUMULATED TREASURY
ADJUSTMENT EQUIVALENTS STOCK CAPITAL EARNINGS (DEFICIT) STOCK TOTAL
---------- ------------- ------ ---------- ------------------ -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
D.................... $(1,850) $43 $(15,634) $27,459 $(10,018) $--
E.................... (640) -- 640 -- -- --
------- --- -------- ------- -------- --
$(2,490) $43 (14,994) $27,459 $(10,018) $--
======= === ======== ======= ======== ==
</TABLE>
Adjustment D to Additional Paid-In Capital consists of: (i) the elimination
of the Tseng equity accounts (approximately $11,009,000); (ii) the issuance of
the shares of CPHI's Common Stock for the net assets of Tseng (approximately
$28,493,000); and (iii) the Transactions costs (approximately $1,850,000).
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<PAGE> 79
CPHI'S BUSINESS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CPHI has not conducted any substantial business activities to date, other
than those incident to its formation and its participation in the preparation of
this Joint Proxy Statement/Prospectus. Immediately following the Effective Time
and the consummation of the Transactions, CPHI will change its name to Cell
Pathways, Inc. and will become a holding company for CPI and Tseng. Accordingly,
the business of CPHI, through its wholly-owned subsidiaries CPI and Tseng, will
be the businesses currently conducted by CPI and Tseng. See "CPI Business". As
it is anticipated that Tseng will have no operations after the consummation of
the Transactions, the Transactions will be accounted for as a reorganization of
CPI into CPHI with the sale of approximately 23% of the CPHI Common Stock in
exchange for Tseng's cash and other net assets. CPI's historical Financial
Statements will be the Financial Statements of the combined company. See
"Approval of Transactions -- Anticipated Accounting Treatment".
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<PAGE> 80
CPI BUSINESS
OVERVIEW
CPI is a pharmaceutical company focused on the development and
commercialization of products to prevent and treat cancer. CPI has started
clinical trials of its lead compound PREVATAC(TM) exisulind (also known as
FGN-1(TM) exisulind) in five indications and is planning clinical trials in
three additional indications. In January 1998, CPI completed enrollment of 74
patients for its ongoing pivotal Phase III clinical trial for APC. CPI
anticipates filing an NDA with the FDA in the first quarter of 1999, which will
seek approval to market PREVATAC(TM) exisulind for the prevention of
precancerous adenomatous polyps in APC patients. There can be no assurance that
such filing will not be delayed or that the Phase III studies will show that
PREVATAC(TM) exisulind is sufficiently safe and effective for marketing approval
by the FDA. In July 1998, the FDA granted PREVATAC(TM) exisulind Fast Track
designation for expedited review for this indication. In December 1997, CPI
initiated a Phase II/III trial of PREVATAC(TM) exisulind for sporadic
adenomatous colonic polyps and a pilot study in lung cancer. In February 1998,
CPI initiated a Phase II/III trial of PREVATAC(TM) exisulind for the prevention
of breast cancer recurrence. In August 1998, CPI completed enrollment of 90
patients into a Phase II/III trial for the prevention of prostrate cancer
recurrence. CPI also plans to initiate Phase II trials for the treatment of
Barrett's Esophagus and bronchial dysplasia in 1998. CPI's technology is based
upon its discovery of a novel mechanism which CPI believes, based on its
research, can be targeted to induce selective apoptosis, or programmed cell
death, in precancerous and cancerous cells without affecting normal cells.
Utilizing this proprietary knowledge, CPI has created over 450 new chemical
compounds, over 200 of which display significantly greater apoptotic potency
than PREVATAC(TM) exisulind.
BUSINESS STRATEGY
CPI's objectives are to be a leader in cancer chemoprevention and to build
an integrated pharmaceutical company focused on the oncology market. To meet
these objectives CPI intends to:
- Pursue accelerated clinical development of PREVATAC(TM)
exisulind. CPI's development program for PREVATAC(TM) exisulind is
initially focused on indications where small clinical trials with
clear endpoints are expected to yield statistically significant
results. CPI is currently conducting a Phase III trial of
PREVATAC(TM) exisulind for APC, Phase II/III trials for the
prevention of sporadic colonic polyps, the prevention of recurrence
of prostate cancer and the prevention of recurrence of breast
cancer, as well as a pilot study in the treatment of lung cancer. In
addition, CPI plans to initiate clinical trials in two additional
indications (Barrett's Esophagus and bronchial dysplasia) in the
fourth quarter of 1998. By focusing initially on APC, an indication
for which there is a clear need for improved therapies and the
potential to demonstrate efficacy relatively quickly, CPI seeks to
accelerate the market introduction of PREVATAC(TM) exisulind.
- Leverage CPI's technology to develop additional agents for cancer
therapy and chemoprevention. Based on its proprietary technology and
its application of combinatorial and computational chemistry, CPI
intends to expand its library of compounds with the objective of
developing agents for the treatment of certain cancers and
precancerous lesions.
- Commercialize products directly to focused physician groups. CPI
intends to establish its own focused sales force to promote products
in the U.S. targeted at diseases that are treated by relatively
small, well-defined groups of physicians. These diseases include
APC, sporadic adenomatous colonic polyps, Barrett's Esophagus,
bronchial dysplasia and prostate cancer.
- Develop strategic collaborations for selected indications and
markets. CPI will seek to establish strategic relationships for the
development and commercialization of potential products for
indications, such as cervical dysplasia, that would require
significant marketing and sales resources. CPI is seeking partners
for international development and commercialization of potential
products. Until such strategic relationships are developed, CPI will
continue to pursue international clinical and regulatory approvals
as a means to increase the value of its development pipeline.
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- Acquire technologies and products for the prevention, diagnosis and
treatment of cancer. CPI will seek to selectively and
opportunistically acquire and further develop synergistic
technologies, products and/or companies focused in the prevention,
diagnosis and treatment of cancer consistent with the objective of
building an integrated pharmaceutical company focused in oncology.
CARCINOGENESIS
Cancer results from a sequence of changes involving the genes of cells
which eventually leads to abnormal and uncontrolled cell proliferation. This
multi-stage process is known as carcinogenesis and generally results from a
combination of factors which occur over a period of years. Certain factors, such
as inherited genetic defects, are present at birth. Other factors that may
contribute to carcinogenesis include environmental exposures and the aging
process. Carcinogenesis is first recognized clinically when abnormal cells
become visible to a screening procedure or reach a size or location sufficient
to create clinical signs and symptoms. The clinical emergence may occur many
years following the events which first initiated carcinogenesis. Generally,
cells characterized by abnormal growth that may lead to cancer but have not yet
invaded surrounding tissue are termed precancerous.
Precancerous Lesions. Many cancers are preceded by precancerous lesions,
which are accumulations of abnormal cells. Because precancerous lesions are
usually asymptomatic, the ability to identify and monitor them and to intervene
clinically before the possible development of cancer is dependent upon
diagnostic screening tests. Recent years have seen broader applications of
screening tests, including the Pap smear, flexible sigmoidoscopy and the
Prostate Specific Antigen ("PSA") test. In addition, there have been recent
advances in genetic screening, such as the BRCA1 and BRCA2 tests to detect
individuals with a higher risk of developing breast cancer in the future.
Precancerous lesions are most often diagnosed in epithelial tissues, such
as the skin or the inside surface of organs, including the intestine, cervix,
bladder and prostate. The following table lists examples of epithelial
precancerous lesions, the types of cancer to which such lesions can progress and
the diagnostic screening tests currently in use to detect such lesions.
EXAMPLES OF EPITHELIAL PRECANCEROUS LESIONS
<TABLE>
<CAPTION>
TYPE OF LESION RELATED CANCER CONVENTIONAL METHOD OF DIAGNOSIS
- -------------- -------------- --------------------------------------------
<S> <C> <C>
Actinic Keratosis Skin Visual examination
Adenomatous Colonic Polyp Colorectal Endoscopy (sigmoidoscopy or colonoscopy)
Barrett's Esophagus Esophageal Endoscopy (esophagogastroscopy)
Bronchial or Lung Dysplasia Lung Sputum cytology
Cervical Intraepithelial Neoplasia Cervical Papanicolau (Pap) smear
Prostatic Intraepithelial Neoplasia Prostate Prostate Specific Antigen (PSA) and digital
rectal examination
Transitional Cell Carcinoma in situ Bladder Cystoscopy
(earliest stage)
</TABLE>
Patients with precancerous lesions are advised to follow a program of
regular monitoring and removal of lesions where appropriate. However, existing
techniques for treating precancerous lesions are often expensive, have
undesirable side effects or are of limited effectiveness. Endoscopic or surgical
removal can be effective for single lesions, but risks and costs increase
significantly if lesions recur, if there are numerous lesions or if lesions
occur in less accessible tissues. Because of their significant side effects,
systemic administration of most existing chemotherapeutic drugs is not
appropriate for treating precancerous lesions. Reduction of environmental risks
or change in diet are generally more effective in preventing the early stages of
carcinogenesis than in arresting or reversing the changes that occur in the
later stages of carcinogenesis. As a result of the inadequacy of current
treatments, there is a significant need for the development of new therapeutics
to treat precancerous lesions. If left untreated and not reversed by natural
processes, precancerous lesions may progress to cancer.
Cancer. The American Cancer Society estimates that over 1.4 million new
cases of cancer were diagnosed and approximately 560,000 cancer deaths occurred
in the U.S. in 1997. Cancer is the second
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<PAGE> 82
leading cause of death in the U.S., and approximately 10 million people living
in the U.S. have a history with cancer. Due in part to the development of new
diagnostic procedures, the highest number of new cancer diagnoses are currently
occurring in the prostate, breast, lung and colon/rectum, representing
approximately 50% of all new cancer cases.
Cancer is generally treated by attempting to remove the cancerous cells,
either by surgery or by chemical or radiation therapies. Currently available
chemotherapies and radiation therapies target all rapidly dividing cells, both
cancerous and healthy, and therefore result in serious side effects. The limited
efficacy and harmful side effects of existing cancer treatments and the costs
associated with managing these side effects continue to drive the search for new
therapies.
CPI TECHNOLOGY
To address the need for new therapies, CPI's technology focuses on the
selective induction of apoptosis in cells that manifest abnormal growth
(neoplastic cells), such as precancerous and cancerous cells. Apoptosis is a
naturally occurring physiological process in which a number of components inside
the cell "program" the cell to die without causing harm to surrounding cells.
Apoptosis occurs in tissues that are continually renewing themselves, such as
the lining of the digestive system, or as a natural defense mechanism that
prevents the replication of cells that have undergone DNA damage. CPI's
technology is based upon its discovery of a novel mechanism which CPI believes,
based on its research, can be targeted to induce selective apoptosis in
neoplastic cells without affecting normal cells.
Many existing chemotherapeutic agents as well as radiation induce apoptosis
in rapidly proliferating cells without differentiating between neoplastic cells
and normal cells. This can result in toxicity, including suppression of the
immune system, hair loss and gastrointestinal disturbances. As a result of this
toxicity, most existing chemotherapeutic agents and radiation therapy are not
appropriate for treating precancerous lesions in otherwise healthy individuals
for whom safety and tolerability are essential for chronic or extended
therapeutic use.
Conventional Induction of Apoptosis in Cancer Therapy. Radiation therapy
and many existing chemotherapeutic agents act on proliferating cells by
disrupting cellular DNA synthesis to induce apoptosis. As depicted below, once
significant damage occurs to the DNA (1), a process is initiated that is
controlled by the gatekeeper protein p53 (2), and modulated by various proteins
such as bax and bcl-2 (3). This process results in the activation of caspases, a
family of enzymes that is involved in the apoptotic process (4), which trigger a
cascade of events resulting in apoptosis (5). The end result of apoptosis is the
dismantling of the cell into apoptotic vesicles (6), which are naturally cleared
by the body. The apoptotic mechanism identified by CPI does not appear to
involve p53, or the modulator proteins, such as bax or bcl-2.
[Graphic depiction of conventional induction of apoptosis in cancer therapy
appears here]
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Discovery of Novel Apoptotic Mechanism. CPI believes it has discovered a
previously undefined mechanism for regulating apoptosis. Research suggests that
two key elements of this mechanism are an apoptosis inducing element ("AIE"),
which is activated by naturally-occurring triggers, and an apoptosis regulatory
element ("ARE"), which plays a key role in controlling levels of activated AIE.
CPI has determined in colon cancer that the neoplastic tissue has a higher level
of ARE activity than neighboring normal tissue, which may prevent neoplastic
cells from responding to normal signals that trigger apoptosis. When ARE
activity increases, as in neoplastic cells, AIE activity is reduced and
activation of a critical downstream protein is interrupted, subsequently
preventing the activation of the caspases and apoptosis.
Selective Induction of Apoptosis by CPI Compounds. Research suggests that
CPI's compounds, including PREVATAC(TM) exisulind, are targeted at inhibiting
ARE activity in neoplastic cells. As shown in the diagram below, CPI compounds
(1) reduce ARE activity (2), thereby preventing ARE from deactivating the active
AIE (3). Research suggests that the active AIE (4) is then available to trigger
a critical downstream protein (5), which leads to the activation of caspases
(6). As in the case of conventional cancer treatment, caspases then trigger a
cascade of events leading to apoptosis (7) and the resulting apoptotic vesicles
(8).
[Graphic depiction of selective induction of apoptosis by CPI Compounds appears
here]
Research and Development Activities. CPI's Biological Discovery Group
consists of its research employees, members of its Scientific Advisory Board,
contract researchers and consultants. The Biological Discovery Group has
identified the specific intracellular protein targeted by PREVATAC(TM) exisulind
and has made significant progress in sequencing the target protein's gene. CPI
has developed polymerase chain reaction ("PCR")-based probes that may be used to
identify additional indications to be targeted and to develop diagnostic tools.
CPI continues to identify additional elements involved in regulating the newly
identified apoptotic mechanism. CPI plans to investigate the potential
applicability of its novel apoptotic mechanism to other hyperproliferative
diseases, such as benign prostatic hyperplasia, coronary restenosis, psoriasis
and polycystic renal disease. There can be no assurance that CPI's investigation
will be successful.
Utilizing its understanding of chemical structure and biological activity,
CPI has created over 450 new chemical compounds in five chemical families and
over 27 chemical classes, over 200 of which display significantly greater
apoptotic potency than PREVATAC(TM) exisulind. CPI's new compounds are tested
for inhibitory effects on the growth of cancer cells in vitro, for the induction
of apoptosis and for activity against the intracellular target ARE.
A number of CPI compounds have shown activity against in vitro cultures of
immortalized cell lines of transplantable human cancers of the breast, colon,
lung and prostate. Preliminary results of studies with CPI's compounds in
short-lived primary cultures of human cancers obtained from individual patients
have shown activity against breast cancer. Using this data, CPI has selected
several new chemical entities ("NCEs"), as its next product development
candidates and is scaling the manufacture of these compounds to permit further
preclinical testing. CPI is conducting tests on other compounds and tissues as
well. Significant additional
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preclinical and clinical trials are necessary to determine the activity of
PREVATAC(TM) exisulind and other CPI compounds in these cancer indications. See
"Risk Factors -- Risks Related to the Business and Operations of CPI".
CPI plans to leverage its understanding of the structure-activity
relationship of CPI's compounds by using combinatorial chemistry techniques and
high-throughput screening systems to expand its proprietary chemical library.
CPI has contracted with outside firms to create or purchase targeted chemical
libraries including thousands of diverse chemical classes. CPI is screening
these compounds in order to identify potential additional lead compounds.
PRODUCTS IN DEVELOPMENT
CPI is developing a family of products targeted at the treatment and
management of precancerous lesions and cancer. CPI's lead compound, PREVATAC(TM)
exisulind, is a sulfone derivative of the nonsteroidal anti-inflammatory drug
("NSAID") sulindac. CPI has shown that PREVATAC(TM) exisulind exhibits strong
anti-neoplastic effects but lacks the anti-cyclooxygenase activity that is
associated with the serious gastrointestinal and renal side effects observed in
NSAIDs. Although PREVATAC(TM) exisulind is currently in Phase III clinical
trials and has been designated for Fast Track review for the treatment of APC,
there can be no assurance that CPI will obtain marketing approval for
PREVATAC(TM) exisulind. Clinical testing of PREVATAC(TM) exisulind has involved
only a limited number of patients to date and results obtained in these trials
in the treatment of APC are not necessarily predictive of the results of future
clinical trials for APC or of clinical results for any other therapeutic
indication. See "Risk Factors -- Risks Related to the Business and Operations of
CPI". The following table lists the potential indications for, and current
clinical development status of, PREVATAC(TM) exisulind:
PREVATAC(TM) EXISULIND DEVELOPMENT PROGRAM
<TABLE>
<CAPTION>
INDICATION CLINICAL DEVELOPMENT STATUS(1)
- ---------- ------------------------------
<S> <C>
Precancer
Adenomatous Polyposis Coli................. Fast Track Designation obtained 3Q 1998
Pivotal Phase III trial fully recruited in 1Q
1998
Phase I/II trial completed in 1Q 1997
Orphan Drug status obtained 1Q 1994
Sporadic Adenomatous Colonic Polyps........ Pivotal Phase II/III trial initiated in 4Q
1997 Phase IB trial completed in 3Q 1997
Barrett's Esophagus........................ Phase II trial expected to commence in 4Q
1998
Bronchial Dysplasia........................ Phase II trial expected to commence in 4Q
1998
Cervical Dysplasia......................... Phase IB trial completed in 3Q 1997
Cancer
Prostate Cancer Recurrence................. Phase II/III trial fully recruited in 3Q 1998
Lung Cancer................................ Pilot study initiated in 4Q 1997
Breast Cancer Recurrence................... Pivotal Phase II/III trial initiated in 1Q
1998
</TABLE>
- ---------------
(1) The steps required before a drug may be marketed in the U.S. include: (i)
preclinical laboratory and animal tests; (ii) submission to the FDA of an
application for an IND exemption, which must become effective before human
clinical trials commence; (iii) human clinical trials to establish the
safety and efficacy of the drug, typically proceeding in three phases; (iv)
submission of a detailed NDA to the FDA; and (v) FDA approval of the NDA.
A "pivotal" study is a clinical trial used as primary evidence of safety and
efficacy. More than one pivotal study may be necessary to gain marketing
approval from the FDA.
Clinical trials proceed through three phases, which may overlap in design
and objective:
"Phase I" trials involve the initial introduction of an investigational new
drug into humans and are designed to test for tolerance and side effects and
to determine the metabolic and pharmocologic actions of the drug in humans.
Phase IB denotes a later stage Phase I study.
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<PAGE> 85
"Phase II" involves clinical studies conducted in a limited number of
patients to evaluate preliminarily the effectiveness of the drug for a
particular indication and to determine the optimal dosage and the common
short-term side effects and risks.
"Phase III" involves expanded studies to evaluate the safety and
effectiveness of the drug.
CPI's clinical trial strategy seeks to identify subsets of patient
populations for the various targeted indications where the endpoints of clinical
trials occur in high frequency or in a relatively short time frame. Because CPI
is studying PREVATAC(TM) exisulind for multiple indications, CPI plans to
utilize safety and pharmacokinetic data obtained in clinical trials completed to
date to provide a basis for commencing more advanced clinical trials in other
indications. CPI believes that this strategy of designing clinical trials around
selected populations and utilizing existing safety data may allow CPI to reduce
the duration of clinical trials and the number of test subjects enrolled in its
clinical trials, thereby generating statistically significant clinical results
more quickly and cost-effectively.
Clinical Development of PREVATAC(TM) exisulind for Precancerous
Lesions. Based on PREVATAC(TM) exisulind's safety profile, CPI believes that
the compound may be useful in treating patients with precancerous lesions for
whom a drug's long-term safety profile is important. The initial indication for
PREVATAC(TM) exisulind is APC, and CPI is also pursuing clinical development of
PREVATAC(TM) exisulind for four other types of precancerous epithelial lesions:
sporadic adenomatous colonic polyps, Barrett's Esophagus, bronchial dysplasia
and cervical dysplasia. These indications have been selected based upon several
factors, including encouraging preclinical results and clinical need.
Adenomatous Polyposis Coli. PREVATAC(TM) exisulind is currently in Phase
III clinical trials for APC, which is an inherited disease characterized by the
development of hundreds to thousands of adenomatous polyps in the colon and the
progression to colon cancer if left untreated. This disease can be confirmed
within a family by genetic testing. Most APC patients must be endoscopically
screened beginning in their teenage years and must have a substantial portion of
their large intestine removed by age 20. Even with this treatment, these
patients continue to develop polyps in the remaining rectal tissue and are
typically monitored by endoscopy two to four times each year. At each
examination, polyps are removed. CPI's clinical program is testing PREVATAC(TM)
exisulind in patients who previously have had most of their large intestine
removed, leaving the rectum intact (sub-total colectomy).
It is estimated that APC occurs in between 8,000 and 36,000 persons in the
U.S. Because of the large number of lesions that occur in these patients and the
continuous development of new lesions with no spontaneous remission, CPI
believes that clinical trials in APC can be conducted in, and statistically
significant results obtained from, a relatively small number of patients.
In a Phase I/II study conducted with the support of the NCI at the
Cleveland Clinic Foundation, 18 APC patients were treated with PREVATAC(TM)
exisulind for six months. The study was completed in January 1997 and was
designed to observe the safety and pharmacokinetics of increasing doses of
PREVATAC(TM) exisulind. No serious adverse events attributable to PREVATAC(TM)
exisulind were reported at the clinically effective doses of 400-600 milligrams
total daily dose. At the 800 milligram total daily dose level, four out of six
patients displayed asymptomatic reversible elevations of liver enzymes; all of
such patients continued in the trial at lower dose levels. At the end of the
study, all patients elected to continue taking the drug in an extension study,
and the majority of the patients have been on the drug for more than 24 months.
No patient has withdrawn from the study or its extension due to serious adverse
events.
In the Phase I/II study and its extension, nearly all patients were
observed to experience a marked reduction in the number and size of exophytic
(i.e., raised over the surface), precancerous rectal polyps that were six
millimeters or less in diameter at the beginning of the study. The effect was
observed to be correlated to dosage, with 600 milligrams per day having a
significantly more pronounced effect than 400 milligrams per day. In the
extended study, no progressive increase in polyp size or volume was observed in
13 of the 14 patients who have remained in the study and have been maintained on
the optimal dose.
Following treatment with PREVATAC(TM) exisulind, examination of certain
regressing polyps showed substantial increases in the rate of apoptosis compared
with untreated polyps, while the rate of apoptosis in nearby normal tissue was
unchanged, demonstrating that PREVATAC(TM) exisulind selectively induces
apoptosis in neoplastic cells without affecting normal cells.
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Although the Phase I/II study of 18 patients generated preliminary evidence
of effectiveness, additional clinical evidence of the safety and efficacy of
PREVATAC(TM) exisulind for APC is required before the filing of the NDA.
Accordingly, CPI initiated a pivotal Phase III study in the second quarter of
1997. This study is a double blind placebo-controlled trial of PREVATAC(TM)
exisulind being conducted at 12 centers in the U.S., Sweden, the United Kingdom
and Israel. The primary endpoint of the study is the reduction in the formation
of new polyps. The design and endpoints of the study have been reviewed with the
FDA. CPI completed recruitment of 74 patients for this study on January 15,
1998. CPI initiated another study on January 16, 1998 utilizing the identical
protocol to the pivotal Phase III study to gather additional patient data. In
addition, CPI is currently enrolling patients with high rates of recurrence of
polyps, who otherwise would have been excluded from the pivotal Phase III study,
in a concurrent study and has commenced a safety study in pediatric APC
patients. CPI anticipates filing an NDA in the first quarter of 1999 which will
seek approval to market PREVATAC(TM) exisulind for the prevention of
precancerous adenomatous polyps in APC patients. There can be no assurance that
this filing will not be delayed and that the results of the Phase I/II study
will be indicative of results in the Phase III and related studies or that the
results of the Phase III and related studies will show that PREVATAC(TM)
exisulind is sufficiently safe and effective for the FDA or other regulatory
authorities to grant marketing approval.
CPI has been granted Fast Track designation for PREVATAC(TM) exisulind for
the reduction in development of new polyps in patients with APC. The Fast Track
Program is a new mechanism, introduced in the FDA Modernization Act of 1997, for
facilitating the development and expediting the approval of drugs that
demonstrate the potential to address unmet medical needs for serious and
life-threatening conditions. This mechanism builds upon existing FDA programs
for accelerated approval.
Patients with APC are usually managed by gastroenterologists and colorectal
surgeons. There are approximately 9,500 gastroenterologists and 1,000 colorectal
surgeons in the U.S. CPI believes that a subset of these physicians treats a
significant number of APC patients and CPI intends to focus its marketing
efforts on these physicians.
Sporadic Adenomatous Colonic Polyps. Sporadic adenomatous colonic polyps
are relatively common precancerous lesions occurring in the large intestine.
These polyps are histologically, microscopically and genetically
indistinguishable from the polyps of APC.
More than 30% of people in the U.S. over the age of 50 have sporadic
adenomatous colonic polyps. Most of these people will develop only one or two
polyps and once the polyps are removed will not require significant ongoing
medical attention. There are, however, subgroups of people at higher than usual
risk of developing colorectal cancer who should be monitored frequently. These
patients include people with close relatives that have had colorectal cancer,
people over age 60 and people with multiple polyps or polyps which are large or
severely dysplastic or which recur frequently. CPI is targeting these patients
for clinical studies and chemopreventive therapy.
The American Cancer Society, American College of Gastroenterology, American
Gastroenterological Association and other expert organizations recommend that
all people over the age of 50 be screened for precancerous colonic polyps and
colon cancer. This recommendation is not followed universally and, as a result,
a large number of people whose polyps have not been detected are at risk of
developing colon cancer. The procedure for screening for sporadic adenomatous
colonic polyps is an endoscopic examination of the lower part of the large
intestine. This procedure, a sigmoidoscopy, is performed by gastroenterologists,
internists and other physicians. For more extensive and invasive examination of
patients who have had polyps detected by sigmoidoscopy and for the treatment of
sporadic adenomatous colonic polyps, a colonoscopy is performed, usually by a
gastroenterologist.
In September 1997, CPI completed a two-month Phase IB safety and
pharmacokinetic study in 18 patients who had a history of either sporadic
adenomatous colonic polyps and/or cervical dysplasia. CPI has initiated a
multi-center, pivotal Phase II/III study in sporadic colonic polyps. The first
study, initiated in December 1997, is a double-blind, placebo-controlled study
to evaluate the safety and efficacy of different doses of PREVATAC(TM) exisulind
in the treatment of existing sporadic adenomatous colonic polyps. CPI may need
to conduct further concurrent studies of safety and pharmacokinetics.
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Gastroenterologists and colorectal surgeons are primarily responsible for
performing colonoscopies and managing treatment of individuals who have sporadic
adenomatous colonic polyps. There are approximately 10,500 of these physicians
in the U.S. This target audience of physicians builds on and overlaps with the
group of physicians who treat APC and is a logical extension of CPI's planned
marketing and sales efforts.
Barrett's Esophagus. Barrett's Esophagus is a precancerous condition of
the lower esophagus characterized by progressive and readily identifiable
changes in the appearance of the lining of the esophagus or esophageal
epithelium. Some patients experience reflux of stomach acid into the esophagus,
exacerbating the condition. Patients with Barrett's Esophagus have 30 to 40
times greater risk of developing esophageal cancer than the average person.
Treatment with anti-acid therapy or other anti-reflux measures is usually not
effective. Approximately one percent of the U.S. population, or an estimated
2,000,000 people, have Barrett's Esophagus.
In the fourth quarter of 1998, CPI plans to initiate a 12-month Phase II
study in patients with Barrett's Esophagus to evaluate the safety and efficacy
of PREVATAC(TM) exisulind. CPI's proposed clinical endpoints are reduction in
the area affected or in the degree of dysplasia found in the affected tissues.
Barrett's Esophagus is diagnosed by upper gastrointestinal endoscopy, a
procedure usually performed by gastroenterologists. Treatment is usually managed
by gastroenterologists or by thoracic surgeons, of whom there are approximately
2,000 in the U.S. Because of the significant overlap between the physician
groups who treat Barrett's Esophagus with those who treat APC and sporadic
adenomatous colonic polyps, CPI does not anticipate that any significant
increase in the sales and marketing organization will be required to promote
products for Barrett's Esophagus.
Bronchial Dysplasia. Bronchial dysplasia is a precancerous condition of
the lower respiratory tract characterized by progressive and readily
identifiable changes in the appearance of the lining of the bronchi of the lung
or bronchial epithelium. In the bronchial epithelium, smoking may initiate a
multi-step process that first appears histologically as dysplasia or metaplasia,
a biological precursor to lung cancer. Two-thirds of heavy smokers may develop
these precancerous lesions.
In the fourth quarter of 1998, CPI plans to initiate a Phase II/III study
in patients with bronchial dysplasia to evaluate the safety and efficacy of
PREVATAC(TM) exisulind. CPI's proposed clinical endpoints are reduction in the
area affected or in the degree of dysplasia found in the affected tissues.
Pulmonary specialists and thoracic surgeons are primarily responsible for
performing bronchoscopies and managing treatment of individuals who have
bronchial dysplasia. There are approximately 8,400 of these physicians in the
U.S. If CPI develops products to treat bronchial dysplasia, CPI anticipates
marketing these products directly to these focused physicians groups.
Cervical Dysplasia. Cervical dysplasia is a relatively common precancerous
lesion of the cervix that is easily diagnosed by Pap smears. Fifty million Pap
smears are performed each year in the U.S., of which approximately five percent
reveal some form of cervical dysplasia. Although very few cases of cervical
dysplasia progress to cancer, it is estimated that in 1997 there were
approximately 14,000 new cases of cervical cancer in the U.S.
In September 1997, CPI completed a two-month Phase IB safety and
pharmacokinetic study in 18 patients who had a history of sporadic adenomatous
colonic polyps and/or cervical dysplasia. CPI is designing a six-month Phase II
study to evaluate the safety and efficacy of different doses of PREVATAC(TM)
exisulind in reducing the size of the area affected by and degree of dysplasia.
Treatment of cervical dysplasia, especially those cases with more severe
dysplasia or recurrence, is usually performed by gynecologists, of whom there
are approximately 36,000 in the U.S. If CPI determines to pursue this market,
CPI anticipates seeking a marketing partner for sales to this large physician
market.
Clinical Development of PREVATAC(TM) exisulind for Cancerous
Lesions. Laboratory studies have demonstrated that PREVATAC(TM) exisulind
arrests or slows the progression of certain cancerous lesions. Based on the
safety profile of PREVATAC(TM) exisulind and its novel mechanism of activity,
CPI believes that PREVATAC(TM) exisulind may be clinically useful in augmenting
radiation and conventional chemotherapy in
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the treatment of cancers and the prevention of recurrence. CPI believes that
cancer cells that are resistant to radiation or conventional chemotherapy may be
killed by PREVATAC(TM) exisulind due to its effect on an apoptotic mechanism
that is different from that targeted by conventional therapies.
CPI has initiated certain studies and is planning additional clinical
studies in specific cancer indications, using the safety and pharmacokinetic
data from its APC and sporadic colonic adenomatous polyp/cervical dysplasia
studies to support the initiation of Phase II or Phase II/III studies. CPI has
expanded the trials covered under its existing IND for PREVATAC(TM) exisulind to
cover these additional indications. Results of earlier clinical trials of
PREVATAC(TM) exisulind in the treatment of APC may not be predictive of the
results that may be obtained from trials of PREVATAC(TM) exisulind in the
treatment of cancer.
Prostate Cancer. It is estimated that in 1997 there were approximately
209,000 new cases of prostate cancer in the U.S. In in vitro and in vivo
studies, CPI has observed that PREVATAC(TM) exisulind inhibits growth of
prostate cancer, including one such cancer that is resistant to conventional
chemotherapeutic drugs. In August 1998, CPI completed enrollment of 90 patients
in a Phase II/III clinical study for the prevention of prostate cancer
recurrence. This study involves men who have had a prostatectomy and have rising
PSA levels, which is often a sign of recurrent prostate cancer that is not
detectable by current imaging or diagnostic methods. The endpoint of this study
is the arrest or delay in the elevation of PSA. Depending on the results of this
study, CPI anticipates additional clinical studies to confirm the efficacy of
the compound.
Prostate cancer is commonly diagnosed and treated by urologists, of whom
there are approximately 10,000 in the U.S. Oncologists, of whom there are 5,500
in the U.S., manage the chemotherapeutic treatment of prostate cancer. If CPI
develops products to treat prostate cancer, CPI anticipates marketing these
products directly to urologists and oncologists.
Breast Cancer. It is estimated that in 1997 there were approximately
181,000 new cases of breast cancer in the U.S. CPI has observed that
PREVATAC(TM) exisulind and other CPI compounds show dose-related inhibitory
effects in several in vitro breast cancer cell systems, in in vivo
chemically-induced cancer models and in in vitro studies with primary breast
cancer tissues removed from patients. In February 1998, CPI initiated a Phase
II/III study to evaluate the safety and efficacy of PREVATAC(TM) exisulind in
the prevention of recurrence of breast cancer in women who have not responded to
traditional recurrence prevention, such as tamoxifen, and who are in remission
after having been treated with conventional chemotherapeutic agents.
Gynecologists usually diagnose breast cancer, while oncologists manage the
chemotherapeutic treatment. If CPI develops any products to treat breast cancer,
CPI anticipates marketing these products to oncologists.
Lung Cancer. It is estimated that in 1997 there were approximately 178,000
new cases of lung cancer in the U.S. PREVATAC(TM) exisulind has shown positive
results in the prevention of chemically-induced lung cancer in rodents. CPI
commenced a pilot study of the safety and efficacy of PREVATAC(TM) exisulind in
patients with advanced lung cancer in December 1997. The results of this
exploratory study will determine CPI's plans for further studies.
Lung cancer may be diagnosed by general practitioners or internists.
Oncologists manage the chemotherapeutic treatment of lung cancer. If CPI
develops products to treat lung cancer, CPI anticipates marketing these products
directly to oncologists.
NATIONAL CANCER INSTITUTE AND OTHER THIRD-PARTY ARRANGEMENTS
Pursuant to a Clinical Trials Agreement entered into in 1994, the NCI
agreed to sponsor human clinical trials (including but not limited to safety and
efficacy testing) of PREVATAC(TM) exisulind for at least two precancer
indications. The first indication is colonic adenomas, including APC. The NCI
sponsored a portion of the Phase I/II clinical study for APC that CPI concluded
in January 1997. The NCI has the right to conduct as many additional clinical
trials as it would like and CPI is obligated to provide PREVATAC(TM) exisulind
for such studies. The Clinical Trials Agreement expires on July 1, 1999 unless
extended by both parties, and is subject to unilateral termination on sixty
days' notice by either party, subject in both cases to completion of clinical
trials that have been agreed to or are ongoing. CPI has retained all commercial
rights to
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PREVATAC(TM) exisulind, and the agreement with the NCI contains no provisions
for royalties or restrictions on CPI's ability to commercialize PREVATAC(TM)
exisulind.
CPI has also entered into an amendment of the Clinical Trials Agreement
with the NCI to permit the NCI to conduct preclinical testing and, if agreed
with CPI, clinical testing of three additional CPI compounds. CPI believes that
continued collaboration with the NCI will advance the progress of both CPI and
the NCI in developing therapies to treat precancerous lesions in a variety of
tissues.
In June 1991, CPI entered into a Research and License Agreement with the
University of Arizona (the "University"). Under the agreement, CPI has agreed to
attempt to commercialize at least one product while the University has agreed to
conduct a research program in support of CPI's efforts. The agreement, as
amended, provides for CPI to establish a budget for the research program with
the University on an annual basis and for CPI to be licensed under all patents
based on inventions developed by the University's employees in conjunction with
CPI. CPI has agreed to pay to the University a royalty based on sales of
products, if any, based on each such patent, which would apply to PREVATAC(TM)
exisulind in the event it is approved for sale by the FDA. The agreement expires
on June 26, 2000 unless extended by both parties, and is subject to termination
by CPI upon thirty days' notice.
CPI contracts with a number of university-based researchers and commercial
vendors throughout the U.S., Europe and Israel who furnish additional cell
biology studies, in vivo pharmacological studies, in vivo drug candidate
screening and animal toxicological studies and scale-up and synthesis of
promising new compounds. CPI retains all exclusive rights to commercialize the
inventions and discoveries that result from these collaborations.
SCIENTIFIC ADVISORY BOARD
CPI is assisted in its research and development activities by its
Scientific Advisory Board ("SAB") composed of physicians and scientists who
review CPI's research and development, participate in the design of clinical
trials, discuss technological advances relevant to CPI and its business and
otherwise assist CPI. The members of the SAB are appointed by CPI's management.
The SAB meets periodically and certain members meet in smaller groups or with
CPI individually as needed. Dr. Rifat Pamukcu, CPI's Chief Scientific Officer
and Senior Vice President, Research and Development, served as co-chair of CPI's
SAB prior to joining CPI in 1993, and continues to participate in all SAB
meetings. SAB members are compensated in cash and stock options for their
services to CPI. CPI also reimburses each member for expenses incurred when
traveling to and attending meetings. All SAB members have commitments or
consulting contracts with other organizations and companies, some of which are
competitors or potential competitors of CPI, that may limit their availability
to CPI. None of these individuals is expected to devote more than a small
portion of his time to CPI. The members of the SAB are listed below by area of
specialization.
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SCIENTIFIC ADVISORY BOARD
<TABLE>
<CAPTION>
NAME PROFESSIONAL AFFILIATION
- ---- -----------------------------------------------------------------
<S> <C>
CELLULAR & ANIMAL RESEARCH
Dennis Ahnen, M.D.................... Professor of Medicine, University of Colorado School of Medicine;
Director of Cancer Prevention and Control, University of Colorado
Cancer Center
David M. Livingston, M.D............. Emil Frei Professor of Medicine, Harvard Medical School; Chief of
the Division of Neoplastic Disease Mechanisms and Chairman of the
Executive Committee for Research, Dana-Farber Cancer Institute
Alan C. Sartorelli, Ph.D............. Alfred Gilman Professor of Pharmacology and Epidemiology, Yale
University School of Medicine; formerly Director of Yale
Comprehensive Cancer Center
I. Bernard Weinstein, M.D............ Forde Jensen Professor of Medicine, Genetics and Development and
Public Health, Columbia University; Director Emeritus, Columbia
University Comprehensive Cancer Center
CLINICAL & DRUG DEVELOPMENT
David S. Alberts, M.D................ Associate Dean of Research, Director of Cancer Prevention and
Control Program, and Professor of Medicine and Pharmacology,
Arizona Cancer Center, University of Arizona
Randall W. Burt, M.D. (Chairman)..... Professor of Internal Medicine and Chief of Gastroenterology,
University of Utah School of Medicine; formerly Chief of Medical
Services, Veterans Administration Medical Center, Salt Lake City,
Utah
Daniel D. Von Hoff, M.D.............. Director of the Institute for Drug Development, Cancer Therapy
and Research Center at the University of Texas Health Science
Center
Louis M. Weiner, M.D................. Chairman of the Department of Medical Oncology, Division of
Medical Science at Fox Chase Cancer Center; Professor in the
Department of Medicine, Temple University School of Medicine
INDUSTRY RESEARCH & DEVELOPMENT
Ira Ringler, Ph.D.................... Pharmaceutical industry consultant; formerly President
Takeda-Abbott Pharmaceuticals, and Vice President, Pharmaceutical
Research and Development, Abbott Laboratories
</TABLE>
PATENTS AND PROPRIETARY TECHNOLOGY
CPI's success will depend, in part, on its ability to obtain patents,
operate without infringing the proprietary rights of others and maintain trade
secrets, both in the U.S. and other countries. Patent matters in the
pharmaceutical industry can be highly uncertain and involve complex legal and
factual questions. Accordingly, the validity, breadth, and enforceability of
CPI's patents and the existence of potentially blocking patent rights of others
cannot be predicted, either in the U.S. or in other countries.
As of August 1998, CPI held title or exclusive licenses to two issued U.S.
patents and six other pending U.S. patent applications relating to the
therapeutic use of PREVATAC(TM) exisulind in the treatment of neoplasia,
precancerous lesions and/or other indications. The sulfone derivative of
sulindac, now named exisulind, was described in the scientific and patent
literature over 20 years ago and, as a result, CPI is unable to obtain a
composition of matter patent on PREVATAC(TM) exisulind. Thus, CPI's current
patent rights relating to PREVATAC(TM) exisulind are limited to a series of
patents and patent applications pertaining to
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various specific uses of PREVATAC(TM) exisulind. CPI has also been issued or
holds exclusive licenses to 13 foreign patents (including patents in various
European countries, Australia, Canada and Japan) as well as one other pending
patent application in South Korea relating to the use of PREVATAC(TM) exisulind
in pharmaceutical compositions for the treatment of neoplasia and/or
precancerous lesions. In Europe, CPI's patent rights relating to PREVATAC(TM)
exisulind are directed to the use of PREVATAC(TM) exisulind in the manufacture
of pharmaceutical compositions for the treatment of precancerous lesions. CPI
also holds title or exclusive licenses to three U.S. patents, two U.S. patent
applications which have been allowed, 33 other pending U.S. patent applications,
five issued foreign patents and 18 pending foreign applications on other
compounds, or therapeutic methods involving such compounds, for the treatment of
colonic polyps, precancerous lesions, and/or neoplasia. CPI also has filed two
U.S. and 13 foreign patent applications on methods for screening compounds for
their usefulness in selectively inducing apoptosis involving the ARE. CPI
intends to file additional applications, as appropriate, for patents on new
compounds, products, or processes discovered or developed through application of
CPI's technology.
Beyond the patents granted to date, there can be no assurance that CPI will
discover or develop patentable products or processes, that patents will issue
from any of the currently pending patent applications, or that claims granted on
issued patents will be sufficient to protect CPI's technology. Potential
competitors or other researchers in the field may have filed patent
applications, been issued patents, published articles or otherwise created prior
art that could restrict or block CPI's efforts to obtain additional patents.
There also can be no assurance that CPI's issued patents or pending patent
applications, if issued, will not be challenged, invalidated or circumvented or
that the rights granted thereunder will provide proprietary protection or
competitive advantages to CPI. CPI's patent rights also depend on its compliance
with technology and patent licenses upon which its patent rights are based and
upon the validity of assignments of patent rights from consultants and other
inventors that were, or are, not employed by CPI.
In addition, competitors may manufacture and sell CPI's potential products
in those foreign countries where CPI has not filed for patent protection or
where patent protection may be unavailable, not obtainable or ultimately not
enforceable. The ability of such competitors to sell such products in the U.S.
or in foreign countries where CPI has obtained patents is usually governed by
the patent laws of the countries in which the product is sold. In addition, to
the extent that clinical uses of PREVATAC(TM) exisulind are discovered beyond
those set forth in CPI's patent claims, CPI may not be able to enforce its
patent rights against companies marketing PREVATAC(TM) exisulind for such other
clinical uses.
The success of CPI also will depend, in part, on CPI not infringing patents
issued to others. Pharmaceutical companies, biotechnology companies,
universities, research institutions, and others may have filed patent
applications or have received, or may obtain, issued patents in the U.S. or
elsewhere relating to aspects of CPI's technology. It is uncertain whether the
issuance of any third-party patents will require CPI to alter its products or
processes, obtain licenses, or cease certain activities. Some third-party
applications or patents may conflict with CPI's issued patents or pending
applications. Such conflict could result in a significant reduction of the
coverage of CPI's issued or licensed patents. In addition, if patents are issued
to other companies which contain blocking, dominating or conflicting claims and
such claims are ultimately determined to be valid, CPI may be required to obtain
licenses to these patents or to develop or obtain alternative technology. If any
licenses are required, there can be no assurance that CPI will be able to obtain
any such licenses on commercially favorable terms, if at all, and if these
licenses are not obtained, CPI might be prevented from pursuing the development
of certain of its potential products. CPI's failure to obtain a license to any
technology that it may require to commercialize its products may have a material
adverse impact on CPI's business, financial condition and results of operations.
Litigation, which could result in substantial costs to CPI, may also be
necessary to enforce any patents issued or licensed to CPI or to determine the
scope and validity of the proprietary rights of others. In this connection,
under the Abbreviated New Drug Application provisions of U.S. law, after four
years from the date marketing approval is granted to CPI by the FDA for a
patented drug, a generic drug company may submit an Abbreviated New Drug
Application to the FDA to obtain approval to market in the U.S. a generic
version of the drug patented by CPI. If approval is given to the generic drug
company, CPI would be required to promptly initiate patent litigation to prevent
the marketing of such a generic version prior to the normal
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expiration of the patent. There can be no assurance that CPI's issued or
licensed patents would be held valid by a court of competent jurisdiction. In
addition, if competitors of CPI file patent applications in the U.S. that claim
technology also claimed by CPI, CPI may have to participate in interference
proceedings to determine priority of invention. These proceedings, if initiated
by the U.S. Patent and Trademark Office, could result in substantial cost to
CPI, even if the eventual outcome is favorable to CPI. An adverse outcome with
respect to a third party claim or in an interference proceeding could subject
CPI to significant liabilities, require disputed rights to be licensed from
third parties, or require CPI to cease using such technology, any of which could
have a material adverse effect on CPI's business, financial condition and
results of operations.
CPI also relies on trade secrets to protect technology, especially where
patent protection is not believed to be appropriate or obtainable or where
patents have not been issued. CPI attempts to protect its proprietary technology
and processes, in part, by confidentiality agreements and assignment of
invention agreements with its employees and confidentiality agreements with its
consultants and certain contractors. There can be no assurance that these
agreements will not be breached, that CPI would have adequate remedies for any
breach, or that CPI's trade secrets will not otherwise become known or be
independently discovered by competitors. Such trade secrets or other
intellectual property of CPI, should they become known to its competitors, could
result in a material adverse effect on CPI's business, financial condition and
results of operations. To the extent that CPI or its consultants or research
collaborators use intellectual property owned by others in their work for CPI,
disputes may also arise as to the rights to related or resulting know-how and
inventions.
PREVATAC(TM) is CPI's proposed trademark for exisulind. CPI has filed an
intent to use trademark application for the mark with the U.S. Patent and
Trademark Office, and plans to perfect foreign trademark rights in the mark.
While CPI has searched for confusingly similar marks and believes that
PREVATAC(TM) is available for use on its product, there can be no guarantee that
that mark will not be challenged by others, or that others have not perfected or
attempted to perfect rights in a confusingly similar mark. In the event of a
successful challenge to CPI's adoption and use of PREVATAC(TM), CPI could be
forced to change its proposed mark in one or more countries in the world.
COMPETITION
The industry in which CPI competes is characterized by extensive research
and development efforts and rapid technological progress. New developments occur
and are expected to continue to occur at a rapid pace, and there can be no
assurance that discoveries or commercial developments by CPI's competitors will
not render some or all of CPI's potential products obsolete or non-competitive,
which would have a material adverse effect on CPI's business, financial
condition and results of operations. CPI's competitive position also depends on
its ability to attract and retain qualified scientific and other personnel,
develop effective proprietary products, implement development and marketing
plans, obtain patent protection and secure adequate capital resources.
In the fields of cancer therapy and the prevention of precancerous and
cancerous lesions, other products are being developed that may compete directly
with the products that CPI is seeking to develop and market. CPI is aware of
clinical trials in which a number of pharmaceutical and nutritional agents are
being examined for their potential usefulness in the treatment of precancerous
lesions and cancer. These include studies of NSAID-like compounds,
cyclooxygenase inhibitors, difluoromethylornithine ("DFMO") and natural
nutrients in the treatment of APC and sporadic colonic polyps, studies of
retinoids and DFMO in the treatment of cervical dysplasia and studies of
tamoxifen for the prevention of breast cancer. Additional compounds being tested
in various epithelial lesions include compounds related to aspirin, various
vitamins and nutritional supplements, oltipraz, N-acetyl cysteine and compounds
that interfere with hormone activities. The studies are being conducted by
pharmaceutical and biotechnology companies, major academic institutions and
government agencies. There are other agents, including certain prescription
drugs, that have been observed to have an effect on ARE. Although CPI is not
aware that any third party has demonstrated the preclinical utility of these
compounds in the treatment of precancerous or cancerous lesions, there can be no
assurance that such existing or new agents will not ultimately be found to be
useful, and therefore competitive with any future products of CPI.
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Near-term competition from fully integrated and more established
pharmaceutical and biotechnology companies is expected. Most of these companies
have substantially greater financial, research and development, manufacturing
and marketing experience and resources than CPI and represent substantial
long-term competition for CPI. Such companies may succeed in discovering and
developing pharmaceutical products more rapidly than CPI or pharmaceutical
products that are safer, more effective or less costly than any that may be
developed by CPI. Such companies also may be more successful than CPI in
production and marketing. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical and established biotechnology companies. Academic institutions,
governmental agencies and other public and private research organizations also
conduct clinical trials, seek patent protection and establish collaborative
arrangements for the development of oncology products.
CPI will face competition based on product efficacy and safety, the timing
and scope of regulatory approvals, availability of supply, marketing and sales
capability, reimbursement coverage, price and patent position. There can be no
assurance that CPI's competitors will not develop safer and more effective
products or obtain patent protection or intellectual property rights that limit
CPI's ability to commercialize products that may be developed or commercialize
products earlier than CPI. There can be no assurance that CPI's issued patents
or pending patent applications, if issued, will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide proprietary
protection or competitive advantage to CPI.
GOVERNMENT REGULATION
The research, design, testing, manufacturing, labeling, marketing,
distribution and advertising of products such as CPI's proposed products are
subject to extensive regulation by governmental regulatory authorities in the
U.S. and other countries. The drug development and approval process is generally
lengthy, expensive and subject to unanticipated delays. The FDA and comparable
agencies in foreign countries impose substantial requirements on the
introduction of new pharmaceutical products through lengthy and detailed
preclinical and clinical testing procedures, sampling activities and other
costly and time-consuming compliance procedures. A new drug may not be marketed
in the U.S. until it has undergone rigorous testing and has been approved by the
FDA. The drug may then be marketed only for the specific indications, uses,
formulation, dosage forms and strengths approved by the FDA. Similar
requirements are imposed by foreign regulators upon the marketing of a new drug
in their respective countries. Satisfaction of such regulatory requirements,
which includes demonstrating to the satisfaction of the FDA that the relevant
product is both safe and effective, typically takes several years or more
depending upon the type, complexity and novelty of the product and requires the
expenditure of substantial resources. Preclinical studies must be conducted in
conformance with the FDA's GLP regulations. CPI's compounds require extensive
clinical trials and FDA review as new drugs. Clinical trials are vigorously
regulated and must meet requirements for FDA review and oversight and
requirements under GCP guidelines. There can be no assurance that CPI will not
encounter problems in clinical trials which would cause CPI or the FDA to delay
or suspend clinical trials. Any such delay or suspension could have a material
adverse effect on CPI's business, financial condition and results of operations.
The steps required before a drug may be marketed in the U.S. include: (i)
preclinical laboratory and animal tests; (ii) submission to the FDA of an
application for an IND exemption, which must become effective before human
clinical trials may commence; (iii) human clinical trials to establish the
safety and efficacy of the drug; (iv) submission of a detailed NDA to the FDA;
and (v) FDA approval of the NDA. In addition to obtaining FDA approval for each
product, each domestic establishment where the drug is to be manufactured must
be registered with the FDA. Domestic manufacturing establishments must comply
with cGMP regulations and are subject to periodic inspections by the FDA.
Foreign manufacturing establishments manufacturing drugs intended for sale in
the U.S. also must comply with cGMP regulations and are subject to periodic
inspection by the FDA or by local authorities under agreement with the FDA.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the metabolic and pharmacologic activity and potential
safety and efficacy of the product. Preclinical tests must be conducted by
laboratories that comply with FDA regulations regarding GLP. The results of
preclinical tests are submitted to the FDA as part of an IND, which must become
effective before the sponsor may conduct
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clinical trials in human subjects. Unless the FDA objects to an IND, the IND
becomes effective 30 days following its receipt by the FDA. There is no
certainty that submission of an IND will result in FDA authorization of the
commencement of clinical trials. A separate IND application may be required by
the FDA, in its sole discretion, as to each indication. The FDA has determined
that all cancer prevention and therapeutic indications for which PREVATAC(TM)
exisulind is or will be tested are to be submitted under its current IND
application filed in December 1993.
Clinical trials involve the administration of the investigational drug to
patients. Every clinical trial must be conducted under the review and oversight
of an institutional review board ("IRB") at each institution participating in
the trial. The IRB evaluates, among other things, ethical factors, the safety of
human subjects and the possible liability of the institution. Clinical trials
typically are conducted in three phases, which generally are conducted
sequentially, but which may overlap. Clinical trials test for efficacy and
safety, side effects, dosage, tolerance, metabolism and clinical pharmacology.
Phase I tests involve the initial introduction of the drug to a small group of
subjects to test for safety, dosage tolerance, pharmacology and metabolism.
Phase II trials involve a larger but still limited patient population to
determine the efficacy of the drug for specific indications, to determine
optimal dosage and to identify possible side effects and safety risks. If a drug
appears to be efficacious in Phase II evaluations, larger-scale Phase III trials
are undertaken to evaluate the safety and effectiveness of the drug, usually,
though not necessarily, in comparison with a placebo or an existing treatment.
There can be no assurance, however, that Phase I, Phase II or Phase III testing
will be completed successfully within any specified time period, if at all.
Furthermore, the FDA may suspend clinical trials at any time if it decides that
patients are being exposed to a significant health risk.
The results of the preclinical studies and clinical trials are submitted to
the FDA as part of an NDA for approval of the marketing of the drug. The NDA
also includes information pertaining to the chemistry, formulation and
manufacture of the drug and each component of the final product, as well as
details relating to the sponsoring company. The NDA review process takes from
one to two years on average to complete, although reviews of treatments for
cancer and other life-threatening diseases may be accelerated. However, the
process may take substantially longer if the FDA has questions or concerns about
a product. In general, the FDA requires at least two adequate and
well-controlled clinical studies demonstrating efficacy in order to approve an
NDA. The FDA may, however, request additional information, such as long-term
toxicity studies or other studies relating to product safety. Notwithstanding
the submission of such data, the FDA ultimately may decide that the application
does not satisfy its regulatory criteria for approval. Finally, the FDA may
require additional clinical tests following NDA approval.
There can be no assurance that the drugs CPI is seeking to develop will
prove to be safe and effective in treating or preventing cancer. The development
of such drugs will require the commitment of substantial resources to conduct
the preclinical development and clinical trials necessary to bring such
compounds to market. Drug research and development by its nature is uncertain.
There is a risk of delay or failure at any stage, and the time required and cost
involved in successfully accomplishing CPI's objectives cannot be predicted.
Actual drug research and development costs could exceed budgeted amounts, which
could have a material adverse effect on CPI's business, financial condition and
results of operations.
CPI cannot predict when, if ever, it might submit for regulatory review
additional compounds currently under development. Once CPI submits its potential
products for review, there can be no assurance that the FDA or other regulatory
approvals for any pharmaceutical products developed by CPI will be granted on a
timely basis, if at all. The FDA and comparable agencies in foreign countries
impose substantial requirements on the introduction of new pharmaceutical
products through lengthy and detailed preclinical and clinical testing
procedures, sampling activities and other costly and time-consuming compliance
procedures. Clinical trials are vigorously regulated and must meet requirements
for FDA review and oversight and requirements under GCP guidelines. A new drug
may not be marketed in the U.S. until it has been approved by the FDA. There
also can be no assurance that CPI will not encounter delays or rejections or
that the FDA will not make policy changes during the period of product
development and FDA regulatory review of each submitted NDA. A delay in
obtaining or failure to obtain such approvals would have a material adverse
effect on CPI's business, financial condition and results of operations. Even if
regulatory approval is obtained, it would be limited as to the indicated uses
for which the product may be promoted or marketed. A marketed product, its
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manufacturer and the facilities in which it is manufactured are subject to
continual review and periodic inspections. If marketing approval is granted, CPI
would be required to comply with FDA requirements for manufacturing, labeling,
advertising, record keeping and reporting of adverse experiences and other
information. In addition, CPI would be required to comply with federal and state
anti-kickback and other health care fraud and abuse laws that pertain to the
marketing of pharmaceuticals. Failure to comply with regulatory requirements and
other factors could subject CPI to regulatory or judicial enforcement actions,
including, but not limited to, product recalls or seizures, injunctions,
withdrawal of the product from the market, civil penalties, criminal
prosecution, refusals to approve new products and withdrawal of existing
approvals, as well as enhanced product liability exposure, any of which could
have a material adverse effect on CPI's business, financial condition and
results of operations. Sales of CPI's products outside the U.S. will be subject
to foreign regulatory requirements governing clinical trials, marketing
approval, manufacturing and pricing. Non-compliance with these requirements
could result in enforcement actions and penalties or could delay introduction of
CPI's products in certain countries.
CPI's current clinical trial strategy for the development of drugs for the
prevention of precancerous lesions assumes that the FDA will accept reduction in
the formation of precancerous lesions as an endpoint for precancer trials. To
date, the FDA has not approved any chemoprevention compounds and there can be no
assurance that the FDA will approve such compounds in the future. Should the FDA
require CPI to demonstrate the efficacy of PREVATAC(TM) exisulind in the
reduction of certain cancers or in overall mortality rates resulting from
certain cancers, CPI's clinical trial strategy would be materially and adversely
affected, as significant additional time and funding would be required to
demonstrate such efficacy. There can be no assurance that CPI will be able to
successfully develop a safe and efficacious chemoprevention product or that such
product will be commercially viable or will achieve market acceptance.
In 1988 and again in 1992, the FDA issued regulations intended to expedite
the development, evaluation and marketing of new therapeutic products to treat
life-threatening and severely debilitating illnesses for which no satisfactory
alternative therapies exist. One program under these regulations provides for
early consultation between the sponsor and the FDA in the design of both
preclinical studies and clinical trials. Another program provides for
accelerated approval based on a surrogate endpoint. There can be no assurance,
however, that any future products CPI may develop will be eligible for
evaluation by the FDA under these regulations. In addition, there can be no
assurance that PREVATAC(TM) exisulind or any future products CPI may develop, if
eligible for these programs, will be approved for marketing sooner than would be
traditionally expected. Regulatory approval granted under these regulations may
be restricted by the FDA as necessary to ensure the safe use of the drug. In
addition, post-marketing clinical studies may be required. If PREVATAC(TM)
exisulind or any future products of CPI do not perform satisfactorily in such
post-marketing clinical studies, they would likely be required to be withdrawn
from the market.
CPI has obtained Orphan Drug status for PREVATAC(TM) exisulind for the
treatment of APC. Although Orphan Drug status may provide an applicant exclusive
marketing rights in the U.S. for a designated indication for seven years
following marketing approval, in order to obtain such benefits, the applicant
must be the sponsor of the first NDA approved for that drug and indication.
Moreover, amendment of the Orphan Drug Act by the U.S. Congress and
reinterpretation by the FDA are frequently discussed. Therefore, there can be no
assurance as to the precise scope of protection that may be afforded by Orphan
Drug status in the future, or that the current level of exclusivity will remain
in effect.
CPI has been granted Fast Track designation by the FDA for PREVATAC(TM)
exisulind for the reduction in development of new polyps in patients with APC.
The Fast Track Program is a new mechanism, introduced in the FDA Modernization
Act of 1997, for facilitating the development and expediting the approval of
drugs that demonstrate the potential to address unmet medical needs for serious
and life-threatening conditions. This mechanism builds upon existing FDA
programs for accelerated approval of such drugs. Among other things, the Fast
Track provisions provide for rolling review of the marketing application for the
Fast Track drug, so that portions of the application can be submitted and
reviewed by FDA before the complete application is submitted, which can help to
accelerate FDA review. However, there can be no assurance that PREVATAC(TM)
exisulind will be approved for marketing sooner than would be traditionally
expected. In addition, the FDA may require post-marketing studies for a Fast
Track drug. If such studies were required as
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a condition of approval of PREVATAC(TM) exisulind and the studies showed that
PREVATAC(TM) exisulind is not safe or effective or failed to demonstrate any
clinical benefit, it is likely that PREVATAC(TM) exisulind would be required to
be withdrawn from the market for such indication.
In most cases, pharmaceutical companies rely on patents to provide market
exclusivity for the periods covered by the patents. See "-- Patents and
Proprietary Technology." In the U.S., the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Hatch-Waxman Act") permits an extension of patents
in certain cases to compensate for patent time expended during clinical
development and FDA review of a drug. In addition, the Hatch-Waxman Act
establishes a period of market exclusivity, independent of any patents, during
which the FDA may not accept or approve abbreviated applications for generic
versions of the drug from other sponsors, although the FDA may accept and
approve subsequent long-form applications for the drug. The applicable period of
market exclusivity for a drug containing an active ingredient not previously
approved is five years. There is no assurance that all or any of CPI's products,
if approved, will receive market exclusivity under the Hatch-Waxman Act. Failure
to receive such exclusivity could have an adverse effect on CPI's business,
financial condition and results of operations.
Among the requirements for product approval is the requirement that
prospective manufacturers conform to the FDA's cGMP standards, which also must
be observed at all times following approval. Accordingly, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure compliance with cGMP standards. Failure to so comply
subjects the manufacturer to possible FDA action, such as the suspension of
manufacturing or seizure of the product. The FDA may also request a voluntary
recall of a product.
Health care reform legislation, if enacted, could result in significant
change in the financing and regulation of the health care business. In addition,
legislation affecting coverage and reimbursement under Medicare, Medicaid and
other government medical assistance programs has been enacted from time to time.
CPI is unable to predict whether such legislation will be enacted in the future
or, if enacted, the effect of such legislation on the future operation of CPI's
business. Changes adversely affecting drug pricing, drug reimbursement and
prescription benefits, among other changes, could have a materially adverse
effect on CPI's business, financial condition and results of operations.
MANUFACTURING
CPI currently has no manufacturing facilities for clinical or commercial
production of any of its compounds under development. CPI is currently relying
on third-party manufacturers to produce its compounds for research and clinical
purposes. Therefore, CPI will need to develop its own facilities or contract
with third parties for the manufacture of products, if any, that it may develop
for its own account or in connection with collaborative arrangements in which it
has retained manufacturing rights.
CPI is working with a manufacturer of pharmaceutical chemicals for the
supply of PREVATAC(TM) exisulind in bulk form. In its most recent FDA
inspection, this manufacturer was found to adhere to cGMP regulations. Several
batches of PREVATAC(TM) exisulind drug substance have been delivered by the
manufacturer to CPI at a scale suitable for commercial use and are currently
being used in CPI's pivotal Phase III APC study. This manufacturer has the
capacity to supply CPI's current and foreseeable future requirements for
PREVATAC(TM) exisulind and is currently in discussions with CPI to provide for
the long-term supply of PREVATAC(TM) exisulind.
CPI is also working with a contract manufacturer to manufacture
PREVATAC(TM) exisulind in its final pharmaceutical dosage form. This
manufacturer has also been found to adhere to cGMP regulations. Manufacturing
methods have been transferred to and developed with this contractor. Capsules
used in the current pivotal Phase III APC study are made by this manufacturer at
a scale suitable for commercialization, substantially reducing the need for
further bioequivalency studies. CPI has not yet entered into a commercial supply
agreement with this manufacturer.
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MARKETING AND SALES
CPI has to date retained all rights to PREVATAC(TM) exisulind and its other
compounds and plans to establish its own sales, marketing and distribution
organization. CPI plans to promote PREVATAC(TM) exisulind, if approved for sale,
primarily to the gastroenterologists and other physicians who manage patients
with APC, sporadic adenomatous colonic polyps and Barrett's Esophagus. These
initial markets are treated by approximately 10,500 physicians, a relatively
small target audience. If CPI receives additional FDA approvals for PREVATAC(TM)
exisulind, CPI may expand its sales and marketing team to reach other targeted
groups of physicians. Target groups would include the approximately 10,000
urologists who manage most prostate cancer patients, the approximately 8,400
pulmonary specialists and thoracic surgeons who are primarily responsible for
performing bronchoscopies and managing treatment of individuals with bronchial
dysplasia and the approximately 5,500 oncologists who manage cancer therapy
patients.
Certain indications, based on their treatment by a large number of
physicians, require an extensive sales force to sufficiently reach the
appropriate physician groups. Cervical dysplasia, for example, is treated by
approximately 36,000 gynecologists. To reach these more extensive physician
groups, CPI may, if appropriate, enter into co-marketing agreements with
pharmaceutical or biotechnology companies.
CPI anticipates marketing its products in Europe by entering into strategic
alliance agreements with established sales organizations located in such
markets, and CPI is currently in preliminary discussions with several such
parties. In Japan and other Pacific Rim countries, CPI is seeking marketing
partners to assist in local clinical trials, regulatory filings and marketing,
sales and distribution. While seeking international collaborations, CPI will
continue to pursue the clinical development and the regulatory approval of
PREVATAC(TM) exisulind in major international markets. See "Risk Factors -- Risk
Factors Related to the Business and Operations of CPI -- Absence of Sales and
Marketing Experience; Dependence on Third Parties".
EMPLOYEES
As of August 31, 1998, CPI employed 42 persons full-time. CPI places an
emphasis on obtaining the highest available quality of staff. None of CPI's
employees is covered by collective bargaining arrangements and management
considers relations with its employees to be good.
FACILITIES
CPI leases approximately 40,000 square feet of laboratory and office space
in Horsham, Pennsylvania under a ten-year lease which expires in 2008 and which
contains two five-year renewal options. In June 1998, CPI completed a financing
transaction with a public Real Estate Investment Trust ("REIT") whereby CPI now
leases the facility from the REIT. In connection therewith, in June 1998, CPI
received a one-time payment of $3 million toward improvements previously made
and to be made to such facility for laboratories and office space. CPI vacated
its 7,900 square feet facility in Aurora, Colorado at the end of July 1998; the
lease expires in June 1999. CPI has consolidated all operations from the Aurora
facility into the Horsham facility.
LEGAL PROCEEDINGS
CPI is not a party to any legal proceedings.
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CPI AND CPHI SELECTED FINANCIAL INFORMATION
The following tables set forth certain selected financial data of CPI and
CPHI. This data is derived from and should be read in conjunction with, and is
qualified in its entirety by, the financial statements, including the notes
thereto, of CPI appearing elsewhere in this Joint Proxy Statement/Prospectus.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of results to be expected for the full year of any future
period. No cash dividends have ever been declared or paid on CPI Common Stock.
The selected financial data set forth below should be read in conjunction with
the financial statements, including the notes attached thereto, and "CPI
Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the "Unaudited Pro Forma Condensed Consolidated Financial
Information".
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------- --------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CPI STATEMENT OF OPERATIONS
DATA:
Expenses:
Research and development..... $ 1,623 $ 2,429 $ 2,575 $ 4,163 $ 8,757 $ 3,224 $ 6,898
General and administrative... 698 705 644 663 950 342 1,966
Provision for redemption of
CPI Redeemable Preferred
Stock...................... -- -- -- -- 1,017 -- --
--------- --------- --------- --------- ---------- --------- ----------
Total expenses............. 2,321 3,134 3,219 4,826 10,724 3,566 8,864
Interest income................ 52 24 28 91 427 123 244
--------- --------- --------- --------- ---------- --------- ----------
Net loss....................... $ (2,269) $ (3,110) $ (3,191) $ (4,735) $ (10,297) $ (3,443) $ (8,620)
========= ========= ========= ========= ========== ========= ==========
Basic and diluted net loss per
common share(1).............. $ (1.00) $ (1.36) $ (1.39) $ (1.83) $ (3.63) $ (1.27) $ (2.88)
========= ========= ========= ========= ========== ========= ==========
Shares used in computing basic
and diluted net loss per
common share................. 2,279,500 2,291,306 2,296,167 2,587,552 2,838,814 2,718,845 2,990,095
========= ========= ========= ========= ========== ========= ==========
Pro forma basic and diluted net
loss per common share(2)..... $ (.82) $ (.56)
========== ==========
Shares used in computing pro
forma basic and diluted net
loss per common share........ 12,526,620 15,524,145
========== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------
CPHI CPHI
PRO FORMA PRO FORMA
DECEMBER 31, BEFORE AFTER
-------------------------------------------------- CPI TSENG MERGER TRANSACTIONS
1993 1994 1995 1996 1997 ACTUAL (3) (4)
------- ------- -------- -------- -------- -------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents......... $ 1,335 $ 605 $ 2,203 $ 645 $ 8,461 $ 20,349 $ 20,020 $ 44,639
Working capital
(deficiency)........ 613 (294) 835 (507) 5,383 18,747 18,418 41,993
Total assets.......... 1,396 704 2,330 1,106 10,980 22,332 22,003 50,080
Notes payable......... -- -- 94 111 62 -- -- --
Redeemable Preferred
Stock............... 1 1 1 1 1,092 1,092 -- --
Accumulated deficit... (4,651) (7,761) (10,952) (15,688) (25,985) (34,605) (34,605) (34,605)
Total stockholders'
equity (deficit).... 660 (242) 901 (180) 6,622 19,200 19,963 46,021
</TABLE>
- ---------------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of basic and diluted net loss per common share.
(2) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma basic and diluted net loss per common share.
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<PAGE> 99
(3) Includes the (i) conversion of all shares of outstanding CPI Series A, B, C,
D, E, F and G Preferred Stock into the rights to receive 15,614,266 shares
of CPHI Common Stock, (ii) redemption of all shares of the CPI Redeemable
Preferred Stock for $546,000 of cash consideration and 82,732 shares of CPI
Common Stock which shares will be converted into rights to receive an
equivalent number of shares of CPHI Common Stock and (iii) the exercise of
all warrants to purchase Series E Preferred Stock into 69,044 shares of CPI
Series E Preferred Stock at $3.15 per share which shares will be converted
into rights to receive an equivalent number of shares of CPHI Common Stock.
All of the shares of CPI Common Stock then outstanding will be converted
into the same number of shares of CPHI Common Stock. See "The Transactions"
and "Unaudited Pro Forma Condensed Consolidated Financial Information."
(4) Includes the sale of 5,477,614 shares of CPHI Common Stock in exchange for
Tseng's cash and other net assets less estimated transactions costs of
approximately $1,850,000 consisting principally of investment banking and
other professional fees and the payment of $640,000 related to severance to
be triggered by the Transactions to be paid to Tseng employees after
consummation of the Transactions, as it is anticipated that the affected
Tseng employees will not be employed by CPHI, CPI, or Tseng. The pro forma
information is subject to the assumptions set forth in the notes to the
Unaudited Pro Forma Condensed Consolidated Financial Information appearing
elsewhere in this Joint Proxy Statement/ Prospectus. See "The Transactions"
and "Unaudited Pro forma Condensed Consolidated Financial Information."
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<PAGE> 100
CPI AND CPHI CAPITALIZATION
The following table sets forth the CPI Actual, CPHI Pro Forma Before Tseng
Merger and CPHI Pro Forma After Transactions capitalization of CPHI as of June
30, 1998 (see "The Reorganization Agreement"). The financial data presented
below should be read in conjunction with the Unaudited Pro Forma Condensed
Consolidated Financial Information and the Notes thereto, CPI's Financial
Statements and the Notes thereto, "CPI Management's Discussion and Analysis of
Financial Condition and Results of Operations" herein and the other financial
data included elsewhere in this Joint Proxy/Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------------
CPHI CPHI
PRO FORMA PRO FORMA
CPI BEFORE AFTER
ACTUAL TSENG MERGER(1) TRANSACTIONS(2)
--------- ---------------- ----------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Redeemable Preferred Stock, $.01 par value, 61,250
shares authorized, issued and outstanding CPI
actual; none issued and outstanding CPHI pro forma
before Tseng Merger and after Transactions.......... $ 1,092 $ -- $ --
-------- -------- --------
Stockholders' Equity:
Preferred Stock, $.01 par value, 18,400,000 shares
authorized and 15,614,266 shares issued and
outstanding CPI actual; 5,000,000 shares
authorized and none outstanding CPHI pro forma
before Tseng Merger and after Transactions....... 53,571 -- --
Common Stock, $.01 par value, 22,400,000 shares
authorized and 2,990,095 shares issued and
outstanding CPI actual; 70,000,000 authorized and
18,756,137 shares issued and outstanding CPHI pro
forma before Tseng Merger and 24,233,751 issued
and outstanding CPHI pro forma after
Transactions(3).................................. 30 188 243
Additional paid-in capital.......................... 456 54,632 80,635
Stock subscription receivable from issuance of
Preferred Stock.................................. (215) -- --
Stock subscription receivable from issuance of
Common Stock..................................... (37) (252) (252)
Accumulated deficit................................. (34,605) (34,605) (34,605)
-------- -------- --------
Total stockholders' equity....................... 19,200 19,963 46,021
-------- -------- --------
Total capitalization........................... $ 20,292 $ 19,963 $ 46,021
======== ======== ========
</TABLE>
- ---------------
(1) Includes the (i) conversion of all shares of outstanding CPI Series A, B, C,
D, E, F and G Preferred Stock into the rights to receive 15,614,266 shares
of CPHI Common Stock, (ii) redemption of all shares of the CPI Redeemable
Preferred Stock for $546,000 of cash consideration and 82,732 shares of CPI
Common Stock which shares will be converted into rights to receive an
equivalent number of shares of CPHI Common Stock and (iii) the exercise of
all warrants to purchase Series E Preferred Stock into 69,044 shares of CPI
Series E Preferred Stock at $3.15 per share which shares will be converted
into rights to receive an equivalent number of shares of CPHI Common Stock.
Also assumes all of the shares of CPI Common Stock then outstanding will be
converted into the same number of shares of CPHI Common Stock.
(2) Includes the sale of 5,477,614 shares of CPHI Common Stock in exchange for
Tseng's cash and other net assets less estimated Transactions costs of
approximately $1,850,000 consisting principally of investment banking and
other professional fees and the payment of $640,000 related to severance to
be triggered by the Transactions to be paid to Tseng employees after
consummation of the Transactions, as it is anticipated that the affected
Tseng employees will not be employed by CPHI, CPI, or Tseng. The pro forma
information is subject to the assumptions set forth in the notes to the
Unaudited Pro Forma
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<PAGE> 101
Condensed Consolidated Financial Information appearing elsewhere in this
Joint Proxy Statement/Prospectus.
(3) Excludes 1,231,255 shares of CPI Common Stock issuable upon the exercise of
outstanding CPI Options, 358,144 shares of CPI Capital Stock issuable upon
the exercise of outstanding CPI Warrants, 735,429 shares of CPI Common Stock
reserved for the future issuance under the CPI 1997 Equity Incentive Plan,
363,141 shares of CPI Common Stock reserved for future issuance under the
CPI 1997 Non-Employee Director Stock Option Plan, 544,710 shares of CPI
Common Stock reserved for future issuance under the CPI Employee Purchase
Plan, 1,422,508 options to acquire Tseng Common Stock which will become
options to acquire 516,559 shares of CPHI Common Stock and 3,066,785 options
to acquire Tseng Common Stock which could become options to acquire
1,113,650 shares of CPHI Common Stock reserved for future issuance under the
1991 and 1995 Stock Option Plans and the 1991 Special Directors Stock Option
Plan.
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<PAGE> 102
CPI MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
CPI's financial statements and notes thereto included elsewhere in this Joint
Proxy Statement/Prospectus. When used in this discussion, the word "expects" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
include, but are not limited to, the risks discussed below, the risks discussed
in the section of this Joint Proxy Statement/Prospectus entitled "Risk Factors"
and the risks discussed elsewhere in this Joint Proxy Statement/Prospectus.
OVERVIEW
CPI is a pharmaceutical company focused on the development and
commercialization of products to prevent and treat cancer. From the inception of
CPI's business in partnership form in 1990, CPI's operating activities have
related primarily to conducting research and development activities, raising
capital and recruiting personnel. The business converted from partnership to
corporate form in September 1993. Historically, CPI conducted its business with
few direct employees and many consultants. In the four years leading to the
filing of the IND with the FDA in December 1993, to permit the commencement of
human clinical trials of CPI's first product candidate, PREVATAC(TM) exisulind,
CPI spent a total of $4.6 million. Annual expenses were $3.2 million, $4.8
million and $10.7 million in 1995, 1996 and 1997, respectively. Expenses for the
first six months of 1998 were $8.9 million. In APC, Phase I clinical trials for
PREVATAC(TM) exisulind began in February 1994; Phase I/II clinical trials began
in August 1995; and Phase III clinical trials were initiated in the second
quarter of 1997. In December 1997, CPI initiated Phase II/III trials of
PREVATAC(TM) exisulind for sporadic adenomatous colonic polyps and for the
prevention of prostate cancer recurrence as well as a pilot study in lung
cancer. In February 1998, CPI initiated a Phase II/III trial of PREVATAC(TM)
exisulind for prevention of breast cancer recurrence. CPI also plans to initiate
Phase II trials for the treatment of Barrett's Esophagus and bronchial dysplasia
in 1998.
CPI has not received any revenue from the sale of products, and no product
candidate of CPI has been approved for marketing. Accordingly, CPI's income has
been limited to interest income from investments, and CPI's primary source of
capital has been the sale of equity securities. As of June 30, 1998, CPI's
accumulated deficit was $34.6 million and its cash and investments were $20.3
million. CPI anticipates that it will continue to incur additional operating
losses for the next several years. There can be no assurance that CPI's products
will be approved for marketing, that CPI will attain profitability or, if
profitability is achieved, that CPI will remain profitable on a quarterly or
annual basis in the future.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared with Six Months Ended June 30,
1997. Total expenses for the six months ended June 30, 1998 were $8.9 million,
an increase of $5.3 million from the same period in 1997. Research and
development expenses for the first half of 1998 were $6.9 million, an increase
of $3.7 million from the same period in 1997. Such increase was primarily due to
increased activities in 1998 associated with the clinical development of
PREVATAC(TM) exisulind, research contracts and consulting expenses associated
with the development of new product candidates, personnel related expenses
associated with expanded in-house activity, and facility expenses for CPI's new
research facility in Horsham, Pennsylvania. General and administrative expenses
were $2.0 million in the first half of 1998, an increase of $1.6 million from
the same period in 1997. Such increase was primarily due to a charge of
approximately $715,000 for expenses related to CPI's initial public offering
which was not undertaken, as well as increases in personnel related activities,
principally salary, travel and recruitment expenses, consulting expenses for
management information systems and public and investor relations, and facility
expenses associated with CPI's new facility.
Interest income was $244,000 in the first half of 1998, an increase of
$121,000 from the same period in 1997 due to higher cash balances in 1998 from
the CPI Series G Preferred Stock financing in April and May 1998 and which
resulted in net proceeds of approximately $21.4 million.
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<PAGE> 103
Year Ended December 31, 1997 Compared with Year Ended December 31,
1996. Total expenses for the year ended December 31, 1997, were $10.7 million,
an increase of $5.9 million from the same period in 1996. Research and
development expenses in 1997 were $8.8 million, an increase of $4.6 million from
1996. Such increase was primarily due to increased activities with respect to
the clinical development of PREVATAC(TM) exisulind and cell biology research
related to CPI's technology. General and administrative expenses were $950,000
in 1997, an increase of $287,000 from 1996, primarily due to higher
personnel-related expenses for salaries, travel and recruiting. In the third
quarter of 1997, CPI recorded a provision of $1.0 million for the redemption of
CPI Redeemable Preferred Stock as CPI's preparations for a registration of its
stock made it probable that such redemption would occur.
Interest income was $427,000, an increase of $336,000 from 1996, due to the
higher cash balances resulting from the CPI Series F Preferred Stock financing
that commenced in 1996 and resulted in net proceeds of $17.6 million in 1996 and
1997.
Year Ended December 31, 1996 Compared with Year Ended December 31,
1995. Total expenses for the year ended December 31, 1996 were $4.8 million, an
increase of $1.6 million from the same period in 1995. Research and development
expenses in 1996 were $4.2 million, an increase of $1.6 million from 1995. Such
increase was primarily due to increased activity and related expenses associated
with the pharmaceutical and clinical development of PREVATAC(TM) exisulind,
including the Phase I/II trial of PREVATAC(TM) exisulind in APC that commenced
in August 1995, increases in staffing and supply of CPI's research laboratory
and third-party research contracts. General and administrative expenses were
$663,000 in 1996, an increase of $19,000 from 1995.
Interest income was $91,000 in 1996, an increase of $63,000 from 1995, due
to the higher cash balances resulting from the continued sale of the CPI Series
E Preferred Stock which commenced in May 1994 and resulted in net proceeds of
$6.5 million during 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
CPI has financed its operations since inception primarily with the net
proceeds received from private placements of equity securities. These placements
generated net proceeds of approximately $53.6 million from inception through
June 30, 1998. Net cash generated by financing activities was $4.3 million, $3.5
million, $17.1 million and $20.5 million in 1995, 1996, 1997 and for the six
months ended June 30, 1998, respectively, primarily reflecting the sale of
equity securities. The CPI Series F Preferred Stock private placement, which
commenced in December 1996 and concluded in June 1997, raised net proceeds $17.6
million. The CPI Series G Preferred Stock private placement in April and May of
1998 raised net proceeds of approximately $21.4 million.
CPI had cash and cash equivalents of $20.3 million (excluding restricted
cash of $401,000) at June 30, 1998. Overall, CPI's cash position increased by
$11.9 million for the six month period ended June 30, 1998 primarily as a result
of the proceeds from the CPI Series G Preferred Stock offering. CPI invests its
excess cash primarily in low risk, highly liquid money market funds and U.S.
government treasuries. As of June 30, 1998, CPI had $401,000 in a restricted
account pledged as security to a letter of credit for the deposit on the
facility lease in Horsham. See "CPI Business -- Facilities".
CPI anticipates that annual expenditures for preclinical studies, clinical
trials, product development, research and general and administrative expenses
will continue to increase in future years. In anticipation of the possible FDA
approval for the marketing of PREVATAC(TM) exisulind, CPI expects to begin
preparing for the commercialization of CPI's first product during the second
half of 1998 and to accelerate such preparation in 1999, adding substantial
additional expense. There can be no assurance, however, that CPI will be able to
successfully complete the clinical development of PREVATAC(TM) exisulind for APC
or any other indication, that the FDA will grant approvals within the time
frames expected, if at all, that the other developments or expansions in CPI's
programs of research, development and commercialization will not require
additional funding or encounter delays or that, in light of these or other
circumstances, CPI will be able to achieve the planned levels of revenue,
expense and cash flow.
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CPI leases approximately 40,000 square feet of laboratory and office space
in Horsham, Pennsylvania under a ten-year lease which expires in 2008 and which
contains two five-year renewal options. In June 1998, CPI completed a financing
transaction with a public Real Estate Investment Trust ("REIT") whereby CPI now
leases the facility from the REIT. In connection therewith, in June 1998, CPI
received a one-time payment of $3 million toward improvements previously made
and to be made to such facility for laboratories and office space. CPI vacated
its 7,900 square feet facility in Aurora, Colorado at the end of July 1998; the
lease expires in June 1999. CPI has consolidated all operations from the Aurora
facility into the Horsham facility.
CPI plans to finance its anticipated growth and development largely through
equity financings. CPI expects that the net proceeds of approximately $26.4
million from consummation of the Transactions, together with existing cash
balances and interest on combined cash balances, will provide CPI with
sufficient working capital to sustain operations through approximately the end
of 2000, although there can be no assurance that CPI will not require additional
funding prior to that time. CPI anticipates that, if there are delays in its
current programs or if its current programs of research and development yield
expansion opportunities, CPI would seek additional financing, whether through
public or private equity or debt financings, corporate alliances or through
combinations thereof. There can be no assurance that additional equity or debt
financing will be available on terms acceptable to CPI, if at all. Any
additional equity financing would be dilutive to stockholders. Debt financing,
if available, may include restrictive covenants. If additional funds should be
needed but are not available, CPI may be required to curtail its operations
significantly or to obtain funds through other arrangements on unfavorable
terms. The failure by CPI to raise capital on acceptable terms if and when
needed would have a material adverse effect on CPI's business, financial
condition and results of operations.
INFLATION
CPI does not believe that inflation has had any significant impact on CPI's
business to date.
INCOME TAXES
As of December 31, 1997, CPI had approximately $20.9 million of net
operating loss carryforwards ("NOLs") for income tax purposes available to
offset future federal income tax, subject to limitations for alternative minimum
tax. The NOLs are subject to examination by the federal and state tax
authorities and expire between 2008 and 2012.
Prior to its conversion into corporate form, the business had accumulated
losses totaling approximately $3.9 million. For tax purposes, these losses were
distributed to the partners in accordance with the provisions of the partnership
agreement of CPI's predecessor partnership. Thus, these losses, while included
in the financial statements of CPI, are not available to offset future taxable
income, if any, of CPI.
The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company of greater than 50% within a three-year period results in an annual
limitation on CPHI's ability to utilize its NOLs from tax periods prior to the
ownership change. CPHI expects that upon consummation of the Transactions, such
a limitation will be triggered. However, CPHI does not expect such limitation to
have a significant impact on its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements and requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
has been adopted in CPI's
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fiscal 1998 financial statements and had no impact on CPI's financial position
or results of operations. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
required to be adopted for CPI's 1998 year-end financial statements. The
adoption of this pronouncement is expected to have no impact on CPI's financial
statements as CPI currently operates in one segment.
RISKS ASSOCIATED WITH THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions and information, send invoices, or engage in
similar normal business activities.
CPI does not believe that it has material exposure to the Year 2000 issue
with respect to its own information systems since CPI has reviewed its existing
systems and they correctly define the Year 2000. Non-information technology
systems that utilize embedded technology, such as microcontrollers, may also
face Year 2000 issues. However, the Company believes that it does not have
significant Year 2000 issues related to non-information technology systems and
is currently reviewing these systems. This review is expected to be completed
during 1998.
In addition, CPI is conducting an analysis to determine the extent to which
its major vendors' systems (insofar as they relate to CPI's business) are
subject to the Year 2000 issue. This review is expected to be completed during
1998. CPI is currently unable to predict the extent to which it would be
vulnerable to its vendors' failure to remediate any Year 2000 issues on a timely
basis. The failure of a major vendor subject to the Year 2000 issue to convert
its systems on a timely basis or a conversion that is incompatible with CPI's
systems could have a material adverse effect on CPI. However, CPI's activities
to date have related primarily to conducting research and development activities
and as a result are not significantly dependent on external third-party systems.
All new contractual arrangements with third parties require assurance that the
third party is Year 2000 compliant.
To date CPI has not made any contingency plans to address third-party Year
2000 risks. CPI plans to formulate contingency plans to the extent necessary in
1999. Historical and estimated costs directly related to Year 2000 issue
remediation have been and are expected to be immaterial as CPI's past and future
infrastructure has been built with Year 2000 issues in mind and to minimize
these issues. Thus, systems have been and will be upgraded on a normal
replacement schedule with only immaterial opportunity costs of CPI personnel to
ensure new systems and third parties are Year 2000 compliant.
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MANAGEMENT OF CPHI AND EXECUTIVE COMPENSATION
The following table sets forth information as of August 31, 1998 regarding
the individuals who are expected to serve as directors or executive officers of
CPHI upon consummation of the Transactions.
<TABLE>
<CAPTION>
NAME POSITION WITH CPHI
- ---- ------------------
<S> <C>
Robert J. Towarnicki................. Chief Executive Officer; President; Director
Brian J. Hayden...................... Chief Financial Officer; Vice President -- Finance;
Treasurer
Rifat Pamukcu, M.D. ................. Chief Scientific Officer; Senior Vice President -- Research
and Development
Richard H. Troy...................... Senior Vice President--Corporate Development; General
Counsel; Secretary; Director
William A. Boeger(1)(2).............. Chairman of the Board of Directors
Thomas M. Gibson(2).................. Director
Judith A. Hemberger, Ph.D............ Director
Roger J. Quy, Ph.D.(1)............... Director
Bruce R. Ross........................ Director
Peter G. Schiff(1)................... Director
Randall M. Toig, M.D. ............... Director
John J. Gibbons...................... Director Nominee
Louis M. Weiner, M.D................. Director Nominee
</TABLE>
- ---------------
(1) Member of the Compensation and Stock Option Committee.
(2) Member of the Audit Committee.
EXECUTIVE OFFICERS AND DIRECTORS
ROBERT J. TOWARNICKI, 47, has served as Chief Executive Officer and a
Director of CPI since October 1996 and President of CPI since January 1998.
Prior to joining CPI, from 1992 to 1996, he served as President, Chief Operating
Officer, a Director and most recently as Executive Vice President of Integra
LifeSciences Corporation, which is the publicly held parent firm for a group of
biotechnology and medical device companies including Collatech, Inc., ABS
LifeSciences Inc., Telios Pharmaceuticals, Inc. and Vitaphore Corporation. In
addition, from 1991 to 1992, he served as Founder, President and Chief Executive
Officer of MediRel, Inc. From 1989 to 1991, he was General Manager of Focus/MRL,
Inc.; from 1985 to 1989, he was Vice President of Development and Operations for
Collagen Corporation and from 1974 to 1985, he held a variety of operations
management positions at Pfizer, Inc. and Merck & Co., Inc. Mr. Towarnicki was a
Ph.D. candidate in Pharmaceutical Chemistry at Temple University School of
Pharmacy and received his M.S. and B.S. degrees from Villanova University.
BRIAN J. HAYDEN, 46, has served as Vice President and Chief Financial
Officer of CPI since November 1997 and as Treasurer since June 1998. Prior to
joining CPI, during 1996 and 1997, he served as Vice President of Finance and
Administration for NeoStrata, Inc., a dermatology company and Vice President and
Chief Financial Officer of Micrus Corporation, a medical device company. From
1992 to 1996, he served as Vice President, Finance, Chief Financial Officer and
Treasurer of Biomatrix, Inc., a public medical device company. From 1988 to
1992, he served as Vice President, Chief Financial Officer, Treasurer and
Secretary of Alteon Inc., a public biopharmaceutical company. Mr. Hayden served
as Vice President, Finance and Administration for Healthways Systems, Inc., a
managed care organization, from 1985 to 1988. From 1976 to 1985, he served in
various auditing, financial analysis and senior financial management positions
with Hoffmann-La Roche, Inc. He served as a Senior Auditor from 1973 to 1976
with Coopers and Lybrand LLP. Mr. Hayden received a B.B.A. in Accounting from
Loyola University of Chicago and has completed graduate courses at Seton Hall
University.
RIFAT PAMUKCU, M.D., 41, is CPI's Chief Scientific Officer and Senior Vice
President -- Research and Development. Dr. Pamukcu is a co-founder of CPI. Prior
to joining CPI full time in 1993, from 1989 to
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March 1993, he was Assistant Professor of Medicine at the University of
Cincinnati and co-chair of CPI's SAB. He continued as an Adjunct Assistant
Professor of Medicine at the University of Cincinnati from 1993 to 1995. He was
a postdoctoral fellow from 1986 to 1989 in the Division of Gastroenterology at
the University of Chicago. Dr. Pamukcu received a B.A. in Biology from Johns
Hopkins University in 1979 and an M.D. degree from the University of Wisconsin
School of Medicine in 1983.
RICHARD H. TROY, 60, has served as Senior Vice President -- Corporate
Development of CPI since November 1997, Vice President -- Finance, Law and
Administration from January 1993 until November 1997, and General Counsel,
Secretary and a Director of CPI since December 1992. He has been an advisor to
CPI since its inception, and he is a Director and President of FGN, Inc., the
predecessor partnership's first general partner and a principal stockholder of
CPI. Prior to joining CPI, from 1990 to 1992, he served as Vice President and
Associate General Counsel of UST, Inc. Prior to that, from 1973 to 1990, he
worked at Combustion Engineering, Inc., most recently as Vice President and
Deputy General Counsel, and from 1964 to 1973, he practiced law with the firm of
Shearman & Sterling in New York City. Mr. Troy received a B.A. in Philosophy
from Georgetown University in 1959, studied at the Ludwig-Maximilians-
Universitat in Munich in 1959-60, and received a LL.B. degree from Harvard Law
School in 1963.
WILLIAM A. BOEGER, 48, has served as Chairman of the Board of Directors of
CPI since September 1996 and as a Director since December 1992. Since 1986 he
has been Managing General Partner of Quest Ventures II, a venture capital
company that he founded. Since 1993 he also has been Chairman of the Board of
Calypte Biomedical Corporation. Since December 1997 he has been President and
Chief Executive Officer of Calypte Biomedical Corporation, having also served as
President and Chief Executive Officer at that company from 1993 to 1995. In
addition, Mr. Boeger is Chief Executive Officer of Pepgen Corporation. From 1981
to 1986, Mr. Boeger was employed by Continental Capital Ventures, a
publicly-traded venture capital fund, where he attained the position of General
Partner. Mr. Boeger received a B.S., with an emphasis in Psychobiology, from
Williams College in 1972 and an M.B.A. from the Harvard Business School.
THOMAS M. GIBSON, 70, has served as a Director of CPI since August 1996. He
also has served as President of Integrated Technologies Development Corporation
since 1995. Prior to coming out of retirement in 1994 to serve as President of
Jupiter Electric Company, Inc. until 1996, he was associated with Gibson
Electric Company, Inc. from 1947 to 1992, where he attained the position of
Chief Executive Officer. In addition, in the early 1980s he co-founded Gibson
Information Systems, a data service bureau. Mr. Gibson attended Culver Military
Academy, the University of Arizona and the University of Illinois.
JUDITH A. HEMBERGER, PH.D., 51 has served as a director of CPI since June
1998. Since 1997, she has served as Vice-Chair, Strategic Planning and
Regulatory Affairs, Mayo Foundation for Medical Research and Education. From
1979 to 1997, she served Marion Merrell Dow Inc., most recently as Senior Vice
President, Global Regulatory Affairs (1995-1997), and Vice President, Global
Medical Affairs and Commercial Development (1994-1995). She is a member of the
Board of Directors of NexStar Pharmaceutical Company, the International Board of
Directors of Pharmaceutical Research Associates, and of the Dean's Advisory
Board, School of Pharmacy, University of Missouri at Kansas City. Since 1985,
she has been Adjunct Associate Professor, Division of Pharmacology, University
of Missouri at Kansas City School of Pharmacy. Dr. Hemberger received her
undergraduate degree in Biology from Mt. St. Scholastica College, a Ph.D. in
Pharmacology from the University of Missouri, Kansas City, and an M.B.A. from
Rockhurst College.
ROGER J. QUY, PH.D., 47, has served as a Director of CPI since December
1992. He has been a General Partner of Technology Partners, a venture capital
firm, since 1990 and has been responsible for health care investments at
Technology Partners since 1989. From 1982 to 1989, Dr. Quy held various
management positions with the Hewlett-Packard Company. Dr. Quy received his
undergraduate degree with a major in Psychology and Law and a Doctorate in
Neuroscience from the University of Keele, England, and an M.B.A. from the Haas
School of Business, University of California, Berkeley.
BRUCE R. ROSS, 56, has served as a Director of CPI since January 1998. He
also works as a consultant at Cancer Rx, Inc. From 1994 to 1997, he served as
Chief Executive Officer of The National Comprehensive Cancer Network, an
association of fifteen U.S. cancer centers. From 1976 to 1994, he held various
positions with Bristol-Myers Squibb Company, including as Senior Vice President,
Policy, Planning and Development
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of the U.S. Pharmaceutical Group from 1993 to 1994 and as President of the U.S.
Pharmaceutical Group from 1990 to 1992. Mr. Ross received his B.S. degree from
Syracuse University in 1962.
PETER G. SCHIFF, 46, has served as a Director of CPI since December 1992.
He is the President and founder of Northwood Ventures LLC, a firm specializing
in venture capital and leveraged buyouts, President of Northwood Capital
Partners LLC, and Managing General Partner of Rabbit Hollow Partners. Prior to
founding Northwood Ventures LLC in 1983, Mr. Schiff worked for E.M. Warburg,
Pincus & Co., Inc. from 1980 to 1983, and at Chemical Bank from 1976 to 1980.
Mr. Schiff received a B.A. from Lake Forest College in 1974 and an M.B.A. from
the University of Chicago's Graduate School of Business in 1976.
RANDALL M. TOIG, M.D., 47, has served as a Director of CPI since November
1994. He has been in private medical practice at Prentise Women's Hospital in
Chicago, Illinois since 1982. He has been Associate of Clinical Obstetrics and
Gynecology in the Department of Obstetrics and Gynecology at both Northwestern
University Hospital and the Northwestern University Medical School since 1982,
and has been a Fellow at the American College of Obstetrics and Gynecology since
1985. Dr. Toig received a B.S. in Zoology and Anthropology from the University
of Michigan in 1972 and an M.D. from the University of Pittsburgh School of
Medicine in 1977.
The Certificate of Incorporation of CPHI provides that the members of the
Board of Directors shall be divided into three classes prior to the consummation
of the Transactions.
DIRECTOR NOMINEES
JOHN J. GIBBONS, 60, has been the President and Chief Executive Officer of
Tseng since November 1997. From December 1996 until November 1997, Mr. Gibbons
was Executive Vice President and Chief Operating Officer of Tseng. From January
1996 to November 1996, Mr. Gibbons served as a consultant to Tseng. Mr. Gibbons
served as Tseng's Chief Financial Officer from January 1989 to May 1991, and as
a Vice Chairman from May 1991 to December 1995. Mr. Gibbons has been a director
of Tseng since 1983 and Chairman since November 1997.
LOUIS M. WEINER, M.D., 47, has served as the Chairman of the Department of
Medical Oncology, Division of Medical Science at Fox Chase Cancer Center since
1994 and has been on staff at Fox Chase Cancer Center since 1984. Since 1995,
Dr. Weiner has been a Professor in the Department of Medicine, Temple University
School of Medicine. Since 1995, he has chaired the Biologic Response Modifiers
Committee and the Translational Research Committee of the Eastern Cooperative
Oncology Group. Dr. Weiner is a graduate of the University of Pennsylvania and
the Mount Sinai School of Medicine.
KEY EMPLOYEES
LLOYD G. GLENN, 43, has served as Vice President -- Marketing of CPI since
June 1998. Prior to joining CPI, from 1995 to 1998, he served as Vice President
of Marketing for Athena Neurosciences, Inc., the Neurological Division of Elan.
From 1983 to 1994, he served in a series of sales management positions,
ultimately serving as Senior Product Manager for the Pharmaceutical Division of
Allergan, Inc. His additional past experience includes positions at Block Drug,
from 1982 to 1983, and Airwork, a subsidiary of Purex, Inc. from 1981 to 1982.
Mr. Glenn received his B.S. degree in marketing from Brigham Young University.
KERSTIN B. MENANDER, M.D., PH.D., 60, has served as Vice
President -- Medical and Regulatory Affairs of CPI since January 1997. Prior to
joining CPI, from 1989 to 1997 she was President of US 3D Development, Inc. From
1992 to 1994 she was also a corporate officer and Vice President, Medical
Affairs of Curative Technologies, Inc. Between 1986 and 1989 she served as Vice
President, Medical and Regulatory Affairs and a corporate officer of Collagen
Corporation. From 1973 to 1986 she held a variety of clinical and regulatory
positions at companies such as Syntex Corporation and Abbott Laboratories. Dr.
Menander received her M.D. and Ph.D. from the University of Lund, Sweden, where
she also did research and taught as Associate Professor of Histology of the
Medical Faculty.
ROBERT W. STEVENSON, J.D. 43, has served as CPI's Vice President for
Intellectual Property since November 1997. Prior to joining CPI, he was an
attorney at Brinks Hofer Gilson & Lione, where he served as
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a partner from 1992 to 1997 and as counsel from 1988 until 1992. He served as
CPI's outside patent counsel since its inception. In addition, he was an Adjunct
Professor of Patent Law at DePaul University from 1992-1996. Before joining
Brinks Hofer Gilson & Lione, he was a senior attorney at Abbott Laboratories,
where he handled a variety of patent matters involving pharmaceuticals and
biotechnology. Mr. Stevenson received his B.S.E. from Penn State University in
1977, his M.S.E. from the University of Michigan in 1979, and his J.D. from
Wayne State University in 1982.
COMPENSATION OF DIRECTORS
CPHI. CPHI's directors do not currently receive any compensation for
service on the CPHI Board or any committee thereof. Upon completion of the
Transactions, the CPI Directors Plan described below will be assumed by CPHI.
Directors are reimbursed for certain expenses in connection with attendance at
CPHI Board and committee meetings.
CPI. CPI's directors do not currently receive any compensation for service
on the CPI Board or any committee thereof other than pursuant to the 1997
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Directors are
reimbursed for certain expenses in connection with attendance at CPI Board and
committee meetings.
The Directors' Plan, which was approved by the CPI stockholders, was
adopted by the CPI Board on October 14, 1997 and provides for the automatic
grant of options to purchase shares of CPI Common Stock to non-employee
directors of CPI. The Directors' Plan is administered by the CPI Board, unless
the CPI Board delegates administration to a committee.
The aggregate number of shares of CPI Common Stock that may be issued
pursuant to options granted under the Directors' Plan is 453,925. Each person
who first becomes a Non-Employee Director automatically shall be granted an
option to purchase 18,157 shares of CPI Common Stock (the "Inaugural Grant"). In
addition, on the date of each annual stockholders meeting, each Non-Employee
Director who has served at least one full year as director will automatically be
granted an option to purchase 5,447 shares of CPI Common Stock (the "Anniversary
Grant").
Options subject to an Inaugural Grant under the Directors' Plan will vest
in three equal, annual installments commencing on the first anniversary of the
date of the grant of the option. Options subject to an Anniversary Grant under
the Directors' Plan will vest in full on the first anniversary of the date of
the grant of the option. The vesting of all options under the Directors' Plan is
conditioned on the continued service of the recipient as a director, employee or
consultant of CPI or any affiliate of the CPI.
The exercise price of the options granted under the Directors' Plan will be
equal to the fair market value of CPI Common Stock granted on the date of grant.
No option granted under the Directors' Plan may be exercised after the
expiration of 10 years from the date it was granted. Options granted under the
Directors' Plan generally are non-transferable, except as provided in the option
agreement. The Directors' Plan will terminate on the tenth anniversary of the
date of its adoption by the CPI Board unless sooner terminated by the CPI Board.
In the event of certain changes of control, options outstanding under the
Directors' Plan will automatically become fully vested and will terminate if not
exercised prior to such change of control.
Directors who are employees of CPI do not receive separate compensation for
their services as directors.
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COMPENSATION OF EXECUTIVE OFFICERS OF CPI
The following table sets forth for the fiscal years ended December 31, 1997
and 1996, the compensation for services rendered to CPI awarded or paid to, or
earned by, each executive officer of CPI who will serve as an executive officer
of CPHI upon consummation of the Transactions (the "CPI Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------- ---------------------------------
SECURITIES
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS STOCK AWARDS UNDERLYING OPTIONS
- --------------------------- ----------- -------- ------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Robert J. Towarnicki(1).......... 1997 $175,000 $40,000 $ -- 100,000
Chief Executive Officer;
President 1996 32,532 -- -- 175,000
Rifat Pamukcu, M.D............... 1997 145,000 25,000 -- 25,000
Chief Scientific Officer; 1996 145,000 25,000(2) 12,800(3) 60,000
Senior Vice President --
Research and Development
Richard H. Troy.................. 1997 140,000 25,000 -- 10,000
Senior Vice President -- 1996 140,000 25,000(2) 12,800(3) 50,000
Corporate Development;
General Counsel; Secretary
Brian J. Hayden(4)............... 1997 21,760 -- -- 90,785
Chief Financial Officer; 1996 -- -- -- --
Vice President -- Finance;
Treasurer
</TABLE>
- ---------------
(1) Robert J. Towarnicki began serving as Chief Executive Officer of CPI in
October 1996.
(2) In February 1996, the CPI Compensation Committee awarded bonuses of $25,000
in cash to each of Rifat Pamukcu and Richard H. Troy with respect to
services rendered during the 1993-1995 period.
(3) In March 1996, pursuant to the 1995 Stock Award Plan, the CPI Compensation
Committee awarded 40,000 shares of CPI Common Stock to each of Rifat Pamukcu
and Richard H. Troy with respect to services rendered during the 1993-1995
period. The fair market value of such stock awards was $0.32 per share, as
determined by the CPI Board.
(4) Brian J. Hayden began serving as Chief Financial Officer and Vice
President -- Finance in November 1997.
EMPLOYMENT AGREEMENTS OF CPI EXECUTIVE OFFICERS
In November 1997, CPI entered into an employment agreement with Brian J.
Hayden providing an annual compensation of $155,000 and up to 20% of base
compensation as an annual bonus, an option to purchase 90,785 shares of CPI
Common Stock at $4.75 per share subject to a four year vesting schedule, an
initial payment of $15,000, and a severance payment equal to six months of
salary and twelve months of health care premiums in the event of termination
without cause.
In October 1996, CPI entered into an employment agreement with Robert J.
Towarnicki providing for annual compensation of $175,000 and up to $35,000 as an
annual bonus, an option to purchase up to 175,000 shares of CPI Common Stock at
$0.50 per share subject to a four-year vesting schedule, certain relocation
expenses and a severance payment equal to six months of salary and vesting of at
least 87,500 options in the event of termination without cause. On July 23,
1997, the CPI Board increased Mr. Towarnicki's annual salary to $195,000,
effective as of January 1, 1998.
In February 1993, CPI entered into an employment agreement with Rifat
Pamukcu providing for annual compensation of $110,000 and up to $30,000 as an
annual bonus, certain relocation expenses and a severance payment equal to nine
months of salary in the event of involuntary termination or termination by Dr.
Pamukcu
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for good reason. CPI increased Dr. Pamukcu's annual compensation to $145,000 in
1996, and on July 23, 1997, the CPI Board increased Dr. Pamukcu's annual salary
to $175,000, effective as of January 1, 1998.
In January 1993, CPI entered into a memorandum of employment with Richard
H. Troy providing for annual compensation of $110,000, up to $30,000 as an
annual bonus, and a severance payment equal to six months of salary and benefits
in the event of termination without cause or termination by Mr. Troy for good
reason. CPI increased Mr. Troy's annual compensation to $140,000 in 1996, and on
January 23, 1997, the CPI Board increased Mr. Troy's annual salary to $160,000,
effective as of January 1, 1998.
STOCK OPTION GRANTS AND EXERCISES OF CPI EXECUTIVE OFFICERS
CPI grants options to its executive officers under its 1997 Equity
Incentive Plan (the "1997 Equity Incentive Plan"). As of June 30, 1998, options
to purchase a total of 1,130,271 shares of CPI Common Stock were outstanding
under the 1997 Equity Incentive Plan and options to purchase 745,629 shares of
CPI Common Stock remained available for grant thereunder.
The following tables show for the fiscal year ended December 31, 1997
certain information regarding options granted to, exercised by and held at such
dates by the CPI Executive Officers:
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL OPTIONS EXERCISE ANNUAL RATES OF
NUMBER OF GRANTED TO OR BASE STOCK PRICE
OPTIONS EMPLOYEES IN PRICE EXPIRATION APPRECIATION FOR
NAME GRANTED FISCAL YEAR ($/SHARE) DATE(1) OPTION TERMS(2)
---- --------- ------------- ---------- ---------------- ---------------------
5% 10%
--------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert Towarnicki........... 100,000(3) 22.0% $3.70 July 22, 2007 $232,750 $589,850
Rifat Pamukcu, M.D.......... 25,000(3) 5.5 3.70 July 22, 2007 58,175 147,450
Richard H. Troy............. 10,000(3) 2.2 3.70 July 22, 2007 23,275 58,975
Brian J. Hayden............. 90,785(3) 20.0 4.75 December 2, 2007 271,200 687,250
</TABLE>
- ---------------
(1) The standard options granted pursuant to the 1997 Equity Incentive Plan
(previously the 1993 Stock Option Plan) expire ten years after date of
grant.
(2) The potential realizable value is calculated assuming that the fair market
value of CPI Common Stock on the date of the grant as determined by the CPI
Board appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and the CPI
Common Stock received therefor is sold on the last day of the term of the
option for the appreciated price. The 5% and 10% rates of appreciation are
mandated by the rules of the Commission and do not represent CPI's estimate
or projection of future increases in the price of CPI Common Stock.
(3) Generally, options for 25% of the total shares of CPI Common Stock
underlying the options granted vest upon each anniversary of grant over four
years.
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<PAGE> 112
OPTION EXERCISES AND YEAR-END VALUE TABLE
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DEC. 31, 1997 DEC. 31, 1997
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME(1) EXERCISE REALIZED UNEXERCISABLE(2) UNEXERCISABLE(3)
------- ----------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Robert J. Towarnicki............... 175,000(4) $560,180 100,000/-- $105,000/--
Rifat Pamukcu, M.D. ............... -- -- 85,000/-- 292,050/--
Richard H. Troy ................... -- -- 10,000/-- 10,500/--
Brian J. Hayden.................... -- -- --/90,785 --/--
</TABLE>
- ---------------
(1) Since December 31, 1997, the following options to purchase CPI Common Stock
have been granted to the CPI Executive Officers: Robert J. Towarnicki,
120,000; Rifat Pamukcu, M.D., 80,000; Richard H. Troy, 50,000; and Brian J.
Hayden, 30,000. All of these options were granted at an exercise price of
$6.60 to vest ratably over four years.
(2) All options are subject to vesting; however, with respect to options granted
prior to July 1997 early exercise is possible with portions thereof
remaining subject to a repurchase option of CPI.
(3) To date, all options have been granted at exercise prices equal to the fair
market value per share of CPI Common Stock, as determined by the CPI Board;
the fair market value at December 31, 1997 was $4.75 per share.
(4) 123,958 shares were subject to a repurchase option of CPI as of December 31,
1997.
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<PAGE> 113
SECURITY OWNERSHIP OF CPI AND CPHI
The following table sets forth certain information regarding the beneficial
ownership of CPI Capital Stock as of June 30, 1998, and the anticipated
beneficial ownership of CPHI Common Stock after giving effect to the
Transactions as to each person who owns more than five percent of the
outstanding CPI Capital Stock, each person expected to own more than five
percent of the outstanding CPHI Common Stock after consummation of the
Transactions, certain other significant stockholders, each CPI Executive Officer
and CPI director, all of whom are executive officers and directors of CPHI, and
each CPHI director, the Chief Executive Officer of CPHI, each of the most highly
compensated executive officers of CPHI other than the Chief Executive Officer,
calculated based upon compensation of executive officers of CPI for fiscal year
1997 and all persons expected to be CPHI directors and executive officers, as a
group.
<TABLE>
<CAPTION>
% OF CPI % OF CPHI
NUMBER OF SHARES COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED OUTSTANDING OUTSTANDING
PRIOR TO AND AFTER BEFORE THE AFTER THE
BENEFICIAL OWNER THE TRANSACTIONS TRANSACTIONS(1) TRANSACTIONS
- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C>
5% STOCKHOLDERS:
FGN, Inc.(2)................................... 1,835,597 9.87% 7.62%
c/o Mayer, Brown & Platt
190 S. LaSalle Street
Chicago, IL 60603
Attn: Michael P. Cannon, Esq.
Gem Capital Management, Inc.(3)................ 1,780,939 9.55% 7.38%
70 East 55th Street, 12th Floor
New York, NY 10022
Northwood Ventures LLC(4)...................... 1,212,674 6.51% 5.03%
485 Underhill Blvd., Suite 205
Syossett, NY 11791
The Goldman Sachs Group, L.P.(5)............... 1,046,043 5.61% 4.33%
85 Broad Street
New York, NY 10004
Technology Partners(6)......................... 966,709 5.19% 4.01%
West Fund IV, L.P.
150 Tiburon Blvd., Suite A
Belvedere, CA 94920
OTHER SIGNIFICANT STOCKHOLDERS:
New York Life Insurance Company................ 896,729 4.82% 3.72%
51 Madison Avenue
New York, NY 10010
Jackson Boulevard Fund, Ltd.(7)................ 894,297 4.80% 3.71%
53 W. Jackson Blvd., Suite 400
Chicago, IL 60604
James Harpel(8)................................ 863,354 4.64% 3.58%
237 Park Avenue
New York, NY 10017
Vulcan Ventures, Inc.(9)....................... 837,231 4.49% 3.47%
110-110 Avenue N.E., Suite 550
Bellevue, WA 98004
DIRECTORS AND EXECUTIVE OFFICERS:**
William A. Boeger(10).......................... 344,817 1.85% 1.43%
Thomas M. Gibson(11)........................... 103,725 * *
Brian J. Hayden................................ 0 * *
Judith A. Hemberger, Ph.D...................... 0 * *
Rifat Pamukcu, M.D.(12)........................ 381,964 2.05% 1.59%
Roger J. Quy, Ph.D.(13)........................ 966,709 5.19% 4.01%
</TABLE>
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<PAGE> 114
<TABLE>
<CAPTION>
% OF CPI % OF CPHI
NUMBER OF SHARES COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED OUTSTANDING OUTSTANDING
PRIOR TO AND AFTER BEFORE THE AFTER THE
BENEFICIAL OWNER THE TRANSACTIONS TRANSACTIONS(1) TRANSACTIONS
- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C>
Bruce R. Ross.................................. 0 * *
Peter G. Schiff(14)............................ 1,212,674 6.51% 5.03%
Randall M. Toig, M.D.(15)...................... 142,468 * *
Robert J. Towarnicki(16)....................... 289,196 1.55% 1.20
Richard H. Troy(17)............................ 2,138,960 11.50% 8.88%
DIRECTOR NOMINEES:
John J. Gibbons(18)............................ 108,036 * *
Louis M. Weiner, M.D........................... 0 * *
All executive officers, directors and director
nominees as a group (13 persons)(19)......... 5,601,549 29.81% 23.08%
</TABLE>
- ---------------
* Indicates beneficial ownership of less than one percent.
** The address of the directors and executive officers is 702 Electronic
Drive, Horsham, PA 19044.
(1) This table is based upon information supplied by officers, directors and
principal stockholders. Unless otherwise indicated in the footnotes to this
table and subject to community property laws where applicable, CPI and CPHI
believes that each of the stockholders named in this table has sole voting
and investment power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on 18,604,360 shares of CPI Common
Stock outstanding as of June 30, 1998 and 24,081,360 shares of CPI Common
Stock outstanding after completion of this offering, adjusted as required
by rules promulgated by the Commission.
(2) Includes 5,681 shares to be received upon redemption of the Redeemable
Preferred Stock. Until the closing of this offering, FGN, Inc. has the
authority to vote 782,421 additional shares of CPI Common Stock of which it
is not the beneficial owner but that it holds in trust for 12 persons,
including: David S. Alberts; Klaus Brendel; Randall W. Burt; Michael P.
Cannon; Stella Ocampo as Trustee of the Jaime Ocampo Marital Trust; Rifat
Pamukcu; Nancy Shipp Paranka; Phyllis Sanford Stevenson and Robert W.
Stevenson; and Mr. Richard H. Troy, Richard H. Troy's wife and Richard H.
Troy's daughter. FGN, Inc.'s ultimate beneficial owners include a marital
trust of Floyd Nichols for the benefit of his widow (20%), a trust for one
child of Floyd Nichols (24.5%), a trust for the other child of Floyd
Nichols (24.5%), and 31 stockholders (including 15 brothers, sisters,
nieces, nephews, sisters-in-law and brother-in law, and 16 friends, each
with 1%).
(3) Includes 1,674,254 shares and warrants to purchase 52,631 shares
beneficially owned by Oak Tree Partners, L.P., an entity that may be deemed
an affiliate of Gem Capital Management, Inc. Gem Capital Management, Inc.
disclaims beneficial ownership of such shares except to the extent of its
pecuniary interest therein.
(4) Includes warrants to purchase 9,263 shares beneficially owned by Northwood
Ventures LLC, options to purchase 5,447 shares of CPI Common Stock
beneficially owned by Peter G. Schiff, 130,600 shares and warrants to
purchase 1,802 shares beneficially owned by Northwood Capital Partners LLC,
118,000 shares and warrants to purchase 1,754 shares beneficially owned by
Rabbit Hollow Partners and 27,000 shares beneficially owned by the Edward
T. Schiff et. al. Trust, entities that may be deemed affiliates of
Northwood Ventures LLC. The ultimate beneficial owner of Northwood Ventures
LLC include a partnership of investors, Mr. Schiff and members of Mr.
Schiff's family.
(5) Includes 49,573 shares issuable upon exercise of outstanding warrants.
(6) Includes options to purchase 5,447 shares of CPI Common Stock beneficially
owned by Roger J. Quy. Technology Partners West Fund IV, L.P.'s ultimate
beneficial owners include 33 employee retirement trusts, venture funds,
family trusts and individuals, none of which possess an ownership interest
of more than 12% in the Fund.
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<PAGE> 115
(7) Includes 95,890 shares and warrants to purchase 26,062 shares beneficially
owned by Jackson Boulevard Partners, 81,650 shares and warrants to purchase
1,500 shares beneficially owned by Jackson Boulevard Equities, 225,138
shares beneficially owned by Jackson Boulevard Ventures, 205,530 shares and
warrants to purchase 9,527 shares beneficially owned by Jackson Boulevard
Ventures II, 187,000 shares beneficially owned by Jackson Boulevard
Ventures III L.P., 10,000 shares and warrants to purchase 500 shares
beneficially owned by Jackson Boulevard Investments, L.P. and 50,000 shares
and warrants to purchase 1,500 shares beneficially owned by Deborah Gemini.
Jackson Boulevard Fund, Ltd. is the General Partner of Jackson Boulevard
Equities, Jackson Boulevard Ventures and Jackson Boulevard Ventures II. The
President and sole stockholder of Jackson Boulevard Fund, Ltd. is Paul J.
Duggan, who is the General Partner of Jackson Boulevard Partners and the
spouse of Deborah Gemini. Mr. Duggan may be deemed to share voting and
investment power with these entities and individuals; however, Mr. Duggan
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(8) Includes warrants to purchase 15,873 shares, 328,777 shares and warrants to
purchase 2,550 shares beneficially owned by CP Partners, 115,088 shares
beneficially owned by the Harpel Family Partnership, 81,081 shares
beneficially owned by Harpel Wheelock, and 63,158 shares and warrants to
purchase 3,157 shares beneficially owned by Harpel Venture Partners,
entities that may be deemed affiliates of James Harpel and in which James
Harpel may be deemed to share voting and investment power. Mr. Harpel
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(9) Includes 24,639 shares issuable upon exercise of outstanding warrants.
(10) Includes 13,379 shares and warrants to purchase 5,447 shares owned of
record by Mr. Boeger, 187,982 shares and warrants to purchase 9,523 shares
owned of record by Quest Ventures II and 128,486 shares owned of record by
Quest Ventures International. Mr. Boeger is a managing general partner of
Quest Ventures II and Quest Ventures International, and may be deemed to
share voting and investment power with respect to such shares. Mr. Boeger
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein.
(11) Includes options to purchase 5,447 shares beneficially owned by Thomas M.
Gibson and 71,213 shares in the Thomas M. Gibson Trust established by
Thomas M. Gibson.
(12) Includes 245,600 shares beneficially owned by Dr. Pamukcu but held in trust
by FGN, Inc., options to purchase 85,000 shares, 48,750 of which are
unvested and would currently be subject to a repurchase option by CPI and
11,364 shares expected to be received upon redemption of the Redeemable
Preferred Stock.
(13) Includes options to purchase 5,447 shares of CPI Common Stock beneficially
owned by Roger Quy and 961,262 shares owned of record by Technology
Partners. Dr. Quy is a general partner of Technology Partners, and may be
deemed to share voting and investment power with respect to such shares.
Dr. Quy disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest therein.
(14) Includes options to purchase 5,447 shares of CPI Common Stock beneficially
owned by Peter Schiff, 918,808 shares and warrants to purchase 9,263 shares
owned of record by Northwood Ventures LLC, 130,600 shares and warrants to
purchase 1,802 shares owned of record by Northwood Capital Partners LLC,
118,000 shares and warrants to purchase 1,754 shares owned of record by
Rabbit Hollow Partners and 27,000 shares owned of record by the Edward T.
Schiff et. al. Trust. Mr. Schiff is the President of Northwood Ventures
LLC, the President of Northwood Capital Partners LLC, the Managing General
Partner of Rabbit Hollow Partners and the Trustee of the Edward T. Schiff
et. al. Trust; he may be deemed to share voting and investment power with
respect to such shares. Mr. Schiff disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(15) Includes options to purchase 5,447 shares of CPI Common Stock and 676
shares issuable upon exercise of outstanding warrants.
(16) Includes options to purchase 100,000 shares, 75,000 of which are unvested
and would currently be subject to a repurchase option by CPI.
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<PAGE> 116
(17) Includes 130,000 shares beneficially owned by Mr. Troy but held in trust by
FGN, Inc., 25,000 shares subject to repurchase by CPI, options to purchase
10,000 shares, 7,500 of which are unvested and would be subject to a
repurchase option by CPI, 7,575 shares to be received upon redemption of
the Redeemable Preferred Stock and warrants to purchase 250 shares. Also
includes 27,250 shares beneficially owned by Mr. Troy's spouse, Elizabeth
N. Troy, and 16,100 shares beneficially owned by Mr. Troy's daughter,
Elizabeth D. Troy, as well as 1,835,597 shares owned of record by FGN,
Inc., of which Mr. Troy is a director and the President. Mr. Troy may be
deemed to share voting and investment power with respect to such 43,350
shares beneficially owned by his spouse and daughter and to such 1,835,597
shares beneficially owned by FGN, Inc.; however, Mr. Troy disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein.
(18) Represents shares of Tseng Common Stock and Tseng Options currently held by
Mr. Gibbons. Assuming consummation of the Transactions, Mr. Gibbons will
own four shares of CPHI Common Stock and options to purchase 108,032 shares
of CPHI Common Stock.
(19) Includes shares and options or warrants to purchase 185,503 shares held by
directors and executive officers of CPI, entities affiliated with such
persons and director nominees. See Notes 9 through 18 above.
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<PAGE> 117
CERTAIN TRANSACTIONS
FIRST ROUND OF CPI SERIES E PREFERRED STOCK
Between April 1994 and July 1994, CPI sold to institutional and other
accredited investors a total of 542,761 shares of CPI Series E Preferred Stock
at a price of $4.10 per share and warrants to purchase an additional 18,766
shares of CPI Series E Preferred Stock at $4.10 per share in a first round of
financing of CPI Series E Preferred Stock. In August 1995, in connection with
repricing the CPI Series E Preferred Stock to $3.15 per share, the CPI Board
authorized the issuance of additional CPI Series E Preferred Stock. In
conjunction with this new price, CPI issued 163,701 shares of CPI Series E
Preferred Stock and 5,654 warrants to purchase CPI Series E Preferred Stock to
the previous holders of CPI Series E Preferred Stock. Certain directors,
executive officers and five percent stockholders purchased Series E Preferred
Stock and warrants to purchase CPI Series E Preferred Stock in the first round
of financing of CPI Series E Preferred Stock, as follows: FGN, Inc., which is a
holder of more than five percent of CPI's voting stock and a director and the
president of which is Richard H. Troy, a Director, Senior Vice
President -- Corporate Development, General Counsel and Secretary of CPI,
purchased 13,015 shares of CPI Series E Preferred Stock; the Thomas M. Gibson
Trust established by Thomas M. Gibson, a director of CPI, purchased a total of
951 shares of CPI Series E Preferred Stock; Quest Ventures II and Quest Ventures
International, entities in which William A. Boeger, a director of CPI, is a
general manager, purchased a total of 49,966 shares of CPI Series E Preferred
Stock and warrants to purchase CPI Series E Preferred Stock; Randall M. Toig, a
director of CPI, purchased 6,507 shares of CPI Series E Preferred Stock; Richard
H. Troy, a director, Senior Vice President -- Corporate Development, General
Counsel and Secretary of CPI, purchased 4,686 shares of CPI Series E Preferred
Stock and warrants to purchase CPI Series E Preferred Stock; Technology
Partners, which is a holder of more than five percent of CPI Common Stock and a
general manager of which is Roger J. Quy, a director of CPI, purchased 168,128
shares of CPI Series E Preferred Stock and warrants to purchase Series E
Preferred Stock; Rabbit Hollow Partners, the Managing General Partner of which
is Peter G. Schiff, a director of CPI, purchased 32,902 shares of CPI Series E
Preferred Stock; and Northwood Ventures LLC, which is a holder of more than five
percent of CPI's voting stock and the President of which is Peter G. Schiff, a
director of CPI, purchased 134,349 shares of CPI Series E Preferred Stock and
warrants to purchase CPI Series E Preferred Stock.
BRIDGE LOAN AND SECOND ROUND OF CPI SERIES E PREFERRED STOCK
CPI commenced the second round of CPI Series E Preferred Stock financing
between June and August 1995, when CPI received a bridge loan of $791,000 from
certain of its stockholders and issued convertible promissory notes with an
annual interest rate of 9% to such stockholders. Certain directors, executive
officers and five percent stockholders participated in the bridge loan, as
follows: Floyd G. Nichols, who was a director and CPI's Chief Executive Officer,
purchased a $50,000 convertible promissory note; Northwood Ventures LLC, the
President of which is Peter G. Schiff, a director of CPI, purchased a $200,000
convertible promissory note; Quest Ventures II, a general manager of which is
William A. Boeger, a director of CPI, purchased a $50,000 convertible promissory
note; and Technology Partners West Fund IV, a general manager of which is Roger
J. Quy, a director of CPI, purchased a $90,000 convertible promissory note. CPI
converted the bridge loan's principal and interest into 253,633 shares of Series
E Preferred Stock and warrants to purchase an additional 125,550 shares of CPI
Series E Preferred Stock in August 1995.
Between August 1995 and May 1996, CPI issued 2,263,094 shares of CPI Series
E Preferred Stock and warrants to purchase an additional 210,889 shares of CPI
Series E Preferred Stock at $3.15 per share, which includes those issued in
converting the bridge loan. Certain directors, executive officers and five
percent stockholders purchased CPI Series E Preferred Stock in the conversion of
the bridge loan and the second round of financing of CPI Series E Preferred
Stock, as follows: Floyd G. Nichols, who was a director and CPI's Chief
Executive Officer, purchased 17,596 shares of CPI Series E Preferred Stock and
warrants to purchase CPI Series E Preferred Stock; Northwood Ventures LLC, the
President of which is Peter G. Schiff, a director of CPI, purchased 147,190
shares of CPI Series E Preferred Stock and warrants to purchase CPI Series E
Preferred Stock; Northwood Capital Partners LLC, the President of which is Peter
G. Schiff, a
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<PAGE> 118
director of CPI, purchased 82,544 shares of CPI Series E Preferred Stock;
Technology Partners West Fund IV, a general manager of which is Roger J. Quy, a
director of CPI, purchased 151,079 shares of CPI Series E Preferred Stock and
warrants to purchase CPI Series E Preferred Stock; and Thomas M. Gibson, a
director of CPI, and the Thomas M. Gibson Trust purchased a total of 31,748
shares of CPI Series E Preferred Stock.
CPI SERIES F PREFERRED STOCK.
Between December 1996 and June 1997, CPI issued a total of 4,808,945 shares
of Series F Convertible Preferred Stock ("CPI Series F Preferred Stock") and
warrants to purchase 125,843 shares of CPI Series F Preferred Stock to
institutional investors and accredited investors. Certain directors, executive
officers and five percent stockholders of CPI participated in the private
offering, as follows: Technology Partners, which is a holder of more than five
percent of CPI's voting stock and a general partner of which is Roger J. Quy, a
director of CPI, purchased 101,051 shares of CPI Series F Preferred; Northwood
Ventures LLC, which is a holder of more than five percent of CPI's voting stock
and a President of which is Peter G. Schiff, a director of CPI, purchased
111,000 shares of CPI Series F Preferred Stock and warrants to purchase CPI
Series F Preferred Stock; Northwood Capital Partners LLC, the President of which
is Peter G. Schiff, a director of CPI, purchased 27,750 shares of CPI Series F
Preferred Stock and warrants to purchase CPI Series F Preferred Stock; The
Goldman Sachs Group, L.P., which is a holder of more than five percent of CPI's
voting stock, purchased 709,461 shares of CPI Series F Preferred Stock and
warrants to purchase CPI Series F Preferred Stock; Robert J. Towarnicki, the
Chief Executive Officer, President and a director of CPI, purchased 13,520
shares of CPI Series F Preferred Stock; Randall M. Toig, a director of CPI,
purchased 13,512 shares of CPI Series F Preferred Stock; Richard H. Troy, a
director, Senior Vice President -- Corporate Development, General Counsel and
Secretary of CPI, purchased 3,000 shares of CPI Series F Preferred Stock;
William A. Boeger, a director of CPI, purchased 3,377 shares of CPI Series F
Preferred Stock; Thomas M. Gibson, a director of CPI, purchased 13,512 shares of
CPI Series F Preferred Stock; and Grosvenor G. Nichols, the brother-in-law of
Richard H. Troy, a director, Senior Vice President -- Corporate Development,
General Counsel and Secretary of CPI, purchased 25,748 shares of CPI Series F
Preferred Stock and warrants to purchase CPI Series F Preferred Stock.
CPI SERIES G PREFERRED STOCK.
In April and May of 1998, CPI issued a total of 4,645,879 shares of CPI
Series G Preferred Stock and warrants to purchase 227,793 shares of CPI Series G
Preferred Stock to institutional investors and stockholders with preemptive
rights. Certain directors, executive officers and five percent stockholders of
CPI participated in the private offering as follows: Northwood Ventures LLC,
which together with affiliated funds is a holder of more than five percent of
CPI's voting stock and the President of which is Peter G. Schiff, a director of
CPI, purchased 105,263 shares of CPI Series G Preferred Stock and warrants to
purchase CPI Series G Preferred Stock; Northwood Capital Partners LLC, which
together with affiliated funds is a holder of more than five percent of CPI's
voting stock and the President of which is Peter G. Schiff, a director of CPI,
purchased 21,053 shares of CPI Series G Preferred Stock and warrants to purchase
CPI Series G Preferred Stock; Rabbit Hollow Partners, a general partner of which
is Peter G. Schiff, a director of CPI, purchased 20,096 shares of CPI Series G
Preferred Stock and warrants to purchase CPI Series G Preferred Stock; The
Goldman Sachs Group, L.P., which is a holder of more than five percent of CPI's
voting stock, purchased 315,790 shares of CPI Series G Preferred Stock and
warrants to purchase CPI Series G Preferred Stock and, in recognition of its
efforts in connection with the offering, received a warrant to purchase 5,000
shares of CPI Common Stock; Gem Capital Management, which is a holder of more
than five percent of CPI's voting stock, purchased 1,052,632 shares of CPI
Series G Preferred Stock and warrants to purchase CPI Series G Preferred Stock;
Richard H. Troy, a director, Senior Vice President -- Corporate Development,
General Counsel and Secretary of CPI, purchased 2,000 shares of CPI Series G
Preferred Stock and warrants to purchase CPI Series G Preferred Stock; Thomas M.
Gibson, a director of CPI, purchased 25,777 shares of CPI Series G Preferred
Stock and warrants to purchase CPI Series G Preferred Stock; Bart L. Troy, M.D.,
a brother of Richard H. Troy, a director, Senior Vice President -- Corporate
Development, General Counsel and Secretary of CPI, purchased 8,360 shares of CPI
Series G Preferred Stock and warrants to purchase CPI Series G Preferred Stock;
and Grosvenor G. Nichols, a brother-in-law of Richard H. Troy, a director,
Senior
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Vice President - Corporate Development, General Counsel and Secretary of CPI,
purchased 26,335 shares of CPI Series G Preferred Stock and warrants to purchase
CPI Series G Preferred Stock.
CPI REDEEMABLE PREFERRED STOCK
Prior to the Effective Time, CPI must redeem in cash and/or CPI Common
Stock, pursuant to the Reorganization Agreement, the outstanding shares of CPI
Redeemable Preferred Stock, all of which are held by FGN, Inc., a holder of more
than five percent of CPI Capital Stock and a director, the president and a
stockholder of which is Richard H. Troy, a Director, Senior Vice
President -- Corporate Development, General Counsel and Secretary of CPI.
Pursuant to the arrangements entered into in 1990 with certain persons who
participated in the founding of CPI, FGN, Inc. will immediately pay out all but
$75,000 of the proceeds of such redemption of the CPI Redeemable Preferred Stock
to or on behalf of such persons, including the payment of cash and/or registered
CPHI Common Stock in an aggregate value of $150,000 to Rifat Pamukcu, CPI's
Chief Scientific Officer and Senior Vice President -- Research and Development,
and the payment of cash and or stock in an aggregate value of $100,000 to
Richard H. Troy, a Director, Senior Vice President -- Corporate Development,
General Counsel and Secretary of CPI.
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DESCRIPTION OF CPHI CAPITAL STOCK
The following description of the capital stock of CPHI and certain
provisions of CPHI's Certificate of Incorporation and Bylaws is a summary and is
qualified in its entirety by the provisions of the CPHI Certificate of
Incorporation and Bylaws.
CPHI AUTHORIZED CAPITAL STOCK
Under CPHI's Certificate of Incorporation, the total number of shares of
all classes of stock that CPHI has authority to issue is 75,000,000, of which
70,000,000 are shares of CPHI Common Stock (par value $0.01 per share) and
5,000,000 are shares of CPHI Preferred Stock (par value $.01 per share).
The additional shares of authorized stock available for issuance by CPHI
might be issued at such times and under such circumstances as to have a dilutive
effect on earnings per share and on the equity ownership of the holders of CPHI
Common Stock. The ability of the CPHI Board to issue additional shares of stock
could enhance the CPHI Board's ability to negotiate on behalf of the
stockholders in a takeover situation and also could be used by the CPHI Board to
make a change in control more difficult, thereby denying stockholders the
potential to sell their shares at a premium and entrenching current management.
CPHI COMMON STOCK
Holders of CPHI Common Stock will be entitled to one vote per share on all
matters voted on generally by the stockholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any series of CPHI Preferred Stock, the holders of CPHI Common Stock
will possess all voting power. The CPHI Certificate of Incorporation does not
provide for cumulative voting rights. Without cumulative voting, under the DGCL,
the holders of more than one-half of the outstanding shares of CPHI Common Stock
generally will be able to elect all the directors of CPHI then standing for
election and holders of the remaining shares will not be able to elect any
directors.
Subject to any preferential rights of any series of CPHI Preferred Stock,
holders of shares of CPHI Common Stock will be entitled to receive dividends on
such stock out of assets legally available for distribution when, as and if
authorized and declared by the CPHI Board and to share ratably in the assets of
CPHI legally available for distribution to its stockholders in the event of its
liquidation, dissolution or winding up.
Holders of CPHI Common Stock will have no preferences, preemptive,
conversion or exchange rights.
CPHI PREFERRED STOCK
The CPHI Board is authorized to issue shares of CPHI Preferred Stock, in
one or more series without stockholder approval, and to (i) fix or alter, from
time to time, the designation, powers, preferences and rights of the shares of
each such series and the qualifications, limitations or restrictions of any
wholly unissued series of CPHI Preferred Stock, (ii) establish, from time to
time, the number of shares constituting any such series or any of them, and
(iii) to increase or decrease the number of shares of any series subsequent to
the issuance of shares of that series, but not below the number of shares of
such series then outstanding.
The CPHI Board could authorize the issuance of shares of CPHI Preferred
Stock with terms and conditions which could discourage a takeover or other
transaction that holders of some or a majority of shares of CPHI Common Stock
might believe to be in their best interests or in which such holders might
receive a premium for their shares of stock over the then-market price of such
shares. As of the date hereof, no shares of CPHI Preferred Stock are outstanding
and the CPHI Board has no present intention to issue any shares of CPHI
Preferred Stock after the Effective Time.
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<PAGE> 121
CERTAIN ANTI-TAKEOVER PROVISIONS
General. Certain provisions of the CPHI Certificate of Incorporation, the
CPHI Bylaws and the DGCL may have the effect of impeding the acquisition of
control of CPHI by means of a tender offer, a proxy fight, open market purchases
or otherwise in a transaction not approved by the CPHI Board.
The provisions of the CPHI Certificate of Incorporation, the CPHI Bylaws
and the DGCL described below are designed to reduce, or have the effect of
reducing, the vulnerability of CPHI to an unsolicited proposal for the
restructuring or sale of all or substantially all of the assets of CPHI or an
unsolicited takeover attempt which is unfair to CPHI stockholders. The summary
of such provisions set forth below does not purport to be complete and is
subject to and qualified in its entirety by reference to the CPHI Certificate of
Incorporation, the CPHI Bylaws and DGCL.
Classified Board; Removal of Directors. The CPHI Certificate of
Incorporation provides that the CPHI Board shall consist of three classes of
directors, after an initial term, each serving a three-year term ending in
successive years. This provision may make it more difficult to effect a takeover
of CPHI because it would generally take two annual meetings of stockholders for
an acquiring party to elect a majority of the CPHI Board. As a result, a
classified CPHI Board may discourage proxy contests for the election of
directors or purchases of a substantial block of stock because it could operate
to prevent obtaining control of the CPHI Board in a relatively short period of
time.
In addition, subject to the rights of holders of any series of CPHI
Preferred Stock, CPHI directors may only be removed for cause and only by the
affirmative vote of the holders of a majority of the voting power of all the
then-outstanding shares of voting stock of CPHI entitled to vote at an election
of directors.
Business Combinations. Section 203 of the DGCL restricts a wide range of
transactions ("business combination") between a corporation and an interested
stockholder. An "interested stockholder" is, generally, any person who
beneficially owns, directly or indirectly, 15% or more of the corporation's
outstanding voting stock. Business combinations are broadly defined to include
(i) mergers or consolidations with, (ii) sales or other dispositions of more
that 10% of the corporation's assets to, (iii) certain transactions resulting in
the issuance or transfer of any stock of the corporation or any subsidiary to,
(iv) certain transactions which would result in increasing the proportionate
share of stock of the corporation or any subsidiary owned by, or (v) receipt of
the benefit (other than proportionately as a stockholder) of any loans, advances
or other financial benefits by an interested stockholder. Section 203 provides
that an interested stockholder may not engage in a business combination with the
corporation for a period of three years from the time of becoming an interested
stockholder unless (i) the board of directors approved either the business
combination or the transaction which resulted in the person becoming an
interested stockholder prior to the time such person became an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
person becoming an interested stockholder, that person owned at least 85% of the
corporation's voting stock (excluding shares owned by persons who are officers
and also directors and shares owned by certain employee stock plans); or (iii)
the business combination is approved by the board of directors and authorized by
the affirmative vote of at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholder. The restrictions on business combinations
with interested stockholders contained in Section 203 do not apply to a
corporation whose certificate of incorporation contains a provision expressly
electing not to be governed by the statute. The CPHI Certificate does not
contain a provision electing to "opt-out" of Section 203.
LISTING
CPHI has applied for listing of CPHI Common Stock on the Nasdaq National
Market under the trading symbol "CLPA".
TRANSFER AGENT AND REGISTRAR
BankBoston N.A. is the transfer agent and registrar for CPHI Common Stock.
108
<PAGE> 122
THE INFORMATION REGARDING TSENG'S BUSINESS THAT IS SET FORTH UNDER THE
CAPTIONS "TSENG BUSINESS," "TSENG STOCK PRICE AND DIVIDEND INFORMATION," "TSENG
SELECTED FINANCIAL DATA," "TSENG MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "TSENG PRINCIPAL
SHAREHOLDERS" IS HISTORICAL. IT IS ANTICIPATED THAT UPON CONSUMMATION OF THE
TRANSACTIONS, TSENG WILL HAVE NO CONTINUING OPERATIONS. CONSEQUENTLY, NEITHER
CPHI, CPI NOR TSENG BELIEVE THAT SUCH INFORMATION IS INDICATIVE OF FUTURE
OPERATIONS OR FINANCIAL INFORMATION OF TSENG OR CPHI IF THE TRANSACTIONS ARE
CONSUMMATED.
TSENG BUSINESS
OVERVIEW
Tseng was incorporated in 1983 and, until the sale of substantially all of
its graphics development assets to ATI Technologies, Inc. ("ATI") in December
1997, was a supplier of high performance video graphic controller chips. These
chips were designed to enhance the personal computer's performance by
off-loading the graphics and video functions from the Central Processing Unit
("CPU") to the graphics accelerator chip. By working in connection with the
personal computer's CPU, the graphic accelerator offered significant improvement
to the quality of the graphics and improved the system's overall performance.
Tseng expects that it will have limited future revenues and expenses from
graphics operations as it supports existing customers through third party
agreements through March 1999 and offers customers the opportunity to purchase
any additional quantities of Tseng product ("last time buy") necessary to
support their ongoing product requirements, if any. It is anticipated that after
consummation of the Transactions, Tseng will have no continuing operations.
During the fourth quarter of 1997, Tseng announced that it would explore
opportunities to utilize its cash and stock to make acquisitions of or
investments in a potential growth stage company or companies including but not
limited to those that are technology-based. On June 23, 1998, the Company signed
a definitive agreement to combine with CPI. Tseng expects that if the
Transactions are consummated, it will discontinue its last-time buy program and
have no continuing operations.
PRIOR OPERATIONS
Prior to the sale of its graphics development assets to ATI, Tseng competed
in the highly competitive and rapidly changing graphics technology marketplace.
Sales of Tseng's ET6000 graphic accelerator, which was introduced in November
1995 at Fall Comdex and began shipping in volume in the second quarter of 1996,
represented approximately 47% and 73% of Tseng's revenues for the six-month
periods ended June 30, 1998 and 1997, respectively, and 72% and 65% of Tseng's
revenues in 1997 and 1996, respectively. At its introduction, the ET6000 was a
state-of-the-art 128-bit graphics and multimedia engine that integrated a 2D
graphics accelerator, high quality video processor, a revolutionary interface
into Multibank(TM) DRAM and PCI interface. Total sales of the ET6000 were
adversely impacted by both the market transition to 3D graphic accelerators and
the high-solution costs for ET6000-based solutions as the cost of MDRAM utilized
in ET6000 solutions did not keep pace with more industry-standard EDO memory
prices which were utilized in most competitor solutions. In response to the
market transition to 3D graphic accelerators, Tseng attempted to develop and
introduce a 3D graphics accelerator, the ET6300. In October 1997, Tseng
announced that it would not commercialize this product as it did not expect
sales of this product would return Tseng to profitability. At the same time,
Tseng announced it would focus on attempting to attract strategic partners
and/or merger candidates in the technology industry. This effort resulted in the
sale of Tseng's graphics development assets to ATI in December 1997.
Tseng had distributed its graphics products to its OEM customer base
through an internal marketing and sales team located in Newtown, Pennsylvania
supported domestically by a series of independent manufacturers representatives
and internally by a sales and support office in Taipei, Taiwan with local
distributors located in Hong Kong, Japan, Korea, Singapore and Taiwan.
Manufacturers representatives located in Belgium, Germany and the United Kingdom
were also used to support European customers.
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<PAGE> 123
Three customers accounted for 42% of revenues in 1997. Two customers
accounted for 38% and 37% of revenues in 1996 and 1995, respectively. Two
customers accounted for 33% of revenues in the six-month period ended June 30,
1998. Four customers accounted for 55% of revenues in the six-month period ended
June 30, 1997.
Total export sales, including those to the Far East distributors,
represented approximately 58%, 43% and 59% of revenues during 1997, 1996 and
1995, respectively, and 34% and 76% of revenues in the six-month periods ended
June 30, 1998 and 1997, respectively. As a significant portion of Tseng's sales
were export sales, Tseng has historically been subject to the risks of
conducting business internationally, including unexpected changes in regulatory
requirements, fluctuations in the US dollar which could increase the sales price
in local currencies of Tseng's products in foreign markets, tariffs, and other
barriers and restrictions and the burden of complying with a wide variety of
foreign laws.
Tseng had maintained a staff of in-house engineers which were critical to
its ability to develop new products. Following the sale of its graphics
development assets to ATI, most of Tseng's engineers accepted employment with
ATI. Total research and development expense, including the one-time charge in
1996 discussed in Note 3 to the consolidated financial statements, was
$8,778,000, $14,561,000 and $3,440,000 in 1997, 1996 and 1995, respectively, and
$4,715,000 for the six-months ended June 30, 1997. Tseng did not incur any
research and development expense during the six-month period ended June 30,
1998.
Tseng purchased substantially all of its product from one foundry. Most of
Tseng's products were manufactured using a .6 micron CMOS triple level metal
process. Tseng did not have a long term supply contract with its foundry.
Historically Tseng conducted its business with its foundries by written purchase
orders which covered a period or range of periods. Tseng purchased its product
primarily in wafer and "known good die" forms and managed the assembly and test
process. Product returns to date have not been significant.
EMPLOYEES
As of August 31, 1998, Tseng had 6 full-time employees. It is anticipated
that after consummation of the Transactions, none of the Tseng employees will be
employees of CPHI, CPI or Tseng.
PROPERTIES
Tseng currently leases 2,700 square feet for its corporate offices in
Norristown, Pennsylvania. The facility is leased pursuant to a one-year lease
with a one-year renewal option. Tseng owns a building with 34,000 square feet in
an industrial and office park in Newtown, Pennsylvania which was formerly used
as its advanced research, product development facility and principal executive
offices. This facility was leased to ATI in December 1997 for an initial 3-year
term, with renewal options through 2007. In August 1998, Tseng entered into a
definitive agreement to sell the facility leased to ATI to a third party for
$2,787,500. The sale is subject to a number of factors, including completion of
due diligence, and is expected to close in October 1998. The net book value of
the real estate was $2,435,000 at June 30, 1998.
LEGAL PROCEEDINGS
Tseng is involved in certain legal actions and claims arising in the
ordinary course of business. Management, after discussion with legal counsel,
believes that the outcome of such litigation and claims will not have a material
adverse effect on Tseng's financial position.
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<PAGE> 124
TSENG STOCK PRICE AND DIVIDEND INFORMATION
Tseng's Common Stock is traded on the Nasdaq National Market under the
symbol "TSNG". There were approximately 1,014 holders of record of Tseng's
Common Stock as of August 31, 1998. The following table sets forth, for the
periods indicated, the high and low bid quotations for the Common Stock as
reported by the National Quotation Bureau.
<TABLE>
<CAPTION>
BID PRICES
---------------
HIGH LOW
------ -----
<S> <C> <C>
1996:
First Quarter............................................... $10.63 $8.63
Second Quarter.............................................. 13.06 8.38
Third Quarter............................................... 10.00 7.63
Fourth Quarter.............................................. 6.38 3.00
1997:
First Quarter............................................... $ 4.63 $2.94
Second Quarter.............................................. 4.25 2.63
Third Quarter............................................... 4.94 3.00
Fourth Quarter.............................................. 3.88 1.25
1998:
First Quarter............................................... $ 2.00 $1.25
Second Quarter.............................................. 2.75 1.63
Third Quarter (July 1 to September 3)....................... 2.94 2.31
</TABLE>
On August 31, 1998, the closing bid price in the Nasdaq National Market of
Tseng's Common Stock was $2.4375.
Tseng has not paid a dividend since 1995. Tseng does not anticipate paying
cash dividends in the foreseeable future and currently intends to retain its
cash for use in attempting to acquire or invest in a growth-stage company or
growth-stage companies.
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<PAGE> 125
TSENG SELECTED FINANCIAL DATA
The following tables set forth certain selected consolidated financial data
of Tseng. This data is derived from and should be read in conjunction with, and
is qualified in its entirety by, the consolidated financial statements,
including the notes thereto, of Tseng appearing elsewhere in this Joint Proxy
Statement/ Prospectus. The unaudited results of operations for the six months
ended June 30, 1998 are not necessarily indicative of results to be expected for
the full year of any future period. No cash dividends have been declared or paid
on Tseng Common Stock since 1995. The selected financial data set forth below
should be read in conjunction with the consolidated financial statements,
including the notes attached thereto, and "Tseng Management's Discussion and
Analysis of Financial Conditions and Results of Operations".
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED
AS OF AND FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $75,526 $79,418 $37,115 $ 26,231 $ 8,015 $ 5,061 $ 1,582
Net income (loss)....................... 10,782 9,272 477 (13,965) (11,429) (3,447) 227
Basic and diluted net income (loss) per
share................................. .56 .49 .03 (.73) (.60) (.18) .02
Working capital......................... 49,214 50,431 47,155 36,268 25,719 32,778 26,064
Total assets............................ 64,434 65,819 64,671 51,539 31,418 46,356 30,567
Long-term debt.......................... -- -- -- -- -- -- --
Shareholders' equity.................... 56,674 59,861 58,395 45,228 28,320 41,712 28,547
Cash dividends per share................ .10 .20 .10 -- -- -- --
</TABLE>
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<PAGE> 126
TSENG MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Prior to the sale of its graphic development assets to ATI Technologies
Inc. ("ATI") in December 1997, Tseng was a developer of custom semiconductor
products and board level enhancement products that expand the graphics
capabilities and performance of IBM and IBM-compatible personal computers.
Approximately two-months prior to the sale of its graphics development assets,
Tseng announced that it would explore opportunities to make acquisitions of or
investments in a potential growth stage company or companies including but not
limited to those that are technology-based. On June 23, 1998, Tseng signed a
definitive agreement to combine with CPI.
RESULTS OF OPERATIONS
Six Months ended June 30, 1998 compared with Six Months ended June 30, 1997.
Revenues for the six-month period ended June 30, 1998 were $1,582,000, a
69% decrease from the corresponding period in 1997. In December 1997, Tseng sold
its graphics development assets to ATI. Following the sale, Tseng commenced a
"last-time" buy program to offer its customers the opportunity to purchase
additional quantities of Tseng product, if any, necessary to support their
ongoing product requirements. Tseng expects that revenues generated from this
program will continue to be below 1997 levels. Tseng expects that if the
Transactions are consummated, it will discontinue its last-time buy program late
in the third quarter or early in the fourth quarter of 1998 and have no
continuing operations.
Sales to two customers represented approximately 33% of Tseng's revenues in
the six-month period ended June 30, 1998. Sales to four customers represented
approximately 55% of Tseng's revenues in the corresponding period in 1997.
Cost of sales as a percentage of revenues decreased to 58% of revenues in
the six-month period ended June 30, 1998, from 76%, in the corresponding period
in 1997. The increase is due to higher margins associated with Tseng's last-time
buy program.
Tseng did not incur research and development expense in the six-month
period ended June 30, 1998 compared to $4,715,000 in the corresponding 1997
period. The decrease is due to the sale of Tseng's graphics development assets
in December 1997.
Operating expenses decreased to $1,124,000 in the six-month period ended
June 30, 1998 from $2,642,000 in the comparable 1997 period. The decrease is due
to significant reductions in personnel and facilities to those necessary to
support Tseng's acquisition/investment strategy and its last-time buy program.
Transaction costs of $136,000 in the six-month period ended June 30, 1998
relate primarily to investment banker and professional fees incurred in
connection with the CPI combination discussed above. There were no transaction
costs in the corresponding 1997 period. Tseng is charging transaction costs to
expense as incurred.
No tax provision was recorded by Tseng in the six-month period ended June
30, 1998 as Tseng utilized a portion of its net operating loss carryforward
which was generated in 1997. The benefit was not recorded as a deferred asset at
December 31, 1997 as realization was not assured. Tseng recorded a tax benefit
of 35% in the corresponding 1997 period.
Years ended December 31, 1997, 1996 and 1995.
Revenues for 1997 were $8,015,000, a 69% decrease from 1996 levels. The
decrease is due to lower unit shipments and selling prices for Tseng's
ET6000-based products, which began shipping in volume in the second quarter of
1996. Volume and selling prices were adversely affected during 1997 by both the
market transition to 3D graphics accelerators and high solution costs for ET6000
solutions which adversely impacted sales of ET6000-based solutions in a very
cost-competitive 2D graphics marketplace. The ET6000 was designed to use 5 volt
MDRAM and the cost of the MDRAM did not keep pace with more industry-standard
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<PAGE> 127
EDO memory prices. In response to the market transition to 3D graphics
accelerators, Tseng expended significant resources to complete development of
its first 3D graphics product, the ET6300, which was designed to work with 3.3
volt MDRAM. On October 21, 1997, Tseng announced that it would not commercialize
the ET6300 in light of problems with the price and availability of 3.3 volt
MDRAM as sales of this product would not return Tseng to profitability. In
addition, Tseng announced that in consideration of the lead time and research
and development costs required to produce new graphics products, Tseng would
cease development efforts on future products and attempt to continue to complete
3D and multimedia technologies under development to attempt to attract strategic
partners and/or merger candidates in the technology industry. In connection with
the decision to cease developing new graphics products and attempt to position
Tseng to attract a strategic partner, Tseng retained the services of Broadview
Associates, reduced its workforce to personnel needed for this effort and
recorded a pretax restructuring charge of approximately $2,031,000. In December
1997, Tseng sold its graphics development assets to ATI and, in connection with
the sale, recorded a one-time pretax loss on the sale of approximately
$3,698,000. In connection with the October 21, 1997 announcement, Tseng also
announced that it would explore opportunities to utilize its cash and stock to
make acquisitions of or investments in a potential growth-stage company or
companies including but not limited to those that are technology-based. On June
23, 1998, Tseng signed a definitive agreement to combine with CPI. There can be
no assurance that this transaction can be completed and closed as anticipated.
Revenues for 1996 were $26,231,000, a 29% decrease from 1995 levels. The
decrease was due primarily to the fact that shipments of ET6000-based products,
which commenced in volume in the second quarter of 1996, were not sufficient to
offset lower shipments and selling prices of Tseng's second generation
accelerator products as these products reached maturation in a rapidly evolving
personal computer market. Sales volumes and selling prices of Tseng's ET6000
chip were adversely affected during 1996 by both high solution costs for
ET6000-based solutions as the ET6000 was designed primarily for use with MDRAM
and MDRAM prices did not keep pace with more industry-standard EDO memory prices
and the market transition at the high end of the graphics market to first
generation 3D graphic accelerators which accelerated in the fourth quarter of
1996.
Cost of sales as a percentage of sales was 77% in 1997, 96% in 1996 and 78%
in 1995, respectively. The decrease in costs as a percentage of revenues in 1997
is due both to a one-time charge in 1996 of $2,354,000 for reserves for 2D
graphics inventory and purchase commitments and the increase in ET6000 revenues
as a percentage of total revenues in 1997. Despite pricing pressures on ET6000
sales, margins on ET6000 sales were higher than on sales of Tseng's older
W32-based product line which contributed significantly to sales in the first
half of 1996. ET6000 products were subject to severe pricing pressures in both
1997 and 1996 due to the competitive graphics market as a whole, high solution
cost of ET6000 solutions as 5 volt MDRAM prices did not keep pace with EDO
prices in either year and the transition to 3D graphics accelerators which
accelerated in the fourth quarter of 1996. The increase in costs as a percentage
of revenue in 1996 when compared to 1995 is due to the one-time charge of
$2,354,000 discussed above, pricing pressures on the ET6000 due to the high
solution costs of ET6000 based solutions as MDRAM price reductions did not keep
pace with EDO price reductions in 1996, and pricing pressures on Tseng's older
W32-based product line which reached maturation in the rapidly changing graphics
market.
Research and development expense in 1997 was $8,778,000, a 40% decrease
from the $14,561,000 incurred in 1996. The 1996 expense includes a one-time
charge of $8,660,000 related primarily to the write-off of investments and
commitments in technologies related primarily to 2D graphics and related
multimedia products. Excluding this one-time charge, research expenditures
increased during 1997 by 49%. This increase was due to additional personnel and
consulting costs to support development of the ET6300. As explained above, in
October 1997, Tseng announced it would not commercialize the ET6300 and stopped
development of new graphics products. In December, Tseng sold its graphics
development assets to ATI. As Tseng is no longer in the business of developing
graphics products, unless and until Tseng completes an investment or acquisition
in a Company which may be involved in development activities, it does not expect
to incur significant research and development costs in 1998. Research and
development expense in 1996 was $14,561,000, a 323% increase from the $3,440,000
incurred in 1995. The increase was due to additional personnel and consulting
costs to support the development of its third-generation graphics products,
including
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<PAGE> 128
completion of the ET6000 and development of Tseng's first 3D graphics
accelerator, as well as the one-time charge of $8,660,000 discussed above.
Selling, general and administrative expenses were $4,749,000, $9,239,000
and $6,328,000 in 1997, 1996 and 1995, respectively. The decrease in 1997 is due
primarily to reductions in non-research personnel costs and lower selling and
marketing expenditures. Included in expense for 1996 was approximately
$1,838,000 of one-time charges related primarily to the write-down of an
investment in a multimedia company and its refocus on 3D graphics. As a result
of the sale of the graphics development assets to ATI in December 1997, Tseng's
operating expense level as it enters 1998 is substantially below 1997 historical
operating levels. The increase in 1996 is due primarily to increased investments
in personnel to enhance Tseng's operations, marketing and sales efforts and the
one-time charge of $1,838,000 referred to above.
Tseng's effective income tax rate was a benefit of 28% and 34.6% in 1997
and 1996 and an expense of 17.6% in 1995. The primary reason for the reduced
benefit recorded in 1997 is that Tseng recorded a valuation allowance in 1997 as
realization of deferred tax assets is not assured at December 31, 1997. The
primary reason for the decrease in 1996 was lower pretax income.
Inflation is not expected to have an significant adverse impact on Tseng's
operations.
LIQUIDITY AND CAPITAL RESOURCES
Tseng's ability to generate cash adequate to meet its requirements results
primarily from cash on hand, investment and rental incomes, operating cash flow
generated from the last-time buy program and the potential availability of
additional debt and equity financing. Tseng believes that these sources are
sufficient to fund current working capital requirements as it wraps up its
graphics operations and works to close its business combination with CPI. As a
result of Tseng's sale of its graphics development assets to ATI, Tseng expects
that research and development, sales and marketing and general administrative
expenses during 1998 will be below historical levels. There can be no assurance
that Tseng will be able to close its business combination with CPI. Also, if
such transaction does not close, there can be no assurance that existing sources
of liquidity will be sufficient to complete one or more acquisitions of or
investments in a growth stage company or companies on terms acceptable to Tseng,
if at all. Should Tseng be required to seek additional capital to complete one
or more such transactions, there can be no assurance that such additional
financing, if required, will be available when needed or, if available, will be
on satisfactory terms.
Total working capital was $26,064,000 and $25,719,000 at June 30, 1998 and
December 31, 1997, respectively. Tseng's cash and short-term investments
increased to $27,109,000 at June 30, 1998 from $22,751,000 at December 1997. The
increase is due to cash generated from operations and the collection of
recoverable income taxes.
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TSENG PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of September 1,
1998, as to shares of Tseng's Common Stock beneficially owned by: (i) each
director, (ii) each of Tseng's named executive officers (as defined in Item
402(a)(3) of Regulation S-K promulgated under the Securities Act) and (iii) all
directors and executive officers of Tseng as a group. Tseng is not aware of any
shareholder that beneficially owns more than 5% of its Common Stock. Except as
otherwise noted, each person named below, either alone or together with such
person's family, had sole voting power and investment power with respect to the
shares listed next to such person's name.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED COMMON STOCK
--------------------------- ------------------ ------------
<S> <C> <C>
John J. Gibbons....................................... 297,512(2) 1.9%
Mark H. Karsch........................................ 249,307(3) 1.6%
Christopher F. Sutphin................................ 60,000(4) *
Mark Dorfman.......................................... 47,000(5) *
Directors and executive officers as a group (5
persons)............................................ 912,819(6) 5.7%
</TABLE>
- ---------------
* less than 1%
(1) The address for all persons listed in this table is c/o Tseng Labs, Inc., 18
W. Airy Street, Suite 100, Norristown, Pennsylvania 19401.
(2) Includes 297,500 shares underlying options exercisable within 60 days of
September 1, 1998.
(3) Includes 249,107 shares underlying options exercisable within 60 days of
September 1, 1998.
(4) Includes 30,000 shares underlying options exercisable within 60 days of
September 1, 1998.
(5) Includes 40,000 shares underlying options exercisable within 60 days of
September 1, 1998.
(6) Includes a total of 875,607 shares underlying options either currently
exercisable or exercisable within 60 days of September 1, 1998.
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<PAGE> 130
COMPARISON OF STOCKHOLDER RIGHTS
At the Effective Time, the stockholders of CPI and the stockholders of
Tseng will become stockholders of CPHI. As stockholders of CPHI, their rights
will be governed by the DGCL and the CPHI Certificate of Incorporation and
Bylaws. Following are summaries of certain differences between (i) the rights of
CPI stockholders and CPHI stockholders and (ii) the rights of Tseng stockholders
and CPHI stockholders.
COMPARISON OF STOCKHOLDER RIGHTS WITH RESPECT TO CPHI AND CPI
CPHI and CPI are both organized under the laws of the State of Delaware and
are subject to the DGCL. Any differences, therefore, in the rights of holders of
CPHI Common Stock and CPI Capital Stock arise solely from the differences in
their respective certificates of incorporation and bylaws.
Authorized Capital. The total number of authorized shares of capital stock
of CPI is 40,861,250, consisting of 18,400,000 shares of preferred stock, $.01
par value, 61,250 shares of redeemable preferred stock, $.01 par value, and
22,400,000 shared of common stock, $.01 par value. The authorized capital of
CPHI is set forth under "Description of CPHI Capital Stock".
Class Votes. The DGCL does not require separate class votes of all voting
classes in order to approve charter amendments generally. However, Section 242
of the DGCL does provide that each class of stock, even a nonvoting class of
stock, shall vote on charter amendments that increase or decrease the aggregate
number of authorized shares of such class, increase or decrease the par value of
such class or adversely affect the rights of the holders of such class.
Although CPHI has a portion of its authorized capital stock allocated to
preferred stock, at the Effective Time, no preferred stock will be outstanding,
all stockholders will have equal voting rights, and there will be no class
voting.
Certain additional actions do, however, require further class votes. The
CPI Certificate of Incorporation provides that CPI shall not, without first
obtaining the approval by vote or written consent of each of (i) the holders of
a majority of the shares of CPI Common Stock then outstanding, (ii) the holders
of a majority of the shares of CPI Series C Preferred Stock, CPI Series D
Preferred Stock, CPI Series E Preferred Stock, CPI Series F Preferred Stock and
CPI Series G Preferred Stock, then outstanding, voting as one class, and (iii)
the holders of a majority of the shares of CPI Series A Preferred Stock and CPI
Series B Preferred Stock, then outstanding, voting as one class (collectively,
the "CPI Additional Approval"): (i) sell, exchange, mortgage or pledge all or
substantially all of the assets of CPI, whether in one transaction or in a
series of related transactions; (ii) merge or consolidate with any other person;
or (iii) make any assignment for the benefit of CPI's creditors.
In addition, unless the CPI Board shall have given its unanimous approval
thereto, CPI shall not, without first obtaining the CPI Additional Approval: (i)
with certain exceptions, incur any indebtedness for borrowed money; (ii) with
certain exceptions, guarantee the indebtedness or other liabilities or
obligations of any other person; (iii) form or participate in any limited or
general partnership or joint venture; (iv) make any acquisition of, or equity
investment in, another person in excess of $100,000; (v) permit any subsidiary
to issue or sell, or obligate itself to issue or sell, any stock of such
subsidiary to any person other than CPI; (vi) enter into or adopt any salary,
bonus or other compensation plan or programs for executive officers of CPI;
(vii) enter into any agreement or transaction with any officer or director of
CPI out of the ordinary course of CPI's business; (viii) enter into any business
that does not involve the research and development of pharmaceutical drugs; (ix)
amend or repeal any provision of, or add any provision to, the CPI Certificate
of Incorporation or Bylaws; (x) with certain exceptions, redeem, purchase or
otherwise acquire for value any shares of CPI Capital Stock; or (xi) issue any
shares of CPI Preferred Stock other than shares of CPI Series A, B, C, D, E, F
or G Preferred Stock.
In addition, without the approval of the holders of a majority of shares of
a given series of CPI Preferred Stock, CPI shall not amend or repeal any
provision of, or add any provision to, the CPI Certificate of Incorporation if
such action would change any of the express powers, preferences or special
rights provided for such series in the CPI Certificate of Incorporation so as to
affect such series adversely under the DGCL.
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Classified Board of Directors. A classified board is one on which a
certain number, but not all, of the directors are elected on a rotating basis
each year. The DGCL permits, but does not require, a classified board of
directors, pursuant to which the directors can be divided into as many as three
classes with staggered terms of office, with only one class of directors
standing for election each year. The CPHI charter documents provide for a
classified board of directors, with only one class out of three being elected
each year to a three year term. The CPI charter documents do not include a
classified board. Rather, CPI's directors are elected at each annual
stockholders' meeting, and hold office until his or her successor is elected and
qualified, or until his or her earlier resignation or removal.
Removal of Directors. Under the DGCL, if a corporation has a classified
board, the stockholders may remove a director only for cause, unless the
certificate of incorporation provides otherwise. The CPHI Certificate of
Incorporation does not provide otherwise; therefore, a director may only be
removed for cause by a majority vote of the stockholders entitled to vote. The
CPI Bylaws, however, provide that a majority vote of the stockholders entitled
to vote may remove a director with or without cause.
Election of Directors. Pursuant to Section 2 of the CPI Stockholders'
Agreement entered into in December 1992, each of Northwood Ventures, Quest
Ventures, Technology Partners and FGN, Inc. has had certain rights in respect of
the nomination and election of directors. These provisions of Section 2 will
cease to have effect upon completion of the Transactions.
Limitation on Directors' Liability; Indemnification of Directors and
Officers. Section 102 of the DGCL allows a corporation to include in its
certificate of incorporation a provision that limits or eliminates the personal
liability of directors to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. Section 102 of the DGCL does
not, however, permit a corporation to limit or eliminate the personal liability
of a director for (i) any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
intentional or negligent payment of unlawful dividends or an unlawful stock
purchase or redemption, or (iv) any transaction from which the director derived
an improper personal benefit.
Both the CPHI Certificate of Incorporation and the CPI Certificate of
Incorporation provide for limitations on the personal liability of any director
to the extent permitted by the DGCL.
In addition, the charter documents of CPHI and CPI provide for
indemnification of directors and executive officers. Both corporations' bylaws
provide that each such corporation shall, to the maximum extent and in the
manner permitted by the law, indemnify each of its directors and officers
against expenses (including attorneys' fees), judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with any proceeding
arising by reason of the fact that such person is or was an agent of the
corporation.
Under Section 145 of the DGCL, other than an action brought by or in the
right of the corporation, indemnification is available if it is determined that
the proposed indemnitee acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceedings, had no reasonable cause to
believe his or her conduct was unlawful. In actions brought by or in the right
of the corporation, such indemnification is limited to expenses (including
attorneys' fees) actually and reasonably incurred and permitted only if the
indemnitee acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person is adjudged to be liable to the corporation, unless and only to the
extent that the court in which the action was brought determines that, despite
the adjudication of liability but in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for such expenses
which the court deems proper. To the extent that the proposed indemnitee has
been successful in defense of any action, suit or proceeding, he or she must be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the action.
Amendments to the Certificate of Incorporation. Under the DGCL, a
corporation's certificate of incorporation can be amended by the affirmative
vote of the board of directors and approved by the affirmative
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vote of the holders of a majority of the outstanding shares entitled to vote
thereon, unless the certificate of incorporation requires the vote of a larger
portion of the shares. The CPHI Certificate of Incorporation requires approval
of at least two-thirds of the voting power of the outstanding shares of voting
stock to amend the provisions contained in Articles V, VI and VII thereof.
Article V makes provisions for the CPHI Board, including the number of
directors, status as a classified board, resignations, vacancies and committees,
as well as other corporate actions, including amendment to the CPHI Bylaws,
written consent of the CPHI stockholders and special meetings. Article VI
provides for director indemnification while Article VII provides for amendment
to the CPHI Certificate of Incorporation.
By contrast, the CPI Certificate provides that holders of CPI Preferred
Stock have the right to a separate class vote in addition to the vote with
respect to certain amendments to the CPI Certificate of Incorporation. See
"-- Class Votes".
Power to Call Special Stockholders' Meeting; Action By Consent. Under the
DGCL, a special meeting of stockholders may be called by the board of directors
or by any other person authorized to do so in the corporation's certificate of
incorporation or bylaws. The CPHI Bylaws provide that special meetings of
stockholders may be called only by the Chairman of the CPHI Board, the Chief
Executive Officer or the CPHI Board pursuant to a resolution adopted by a
majority of the total number of authorized directors. Pursuant to the CPI
Bylaws, a special meeting of the CPI stockholders may be called at any time by
the Chairman of the CPI Board or by the President, and shall be called by the
Chairman of the CPI Board, the President or the Secretary at the written request
of a majority of the CPI Board or at the written request to the Secretary of CPI
stockholders owning not less than 20% of the votes of the entire capital stock
of CPI issued and outstanding that are entitled to vote for the election of
directors. CPI allows stockholders to take action by written consent without a
meeting whereas action by written consent is not available under the CPHI
charter documents, unless the consent is unanimous.
Dividends and Repurchases of Shares. The DGCL permits a corporation,
unless otherwise restricted by its certificate of incorporation, to declare and
pay dividends out of its surplus or, if there is no surplus, out of net profits
for the fiscal year in which the dividend is declared or for the preceding
fiscal year as long as the amount of capital of the corporation is not less than
the aggregate amount of the capital represented by the issued and outstanding
stock of all classes having a preference upon the distribution of assets.
Neither the CPHI Certificate of Incorporation nor the CPI Certificate of
Incorporation contains any such restrictions on such corporation's ability to
declare and pay dividends except that the CPI Certificate of Incorporation
provides that no dividends (other than those payable solely in CPI Common Stock
and/or rights to acquire CPI Common Stock) shall be declared, paid or set apart
for payment on the CPI Common Stock unless a dividend is concurrently declared,
paid or set apart for payment, as the case may be, on all outstanding shares of
CPI Preferred Stock in an amount as set forth in CPI Certificate of
Incorporation.
In addition, the CPHI Bylaws permit the CPHI Board, before payment of any
dividend, to set aside out of any funds available for dividends such sum or sums
as the CPHI Board from time to time, in its absolute discretion, thinks proper
as a reserve or reserves to meeting contingencies, or for equalizing dividends
or for repairing or maintaining any property of CPHI or for such other purposes
as the CPHI Board shall think conducive to the interest of CPHI.
The DGCL generally provides that a corporation may redeem or repurchase its
shares only if such redemption or repurchase would not impair the capital of the
corporation. The ability of a Delaware corporation to pay dividends on, or to
make repurchases or redemptions of, its shares is dependent on the financial
status of the corporation standing alone and not on a consolidated basis. In
determining the amount of surplus of a Delaware corporation, the assets of the
corporation, including stock of subsidiaries owned by the corporation, must be
valued at their fair market value as determined by the board of directors,
regardless of their historical book value.
Amendment of Bylaws. Section 109 of the DGCL provides that the
stockholders entitled to vote have the power to adopt, amend or repeal bylaws
and that a corporation may confer, in its certificate of incorporation, such
powers on the board of directors. Both CPHI and CPI have conferred such power of
amendment upon their
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boards of directors. The CPHI Bylaws further provide that its Bylaws may be
altered or amended, or new Bylaws adopted, by the affirmative vote of two-thirds
of the voting power then outstanding.
Approval of Certain Corporate Transactions. Under the DGCL, any merger,
consolidation or sale, lease or exchange of all or substantially all of the
assets (an "Extraordinary Event") must be approved by the board of directors and
by the affirmative vote of a majority of the outstanding shares entitled to
vote. The CPHI Certificate of Incorporation does not provide for any additional
vote that would be required to approve such a transaction. The CPI Certificate
of Incorporation provides that the CPI Additional Approval is required with
respect to most Extraordinary Events and certain other transactions. The CPI
Certificate of Incorporation also requires that, unless the Board gives its
unanimous approval, CPI shall not take certain action without further
stockholder vote. See "-- Class Votes."
Certain Business Combinations; Anti-Takeover Provisions. Section 203 of
the DGCL prohibits a corporation from engaging in any business combination with
an interested stockholder (defined as any entity or person beneficially owning
15% or more of the outstanding voting stock of the corporation and any entity or
person associated with, affiliated with or controlling or controlled by such
entity or person) for a period of three years after the time that the
stockholder became an interested stockholder unless (i) prior to that time, the
board of directors of the corporation approved either the business combination
or the transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction pursuant to which the
person became an interested stockholder, such stockholder owned 85% or more of
the outstanding voting stock at the time the transaction commenced (excluding
shares owned by directors and officers and shares owned by employee stock option
plans in which the participants cannot determine confidentially whether or not
the shares would be tendered in response to a tender or an exchange offer), or
(iii) at or subsequent to the time of the transaction, the business combination
is approved by the corporation's board of directors and by a vote at a meeting
(and not by written consent) of at least two-thirds of the outstanding voting
stock not owned by the interested stockholder.
Section 203 applies to Delaware corporations that have a class of voting
stock (i) listed on a national securities exchange, (ii) authorized for
quotation by the Nasdaq Stock Market, Inc. or (iii) held of record by more than
2,000 stockholders. Even if Section 203 would otherwise apply, a Delaware
corporation may elect in its certificate of incorporation or bylaws not to be
governed by Section 203. Any amendment to such a provision must be approved by
the stockholders and may not be further amended by the board of directors.
Since CPHI is authorized for quotation by the Nasdaq Stock Market, Inc. and
as it has not opted out of Section 203 as set forth above, CPHI is subject to
the anti-takeover provisions of Section 203 of the DGCL. Section 203 does not
currently apply to CPI since CPI does not meet any of the criteria set forth
above.
Appraisal Rights. Under the DGCL, a stockholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal rights pursuant to which such
stockholder may receive cash in an amount equal to the "fair value" of the
shares held by such stockholder (as determined by the Delaware Court of
Chancery) in lieu of the consideration such stockholder may otherwise receive in
the transaction.
Under the DGCL, appraisal rights are not available to: (i) stockholders
with respect to a merger or consolidation by a corporation, the shares of which
are either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or are held of record by more than 2,000
holders if such stockholders receive only (A) shares of the surviving
corporation or shares of any other corporation which are either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or are held of record by more than 2,000 holders and (B) cash in
lieu of fractional shares; or (ii) stockholders of a corporation surviving a
merger if no vote of the stockholders of the surviving corporation is required
to approve the merger because, among other things, the number of shares to be
issued in the merger does not exceed twenty percent (20%) of the shares of the
surviving corporation outstanding immediately prior to the merger, and if
certain other conditions are met.
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Appraisal rights are available to stockholders of CPI with respect to the
CPI Merger. See "Approval of the Transactions -- Rights of Dissenting
Stockholders".
Registration Rights. Pursuant to the CPI Stockholders' Agreement, certain
holders of CPI Capital Stock currently have registration rights with respect to
such shares. The CPI Stockholders' Agreement provides that such holders may (i)
request registration of Registrable Securities (as defined in the CPI
Stockholders' Agreement) (subject to certain limitations and restrictions,
including a limitation as to the offering price), (ii) include their shares with
any registration effected by CPI (subject to certain restrictions and
limitations), and (iii) request that CPI effect registrations pursuant to a
Registration Statement on Form S-3 (subject to certain restrictions and
limitations).
Upon the consummation of the Transactions, CPHI will assume CPI's
obligations under the CPI Stockholders' Agreement. Pursuant to the terms of the
Reorganization Agreement, CPI shall, however, use all reasonable efforts to
provide that any Holder (as defined in the CPI Stockholders' Agreement) shall
not request any registration until the earlier of (i) 90 days after the
effective date of a registration statement for the first public offering of
securities of CPHI following the Effective Time and (ii) the first anniversary
of the Effective Time. Moreover, Section 3.15 of the Stockholders Agreement
generally restricts the availability of registration rights to shares that may
not otherwise be sold without a registration statement.
Liquidation Rights. Section 281 of the DGCL provides that, upon the
dissolution of a corporation, and after the satisfaction of payment of all
claims and obligations, any remaining assets shall be distributed to the
stockholders ratably. No stockholders of CPHI Common Stock will have a
liquidation preference. Under the CPI Certificate of Incorporation, if CPI is
voluntarily or involuntarily liquidated, dissolved or wound up, then the holders
of CPI Preferred Stock are entitled to receive a liquidation preference, prior
and in preference to, any distribution of the remaining assets to the holders of
CPI Common Stock.
Redemption Provisions. Pursuant to the CPI Certificate of Incorporation,
subject to certain limitations and restrictions, CPI may, at its option, offer
to redeem, and thereafter, with the consent of the holders, redeem out of the
funds of CPI legally available therefor, some or all of the outstanding shares
of any class or series of CPI Capital Stock on such terms as CPI shall
determine. In addition, upon the closing of any sale of CPI Common Stock in a
firm commitment, underwritten public offering registered under the Securities
Act, CPI is required to redeem all of the CPI Redeemable Preferred Stock at a
redemption price of $20.00 per share. There are no redemption provisions in the
CPHI charter documents.
Conversion Rights. Pursuant to the CPI Certificate of Incorporation, the
holders of CPI Preferred Stock have certain conversion rights including the
right (i) upon the option of the holder of CPI Preferred Stock, to convert each
share of CPI Preferred Stock of any series into such number of fully paid and
nonassessable shares of CPI Common Stock determined by dividing the Initial
Value (as defined in the CPI Certificate of Incorporation) for such series by
the Conversion Price (as defined in the CPI Certificate of Incorporation) then
in effect for such series (as set forth in the CPI Certificate of
Incorporation), and (ii) that each share of CPI Preferred Stock of a particular
series shall be automatically converted into fully paid and nonassessable shares
of CPI Common Stock at the Conversion Price then in effect for such series,
without any action on the part of either CPI or the holder thereof, upon the
earlier to occur of the following: (A) the date specified by vote or written
consent or agreement of the holders of a least 67% of the shares of such series
then outstanding; (B) the date specified by resolution of the CPI Board at such
time as there are outstanding less than 25% of the number of originally
authorized shares of such series; and (C) immediately upon the closing of the
sale of CPI Common Stock in a firm commitment, underwritten public offering
registered under the Securities Act and resulting in aggregate proceeds to CPI
and/or the selling stockholders of not less than $10,000,000 (subject to certain
exceptions). The CPHI Certificate of Incorporation gives no conversion rights to
any holders of CPHI Common Stock.
COMPARISON OF STOCKHOLDER RIGHTS WITH RESPECT TO CPHI AND TSENG
CPHI is organized under the laws of the State of Delaware and is subject to
the DGCL and Tseng is organized under the laws of the State of Utah and is
subject to the UBCA. Any differences, therefore, in the
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rights of holders of CPHI Common Stock and Tseng Common Stock arise from the
differences in applicable law as well as the differences in the companies'
charter documents.
Authorized Capital. The authorized capital stock of Tseng consists of
50,000,000 shares of common stock, $.005 par value. The authorized capital of
CPHI is set forth under "Description of CPHI Capital Stock".
Classified Board of Directors. A classified board is one on which a
certain number, but not all, of the directors are elected on a rotating basis
each year. The DGCL permits, but does not require, a classified board of
directors, pursuant to which the directors can be divided into as many as three
classes with staggered terms of office, with only one class of directors
standing for election each year. The CPHI charter documents, however, do provide
for a classified board of directors, with only one class out of three being
elected each year to a three year term. The Tseng charter documents provide that
directors shall be elected at each annual stockholders' meeting and shall hold
office until the next annual meeting of stockholders and until his or her
successor is elected and qualified, or until his or her earlier death,
resignation or removal.
Removal of Directors. Under the DGCL, if a corporation has a classified
board, the stockholders may remove a director only for cause, unless the
certificate of incorporation provides otherwise. The CPHI Certificate of
Incorporation does not provide otherwise; therefore, a director may only be
removed with cause by a majority vote of the stockholders entitled to vote.
Regardless of whether a board of directors is classified, UBCA provides that the
stockholders of a Utah corporation may remove one or more directors with or
without cause, unless the articles of incorporation provide that directors may
be removed only for cause. Further, the UBCA provides that a director may be
removed only at a meeting called for that purpose, and requires that the notice
of the meeting state that the purpose or one of the purposes of the meeting is
the removal of the director. The Tseng charter documents provide that a director
may be removed by a vote of the stockholders if the number of votes cast to
remove such director exceeds the number of votes cast against removal.
Limitation on Directors' Liability; Indemnification of Directors and
Officers. Section 102 of the DGCL permits a corporation to adopt provisions in
its certificate of incorporation eliminating or limiting the personal liability
of a director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director. Section 102 of the DGCL does not,
however, permit a corporation to limit or eliminate the personal liability of a
director for: (i) any breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
intentional or negligent payment of unlawful dividends or unlawful stock
purchase or redemption; or (iv) any transaction in which the director derived an
improper personal benefit. The CPHI Certificate of Incorporation provides for
limitations on the personal liability of any director to the extent permitted by
the DGCL.
Similarly, the UBCA permits a corporation, if so provided in its articles
of incorporation, its bylaws or in a stockholder resolution, to eliminate or
limit the personal liability of a director to the corporation or its
stockholders for monetary damages due to any action taken or any failure to take
action as a director, except liability for: (i) improper financial benefits
received by a director; (ii) intentional infliction of harm on the corporation
or its stockholders; (iii) payment of dividends to stockholders making the
corporation insolvent; and (iv) intentional violations of criminal law. The
Tseng charter documents eliminate the liability of officers and directors of the
corporation for monetary damages to the fullest extent permissible under UBCA.
Under Section 145 of the DGCL, other than an action brought by or in the
right of the corporation, indemnification is available if it is determined that
the proposed indemnitee acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceedings, had no reasonable cause to
believe his or her conduct was unlawful. In actions brought by or in the right
of the corporation, such indemnification is limited to expenses (including
attorneys' fees) actually and reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person is adjudged to be
liable to the corporation, unless and only to the extent that the court in which
the action was brought determines that, despite the adjudication of liability
but in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such expenses which
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the court deems proper. To the extent that the proposed indemnitee has been
successful in defense of any action, suit or proceeding, he or she must be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the action. The CPHI Bylaws provide that CPHI
shall, to the maximum extent and in the manner permitted by the law, indemnify
each of its directors and officers against expenses (including attorneys' fees),
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceeding arising by reason of the fact that such person
is or was an agent of CPHI.
Under the UBCA, a corporation may indemnify its current and former
directors, officers, employees and other agents made party to any proceeding
because of their relationship to the corporation against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with such proceeding if that person acted in good faith and
reasonably believed his or her conduct to be in the corporation's best
interests, and, in the case of a criminal proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The UBCA also permits a corporation to
indemnify its directors, officers, employees and other agents in connection with
a proceeding by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that the person is such an agent of the corporation
against expenses actually and reasonably incurred by such person in connection
with the proceeding. The UBCA prohibits the indemnification of an agent in
connection with a proceeding by or in the right of the corporation in which the
director, officer, employee or agent was adjudged liable to the corporation, or
in connection with any other proceeding in which the agent is adjudged liable on
the basis that the agent derived an improper personal benefit. The Tseng charter
documents permit indemnification of all such persons whom it has the power to
indemnify to the fullest extent legally permissible under the UBCA.
Further, the UBCA permits a corporation to advance expenses incurred by a
director, officer, employee or agent who is a party to a proceeding in advance
of final disposition of the proceeding if that person provides: (a) a written
affirmation of his good faith belief that he acted in good faith, in the
corporation's best interests and, in the case of a criminal proceeding, had no
reasonable cause to believe his conduct was unlawful; (b) a written undertaking
by or on behalf of that person to repay the advance if it is ultimately
determined that such person's conduct did not meet the statutory standard
required for indemnification; and (c) the corporation determines under the facts
then known that indemnification would not be precluded. The Tseng charter
documents permit such advances.
Amendments to the Certificate of Incorporation or the Articles of
Incorporation. Under the DGCL, a corporation's certificate of incorporation can
be amended by the affirmative vote of the board of directors and approved by the
affirmative vote of the holders of a majority of the outstanding shares entitled
to vote thereon, unless the certificate of incorporation requires the vote of a
larger portion of the shares. The CPHI Certificate of Incorporation requires
approval of at least two-thirds of the voting power of the outstanding shares of
voting stock to amend the provisions contained in Articles V, VI, and VII
thereof. Article V makes provisions for the CPHI Board, including the number of
directors, status as a classified board, resignations, vacancies and committees,
as well as other corporate actions, including amendment to the CPHI Bylaws,
written consent of the CPHI stockholders and special meetings. Article VI
provides for director indemnification while Article VII provides for amendment
to the Certificate of Incorporation.
UBCA provides that, for an amendment to the articles of incorporation of a
Utah corporation to be affected, (i) the board of directors must recommend the
amendment to the stockholders (unless the board determines that because of a
conflict of interest or other special circumstances it should not make a
recommendation and communicates the basis for its determination to the
stockholders), and (ii) unless the articles of incorporation, the bylaws (if
authorized by the articles of incorporation) or a resolution of the board of
directors requires a greater number, the amendment must be approved by (A) a
majority of the votes entitled to be cast on the amendment by any voting group
as to which the amendment would provide appraisal rights, (B) a majority of the
votes entitled to be cast on the amendment by any voting group as to which the
amendment would materially and adversely affect the voting group's rights in
shares (including preferential rights, rights in redemption, preemptive rights,
voting rights or rights in certain reverse splits), and (C) a majority of the
votes cast for all other voting groups (voting separately, as applicable, with
shares constituting a quorum present for each voting group). Notwithstanding the
foregoing, unless provided otherwise in the articles of incorporation, a
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corporation's board of directors may, without stockholder approval, amend the
corporation's articles of incorporation with respect to certain corporate
issues, including: (i) deleting the names and addresses of incorporators or
initial directors from the articles of incorporation; (ii) deleting the name and
address of the initial registered agent or registered office; (iii) changing
each issued and unissued authorized share of a class into a greater number of
whole shares if the corporation has only shares of that class outstanding; (iv)
changing the corporate name by adding the words "corporation," "incorporated,"
or "company" or an abbreviation of those words, by substituting any such word or
abbreviation for a similar word or abbreviation in the name; and (v) making any
other change expressly permitted by the UBCA to be made without stockholder
action. The Tseng Articles of Incorporation provide that the Tseng Articles of
Incorporation may be amended by the affirmative vote of a majority of the shares
entitled to vote on each such amendment.
Power to Call Special Stockholders' Meeting; Action by Consent. Under the
DGCL, a special meeting of stockholders may be called by the board of directors
or by any other person authorized to do so in the corporation's certificate of
incorporation or bylaws. The CPHI Bylaws provide that special meetings of
stockholders may be called only by the Chairman of the CPHI Board, the Chief
Executive Officer or the CPHI Board pursuant to a resolution adopted by a
majority of the total number of authorized directors. Under the UBCA, special
meetings of the stockholders may be called by the board of directors, the person
or persons authorized by the corporation's bylaws to call a special meeting, or
the holders of shares representing at least 10% of all votes entitled to be cast
on any issue proposed to be considered at the special meeting. The Tseng Bylaws
provide that special meetings of stockholders may be called by the Tseng Board
or by the holders representing at least 10% of the votes entitled to be cast on
any issue proposed to be considered at the proposed special meeting.
Both the DGCL and UBCA allow stockholders to take action without a meeting
upon the written consent of stockholders having not less than the minimum number
of votes that would be necessary to take such action at a meeting at which all
shares entitled to vote thereon were present and acting although the UBCA
further provides that, unless the stockholders of any Utah corporation in
existence prior to July 1, 1992 adopted a resolution permitting action by less
than unanimous written consent, the stockholders are only permitted to act by
unanimous written consent. The CPHI charter documents that are effective upon
the consummation of the Transactions do not provide for stockholder action by
written consent, while the Tseng charter documents provide for action by the
stockholders by written consent of stockholders having not less than the minimum
number of votes that would be necessary to take such action at a meeting at
which all shares entitled to vote thereon were present and acting. The UBCA
further requires that any written consent for the election of directors must be
unanimous.
Dividends. The DGCL permits a corporation, unless otherwise restricted by
its certificate of incorporation, to declare and pay dividends out of its
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared or for the preceding fiscal year as long as the
amount of capital of the corporation is not less than the aggregate amount of
the capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets. The CPHI Bylaws do not
further limit the availability of dividends but do, however, allow the CPHI
Board to set aside out of any funds of the corporation available for dividends
such sum or sums as the CPHI Board from time to time, in its absolute
discretion, thinks, proper as a reserve or reserves to meet contingencies, for
equalizing dividends, or for repairing or maintaining any property of CPHI or
for such other purposes as the CPHI Board shall think conducive to the interest
of CPHI. UBCA provides that a corporation is prohibited from making a
distribution to its stockholders if, after giving effect to the distribution,
the corporation would not be able to pay its debts as they become due in the
usual course of business or the corporation's total assets would be less than
its total liabilities (plus any amounts necessary to satisfy any preferential
rights). The Tseng charter documents do not include additional dividend
provisions.
Amendment of Bylaws. Section 109 of the DGCL provides that the
stockholders entitled to vote have the power to adopt, amend or repeal bylaws
and that a corporation may confer, in its certificate of incorporation, such
powers on the board of directors. CPHI has conferred such power of amendment
upon the CPHI Board. The CPHI Bylaws further provide that the CPHI Bylaws may be
altered or amended, or new bylaws adopted, by the affirmative vote of two-thirds
of the voting power then outstanding. The UBCA
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<PAGE> 138
provides that a corporation's board of directors may amend the corporation's
bylaws at any time, except to the extent that the articles of incorporation, the
bylaws or the UBCA reserve that power exclusively to the stockholders. In
addition, a corporation's stockholders may amend the corporation's bylaws at
anytime, even though the bylaws may also be amended by the board of directors. A
bylaw that fixes a greater quorum or voting requirement for the board of
directors of a corporation than is required by the UBCA may be amended, however,
(i) if originally adopted by the stockholders, only by the stockholders, or (ii)
if originally adopted by the board of directors, by the stockholders or unless
otherwise provided in the corporation's articles of incorporation or bylaws, by
the board of directors. The Tseng Bylaws provide that the Tseng Bylaws may be
amended by a vote of a majority of the Tseng Board in office or by a vote of a
majority of the stockholders.
Approval of Certain Corporate Transactions. Under the DGCL, an
Extraordinary Event (as defined above) must be approved by the board of
directors and by the affirmative vote of a majority of the outstanding shares
entitled to vote. The CPHI Certificate does not provide for any additional vote
that would be required to approve such a transaction.
Under the UBCA, a merger, share exchange or sale of all or substantially
all of the assets of a corporation (other than a sale in the ordinary course of
the corporation's business) requires the approval of a majority of the
outstanding shares of the corporation (unless the articles of incorporation, the
bylaws or a resolution of the board of directors requires a greater number). The
Tseng charter documents do not provide for any additional vote that would be
required to approve such a transaction.
Certain Business Combinations; Anti-Takeover Provisions. Section 203 of
the DGCL prohibits a corporation from engaging in any business combination with
an interested stockholder (defined as any entity or person beneficially owning
15% or more of the outstanding voting stock of the corporation and any entity or
person associated with, affiliated with or controlling or controlled by such
entity or person) for a period of three years after the time that the
stockholder became an interested stockholder unless (i) prior to that time, the
board of directors of the corporation approved either the business combination
or the transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction pursuant to which the
person became an interested stockholder, such stockholder owned 85% or more of
the outstanding voting stock at the time the transaction commenced (excluding
shares owned by directors and officers and shares owned by employee stock option
plans in which the participants cannot determine confidentially whether or not
the shares would be tendered in response to a tender or an exchange offer), or
(iii) at or subsequent to the time of the transaction, the business combination
is approved by the corporation's board of directors and by a vote at a meeting
(and not by written consent) of at least two-thirds of the outstanding voting
stock not owned by the interested stockholder.
Section 203 applies to Delaware corporations that have a class of voting
stock (i) listed on a national securities exchange, (ii) authorized for
quotation by The Nasdaq Stock Market, Inc. or (iii) held of record by more than
2,000 stockholders. Even if Section 203 would otherwise apply, a Delaware
corporation may elect in its certificate of incorporation or bylaws, not to be
governed by Section 203. Any amendment to such a provision must be approved by
the stockholders and may not be further amended by the board of directors. Since
CPHI is or will be authorized for quotation by The Nasdaq Stock Market, Inc. and
as it has not opted out of Section 203 as set forth above, CPHI is subject to
the anti-takeover provisions of Section 203 of the DGCL.
The UBCA provides that Control Shares of an Issuing Public Corporation
acquired in a Control Share Acquisition shall have the same rights as they had
before such acquisition only to the extent granted by resolution of the
stockholders of the corporation. Control Shares is defined as shares that, when
combined with all other voting shares held by the stockholder, would entitle the
holder to vote in the election of directors within any of the following ranges
of voting power: (i) one-fifth or more but less than one-third of all voting
power; (ii) one-third or more but less than a majority of all voting power; or
(iii) a majority or more of all voting power. An Issuing Public Corporation is
defined as a Utah corporation with: (i) 100 or more stockholders; (ii) its
principal place of business, its principal office, or substantial assets within
the state; and (iii) (A) more than 10% of its stockholders resident in Utah; (B)
more than 10% of its shares owned by Utah residents; or (C) 10,000 stockholders
resident in the state. A Utah corporation's articles of incorporation or
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<PAGE> 139
bylaws may exempt the corporation's shares from these provisions, as long as
such exemption is adopted before the control share acquisition in question.
Appraisal Rights. Under the DGCL, a stockholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal rights pursuant to which such
stockholder may receive cash in an amount equal to the "fair value" of the
shares held by such stockholder (as determined by the Delaware Court of
Chancery) in lieu of the consideration such stockholder may otherwise receive in
the transaction.
Under the DGCL, appraisal rights are not available to: (i) stockholders
with respect to a merger or consolidation by a corporation, the shares of which
are either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or are held of record by more than
2,000 holders if such stockholders receive only (A) shares of the surviving
corporation or shares of any other corporation which are either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or are held of record by more than 2,000 holders and (B) cash in
lieu of fractional shares; or (ii) stockholders of a corporation surviving a
merger if no vote of the stockholders of the surviving corporation is required
to approve the merger because, among other things, the number of shares to be
issued in the merger does not exceed twenty percent (20%) of the shares of the
surviving corporation outstanding immediately prior to the merger, and if
certain other conditions are met.
UBCA provides that, in connection with a merger, share exchange or sale,
lease, exchange or other disposition of all or substantially all of the assets
of a corporation (other than in the ordinary course of the corporation's
business), a dissenting stockholder, after complying with certain procedures, is
entitled to payment from the corporation of the fair value of the stockholder's
shares, as estimated by the corporation. If the stockholder is unwilling to
accept the corporation's estimate, the stockholder may provide the corporation
with an estimate of the fair value and demand payment of that amount. If the
corporation is unwilling to pay that amount, the corporation shall apply for
judicial determination of the fair value. Unless the articles of incorporation,
bylaws or a resolution of the board of directors provides otherwise,
stockholders are not entitled to appraisal rights when the shares are listed on
a national securities exchange or the Nasdaq National Market, or are held of
record by more than 2,000 holders. This exception does not apply if, pursuant to
the corporate action, the stockholder will receive anything except (i) shares of
the surviving corporation, (ii) shares of a corporation that is or will be
listed on a national securities exchange or the Nasdaq National Market, or held
of record by more than 2,000 holders, (iii) cash in lieu of fractional shares or
(iv) any combination of the foregoing. The Tseng charter documents do not make
any exceptions to this application of the UBCA.
Tseng stockholders are not entitled to appraisal rights in connection with
the Tseng Merger.
Quorum of Directors. DGCL provides that, unless a greater or lesser number
is required for a quorum by the certificate of incorporation or bylaws (but in
no event less than one-third of the votes of the entire board or committee), a
majority of the directors then in office shall constitute a quorum. The CPHI
Bylaws provide that, except with respect to indemnification questions for which
a quorum shall be one-third of the exact number of directors fixed from time to
time in accordance with the CPHI Certificate of Incorporation, a quorum of the
CPHI Board shall consist of a majority of the exact number of directors fixed
from time to time in accordance with the CPHI Certificate of Incorporation. UBCA
provides that a quorum of the board of directors consists of a majority of the
fixed number of directors if the corporation has a fixed board size, or if the
corporation's bylaws provide for a variable board size, a majority of the number
of directors prescribed, or if no number is prescribed, the number in office.
The articles of incorporation or the bylaws of a corporation may establish a
higher or lower number of directors to constitute a quorum, but in no event may
the number be less than one-third of the number of directors. The Tseng Bylaws
provide that a majority of the directors in office immediately before the
meeting begins shall be necessary to constitute a quorum for the transaction of
business.
Number of Directors; Vacancy. The CPHI charter documents provide that the
number of members of the Board shall be fixed exclusively by one or more
resolutions adopted by the CPHI Board. The CPHI
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<PAGE> 140
charter documents provide that a vacancy among the directors shall be filled
only by the affirmative vote of a majority of the directors then in office, even
less than a quorum of the CPHI Board, unless the CPHI Board determines by
resolution that any such vacancies or newly created directorships shall be
filled by the stockholders.
The Tseng Bylaws provide that the Tseng Board consists of not less than
three, nor more than nine directors with the actual number being determined by
resolutions adopted by the Board of Directors. The Tseng Bylaws provide that a
vacancy among the directors may be filled for the unexpired term by the
affirmative vote of a majority of the remaining directors in office, though less
than a quorum, or by a sole remaining director.
Inspection of Corporate Books and Records. DGCL provides that any
stockholder of record, upon written demand under oath stating the purpose
thereof, has the right during the usual hours for business to inspect for any
proper purpose, a corporation's stock ledger, a list of its stockholders and its
other books and records and to make copies or extract therefrom. UBCA also
provides that, upon providing the corporation with a written demand at least
five business days before the date the stockholder wishes to make an inspection,
a stockholder and his agents and attorneys are entitled to inspect and copy,
during regular business hours (i) the certificate of incorporation, bylaws,
minutes of stockholders meetings for the previous three years, written
communications to stockholders for the previous three years, names and business
addresses of the officers and directors, the most recent annual report delivered
to the State of Utah, and financial statements for the previous three years and
(ii) if the stockholder is acting in good faith and for a proper purpose,
excerpts from the records of the board of directors and stockholders (including
minutes of meetings, written consents and waivers of notices), accounting
records and stockholder lists.
Transactions with Officers and Directors. Under the DGCL, contracts or
transactions in which a director or officer is financially interested are not
automatically void or voidable, if approved by the stockholders or the
directors. Approval by the stockholders requires only a simple majority. Board
approval must be by a majority of the disinterested directors, but interested
directors may be counted for purposes of establishing a quorum. The UBCA
provides that every director who is in any way, directly or indirectly,
interested in a proposed contract or transaction with the corporation is liable
to account to the corporation for any profit made as a consequence of the
corporation entering into such transaction unless such person (i) disclosed his
or her interest at the meeting of directors where the proposed transaction was
first considered, and, after his or her disclosure, the transaction was approved
by the a majority of the disinterested directors, (ii) disclosed his or her
interest prior to a meeting or written consent of stockholders and, after his or
her disclosure, the transaction was approved by the a majority of the
disinterested shares, or (iii) can show that the contract or transaction was
fair and reasonable to the corporation.
Quorum of Stockholders. The DGCL provides that, unless the certificate of
incorporation or bylaws of a corporation specifies the number of shares and/or
the amount of the securities having voting power of which shall be present (of
represented by a proxy) at a meeting of stockholders to constitute a quorum, a
majority of the shares entitled to vote, present in person or represented by
proxy, shall constitute a quorum at a meeting of stockholders. In no event,
however, may a quorum consist of less than one-third of the shares entitled to
vote at the meeting. The CPHI Bylaws provide that holders of a majority of the
outstanding shares of stock entitled to vote shall constitute a quorum.
Similarly, the UBCA provides that, unless the corporation's articles of
incorporation provide otherwise, a majority of the votes entitled to be cast in
a matter constitutes a quorum for action on a particular matter. The Tseng
Bylaws state that the presence of stockholders entitled to cast a majority of
the votes that all stockholders are entitled to cast in a particular matter to
be acted upon at the meeting shall constitute a quorum.
Inspection of Stockholder List. The DGCL requires that a Delaware
corporation make its stockholder list available for inspection by stockholders
prior to any meeting of stockholders for ten days prior to the meeting as well
as at the meeting. Further, the willful neglect or refusal by the directors to
produce such list at a meeting for the election of directors will result in
their ineligibility for election to any office at such meeting. The CPHI Bylaws
provide similarly.
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<PAGE> 141
The UBCA requires that a Utah corporation make its stockholder list
available for inspection by any stockholder for a period beginning on the
earlier of ten days before the meeting for which the list was prepared or two
business days after notice of the meeting is given, and continuing through the
meeting and any adjournments thereof. If the corporation refuses a stockholder
inspection of the stockholder list as provided above, the stockholder may apply
to the district court of the county where the corporation's principal office
(or, if none, its registered office) is located, and the district court may
summarily order inspection or copying of the list at the corporation's expense
and may postpone the meeting until the inspection or copying is complete. The
Tseng Bylaws provide similarly.
Derivative Suits. Under the DGCL, in any derivative suits instituted by a
stockholder of a corporation, the plaintiff must specifically aver that he or
she was a stockholder of the corporation at the time of the transaction of which
he complains or that his stock thereafter devolved upon him by operation of law.
Under the UBCA, a person may not commence a derivative action unless the
person was a stockholder of the corporation at the time when the transactions
complained of occurred (unless the person became a stockholder through transfer
by operation of law from a person who was a stockholder at the time). The
complaint must be verified and allege with particularity (i) the demand made on
the board of directors and that either the demand was refused or ignored by the
board of directors, or (ii) if no demand was made on the board of directors, why
the person did not make the demand. If a court finds that the proceeding was
commenced without reasonable cause, the court may require the plaintiff to pay
the defendant's reasonable expenses, including counsel fees.
STOCKHOLDER PROPOSAL
Proposals of stockholders of CPHI which are intended to be presented by
such stockholders at CPHI's 1999 annual meeting of stockholders must be received
by the Secretary of CPHI no later than December 4, 1998, in order to be included
in the proxy statement and form of proxy relating to that meeting.
EXPERTS
The audited financial statements of CPI as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997 and for
the period from inception (August 10, 1990) to December 31, 1997, included in
this Joint Proxy Statement/Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The audited financial statements of Tseng, as of December 31, 1996 and
1997, and for each of the three years in the period ended December 31, 1997
included in this Joint Proxy Statement/Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report.
LEGAL MATTERS
The validity of the shares of CPHI Common Stock offered hereby will be
passed upon for CPHI by Cooley Godward LLP, Boulder, Colorado.
Certain legal matters in connection with the Transactions will be passed
upon for Tseng by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.
REPRESENTATIVES OF INDEPENDENT ACCOUNTANTS
Representatives of Arthur Andersen LLP expect to be present at the CPI
Special Meeting and the Tseng Special Meeting, respectively. While such
representatives have stated that they do not plan to make a statement at such
meetings, they will be available to respond to appropriate questions from
stockholders in attendance.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CELL PATHWAYS, INC.:
Report of Independent Public Accountants............... F-2
Balance Sheets......................................... F-3
Statements of Operations............................... F-4
Statements of Stockholders' Equity (Deficit) and
Partners' Investment.................................. F-5
Statements of Cash Flows............................... F-8
Notes to Financial Statements.......................... F-9
TSENG LABS, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants............... F-21
Consolidated Balance Sheets............................ F-22
Consolidated Statements of Operations.................. F-23
Consolidated Statements of Shareholders' Equity........ F-24
Consolidated Statements of Cash Flows.................. F-25
Notes to Consolidated Financial Statements............. F-26
</TABLE>
F-1
<PAGE> 143
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cell Pathways, Inc.:
We have audited the accompanying balance sheets of Cell Pathways, Inc. (a
Delaware corporation in the development stage), as of December 31, 1996 and
1997, and the related statements of operations, stockholders' equity (deficit)
and partners' investment, and cash flows for each of the three years in the
period ended December 31, 1997 and for the period from inception (August 10,
1990) to December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cell Pathways, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 and for the
period from inception (August 10, 1990) to December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
February 6, 1998
F-2
<PAGE> 144
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
------------------- JUNE 30, EQUITY
1996 1997 1998 (NOTE 1)
-------- ------- ----------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 645 $ 8,461 $20,349
Prepaid expenses and other................................ 71 179 438
-------- ------- -------
Total current assets................................ 716 8,640 20,787
-------- ------- -------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture and equipment................................... 256 518 1,224
Leasehold improvements.................................... -- 1,258 2
-------- ------- -------
256 1,776 1,226
Less-Accumulated depreciation and amortization............ (71) (133) (199)
-------- ------- -------
185 1,643 1,027
DEFERRED OFFERING COSTS..................................... -- 470 97
RESTRICTED CASH............................................. 194 199 401
DEPOSITS.................................................... 11 28 20
-------- ------- -------
$ 1,106 $10,980 $22,332
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 159 $ 209 $ 947
Accrued leasehold improvement costs....................... -- 1,053 542
Accrued compensation...................................... 109 180 103
Accrued offering costs.................................... -- 441 97
Other accrued liabilities................................. 906 1,321 351
Notes payable............................................. 49 53 --
-------- ------- -------
Total current liabilities........................... 1,223 3,257 2,040
LONG-TERM LIABILITIES:
Note payable, net of current portion...................... 62 9 --
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 8)
REDEEMABLE PREFERRED STOCK, $.01 par value, 61,250 shares
authorized, issued and outstanding, redeemable for a total
of $1,092; none issued and outstanding pro forma.......... 1 1,092 1,092 --
-------- ------- ------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible Preferred Stock, $.01 par value, 18,400,000
shares authorized, 6,277,282, 10,968,387 and 15,614,266
shares outstanding, with an aggregate liquidation
preference of $15,819, $33,092 and $55,160,
respectively; none issued and outstanding pro forma..... 15,137 32,158 53,571 --
Common Stock $.01 par value, 22,400,000 shares authorized,
2,718,845, 2,990,095 and 2,990,095 shares issued and
outstanding; 18,756,137 shares issued and outstanding
pro forma............................................... 27 30 30 188
Additional paid-in capital................................ 347 456 456 54,632
Stock subscription receivable from issuance of Convertible
Preferred Stock......................................... (3) -- (215) --
Stock subscription receivable from issuance of Common
Stock................................................... -- (37) (37) (252)
Deficit accumulated during the development stage.......... (15,688) (25,985) (34,605) (34,605)
-------- ------- ------- --------
Total stockholders' equity (deficit)................ (180) 6,622 19,200 19,963
-------- ------- ------- --------
$ 1,106 $10,980 $22,332
======== ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE> 145
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD SIX MONTHS INCEPTION
YEAR ENDED DECEMBER 31, FROM INCEPTION ENDED JUNE 30, (AUGUST 10,
------------------------------------ (AUGUST 10, 1990) ----------------------- 1990) TO
1995 1996 1997 TO DECEMBER 31, 1997 1997 1998 JUNE 30, 1998
---------- ---------- ---------- -------------------- ---------- ---------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
EXPENSES:
Research and
development........... $ 2,575 $ 4,163 $ 8,757 $ 21,078 $ 3,224 $ 6,898 $ 27,976
General and
administrative........ 644 663 950 4,555 342 1,966 6,521
Provision for redemption
of the Redeemable
Preferred Stock....... -- -- 1,017 1,017 -- -- 1,017
---------- ---------- ---------- -------- ---------- ---------- -------------
Total expenses... 3,219 4,826 10,724 26,650 3,566 8,864 35,514
INTEREST INCOME........... 28 91 427 665 123 244 909
---------- ---------- ---------- -------- ---------- ---------- -------------
NET LOSS.................. $ (3,191) $ (4,735) $ (10,297) $(25,985) $ (3,443) $ (8,620) $ (34,605)
========== ========== ========== ======== ========== ========== =============
Basic and diluted net loss
per common share........ $ (1.39) $ (1.83) $ (3.63) $ (1.27) $ (2.88)
========== ========== ========== ========== ==========
Shares used in computing
basic and diluted net
loss per common share... 2,296,167 2,587,552 2,838,814 2,718,845 2,990,095
========== ========== ========== ========== ==========
Pro forma basic and
diluted net loss per
common share............ $ (.82) $ (.56)
========== ==========
Share used in computing
pro forma basic and
diluted net loss per
common share............ 12,526,620 15,524,145
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE> 146
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS' INVESTMENT
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
PARTNERS' ---------------- ---------------- ------------------ PAID-IN
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ------- ------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, Inception (August 10,
1990)............................. $ -- -- $ -- -- $ -- -- $-- $ --
Partner cash contributions in
September 1990 for Class A
Partnership units............... 406 -- -- -- -- -- -- --
Partner contribution of interest
in research grant in September
1990 for Class A
Partnership units, at historical
cost............................ 49 -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
------- ------ ------- ------- ----- --------- --- ----
BALANCE, December 31, 1990......... 455 -- -- -- -- -- -- --
Partner cash contributions in
March 1991 for Class A
Partnership units............... 406 -- -- -- -- -- -- --
Partner cash contributions in
December 1991 for Class B
Partnership units............... 897 -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
------- ------ ------- ------- ----- --------- --- ----
BALANCE, December 31, 1991......... 1,758 -- -- -- -- -- -- --
Partner cash contributions in
January and April 1992 for Class
B Partnership units............. 21 -- -- -- -- -- -- --
Partner cash contributions in
December 1992 for Class B
Partnership units............... 134 -- -- -- -- -- -- --
Partner cash contributions in
December 1992 for Class C
Partnership units............... 1,540 -- -- -- -- -- -- --
Partner cash contributions in
December 1992 for Class D
Partnership units............... 1,475 -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
------- ------ ------- ------- ----- --------- --- ----
BALANCE, December 31, 1992......... 4,928 -- -- -- -- -- -- --
Partner cash contributions in
January 1993 to March 1993 for
Class D Partnership units....... 385 -- -- -- -- -- -- --
Exchange of interests in the
Partnership in September 1993
for 872,000 shares of Series A
convertible preferred stock..... (812) -- -- 872,400 812 -- -- --
Exchange of interests in the
Partnership in September 1993
for 848,100 shares of Series B
convertible preferred stock..... (868) -- -- 848,100 868 -- -- --
Exchange of interests in the
Partnership in September 1993
for 700,000 shares of Series C
convertible preferred stock..... (1,540) -- -- 700,000 1,540 -- -- --
Exchange of interests in the
Partnership in September 1993
for 616,808 shares of Series D
convertible preferred stock..... (1,860) -- -- 616,808 1,860 -- -- --
Exchange of interests in the
Partnership in September 1993
for 61,250 shares of redeemable
preferred stock................. (1) 61,250 1 -- -- -- -- --
Exchange of interests in the
Partnership in September 1993
for 2,279,500 shares of common
stock........................... (232) -- -- -- -- 2,279,500 23 209
Net loss.......................... $ -- -- $ -- -- $ -- -- $-- $ --
------- ------ ------- ------- ----- --------- --- ----
<CAPTION>
STOCK STOCK
SUBSCRIPTION SUBSCRIPTION
RECEIVABLE RECEIVABLE DEFICIT
FROM FROM ACCUMULATED
ISSUANCE OF ISSUANCE OF DURING THE
CONVERTIBLE COMMON DEVELOPMENT
PREFERRED STOCK STOCK STAGE
--------------- ------------ -----------
<S> <C> <C> <C>
BALANCE, Inception (August 10,
1990)............................. $ -- $ -- $ --
Partner cash contributions in
September 1990 for Class A
Partnership units............... -- -- --
Partner contribution of interest
in research grant in September
1990 for Class A
Partnership units, at historical
cost............................ -- -- --
Net loss.......................... -- -- (253)
------- ------- -------
BALANCE, December 31, 1990......... -- -- (253)
Partner cash contributions in
March 1991 for Class A
Partnership units............... -- -- --
Partner cash contributions in
December 1991 for Class B
Partnership units............... -- -- --
Net loss.......................... -- -- (739)
------- ------- -------
BALANCE, December 31, 1991......... -- -- (992)
Partner cash contributions in
January and April 1992 for Class
B Partnership units............. -- -- --
Partner cash contributions in
December 1992 for Class B
Partnership units............... -- -- --
Partner cash contributions in
December 1992 for Class C
Partnership units............... -- -- --
Partner cash contributions in
December 1992 for Class D
Partnership units............... -- -- --
Net loss.......................... -- -- (1,391)
------- ------- -------
BALANCE, December 31, 1992......... -- -- (2,383)
Partner cash contributions in
January 1993 to March 1993 for
Class D Partnership units....... -- -- --
Exchange of interests in the
Partnership in September 1993
for 872,000 shares of Series A
convertible preferred stock..... -- -- --
Exchange of interests in the
Partnership in September 1993
for 848,100 shares of Series B
convertible preferred stock..... -- -- --
Exchange of interests in the
Partnership in September 1993
for 700,000 shares of Series C
convertible preferred stock..... -- -- --
Exchange of interests in the
Partnership in September 1993
for 616,808 shares of Series D
convertible preferred stock..... -- -- --
Exchange of interests in the
Partnership in September 1993
for 61,250 shares of redeemable
preferred stock................. --
Exchange of interests in the
Partnership in September 1993
for 2,279,500 shares of common
stock........................... -- -- --
Net loss.......................... $ -- $ -- $(2,269)
------- ------- -------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE> 147
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
PARTNERS' ---------------- -------------------- ------------------ PAID-IN
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ------- ---------- ------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........ $ -- 61,250 $ 1 3,037,308 $ 5,080 2,279,500 $23 $ 209
=======
Issuance of Common Stock for
services valued at $.41 per
share.......................... -- -- -- -- 16,667 -- 7
Issuance of 542,761 shares of
Series E Convertible Preferred
Stock for cash at $4.10 per
share.......................... -- -- 542,761 2,225 -- -- --
Net loss......................... -- -- -- -- -- -- --
------ ------- ---------- ------- --------- --- ------
BALANCE, December 31, 1994........ 61,250 1 3,580,069 7,305 2,296,167 23 216
Issuance of 1,121,800 shares of
Series E Convertible Preferred
Stock for cash at $3.15 per
share.......................... -- -- 1,121,800 3,534 -- -- --
Issuance of 163,701 shares of
Series E Convertible Preferred
Stock to effect the price
change from $4.10 to $3.15
(Note 3)....................... -- -- 163,701 -- -- -- --
Conversion of bridge notes
payable plus interest to
253,633 shares of Series E
Convertible Preferred stock at
a price of $3.15 per share
(Note 3)....................... -- -- 253,633 800 -- -- --
Net loss......................... -- -- -- -- -- -- --
------ ------- ---------- ------- --------- --- ------
BALANCE, December 31, 1995........ 61,250 1 5,119,203 11,639 2,296,167 23 216
Issuance of 887,661 shares of
Series E Convertible Preferred
Stock for cash at $3.15 per
share, net of offering costs of
$300........................... -- -- 887,661 2,498 -- -- --
Collection of Series E
Convertible Preferred Stock
subscription receivable........ -- -- -- -- -- -- --
Issuance of 270,270 shares of
Series F Convertible Preferred
Stock for cash at $3.70 per
share.......................... -- -- 270,270 1,000 -- -- --
Issuance of 185,000 shares of
Common Stock in February 1996
as bonuses to officers and
employees valued at $0.32 per
share.......................... -- -- -- -- 185,000 2 57
Issuance of 14,828 shares of
Common Stock in May 1996 for
consulting services, valued at
$0.32 per share................ -- -- -- -- 14,828 -- 5
Exercise of warrants to purchase
148 shares of Series E
Convertible Preferred Stock at
$3.15 per share................ -- -- 148 -- -- -- --
Exercise of options to purchase
Common Stock at $0.32 per
share.......................... -- -- -- -- 222,850 2 69
Net loss......................... -- $ -- -- $ -- -- $-- $ --
------ ------- ---------- ------- --------- --- ------
<CAPTION>
STOCK STOCK
SUBSCRIPTION SUBSCRIPTION
RECEIVABLE RECEIVABLE DEFICIT
FROM FROM ACCUMULATED
ISSUANCE OF ISSUANCE OF DURING THE
CONVERTIBLE COMMON DEVELOPMENT
PREFERRED STOCK STOCK STAGE
--------------- ------------ -----------
<S> <C> <C> <C>
BALANCE, December 31, 1993........ $ -- $ -- $ (4,652)
Issuance of Common Stock for
services valued at $.41 per
share.......................... -- -- --
Issuance of 542,761 shares of
Series E Convertible Preferred
Stock for cash at $4.10 per
share.......................... (24) -- --
Net loss......................... -- -- (3,110)
----- ---- --------
BALANCE, December 31, 1994........ (24) -- (7,762)
Issuance of 1,121,800 shares of
Series E Convertible Preferred
Stock for cash at $3.15 per
share.......................... -- -- --
Issuance of 163,701 shares of
Series E Convertible Preferred
Stock to effect the price
change from $4.10 to $3.15
(Note 3)....................... -- -- --
Conversion of bridge notes
payable plus interest to
253,633 shares of Series E
Convertible Preferred stock at
a price of $3.15 per share
(Note 3)....................... -- -- --
Net loss......................... -- -- (3,191)
----- ---- --------
BALANCE, December 31, 1995........ (24) -- (10,953)
Issuance of 887,661 shares of
Series E Convertible Preferred
Stock for cash at $3.15 per
share, net of offering costs of
$300........................... -- -- --
Collection of Series E
Convertible Preferred Stock
subscription receivable........ 21 -- --
Issuance of 270,270 shares of
Series F Convertible Preferred
Stock for cash at $3.70 per
share.......................... -- -- --
Issuance of 185,000 shares of
Common Stock in February 1996
as bonuses to officers and
employees valued at $0.32 per
share.......................... -- -- --
Issuance of 14,828 shares of
Common Stock in May 1996 for
consulting services, valued at
$0.32 per share................ -- -- --
Exercise of warrants to purchase
148 shares of Series E
Convertible Preferred Stock at
$3.15 per share................ -- -- --
Exercise of options to purchase
Common Stock at $0.32 per
share.......................... -- -- --
Net loss......................... $ -- $ -- $ (4,735)
----- ---- --------
</TABLE>
F-6
<PAGE> 148
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND PARTNERS'
INVESTMENT -- (CONTINUED)
FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1990) TO JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
PARTNERS' ---------------- ------------------------ ------------------- PAID-IN
INVESTMENT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ ------- ---------- ----------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996....... 61,250 $ 1 6,277,282 $ 15,137 2,718,845 $ 27 $ 347
Issuance of 4,538,675 shares of
Series F Convertible Preferred
Stock for cash at $3.70 per
share, net of offering costs
of $245....................... -- -- 4,538,675 16,548 -- -- --
Exercise of warrants to purchase
149,462 shares of Series E
Convertible Preferred Stock at
$3.15 per share............... -- -- 149,462 471 -- -- --
Exercise of warrants to purchase
492 shares of Series F
Convertible Preferred Stock at
$3.70 per share............... -- -- 492 2 -- -- --
Cashless exercise of warrants to
purchase 2,476 shares of
Series E Convertible Preferred
Stock......................... -- -- 2,476 -- -- -- --
Exercise of options by employees
and directors at $0.32 - $0.50
per share..................... -- -- -- -- 251,250 3 109
Issuance of Common Stock to
director at $3.70 per share... -- -- -- -- 10,000 -- 37
Issuance of Common Stock to
consultant, valued at $3.70
per share..................... -- -- -- -- 10,000 -- 37
Collection of stock subscription
receivable.................... -- -- -- -- -- -- --
Provision for redemption of
Redeemable Preferred Stock.... -- 1,091 -- -- -- -- (74)
Net loss........................ -- -- -- -- -- -- --
------ ------- ---------- ----------- ---------- ---- -------
BALANCE, December 31, 1997....... 61,250 1,092 10,968,387 32,158 2,990,095 30 456
Issuance of 4,645,879 shares of
Series G Convertible Preferred
Stock at $4.75 per share, net
of offering costs of $656
(unaudited)................... -- -- 4,645,879 21,413 -- -- --
Stock subscription receivable in
connection with the issuance
of Series G Convertible
Preferred Stock (unaudited)... -- -- -- -- -- -- --
Net loss (unaudited)............ -- -- -- -- -- -- --
------ ------- ---------- ----------- ---------- ---- -------
BALANCE, June 30, 1998
(unaudited)..................... 61,250 $ 1,092 15,614,266 $ 53,571 2,990,095 $ 30 $ 456
====== ======= ========== =========== ========== ==== =======
PRO FORMA BALANCE (Note 1)
(unaudited)..................... -- $ -- -- $ -- 18,756,137 $188 $54,632
====== ======= ========== =========== ========== ==== =======
<CAPTION>
STOCK STOCK
SUBSCRIPTION SUBSCRIPTION
RECEIVABLE RECEIVABLE DEFICIT
FROM FROM ACCUMULATED
ISSUANCE OF ISSUANCE OF DURING THE
CONVERTIBLE COMMON DEVELOPMENT
PREFERRED STOCK STOCK STAGE
--------------- ------------ -----------
<S> <C> <C> <C>
BALANCE, December 31, 1996....... $ (3) $ -- $(15,688)
Issuance of 4,538,675 shares of
Series F Convertible Preferred
Stock for cash at $3.70 per
share, net of offering costs
of $245....................... -- -- --
Exercise of warrants to purchase
149,462 shares of Series E
Convertible Preferred Stock at
$3.15 per share............... -- -- --
Exercise of warrants to purchase
492 shares of Series F
Convertible Preferred Stock at
$3.70 per share............... -- -- --
Cashless exercise of warrants to
purchase 2,476 shares of
Series E Convertible Preferred
Stock......................... -- -- --
Exercise of options by employees
and directors at $0.32 - $0.50
per share..................... -- -- --
Issuance of Common Stock to
director at $3.70 per share... -- (37) --
Issuance of Common Stock to
consultant, valued at $3.70
per share..................... -- -- --
Collection of stock subscription
receivable.................... 3 -- --
Provision for redemption of
Redeemable Preferred Stock.... -- -- --
Net loss........................ -- -- (10,297)
----- ---- --------
BALANCE, December 31, 1997....... -- (37) (25,985)
Issuance of 4,645,879 shares of
Series G Convertible Preferred
Stock at $4.75 per share, net
of offering costs of $656
(unaudited)................... -- -- --
Stock subscription receivable in
connection with the issuance
of Series G Convertible
Preferred Stock (unaudited)... (215) -- --
Net loss (unaudited)............ -- -- (8,620)
----- ---- --------
BALANCE, June 30, 1998
(unaudited)..................... $(215) $(37) $(34,605)
===== ==== ========
PRO FORMA BALANCE (Note 1)
(unaudited)..................... $(252) $ -- $(34,605)
===== ==== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE> 149
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED INCEPTION SIX MONTHS INCEPTION
DECEMBER 31, (AUGUST 10, ENDED JUNE 30, (AUGUST 10,
---------------------------- 1990) TO ------------------- 1990) TO
1995 1996 1997 DECEMBER 31, 1997 1997 1998 JUNE 30, 1998
------- ------- -------- ----------------- -------- -------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................ $(3,191) $(4,735) $(10,297) $(25,985) $ (3,443) $ (8,620) $(34,605)
Adjustments to reconcile net loss to net
cash used in operating activities --
Depreciation expense and other........ 12 33 62 133 25 65 198
Issuance of Common Stock for
services............................ -- 5 -- 12 -- -- 12
Provision for redemption of Redeemable
Preferred Stock..................... -- -- 1,017 1,017 -- -- 1,017
Write-off of deferred offering
costs............................... -- -- -- -- -- 470 470
Other................................. 9 -- (12) (12) 3 -- (12)
Increase in prepaid expenses.......... (14) (12) (108) (179) (159) (259) (438)
Increase (decrease) in accounts
payable and accrued liabilities..... 483 (304) 499 1,564 (253) (743) 821
Increase (decrease) in accrued
compensation........................ -- 109 71 180 -- (77) 103
------- ------- -------- -------- -------- -------- --------
Net cash flows used in operating
activities........................ (2,701) (4,904) (8,768) (23,270) (3,827) (9,164) (32,434)
------- ------- -------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold
improvements.......................... (23) (161) (467) (723) (62) (1,907) (2,630)
Sale of leasehold improvements.......... -- -- -- -- -- 2,458 2,458
Cash (paid for) received from
deposits.............................. (3) -- -- -- -- 8 8
------- ------- -------- -------- -------- -------- --------
Net cash flows provided by (used in)
investing activities.............. (26) (161) (467) (723) (62) 559 (164)
------- ------- -------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of Convertible
Preferred stock, net of related
offering costs........................ 3,534 3,498 16,548 25,839 16,511 21,198 47,037
Proceeds from exercise of warrants to
purchase Series E and Series F
Convertible Preferred Stock........... -- -- 473 473 51 -- 473
Decrease in shareholder receivable...... -- 21 3 24 -- -- 24
Cash received for Common Stock options
exercised............................. -- 71 110 181 -- -- 181
Cash paid for deferred offering costs... -- -- (29) (29) -- (441) (470)
Proceeds from bridge loan (Note 3)...... 791 -- -- 791 -- -- 791
Partner cash contributions.............. -- -- -- 5,312 -- -- 5,312
Increase in restricted cash............. -- (194) (5) (199) -- (202) (401)
Proceeds from borrowings................ -- 150 -- 150 (4) -- 150
Repayment of borrowings................. -- (39) (49) (88) (24) (62) (150)
------- ------- -------- -------- -------- -------- --------
Net cash flows provided by financing
activities........................ 4,325 3,507 17,051 32,454 16,534 20,493 52,947
------- ------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................. 1,598 (1,558) 7,816 8,461 12,645 11,888 20,349
CASH AND CASH EQUIVALENTS, beginning of
period.................................. 605 2,203 645 -- 645 8,461 --
------- ------- -------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of
period.................................. $ 2,203 $ 645 $ 8,461 $ 8,461 $ 13,290 $ 20,349 $ 20,349
======= ======= ======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Accrual of leasehold improvements
payable................................. $ -- $ -- $ 848 $ 848 $ -- $ -- $ 848
======= ======= ======== ======== ======== ======== ========
Accrual of deferred offering costs....... $ -- $ -- $ 441 $ 441 $ -- $ 97 $ 538
======= ======= ======== ======== ======== ======== ========
Conversion of partners' investment to
Preferred Stock......................... $ -- $ -- $ -- $ 4,927 $ -- $ -- $ 4,927
======= ======= ======== ======== ======== ======== ========
Conversion of bridge loan to Convertible
Preferred Stock......................... $ 800 $ -- $ -- $ 800 $ -- $ -- $ 800
======= ======= ======== ======== ======== ======== ========
Issuance of Convertible Preferred Stock
to investment advisors.................. $ -- $ 146 $ -- $ 261 $ 115 $ 426 $ 687
======= ======= ======== ======== ======== ======== ========
Issuance of Common Stock as payment of
management bonus........................ $ -- $ 59 $ -- $ 59 $ -- $ -- $ 59
======= ======= ======== ======== ======== ======== ========
Sale of Common Stock in exchange for
stock subscription receivable........... $ -- $ -- $ 37 $ 37 $ -- $ -- $ 37
======= ======= ======== ======== ======== ======== ========
Sale of Convertible Preferred Stock in
exchange for stock subscription
receivable.............................. $ -- $ -- $ -- $ 24 $ -- $ 215 $ 239
======= ======= ======== ======== ======== ======== ========
Issuance of Common Stock as payment for
accounts payable........................ $ -- $ -- $ 37 $ 37 $ -- $ -- $ 37
======= ======= ======== ======== ======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-8
<PAGE> 150
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Cell Pathways, Inc. ("CPI" or the "Company") is a pharmaceutical company
focused on the development and commercialization of products to prevent and
treat cancer. The Company is in the development stage and has not generated any
product revenues to date, nor is there any assurance of any future product
revenues. The Company's intended products are subject to long development cycles
and there is no assurance the Company will be able to successfully develop,
manufacture, obtain regulatory approval for or market its products. During the
period required to develop its products, the Company plans to continue to
finance operations through debt and equity financings (see Notes 3, 4 and 5 as
well as the Transactions, as defined below.) There is no assurance, however,
that such additional funding will be available to the Company when required. The
Company will continue to be considered in the development stage until such time
as it generates significant revenues from its principal operations. As of June
30, 1998, the Company had a deficit accumulated during the development stage of
$34,605,000.
The Company is a Delaware corporation and is the successor to Cell Pathways
Limited Partnership (the "Partnership"). The Partnership was formed on August
10, 1990 pursuant to the laws of the State of Illinois under the name of FGN
Pharmaceutical Research Limited Partnership. The Partnership Agreement was
amended on December 9, 1992 to provide for additional financing, admission of a
new general partner (the "Company") and new limited partners, change in the name
of the Partnership and eventual conversion of the Partnership to corporate form.
On September 29, 1993, the assets and liabilities of the Partnership were
acquired by the Company in exchange for the Preferred and Common Stock of the
Company, thereby converting the business from partnership to corporate form. The
accompanying financial statements include the accounts of the Partnership from
inception (August 10, 1990) through September 29, 1993, and the accounts of the
successor Delaware corporation thereafter.
On June 23, 1998, the Company and Tseng Labs, Inc., a Utah corporation
("Tseng"), entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") to provide further financing of the Company's
programs. Through the reorganization, the stockholders of Tseng will exchange
their Tseng common stock for an approximately 23% equity interest in a newly
formed holding company of CPI and CPI will obtain the benefit of the substantial
cash assets of Tseng.
The Reorganization Agreement provides for (i) the formation of Cell
Pathways Holding, Inc., a Delaware corporation ("CPHI"), (ii) the merger of
Tseng Sub, Inc., a wholly-owned subsidiary of CPHI, with and into Tseng (the
"Tseng Merger"), (iii) the merger of CPI Sub, Inc., a wholly-owned subsidiary of
CPHI, with and into the Company (the "CPI Merger" and, together with the Tseng
Merger, the "Transactions") and (iv) the issuance of approximately 23% of the
outstanding shares of the Common Stock of CPHI ("CPHI Common Stock") to the
Tseng stockholders and approximately 77% of the outstanding shares of CPHI
Common Stock to the CPI stockholders. As a result of the Transactions, Tseng and
CPI will become wholly-owned subsidiaries of CPHI. Consummation of the
Transactions is contingent, among other conditions, upon certain approvals by
stockholders of the Company and Tseng. Effective upon the consummation of the
Transactions, CPHI will change its name to Cell Pathways, Inc. If the
Reorganization Agreement is not approved, the Company or Tseng could be subject
to certain termination costs. If the reorganization is approved the dissenting
Company stockholders have certain appraisal rights.
As it is anticipated Tseng will have no operations after the consummation
of the Transactions, the Transactions will be accounted for as a reorganization
of CPI into CPHI with the sale of approximately 23% of CPHI's Common Stock in
exchange for Tseng's cash and other net assets. CPI's historical financial
statements will be the financial statements of the combined company.
F-9
<PAGE> 151
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited Pro Forma Stockholders' Equity
In conjunction with the Transactions, all of the outstanding shares of the
Series A, B, C, D, E, F and G Convertible Preferred Stock will be converted into
the rights to receive CPHI Common Stock. In addition, the Redeemable Preferred
Stock is expected to be redeemed for approximately 50% in cash consideration and
50% in Common Stock which would result in $546,000 of cash consideration and the
issuance of 82,732 shares of CPI Common Stock which will be converted into
rights to receive an equivalent number of shares of CPHI Common Stock. It is
also anticipated that the warrants to purchase Series E Convertible Preferred
Stock will be exercised into 69,044 shares of CPI Series E Convertible Preferred
Stock at $3.15 per share and which will be converted into rights to receive an
equivalent number of shares of CPHI Common Stock. All of the shares of CPI
Common Stock then outstanding will then be converted into the same number of
shares of CPHI Common Stock. The unaudited pro forma stockholders' equity as of
June 30, 1998 reflects the assumed conversion of the Series A, B, C, D, E, F and
G Convertible Preferred Stock into 872,400, 848,100, 700,000, 616,808,
3,121,642, 4,809,437 and 4,645,879 shares, respectively, of CPHI Common Stock,
and the redemption of the Redeemable Preferred Stock for $546,000 of cash
consideration and 82,732 shares of Common Stock, the exercise of all warrants to
purchase Series E Convertible Preferred Stock into 69,044 shares of CPI Series E
Convertible Preferred Stock including conversion into CPHI Common Stock, and the
conversion of all shares of CPI Common Stock then outstanding into the same
number of shares of CPHI Common Stock. The CPI Redeemable Preferred Stock is
required to be redeemed by CPI. The allocation between cash and Common Stock is
at the discretion of the Board of Directors. The allocation assumed herein is
based upon the stated intention of the Board of Directors. The Series E warrants
discussed above expire upon the consummation of the Transactions. The exercise
price of the warrants is below market and thus the warrants have been assumed to
be exercised.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements as of June 30, 1998 and for the six months ended
June 30, 1997 and 1998 are unaudited and, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of results for these interim periods. The results of
operations for the six months ended June 30, 1998 are not necessarily indicative
of the results to be expected for the entire year.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
For purposes of the statements of cash flows, the Company considers all
highly liquid instruments with an original maturity of three months or less to
be cash equivalents. As of December 31, 1996, December 31, 1997 and June 30,
1998, approximately $194,000, $199,000 and $401,000 of cash and cash equivalents
was restricted to secure letters of credit and other indebtedness of the Company
(See Note 6).
F-10
<PAGE> 152
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Equipment and Leasehold Improvements
Depreciation of equipment is provided on the straight-line method over
estimated useful lives of five to seven years. Leasehold improvements are
amortized over the shorter of the useful life or the life of the related lease.
In June 1998, the Company's option to purchase the Horsham, Pennsylvania
facility was exercised in favor of a third-party from which it entered into a
new lease (see Note 8). In conjunction with the Company's new facility lease the
Company received a one-time payment of $3 million of which $2,458,000 related to
a reimbursement of leasehold improvements previously made to the facility. The
leasehold improvements that were included in equipment and leasehold
improvements in the accompanying balance sheets were removed from the Company's
assets as they became the property of the new lessor. No gain or loss was
recorded on the transaction as the reimbursement was at the net book value of
the assets. The remaining $542,000 was recorded as accrued leasehold
improvements in the accompanying balance sheet as it represents a liability to
make the final payments on the remaining leasehold improvements that will become
the property of the new lessor.
Research and Development
Costs incurred in connection with research and development activities are
expensed as incurred.
Stock Compensation
The Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the Company's stock option plan, options may be granted at not
less than the fair market value on the date of the grant and therefore no
compensation expense is recognized for stock options granted to employees. In
1996, the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."
Deferred Offering Costs
As of December 31, 1997, the Company had deferred costs related to a
planned initial public offering. As the planned initial public offering was not
undertaken, the total of such costs, representing approximately $715,000,
including costs incurred in 1998, were expensed during the six months ended June
30, 1998. The deferred offering costs as of June 30, 1998 relate to the
Transactions. (See Note 1)
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Basic and Diluted Net Loss and Unaudited Pro Forma Basic and Diluted Net Loss
Per Common Share
The Company has provided basic and diluted net loss per share pursuant to
SFAS No. 128 "Earnings per Share" and the Securities and Exchange Commission
Staff Accounting Bulletin No. 98.
Basic and diluted net loss per common share was computed by dividing net
loss applicable to Common stockholders by the weighted average number of shares
of Common Stock outstanding during the period. Common Stock issuable upon
exercise or conversion of options, warrants, Convertible Preferred Stock and
warrants to purchase Convertible Preferred Stock and upon the redemption of the
Redeemable Preferred Stock have not been included in the calculation of diluted
net loss per common share since the result would be anti-dilutive.
F-11
<PAGE> 153
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Options and warrants to purchase 186,850, 476,000, 616,271, 259,250 and
1,226,055 shares of Common Stock at weighted average exercise prices of $0.32,
$0.39, $2.59, $0.54 and $4.44 per share, 5,119,203, 6,227,282, 10,968,387,
10,832,047 and 15,614,266 shares of Preferred Stock convertible into the same
number of shares of Common Stock, and warrants to purchase 235,309, 248,823,
194,395, 315,886 and 422,188 shares of Preferred Stock Convertible into the same
number of shares of Common Stock at weighted average exercise prices of $3.15,
$3.18, $3.50, $3.29 and $4.18 were outstanding as of December 31, 1995, 1996 and
1997 and June 30, 1997 and 1998, but are not included in the diluted loss per
common share calculations as they would be anti-dilutive. In addition, the
82,732 shares of Common Stock to be issued upon the redemption of the Redeemable
Preferred Stock are not included in the diluted net loss per common share
calculations as they would also be anti-dilutive.
Pro forma basic and diluted net loss per common share for the year ending
December 31, 1997 and the six months ending June 30, 1998 assumes that the
Common Stock issuable upon conversion of the outstanding Convertible Preferred
Stock and the redemption of the Redeemable Preferred Stock for $546,000 of cash
consideration and 82,732 shares of Common Stock at the time of the Transactions
have been outstanding using the if-converted method, and the 69,044 shares of
Common Stock to be issued upon the exercise of the warrants to purchase Series E
Convertible Preferred Stock at the time of the Transactions have been
outstanding using the treasury stock method and the average price per share of
Common Stock during the period.
The following is a reconciliation of the numerator and denominator of basic
and diluted net loss per Common share (In thousands, except share and per share
data):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Loss (numerator)................. $ (3,191) $ (4,735) $ (10,297) $ (3,443) $ (8,620)
Weighted average Common Stock
outstanding (denominator)...... 2,296,167 2,587,552 2,838,814 2,718,845 2,990,095
---------- ---------- ----------- ---------- -----------
Basic and diluted net loss
per Common share........ $ (1.39) $ (1.83) $ (3.63) $ (1.27) $ (2.88)
========== ========== =========== ========== ===========
Pro forma denominator:
Weighted average Common Stock
outstanding.................. 2,838,814 2,990,095
Conversion of Convertible
Preferred Stock, redemption
of Redeemable Preferred
Stock, and issuance of Common
Stock upon exercise and
conversion of warrants to
purchase Series E Convertible
Preferred Stock.............. 9,687,806 12,534,050
----------- -----------
12,526,620 15,524,145
=========== ===========
Pro forma basic and diluted
net loss per Common
share................... $ (.82) $ (.56)
=========== ===========
</TABLE>
Recent Accounting Pronouncements
Effective with the first quarter of 1998, the Company was subject to the
provisions of SFAS No. 130 "Reporting Comprehensive Income." SFAS No. 130 had no
impact on the Company's financial statements as the Company does not have any
"comprehensive income" type earnings (losses).
F-12
<PAGE> 154
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. STOCKHOLDERS' EQUITY AND PARTNERS' INVESTMENT:
The Company was authorized, as of June 30, 1998, to issue a total of
40,861,250 shares of stock, consisting of 22,400,000 shares of $0.01 par value
Convertible Preferred Stock, 61,250 shares of $0.01 par value Redeemable
Preferred Stock and 18,400,000 shares of $0.01 par value Common Stock. The
Company's Convertible Preferred Stock, consists of the following (In thousands,
except share and per share data):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Series A, 872,400 shares authorized, issued and
outstanding, entitled to a preference in liquidation
of $1,012........................................... $ 812 $ 812 $ 812
Series B, 848,100 shares authorized, issued and
outstanding, entitled to a preference in liquidation
of $1,052........................................... 868 868 868
Series C, 700,000 shares authorized, issued and
outstanding, entitled to a preference in liquidation
of $1,540........................................... 1,540 1,540 1,540
Series D, 675,350 shares authorized, 616,808 shares
issued and outstanding, entitled to a preference in
liquidation of $1,860............................... 1,860 1,860 1,860
Series E, 3,204,865 shares authorized, 2,969,704,
3,121,642 and 3,121,642 shares issued and
outstanding, respectively, entitled to a preference
in liquidation of $9,354, $9,834 and $9,834,
respectively........................................ 9,057 9,528 9,528
Series F, 4,934,788 authorized, 270,270, 4,809,437 and
4,809,437 issued and outstanding, entitled to a
preference in liquidation, of $1,000, $17,795 and
$17,795, respectively............................... 1,000 17,550 17,550
Series G, 5,400,000 authorized, none, none, and
4,645,879, issued and outstanding, entitled to a
preference in liquidation of $0, $0 and $22,068,
respectively........................................ -- -- 21,413
------- ------- -------
$15,137 $32,158 $53,571
======= ======= =======
</TABLE>
Each share of Series A, B, C, D, E, F and G Convertible Preferred Stock is
convertible into one share of Common Stock at any time at the option of the
holder and is entitled to vote as if converted into Common Stock. Each share of
each such series of the Convertible Preferred Stock is mandatorily convertible
into one share of Common Stock upon the earlier of: (i) the affirmative vote or
consent of at least 67% of the holders of such shares; (ii) the resolution of
the board of directors to such effect at a time when fewer than 25% of the
originally issued Convertible Preferred shares are outstanding; or (iii) the
closing of a firm commitment underwritten public offering at a public offering
price equal to or exceeding $6.60 per share of Common Stock (as adjusted)
resulting in aggregate proceeds to the Company and/or the selling stockholders
(before underwriter discounts and other offering expenses) of $10 million or
more.
Series A, B, C, D, E, F and G Convertible Preferred shares have per share
liquidation preferences of $1.16, $1.24, $2.20, $3.0156, $3.15, $3.70 and $4.75,
respectively. Series A, B, C and D correspond to similarly designated classes of
limited partnership units issued by the Partnership pursuant to financings
arranged in 1990 (Class A), 1991 (Class B) and 1992 (Classes C and D). The
ranking of liquidation preferences is Series G, Series F, Series E, Series C,
Series D, Series B, Series A and then the Redeemable Preferred Stock. In March
of 1994, the Company issued 16,667 shares of Common Stock to Lehman Brothers,
Inc. as partial payment for financial advisory services.
In April 1994, the Company commenced an offering of Series E Convertible
Preferred Stock at a price of $4.10 per share. The Company issued 542,761 Series
E Convertible Preferred shares, and warrants to purchase an additional 18,766
shares of Series E Convertible Preferred Stock at $4.10 per share resulting in
proceeds to
F-13
<PAGE> 155
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the Company of $2,225,000. In conjunction with the Company's 1995 financing (see
below), the Series E Convertible Preferred Stock was repriced to $3.15 per
share, the same price as the 1995 financing. Accordingly, the Company issued an
additional 163,701 shares, and warrants to purchase an additional 5,654 shares
of Series E Convertible Preferred Stock at $3.15 per share.
In June through August 1995, as the first step in offering additional
Series E Convertible Preferred Stock, the Company borrowed $791,000 from certain
of its stockholders. In August 1995, this bridge loan, together with interest at
9%, was converted into 253,633 shares of Series E Convertible Preferred Stock at
$3.15 per share. In connection with the bridge loan, warrants to purchase an
additional 125,550 shares of Series E Convertible Preferred Stock at $3.15 per
share were issued, which are exercisable until the earlier of June 5, 1999, or
the closing of an initial public offering of securities by the Company or the
sale of all or substantially all of the assets of the Company. In August 1995,
the Board of Directors authorized the issuance and sale of up to $7 million of
Series E Convertible Preferred Stock at $3.15 per share, including conversion of
the bridge loan. During the year ended December 31, 1995, the Company issued
1,121,800 additional shares of Series E Convertible Preferred Stock and warrants
to purchase an additional 85,339 shares of Series E Convertible Preferred Stock
at $3.15 per share, resulting in proceeds to the Company of $3,534,000; and in
January through May of 1996, the Company issued an additional 841,306 shares of
Series E Convertible Preferred Stock at $3.15 per share, resulting in proceeds
to the Company of $2,650,000. This offering, including conversion of the bridge
loan, resulted in the issuance of 2,216,739 shares of Series E Convertible
Preferred Stock and warrants to purchase 210,889 shares of Series E Convertible
Preferred Stock, resulting in net proceeds of $6,832,000. In May of 1996, the
Company issued 46,355 shares of Series E Convertible Preferred Stock and
$154,000 cash as payment for financial advisory services.
During 1996 the Company issued 185,000 shares of Common Stock as bonuses to
officers and employees, and 14,828 shares of Common Stock were issued for
consulting services.
In December 1996, the Company commenced a private offering of Series F
Convertible Preferred Stock and related warrants at $3.70 per share. As of
December 31, 1996, the Company had issued 270,270 shares of Series F Convertible
Preferred Stock and warrants to purchase 13,514 additional shares of Series F
Convertible Preferred Stock, resulting in proceeds to the Company of $1,000,000.
During 1997, the Company issued 4,507,594 additional shares of Series F
Convertible Preferred Stock and warrants to purchase an additional 112,329
shares of Series F Convertible Preferred Stock, resulting in net proceeds to the
Company of $16,548,000. The warrants are exercisable until the earlier of July
20, 1999, or the sale of all or substantially all of the assets of the Company.
In addition, the Company issued 31,081 shares of Series F Convertible Preferred
Stock as compensation for services rendered in connection with the offering of
the Series F Convertible Preferred Stock.
In April 1998, the Company commenced a private offering of Series G
Convertible Preferred Stock and related warrants at $4.75 per share. As of June
30, 1998, the Company had issued 4,556,249 shares of Series G Convertible
Preferred Stock and warrants to purchase 227,793 additional shares of
Convertible Preferred Stock, resulting in net proceeds to the Company of
$21,413,000. The warrants are exercisable until the earlier of May 1, 2000, or
the sale of substantially all of the assets of the Company. In addition, the
Company issued 89,630 shares of Series G Convertible Preferred Stock as
compensation for services rendered in connection with the offering of the Series
G Convertible Preferred Stock.
The certificate of incorporation and a stockholders' agreement entered into
among the Company, the founder and certain venture capital investors in
conjunction with the December 1992 financing provide for class voting or
combined class voting under certain circumstances. The stockholders' agreement
provides for an agreed upon process for the election of directors which has the
effect that the signatories thereof, through the size of their holdings, can
determine which individuals become directors of the Company. The provision for
election of the directors ceases to be operative upon closing of a firm
commitment underwritten public
F-14
<PAGE> 156
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
offering at a public offering price equal to or exceeding $6.60 per share of
Common Stock (as adjusted) resulting in aggregate proceeds to the Company and/or
the selling stockholders (before underwriter discounts and other offering
expenses) of $10 million or more. The stockholders' agreement also provides for
registration rights and the priority thereof, and for certain rights of first
refusal and of co-sale with respect to securities of the Company.
4. REDEEMABLE PREFERRED STOCK:
The Redeemable Preferred Stock carries no vote and no dividend and is not
convertible into Common Stock. The Redeemable Preferred Stock is mandatorily
redeemable in an aggregate amount of $1,092,000 upon the closing of any firm
commitment underwritten public offering of Common Stock and will be redeemed
prior to the closing of the Transactions (See Note 1.)
The Redeemable Preferred Stock is held by FGN, Inc., the former general
partner of the Partnership. It is anticipated that all but $75,000 of the
proceeds received by FGN, Inc. from the redemption of the Redeemable Preferred
Stock will be paid by FGN, Inc. to certain of the founding and continuing
participants in the business. Accordingly, the Company had always expected that
upon determination that redemption was probable, the Company would record the
amount paid for redemption as compensation expense due to the nature of the
services provided. Company preparations during the third quarter of 1997 for an
initial public offering of Common Stock made it probable that the Company would
redeem such stock. Accordingly, the Company recorded a provision for the
redemption of the Redeemable Preferred Stock during the third quarter of 1997.
5. STOCK OPTIONS AND WARRANTS:
In 1993, the Company adopted a stock option plan which, in October 1997,
was amended and renamed the 1997 Equity Incentive Plan. Pursuant to the 1997
Equity Incentive Plan, the Company is authorized to grant Common Stock, stock
appreciation rights, or options to purchase Common Stock with respect to
2,350,000 shares of Common Stock for issuance to eligible employees, directors
and consultants. As of June 30, 1998, options with respect to 1,678,371 shares
have been granted, 474,100 have been exercised, 74,000 have been forfeited,
1,130,271 shares were outstanding and 745,629 shares of Common Stock remained
eligible for future option grants. Subsequent to June 30, 1998, options with
respect to an additional 10,200 shares were granted under the 1997 Equity
Incentive Plan. The stock options granted may be either incentive stock options
("ISO") or nonstatutory stock options ("NSO"). Such options may be granted only
at an exercise price not less than the fair market value of the shares at the
date of grant unless such option is granted pursuant to an assumption of or a
substitution for another option. The board of directors may set the rate at
which the options become exercisable and determine when the options expire,
subject to the limitations described below. The options granted may be exercised
up to ten years following the date of grant. All options will generally become
exercisable in the event the Company is sold or has other significant changes in
ownership. Generally, the options vest ratably over a four-year period.
Options granted under the 1997 Equity Incentive Plan through July 1997 may
be immediately exercisable, but any unvested shares exercised are held by the
Company and are subject to reacquisition by the Company should employment
terminate prior to completion of applicable vesting periods.
In 1995, the Company adopted the 1995 Cell Pathways, Inc. Stock Award Plan
pursuant to which the Company may award shares of common stock to employees,
directors and consultants as part or all of their compensation, whether salary,
bonus or fee and whether for past services or as incentive for current and
future services. The only awards which have been made under this plan were made
during 1996 by way of bonus compensation to officers and employees of the
Company for the years 1993, 1994 and 1995. In accordance with APB Opinion No.
25, a compensation charge of $59,000 associated with the issuance of 185,000
shares of
F-15
<PAGE> 157
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
common stock having a fair market value of $0.32 per share at the date of grant,
was recognized in the year ended 1995.
In October, 1997, the Board of Directors adopted and the stockholders
approved the 1997 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") covering an aggregate of 453,925 shares of Common Stock. Pursuant to the
terms of the Directors' Plan, each person who first becomes a non-employee
Director, automatically shall be granted an option to purchase 18,157 shares of
Common Stock (the "Inaugural Grant"). In addition, on the date of each annual
stockholders meeting commencing with the meeting in 1998, each non-employee
Director who has served at least one full year as a director is automatically
granted an option to purchase 5,447 shares of Common Stock (the "Anniversary
Grant"). In addition, the Company granted options to purchase 27,235 shares of
Common Stock at the inception of the plan. As of June 30, 1998, options with
respect to 90,784 have been granted, none have been exercised nor forfeited.
Options subject to an Inaugural Grant under the Directors' Plan will vest
in three equal, annual installments commencing on the first anniversary of the
date of the grant of the option. Options subject to an Anniversary Grant under
the Directors' Plan will vest in full on the first anniversary of the date of
the grant of the option. In addition, certain grants made at the inception of
the Director's Plan vested on March 31, 1998. The vesting of all options under
the Directors' Plan is conditioned on the continued service of the recipient as
a director, employee or consultant of the Company or any affiliate of the
Company.
The exercise price of the options granted under the Directors' Plan will be
equal to the fair market value of the Common Stock granted on the date of grant.
No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. Options granted under the
Directors' Plan generally are non-transferable, except as provided in the option
agreement. The Directors' Plan will terminate on the tenth anniversary of the
date of its adoption by the Board unless sooner terminated by the Board. In the
event of certain changes of control, options outstanding under the Directors'
Plan will automatically become fully vested and will terminate if not exercised
prior to such change of control.
The Company accounts for stock options granted to employees under the 1997
Equity Incentive Plan in accordance with the intrinsic value method provided for
under APB Opinion No. 25. Under the 1997 Equity Incentive Plan, options may be
granted at not less than the fair market value on the date of the grant and
therefore no compensation expense is, or has been, recognized in respect of
stock options awarded to employees. The option pricing models recommended by
SFAS No. 123 for recognition of, or disclosure of pro forma, compensation cost
in respect of employee stock options are option pricing models which have been
developed for fully transferable, traded options having no vesting requirements
and which require the input of subjective assumptions including expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options. Had compensation cost for
the 1997 Equity Incentive Plan been recognized in the income statements under
SFAS No. 123, the Company's net loss would have increased to the following pro
forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss:
As reported........................................ $(3,191) $(4,735) $(10,297)
======= ======= ========
Pro forma (unaudited).............................. $(3,191) $(4,767) $(10,438)
======= ======= ========
</TABLE>
The pro forma disclosures made above do not reflect options granted prior
to January 1, 1995. This pro forma compensation cost may also not be
representative of the effects which SFAS No. 123 may have on the
F-16
<PAGE> 158
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
disclosure of pro forma compensation cost in future years. The weighted average
fair value of the stock options granted during 1995, 1996 and 1997 was $0.10,
$0.10 and $0.92, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate................................. 6.15% 6.15% 6.15%
Expected dividend yield................................. 0% 0% 0%
Expected life........................................... 6 years 6 years 6 years
Expected volatility..................................... 0% 0% 0%
</TABLE>
Information relative to the Company's stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE AGGREGATE
EXERCISE PRICE EXERCISE PRICE PROCEEDS
OPTIONS (PER SHARE) (PER SHARE) (IN THOUSANDS)
-------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance as of December 31,
1994.......................... 163,350 $ .32 $ .32 $ 54
Granted....................... 23,500 .32 .32 8
Exercised..................... -- -- -- --
Forfeited..................... -- -- -- --
-------- ---------- ----- ----------
Balance as of December 31,
1995.......................... 186,850 .32 .32 62
Granted....................... 522,500 .32- .50 .38 199
Exercised..................... (222,850) .32 .32 (71)
Forfeited..................... (10,500) .32 .32 (3)
-------- ---------- ----- ----------
Balance as of December 31,
1996.......................... 476,000 .32- .50 .39 187
Granted....................... 455,021 1.00-4.75 3.47 1,578
Exercised..................... (251,250) .32- .50 .45 (112)
Forfeited..................... (63,500) .32-3.70 .85 (54)
-------- ---------- ----- ----------
Balance as of December 31,
1997.......................... 616,271 .32-3.70 2.59 1,599
Granted....................... 604,784 4.75-6.60 6.31 3,815
Exercised..................... -- -- -- --
Forfeited..................... -- -- -- --
-------- ---------- ----- ----------
Balance as of June 30, 1998..... 1,221,055 $ .32-6.60 $4.43 $ 5,414
======== ========== ===== ==========
Options exercisable as of June
30, 1998...................... 156,817 $1.18
======== =====
</TABLE>
The weighted average remaining contractual life of all options outstanding
at June 30, 1998 is 9.2 years.
F-17
<PAGE> 159
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding and exercisable at June 30, 1998 based upon each exercise
price:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
NUMBER OF WEIGHTED WEIGHTED WEIGHTED
OPTIONS AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE AT JUNE 30, CONTRACTUAL PRICE AT JUNE 30, PRICE
PRICES 1998 LIFE IN YEARS (PER SHARE) 1998 (PER SHARE)
- -------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$.32-.50 171,250 6.6 $ .38 108,332 $ .32
$ 1.00 85,000 8.8 1.00 21,250 1.00
$ 3.70 242,000 9.2 3.70 -- --
$ 4.75 213,413 9.6 4.75 27,235 4.75
$ 6.60 509,392 10.0 6.60 -- --
--------- -------
1,221,055 156,817
========= =======
</TABLE>
In October 1997, the Board of Directors adopted and the stockholders
approved the Employee Stock Purchase Plan (the "Purchase Plan") covering an
aggregate of 544,710 shares of Common Stock. Under the Purchase Plan, the Board
may authorize participation by eligible employees, including officers, in
periodic offerings following the adoption of the Purchase Plan. The offering
period for any offering will be no longer than 27 months.
Upon the effectiveness of an initial public offering, employees would be
eligible to participate in the Purchase Plan if they are employed by the Company
or an affiliate of the Company designated by the Board. Employees who
participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specified dates determined by the
Board, to the purchase of shares of Common Stock. The price of Common Stock
purchased under the Purchase Plan will be not less than 85% of the lower of the
fair market value of the Common Stock on the commencement date of each offering
period or the relevant purchase date. Employees may end their participation in
the offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company. The Purchase Plan
will terminate at the Board's direction.
In connection with the offerings of Series E Convertible Preferred Stock in
1994 and 1995, the Company issued warrants to purchase an aggregate of 235,309
additional shares of Series E Convertible Preferred Stock, exercisable at $3.15
per share until the earlier of: (i) the closing of an initial public offering of
securities by the Company; (ii) the sale of all or substantially all of the
assets of the Company; and (iii) August 31, 1997 (in the case of 109,759 shares
all of which have been exercised) or June 5, 1999 (in the case of 125,550
shares). During 1996, warrants were exercised to purchase 148 shares of Series E
Convertible Preferred Stock. During the year ended December 31, 1997, warrants
to purchase 149,462 shares of Series E Convertible Preferred Stock were
exercised for cash at $3.15 per share. Further, holders of warrants to purchase
16,655 shares of Series E Convertible Preferred Stock tendered their warrants in
a cashless exercise in exchange for 2,476 shares of Series E Convertible
Preferred Stock at $3.70 per share. As of June 30, 1998, warrants to purchase
69,044 shares of Series E Convertible Preferred Stock were outstanding.
In connection with the offerings of Series F Convertible Preferred Stock,
commencing in December of 1996, the Company issued in December of 1996 warrants
to purchase 13,514 shares of Series F Convertible Preferred Stock, and during
1997, warrants to purchase 112,329 shares of Series F Convertible Preferred
Stock, at an exercise price of $3.70 per share, all exercisable until the
earlier of: (i) July 20, 1999; and (ii) the sale of all or substantially all of
the assets of the Company. During the year ended December 31, 1997, warrants to
purchase 492 shares of Series F Convertible Preferred Stock were exercised for
cash at $3.70 per
F-18
<PAGE> 160
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
share. As of June 30, 1998, warrants to purchase 125,351 shares of Series F
Convertible Preferred Stock were outstanding.
In connection with the offerings of Series G Convertible Preferred Stock,
commencing in April 1998, the Company issued warrants to purchase 227,793 shares
of Series G Convertible Preferred Stock, at an exercise price of $4.75 per
share, exercisable until the earlier of: (i) May 1, 2000; and (ii) the sale of
all or substantially all of the assets of the Company. As of June 30, 1998,
warrants to purchase 227,793 shares of Series G Convertible Preferred Stock were
outstanding.
Also in connection with the offerings of Series G Convertible Preferred
Stock, the Company issued warrants to purchase 5,000 shares of Common Stock at
an exercise price of $6.60 per share to an investment advisor in consideration
for services rendered. These warrants are exercisable through June 30, 2000.
6. DEBT:
In March 1996, the Company borrowed $150,000 from a bank. The note bore
interest at a rate of 7.79% and was payable in equal monthly installments
through March 1999. During the six months ended June 30, 1998, the note was
repaid.
7. INCOME TAXES:
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes." As of December 31, 1997, the Company had
approximately $20,915,000 of net operating loss carryforwards ("NOLs") for
income tax purposes available to offset future federal income tax, subject to
limitations for alternative minimum tax. The NOLs are subject to examination by
the tax authorities and expire between 2008 and 2012.
Prior to its conversion into corporate form, the business had accumulated
losses totaling approximately $3,900,000. For tax purposes these losses were
distributed to the partners in accordance with the provisions of the Partnership
Agreement of the Company's predecessor partnership. Thus, these losses, while
included in the financial statements of the Company, are not available to offset
future taxable income, if any, of the Company.
The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company of greater than 50% within a three-year period results in an annual
limitation on the Company's ability to utilize its NOLs from tax periods prior
to the ownership change. The Company expects that upon consummation of the
Transactions (see Note 1), such limitation will be triggered. However, the
Company does not expect such limitation to have a significant impact on its
operations.
The components of the net deferred income tax asset at December 31, 1996
and 1997 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $ 4,310 $ 7,738
Less- valuation allowance................................... (4,310) (7,738)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
The Company has not yet achieved profitable operations. Accordingly,
management believes the tax assets as of December 31, 1997 do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a valuation
allowance for the entire net tax asset.
F-19
<PAGE> 161
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
In August 1993, the Company entered into a lease for laboratory facilities
located in Aurora, Colorado. The lease is for a term of five and one-half years
beginning in January 1994 and provides for a renewal option of an additional
five years at the end of the initial term. In June 1998, the Company entered
into a ten-year lease for office and laboratory space in Horsham, Pennsylvania.
This lease contains two five-year renewal terms.
Aggregate minimum rental payments under the Horsham lease are as follows as
of June 30, 1998 (In thousands):
<TABLE>
<S> <C>
1998........................................................ $ 410
1999........................................................ 831
2000........................................................ 856
2001........................................................ 882
2002........................................................ 908
2003........................................................ 935
Thereafter.................................................. 4,566
------
Total....................................................... $9,388
======
</TABLE>
Rental expense under these leases and other month-to-month leases entered
into by the Company totaled $57,000, $95,000, $121,000, $60,000 and $303,000,
for the years ended December 31, 1995, 1996 and 1997 and the six months ended
June 30, 1997 and 1998, respectively.
The Company contracts with a number of university-based researchers and
commercial vendors who provide various research, clinical and product
development activities. Such arrangements are generally cancellable at any time.
F-20
<PAGE> 162
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tseng Labs, Inc.:
We have audited the accompanying consolidated balance sheets of Tseng Labs,
Inc. (a Utah corporation) and subsidiaries as of December 31, 1996 and 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tseng Labs, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pa.
February 6, 1998
F-21
<PAGE> 163
TSENG LABS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- JUNE 30,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 7,996 $ 19,178 $ 27,109
Short-term investments.................................... 14,916 3,573 --
Accounts receivable, net of allowance for doubtful
accounts of $168, $389 and $320, respectively........... 5,165 1,294 666
Inventories............................................... 2,369 33 10
Recoverable income taxes.................................. 5,824 3,588 230
Note receivable........................................... 4,441 -- --
Other receivables......................................... -- 1,004 --
Prepaid expenses and other................................ 877 147 69
-------- -------- --------
Total current assets............................... 41,588 28,817 28,084
-------- -------- --------
PLANT AND EQUIPMENT:
Land and Buildings (Note 1)............................... 2,972 3,125 --
Equipment................................................. 11,400 92 92
Furniture and fixtures.................................... 719 19 19
-------- -------- --------
15,091 3,236 111
Less-Accumulated depreciation............................. (5,758) (677) (63)
-------- -------- --------
Net plant and equipment............................ 9,333 2,559 48
-------- -------- --------
LAND AND BUILDING HELD FOR SALE (Note 2).................... -- -- 2,435
-------- -------- --------
OTHER ASSETS................................................ 618 42 --
-------- -------- --------
$ 51,539 $ 31,418 $ 30,567
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,098 $ 309 $ 336
Accrued expenses.......................................... 3,222 2,789 1,684
-------- -------- --------
Total current liabilities.......................... 5,320 3,098 2,020
-------- -------- --------
DEFERRED INCOME TAXES....................................... 991 -- --
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY:
Common stock, $.005 par value, 50,000,000 shares
authorized; 19,604,087, 19,632,587 and 19,628,587 issued
at December 31, 1996, December 31, 1997 and June 30,
1998.................................................... 98 98 98
Additional paid-in capital................................ 11,113 11,009 11,009
Retained earnings......................................... 38,660 27,231 27,458
-------- -------- --------
49,871 38,338 38,565
Less-Treasury stock, at cost; 519,250, 4,544,250 and
4,544,250 shares, respectively.......................... (4,643) (10,018) (10,018)
-------- -------- --------
Total shareholders' equity......................... 45,228 28,320 28,547
-------- -------- --------
$ 51,539 $ 31,418 $ 30,567
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements
F-22
<PAGE> 164
TSENG LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------ ------------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES.................................... $ 37,115 $ 26,231 $ 8,015 $ 5,061 $ 1,582
COST OF SALES................................ 28,930 25,255 6,172 3,845 910
-------- -------- -------- ------- --------
Gross Profit............................... 8,185 976 1,843 1,216 672
RESEARCH AND DEVELOPMENT..................... 3,440 14,561 8,778 4,715 --
SELLING, GENERAL AND ADMINISTRATIVE.......... 6,328 9,239 4,749 2,642 1,124
MERGER TRANSACTION COSTS (Note 1)............ -- -- -- -- 136
LOSS ON SALE OF GRAPHICS OPERATIONS (Note
1)......................................... -- -- 3,698 -- --
RESTRUCTURING EXPENSE (Note 3)............... -- -- 2,031 -- --
-------- -------- -------- ------- --------
Operating loss............................. (1,583) (22,824) (17,413) (6,141) (588)
INTEREST INCOME.............................. 2,162 1,487 1,534 837 636
RENTAL INCOME................................ -- -- -- -- 179
-------- -------- -------- ------- --------
Income (loss) before income taxes.......... 579 (21,337) (15,879) (5,304) 227
INCOME TAX PROVISION (BENEFIT)............... 102 (7,372) (4,450) (1,857) --
-------- -------- -------- ------- --------
NET INCOME (LOSS)............................ $ 477 $(13,965) $(11,429) $(3,447) $ 227
======== ======== ======== ======= ========
BASIC AND DILUTED NET INCOME (LOSS) PER
SHARE...................................... $ .03 $ (.73) $ (.60) $ (.18) $ .02
======== ======== ======== ======= ========
WEIGHTED AVERAGE SHARES OUTSTANDING.......... 18,941 19,020 18,975 19,074 15,086
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE> 165
TSENG LABS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL TOTAL
PAR PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES VALUE CAPITAL EARNINGS STOCK EQUITY
---------- ----- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995............ 19,435,987 $ 97 $ 9,997 $ 54,039 $ (4,272) $59,861
Exercise of stock options......... 47,500 -- 292 -- -- 292
Tax benefit from exercise of
nonqualified stock options..... -- -- 27 -- -- 27
Cash dividends, $.10 per common
share.......................... -- -- -- (1,891) -- (1,891)
Purchase of treasury stock........ -- -- -- -- (371) (371)
Net income........................ -- -- -- 477 -- 477
---------- ----- ------- -------- -------- -------
BALANCE, DECEMBER 31, 1995.......... 19,483,487 97 10,316 52,625 (4,643) 58,395
Exercise of stock options......... 120,600 1 630 -- -- 631
Tax benefit from exercise of
nonqualified stock options..... -- -- 167 -- 167
Net loss.......................... -- -- -- (13,965) -- (13,965)
---------- ----- ------- -------- -------- -------
BALANCE, DECEMBER 31, 1996.......... 19,604,087 98 11,113 38,660 (4,643) 45,228
Exercise of stock options......... 28,500 -- 83 -- -- 83
Tax benefit from exercise of
nonqualified stock options..... -- -- (187) -- -- (187)
Purchase of treasury stock........ -- -- -- -- (5,375) (5,375)
Net loss.......................... -- -- -- (11,429) -- (11,429)
---------- ----- ------- -------- -------- -------
BALANCE, DECEMBER 31, 1997.......... 19,632,587 98 11,009 27,231 (10,018) 28,320
Cancellation of treasury stock*... (4,000) -- -- -- -- --
Net income*....................... -- -- -- 227 -- 227
---------- ----- ------- -------- -------- -------
BALANCE, JUNE 30, 1998*............. 19,628,587 $ 98 $11,009 $ 27,458 $(10,018) $28,547
========== ===== ======= ======== ======== =======
</TABLE>
- ---------------
* Unaudited
The accompanying notes are an integral part of these statements.
F-24
<PAGE> 166
TSENG LABS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
-------------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 477 $(13,965) $(11,429) $ (3,447) $ 227
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities --
Depreciation and amortization................ 2,889 2,455 1,985 494 77
Loss on sale of graphics operations.......... -- -- 3,698 -- --
Deferred income taxes........................ 64 (1,320) (991) -- --
Deferred costs write-off..................... -- 5,718 -- -- --
(Increase) decrease in --
Accounts receivable, net................... 4,667 759 3,871 3,145 628
Inventories................................ 378 1,205 2,336 1,152 23
Recoverable income taxes................... (646) (5,178) 2,236 3,652 3,358
Prepaid expenses and other................. (678) 248 730 601 1,082
Other receivables.......................... -- -- (1,004) -- --
Other assets............................... (570) 1,421 576 44 42
Increase (decrease) in--
Accounts payable........................... (304) (736) (1,789) (1,579) 27
Accrued expenses........................... 558 2,091 (433) (88) (1,106)
-------- -------- -------- -------- -------
Net cash provided by (used in) operating
activities............................ 6,835 (7,302) (214) 3,974 4,358
-------- -------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment.............. (2,211) (3,069) (1,119) (512) --
Proceeds from sale of graphics operations,
net........................................ -- -- 2,023 -- --
Increase in deferred costs................... (1,982) (2,924) -- -- --
Net sale (purchase) of short-term
investments................................ (28,810) 15,294 11,343 (12,983) 3,573
Decrease (increase) in note receivable....... -- (3,638) 4,441 4,441 --
-------- -------- -------- -------- -------
Net cash provided by (used in) investing
activities............................ (33,003) 5,663 16,688 (9,054) 3,573
-------- -------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options...... 292 631 83 6 --
Dividends paid............................... (1,891) -- -- -- --
Purchase of treasury stock................... (371) -- (5,375) (75) --
-------- -------- -------- -------- -------
Net cash provided by (used in) financing
activities................................. (1,970) 631 (5,292) (69) --
-------- -------- -------- -------- -------
Net increase (decrease) in cash and cash
equivalents........................... (28,138) (1,008) 11,182 (5,149) 7,931
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD....................................... 37,142 9,004 7,996 7,996 19,178
-------- -------- -------- -------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD....... $ 9,004 $ 7,996 $ 19,178 $ 2,847 $27,109
======== ======== ======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for income taxes... $ 707 $ 20 $ -- $ -- $ --
======== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 167
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1998 IS UNAUDITED)
1. BACKGROUND:
Tseng Labs, Inc. was a developer of custom semiconductor devices and board
level enhancement products that expand the graphics capabilities and performance
of IBM and IBM-compatible personal computers. The Company's primary operations
were located in the United States. The Company sold its products primarily to
computer systems manufacturers (OEMs), video subsystem and video add-in board
manufacturers in the United States, Europe and Asia. In December 1997, the
Company sold its graphics design assets to ATI Technologies Inc. (ATI) for
approximately $3,000,000 in cash, and the assumption of certain employee
incentive payments. The Company received approximately $2,500,000 of the
proceeds in cash with the remaining $500,000 distributed from escrow in June
1998, after resolution of certain items specified in the purchase agreement. The
sale resulted in the Company recording a one-time pretax charge of approximately
$3,698,000. In connection with the purchase of the Company's graphic design
assets, ATI received certain rights in the Company's intellectual property and
entered into a three-year lease for the Company's former offices and design
center, with renewal options through 2007. Annual rent during the initial 3-year
term of the lease is approximately $330,000 plus assumption of specified
operating and maintenance expenses on the facility.
The Company will continue to support existing products primarily through
third party support agreements through March 1999 and has commenced a
"last-time" buy program for its customer base. The Company expects that, if the
combination with Cell Pathways, Inc. (CPI) discussed below is consummated, it
will discontinue its "last time" buy program late in the third quarter or early
in the fourth quarter of 1998.
In the fourth quarter of 1997, the Company announced that it would explore
opportunities to utilize its cash and stock to make acquisitions of or
investments in a potential growth stage company or companies including but not
limited to those that are technology-based. On June 23, 1998, the Company signed
a definitive agreement (the Agreement) to combine with CPI. Under the terms of
the Agreement, shareholders of Tseng will exchange all of their stock for
approximately 5.5 million shares of common stock of CPI, representing an equity
interest of approximately 23% in the surviving company. The closing of the
transaction is subject to a number of conditions as specified in the Agreement,
including the approval of the shareholders of both companies. Completion of the
transaction is currently scheduled for October 1998. There can be no assurance
that the transaction can be completed and closed as anticipated. The Company is
charging transaction costs incurred in connection with this combination to
expense as incurred.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Consolidated Financial Statements
The consolidated balance sheet as of June 30, 1998 and the consolidated
statements of operations for the six months ended June 30, 1997 and 1998 are
unaudited and, in the opinion of management of the Company, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results for those interim periods. The results of
operations for the six months ended June 30, 1997 and 1998 are not necessarily
indicative of the results to be expected for the full year.
Principles of Consolidation and Use of Estimates
The consolidated financial statements include the accounts of Tseng Labs,
Inc. and its wholly owned subsidiaries (the Company). All significant
intercompany transactions and balances have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting principals
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, contingent liabilities, revenues and expenses
during a reporting period. The Company has historically operated in very
competitive and rapidly changing markets. Actual results could differ from
management estimates.
F-26
<PAGE> 168
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories, which consist of materials, labor and overhead, are stated at
the lower of weighted average cost or market and consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
-------------- -----------
1996 1997 1998
------ ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Purchased parts................................. $ 769 $10 $ 3
Finished goods.................................. 1,600 23 7
------ --- ---
$2,369 $33 $10
====== === ===
</TABLE>
Plant and Equipment
Plant and equipment are stated at cost. Depreciation is computed using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Building.................................................. 25 years
Equipment................................................. 3-7 years
Furniture and Fixtures.................................... 10 years
</TABLE>
Depreciation expense was $1,080,000, $1,432,000, $1,985,000 in 1995, 1996,
1997, respectively, and $494,000 and $77,000 for the six-month periods ended
June 30, 1997 and 1998, respectively.
In August 1998, the Company entered into a definitive agreement to sell the
real estate leased to ATI (see Note 1), to a third party for $2,787,500. The
sale is subject to a number of factors, including completion of due diligence,
and is expected to close in October 1998. Accumulated depreciation on the
building as of June 30, 1998 was $690,000.
The Company assesses the recoverability of plant and equipment, as well as
other long-lived assets, based upon expectations of future undiscounted cash
flows in accordance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." The
Company continually evaluates whether events or circumstances have occurred that
indicate that the remaining useful lives of the plant and equipment should be
revised or that the remaining balance of such assets may not be recoverable. As
of December 31, 1997, the Company believes that no revisions to the remaining
useful lives or write-downs of intangible assets are required.
Deferred Costs
Research and development costs incurred in developing the Company's
proprietary chips are charged to expense as incurred until technological
feasibility has been established. Thereafter, all costs incurred in refining and
testing the chips are capitalized. These deferred costs are amortized on a
product-by-product basis over the estimated revenue stream of the related
product. Management periodically evaluates whether factors indicate that there
is an impairment of the deferred costs and, accordingly, the carrying value is
adjusted to reflect such impairment, if any. Commencing January 1, 1997, due to
the volatility of the graphics market and difficulty in estimating future
revenue streams, all refining and testing costs were charged to expense as
incurred. In the fourth quarter of 1996, the Company determined that its
investment and future commitments of $8,660,000 related primarily to its current
generation 2D graphics and multimedia products was not recoverable over the
revenue stream of future 2D graphics products. Accordingly, the entire balance
was written-off. During 1995, the Company wrote-off approximately $307,000 of
deferred costs which were identified as not recoverable over the revenue stream
of future generation products. Amortization of deferred costs was $1,451,000 and
$1,023,000 in 1995 and 1996, respectively.
F-27
<PAGE> 169
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income (Loss) Per Share
The Company adopted SFAS No. 128 "Earnings Per Share" effective December
15, 1997. Under SFAS No. 128, basic net income (loss) per share is calculated by
dividing net income by the weighted average number of shares of common stock
outstanding during each period. Diluted net income (loss) per share is
calculated by dividing net income by the weighted average number of shares of
common stock outstanding each period, adjusted for the dilutive effect of common
stock equivalents, which consist of stock options, using the treasury stock
method.
The impact of the assumed exercise of outstanding employee options
increased the assumed shares outstanding for purposes of calculating diluted
earnings per share by approximately 31,000 shares in the six month period ended
June 30, 1998 and 42,000 shares in 1995. The assumed exercise of employee stock
options was anti-dilutive in 1996, 1997 and in the six-month period ended June
30, 1997. The effect of this accounting change did not have a material impact on
1995 and 1996 reported earnings per share.
Cash and Short-Term Investments
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents for the purpose of
determining cash flows.
In accordance with SFAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities", management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. As of December 31, 1996 and 1997, all of the Company's
short-term investments were U.S. Government securities which have been
classified as hold to maturity and reflected at amortized cost in the
accompanying balance sheets. The estimated fair value of each investment
approximated cost at December 31, 1996 and 1997. The Company held no short-term
investments at June 30, 1998.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist primarily of cash equivalents, short-term
investments and accounts and notes receivable. By policy, the Company places its
short-term investments only with high-quality financial institutions and, other
than U.S. Government Treasury instruments, limits the amounts invested in any
one institution or type of investment. Substantially all of the Company's
accounts receivable are derived from sales to manufacturers of computer systems,
subsystems and value-added resellers. The Company performs ongoing credit
evaluations of its customers' financial condition. Approximately 59%, 43%, and
58% of the Company's sales in 1995, 1996, and 1997, and 76% and 34% for the
six-month periods ended June 30, 1997 and 1998, respectively, were export sales.
To date, substantially all such sales have been in U.S. dollars. To reduce
credit risk, the Company generally requires international customers to furnish
letters of credit. Historically, the Company has not incurred material
credit-related losses.
Revenue Recognition
Revenue is recognized upon product shipment. Accruals for estimated sales
returns and allowances are recorded at the time of sale.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
F-28
<PAGE> 170
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the statement of operations in the period that includes the
enactment date.
Recently Issued Financial Standards
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". SFAS No. 123 established
financial and reporting standards for stock-based employee compensation plans.
This statement also applies to transactions in which an entity issues its equity
securities to acquire goods or services from non-employees. The Company has
adopted the disclosure requirement of this statement (see Note 6).
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." This
statement establishes additional standards for segment reporting in the
financial statements and is effective for fiscal years beginning after December
15, 1997. Management believes that SFAS No. 131 will not have an effect on the
Company's financial reporting.
Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
3. ONE-TIME CHARGES:
In the fourth quarter of 1997 and prior to the sale of its graphics
development assets to ATI (see Note 1), the Company announced and implemented a
restructuring program involving the resignation of its former president and
chief executive officer, a reduction in staff to those essential to support
existing customers and further development of 3D and multimedia technologies
under development, and the adoption of an acquisition/divestiture strategy. In
connection with this restructuring, the Company recorded one-time pretax charges
totaling $2,031,000 relating primarily to severance benefits for the terminated
employees.
In the fourth quarter of 1996, the Company announced its intention to focus
its efforts on 3D graphics products and, in connection therewith, recorded
one-time pretax charges of $13,899,000. The charges related primarily to
inventory reserves on 2D graphics products and purchase commitments
($2,354,000), pricing adjustments made to certain customers due to significant
ET6000 price reductions in the fourth quarter ($1,047,000), the write-off of
investments and commitments in technologies related primarily to 2D graphics and
multimedia products ($8,660,000), the write-down of an investment in a
multimedia company ($1,180,000) and other costs related primarily to this
refocus ($658,000).
In the fourth quarter of 1995, the Company recorded a charge to cost of
sales of approximately $735,000 related to a potential decline in the market
value of certain older technology-based inventory.
4. NOTE RECEIVABLE:
In April 1996, the Company amended and expanded a secured loan agreement
with the entity that designed, manufactures and markets Multibank DRAM (MDRAM).
Under the expanded agreement, the Company advanced this entity $6,500,000 in the
form of a secured, interest bearing note. The balance of the note (approximately
$4,441,000) was repaid during the first quarter of 1997.
F-29
<PAGE> 171
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES:
The provision (benefit) for income taxes is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
-------------------------- ------------------
1995 1996 1997 1997 1998
---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Federal --
Current........................... $ 12 $(6,042) $(3,459) $(1,857) $ --
Deferred.......................... 64 (1,320) (991) -- --
---- ------- ------- ------- -------
76 (7,362) (4,450) (1,857) --
---- ------- ------- ------- -------
State --
Current........................... 26 (10) -- -- --
Deferred.......................... -- -- -- -- --
---- ------- ------- ------- -------
26 (10) -- -- --
---- ------- ------- ------- -------
$102 $(7,372) $(4,450) $(1,857) $ --
==== ======= ======= ======= =======
</TABLE>
Income tax expense (benefit) differs from the amount currently payable
because certain revenues and expenses are reported in different periods for
financial reporting and tax purposes. The principal differences involve the
timing of deducting software development costs and valuation reserves, and
different methods used in computing financial statement and tax depreciation.
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
--------------------------- ------------------
1995 1996 1997 1997 1998
----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Federal statutory rate............. 34.0% (34.0)% (34.0)% (34.0)% --
State income taxes, net of federal
benefit.......................... 3.0 -- -- -- --
Increase in valuation allowance.... -- -- 6.0 -- --
Tax credits utilized............... (23.0) (.6) -- (1.0) --
Other.............................. 3.6 -- -- -- --
----- ------- ------- ------- -------
17.6% (34.6)% (28.0)% (35.0)% --
===== ======= ======= ======= =======
</TABLE>
The Company has U.S. net operating loss carryforwards and research and
development credit carryforwards of approximately $543,000 and $398,000,
respectively, at December 31, 1997 which will be available to offset regular
taxable U.S. income during the carryforward period (through 2012). U.S. tax laws
impose limitations on the use of net operating loss carryforwards following
certain changes in ownership. If such a change were to occur with respect to the
Company, the limitation could reduce the amount of benefits that
F-30
<PAGE> 172
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
would be available to offset future taxable income each year. Deferred tax
assets consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Net operating loss carryforwards............................ $ 185
Tax credit carryforwards.................................... 398
Restructuring reserves not currently deductible............. 551
Inventory................................................... 204
Other reserves not currently deductible..................... 492
-------
Total deferred tax asset.................................... 1,830
Less -- valuation allowance................................. (1,830)
-------
Net deferred tax asset...................................... $ --
=======
</TABLE>
The Company has provided a full valuation allowance on its deferred tax
assets due to uncertainty surrounding their realization. The Company's deferred
tax assets, both individually and in the aggregate, were not material at
December 31, 1995 and 1996.
6. STOCK OPTION PLANS:
The Company's 1995 stock option plan permits the issuance of either
incentive or nonqualified stock options to employees and nonqualified options to
key consultants. A maximum of 3,000,000 shares of common stock has been reserved
for issuance under this plan. The Company also has two additional nonqualified
stock option plans (the 1991 and 1984 stock option plans) under which a maximum
of 3,000,000 shares of common stock have been reserved for issuance. Options
under all three plans must be granted at a price not less than 100% of the fair
market value of the common stock on the date of grant. Options granted under the
plans become exercisable as determined by the Stock Option Committee of the
Board of Directors at the time of the grant and may have terms extending to 10
years.
A summary of stock option activity related to these plans is as follows:
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING OPTIONS NUMBER PRICE RANGE PRICE
- ------------------- ---------- ------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1995................... 750,900 $ 2.66-18.13 $ 7,889,151
Granted.................................. 1,231,200 5.63-9.13 8,783,000
Exercised................................ (47,500) 3.00-5.63 (261,937)
Canceled................................. (275,000) 5.63-18.13 (3,312,092)
---------- ------------ ------------
Balance, December 31, 1995................. 1,659,600 3.00-13.75 13,098,122
Granted.................................. 1,308,550 5.75-10.50 9,015,994
Exercised................................ (109,600) 2.66-6.63 (562,825)
Canceled................................. (325,750) 5.75-10.50 (2,754,769)
---------- ------------ ------------
Balance, December 31, 1996................. 2,532,800 3.00-13.75 18,796,522
Granted.................................. 2,473,100 2.94-3.75 7,067,362
Exercised................................ (28,500) 2.94-3.00 (83,844)
Canceled................................. (3,018,915) 2.94-13.75 (19,056,412)
---------- ------------ ------------
Balance, December 31, 1997................. 1,958,485 1.38-10.375 6,723,628
Granted.................................. 40,886 1.38-2.94 77,728
Canceled................................. (601,167) 2.94-10.375 (2,880,788)
---------- ------------ ------------
Balance, June 30, 1998..................... 1,398,204 $ 1.38-8.75 $ 3,920,568
========== ============ ============
</TABLE>
F-31
<PAGE> 173
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997 and June 30, 1998, a maximum of 2,263,308 and
2,823,589 additional options may be granted under the plans. There were
1,705,167 and 1,346,112 options with average exercise prices of $3.51 and $2.80
per share exercisable at December 31, 1997 and June 30, 1998, respectively. The
options expire on various dates through 2008.
In March 1997, the Company canceled and reissued 1,094,600 options held by
non-officers which had been outstanding under the plans. The options had an
average price of $6.08 per share. The re-issue price was $2.94 per share. In
April 1997, the Company allowed its officers to exchange 1,065,000 options with
an average exercise price of $8.77 per share for 937,500 options with an average
exercise price of $2.94 per share.
The Company's 1991 Special Directors Stock Option Plan, as amended and
restated in 1997, provides that outside Directors receive options upon their
initial election to the Board and additional options for every two years of
service on the Board. The options vest 50% at grant and 50% on the first
anniversary of grant. The Directors Plan also provides that the Board may modify
the number of shares subject to automatic grant, permits the Board to make other
grants to non-employee directors and grants the Board flexibility with respect
to vesting and acceleration of vesting of outstanding options. A maximum of
300,000 shares have been reserved for grant under the plan. As of December 31,
1997 and June 30, 1998, a maximum of 127,500 and 187,500 additional options may
be granted under this plan. At December 31, 1997 and June 30, 1998, 140,000 and
80,000 options, respectively, were outstanding under the plan at average
exercise prices of $5.98 and $2.56 per share. No options were exercised by the
outside directors during the three and one-half year period ended June 30, 1998.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and the related interpretations in accounting
for its stock option plans. SFAS No. 123 "Accounting for Stock-Based
Compensation" was adopted by the Company in 1996. Had compensation cost for the
Company's stock option plans been determined based upon the fair value of the
options at the date of grant, as prescribed under SFAS No. 123, the Company's
net income (loss) would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1995 1996 1997
-------- ------------ ------------
<S> <C> <C> <C>
Net income (loss) --
As reported............................... $477,000 $(13,965,000) $(11,429,000)
Pro forma................................. $(35,000) $(15,967,000) $(13,557,000)
Basic and diluted net income (loss) per
share
As reported............................... $ .03 $ (.73) $ (.60)
Pro forma................................. $ - $ (.84) $ (.73)
</TABLE>
The fair value of the options granted during 1995, 1996 and 1997 has been
calculated using the Black-Scholes option pricing model with the following
assumptions: dividend yield -- 0.0%, volatility -- 70%, risk-free interest
rate -- 6.0%, and an expected life of 2-4 years.
7. COMMITMENTS AND CONTINGENCIES:
The Company purchased all of its video graphics chips from independent
foundries. During 1996 and 1997, and the six-month period ended June 30, 1998,
the Company purchased substantially all its video graphics chips from one
foundry. The use of third parties to manufacture, package and test the Company's
products involves a number of significant risks including, but not limited to,
the absence of adequate capacity to produce the Company's products,
unavailability of, or interruptions in access to the process technologies
necessary to manufacture the Company's products, the absence of guaranteed
manufacturing capacity and reduced control over delivery schedules,
manufacturing yields and costs. The Company has various purchase
F-32
<PAGE> 174
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commitments, including commitments to its foundries, for materials and supplies
used in the ordinary course of business.
In May 1993, two purported shareholders of the Company brought an action
against the Company and certain of its executive officers in the United States
District Court for the Eastern District of Pennsylvania, alleging that the
defendants had issued false and misleading statements concerning the Company,
and thus had violated the federal securities laws and committed common law fraud
and negligent misrepresentation. Subsequently, several other purported
shareholders filed similar actions in the same forum against the Company and
certain of its executive officers. The actions have been consolidated. On July
8, 1994, pursuant to stipulation, the Court certified a class for the federal
securities law claims and dismissed the state law claims, without prejudice. On
August 21, 1995, the Company filed a motion for summary judgment seeking to
dismiss the action in its entirety. On March 19, 1996, the Court ruled on the
Company's motion and dismissed the action in its entirety. The plaintiff's filed
an appeal of the summary judgment with the United States Court of Appeals for
the Third Circuit which, on January 28, 1997, affirmed the summary judgment
order dismissing the action in its entirety. The Company had recorded the
expense of defending these claims on an as incurred basis.
In addition to the complaints discussed above, the Company is involved in
certain legal actions and claims arising in the ordinary course of business.
Management, after discussion with legal counsel, believes that the outcome of
such litigation and claims will not have a material adverse effect on the
Company's financial position.
8. EXPORT SALES AND MAJOR CUSTOMERS:
The Company's primary operations are located in the United States. The
Company sold its products primarily into the personal computer market in the
United States, Europe and Asia. Sales into the Asian market were primarily
through six unaffiliated distributors. Total export sales, including sales to
the distributors discussed above, were 59%, 43%, and 58% of the Company's sales
in 1995, 1996 and 1997, respectively and 76% and 34% in the six-month periods
ended June 30, 1997 and 1998, respectively. As a significant portion of the
Company's sales are export sales, the Company has been subject to the risks of
conducting business internationally, including unexpected changes in regulatory
requirements, fluctuations in the US dollar which could increase the sales price
in local currencies of the Company's products in foreign markets, tariffs, and
other barriers and restrictions and the burden of complying with a wide variety
of foreign laws.
Three customers accounted for 42% of revenues in 1997. Two customers
accounted for 38% and 37% of revenues in 1996 and 1995, respectively. Two
customers accounted for 33% of revenues in the six-month period ended June 30,
1998. Four customers accounted for 55% of the Company's revenues in the
six-month period ended June 30, 1997.
9. RELATED-PARTY TRANSACTIONS:
In November 1997, Jack Tseng, the Company's former president and chief
executive officer, resigned effective October 31, 1997. Included in the
restructuring charge recorded by the Company in the fourth quarter of 1997 (see
Note 3), is a one-time charge of approximately $700,000 related to this
resignation.
Subsequent to the resignation discussed above, in December 1997, the
Company repurchased 4,000,000 shares of stock from the Company's former Chief
Executive Officer and his family for $5,200,000. The repurchased shares are
recorded as treasury stock in the accompanying December 31, 1997 balance sheet.
The shares were retired during 1998.
The Company had participated in two rounds of financing and has invested
$1,000,000 in a minority interest in preferred stock of a start-up multimedia
product company. The Company had also advanced this
F-33
<PAGE> 175
TSENG LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
entity $359,000 in the form of a secured loan. In connection with an additional
round of financing, which closed in the first quarter of 1997, the Company
agreed to significant dilution in its ownership percentage and to forgive 50% of
the secured note, the balance of which was repaid during 1997. The write-down of
this investment and impact of the debt forgiveness is included in the one-time
charge for 1996 described in Note 3. Sales to this entity were approximately
$180,000, $364,000 and $47,000 for the years ended December 31, 1995, 1996 and
1997, respectively, and $38,650 and $0 for the six-month periods ended June 30,
1997 and 1998, respectively.
The Company had entered into a split-dollar insurance agreement with a
trust established by Jack Tseng pursuant to which the Company advance funded the
premium costs of a whole life insurance policy that pays a death benefit to the
trust of not less than $10 million upon the death of Mr. Tseng. The premium
advances are secured by a note and a collateral assignment agreement with
respect to the death benefit payable thereunder. This agreement was terminated
in November 1997 and the total premium advances ($504,000 at December 31, 1997)
were repaid to the Company in January 1998. The premium advances at December 31,
1997 are included in other receivables in the accompanying balance sheet.
10. SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS:
<TABLE>
<CAPTION>
BALANCE, CHARGES DEDUCTIONS BALANCE,
BEGINNING TO FROM END
OF PERIOD EXPENSE RECOVERIES RESERVE OF PERIOD
--------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
Reserve for doubtful accounts......... $168 $276 $2 $ (57) $389
==== ==== == ===== ====
December 31, 1996:
Reserve for doubtful accounts......... $678 $154 $-- $(664) $168
==== ==== == ===== ====
December 31, 1995:
Reserve for doubtful accounts......... $861 $363 $-- $(546) $678
==== ==== == ===== ====
</TABLE>
F-34
<PAGE> 176
APPENDIX A -- AGREEMENT AND PLAN OF REORGANIZATION
A-1
<PAGE> 177
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN:
TSENG LABS, INC.
A UTAH CORPORATION,
AND
CELL PATHWAYS, INC.,
A DELAWARE CORPORATION
DATED AS OF JUNE 23, 1998
- --------------------------------------------------------------------------------
<PAGE> 178
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. DESCRIPTION OF TRANSACTION ........................................................... 1
1.1 Formation of Merger Subsidiaries ............................................ 1
1.2 The Mergers ................................................................. 2
1.3 Closing; Effective Time ..................................................... 2
1.4 Effect of the Mergers ....................................................... 2
1.5 Subsequent Actions .......................................................... 3
1.6 Certificate of Incorporation and Bylaws; Directors and Officers ............. 3
1.7 Conversion of Stock; Options and Warrants ................................... 4
1.8 CPI Charter Amendment ....................................................... 8
2. REPRESENTATIONS AND WARRANTIES OF TARGET ............................................. 8
2.1 Due Organization; Subsidiaries .............................................. 8
2.2 Articles of Incorporation and Bylaws ........................................ 9
2.3 Capitalization .............................................................. 9
2.4 SEC Filings; Financial Statements ........................................... 10
2.5 Absence of Changes .......................................................... 11
2.6 Title to Assets ............................................................. 11
2.7 Real Property; Equipment; Leasehold ......................................... 11
2.8 Proprietary Assets .......................................................... 12
2.9 Material Contracts .......................................................... 12
2.10 Liabilities.................................................................. 14
2.11 Compliance with Legal Requirements........................................... 14
2.12 Certain Business Practices................................................... 14
2.13 Governmental Authorizations.................................................. 14
2.14 Tax Matters.................................................................. 14
2.15 Employee and Labor Matters; Benefit Plans.................................... 16
2.16 Environmental Matters........................................................ 17
2.17 Insurance.................................................................... 18
2.18 Transactions with Affiliates................................................. 18
2.19 Legal Proceedings; Orders.................................................... 18
</TABLE>
i.
<PAGE> 179
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
2.20 Authority; Binding Nature of Agreement....................................... 19
2.21 No Existing Discussions...................................................... 19
2.22 Vote Required................................................................ 19
2.23 Non-Contravention; Consents.................................................. 19
2.24 Fairness Opinion............................................................. 20
2.25 Valid Issuance; Reservation of Shares........................................ 20
2.26 Financial Advisor............................................................ 20
2.27 Full Disclosure.............................................................. 21
3 REPRESENTATIONS AND WARRANTIES OF CPI AND HOLDCO ..................................... 21
3.1 Organization; Good Standing; Qualification .................................. 21
3.2 Certificate of Incorporation and Bylaws ..................................... 22
3.3 Holdco ...................................................................... 22
3.4 Capitalization .............................................................. 22
3.5 Financial Statements ........................................................ 23
3.6 Absence of Changes .......................................................... 24
3.7 Valid Issuance .............................................................. 24
3.8 Title to Assets ............................................................. 24
3.9 Real Property; Equipment; Leasehold ......................................... 24
3.10 Proprietary Assets........................................................... 25
3.11 Material Contracts........................................................... 25
3.12 Liabilities.................................................................. 27
3.13 Compliance with Legal Requirements........................................... 27
3.14 Certain Business Practices................................................... 28
3.15 Governmental Authorizations.................................................. 28
3.16 Tax Matters.................................................................. 28
3.17 Employee and Labor Matters; Benefit Plans.................................... 29
3.18 Environmental Matters........................................................ 31
3.19 Insurance.................................................................... 31
3.20 Transactions with Affiliates................................................. 31
</TABLE>
ii.
<PAGE> 180
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.21 Legal Proceedings; Orders.................................................... 32
3.22 Authority; Binding Nature of Agreement....................................... 32
3.23 No Existing Discussions...................................................... 33
3.24 Vote Required................................................................ 33
3.25 Non-Contravention; Consents.................................................. 33
3.26 Financial Advisor............................................................ 34
3.27 Full Disclosure.............................................................. 34
4 CERTAIN COVENANTS OF THE PARTIES ..................................................... 35
4.1 Access and Investigation; Confidentiality ................................... 35
4.2 Operation of Target's Business .............................................. 35
4.3 Operation of CPI's Business ................................................. 37
4.4 No Solicitation by Target ................................................... 39
4.5 No Solicitation by CPI ...................................................... 40
5 ADDITIONAL COVENANTS OF THE PARTIES .................................................. 42
5.1 Registration Statements; Joint Proxy Statement .............................. 42
5.2 CPI Stockholders' Meeting ................................................... 42
5.3 Target Stockholders' Meeting ................................................ 44
5.4 Regulatory Approvals ........................................................ 45
5.5 Continuation of Target D&O Insurance ........................................ 45
5.6 Additional Agreements ....................................................... 45
5.7 Disclosure .................................................................. 45
5.8 Tax Matters ................................................................. 46
5.9 Resignation of Officers and Directors ....................................... 46
5.10 FIRPTA Matters............................................................... 46
5.11 Affiliate Agreements......................................................... 46
5.12 Post Merger Holdco Board of Directors........................................ 46
5.13 Registration Rights.......................................................... 47
5.14 CPI Redeemable Preferred Stock............................................... 47
5.15 Market Stand-off Agreement................................................... 47
</TABLE>
iii.
<PAGE> 181
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.16 Nasdaq Listing............................................................... 47
6 CONDITIONS PRECEDENT TO OBLIGATIONS OF CPI ........................................... 47
6.1 Accuracy of Representations ................................................. 47
6.2 Performance of Covenants .................................................... 48
6.3 Effectiveness of Registration Statement ..................................... 48
6.4 Stockholder Approval ........................................................ 48
6.5 Documents ................................................................... 48
6.6 No Material Adverse Change .................................................. 48
6.7 No Restraints ............................................................... 48
6.8 Delivery of Affiliates' Agreements .......................................... 49
6.9 Consents. ................................................................... 49
6.10 Registration................................................................. 49
6.11 Nasdaq Listing............................................................... 49
6.12 No Governmental Litigation................................................... 49
6.13 No Other Litigation.......................................................... 49
7 CONDITIONS PRECEDENT TO OBLIGATIONS OF TARGET .........................................50
7.1 Accuracy of Representations ................................................. 50
7.2 Performance of Covenants .....................................................50
7.3 Effectiveness of Registration Statement ......................................50
7.4 Stockholder Approval ........................................................ 50
7.5 Consents .................................................................... 50
7.6 Documents ................................................................... 50
7.7 No Material Adverse Change .................................................. 51
7.8 Directors ................................................................... 51
7.9 Registration ................................................................ 51
7.10 Nasdaq Listing............................................................... 51
7.11 Delivery of Affiliates' Agreements........................................... 52
7.12 No Restraints................................................................ 52
7.13 No Governmental Litigation................................................... 52
</TABLE>
iv.
<PAGE> 182
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
7.14 No Other Litigation.......................................................... 52
7.15 Market Stand-Off Agreements.................................................. 52
8 TERMINATION .......................................................................... 52
8.1 Termination ................................................................. 52
8.2 Effect of Termination ....................................................... 53
8.3 Expenses; Termination Fees .................................................. 54
9 MISCELLANEOUS PROVISIONS ............................................................. 55
9.1 Amendment ................................................................... 55
9.2 Waiver ...................................................................... 55
9.3 No Survival of Representations and Warranties ............................... 55
9.4 Entire Agreement; Counterparts; Applicable Law .............................. 55
9.5 Jury Waiver ................................................................. 55
9.6 Attorneys' Fees ............................................................. 56
9.7 Assignability ............................................................... 56
9.8 Notices ..................................................................... 56
9.9 Cooperation ................................................................. 57
9.10 Construction................................................................. 57
</TABLE>
v.
<PAGE> 183
EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit A - Certain Definitions
Exhibit B - Form of Certificate of Incorporation of Holdco Merger Company
Exhibit C - Form of CPI Charter Amendment to Restated Certificate of Incorporation
of Cell Pathways, Inc.
</TABLE>
vi.
<PAGE> 184
Appendix A
AGREEMENT AND
PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made and
entered into as of June 23, 1998, by and between CELL PATHWAYS, INC., a Delaware
corporation ("CPI") and TSENG LABS, INC., a Utah corporation ("TARGET"). Certain
capitalized terms used in this Agreement are defined in Exhibit A.
RECITALS
WHEREAS, Holdco Company ("HOLDCO") is a Delaware corporation to be
formed for the purpose of effectuating the transactions contemplated hereby;
WHEREAS, the Boards of Directors of CPI and Target have each determined
that it is in the best interests of their respective stockholders that each
corporation become a subsidiary of Holdco pursuant to the Mergers (as defined in
Section 1.2 below) and desire to make certain representations, warranties and
agreements in connection with the Mergers;
WHEREAS, the Boards of Directors of CPI and Target have each determined
that the Mergers and the other transactions contemplated hereby are consistent
with, and in furtherance of, their respective business strategies and goals and
have each approved the Mergers upon the terms and conditions set forth herein;
WHEREAS, for federal income tax purposes, it is intended that the
formation of Holdco and the Mergers shall constitute one or more tax-free
transactions under the Internal Revenue Code of 1986, as amended (the "CODE");
and
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
1. DESCRIPTION OF TRANSACTION
1.1 FORMATION OF MERGER SUBSIDIARIES. CPI will cause the following to
occur: (i) Holdco to be formed under the Delaware General Corporation Law
("DGCL"), (ii) a wholly owned subsidiary of Holdco to be formed to be merged
into CPI ("C-SUB"); and (iii) a wholly owned subsidiary of Holdco to be formed
to be merged into Target ("T-SUB," and together with C-Sub, the "MERGER
SUBSIDIARIES"), in each case as set forth in Section 1.2 hereof. Each of the
Merger Subsidiaries will be formed solely to facilitate the Mergers and will
conduct no business or activity other than in connection with the Mergers. CPI
and Target will cause (i) Holdco and the Merger Subsidiaries to execute and
deliver a joinder to this Agreement pursuant to Section 251 of the DGCL, and
(ii) Holdco to execute formal written consents under Section 228 of the
1.
<PAGE> 185
DGCL as the sole stockholder of each of the Merger Subsidiaries, approving the
execution, delivery and performance of this Agreement by each of the Merger
Subsidiaries.
1.2 THE MERGERS. At the Effective Time (as defined in Section 1.3 hereof)
and subject to and upon the terms and conditions of this Agreement and the DGCL:
(i) C-Sub shall be merged with and into CPI, the separate corporate existence of
C-Sub shall cease, and CPI shall continue as the surviving corporation that
shall be a wholly owned subsidiary of Holdco; and (ii) T-Sub shall be merged
with and into Target, the separate corporate existence of T-Sub shall cease, and
Target shall continue as the surviving corporation that shall be a wholly owned
subsidiary of Holdco. The mergers described in clauses (i) and (ii) of the
immediately preceding sentence are herein collectively referred to as the
"MERGERS" and each individually as a "MERGER." CPI and Target, as the surviving
corporations after the Mergers, are herein collectively referred to as the
"SURVIVING CORPORATIONS" and each individually as a "SURVIVING CORPORATION" and
C-Sub and T-Sub as the non-surviving corporations after the Mergers are herein
sometimes collectively referred to as the "MERGED CORPORATIONS" and each as a
"MERGED CORPORATION." Holdco, CPI, Target, and, individually after entering into
a joinder to this Agreement, Holdco, C-Sub and T-Sub, are herein referred to
collectively as the "PARTIES" and each individually as a "PARTY."
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "CLOSING") shall take place at the offices
of Cell Pathways, Inc at 702 Electronic Drive, Horsham, PA 19044 at 10:00 a.m.
on a date to be agreed by CPI and Target (the "CLOSING DATE"), which shall be no
later than the tenth business day after the satisfaction or waiver of the
conditions set forth in Sections 6 and 7. Contemporaneously with or as promptly
as practicable after the Closing, the parties shall cause the Mergers to be
consummated concurrently by filing a properly executed Certificate of Merger
with the Secretary of State of the State of Delaware and properly executed
Articles of Merger with the Secretary of State of Utah, respectively, with
respect to each of the Mergers. The Mergers shall take effect at the time such
Certificate of Merger and Articles of Merger are filed with the Secretaries of
State of the State of Delaware and the State of Utah, respectively (the
"EFFECTIVE TIME").
1.4 EFFECT OF THE MERGERS. At the Effective Time, the effect of the Mergers
shall be as provided in the applicable provisions of DGCL and the Utah Business
Corporation Act, respectively. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time (a) all the property, rights,
privileges, powers and franchises of CPI and C-Sub shall continue with, or vest
in, as the case may be, CPI as the Surviving Corporation, and all debts,
liabilities and duties of CPI and C-Sub shall continue to be, or become, as the
case may be, the debts, liabilities and duties of CPI as the Surviving
Corporation and (b) all the property, rights, privileges, powers and franchises
of Target and T-Sub shall continue with, or vest in, as the case may be, Target
as the Surviving Corporation, and all debts, liabilities and duties of Target
and T-Sub shall continue to be, or become, as the case may be, the debts,
liabilities and duties of Target as the Surviving Corporation. As of the
Effective Time, each of the Surviving Corporations shall be a direct
wholly-owned subsidiary of Holdco. At the Effective Time, Holdco shall assume
the 1997 Equity Incentive Plan of CPI, the 1997 Non-Employee Directors Stock
Option Plan of CPI, the approved Employee Stock Purchase Plan of CPI and the
Cell
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Pathways, Inc. 1995 Stock Award Plan and all stock options outstanding under
such plans. At the Effective Time, Holdco shall also assume the Target 1991
Stock Option Plan, the Target 1995 Stock Option Plan and the Target 1991 Special
Directors Stock Option Plan (each a "TARGET OPTION PLAN," and collectively the
"TARGET OPTION PLANS") and all stock options outstanding under such plans.
1.5 SUBSEQUENT ACTIONS. If, at any time after the Effective Time, either of
the Surviving Corporations shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to continue in, vest, perfect or confirm of record or otherwise in
such Surviving Corporation its right, title or interest in, to or under any of
the rights, properties, privileges, franchises or assets of either of its
constituent corporations acquired or to be acquired by such Surviving
Corporation as a result of, or in connection with, one of the Mergers or
otherwise to carry out this Agreement, the officers and directors of such
Surviving Corporation shall be directed and authorized to execute and deliver,
in the name and on behalf of either of such constituent corporations, all such
deeds, bills of sale, assignments and assurances and to take and do, in the name
and on behalf of each of such corporations or otherwise, all such other actions
and things as may be necessary or desirable to vest, perfect or confirm any and
all right, title and interest in, to and under such rights, properties,
privileges, franchises or assets in such Surviving Corporation or otherwise to
carry out this Agreement.
1.6 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS.
(a) The respective Certificate of Incorporation of each of C-Sub and
T-Sub shall become the Certificates of Incorporation of CPI and Target,
respectively, as the Surviving Corporations.
(b) The respective Bylaws of each of C-Sub and T-Sub shall become the
Bylaws of CPI and Target, respectively, as the Surviving Corporation.
(c) The officers and directors of CPI immediately prior to the
Effective Time shall continue to serve in their respective positions of CPI as
the Surviving Corporation from and after the Effective Time. The officers and
directors of T-Sub immediately prior to the Effective Time shall serve in their
respective positions of Target as the Surviving Corporation from and after the
Effective Time. In addition, the officers of CPI immediately prior to the
Effective Time shall become the officers of Holdco at the Effective Time and the
directors of CPI immediately prior to the Effective Time together with the
persons to be designated pursuant to Section 5.12 below shall be the directors
of Holdco after the Effective Time.
(d) On the Effective Date, Holdco's Certificate of Incorporation will
be amended to change Holdco's name to "Cell Pathways, Inc." and CPI's
Certificate of Incorporation will be amended to change CPI's name to "CPI, Inc."
3.
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1.7 CONVERSION OF STOCK; OPTIONS AND WARRANTS.
The manner and basis of converting the shares of common stock and
preferred stock, where applicable, of the Surviving Corporations and of the
Merged Corporations at the Effective Time, by virtue of the Mergers and without
any action on the part of any of the Parties or the holder of any of such
securities, shall be as hereinafter set forth.
(a) CONVERSION OF SHARES.
(i) Each share of CPI Common Stock, par value $0.01
per share ("CPI COMMON STOCK"), and CPI Preferred Stock, par value $0.01 per
share ("CPI PREFERRED STOCK"), issued and outstanding immediately before the
Effective Time (excluding those held in the treasury of CPI and those owned by
Target) and all rights in respect thereof, shall at the Effective Time, without
any action on the part of any holder thereof, forthwith cease to exist and be
converted into the right to receive one share of common stock, par value $.01
per share, of Holdco ("HOLDCO COMMON STOCK") (such ratio of Holdco Common Stock
to CPI Stock being herein referred to as the "CPI EXCHANGE RATIO").
(ii) Each share of Target Common Stock, par value
$.005 per share ("TARGET COMMON STOCK") issued and outstanding immediately
before the Effective Time (excluding those held in the treasury of Target and
those owned by CPI) and all rights in respect thereof, shall at the Effective
Time, without any action on the part of any holder thereof, forthwith cease to
exist and be converted into the right to receive .3631326 of a share of Holdco
Common Stock (such ratio of Holdco Common Stock to Target Common Stock being
herein referred to as the "TARGET EXCHANGE RATIO"; and the CPI Exchange Ratio
and the Target Exchange Ratio being referred to herein collectively as the
"EXCHANGE RATIOS").
(iii) Commencing immediately after the Effective
Time, each certificate that, immediately prior to the Effective Time,
represented issued and outstanding shares of CPI Common Stock and CPI Preferred
Stock ("CPI SHARES") or Target Common Stock ("TARGET SHARES" and, together with
the CPI Shares, the "SHARES"), shall evidence ownership of Holdco Common Stock
on the basis hereinbefore set forth, but subject to the limitations set forth in
this Section 1.7.
(b) CANCELLATION OF TREASURY SHARES AND OF OUTSTANDING HOLDCO COMMON
STOCK.
(i) At the Effective Time, each share of CPI Common
Stock and CPI Preferred Stock held in the treasury of CPI or owned by Target
immediately prior to the Effective Time, and each share of Target Common Stock
held in the treasury of Target or owned by CPI immediately prior to the
Effective Time, shall be canceled and retired and no shares of stock or other
securities of Holdco or either of the Surviving Corporations shall be issuable,
and no payment or other consideration shall be made, with respect thereto.
(ii) At the Effective Time, any shares of Holdco
Common Stock issued prior to the Effective Time shall be canceled and retired
and no shares of stock or other securities
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of Holdco or any other corporation shall be issuable, and no payment or other
consideration shall be made, with respect thereto.
(c) CONVERSION OF COMMON STOCK OF THE MERGED CORPORATIONS INTO COMMON
STOCK OF THE SURVIVING CORPORATIONS.
(i) At the Effective Time, each share of Common
Stock, par value $0.01 per share, of C-Sub issued and outstanding immediately
prior to the Effective Time, and all rights in respect thereof, shall, without
any action on the part of Holdco, forthwith cease to exist and be converted into
one validly issued, fully paid and nonassessable share of Common Stock of CPI,
par value $0.01 per share, as one of the Surviving Corporations (the "NEW CPI
COMMON STOCK"). Immediately after the Effective Time and upon surrender by
Holdco of the certificate representing the shares of the common stock of C-Sub,
CPI as one of the Surviving Corporations shall deliver to Holdco an appropriate
certificate or certificates representing the New CPI Common Stock created by
conversion of the common stock of C-Sub owned by Holdco.
(ii) At the Effective Time, each share of Common
Stock, par value $0.01 per share, of T-Sub issued and outstanding immediately
prior to the Effective Time, and all rights in respect thereof, shall, without
any action on the part of Holdco, forthwith cease to exist and be converted into
one validly issued, fully paid and nonassessable share of common stock of
Target, par value $0.01 per share, as one of the Surviving Corporations (the
"NEW TARGET COMMON STOCK"). Immediately after the Effective Time and upon
surrender by Holdco of the certificate representing the shares of the common
stock of T-Sub, Target as one of the Surviving Corporations shall deliver to
Holdco an appropriate certificate or certificates representing the New Target
Common Stock created by conversion of the common stock of T-Sub owned by Holdco.
(d) EXCHANGE OF SHARES OTHER THAN TREASURY SHARES. Subject to the
terms and conditions hereof, at or prior to the Effective Time, Holdco shall
appoint an exchange agent to effect the exchange of Shares for Holdco Common
Stock in accordance with the provisions of this Section 1.7 (the "EXCHANGE
AGENT"). From time to time after the Effective Time, Holdco shall deposit, or
cause to be deposited, certificates representing Holdco Common Stock for
conversion of Shares in accordance with the provisions of Section 1.7(a) hereof
(such certificates, together with any dividends or distributions with respect
thereto, being herein referred to as the "EXCHANGE FUND"). Commencing
immediately after the Effective Time and until the appointment of the Exchange
Agent shall be terminated, each holder of a certificate or certificates
theretofore representing Shares may surrender the same to the Exchange Agent,
and, after the appointment of the Exchange Agent shall be terminated, any such
holder may surrender any such certificate to Holdco. Such holder shall be
entitled upon such surrender to receive in exchange therefor a certificate or
certificates representing the number of full shares of Holdco Common Stock into
which the Shares theretofore represented by the certificate or certificates so
surrendered shall have been converted in accordance with the provisions of
Section 1.7(a) hereof, together with a cash payment in lieu of fractional
shares, if any, in accordance with Section 1.7(f) hereof, and all such shares of
Holdco Common Stock shall be deemed to have been issued at the
5.
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Effective Time. Until so surrendered and exchanged, each outstanding certificate
that, prior to the Effective Time, represented issued and outstanding Shares
shall be deemed for all corporate purposes of Holdco, other than the payment of
dividends and other distributions, if any, to evidence ownership of the number
of full shares of Holdco Common Stock into which the Shares theretofore
represented thereby shall have been converted at the Effective Time. Unless and
until any such certificate theretofore representing Shares is so surrendered, no
dividend or other distribution, if any, payable to the holders of record of
Holdco Common Stock as of any date subsequent to the Effective Time shall be
paid to the holder of such certificate in respect thereof. Upon the surrender of
any such certificate theretofore representing Shares, however, the record holder
of the certificate or certificates representing shares of Holdco Common Stock
issued in exchange therefor shall receive from the Exchange Agent or from
Holdco, as the case may be, payment of the amount of dividends and other
distributions, if any, which as of any date subsequent to the Effective Time and
until such surrender shall have become payable with respect to such number of
shares of Holdco Common Stock ("PRE-SURRENDER DIVIDENDS"). No interest shall be
payable with respect to the payment of Pre-Surrender Dividends upon the
surrender of certificates theretofore representing Shares. After the appointment
of the Exchange Agent shall have been terminated, such holders of Holdco Common
Stock that have not received payment of Pre-Surrender Dividends shall look only
to Holdco for payment thereof. Notwithstanding the foregoing provisions of this
Section 1.7(d), neither the Exchange Agent nor any Party shall be liable to a
holder of Shares for any Holdco Common Stock or dividends or distributions
thereon delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law or to a transferee pursuant to Section 1.7(e)
hereof.
(c) TRANSFER BOOKS. The stock transfer books of CPI with respect to
the CPI Shares and the stock transfer books of Target with respect to the Target
Shares shall each be closed at the Effective Time and no transfer of any Shares
will thereafter be recorded on any of such stock transfer books. In the event of
a transfer of ownership of Shares that is not registered in the stock transfer
records of CPI or Target, as the case may be, at the Effective Time, a
certificate or certificates representing the number of full shares of Holdco
Common Stock into which such Shares shall have been converted shall be issued to
the transferee together with a cash payment in lieu of fractional shares, if
any, in accordance with Section 1.7(f) hereof, and a cash payment in the amount
of Pre-Surrender Dividends, if any, in accordance with Section 1.7(d) hereof, if
the certificate or certificates representing such Shares is or are surrendered
as provided in Section 1.7(d) hereof, accompanied by all documents required to
evidence and effect such transfer and by evidence of payment of any applicable
stock transfer tax.
(f) NO FRACTIONAL SHARE CERTIFICATES.
(i) No scrip or fractional share certificate for Holdco Common
Stock will be issued upon the surrender for exchange of certificates evidencing
Shares. CPI and Target shall cause Holdco to pay to the Exchange Agent an amount
sufficient for the Exchange Agent to pay each holder of Target Common Stock an
amount in cash equal to the product obtained by multiplying (i) the fractional
share interest to which such holder would otherwise be entitled (after taking
into account all shares of Target Common Stock held at the Effective Time by
such holder) by (ii) the closing price of a share of Target Common Stock on the
Nasdaq National
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Market on the trading day immediately preceding the Effective Time divided by
the Target Exchange Ratio.
(ii) As soon as practicable after the determination
of the amount of cash, if any, to be paid to holders of Target Common Stock with
respect to any fractional share interests, the Exchange Agent shall make
available such amounts, net of any required withholding, to such holders of
Target Common Stock, subject to and in accordance with the terms of Section
1.7(d) hereof.
(iii) Any portion of the Exchange Fund that remains
undistributed for six months after the Effective Time shall be delivered to
Holdco, upon demand, and any holders of CPI Common Stock, CPI Preferred Stock or
Target Common Stock who have not theretofore complied with the provisions of
this Section 1.7 shall thereafter look only to Holdco for satisfaction of their
claims for Holdco Common Stock or any cash in lieu of fractional shares of
Holdco Common Stock and any Pre-Surrender Dividends.
(g) OPTIONS AND WARRANTS.
(i) At the Effective Time, each option or warrant
granted by CPI to purchase shares of CPI Common Stock or CPI Preferred Stock,
and each Target Option, which is outstanding and unexercised immediately prior
to the Effective Time, shall be assumed by Holdco and be converted into an
option or warrant to purchase shares of Holdco Common Stock in such amount and
at such exercise price as provided below and otherwise having the same terms and
conditions as are in effect immediately prior to the Effective Time (except to
the extent that such terms, conditions and restrictions may be altered in
accordance with their terms as a result of the transactions contemplated
hereby):
(1) the number of shares of Holdco Common Stock to be
subject to the new option or warrant shall be equal to the product of (x) the
number of shares of CPI Common Stock, CPI Preferred Stock or Target Common Stock
subject to the original option or warrant and (y) the CPI Exchange Ratio (if the
original option or warrant related to CPI Common Stock or CPI Preferred Stock)
or the Target Exchange Ratio (if the original option or warrant related to
Target Common Stock), respectively;
(2) the exercise price per share of Holdco Common Stock
under the new option or warrant shall be equal to (x) the exercise price per
share of the CPI Common Stock, CPI Preferred Stock or Target Common Stock under
the original option or warrant divided by (y) the CPI Exchange Ratio (if the
original option or warrant related to CPI Common Stock or CPI Preferred Stock)
or the Target Exchange Ratio (if the original option or warrant related to
Target Common Stock); and
(3) upon each exercise of options or warrants by a holder
thereof, the aggregate number of shares of Holdco Common Stock deliverable upon
such exercise shall be rounded down, if necessary, to the nearest whole share
and the aggregate exercise price shall be rounded up, if necessary, to the
nearest cent. The adjustments provided
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herein with respect to any options that are "incentive stock options" (as
defined in Section 422 of the Code) shall be effected in a manner consistent
with Section 424(a) of the Code.
(h) CERTAIN ADJUSTMENTS. If between the date of this Agreement and the
Effective Time, the outstanding shares of CPI Common Stock, CPI Preferred Stock
or of Target Common Stock shall be changed into a different number of shares by
reason of any reclassification, recapitalization, split-up, combination or
exchange of shares, or any dividend payable in stock or other securities shall
be declared thereon with a record date within such period, the exchange ratio
established pursuant to the provisions of Section 1.7(a) hereof shall be
adjusted accordingly to provide to the holders of CPI Common Stock, CPI
Preferred Stock and Target Common Stock the same economic effect as contemplated
by this Agreement prior to such reclassification, recapitalization, split-up,
combination, exchange or dividend.
1.8 CPI CHARTER AMENDMENT. The Board of Directors of CPI has approved an
amendment to CPI's Certificate of Incorporation attached hereto as Exhibit C
(the "CPI CHARTER AMENDMENT"), in order to effectuate the consummation of the
Mergers. CPI shall file the CPI Charter Amendment immediately prior to the
Effective Time.
2. REPRESENTATIONS AND WARRANTIES OF TARGET
For purposes of this Section 2, "TARGET" shall mean each of Target and
its Subsidiaries, collectively. Except as set forth in the Target Disclosure
Schedule or the Target SEC Documents (as defined in Section 2.4 below), Target
represents and warrants to Holdco and CPI, as follows:
2.1 DUE ORGANIZATION; SUBSIDIARIES
(a) Target is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all necessary power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own, lease and use its
assets in the manner in which its assets are currently owned, leased and used;
and (iii) to perform its obligations under all contracts by which it is bound.
Target is qualified to do business as a foreign corporation, and is in good
standing, under the laws of all jurisdictions where the nature of its business
requires such qualification except in jurisdictions where the failure to so
qualify, individually and in the aggregate, would not have a Material Adverse
Effect on Target.
(b) Except for those Entities identified in the Target Disclosure
Schedule, Target has no Subsidiaries; and neither Target nor any Entity
identified in the Target Disclosure Schedule owns any capital stock of, or any
equity interest of any nature in, any other Entity other than the Entities
identified in the Target Disclosure Schedule. Target has not agreed or is not
obligated to make or is not bound by any Contract to make any future investment
in or capital contribution to any other Entity. Except as set forth on the
Target Disclosure Schedule, Target has not, at any time, been a general partner
of any general partnership, limited partnership, or other Entity.
8.
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2.2 ARTICLES OF INCORPORATION AND BYLAWS. Target has delivered to CPI
complete and accurate copies of the Articles of Incorporation, Bylaws, and other
charter and organizational documents of the Target, including all amendments
thereto.
2.3 CAPITALIZATION
(a) The authorized capital stock of Target consists of: 50,000,000
shares of Target Common Stock, par value $0.005, of which, as of the date hereof
15,628,587 shares were issued and outstanding and 544,250 shares were held in
its treasury. All of the outstanding shares of Target Common Stock have been
duly authorized and validly issued, and are fully paid and nonassessable. Except
as set forth in the Target Disclosure Schedule: (i) none of the outstanding
shares of Target Common Stock is entitled or subject to any preemptive right,
right of participation in future financings, right to maintain a percentage
ownership position, or any similar right; (ii) none of the outstanding shares of
Target Common Stock is subject to any right of first refusal in favor of Target;
and (iii) there is no Target Contract relating to the voting or registration of,
or restricting any Person from purchasing, selling, pledging or otherwise
disposing of (or granting any option or similar right with respect to), any
shares of Target Common Stock. Target is not under any obligation, or is not
bound by any Contract pursuant to which it may become obligated, to repurchase,
redeem or otherwise acquire any outstanding shares of Target Common Stock or any
other securities of Target, other than the stockholder rights plan disclosed
pursuant to Section 2.3(c) hereof.
(b) As of the date hereof: (i) 957,427 shares of Target Common Stock
are reserved for future issuance pursuant to stock options granted and
outstanding under Target's 1995 Stock Option Plan, (ii) 80,000 shares of Target
Common Stock are reserved for future issuance pursuant to stock options granted
and outstanding under Target's 1991 Special Directors' Stock Option Plan, and
(iii) 434,777 shares of Target Common Stock are reserved for future issuance
pursuant to stock options granted and outstanding under Target's 1991 Stock
Option Plan. The Target Disclosure Schedule sets forth the following information
with respect to each Target Option outstanding as of the date of this Agreement:
(i) the particular plan pursuant to which such Target Option was granted; (ii)
the name of the optionee; (iii) the number of shares of Target Common Stock
subject to such Target Option; (iv) the exercise price of such Target Option;
(v) the date on which such Target Option was granted; (vi) the extent to which
such Target Option is vested and exercisable as of June 23, 1998; and (vii) the
date on which such Target Option expires. Target has delivered to CPI accurate
and complete copies of all stock option plans and forms of option grant pursuant
to which Target has granted any outstanding stock options. Target has no
outstanding stock appreciation rights.
(c) Except as set forth in the Target Disclosure Schedule, there is
no: (i) outstanding subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital stock or other
securities of Target or any subsidiary of Target; (ii) outstanding security,
instrument or obligation that is or may become convertible into or exchangeable
for any shares of the capital stock or other securities of Target or any
subsidiary of Target; (iii) stockholder rights plan (or similar plan commonly
referred to as a "poison pill") or Contract under which Target or any subsidiary
of Target is or may become obligated to sell or
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otherwise issue any shares of its capital stock or any other securities; or (iv)
condition or circumstance that may reasonably give rise to or provide a basis
for the assertion of a claim by any Person to the effect that such Person is
entitled to acquire or receive any shares of capital stock or other securities
of Target or any subsidiary of Target. There are no bonds, debentures, notes or
other indebtedness of Target outstanding having the right to vote (or
convertible into securities having the right to vote) on any matters on which
the stockholders of Target have the right to vote.
(d) All outstanding securities of Target, including shares of Target
Common Stock, and Target Options, have been issued and granted in all material
respects in compliance with (i) all applicable securities laws and other
applicable Legal Requirements, and (ii) all requirements set forth in applicable
Contracts.
2.4 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Target has made available to CPI accurate and complete copies
(excluding copies of exhibits) of all registration statements, proxy statements
and other statements, reports, schedules, forms and other documents filed by
Target with the SEC since January 1, 1997 (the "TARGET SEC DOCUMENTS"). All
statements, reports, schedules, forms and other documents required to have been
filed by Target with the SEC have been so filed by Target on a timely basis. As
of the time it was filed with the SEC (or, if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such filing): (i) each
of the Target SEC Documents complied in all material respects with the
applicable requirements of the Securities Act or the Exchange Act (as the case
may be); and (ii) none of the Target SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) Except as set forth in the Target Disclosure Schedule, the
consolidated financial statements (including any related notes) contained in the
Target SEC Documents (the "TARGET FINANCIAL STATEMENTS"): (i) complied as to
form in all material respects with the published rules and regulations of the
SEC applicable thereto; (ii) were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
covered (except as may be indicated in the notes to such financial statements
and, in the case of unaudited statements, as permitted by Form 10-Q of the SEC,
and except that unaudited financial statements may not contain footnotes and are
subject to normal and recurring year-end audit adjustments that will not,
individually or in the aggregate, be material in amount); (iii) fairly present
the financial position of Target as of the respective dates thereof and the
results of operations and cash flows of Target for the periods covered thereby;
and (iv) reflect any contingent liabilities to the extent required to be
reflected therein.
(c) Since December 31, 1997, Target and its subsidiaries have not
incurred any liabilities of the type required under GAAP to be recorded on a
balance sheet or in the footnotes thereto except liabilities incurred in the
ordinary course of business.
10.
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2.5 ABSENCE OF CHANGES. Except as set forth in the Target Disclosure
Schedule or the Target SEC documents, since December 31, 1997:
(a) there has not been any change that has had a Material Adverse
Effect on the business, condition, capitalization, assets, liabilities,
operations or financial performance of Target, and no event has occurred that
could reasonably be expected to have a Material Adverse Effect on Target;
(b) there has not been any material loss, damage or destruction to, or
any material interruption in the use of, any of the assets of Target that are
necessary for the conduct of Target's business as currently conducted (whether
or not covered by insurance);
(c) there has not been any transaction, commitment, or other event or
condition (financial or otherwise) that would be prohibited by Section
4.2(b)(i), (iv), (ix), (x) or (xi) if it were to be effected, accepted or were
to take place between the date hereof and the Effective Time.
2.6 TITLE TO ASSETS. Except as set forth in the Target Disclosure Schedule
or the Target SEC Documents, Target owns, and has good, valid and marketable
title to, all assets purported to be owned by it, including: all assets
reflected in their books and records as being owned by Target. All of said
assets are owned by Target free and clear of any Encumbrances, except for (a)
any lien for current taxes not yet due and payable, (b) minor liens that have
arisen in the ordinary course of business and that do not (in any case or in the
aggregate) materially detract from the value of the assets subject thereto or
materially impair the operations of Target, and (c) liens described in the
Target Disclosure Schedule.
2.7 REAL PROPERTY; EQUIPMENT; LEASEHOLD. Except as described in the Target
Disclosure Schedule or the Target SEC Documents:
(a) Target does not own any real property or any material interest in
real property, except for the leasehold created under real property leases set
forth in the Target Disclosure Schedule. Complete and correct copies of such
leases have previously been delivered to CPI by Target.
(b) All material items of equipment and other tangible assets owned by
or leased to Target are reasonably adequate for the uses to which they are being
put, are in good condition and repair (ordinary wear and tear excepted) and are
reasonably adequate for the conduct of the business of Target in the manner in
which such business is currently being conducted and in the manner in which such
business is required to be conducted pursuant to Target Contracts and that are
in effect on the date hereof.
2.8 PROPRIETARY ASSETS.
(a) Target has title, or the right to use, such Proprietary Assets as
are reasonably necessary to enable Target to conduct its business, as presently
conducted.
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(b) Except as set forth on the Target Disclosure Schedule, to the best
of Target's knowledge: (i) none of the Target commercial products and processes
infringes, misappropriates or conflicts with any Proprietary Assets owned or
used by any Person (ii) Target has not received any notice or other
communication (in writing or otherwise) of any actual, alleged, possible or
potential infringement, misappropriation or unlawful or unauthorized use of any
Proprietary Asset owned or used by any other Person; and (iii) no other Person
is infringing, misappropriating or making any unlawful or unauthorized use of
any material Target Proprietary Asset.
2.9 MATERIAL CONTRACTS.
(a) The Target Disclosure Schedule identifies each Target Contract
that constitutes a "TARGET MATERIAL CONTRACT." For purposes of this Agreement,
each of the following shall be deemed to constitute a Target Material Contract:
(i) any Contract relating to the employment of, or the
performance of services by, any director, officer, employee or consultant, and
any Contract pursuant to which Target is or may become obligated to make any
severance, termination, bonus or relocation payment or any similar payment
(other than payments in respect of salary and the grant of standard benefits);
(ii) any Contract that provides for indemnification of any
officer, director, employee or agent;
(iii) any Contract (A) relating to the acquisition, issuance,
voting, registration, sale or transfer of any securities, (B) providing any
Person with any preemptive right, right of participation, right of maintenance
or any similar right with respect to any securities, or (C) providing Target
with any right of first refusal with respect to, or right to repurchase or
redeem, any securities;
(iv) any Contract requiring that Target give any notice, obtain
any consent or provide any information to any Person prior to accepting any
Acquisition Proposal;
(v) any Contract (not otherwise identified in this Section) that
(A) has a term of more than sixty (60) days or that may not be terminated by
Target (without penalty) within sixty (60) days after the delivery of a
termination notice by Target and (B) that contemplates or involves (I) the
payment or delivery of cash or other consideration on or after the date hereof
in an amount or having a value in excess of $100,000 in aggregate payments under
such Contract, or (II) the performance of services on or after the date hereof
having a value in excess of $100,000 in aggregate payments under such Contract;
(vi) any Contract (A) to which any Governmental Body is a party
or under which any Governmental Body has any rights or obligations, or involving
or directly or indirectly benefiting any Governmental Body (including any
subcontract or other Contract between CPI and any contractor or subcontractor to
any Governmental Body) and (B) that contemplates and involves (I) the payment or
delivery of cash or other consideration on or after
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the date hereof in an amount or having a value in excess of $100,000 in
aggregate payments under such Contract, or (B) the performance of services on or
after the date hereof having a value in excess of $100,000 in aggregate payments
under such Contract;
(vii) any open purchase order placed by Target requiring future
aggregate payments in excess of $100,000;
(viii) any Contract (not otherwise identified in this Section),
which would be required as an Exhibit in a registration statement filed under
the Securities Act of 1933.
(b) Each Target Material Contract is valid and in full force and
effect, and is enforceable in accordance with its terms, subject to (i) laws of
general application relating to bankruptcy, insolvency and the relief of
debtors, (ii) rules of law governing specific performance, injunctive relief and
other equitable remedies and (iii) in the case of any Contract with a
Governmental Body, any law applicable thereto.
(c) Except as set forth in the Target Disclosure Schedule: (i) Target
has not materially violated or breached, or committed any material default
under, any Target Material Contract, and, to the best of the knowledge of
Target, no other Person has materially violated or breached, or committed any
material default under, any Target Material Contract; (ii) to the best of the
knowledge of Target, no event has occurred, and no circumstance or condition
exists, that (with or without notice or lapse of time) could reasonably be
expected to (A) result in a material violation or breach of any of the
provisions of any Target Material Contract, (B) give any Person the right to
declare a default or exercise any remedy under any Target Material Contract, (C)
give any Person the right to accelerate the maturity or performance of any
Target Material Contract, or (D) give any Person the right to cancel, terminate
or materially modify any Target Material Contract; (iii) since December 31,
1997, none of Target has received any written notice or other written
communication regarding any actual or possible violation or breach of, default
under, or any intention to terminate, any Target Contract, except for
communication (A) that has subsequently been revoked; or (B) has been received
from a complaining party that has not contacted Target or otherwise, to Target's
knowledge, taken any action with respect to such party's complaint for a period
of more than six months following receipt of the communication; and (iv) Target
has not waived any of its material rights under any Target Material Contract, in
each case where such breach, default, violation or waiver would have a Material
Adverse Effect on Target.
(d) To the best of the knowledge of Target, no Person is
renegotiating, or has the right to renegotiate, any material amount paid or
payable to Target under any Target Material Contract, or any other material term
or provision of any Target Material Contract, including termination provisions.
(e) The Target Disclosure Schedule sets forth a list of all claims
made under any Target Material Contract that are disputed in any material
respect or, to Target's knowledge, where a dispute as to any material matter has
been threatened.
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2.10 LIABILITIES. Target does not have any accrued or contingent
liabilities of a nature required to be reflected in financial statements in
accordance with GAAP, except for: (a) liabilities identified as such in the
Target Financial Statements; (b) normal and recurring liabilities that have been
incurred by Target since December 31, 1997 in the ordinary course of business
and consistent with past practices; and (c) other liabilities that have not had
and could not reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect on Target.
2.11 COMPLIANCE WITH LEGAL REQUIREMENTS. Target is, and, to the best
knowledge of Target, has at all times since inception been, in compliance with
all applicable Legal Requirements, except where the failure to comply with such
Legal Requirements has not had and could not reasonably be expected to have, a
Material Adverse Effect on Target. There is not presently pending any notice or
other communication received by Target from any Governmental Body regarding any
actual or possible violation of, or failure to comply with, any material Legal
Requirement.
2.12 CERTAIN BUSINESS PRACTICES. None of Target nor any director, officer,
agent or employee of Target has (i) used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political activity,
(ii) made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii)
made any other unlawful payment.
2.13 GOVERNMENTAL AUTHORIZATIONS. Target holds all material Governmental
Authorizations necessary to enable them to conduct their respective businesses
in the manner in which such businesses are currently being conducted. All such
Governmental Authorizations are valid and in full force and effect. Target is,
and to the best knowledge of Target, at all times since inception has been, in
substantial compliance with the terms and requirements of such Governmental
Authorizations. To the best knowledge of Target, since inception, none of Target
has received any notice or other communication from any Governmental Body
regarding (a) any actual or possible violation of or failure to comply with any
term or requirement of any material Governmental Authorization, or (b) any
actual or possible revocation, withdrawal, suspension, cancellation, termination
or modification of any material Governmental Authorization or (c) any
requirement to apply for or hold a Governmental Authorization not held by
Target, in each case where such violation, revocation, suspension, cancellation,
termination or modification would have a Material Adverse Effect on Target.
2.14 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of Target
with any Governmental Body with respect to any taxable period ending on or
before the Closing Date (the "TARGET RETURNS") have been or will be filed on or
before the applicable due date (including any extensions of such due date). All
amounts shown on the Target Returns to be due on or before the Closing Date have
been or will be paid on or before the Closing Date.
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(b) Except as set forth on the Target Disclosure Schedule, the Target
Financial Statements fully accrue all actual and contingent liabilities for
Taxes with respect to all periods through the dates thereof in accordance with
GAAP. Target will establish, in the ordinary course of business and consistent
with its past practices, quarterly reserves adequate for the payment of all
Taxes for the applicable periods from December 31, 1997 through the Closing
Date. Since January 1, 1998 no material Tax liability has been incurred other
than in the ordinary course of business.
(c) Except as set forth in the Target Disclosure Schedule, no Target
Return has ever been examined or audited by any Governmental Body. No extension
or waiver of the limitation period applicable to any of the Target Returns has
been granted (by Target or any other Person), and no such extension or waiver
has been requested by Target.
(d) Except as set forth in the Target Disclosure Schedule, no claim or
Legal Proceeding is pending or, to the best of the knowledge of Target, has been
threatened in writing against or with respect to Target in respect of any Tax.
There are no unsatisfied liabilities for Taxes (including liabilities for
interest, additions to tax and penalties thereon and related expenses) with
respect to any notice of deficiency or similar document received by Target
(other than liabilities for Taxes asserted under any such notice of deficiency
or similar document that are being contested in good faith by Target and with
respect to which adequate reserves for payment have been established). There are
no liens for Taxes upon any of the assets of any of Target except liens for
current Taxes not yet due and payable. None of Target has entered into or become
bound by any agreement or consent pursuant to Section 341(f) of the Code. None
of Target has been, and none of Target will be required to include any
adjustment in taxable income for any tax period (or portion thereof) pursuant to
Section 481 or 263A of the Code or any comparable provision under state or
foreign Tax laws as a result of transactions or events occurring, or accounting
methods employed, prior to the Closing. None of Target is nor has been a United
States real property holding corporation within the meaning of Section 897(c)(2)
of the Code. Target has no liabilities for the Taxes of any other Person except
for payroll taxes collected in the ordinary course of business.
(e) Except as set forth in the Target Disclosure Schedule or the
Target SEC Documents, there is no agreement, plan, arrangement or other Contract
covering any employee or independent contractor or former employee or
independent contractor of any of Target that, considered individually or
considered collectively with any other such Contracts, will, or could reasonably
be expected to, give rise directly or indirectly to the payment of any amount
that would not be deductible pursuant to Section 280G or Section 162 of the
Code. Target is not, nor has ever been, a party to or bound by any tax indemnity
agreement, tax sharing agreement, tax allocation agreement or similar Contract
(other than a Contract entered into in the ordinary course of business in
connection with the purchase or sale of inventory or supplies).
2.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) The Target Disclosure Schedule or the Target SEC Documents
identifies salary, bonus, deferred compensation, incentive compensation, stock
purchase, stock option,
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severance pay, termination pay, hospitalization, medical, life or other
insurance, supplemental unemployment benefit, profit-sharing, pension or
retirement plan, program or agreement covering one or more people (collectively,
the "TARGET PLANS") sponsored, maintained, contributed to or required to be
contributed to by any of Target for the benefit of any current of former
employee of Target.
(b) No Target plan is subject to Title IV of ERISA, Part 3 of Title I
of ERISA or Section 412 of the Code, and no Target Plan constitutes a
"multi-employer plan" (as defined in Section 3(37) of ERISA).
(c) With respect to each Target Plan, Target has made available to
CPI: (i) an accurate and complete copy of each such Target Plan (including all
amendments thereto); (ii) an accurate and complete copy of the annual report, if
required under ERISA, with respect to such Target Plans for the last two plan
years; (iii) an accurate and complete copy of the most recent summary plan
description, together with each summary of material modifications thereto, if
required under ERISA, with respect to such Target Plans; (iv) if such Target
Plans are funded through a trust or a third party funding vehicle, an accurate
and complete copy of the trust or other funding agreement (including all
amendments thereto); (v) accurate and complete copies of all Contracts relating
to such Target Plans, including service provider agreements, insurance
contracts, minimum premium contracts, stop-loss agreements, investment
management agreements, subscription and participation agreements and
record-keeping agreements; and (vi) an accurate and complete copy of the most
recent determination, opinion, notification or advisory letter received from the
Internal Revenue Service with respect to such Target Plans (if such Target Plans
are intended to be qualified under Section 401(a) of the Code).
(d) Target has no plan or commitment to create any additional Plan, or
to modify or change any existing Plan (other than to comply with applicable law)
in a manner that would create any material liability for any of Target.
(e) No Target Plan provides death, medical or health benefits coverage
(whether or not insured) with respect to any of its current or former employees
after any such employee's termination of service (other than (i) benefit
coverage mandated by applicable law, including coverage provided pursuant to
Section 4980B of the Code ("COBRA"), (ii) deferred compensation benefits accrued
as liabilities on the most recent financial statements included in the Target
SEC filings, and (iii) benefits the full cost of which are borne by such current
or former employees (or the employees' beneficiaries)).
(f) With respect to any Target Plan constituting a group health plan
within the meaning of Section 4980B(g)(2) of the Code, COBRA has been complied
with in all material respects. The Target Disclosure Schedule lists all
qualified beneficiaries under COBRA with respect to all such Target Plans.
(g) Each of the Target Plans has been operated and administered in all
material respects in accordance with its terms and applicable Legal
Requirements, including but not limited to ERISA and the Code.
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(h) All material contributions, premiums or other payments due from
any of Target to (or under) any Target Plan have been fully paid or adequately
provided for on the books and financial statements of Target.
(i) Each of the Target Plans intended to be qualified under Section
401(a) of the Code has received a favorable determination, opinion, notification
or advisory letter from the Internal Revenue Service, and Target is not aware of
any reason why any such letter should be revoked.
(j) Except as set forth in the Target Disclosure Schedule, neither the
execution, delivery or performance of this Agreement, nor the consummation of
the Mergers or any of the other transactions contemplated by this Agreement,
will result in any payment (including any bonus, golden parachute or severance
payment) to any of Target's current or former employees or directors (whether or
not under any Target Plan), or materially increase the benefits payable under
any Target Plan, or result in any acceleration of the time of payment or vesting
of any such benefits.
(k) Target is not a party to any collective bargaining contract or
other Contract with a labor union involving any of its employees.
(l) Target is in compliance in all material respects with all
applicable Legal Requirements and Contracts relating to employment, employment
practices, wages, bonuses and terms and conditions of employment, including
employee compensation matters and the classification of independent contractors
and workers.
2.16 ENVIRONMENTAL MATTERS. Target is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes the
possession by each of Target of all material permits and other Governmental
Authorizations required under applicable Environmental Laws, and compliance with
the terms and conditions thereof. Target has not received any notice or other
communication (in writing or otherwise), whether from a Governmental Body,
citizens group, employee or otherwise, that alleges that Target is not in
compliance with any Environmental Law, and, to the best of the knowledge of
Target, there are no circumstances that may prevent or interfere with the
compliance by Target with any Environmental Law in the future. To the knowledge
of Target without further inquiry, no current or prior owner of any property
leased or controlled by Target has received any notice or other communications
(in writing or otherwise), whether from a Government Body, citizens group,
employee or otherwise, that alleges that such current or prior owner or Target
is not in compliance with any Environmental Law. To the best of the knowledge of
Target, all property that is leased to, controlled by or used by Target, and all
surface water, groundwater and soil associated with or adjacent to such property
is in clean and healthful condition and is free of any material environmental
contamination of any nature. To the best knowledge of Target, Target has not
disposed of, emitted, discharged, handled, stored, transported, used or released
any Materials of Environmental Concern, arranged for the disposal, discharge,
storage or release of any Materials of Environmental Concern, or exposed any
employee or other individual to any
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Materials of Environmental Concern or condition so as to give rise to any
material liability or material corrective or remedial obligation under any
Environmental Laws.
2.17 INSURANCE. Target has delivered to CPI a summary of all material
insurance policies and all material self-insurance programs relating to the
business, assets and operations of Target and has made available to CPI copies
of the polices. Each of such insurance policies is in full force and effect.
Except as set forth on the Target Disclosure Schedule, since December 31, 1997,
Target has not received any notice or other communication regarding any actual
or possible (a) cancellation or invalidation of any insurance policy, (b)
refusal of any coverage or rejection of any material claim under any insurance
policy, or (c) material adjustment in the amount of the premiums payable with
respect to any insurance policy. Except as set forth in the Target Disclosure
Schedule, there is no pending claim (including any workers' compensation claim)
other than routine claims for benefits under any Target Plan, under or based
upon any insurance policy of Target.
2.18 TRANSACTIONS WITH AFFILIATES.
(a) Except as set forth in the Target Disclosure Schedule or the
Target SEC Reports, since the date of Target's last proxy statement filed with
the SEC, no event has occurred that would be required to be reported by Target
pursuant to Item 404 of Regulation S-K promulgated by the SEC. The Target
Disclosure Schedule identifies each Person who is an "affiliate" (as that term
is used in Rule 145 under the Securities Act) of Target.
(b) The Target Disclosure Schedule contains an accurate and complete
list as of the date of this Agreement of all outstanding loans and advances made
by Target to any employee, director, consultant or independent contractor other
than routine travel advances and advances made for relocation purposes made to
employees in the ordinary course of business.
2.19 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth on the Target Disclosure Schedule or in the
Target SEC Reports, there is no pending Legal Proceeding, and (to the best of
the knowledge of Target) no Person has threatened to commence any Legal
Proceeding: (i) that involves Target or any of the assets owned or used by
Target; or (ii) that challenges, or that may have the effect of preventing,
delaying, making illegal or otherwise interfering with, the Mergers or any of
the other transactions contemplated by this Agreement. To the best of the
knowledge of Target, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that could reasonably be expected to, give
rise to or serve as a basis for the commencement of any such Legal Proceeding
that would reasonably be expected to have a Material Adverse Effect on Target.
(b) There is no material order, writ, injunction, judgment or decree
to which Target, or any of the assets owned or used by Target, is subject. To
the best of the knowledge of Target, no officer or key employee of Target is
subject to any order, writ, injunction, judgment or
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decree that prohibits such officer or other employee from engaging in or
continuing any conduct, activity or practice relating to the business of Target.
2.20 AUTHORITY; BINDING NATURE OF AGREEMENT. Target has the absolute and
unrestricted right, power and authority to enter into and to perform their
obligations under this Agreement. The board of directors of Target (at a meeting
duly called and held) has unanimously (a) determined that the Mergers are
advisable and fair and in the best interests of Target and its stockholders, (b)
authorized and approved the execution, delivery and performance of this
Agreement by Target, (c) recommended the approval of the Mergers by the holders
of Target Common Stock, and (d) directed that the Mergers be submitted for
consideration by Target's stockholders at the Target Stockholders' Meeting (as
defined in Section 5.3). This Agreement constitutes the legal, valid and binding
obligation of Target and, enforceable against Target in accordance with its
terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
2.21 NO EXISTING DISCUSSIONS. Target has terminated (or will terminate as
soon as practical after execution of this Agreement) any existing discussions
with any Person that relate to any Acquisition Proposal.
2.22 VOTE REQUIRED. The affirmative vote of the holders of a majority of
the outstanding shares of Target Common Stock entitled to vote at the Target
Stockholders Meeting (the "REQUIRED TARGET STOCKHOLDER MERGER VOTE"), is the
only vote of the holders of any class or series of Target's capital stock
necessary to approve the issuance of Target Common Stock in the Merger.
2.23 NON-CONTRAVENTION; CONSENTS. Neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (2) the consummation of the Mergers or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of Target's Articles of Incorporation, Bylaws or other charter or
organizational documents of any of Target, or (ii) any resolution adopted by the
stockholders, the board of directors or any committee of the board of directors
of any of Target;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Mergers or any of
the other transactions contemplated by this Agreement or to exercise any remedy
or obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which Target, or any of the assets owned or
used by Target, is subject, if the result would have a Material Adverse Effect
on Target;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel,
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terminate or modify, any Governmental Authorization that is held by Target or
that otherwise relates to Target's business or to any of the assets owned or
used by Target, if the result would have a Material Adverse Effect on Target;
(d) contravene, conflict with or result in a violation or material
breach of, or result in a default (or an event that with notice or lapse of time
or both would become a default) under, any provision of any Target Contract that
is or would constitute a Target Material Contract, or give any Person the right
to (i) declare a default or exercise any remedy under any such Target Material
Contract, (ii) a rebate, charge-back, penalty or change in delivery schedule
under any such Target Material Contract, (iii) accelerate the maturity or
performance of any such Target Material Contract, or (iv) cancel, terminate or
materially modify any term of such Target Material Contract, if the result would
have a Material Adverse Effect on Target; or
(e) result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by Target (except for minor liens that
will not, in any case or in the aggregate, materially detract from the value of
the assets subject thereto or materially impair the operations of any of
Target).
Except as may be required by the Exchange Act, the DGCL, the Utah
Business Corporation Act, and the NASD Bylaws (as they relate to the Form S-4
Registration Statement and the Joint Proxy Statement) Target is not, and will
not be, required to make any filing with or give any notice to, or to obtain any
Consent from, any Person in connection with (x) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, or (y) the consummation of the Mergers or any of the other
transactions contemplated by this Agreement.
2.24 FAIRNESS OPINION. Target's Board of Directors has received the written
opinion of Janney Montgomery Scott, financial advisor to Target, dated as of the
date of this Agreement, to the effect that the terms of the Mergers are fair to
Target from a financial point of view.
2.25 VALID ISSUANCE; RESERVATION OF SHARES. The Target Common Stock to be
issued to Holdco in the Merger in exchange for surrender of the T-Sub Common
Stock will, when issued in accordance with the provisions of this Agreement, be
validly issued, fully paid and nonassessable.
2.26 FINANCIAL ADVISOR. Except for Janney Montgomery Scott, no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger or any of the other transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Target. Target has furnished to CPI accurate and complete copies of all
agreements under which any such fees, commissions, or other amounts have been
paid or may become payable and all indemnification and other arrangements
relating to the engagement of Janney Montgomery Scott.
2.27 FULL DISCLOSURE. This Agreement (including the Target Disclosure
Schedule) does not, and the certificate referred to in Section 6.5(c) will not,
(i) contain any representation,
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warranty or information that is false or misleading with respect to any material
fact, or (ii) omit to state any material fact necessary in order to make the
representations, warranties and information contained and to be contained herein
and therein (in the light of the circumstances under which such representations,
warranties and information were or will be made or provided) not false or
misleading.
3. REPRESENTATIONS AND WARRANTIES OF CPI AND HOLDCO
Except as set forth in the CPI Disclosure Schedule, CPI represents and
warrants to Target as follows:
3.1 ORGANIZATION; GOOD STANDING; QUALIFICATION
(a) CPI is, and Holdco will be when organized, a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has, or in the case of Holdco will have,
all necessary power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own, lease and use its
assets in the manner in which its assets are currently owned, leased and used;
and (iii) to perform its obligations under all CPI Contracts by which it is
bound. CPI is, or in the case of Holdco will be, qualified to do business as a
foreign corporation, and is in good standing, under the laws of all
jurisdictions where the nature of its business requires such qualification
except in jurisdictions where the failure to so qualify, individually and in the
aggregate, would not have a Material Adverse Effect on CPI.
(b) CPI has no Subsidiaries and does not own any capital stock of, or
any equity interest of any nature in, any other Entity, other than the Entities
identified in the CPI Disclosure Schedule. Except as set forth in the CPI
Disclosure Schedule, CPI has not agreed nor is it obligated to make, nor is it
bound by any Contract under which it may become obligated to make, any future
investment in or capital contribution to any other Entity. Except as set forth
in the CPI Disclosure Schedule, CPI has not, at any time, been a general partner
of any general partnership, limited partnership or other Entity.
3.2 CERTIFICATE OF INCORPORATION AND BYLAWS. CPI has delivered to Target
accurate and complete copies of the Certificate of Incorporation, Bylaws and
other charter and organizational documents of CPI, including all amendments
thereto.
3.3 HOLDCO. When organized, Holdco's Certificate of Incorporation shall be
in the form attached as Exhibit B hereto, and its bylaws shall be in the form
delivered to Target by CPI. Holdco will not have conducted any business, other
than consummation of the transactions contemplated herein, prior to the
Effective Time. Immediately prior to the Effective Time, Holdco's entire
outstanding capitalization shall consist solely of 100 shares of common stock,
which shares shall be owned, beneficially and of record, by CPI.
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3.4 CAPITALIZATION
(a) The authorized capital stock of CPI consists of: (i) 22,400,000
shares of CPI Common Stock, $0.01 par value, of which, as of the date hereof,
2,990,095 shares were issued and outstanding, (ii) 61,250 shares of CPI
Redeemable Preferred Stock, $0.01 par value, of which, as of the date hereof,
all were issued and outstanding and (iii) 18,400,000 shares of CPI Preferred
Stock, of which, as of the date hereof, (A) 872,400 shares are designated Series
A Preferred Stock of which 872,400 shares are issued and outstanding; (B)
848,100 shares are designated Series B Preferred Stock of which 848,100 shares
are issued and outstanding; (C) 700,000 shares are designated Series C Preferred
Stock of which 700,000 shares are issued and outstanding; (D) 675,350 shares are
designated Series D Preferred Stock, of which 616,807.5 shares are issued and
outstanding; (E) 3,204,865 shares are designated Series E Preferred Stock, of
which 3,121,642 shares are issued and outstanding; (F) 4,934,788 shares are
designated Series F Preferred Stock, of which 4,809,437 shares are issued and
outstanding; and (G) 5,400,000 shares are designated as Series G Preferred
Stock, of which 4,645,879 shares are issued and outstanding. Except as set forth
in the CPI Disclosure Schedule, all of the outstanding shares of CPI Common
Stock, CPI Redeemable Preferred Stock and CPI Preferred Stock have been duly
authorized and validly issued, and are fully paid and nonassessable. Except as
set forth in the CPI Disclosure Schedule: (i) none of the outstanding shares of
CPI Common Stock, CPI Redeemable Preferred Stock or CPI Preferred Stock is
entitled or subject to any preemptive right, right of participation in future
financings, right to maintain a percentage ownership position, or any similar
right; (ii) none of the outstanding shares of CPI Common Stock or CPI Preferred
Stock is subject to any right of first refusal in favor of CPI; and (iii) there
is no Contract relating to the voting or registration of, or restricting any
Person from purchasing, selling, pledging or otherwise disposing of (or granting
any option or similar right with respect to), any shares of CPI Common Stock or
CPI Preferred Stock. Except as set forth in the CPI Disclosure Schedule, CPI is
not under any obligation, and is not bound by any Contract pursuant to which it
may become obligated, to repurchase, redeem or otherwise acquire any outstanding
shares of CPI Common Stock, CPI Redeemable Preferred Stock or CPI Preferred
Stock.
(b) As of the date hereof, 740,429 shares of CPI Common Stock remain
available for grant under the CPI Option Plan (defined below) and 363,141 shares
of CPI Common Stock remain to be granted under the Directors' Plan (defined
below). The CPI Disclosure Schedule sets forth the following information with
respect to each CPI Option outstanding as of the date of this Agreement: (i) the
name of the optionee; (ii) the number of shares of CPI Common Stock subject to
such CPI Option; (iii) whether the CPI Option was granted pursuant to the 1997
Equity Incentive Plan (the "CPI OPTION PLAN") or was granted under the 1997
Non-Employee Directors' Stock Option Plan (the "Directors' Plan" and, together
with the Option Plan, the "Option Plans").(iv) the exercise price of such CPI
Option; (v) the date on which such CPI Option was granted; and (vi) the extent
to which such CPI Option is vested and exercisable as of the date hereof. CPI
has delivered to Target accurate and complete copies of all stock option plans
and forms of option grant pursuant to which CPI has granted any outstanding
stock options. As of the date hereof, warrants to purchase 69,044 shares of
Series E Preferred, warrants to purchase 125,351 shares of Series F Preferred,
warrants to purchase 227,793 shares of Series G Preferred Stock and a warrant to
purchase 5,000 shares of Common
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Stock remained outstanding. The CPI Disclosure Schedule sets forth the following
information with respect to each outstanding warrant to purchase CPI Common
Stock and CPI Preferred Stock: (i) the name of the holder of such warrant; (ii)
the number of shares of CPI Common Stock or CPI Preferred Stock subject to such
warrant; (iii) the exercise price of such warrant; (iv) the date on which such
warrant was issued; and (v) the date on which such warrant expires. CPI has
delivered to Target an accurate and complete copy of each such warrant.
(c) Except as set forth in the CPI Disclosure Schedule, there is no:
(i) outstanding subscription, option, call, warrant or right (whether or not
currently exercisable) to acquire any shares of the capital stock or other
securities of CPI; (ii) outstanding security, instrument or obligation that is
or may become convertible into or exchangeable for any shares of the capital
stock or other securities of CPI; (iii) stockholder rights plan (or similar plan
commonly referred to as a "poison pill") or Contract under
which CPI is or may become obligated to sell or otherwise issue any shares of
its capital stock or any other securities; or (iv) condition or circumstance
that may reasonably give rise to or provide a basis for the assertion of a claim
by any Person to the effect that such Person is entitled to acquire or receive
any shares of capital stock or other securities of CPI. Except as set forth on
the CPI Disclosure Schedule, or elsewhere in this Section 3.3, there are no
bonds, debentures, notes or other indebtedness of CPI outstanding having the
right to vote (or convertible into securities having the right to vote) on any
matters on which the stockholders of CPI have the right to vote.
(d) All outstanding securities of CPI, including shares of CPI Common
Stock, CPI Redeemable Preferred Stock and CPI Preferred Stock, all outstanding
CPI Options and all outstanding warrants to purchase CPI Common Stock or CPI
Preferred Stock, have been issued and granted in all material respects in
compliance with (i) all applicable securities laws and other applicable Legal
Requirements, and (ii) all requirements set forth in applicable Contracts.
3.5 FINANCIAL STATEMENTS.
(a) The CPI Disclosure Schedule sets forth CPI's audited balance
sheets as of December 31, 1996 and December 31, 1997 and related audited
statements of operations, stockholders' equity and cash flows for the three
years then ended (collectively, the "AUDITED FINANCIAL STATEMENTS"), and the
unaudited financial statements as of March 31, 1998 (together with the Audited
Financial Statements, the "CPI FINANCIALS"). The CPI Financials were prepared in
accordance with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods covered. The CPI Financials present
fairly in all material respects the financial condition and operating results of
CPI as of the dates and during the periods indicated therein and reflect any
contingent liabilities to the extent required to be reflected therein.
(b) Since December 31, 1997, CPI has not incurred any liabilities of
the type required under GAAP to be recorded on a balance sheet or reported in
the footnotes thereto except liabilities incurred in the ordinary course of
business.
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3.6 ABSENCE OF CHANGES. Since December 31, 1997:
(a) there has not been any change that has had a Material Adverse
Effect on the business, condition, capitalization, assets, liabilities,
operations or financial performance of CPI taken as a whole, and no event has
occurred that could reasonably be expected to have a Material Adverse Effect on
CPI;
(b) there has not been any material loss, damage or destruction to, or
any material interruption in the use of, any of the assets of CPI (whether or
not covered by insurance);
(c) there has not been any transaction, commitment, or other event or
condition (financial or otherwise) that would be prohibited by Section 4.3(b)(i)
or (iii) if it were to be effected, accepted or were to take place, between the
date hereof and the Effective Time.
3.7 VALID ISSUANCE. The Holdco Common Stock to be issued in the Mergers
will, when issued in accordance with the provisions of this Agreement, be
validly issued, fully paid and nonassessable.
3.8 TITLE TO ASSETS. Except as set forth in the CPI Disclosure Schedule,
CPI owns, and has good, valid and marketable title to, all assets purported to
be owned by it, including all assets reflected in CPI's books and records as
being owned by CPI. All of said assets are owned by CPI free and clear of any
Encumbrances, except for (a) any lien for current taxes not yet due and payable,
(b) minor liens that have arisen in the ordinary course of business and that do
not (in any case or in the aggregate) materially detract from the value of the
assets subject thereto or materially impair the operations of CPI, and (c) liens
described in the CPI Disclosure Schedule.
3.9 REAL PROPERTY; EQUIPMENT; LEASEHOLD.
(a) CPI does not own any real property or any interest in real
property, except for the leasehold created under the real property lease(s) set
forth in the CPI Disclosure Schedule. Complete and correct copies of such
lease(s) have previously been delivered to Target by CPI.
(b) All material items of equipment and other tangible assets owned by
or leased to CPI are reasonably adequate for the uses to which they are being
put, are in good condition and repair (ordinary wear and tear excepted) and are
reasonably adequate for the conduct of CPI's business in the manner in which
such business is currently being conducted and in the manner in which such
business is required to be conducted pursuant to CPI Contracts and that are in
effect on the date hereof.
3.10 PROPRIETARY ASSETS.
(a) The CPI Proprietary Assets constitute such Proprietary Assets as
are reasonably necessary to enable CPI to conduct its business as it is
currently being conducted.
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(i) CPI owns or has the right to use such Proprietary Assets as
are currently used in the business and such ownership and use will not be
adversely affected by the transactions contemplated hereby. So far as is known
to CPI, no present or former employee of, or consultant to, CPI or any other
person (including, without limitation, any former employer of a present or
former employee or consultant of CPI) has any proprietary, commercial or other
interest in such Proprietary Assets other than rights, if any, in respect of
which there has been adequate assignment or license to CPI to permit CPI to
conduct its business as presently conducted.
(ii) CPI has taken commercially reasonable measures in the normal
course of its business to protect through non-disclosure agreements such
Proprietary Assets as CPI has decided to, and is legally and practically able
to, keep secret. CPI has not received notice from a third party of any (nor is
it aware of any) claim of infringement or other violation relating to any such
Proprietary Assets, nor does CPI know of any facts upon which any such claim
could reasonably be based.
(iii) In conducting its business as presently conducted, CPI has
no knowledge that it is infringing upon or unlawfully or wrongfully using any
patent, trademark, tradename, service mark, copyright or any other form of
intellectual property or trade secret, owned or claimed by another and has no
knowledge that any of the compositions of matter or therapeutic methods that CPI
is currently planning to develop clinically infringes upon or results in the
unlawful or wrongful use of any patent, trademark, trade name, service mark,
copyright or any other form of intellectual property or trade secret, owned or
claimed by another. CPI has not received any notice or any claim of infringement
or any other claim or proceeding relating to any such patent, trademark, trade
name, service mark, copyright, trade secret or any other form of intellectual
property or any agreement relating thereto.
3.11 MATERIAL CONTRACTS.
(a) The CPI Disclosure Schedule identifies each CPI Contract that
constitutes a "CPI MATERIAL CONTRACT." For purposes of this Agreement, each of
the following shall be deemed to constitute a CPI Material Contract:
(i) any Contract relating to the employment of, or the
performance of services by, any officer, director or employee and any Contract
pursuant to which CPI is or may become obligated to make any severance,
termination, bonus or relocation payment or any other payment (other than
payments in respect of salary and the grant of standard benefits);
(ii) any Contract that provides for indemnification of any
officer, director, employee or agent;
(iii) any Contract (A) relating to the acquisition, issuance,
voting, registration, sale or transfer of any securities, (B) providing any
Person with any preemptive right, right of participation, right of maintenance
or any similar right with respect to any
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securities, or (C) providing CPI with any right of first refusal with respect
to, or right to repurchase or redeem, any securities;
(iv) any Contract requiring that CPI give any notice, obtain any
consent or provide any information to any Person prior to accepting any
Acquisition Proposal;
(v) any Contract (not otherwise identified in this Section) that
(A) has a term of more than sixty (60) days or that may not be terminated by CPI
(without penalty) within sixty (60) days after the delivery of a termination
notice by CPI and (B) that contemplates or involves (I) the payment or delivery
of cash or other consideration on or after the date hereof in an amount or
having a value in excess of $300,000 in aggregate payments under such Contract,
or (II) the performance of services on or after the date hereof having a value
in excess of $300,000 in aggregate payments under such Contract;
(vi) any Contract (A) to which any Governmental Body is a party
or under which any Governmental Body has any rights or obligations, or involving
or directly or indirectly benefiting any Governmental Body (including any
subcontract or other Contract between CPI and any contractor or subcontractor to
any Governmental Body) and that (B) contemplates or involves (I) the payment or
delivery of cash or other consideration on or after the date hereof in an amount
or having a value in excess of $300,000 in aggregate payments under such
Contract, or (II) the performance of services on or after the date hereof having
a value in excess of $300,000 in aggregate payments under such Contract;
(vii) any open purchase order placed by CPI requiring future
aggregate payments in excess of $300,000; and
(viii) any Contract (not otherwise identified in this Section)
that would be required as an exhibit in a registration statement under the
Securities Act of 1933.
(b) Each CPI Material Contract is valid and in full force and effect,
and is enforceable in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, (ii)
rules of law governing specific performance, injunctive relief and other
equitable remedies and (iii) in the case of any Contract with a Governmental
Body, laws applicable thereto.
(c) Except as set forth in the CPI Disclosure Schedule: (i) CPI has
not materially violated or breached, or committed any material default under,
any CPI Material Contract, and, to the best of the knowledge of CPI, no other
Person has materially violated or breached, or committed any material default
under, any CPI Material Contract; (ii) to the best of the knowledge of CPI, no
event has occurred, and no circumstance or condition exists, that (with or
without notice or lapse of time) could reasonably be expected to (A) result in a
material violation or breach of any of the provisions of any CPI Material
Contract, (B) give any Person the right to declare a default or exercise any
remedy under any CPI Material Contract, (C) give any Person the right to
accelerate the maturity or performance of any CPI Material Contract, or (D) give
any Person the right to cancel, terminate or materially modify any CPI Material
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Contract; (iii) since December 31, 1997, CPI has not received any written notice
or other written communication regarding any actual or possible violation or
breach of, default under, or intention to terminate, any CPI Contract except for
communication (A) that has subsequently been revoked; or (B) has been received
from a complaining party that has not contacted CPI or otherwise, to the
knowledge of CPI, taken any action with respect to such party's complaint for a
period of more than six months following receipt of the communication; and (iv)
CPI has not waived any of its material rights under any CPI Material Contract,
in each case where such breach, default, violation or waiver would have a
Material Adverse Effect on CPI.
(d) To the best of the knowledge of CPI, no Person is renegotiating,
or has the right to renegotiate, any material amount paid or payable to CPI
under any CPI Material Contract, or any other material term or provision of any
CPI Material Contract, including termination provisions.
(e) The CPI Disclosure Schedule sets forth a list of all claims made
under any CPI Material Contract that are disputed in any material respect or, to
CPI's knowledge, where a dispute as to any material matter has been threatened.
3.12 LIABILITIES. CPI has no accrued or contingent liabilities of a nature
required to be reflected in financial statements in accordance with GAAP, except
for: (a) liabilities identified as such in the CPI Financials; (b) normal and
recurring liabilities that have been incurred by CPI since December 31, 1997 in
the ordinary course of business and consistent with past practices; and (c)
other liabilities that have not had and could not reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect on CPI.
3.13 COMPLIANCE WITH LEGAL REQUIREMENTS. CPI is, and to the best knowledge
of CPI has at all times since inception been, in compliance with all applicable
Legal Requirements, except where the failure to comply with such Legal
Requirements has not had and could not reasonably be expected to have a Material
Adverse Effect on CPI. There is not presently pending any notice or other
communication received by CPI from any Governmental Body regarding any actual or
possible violation of, or failure to comply with, any material Legal
Requirement.
3.14 CERTAIN BUSINESS PRACTICES. Neither CPI nor any director, officer,
agent or employee of CPI has (i) used any funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political activity,
(ii) made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii)
made any other unlawful payment.
3.15 GOVERNMENTAL AUTHORIZATIONS. CPI holds all material Governmental
Authorizations necessary to enable CPI to conduct its business in the manner in
which its business is currently being conducted. All such Governmental
Authorizations are valid and in full force and effect. CPI is, and to the best
knowledge of CPI, at all times since inception has been, in substantial
compliance with the terms and requirements of such Governmental Authorizations.
Since inception, CPI has not received any notice or other communication from
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any Governmental Body regarding (a) any actual or possible violation of or
failure to comply with any term or requirement of any material Governmental
Authorization, or (b) any actual or possible revocation, withdrawal, suspension,
cancellation, termination or modification of any material Governmental
Authorization or (c) any requirement to apply for or hold Governmental
Authorization not held by CPI, in each case where such violation, revocation,
suspension, cancellation, termination or modification would have a Material
Adverse Effect on CPI.
3.16 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of CPI with
any Governmental Body with respect to any taxable period ending on or before the
Closing Date (the "CPI RETURNS") have been or will be filed on or before the
applicable due date (including any extensions of such due date). All amounts
shown on the CPI Returns to be due on or before the Closing Date have been or
will be paid on or before the Closing Date.
(b) The CPI Financials fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof in
accordance with generally accepted accounting principles. CPI will establish, in
the ordinary course of business and consistent with its past practices,
quarterly reserves adequate for the payment of all Taxes for the applicable
periods from December 31, 1997 through the Closing Date. Since December 31,
1997, no material Tax liability has been incurred other than in the ordinary
course of business.
(c) Except as set forth in the CPI Disclosure Schedule, no CPI Return
has ever been examined or audited by any Governmental Body. No extension or
waiver of the limitation period applicable to any of the CPI Returns has been
granted (by CPI or any other Person), and no such extension or waiver has been
requested from CPI.
(d) No claim or Legal Proceeding is pending or, to the best of the
knowledge of CPI, has been threatened in writing against or with respect to CPI
in respect of any Tax. There are no unsatisfied liabilities for Taxes (including
liabilities for interest, additions to tax and penalties thereon and related
expenses) with respect to any notice of deficiency or similar document received
by CPI (other than liabilities for Taxes asserted under any such notice of
deficiency or similar document that are being contested in good faith by CPI and
with respect to which adequate reserves for payment have been established).
There are no liens for Taxes upon any of the assets of CPI except liens for
current Taxes not yet due and payable. CPI has not entered into nor has it
become bound by any agreement or consent pursuant to Section 341(f) of the Code.
CPI has not been, and will not be, required to include any adjustment in taxable
income for any tax period (or portion thereof) pursuant to Section 481 or 263A
of the Code or any comparable provision under state or foreign Tax laws as a
result of transactions or events occurring, or accounting methods employed,
prior to the Closing. CPI is not nor has it been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code. CPI has
no liability for the taxes of any other Person except for payroll taxes
collected in the ordinary course of business.
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(e) Except as set forth in the CPI Disclosure Schedule, there is no
agreement, plan, arrangement or other Contract covering any employee or
independent contractor or former employee or independent contractor of CPI that,
considered individually or considered collectively with any other such
Contracts, will, or could reasonably be expected to, give rise directly or
indirectly to the payment of any amount that would not be deductible pursuant to
Section 280G or Section 162 of the Code. CPI is not, nor has it ever been, a
party to or bound by any tax indemnity agreement, tax sharing agreement, tax
allocation agreement or similar Contract (other than a Contract entered into in
the ordinary course of business in connection with the purchase or sale of
inventory or supplies).
3.17 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) The CPI Disclosure Schedule identifies each salary, bonus,
deferred compensation, incentive compensation, stock purchase, stock option,
severance pay, termination pay, hospitalization, medical, life or other
insurance, supplemental unemployment benefits, profit-sharing, pension or
retirement plan or program (collectively, the "CPI PLANS") sponsored,
maintained, contributed to or required to be contributed to by CPI for the
benefit of any current or former employee of CPI.
(b) No CPI Plan is subject to Title IV of ERISA, Part 3 of Title I of
ERISA or Section 412 of the Code, and no CPI Plan constitutes a "multi-employer
plan" (as defined in Section 3(37) of ERISA).
(c) With respect to each CPI Plan, CPI has made available to Target:
(i) an accurate and complete copy of each such CPI Plan (including all
amendments thereto); (ii) an accurate and complete copy of the annual report, if
required under ERISA, with respect to such CPI Plans for the last two plan
years; (iii) an accurate and complete copy of the most recent summary plan
description, together with each summary of material modifications thereto, if
required under ERISA, with respect to such CPI Plans, (iv) if such CPI Plans are
funded through a trust or any third party funding vehicle, an accurate and
complete copy of the trust or other funding agreement (including all amendments
thereto); (v) accurate and complete copies of all Contracts relating to such CPI
Plans, including service provider agreements, insurance contracts, minimum
premium contracts, stop-loss agreements, investment management agreements,
subscription and participation agreements and record-keeping agreements; and
(vi) an accurate and complete copy of the most recent determination, opinion,
notification or advisory letter received from the Internal Revenue Service with
respect to such CPI Plans (if such CPI Plans are intended to be qualified under
Section 401(a) of the Code).
(d) CPI has no plan or commitment to create any additional Plan, or to
modify or change any existing Plan (other than to comply with applicable law) in
a manner that would create any material liability for CPI.
(e) No CPI Plan provides death, medical or health benefits coverage
(whether or not insured) with respect to any current or former employee of CPI
after any such employee's
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termination of service (other than (i) benefit coverage mandated by applicable
law, including coverage provided pursuant to Section 4980B of the Code
("COBRA"), (ii) deferred compensation benefits accrued as liabilities on the CPI
Financials, and (iii) benefits the full costs of which are borne by current or
former employees of CPI (or the employees' beneficiaries)).
(f) With respect to any CPI Plan constituting a group health plan
within the meaning of Section 4980B(g)(2) of the Code, the provisions of COBRA
have been complied with in all material respects. The CPI Disclosure Schedule
lists all qualified beneficiaries under COBRA with respect to all such CPI
Plans.
(g) Each of the CPI Plans has been operated and administered in all
material respects in accordance with its terms and applicable Legal
Requirements, including but not limited to ERISA and the Code.
(h) All material contributions, premiums or other payments due from
CPI to (or under) any CPI Plan have been fully paid or adequately provided for
on the books and financial statements of CPI.
(i) Each of the CPI Plans intended to be qualified under Section
401(a) of the Code has received a favorable determination, opinion, notification
or advisory letter from the Internal Revenue Service, and CPI is not aware of
any reason why any such letter should be revoked.
(j) Except as set forth in the CPI Disclosure Schedule, neither the
execution, delivery or performance of this Agreement, nor the consummation of
the Merger or any of the other transactions contemplated by this Agreement, will
result in any payment (including any bonus, golden parachute or severance
payment) to any current or former employee or director of CPI (whether or not
under any CPI Plan), or materially increase the benefits payable under any CPI
Plan, or result in any acceleration of the time of payment or vesting of any
such benefits.
(k) CPI is not a party to any collective bargaining contract or other
Contract with a labor union involving any of its employees.
(l) The CPI Disclosure Schedule identifies each Employee who is not
fully available to perform work because of disability or other leave and sets
forth the basis of such leave and the anticipated date of return to full
service.
(m) CPI is in compliance in all material respects with all applicable
Legal Requirements and Contracts relating to employment, employment practices,
wages, bonuses and terms and conditions of employment, including employee
compensation matters and the classification of independent contractors and
workers.
3.18 ENVIRONMENTAL MATTERS. CPI is in compliance in all material respects
with all applicable Environmental Laws, which compliance includes the possession
by CPI of all permits and other Governmental Authorizations required under
applicable Environmental Laws, and compliance with the terms and conditions
thereof. CPI has not received any notice or other
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communication (in writing or otherwise), whether from a Governmental Body,
citizens group, employee or otherwise, that alleges that CPI is not in
compliance with any Environmental Law. To the knowledge of CPI without further
inquiry, no current or prior owner of any property leased or controlled by CPI
has received any notice or other communication (in writing or otherwise),
whether from a Government Body, citizens group, employee or otherwise, that
alleges that such current or prior owner or CPI is not in compliance with any
Environmental Law. To the best knowledge of CPI, all property that is leased to,
controlled by or used by CPI, and all surface water, groundwater and soil
associated with or adjacent to such property is in clean and healthful condition
and is free of any material environmental contamination of any nature. To the
best knowledge of CPI, CPI has not disposed of, emitted, discharged, handled,
stored, transported, used or released any Materials of Environmental Concern,
arranged for the disposal, discharge, storage or release of any Materials of
Environmental Concern, or exposed any employee or other individual to any
Materials of Environmental Concern or condition so as to give rise to any
material liability or material corrective or remedial obligation under any
Environmental Laws.
3.19 INSURANCE. CPI has delivered to Target a summary of all material
insurance policies and all material self-insurance programs relating to the
business, assets and operations of CPI and has made available to Target copies
of the policies. Each of such insurance policies is in full force and effect.
Since September 30, 1997, CPI has not received any notice or other communication
regarding any actual or possible (a) cancellation or invalidation of any
insurance policy, (b) refusal of any coverage or rejection of any material claim
under any insurance policy, or (c) material adjustment in the amount of the
premiums payable with respect to any insurance policy. Except as set forth in
the CPI Disclosure Schedule, there is no pending claim (including any workers'
compensation claim) other than routine claims for benefits under any CPI Plan
under or based upon any insurance policy of CPI.
3.20 TRANSACTIONS WITH AFFILIATES.
(a) Since December 31, 1997, except as set forth in the CPI Disclosure
Schedule, no event has occurred that would be required to be reported by CPI
pursuant to Item 404 of Regulation S-K promulgated by the SEC if CPI was a
reporting company. The CPI Disclosure Schedule identifies each Person who is an
"affiliate" (as that term is used in Rule 145 under the Securities Act) of CPI
as of the date of this Agreement.
(b) The CPI Disclosure Schedule contains an accurate and complete list
as of the date of this Agreement of all outstanding loans and advances made by
CPI to any employee, director, consultant or independent contractor other than
routine travel advances and advances made for relocation purposes made to
employees in the ordinary course of business.
3.21 LEGAL PROCEEDINGS; ORDERS.
(a) There is no pending Legal Proceeding, and (to the best of the
knowledge of CPI) no Person has threatened to commence any Legal Proceeding:
(i) that involves CPI or any of the assets owned or used by CPI; or (ii) that
challenges, or that may have the effect of
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preventing, delaying, making illegal or otherwise interfering with, the Merger
or any of the other transactions contemplated by this Agreement. To the best of
the knowledge of CPI, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that could reasonably be expected to give rise
to or serve as a basis for the commencement of any such Legal Proceeding that
would reasonably be expected to have a Material Adverse Effect on CPI.
(b) There is no material order, writ, injunction, judgment or decree
to which CPI, or any of the assets owned or used by CPI, is subject. To the best
of the knowledge of CPI, no officer or key employee of CPI is subject to any
order, writ, injunction, judgment or decree that prohibits such officer or other
employee from engaging in or continuing any conduct, activity or practice
relating to the business of CPI.
3.22 AUTHORITY; BINDING NATURE OF AGREEMENT.
(a) CPI has the absolute and unrestricted right, power and authority
to enter into and to perform its obligations under this Agreement. The board of
directors of CPI (at a meeting duly called and held) has unanimously (i)
determined that the Mergers are advisable and fair and in the best interests of
CPI and its stockholders, (ii) authorized and approved the execution, delivery
and performance of this Agreement by CPI and unanimously approved the Mergers,
and (iii) recommended the approval of this Agreement and the Mergers by the
holders of CPI Common Stock and CPI Preferred Stock and directed that this
Agreement and the Mergers be submitted for consideration by the CPI stockholders
at a CPI Stockholders' Meeting (as defined in Section 5.2). This Agreement
constitutes the legal, valid and binding obligation of CPI, enforceable against
CPI in accordance with its terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of
law governing specific performance, injunctive relief and other equitable
remedies.
(b) Prior to the Effective Time, Holdco will have the absolute and
unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement. Prior to the Effective Time, Holdco will have
had the board of directors of Holdco (at a meeting duly called and held)
unanimously (i) determine that the Mergers are advisable and fair and in the
best interests of Holdco and its stockholders, (ii) authorize and approve the
execution, delivery and performance of this Agreement by Holdco and unanimously
approve the Mergers, and (iii) recommend the approval of this Agreement and the
Mergers by the sole stockholder of Holdco. Such sole stockholder shall have
approved this Agreement and the Mergers. This Agreement will constitute the
legal, valid and binding obligation of Holdco enforceable against Holdco in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
3.23 NO EXISTING DISCUSSIONS. CPI has terminated any existing discussions
with any Person that relate to any Acquisition Proposal. Neither CPI, nor any
Representative of CPI, is currently engaged, directly or indirectly, in any
discussions or negotiations with any other Person relating to any Acquisition
Proposal.
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3.24 VOTE REQUIRED. The approval by vote or written consent of each of (a)
the holders of more than 50% of the shares of CPI Common Stock then outstanding,
(b) the holders of more than 50% of the shares of the CPI Series A Preferred
Stock and CPI Series B Preferred Stock, voting together as a single class, and
(c) the holders of more than 50% of the shares of CPI Series C Preferred Stock,
CPI Series D Preferred Stock, CPI Series E Preferred Stock, CPI Series F
Preferred Stock and CPI Series G Stock then outstanding, voting together as a
single class, are the only votes of the holders of any class or series of CPI's
capital stock necessary to approve this Agreement and the Mergers. The approval
or written consent of (i) the holders of more than 50% of the shares of CPI
Common Stock and CPI Preferred Stock, voting together as a single class, and
(ii) the holders of more than 50% of the shares of each outstanding series of
CPI Preferred Stock, each such series voting as a separate class, are the only
votes of holders of any class or series of CPI's capital stock necessary to
approve the CPI Charter Amendment. The stockholder approvals referred to in the
preceding two sentences are collectively referred to herein as the "REQUIRED CPI
STOCKHOLDER VOTE."
3.25 NON-CONTRAVENTION; CONSENTS. Neither (x) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, nor (y) the consummation of the Merger or any of the other
transactions contemplated by this Agreement, will directly or indirectly (with
or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of
the provisions of the Certificate of Incorporation, Bylaws or other charter or
organizational documents of CPI, or (ii) any resolution adopted by the
stockholders, the board of directors or any committee of the board of directors
of CPI;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge the Merger or any of
the other transactions contemplated by this Agreement or to exercise any remedy
or obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which CPI or Holdco, or any of the assets
owned or used by CPI, is subject, if the result would have a Material Adverse
Effect on CPI;
(c) contravene, conflict with or result in a violation of any of the
terms or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental Authorization
that is held by CPI or that otherwise relates to the business of CPI or to any
of the assets owned or used by CPI, if the result would have a Material Adverse
Effect on CPI;
(d) contravene, conflict with or result in a violation or material
breach of, or result in a default (or an event that with notice or lapse of time
or both would become a default) under, any provision of any CPI Material
Contract, or give any Person the right to (i) declare a default or exercise any
remedy under any such CPI Material Contract, (ii) a rebate, charge-back, penalty
or change in delivery schedule under any such CPI Material Contract, (iii)
accelerate the maturity or performance of any such CPI Material Contract
(including the vesting of all
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outstanding CPI Stock Options), or (iv) cancel, terminate or materially modify
any term of such CPI Material Contract, if the result would have a Material
Adverse Effect on CPI; or
(e) result in the imposition or creation of any Encumbrance upon or
with respect to any asset owned or used by CPI (except for minor liens that will
not, in any case or in the aggregate, materially detract from the value of the
assets subject thereto or materially impair the operations of CPI).
Except as may be set forth in the CPI Disclosure Schedule or as
required by the Exchange Act, the DGCL and the NASD Bylaws (as they relate to
the Form S-4 Registration Statement and the Joint Proxy Statement) CPI is not,
nor will it be required to make any filing with or give any notice to, or to
obtain any Consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, or (y) the consummation of the Merger or any of
the other transactions contemplated by this Agreement.
3.26 FINANCIAL ADVISOR. Except as set forth in the CPI Disclosure Schedule,
no broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Mergers or any of the other
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of CPI. CPI has furnished to Target accurate and complete copies of
all agreements under which any such fees, commissions or other amounts have been
paid or may become payable and all indemnification and other arrangements.
3.27 FULL DISCLOSURE. This Agreement (including the CPI Disclosure
Schedule) does not, and the certificate referred to in Section 7.6(c) will not,
(i) contain any representation, warranty or information that is false or
misleading with respect to any material fact, or (ii) omit to state any material
fact necessary in order to make the representations, warranties and information
contained and to be contained herein and therein (in the light of the
circumstances under which such representations, warranties and information were
or will be made or provided) not false or misleading.
4. CERTAIN COVENANTS OF THE PARTIES
4.1 ACCESS AND INVESTIGATION; CONFIDENTIALITY.
(a) During the period from the date of this Agreement through the
Effective Time (the "PRE-CLOSING PERIOD"), CPI and Target each shall, and CPI
and Target shall cause the respective Representatives of CPI and Target
Corporations to, provide each other and their respective Representatives with
reasonable access to each others' respective personnel and assets and books,
records, Tax Returns, work papers and other documents, and such additional
financial, operating and other data and information regarding each other and
their Subsidiaries, as Target and CPI may reasonably request, subject to
appropriate safeguards with respect to confidentiality.
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(b) Each of the parties hereto hereby agrees to and reaffirms the
terms and provisions of the confidentiality agreements between them dated as of
March 5, 1998 and March 4, 1998.
4.2 OPERATION OF TARGET'S BUSINESS.
(a) During the Pre-Closing Period: (i) Target shall ensure that each
of the Target Corporations conducts its business and operations (A) in the
ordinary course and in accordance with the operating plan previously described
by Target to CPI and (B) in compliance with all applicable Legal Requirements
and the requirements of all Target Material Contracts; (ii) Target shall use
reasonable efforts to ensure that each of the Target Corporations preserves
intact its current business organization, keeps available the services of its
current officers and employees and maintains its relations and goodwill with all
suppliers, customers, landlords, creditors, licensors, licensees, employees and
other Persons having business relationships with the respective Target
Corporations; and (iii) Target shall keep in full force all insurance policies
referred to in Section 2.17 or replace such policies with comparable or superior
policies; (iv) Target shall provide all notices, assurances and support required
by any Target Contract relating to any Proprietary Asset in order to ensure that
no condition under such Target Contract occurs that could result in, or could
increase the likelihood of, any transfer or public disclosure by any Target
Corporation of any Proprietary Asset; and (v) Target shall (to the extent
requested by CPI) cause its officers to report periodically to CPI concerning
the status of Target's business.
(b) During the Pre-Closing Period, without the prior written consent
of CPI, Target shall not and shall not permit any of the other Target
Corporations to:
(i) declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other securities,
except for repurchases at less than fair market value pursuant to employment or
consulting agreements in effect prior to the date hereof;
(ii) hire any new employees whose annual salary exceeds $80,000,
excluding those persons hired to replace employees who terminate their
employment with a Target Corporation during the Pre- Closing Period;
(iii) sell, issue, grant or authorize the issuance or grant of
(A) any capital stock or other security (except Target Common Stock upon the
valid exercise of Target Options, (B) any option, call, warrant or right to
acquire any capital stock or other security, (C) any instrument convertible into
or exchangeable for any capital stock or other security;
(iv) except as contemplated by this Agreement, amend or waive any
of its rights under, or accelerate the vesting under, any provision of any of
Target Option Plans, any provision of any agreement evidencing any outstanding
stock option or any restricted stock purchase agreement, or otherwise modify any
of the terms of any outstanding option, warrant or other security or any related
Contract;
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(v) take any action to permit holders of Target stock options to
receive cash payments in connection with the transactions contemplated by this
Agreement;
(vi) except as contemplated by this Agreement, amend or permit
the adoption of any amendment to its Certificate of Incorporation or Bylaws or
other charter or organizational documents, or effect or become a party to any
merger, consolidation, share exchange, business combination, recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
(vii) except as contemplated by this Agreement, form any
Subsidiary or acquire any equity interest or other interest in any other Entity;
(viii) make any capital expenditure, except capital expenditures
in an aggregate amount of no more than $50,000;
(ix) establish, adopt or amend any employee benefit plan or pay
any bonus or make any profit sharing or similar payment greater than $10,000 in
any individual case or $50,000 in the aggregate, or increase the amount of the
wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees greater
than $10,000 in any individual case or $50,000 in the aggregate;
(x) change any of its methods of accounting or material
accounting practices in any respect;
(xi) make any material Tax election;
(xii) commence or settle any material Legal Proceeding;
(xiii) materially amend or otherwise modify any of the terms of
its engagement of the financial advisor referenced in Section 2.26 above;
(xiv) enter into any material transaction or take any other
material action in each case either inconsistent with the operating plan
previously provided by Target to CPI, or outside the ordinary course of
business;
(xv) agree or commit to take any of the actions described in
clause "(i)" through "(xiv)" of this Section 4.2(b).
(c) During the Pre-Closing Period, Target shall promptly notify CPI in
writing of: (i) the discovery by Target of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this Agreement
and that caused or constitutes a material inaccuracy in any representation or
warranty made by Target in this Agreement; (ii) any event, condition, fact or
circumstance that occurs, arises or exists after the date of this Agreement and
that would cause or constitute a material inaccuracy in any representation or
warranty made by Target in this Agreement if (A) such representation or warranty
had been made as of the time of the occurrence, existence or discovery of such
event, condition, fact or circumstance, or (B) such
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event, condition, fact or circumstance had occurred, arisen or existed on or
prior to the date of this Agreement; (iii) any material breach of any covenant
or obligation of Target; and (iv) any event, condition, fact or circumstance
that would make the timely satisfaction of any of the conditions set forth in
Section 6 or Section 7 impossible or unlikely or that has had or could
reasonably be expected to have a Material Adverse Effect on the Target
Corporations. No notification given to CPI pursuant to this Section 4.2(c) shall
limit or otherwise affect any of the representations, warranties, covenants or
obligations of Target contained in this Agreement.
4.3 OPERATION OF CPI'S BUSINESS.
(a) During the Pre-Closing Period: (i) CPI shall conduct its business
and operations (A) in the ordinary course and in accordance with past practices
or the operating plan previously described by CPI to Target and (B) in
compliance with all applicable Legal Requirements and the requirements of all
CPI Material Contracts; (ii) CPI shall use reasonable efforts to ensure that CPI
preserves intact its current business organization, keeps available the services
of its current officers and employees and maintains its relations and goodwill
with all suppliers, customers, landlords, creditors, licensors, licensees,
employees and other Persons having business relationships with CPI; (iii) CPI
shall keep in full force all insurance policies referred to in Section 3.19 or
replace any such policies that terminate with comparable or superior policies;
(iv) CPI shall provide all notices, assurances and support required by any CPI
Contract relating to any CPI Proprietary Asset in order to ensure that no
condition under such CPI Contract occurs that could result in, or could increase
the likelihood of, any transfer or public disclosure by CPI of any CPI
Proprietary Asset; and (v) CPI shall (to the extent requested by Target) cause
its officers to report periodically to Target concerning the status of CPI's
business.
(b) During the Pre-Closing Period, CPI shall not (without the prior
written consent of Target):
(i) declare, accrue, set aside or pay any dividend or make any
other distribution in respect of any shares of capital stock, or repurchase,
redeem or otherwise reacquire any shares of capital stock or other securities,
except for repurchases at less than fair market value pursuant to employment or
consulting agreements in effect prior to the date hereof and except for the
redemption, prior to the Effective Time, of the CPI Redeemable Preferred Stock
pursuant to the terms set forth in the CPI Disclosure Schedule;
(ii) sell, issue, grant or authorize the issuance or grant of any
capital stock or other security except: CPI Common Stock or Preferred Stock upon
the valid exercise of CPI Options or CPI warrants outstanding on the date of
this Agreement; CPI Common Stock or warrants issued pursuant to equipment lease
financings and similar transactions or otherwise in the ordinary course of
business; CPI Series G Preferred Stock and warrants in completion of the Series
G financing; stock options (and stock issuable upon exercise thereof) to
employees and directors under its existing stock option plans and in the
ordinary course of business with an exercise price of not less than $6.60 per
share of CPI Common Stock; and shares of CPI
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Common Stock, if any, issued in connection with the redemption of the CPI
Redeemable Preferred Stock.
(iii) except as contemplated by this Agreement, amend or waive
any of its rights under, or accelerate the vesting under, any provision of any
CPI Option Plans, any provision of any agreement evidencing any outstanding
stock option or any restricted stock purchase agreement, or otherwise modify any
of the terms of any outstanding option, warrant or other security or any related
Contract, provided that CPI shall be entitled to make any changes that do not
materially increase CPI's obligations under any agreement evidencing any
outstanding stock option, restricted stock purchase agreement, warrant or other
security or any related Contract;
(iv) except as contemplated by this Agreement, amend or permit
the adoption of any amendment to its Certificate of Incorporation or Bylaws or
other charter or organizational documents, or effect or become a party to any
merger, consolidation, share exchange, business combination, recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction which would materially adversely affect the transactions provided in
this Agreement.
(v) except as discussed or projected in discussions with or
presentations to Target, enter into or become bound by, or permit any of the
assets owned or used by it to become bound by, any CPI Material Contract, or
amend or terminate, or waive or exercise any material right or remedy under, any
CPI Material Contract, provided that CPI shall be entitled to make any changes
that do not materially increase CPI's obligations under any CPI Material
Contract;
(vi) change any of its methods of accounting or accounting
practices in any respect;
(vii) make any material Tax election;
(viii) amend or otherwise modify any of the terms of any CPI
Warrants, except to the extent necessary to terminate such Warrants or reduce
the number of shares issuable upon exercise thereunder; or
(ix) agree or commit to take any of the actions described in
clauses "(i)" through "(viii)" of this Section 4.3(b).
(c) During the Pre-Closing Period, CPI shall promptly notify Target in
writing of: (i) the discovery by CPI of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this Agreement
and that caused or constitutes a material inaccuracy in any representation or
warranty made by CPI in this Agreement; (ii) any event, condition, fact or
circumstance that occurs, arises or exists after the date of this Agreement and
that would cause or constitute a material inaccuracy in any representation or
warranty made by CPI in this Agreement if (A) such representation or warranty
had been made as of the time of the occurrence, existence or discovery of such
event, condition, fact or circumstance, or (B) such
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event, condition, fact or circumstance had occurred, arisen or existed on or
prior to the date of this Agreement; (iii) any material breach of any covenant
or obligation of CPI; and (iv) any event, condition, fact or circumstance that
would make the timely satisfaction of any of the conditions set forth in Section
6 or Section 7 impossible or unlikely or that has had or could reasonably be
expected to have a Material Adverse Effect on CPI. No notification given to
Target pursuant to this Section 4.3(c) shall limit or otherwise affect any of
the representations, warranties, covenants or obligations of CPI contained in
this Agreement.
4.4 NO SOLICITATION BY TARGET.
(a) Target shall not directly or indirectly, and shall not authorize
or permit any of the other Target Corporations or any Representative of any of
the Target Corporations directly or indirectly to, (i) solicit, initiate,
knowingly encourage or induce the making, submission or announcement of any
Acquisition Proposal or take any similar action, (ii) furnish any non-public
information regarding any of the Target Corporations to any Person in connection
with or in response to an Acquisition Proposal, (iii) engage in discussions or
negotiations with any Person with respect to any Acquisition Proposal, (iv)
approve, endorse or recommend any Acquisition Proposal or (v) enter into any
letter of intent or similar document or any Contract contemplating or otherwise
relating to any Acquisition Transaction. Without limiting the generality of the
foregoing, Target acknowledges and agrees that any violation of any of the
restrictions set forth in the preceding sentence by any Representative of any of
the Target Corporations, whether or not such Representative is purporting to act
on behalf of Target, shall be deemed to constitute a breach of this Section 4.4
by Target.
(b) Nothing contained in this Agreement shall prevent Target or its
Board of Directors from (i) furnishing information regarding any of the Target
Corporations (including copy of this Section 4.4) to any Person in connection
with or in response to a bona fide, unsolicited Acquisition Proposal or engaging
in discussions or negotiations with respect thereto if and only to the extent
that (A) the Board of Directors of Target determines in good faith, after
consultation with its financial advisor that such Acquisition Proposal is
reasonably likely to result in a Superior Offer, (B) the Board of Directors of
Target determines in good faith, after consultation with its outside counsel,
including discussions of applicable legal standards under Utah law, that such
action is required in order for the Board of Directors to comply with its
fiduciary duties under applicable law, (C) the Person who has requested such
information has executed and delivered to Target a non-disclosure agreement that
is not less restrictive than the non-disclosure agreement in effect between
Target and CPI, and (D) Target has not breached Section 4.4(a)(i), or (ii)
complying with Rule 14e-2 and Rule 14d-9 promulgated under the Exchange Act. In
addition, nothing in Section 4.4(a) above shall prevent the Board of Directors
of Target from recommending a Superior Offer to its stockholders, if the Board
of Directors determines, after consultation with its outside counsel, including
discussions of applicable legal standards under Utah law, that, in light of such
Superior Offer, such recommendation is required in order for the Board of
Directors to comply with its fiduciary obligations to Target's stockholders
under applicable law (which determination shall be made in light of a revised
proposal, if any, made by CPI prior to the date of such determination); provided
however that Target (i) shall provide CPI with at least 48 hours prior written
notice of its intentions to hold
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any meeting at which Target's Board of Directors is reasonably expected to
consider an Acquisition Proposal, or such lesser amount of time as has been
given to the Board of Directors in relation to such meeting, and (ii) Target
shall not recommend to its stockholders a Superior Offer for at least two (2)
business days after Target has provided CPI with the material terms of such
Superior Offer.
(c) Target shall promptly advise CPI orally and in writing of any
Acquisition Proposal (including the identity of the Person making or submitting
such Acquisition Proposal and the terms thereof) that is made or submitted by
any Person during the Pre-Closing Period. Target shall keep CPI informed with
respect to material changes to the terms of any such Acquisition Proposal and
any material modification or proposed modifications thereto.
(d) Target shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition Proposal and
shall request the return or destruction of any confidential information
previously disclosed to such Person and shall use commercially reasonable
efforts to ensure that such information is destroyed or returned.
4.5 NO SOLICITATION BY CPI.
(a) CPI shall not, directly or indirectly, and shall not authorize or
permit any Representative of CPI, directly or indirectly, to (i) solicit,
initiate, knowingly encourage or induce the making, submission or announcement
of any Acquisition Proposal or take any similar action, (ii) furnish any
non-public information regarding CPI to any Person in connection with or in
response to an Acquisition Proposal, (iii) engage in discussions or negotiations
with any Person with respect to any Acquisition Proposal, (iv) approve, endorse
or recommend any Acquisition Proposal or (v) enter into any letter of intent or
similar document or any Contract contemplating or otherwise relating to any
Acquisition Transaction. Without limiting the generality of the foregoing, CPI
acknowledges and agrees that any violation of any of the restrictions set forth
in the preceding sentence by any Representative of CPI, whether or not such
Representative is purporting to act on behalf of CPI, shall be deemed to
constitute a breach of this Section 4.5 by CPI.
(b) Nothing contained in this Agreement shall prevent CPI or its Board
of Directors from (i) furnishing information regarding CPI (including a copy of
this Section 4.5) to any Person in connection with or in response to a bona
fide, unsolicited Acquisition Proposal or engaging in discussions or
negotiations with respect thereto if and only to the extent that (A) the Board
of Directors of CPI determines in good faith, after consultation with its
financial advisor that such Acquisition Proposal is reasonably likely to result
in a Superior Offer, (B) the Board of Directors of CPI determines in good faith,
after consultation with its outside counsel, including discussions of applicable
legal standards under Delaware law, that such action is required in order for
the Board of Directors to comply with its fiduciary duties under applicable law,
(C) the Person who has requested such information has executed and delivered to
CPI a non-disclosure agreement that is not less restrictive than the
non-disclosure agreement in effect between CPI and Target, and (D) CPI has not
breached Section 4.5(a)(i), or (ii) complying with Rule 14e-2 and Rule 14d-9
promulgated under the Exchange Act. In addition, nothing in Section 4.5(a) above
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shall prevent the Board of Directors of CPI from recommending a Superior Offer
to its stockholders, if the Board of Directors determines, after consultation
with its outside counsel, including discussions of applicable legal standards
under Delaware law that, in light of such Superior Offer, such recommendation is
required in order for the Board of Directors to comply with its fiduciary
obligations to CPI's stockholders under applicable law (which determination
shall be made in light of a revised proposal, if any, made by the Target prior
to the date of such determination); provided however that CPI (i) shall provide
Target with at least 48 hours prior written notice of its intention to hold any
meeting at which CPI's Board of Directors is reasonably expected to consider an
Acquisition Proposal, or such lesser amount of time as has been given to the
Board of Directors in relation to such meeting, and (ii) shall not recommend to
its stockholders a Superior Offer for at least two (2) business days after CPI
has provided Target with the material terms of such Superior Offer.
(c) CPI shall promptly advise Target orally and in writing of any
Acquisition Proposal (including the identity of the Person making or submitting
such Acquisition Proposal and the terms thereof) that is made or submitted by
any Person during the Pre-Closing Period. CPI shall keep Target informed with
respect to material changes to the terms of any such Acquisition Proposal and
any material modification or proposed modifications thereto.
(d) CPI shall immediately cease and cause to be terminated any
existing discussions with any Person that relate to any Acquisition Proposal and
shall request the return or destruction of any confidential information
previously disclosed to such Person and shall use commercially reasonable
efforts to ensure that such information is destroyed or returned.
5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 REGISTRATION STATEMENTS; JOINT PROXY STATEMENT.
(a) As promptly as practicable after the date of this Agreement, CPI
and Target shall prepare and cause to be filed with the SEC the Joint Proxy
Statement and simultaneously or thereafter CPI shall prepare and cause to be
filed with the SEC the Form S-4 Registration Statement, in which the Joint Proxy
Statement will be included as a prospectus. Each of CPI and Target shall use all
reasonable efforts to cause the Form S-4 Registration Statement and the Joint
Proxy Statement to comply with the rules and regulations promulgated by the SEC,
to respond promptly to any comments of the SEC or its staff and to have the Form
S-4
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Registration Statement or Joint Proxy Statement or for any other information
and shall supply the other with copies of all correspondence between such party
and the SEC or its staff or other governmental officials with respect to the S-4
Registration Statement or Joint Proxy Statement. The information supplied by
each of, Target and CPI for inclusion in the Form S-4 Registration Statement and
the Joint Proxy Statement shall not (i) at the time the Form S-4 Registration
Statement is declared effective, (ii) at the time the Joint Proxy Statement is
first mailed to the stockholders of Target and CPI, respectively, (iii) at the
time of the CPI Stockholders' Meeting and at the time of the Target
Stockholders' Meeting, and (iv) at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. If Target or CPI
becomes aware of any information, that should be disclosed in an amendment or
supplement to the Form S-4 Registration Statement or the Joint Proxy Statement,
then Target or CPI, as the case may be, shall promptly inform the other Party
thereof and shall cooperate with the other in filing such amendment or
supplement with the SEC and, if appropriate, in mailing such amendment or
supplement to the stockholders of CPI or the stockholders of Target.
(b) Prior to the Effective Time, CPI and Target shall use best efforts
to obtain all regulatory approvals needed to ensure that the Holdco Common Stock
to be issued in the Merger (i) will be registered or qualified under the
securities law of every jurisdiction of the United States in which any
registered holder of CPI Common Stock, CPI Preferred Stock or Target Common
Stock has an address of record on the record date for determining the
stockholders entitled to notice of and to vote at Stockholders' Meeting; and
(ii) will be approved for quotation at the Effective Time on the Nasdaq National
Market.
(c) On or prior to the Closing Date, Holdco shall file a Registration
Statement on Form S-8 covering the offer and sale by Holdco of Holdco Common
Stock pursuant to the CPI Options and Target Options.
5.2 CPI STOCKHOLDERS' MEETING.
(a) CPI shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and hold a meeting of the holders
of CPI Common Stock and CPI Preferred Stock to consider, act upon and vote upon
the approval of the CPI Charter Amendment, this Agreement and of the Mergers
(the "CPI STOCKHOLDERS' MEETING"). The CPI Stockholders' Meeting will be held as
promptly as practicable and in any event within forty-five (45) days after the
Form S-4 Registration Statement is declared effective under the Securities Act.
CPI shall ensure that the CPI Stockholders' Meeting is called, noticed,
convened, held and conducted, and that all proxies solicited in connection with
the CPI Stockholders' Meeting are solicited, in compliance with all applicable
Legal Requirements. CPI's obligation to call, give notice of, convene and hold
the CPI Stockholders' Meeting in accordance with this Section 5.2(a) shall not
be limited or otherwise affected by the withdrawal, amendment or modification of
the recommendation of the board of directors of CPI with respect to the Merger,
except as is required by applicable law.
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(b) Subject to Section 5.2(c): (i) the Board of Directors of CPI shall
unanimously recommend that the CPI stockholders vote in favor of and approve the
CPI Charter Amendment, this Agreement and the Mergers at the CPI Stockholders'
Meeting; (ii) the Joint Proxy Statement shall include a statement to the effect
that the board of directors of CPI has unanimously recommended that the CPI's
stockholders vote in favor of and approve the CPI Charter Amendment, this
Agreement and the Mergers at the CPI Stockholders' Meeting; and (iii) neither
the Board of Directors of CPI nor any committee thereof shall withdraw, amend or
modify, or propose or resolve to withdraw, amend or modify, in a manner adverse
to Target, the unanimous recommendation of the Board of Directors of CPI that
CPI's stockholders vote in favor of and approve the CPI Charter Amendment, this
Agreement and the Mergers. For purposes of this Agreement, said recommendation
of the board of directors of CPI shall be deemed to have been modified in a
manner adverse to Target if said recommendation shall no longer be unanimous.
(c) Nothing in Section 5.2(b) shall prevent the Board of Directors of
CPI from withdrawing, amending or modifying its unanimous recommendation in
favor of the Mergers at any time prior to the approval of this Agreement by the
Required CPI Stockholder Vote if (i) a Superior Offer is made to CPI and is not
withdrawn, (ii) neither CPI nor any of its Representatives shall have violated
any of the restrictions set forth in Section 4.5, and (iii) the Board of
Directors of CPI concludes in good faith, after consultation with its outside
counsel, including discussion of applicable legal standards under Delaware law,
that, in light of such Superior Offer, the withdrawal, amendment or modification
of such recommendation is required in order for the Board of Directors of CPI to
comply with its fiduciary obligations to the CPI's stockholders under applicable
law. Except as may be limited by applicable law, nothing contained in this
Section 5.2 shall limit CPI's obligation to call, give notice of, convene and
hold the CPI Stockholders' Meeting (regardless of whether the unanimous
recommendation of the board of directors of CPI shall have been withdrawn,
amended or modified).
5.3 TARGET STOCKHOLDERS' MEETING.
(a) Target shall take all action necessary under all applicable Legal
Requirements to call, give notice of, convene and hold a meeting of the holders
of Target Common Stock to consider, act upon and vote upon the approval of this
Agreement and of the Mergers (the "TARGET STOCKHOLDERS' MEETING"). The Target
Stockholders' Meeting will be held as promptly as practicable and in any event
within forty-five (45) days after the Form S-4 Registration Statement is
declared effective under the Securities Act. Target shall ensure that the Target
Stockholders' Meeting is called, noticed, convened, held and conducted, and that
all proxies solicited in connection with the Target Stockholders' Meeting are
solicited in compliance with all applicable Legal Requirements. Target's
obligation to call, give notice of, convene and hold the Target Stockholders'
Meeting in accordance with this Section 5.3(a) shall not be limited or otherwise
affected by any withdrawal, amendment or modification of the recommendation of
the Board of Directors of Target with respect to the Merger, except as may be
required by applicable law.
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(b) Subject to Section 5.3(c): (i) the Board of Directors of Target
shall unanimously recommend that Target's stockholders vote in favor of and
approve this Agreement and the Mergers; (ii) the Joint Proxy Statement shall
include a statement to the effect that the Board of Directors of Target has
unanimously recommended that Target's stockholders vote in favor of and approve
this Agreement and the Mergers at the Target Stockholders' Meeting; and (iii)
neither the board of directors of Target nor any committee thereof shall
withdraw, amend or modify, or propose or resolve to withdraw, amend or modify,
in a manner adverse to CPI, the unanimous recommendation of the board of
directors of Target that Target's stockholders vote in favor of and approve this
Agreement and the Mergers. For purposes of this Agreement, said recommendation
of the Board of Directors of Target shall be deemed to have been modified in a
manner adverse to CPI if said recommendation shall no longer be unanimous.
(c) Nothing in Section 5.3(b) shall prevent the Board of Directors of
Target from withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger at any time prior to the approval of this Agreement by the
Required Target Stockholder Merger Vote if (i) a Superior Offer is made to
Target and is not withdrawn, (ii) neither Target nor any of its Representatives
shall have violated any of the restrictions set forth in Section 4.4, and (ii)
the Board of Directors of Target concludes in good faith, based upon the advice
of its outside counsel, including a discussion of applicable legal standards
under Delaware law, that the withdrawal, amendment or modification of such
recommendation is required in order for the Board of Directors of Target to
comply with its fiduciary obligations to Target's stockholders under applicable
law. Except as may be limited by applicable law, nothing contained in this
Section 5.3 shall limit Target's obligation to call, give notice of, convene and
hold the Target Stockholders' Meeting (regardless of whether the unanimous
recommendation of the board of directors shall have been withdrawn, amended or
modified).
5.4 REGULATORY APPROVALS. CPI and Target shall use all reasonable efforts
to file, as soon as practicable after the date of this Agreement, all notices,
reports and other documents required to be filed with any Governmental Body with
respect to the Mergers and the other transactions contemplated by this
Agreement, and to submit promptly any additional information requested by any
such Governmental Body. CPI and Target shall (1) give the other Party prompt
notice of the commencement of any Legal Proceeding by or before any Governmental
Body with respect to the Merger or any of the other transactions contemplated by
this Agreement, (2) keep the other Party informed as to the status of any such
Legal Proceeding, and (3) promptly inform the other Party of any communication
to or from any Governmental Body regarding the Mergers. CPI and Target will
consult and cooperate with one another, and will consider in good faith the
views of one another, in connection with any analysis, appearance, presentation,
memorandum, brief, argument, opinion or proposal made or submitted in connection
with any Legal Proceeding under or relating to any other federal or state
antitrust or fair trade law. In addition, except as may be prohibited by any
Governmental Body or by any Legal Requirement, in connection with any Legal
Proceeding under or relating to any federal or state antitrust or fair trade law
or any other similar Legal Proceeding, CPI and Target will permit authorized
Representatives of the other Party to be present at each meeting or conference
relating to any such Legal Proceeding and to have access to and be consulted in
connection with any document, opinion or proposal made or submitted to any
Governmental Body in connection with any such Legal Proceeding.
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5.5 CONTINUATION OF TARGET D&O INSURANCE. Target and T-Sub shall provide
for the continuance of current Target directors and officers insurance in
respect of acts prior to the Effective Date for the benefit of Target officers
and directors for a period of five (5) years after the Effective Date.
5.6 ADDITIONAL AGREEMENTS. Target and CPI shall use all reasonable efforts
to take, or cause to be taken, all actions necessary to consummate the Mergers
and make effective the other transactions contemplated by this Agreement.
Without limiting the generality of the foregoing, each Party to this Agreement
(i) shall make all filings (if any) and give all notices (if any) required to be
made and given by such Party in connection with the Mergers and the other
transactions contemplated by this Agreement, (ii) shall use all reasonable
efforts to obtain each Consent (if any) required to be obtained (pursuant to any
applicable Legal Requirement or Contract, or otherwise) by such Party in
connection with the Merger or any of the other transactions contemplated by this
Agreement, and (iii) shall use all reasonable efforts to lift any restraint,
injunction or other legal bar to the Mergers.
5.7 DISCLOSURE. Target and CPI shall consult with each other before issuing
any press release or otherwise making any public statement with respect to the
Merger or any of the other transactions contemplated by this Agreement. Without
limiting the generality of the foregoing, neither CPI nor Target shall, and
neither shall permit any of its Representatives to, make any disclosure
regarding the Merger or any of the other transactions contemplated by this
Agreement unless (a) the other Party shall have approved such disclosure or (b)
the disclosing Party shall have been advised in writing by its outside legal
counsel that such disclosure is required by applicable law and shall have given
the other Party the opportunity, to the extent practicable, to review and
comment upon the disclosure.
5.8 TAX MATTERS. Each of Target and CPI acknowledge and agree that (i) it
intends the transactions contemplated by this Agreement to qualify as transfers
subject to the provisions of Section 351(a) of the Code, (ii) it will report the
Mergers as such transfers in any and all federal, state and local income tax
returns filed by it. At or prior to the filing of the S-4 Registration Statement
with the SEC and, to the extent necessary, at the Closing, CPI and Target shall
execute and deliver to Cooley Godward LLP and to Morgan Lewis & Bockius LLP
management tax representation letters in a form agreed to by counsel to Target
and CPI. Following delivery of the management tax representations letters, each
of CPI and Target shall use its reasonable efforts to cause Cooley Godward LLP
and Morgan, Lewis & Bockius LLP, respectively, to deliver promptly to it a legal
opinion satisfying the requirements of Item 601 of Regulation S-K promulgated
under the Securities Act. In rendering such opinion, each of such counsel shall
be entitled to rely on the management tax representation letters. Target and CPI
shall use all reasonable efforts prior to the Effective Time to cause the
Mergers to qualify as tax free transfers under Section 351(a) of the Code.
5.9 RESIGNATION OF OFFICERS AND DIRECTORS. Except as otherwise agreed with
CPI, Target shall use all reasonable efforts to obtain and deliver to CPI prior
to the Closing the resignation of each officer and director of Target effective
as of the Effective Time, except any
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directors identified in Section 5.12 below who are members of the Board of
Directors of Target immediately prior to the Effective Time.
5.10 FIRPTA MATTERS. At the Closing, (a) CPI shall deliver to Target a
statement (in such form as may be reasonably requested by counsel to Target)
conforming to the requirements of Section 1.897 - 2(h)(1)(i) of the United
States Treasury Regulations, and (b) CPI shall deliver to the Internal Revenue
Service the notification required under Section 1.897 - 2(h)(2) of the United
States Treasury Regulations.
5.11 AFFILIATE AGREEMENTS. No later than twenty (20) days in advance of the
Effective Time, each of the parties shall deliver to each other a list of
Persons who are "affiliates," as that term is used in Rule 145 under the
Securities Act (an "AFFILIATE LIST") of Target or CPI, as applicable. Prior to
the Effective Time, each of the parties shall deliver to each other an Affiliate
Agreement, in a mutually agreed form, duly executed by each Person on the
Affiliate List, and by each Person who becomes an affiliate after delivery of
the Affiliate List and prior to the date of delivery of the signed Affiliate
Agreements.
5.12 POST MERGER HOLDCO BOARD OF DIRECTORS. In addition to all of the
directors of CPI immediately prior to the Effective Time who shall serve as the
Board of Directors of Holdco effective immediately after the Effective Time, CPI
shall use all reasonable efforts to nominate and appoint two persons, designated
by Target in consultation with CPI, to join the Board of Directors of Holdco to
serve in such capacity until Holdco's 2000 annual stockholders meeting.
5.13 REGISTRATION RIGHTS. Holdco shall assume CPI's obligations under the
CPI Fourth Amended and Restated Stockholders' Agreement dated as of April 1998,
as amended (the "STOCKHOLDERS' AGREEMENT"); provided, however, that, CPI shall
use all reasonable efforts to provide that no Holder (as defined in the
Stockholders' Agreement) shall request registration or participation in a
registration of Holdco Common Stock until the earlier of (a) the date ninety
(90) days after the effective date of a registration statement for the first
public offering of Holdco's shares following the Effective Time, and (b) the
first anniversary of the Effective Time.
5.14 CPI REDEEMABLE PREFERRED STOCK. Prior to the Effective Time, CPI shall
redeem all outstanding shares of CPI Redeemable Preferred Stock in accordance
with the CPI Disclosure Schedule.
5.15 MARKET STAND-OFF AGREEMENT. CPI shall use reasonable best efforts to
obtain the agreement of each director and executive officer of CPI that such
person shall not directly or indirectly sell, offer to sell, contract to sell
(including without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any Holdco Common Stock beneficially owned by such person for one hundred
eighty (180) days from the Effective Time. Furthermore, CPI shall use reasonable
best efforts to obtain the agreement of each of the remaining holders of CPI
Common Stock and CPI Preferred Stock (each a "CPI INVESTOR") that such CPI
Investor shall not directly or indirectly sell, offer to sell, contract to sell
(including without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any
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Holdco Common Stock beneficially owned by such person for ninety (90) days from
the Effective Time.
5.16 NASDAQ LISTING. Each of the parties shall use its best efforts to
obtain, prior to the Effective Time, the approval for listing on the Nasdaq
National Market, effective upon official notice of issuance, of the shares of
Holdco Common Stock issuable in connection with the Mergers and which will be
issuable upon exercise of options assumed pursuant to this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF CPI
The obligations of CPI to effect the Mergers and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions:
6.1 ACCURACY OF REPRESENTATIONS. The representations and warranties of
Target contained in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) shall also be true
and correct on and as of the Closing Date, with the same force and effect as if
made on and as of the Closing Date; provided, however, that for purposes of this
Section 6.1 only, such representations and warranties shall be deemed to be true
and correct unless the failure or failures of such representations and
warranties to be so true and correct (without regard to materiality qualifiers
contained therein), individually or in the aggregate, results or would
reasonably be expected to result in a Material Adverse Effect on Target.
6.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that
Target is required to comply with or to perform at or prior to the Closing shall
have been complied with and performed in all material respects.
6.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the Form S-4 Registration Statement.
6.4 STOCKHOLDER APPROVAL. This Agreement and the Mergers shall have been
approved by the Required CPI Stockholder Vote and the Required Target
Stockholder Merger Vote. The CPI Charter Amendment shall have been approved by
the Required CPI Stockholder Vote.
6.5 DOCUMENTS. CPI shall have received the following documents:
(a) a legal opinion of Morgan, Lewis & Bockius LLP, dated as of the
Closing Date, in a form reasonably satisfactory to CPI and its legal counsel;
(b) a legal opinion of Cooley Godward LLP, dated as of the Closing
Date, to the effect that the Mergers will qualify as transfers subject to the
provisions of Section 351(a) of the Code, it being understood that, in rendering
such opinion, Cooley Godward LLP, may rely
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upon the tax representation letters referred to in Section 5.8 and a copy of the
legal opinions described in Section 7.6(b) hereof. The opinions described in
this Section 6.5(b) and in Section 7.6(b) shall be substantially identical in
form and substance; and
(c) a certificate executed on behalf of Target by its Chief Executive
Officer confirming that conditions set forth in Sections 6.1, 6.2, 6.4, 6.6 and
6.9 have been duly satisfied.
6.6 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in Target's business, financial condition, assets, liabilities,
operations or financial performance since the date of this Agreement (it being
understood that a decline in Target's stock price shall not constitute, in and
of itself, a Material Adverse Change).
6.7 NO RESTRAINTS. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of either of the Mergers
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Mergers that makes consummation of either of the Mergers
illegal.
6.8 DELIVERY OF AFFILIATES' AGREEMENTS. The Affiliate Agreements referred
to in Section 5.11 above shall have been executed by each Party therein
described and delivered to CPI.
6.9 CONSENTS. All material Consents required to be obtained in connection
with either of the Mergers and the other transactions contemplated by this
Agreement (including the Consents identified in the Target Disclosure Schedule)
shall have been obtained and shall be in full force and effect.
6.10 REGISTRATION. All regulatory approvals needed to ensure that the
Holdco Common Stock to be issued in the Merger will be registered or qualified
under the securities law of every jurisdiction of the United States in which any
registered holder of CPI Common Stock, CPI Preferred Stock has an address of
record on the record date for determining the stockholders entitled to notice of
and to vote at the CPI Stockholders' Meeting shall have been obtained.
6.11 NASDAQ LISTING. All regulatory approvals needed to ensure that the
Holdco Common Stock to be issued in the Merger will be approved for quotation at
the Effective Time on the Nasdaq National Market shall have been obtained.
6.12 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of either of the Mergers or any of the other
transactions contemplated by this Agreement; (b) relating to either of the
Mergers and seeking to obtain from Target or any of its subsidiaries any damages
that may be material to Target; (c) seeking to prohibit or limit in any material
respect Holdco's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of either Surviving
Corporation; or (d) that would materially and adversely
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affect the right of Holdco or either Surviving Corporation to own the assets
or operate the business of CPI.
6.13 NO OTHER LITIGATION. There shall not be pending any Legal Proceeding
in which there is a reasonable probability of an outcome that would have a
Material Adverse Effect on Holdco, CPI or Target: (a) challenging or seeking to
restrain or prohibit the consummation of either of the Mergers or any of the
other transactions contemplated by this Agreement; (b) relating to the Mergers
and seeking to obtain from Target or any of its subsidiaries any damages that
may be material to Target; (c) seeking to prohibit or limit in any material
respect Holdco's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of the Surviving
Corporations; or (d) resulting in Target as constituted after the Effective Time
not containing all of the assets and business of Target as constituted
immediately prior to the Effective Time.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF TARGET
The obligations of Target to effect the Mergers and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
7.1 ACCURACY OF REPRESENTATIONS. The representations and warranties of CPI
contained in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and (except to the extent such representations
and warranties speak as of an earlier date) shall also be true and correct on
and as of the Closing Date, with the same force and effect as if made on and as
of the Closing Date and CPI shall, if requested by Target, provide assurances
reasonably satisfactory to Target in respect of Section 3.25(d); provided,
however, that for purposes of this Section 7.1 only, such representations and
warranties shall be deemed to be true and correct unless the failure or failures
of such representations and warranties to be so true and correct (without regard
to materiality qualifiers contained therein), individually or in the aggregate,
results or would reasonably be expected to result in a Material Adverse Effect
on CPI or Holdco.
7.2 PERFORMANCE OF COVENANTS. CPI shall have complied with and performed in
all material respects each covenant contained in this Agreement that is required
to be performed by CPI on or prior to the date of the Closing.
7.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The Form S-4 Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act, and no stop order shall have been issued by the SEC with respect
to the Form S-4 Registration Statement.
7.4 STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been
duly approved by the Required CPI Stockholder Vote and the Required Target
Stockholder Merger Vote. The CPI Charter Amendment shall have been approved by
the Required CPI Stockholder Vote.
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7.5 CONSENTS. All material Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement
(including the Consents identified in the CPI Disclosure Schedule) shall have
been obtained and shall be in full force and effect.
7.6 DOCUMENTS. Target shall have received the following legal documents,
each of which shall be in full force and effect:
(a) a legal opinion of Cooley Godward LLP dated as of the Closing
Date, in a form reasonably satisfactory to Target and its legal counsel;
(b) a legal opinion of Morgan, Lewis & Bockius LLP dated as of the
Closing Date and addressed to Target, to the effect that the Mergers will
qualify as transfers subject to the provisions of Section 351(a) of the Code (it
being understood that, in rendering such opinion, Morgan Lewis & Bockius LLP may
rely upon the tax representation letters referred to in Section 5.8 and a copy
of the legal opinion described in Section 6.5(b) hereof). The opinions described
in this Section 7.6(b) and in Section 6.5(b) shall be substantially identical in
form and substance; and
(c) a certificate executed on behalf of CPI by its Chief Executive
Officer confirming that the conditions set forth in Sections 7.1, 7.2, 7.4, 7.5
and 7.7 have been duly satisfied.
7.7 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse
change in the business, financial condition, capitalization, assets,
liabilities, operations or financial performance of CPI since the date of this
Agreement. For purposes of this Section 7.7, material adverse change shall be
deemed to include any event, circumstance or occurrence, individually or in the
aggregate, causing, resulting in or reasonably likely to have a material adverse
effect upon CPI's business, results of operations or financial condition (i)
arising from or relating to any clinical trials or studies conducted by CPI or
(ii) arising from or related to the development or commercialization of
technology, processes or products relating to adenomatous colonic polyps that
are (or may reasonably be expected to be) superior to CPI's technology,
processes or products. For purposes of this Section 7.7, a material adverse
change shall not include any event, circumstance or occurrence, individually or
in the aggregate, causing, resulting in, or reasonably likely to have a material
adverse effect upon CPI's business, results of operations or financial condition
(i) arising from or relating to general business or economic conditions, (ii)
relating to or affecting the biotechnology industry generally or (iii) relating
to or affecting the colonic cancer therapeutics industry generally.
7.8 DIRECTORS. The Parties shall have taken all actions necessary to cause
the Board of Directors of Holdco following the Effective Time to consist of the
individuals set forth in Section 5.12.
7.9 REGISTRATION. All regulatory approvals needed to ensure that the Holdco
Common Stock to be issued in the Merger will be registered or qualified under
the securities law
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of every jurisdiction of the United States in which any registered holder of
Target Common Stock has an address of record on the record date for determining
the stockholders entitled to notice of and to vote at the Target Stockholders'
Meeting shall have been obtained.
7.10 NASDAQ LISTING. All regulatory approvals needed to ensure that the
Holdco Common Stock to be issued in the Merger will be approved for quotation at
the Effective Time on the Nasdaq National Market shall have been obtained.
7.11 DELIVERY OF AFFILIATES' AGREEMENTS. The Affiliate Agreements referred
to in Section 5.11 above shall have been executed by each Party therein
described and delivered to CPI.
7.12 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Mergers
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Mergers that makes consummation of the Mergers illegal.
7.13 NO GOVERNMENTAL LITIGATION. There shall not be pending or threatened
any Legal Proceeding in which a Governmental Body is or is threatened to become
a party or is otherwise involved: (a) challenging or seeking to restrain or
prohibit the consummation of either of the Mergers or any of the other
transactions contemplated by this Agreement; (b) relating to either of the
Mergers and seeking to obtain from Target or any of its subsidiaries any damages
that may be material to Target; (c) seeking to prohibit or limit in any material
respect Holdco's ability to vote, receive dividends with respect to or otherwise
exercise ownership rights with respect to the stock of either Surviving
Corporation; or (d) that would materially and adversely affect the right of
Holdco or either Surviving Corporation to own the assets or operate the business
of CPI.
7.14 NO OTHER LITIGATION. There shall not be pending any Legal Proceeding
in which there is a reasonable probability of an outcome that would have a
Material Adverse Effect on Holdco, CPI or Target: (a) challenging or seeking to
restrain or prohibit the consummation of either of the Mergers or any of the
other transactions contemplated by this Agreement; (b) relating to either of the
Mergers and seeking to obtain from Holdco or Target or any of its subsidiaries
any damages that may be material to Target; (c) seeking to prohibit or limit in
any material respect Holdco's ability to vote, receive dividends with respect to
or otherwise exercise ownership rights with respect to the stock of the
Surviving Corporations; or (d) that would affect adversely the right of Holdco
or the Surviving Corporations to own the assets or operate the business of CPI.
7.15 MARKET STAND-OFF AGREEMENTS. Each of CPI's directors and executive
officers shall have executed and delivered the market stand-off agreements
referred to in Section 5.12 hereof.
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8. TERMINATION
8.1 TERMINATION. This Agreement may be terminated prior to the Effective
Time (whether before or after approval of this Agreement and the Mergers by the
Required CPI Stockholder Vote and the Required Target Stockholder Vote):
(a) by mutual written consent of Target and CPI;
(b) by either Target or CPI if the Mergers shall not have been
consummated by November 30, 1998 (unless the failure to consummate either Merger
is attributable to a failure on the part of the Party seeking to terminate this
Agreement to perform any material obligation required to be performed by such
Party at or prior to the Effective Time);
(c) by either Target or CPI if a court of competent jurisdiction or
other Governmental Body shall have issued a final and nonappealable order,
decree or ruling, or shall have taken any other action, having the effect of
permanently restraining, enjoining or otherwise prohibiting the Mergers;
(d) by either Target or CPI if (i) the CPI Stockholders' Meeting shall
have been held and completed and (ii) the CPI Charter Amendment, this Agreement
and the Mergers shall not have been approved at such meeting by the Required CPI
Stockholder Vote;
(e) by either Target or CPI if (i) the Target Stockholders' Meeting
shall have been held and completed and (ii) this Agreement and the Mergers shall
not have been approved at such meeting by the Required Target Stockholder Merger
Vote;
(f) by Target (at any time prior to the approval of this Agreement and
the Mergers) if a CPI Triggering Event shall have occurred;
(g) by CPI (at any time prior to the approval of the issuance of
Holdco Common Stock in the Mergers by the Required Target Stockholder Merger
Vote) if a Target Triggering Event shall have occurred;
(h) by Target if any of CPI's representations and warranties contained
in this Agreement shall be or shall have become materially inaccurate, or if any
of CPI's covenants contained in this Agreement shall have been breached, and
such inaccuracy or breach would cause the condition set forth in Sections 7.1 or
7.2, respectively, to not be satisfied; provided, however, that if an inaccuracy
in CPI's representations and warranties or a breach of a covenant by CPI is
curable by CPI and CPI is continuing to exercise all reasonable efforts to cure
such inaccuracy or breach, then Target may not terminate this Agreement under
this Section 8.1(h) on account of such inaccuracy or breach until twenty (20)
days after delivery of written notice of the inaccuracy or breach to CPI by
Target; or
(i) by CPI if any of Target's representations and warranties contained
in this Agreement shall be or shall have become materially inaccurate, or if any
of Target's covenants contained in this Agreement shall have been breached, and
such inaccuracy or breach would
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cause the condition set forth in Sections 6.1 or 6.2, respectively, to not be
satisfied; provided, however, that if an inaccuracy in Target's representations
and warranties or a breach of a covenant by Target is curable by Target and
Target is continuing to exercise all reasonable efforts to cure such inaccuracy
or breach, then CPI may not terminate this Agreement under this Section 8.1(i)
on account of such inaccuracy or breach until twenty (20) days after delivery of
written notice of the breach or inaccuracy to Target by CPI.
8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement as provided in Section 8.1, this Agreement shall be of no further
force or effect; provided, however, that (i) this Section 8.2, Section 8.3 and
Section 9 shall survive the termination of this Agreement and shall remain in
full force and effect, (ii) the Nondisclosure Agreements shall remain in full
force and effect to the extent provided therein, and (iii) the termination of
this Agreement shall not relieve any Party from any liability for any breach of
any representation, warranty or covenant contained in this Agreement occurring
prior to the date of such termination if such Party is not obligated to pay a
termination fee pursuant to Section 8.3 hereof.
8.3 EXPENSES; TERMINATION FEES.
(a) Except as set forth in this Section 8.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated by
this Agreement shall be paid by the Party incurring such expenses, whether or
not the Mergers are consummated; provided, however, that Target and CPI shall
share equally all fees and expenses, other than attorneys' fees, incurred in
connection with the filing, printing and mailing of the Form S-4 Registration
Statement and the Joint Proxy Statement and any amendments or supplements
thereto.
(b) If this Agreement is terminated by Target pursuant to Section
8.1(f) or by Target or CPI pursuant to Section 8.1(d) hereof, CPI shall pay
Target a termination fee equal to (i) one million five hundred thousand dollars
($1,500,000) plus (ii) reimbursement of the amount of the professional fees and
expenses that Target incurred in connection with the Merger, up to two hundred
fifty thousand dollars ($250,000).
(c) If this Agreement is terminated by CPI pursuant to Section 8.1(g)
or by CPI or Target pursuant to Section 8.1(e) hereof, Target shall pay CPI a
termination fee equal to (i) one million five hundred thousand dollars
($1,500,000) plus (ii) reimbursement of the amount of the professional fees and
expenses that CPI incurred in connection with the Merger, up to two hundred
fifty thousand dollars ($250,000).
(d) Any termination fees and expenses payable under Section 8.3(b) or
8.3(c) above shall be paid in cash, via wire transfer of immediately available
funds no later than the close of business on the second business day following
the date on which the termination giving rise to such payment occurs.
(e) Target and CPI agree that the agreements contained in Sections
8.3(b) and (c) above are an integral part of the transactions contemplated by
this Agreement and constitute
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liquidated damages and not a penalty. If one Party fails to promptly pay to the
other any fee due under such Sections 8.3(b) and (c), the defaulting Party shall
pay the costs and expenses (including legal fees and expenses) in connection
with any action, including the filing of any lawsuit or other legal action,
taken to collect payment, together with interest on the amount of any unpaid fee
at the publicly announced prime rate of Citibank, N.A. from the date such fee
was required to be paid.
9. MISCELLANEOUS PROVISIONS
9.1 AMENDMENT. This Agreement may be amended with the approval of the
respective boards of directors of CPI and Target at any time (whether before or
after approval of this Agreement and the Mergers by the respective stockholders
of CPI and Target); provided, however, that after any such approval of this
Agreement and the Mergers by, respectively, CPI's stockholders and Target's
stockholders, no amendment shall be made that by law or NASD regulation requires
further approval of the respective stockholders of CPI or Target without the
further approval of such stockholders. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
9.2 WAIVER.
(a) No failure on the part of any Party to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any Party
in exercising any power, right, privilege or remedy under this Agreement, shall
operate as a waiver of such power, right, privilege or remedy; and no single or
partial exercise of any such power, right, privilege or remedy shall preclude
any other or further exercise thereof or of any other power, right, privilege or
remedy.
(b) No Party shall be deemed to have waived any claim arising out of
this Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or remedy is expressly
set forth in a written instrument duly executed and delivered on behalf of such
Party; and any such waiver shall not be applicable or have any effect except in
the specific instance in which it is given.
9.3 NO SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained in this Agreement or in any certificate
delivered pursuant to this Agreement shall survive the Mergers.
9.4 ENTIRE AGREEMENT; COUNTERPARTS; APPLICABLE LAW. This Agreement and the
other agreements and schedules referred to herein and therein and the
Non-Disclosure Agreements constitute the entire agreement and supersede all
prior agreements and understandings, both written and oral, among or between any
of the parties with respect to the subject matter hereof and thereof. This
Agreement may be executed in several counterparts, each of which shall be deemed
an original and all of which shall constitute one and the same instrument, and
shall be governed in all respects by the laws of the State of Delaware as
applied to contracts entered into and to be performed entirely within Delaware.
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9.5 JURY WAIVER. The parties hereto hereby agree to waive their respective
rights to a trial by jury of any claim or cause of action based upon or arising
out of or related to this Agreement or the transactions contemplated thereby in
any action, proceeding or other litigation of any type brought by any Party
against any other Party with respect to contracts, claims, tort claims or
otherwise. The scope of this waiver is intended to be as broad as permitted by
law, covering all disputes that may be filed in any court that relate to the
subject matter of this Agreement, including tort claims, contract claims, claims
under common law, statutory claims and any action, counterclaim or other
proceeding that seeks in whole or in part to challenge the validity or
enforceability of this Agreement or the transactions contemplated thereby. This
waiver is irrevocable.
9.6 ATTORNEYS' FEES. In any action at law or suit in equity to enforce this
Agreement or the rights of any of the parties hereunder, the prevailing Party in
such action or suit shall be entitled to receive a reasonable sum for its
attorneys' fees and all other reasonable costs and expenses incurred in such
action or suit.
9.7 ASSIGNABILITY. This Agreement shall be binding upon, and shall be
enforceable by and inure solely to the benefit of, the parties hereto and their
respective successors and assigns; provided, however, that neither this
Agreement nor any of the rights hereunder may be assigned by any Party without
the prior written consent of the other Party, and any attempted assignment of
this Agreement or any of such rights by a Party without such consent shall be
void and of no effect. Nothing in this Agreement, express or implied, is
intended to or shall confer upon any person except the parties hereto and their
respective successors any right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement.
9.8 NOTICES. Any notice or other communication required or permitted to be
delivered to any Party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such Party
below (or to such other address or facsimile telephone number as such Party
shall have specified in a written notice given to the other parties hereto):
if to Target or Merger Sub:
Target, Inc.
18 W. Airy Street
Suite 100
Courthouse Plaza
Morristown, PA 19041
Attention: John J. Gibbons
Phone: 610/313-9388
Fax: 610/239-7894
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with a copy to:
Morgan, Lewis & Bockius LLP
200 One Logan Square
Philadelphia, PA 19103
Attention: Stephen M. Goodman, Esq.
Phone: 215/963-5000
Fax: 215/963-5299
if to CPI :
Cell Pathways, Inc.
702 Electronic Drive
Horsham, PA 94044
Attention: Robert J. Towarnicki
Phone: 215/706-3800
Fax: 215/706-3801
with a copy to:
Cooley Godward LLP
2595 Canyon Boulevard
Suite 250
Boulder, Colorado 80302
Attention: James C.T. Linfield
Phone: 303/546-4000
Fax: 303/546-4099
9.9 COOPERATION. Each Party agrees to cooperate fully with the other Party
and to execute and deliver such further documents, certificates, agreements and
instruments and to take such other actions as may be reasonably requested by the
other Party to evidence or reflect the transactions contemplated by this
Agreement and to carry out the intent and purposes of this Agreement.
9.10 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine gender
shall include the feminine and neuter genders; the feminine gender shall include
the masculine and neuter genders; and the neuter gender shall include masculine
and feminine genders.
(b) The parties hereto agree that any rule of construction to the
effect that ambiguities are to be resolved against the drafting party shall not
be applied in the construction or interpretation of this Agreement.
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(c) As used in this Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this Agreement
and Exhibits to this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first above written.
TARGET
By:
-------------------------------------
John J. Gibbons
President/Chief Executive Officer
CELL PATHWAYS, INC.
By:
------------------------------------
Robert J. Towarnicki
President/ Chief Executive Officer
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EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
ACQUISITION PROPOSAL. "Acquisition Proposal" shall mean any offer or
proposal (other than an offer or proposal between Target and CPI) contemplating
or otherwise relating to any Acquisition Transaction in substitution for the
transactions provided in the Agreement.
ACQUISITION TRANSACTION. "Acquisition Transaction" shall mean any
transaction or series of related transactions involving:
(a) any merger, consolidation, share exchange, business combination,
tender offer, exchange offer or other similar transaction in which a Person or
"group" (as defined in the Exchange Act and the rules promulgated thereunder) of
Persons directly or indirectly acquires Target or CPI or more than 50% of
Target's business or CPI's business;
(b) any sale, lease, exchange, transfer, license, acquisition or
disposition of more than 50% of the assets of CPI or Target; or
(c) any offering of CPI capital stock that is registered under Section
5 of the Securities Act;
(d) any liquidation or dissolution of CPI or Target.
AGREEMENT. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached, as it may be amended from
time to time.
BEST OF KNOWLEDGE; KNOWLEDGE. Information shall be deemed to be known
to the "best of knowledge" or to the "knowledge" of a Party if that information
was actually known or reasonably should have been known by an executive officer
of such Party.
CPI COMMON STOCK. "CPI Common Stock" shall mean the Common Stock, $.01
par value, of CPI.
CPI CONTRACT. "CPI Contract" shall mean any Contract: (a) to which CPI
is a party; (b) by which CPI or any asset of CPI is or may become bound or under
which CPI has, or may become subject to, any obligation; or (c) under which CPI
has or may acquire any right or interest.
CPI DISCLOSURE SCHEDULE. "CPI Disclosure Schedule" shall mean the
disclosure schedule that has been prepared by CPI in conjunction with Section 3
and that has been delivered by CPI to Target on the date of this Agreement and
signed by the President of CPI.
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CPI OPTIONS. "CPI Options" shall mean each unexpired and unexercised
option to purchase shares of CPI Common Stock granted under the 1997 Equity
Incentive Plan or under the 1997 Non-Employee Director Stock Option Plan or
outside such plans and outstanding immediately prior to the Effective Time.
CPI PROPRIETARY ASSET. "CPI Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to CPI or otherwise used by CPI.
CPI PREFERRED STOCK. "CPI Preferred Stock" shall mean the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series D Convertible Preferred Stock, Series E
Convertible Preferred Stock, Series F Convertible Preferred Stock and Series G
Convertible Preferred Stock of CPI.
CPI RECORD DATE. "CPI Record Date" shall mean the record date for the
CPI Stockholders Meeting.
CPI TRIGGERING EVENT. A "CPI Triggering Event" shall be deemed to have
occurred if: (i) the board of directors of CPI shall have failed to recommend,
or shall for any reason have withdrawn or shall have amended or modified in a
manner adverse to Target its unanimous recommendation in favor of, the CPI
Charter Amendment, the Mergers or approval of this Agreement; (ii) CPI shall
have failed to include in the Joint Proxy Statement the unanimous recommendation
of the board of directors of CPI in favor of approval of the CPI Charter
Amendment, this Agreement and the Merger; (iii) the board of directors of CPI
fails to unanimously reaffirm its recommendation in favor of approval of the CPI
Charter Amendment, this Agreement and the Merger within five (5) business days
after the Target requests in writing that such recommendation be reaffirmed;
(iv) the board of directors of CPI shall have approved, endorsed or recommended
any Acquisition Proposal; (v) CPI shall have entered into any letter of intent
or similar document or any Contract relating to any Acquisition Proposal; (vi)
CPI shall have failed to hold CPI Stockholders' Meeting as promptly as
practicable and in any event within forty-five (45) days after the Form S-4
Registration Statement is declared effective under the Securities Act; (vii) a
tender or exchange offer relating to securities of CPI shall have been commenced
and CPI shall not have sent to its security holders, within five (5) business
days after the commencement of such tender or exchange offer, a statement
disclosing that CPI recommends rejection of such tender or exchange offer; or
(viii) an Acquisition Proposal is publicly announced, and CPI (A) fails to issue
a press release announcing its opposition to such Acquisition Proposal within
five (5) business days after such Acquisition Proposal is announced or (B)
otherwise fails to actively oppose such Acquisition Proposal.
CPI WARRANTS. CPI Warrants shall mean the outstanding warrants of CPI
to purchase Series E Preferred Stock, Series F Preferred Stock Series G
Preferred Stock or Common Stock.
CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended.
CONSENT. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
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CONTRACT. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense, insurance policy, benefit plan or legally
binding commitment or undertaking of any nature.
ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
ENTITY. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
ENVIRONMENTAL LAW. "Environmental Law" means any federal, state, local
or foreign Legal Requirement relating to pollution or protection of human health
or the environment (including ambient air, surface water, ground water, land
surface or subsurface strata), including any law or regulation relating to
emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
FORM S-4 REGISTRATION STATEMENT. "Form S-4 Registration Statement"
shall mean the registration statement on Form S-4 to be filed with the SEC by
Holdco in connection with issuance of Holdco Common Stock in the Mergers, as
said registration statement may be amended prior to the time it is declared
effective by the SEC.
GOVERNMENTAL AUTHORIZATION. "Governmental Authorization" shall mean
any: (a) permit, license, certificate, franchise, permission, variance,
clearance, registration, qualification or authorization issued, granted, given
or otherwise made available by or under the authority of any Governmental Body
or pursuant to any Legal Requirement; or (b) right under any Contract with any
Governmental Body.
GOVERNMENTAL BODY. "Governmental Body" shall mean any: (a) nation,
state, commonwealth, province, territory, county, municipality, district or
other jurisdiction of any nature; (b) federal, state, local, municipal, foreign
or other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department,
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agency, commission, instrumentality, official, organization, unit, body or
Entity and any court or other tribunal).
JOINT PROXY STATEMENT. "Joint Proxy Statement" shall mean the joint
proxy statement/prospectus to be sent to CPI's stockholders in connection with
the CPI Stockholder's Meeting and to Target's stockholders in connection with
the Target Stockholders' Meeting.
LEGAL PROCEEDING. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
MATERIAL ADVERSE EFFECT. An event, violation, inaccuracy, circumstance
or other matter will be deemed to have a "Material Adverse Effect" on CPI if
such event, violation, inaccuracy, circumstance or other matter would have a
material adverse effect on (i) the business, financial condition,
capitalization, assets, liabilities, operations or financial performance of CPI
or (ii) the ability of the company to consummate the Merger or any of the other
transactions contemplated by this Agreement or to perform obligations under this
Agreement. An event, violation, inaccuracy, circumstance or other matter will be
deemed to have a "Material Adverse Effect" on Target if such event, violation,
inaccuracy, circumstance or other matter would have a material adverse effect on
(i) the business, financial condition, assets, liabilities, operations or
financial performance of the Target Corporations taken as a whole or (ii) the
ability of Target to consummate the Merger or any of the other transactions
contemplated by this Agreement or to perform its obligations under this
Agreement.
MATERIALS OF ENVIRONMENTAL CONCERN. "Materials of Environmental
Concern" include chemicals, pollutants, contaminants, wastes, toxic substances,
petroleum and petroleum products and any other substance that is now or
hereafter regulated by any Environmental Law or that is otherwise a danger to
health, reproduction or the environment.
PENSION PLAN. "Pension Plan" shall mean any employee pension benefit
plan (as defined in Section 3(2) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), whether or not excluded from coverage under
specific Titles or Subtitles of ERISA).
PERSON. "Person" shall mean any individual, Entity or Governmental
Body.
PROPRIETARY ASSET. "Proprietary Asset" shall mean any material: (a)
patent, patent application, trademark (whether registered or unregistered),
trademark application, trade name, fictitious business name, service mark
(whether registered or unregistered), service mark
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application, copyright (whether registered or unregistered), copyright
application, maskwork, maskwork application, trade secret, know-how, customer
list, franchise, system, computer software, computer program, source code,
algorithm, invention, design, blueprint, engineering drawing, proprietary
product, technology, proprietary right or other intellectual property right or
intangible asset; or (b) right to use or exploit any of the foregoing.
REPRESENTATIVES. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange
Commission.
SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933,
as amended.
SUBSIDIARY. An entity shall be deemed to be a "Subsidiary" of another
Person if such Person directly or indirectly owns, beneficially or of record, an
amount of voting securities or other interests in such Entity that is sufficient
to enable such Person to elect at least a majority of the members of such
Entity's board of directors or other governing body.
SUPERIOR OFFER. "Superior Offer" shall mean an unsolicited, bona fide
written Acquisition Proposal on terms that the board of directors of CPI or
Target, as the case may be, determines in its reasonable judgment, after
consultation with its financial advisor, to be more favorable to CPI's
stockholders or Target's stockholders, as the case may be, than the terms of the
Mergers.
TARGET COMMON STOCK. "Target Common Stock" shall mean the Common Stock,
$0.005 par value per share, of Target.
TARGET CONTRACT. "Target Contract" shall mean any Contract: (a) to
which any of the Target Corporations is a party; (b) by which any Target
Corporation or any asset of a Target Corporation may become bound or under which
any Target Corporation has, or may become subject to, any obligation; or (c)
under which any Target Corporation has or may acquire any right or interest.
TARGET CORPORATION. "Target Corporation," or "Target Corporations" in
the plural, shall mean Target and any Target subsidiary.
TARGET DISCLOSURE SCHEDULE. "Target Disclosure Schedule" shall mean the
disclosure schedule that has been prepared by Target in conjunction with Section
2 and that has been delivered by Target to CPI on the date of this Agreement and
signed by the President of Target.
TARGET OPTIONS. "Target Options" shall mean stock options granted by
Target pursuant to the Target's 1991 Stock Option Plan, Target's 1995 Stock
Option Plan and Target's 1991 Special Directors' Stock Option Plan.
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TARGET PROPRIETARY ASSET. "Target Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to any of the Target Corporations or
otherwise used by any of the Target Corporations.
TARGET RECORD DATE. "Target Record Date" shall mean the record date for
the Target Stockholders Meeting.
TARGET TRIGGERING EVENT. A "Target Triggering Event" shall be deemed to
have occurred if: (i) the board of directors of the Target shall have failed to
recommend, or shall for any reason have withdrawn or shall have amended or
modified in a manner adverse to CPI its unanimous recommendation in favor of,
the Merger or approval of this Agreement; (ii) Target shall have failed to
include in the Joint Proxy Statement the unanimous recommendation of the board
of directors of Target in favor of approval of this Agreement and the Merger;
(iii) the board of directors of Target fails to unanimously reaffirm its
recommendation in favor of approval of this Agreement and the Merger within five
(5) business days after CPI requests in writing that such recommendation be
reaffirmed; (iv) the board of directors of Target shall have approved, endorsed
or recommended any Acquisition Proposal; (v) Target shall have entered into any
letter of intent or similar document or any Contract relating to any Acquisition
Proposal; (vi) Target shall have failed to hold the Target Stockholders' Meeting
as promptly as practicable and in any event within forty-five (45) days after
the Form S-4 Registration Statement is declared effective under the Securities
Act; (vii) a tender or exchange offer relating to securities of Target shall
have been commenced and Target shall not have sent to its security holders,
within five (5) business days after the commencement of such tender or exchange
offer, a statement disclosing that Target recommends rejection of such tender or
exchange offer; or (viii) an Acquisition Proposal is publicly announced, and
Target (A) fails to issue a press release announcing its opposition to such
Acquisition Proposal within five (5) business days after such Acquisition
Proposal is announced or (B) otherwise fails to actively oppose such Acquisition
Proposal.
TAX. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
TAX RETURN. "Tax Return" shall mean any return (including any
information return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
WELFARE PLAN. "Welfare Plan" shall mean an employee welfare benefit
plan (as defined in Section 3(1) of ERISA, whether or not excluded from coverage
under specific Titles or Subtitles of ERISA).
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EXHIBIT B
FORM OF CERTIFICATE OF INCORPORATION
OF
HOLDCO COMPANY
I.
The name of the corporation is Holdco Company (the "Corporation").
II.
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, and the
name of the registered agent of the Corporation in the State of Delaware at such
address is Corporation Service Company.
III.
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. The Corporation shall be authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock". The total
number of shares that the Corporation shall be authorized to issue is
seventy-five million (75,000,000) shares. Seventy million (70,000,000) shares
shall be Common Stock, each having a par value of One Cent ($.01). Five million
(5,000,000) shares shall be Preferred Stock, each having a par value of One Cent
($.01).
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to provide for such issuance, and to fix or alter from time to time the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions of any wholly unissued
series of Preferred Stock, and to establish from time to time the number of
shares constituting any such series or any of them; and to increase or decrease
the number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
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C. Subject to the rights of any Preferred Stock then outstanding, each
issued and outstanding share of Common Stock shall entitle the Holder thereof to
receive such dividends as may be declared from time to time by the Board of
Directors of the Corporation out of funds legally available therefor, and shall
entitle the Holder thereof to share ratably with other Holders of Common Stock
in all assets available for distribution in the event of any liquidation,
dissolution or winding up of the Corporation. Each issued and outstanding share
of Common Stock shall be identical to all other shares of that class, and shall
entitle the Holder thereof to cast one vote on each matter submitted to a vote
of the Corporation's stockholders. No Holder of Common Stock shall be entitled
to any cumulative voting rights or to any preemptive rights upon the issuance or
sale of any Securities.
V.
For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. 1. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. The number of directors that
shall constitute the whole Board of Directors shall be fixed exclusively by one
or more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following the filing of this
Certificate of Incorporation, the term of office of the Class I directors shall
expire and Class I directors shall be elected for a full term of three years. At
the second annual meeting of stockholders following the filing of this
Certificate of Incorporation, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the filing of this
Certificate of Incorporation, the term of office of the Class III directors
shall expire and Class III directors shall be elected for a full term of three
years. At each succeeding annual meeting of stockholders, directors shall be
elected for a full term of three years to succeed the directors of the class
whose terms expire at such annual meeting.
Each director shall serve beyond the term specified until his
successor is duly elected and qualified or until his death, resignation or
removal. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
3. Subject to the rights of the holders of any series of
Preferred Stock, a director may be removed only for cause and only by the
affirmative vote of the holders of a
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majority of the voting power of all the then-outstanding shares of voting stock
of the Corporation, entitled to vote at an election of directors (the "Voting
Stock").
4. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, be filled
only by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors, and not by the
stockholders. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the director for which
the vacancy was created or occurred and until such director's successor shall
have been elected and qualified.
5. The Board of Directors shall designate and empower
committees of the Board of Directors, shall elect and empower the officers of
the Corporation, may appoint and empower other officers and agents of the
Corporation, and shall determine the time, place and notice of Board meetings,
quorum and voting requirements, and the manner of taking Board action. Subject
to the other provisions of this Article V, the Board of Directors shall
determine the rights, powers, duties, rules and procedures that shall affect the
directors' power to manage and direct the business and affairs of the
Corporation. Notwithstanding any other provision of this Certificate of
Incorporation, the powers specified in this Article V shall be exercised only by
or under the direction of the Board of Directors and may be exercised or
expressed in the form of resolution, Bylaw or other form of determination or
exercise; and the form of the exercise of the power shall not derogate the
status of the power exercised or imply that such exercise by the Board of
Directors may be altered or superseded by any person, group or entity other than
the Board of Directors.
B. 1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
may be altered or amended or new Bylaws adopted by the affirmative vote of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the Voting Stock. The Board of Directors shall
also have the power to adopt, amend, or repeal Bylaws.
2. The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the
Corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws or by unanimous written consent of the stockholders.
4. Special meetings of the stockholders of the Corporation may
be called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors
pursuant to a resolution adopted by a majority of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption), and shall be held at such place, on such date, and at
such time as the Board of Directors shall fix.
B-3
<PAGE> 251
5. Advance notice of stockholder nominations for the election
of directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
VI.
A. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in Section B of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law that might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI
and VII.
B-4
<PAGE> 252
EXHIBIT C
FORM OF CPI CHARTER AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
CELL PATHWAYS, INC.
Cell Pathways, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"CORPORATION"), DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Cell Pathways, Inc.
SECOND: The original Certificate of Incorporation of the Corporation
was (i) filed with the Secretary of State of Delaware on November 24, 1992.
THIRD: The Board of Directors of the Corporation, acting in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware, has adopted resolutions to amend the Sixth Amended and Restated
Certificate of Incorporation of the Corporation.
FOURTH: The Sixth Amended and Restated Certificate of Incorporation
shall be amended as follows:
1. Subsection E.3(e) of Article IV is amended to add the following
sentence:
"In addition, the Excluded Merger (as defined in Subsection E.7
below), shall not be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of any of the
provisions of this Section E.3."
2. Subsection E.5(f) of Article IV is amended to add the following
sentence:
"Notwithstanding the foregoing, in the event of the Excluded
Merger, no conversion price adjustment shall be made and no holder
of Designated Preferred Stock or Common Stock of the Corporation
shall be entitled to receive, as consideration for any of such
holder's Preferred Stock or Common Stock, any payment,
consideration or exchange of cash, securities or other property
other than the consideration set forth in the Reorganization
Agreement."
3. The following new Subsection E.6(e) is added to Article IV,
immediately following Subsection E.6(d):
C-1
<PAGE> 253
"(e) Notwithstanding any other provision of this Restated
Certificate, in the event of the Excluded Merger, no holder of
Designated Preferred Stock or Common Stock of the Corporation
shall be entitled to receive, as consideration for any of such
holder's Preferred Stock or Common Stock, any payment,
consideration or exchange of cash, securities or other property
other than the consideration set forth in the Reorganization
Agreement."
4. The following definition is inserted Subsection E.7 of Article IV,
immediately following the definition of "Designated Preferred
Stock":
"EXCLUDED MERGER" shall mean the transactions contemplated by that
certain Agreement and Plan of Reorganization, dated June __, 1998,
by and between Cell Pathways, Inc. and Target."
FIFTH: Thereafter, pursuant to a resolution of the Board of Directors
of the Corporation, this Certificate of Amendment was submitted to the
stockholders of the Corporation for their approval in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to
be signed by its duly authorized officer this ___ day of _________, 1998.
Cell Pathways, Inc.
By:
------------------------------------
Robert J. Towarnicki
President/Chief Executive Officer
C-2
<PAGE> 254
APPENDIX B -- PROPOSED AMENDMENTS TO CPI CERTIFICATE OF INCORPORATION AND CPI'S
SIXTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
B-1
<PAGE> 255
APPENDIX B - AMENDMENTS TO CPI CERTIFICATE
Cell Pathways, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"CORPORATION"), DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Cell Pathways, Inc.
SECOND: The original Certificate of Incorporation of the Corporation
was (i) filed with the Secretary of State of Delaware on November 24, 1992.
THIRD: The Board of Directors of the Corporation, acting in accordance
with the provisions of Section 242 of the General Corporation Law of the State
of Delaware, has adopted resolutions to amend the Sixth Amended and Restated
Certificate of Incorporation of the Corporation.
FOURTH: The Sixth Amended and Restated Certificate of Incorporation
shall be amended as follows:
1. Subsection E.3(e) of Article IV is amended to add the following
sentence:
"In addition, the Excluded Merger (as defined in Subsection E.7
below), shall not be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of any of the
provisions of this Section E.3."
2. Subsection E.5(f) of Article IV is amended to add the following
sentence:
"Notwithstanding the foregoing, in the event of the Excluded
Merger, no conversion price adjustment shall be made and no holder
of Designated Preferred Stock or Common Stock of the Corporation
shall be entitled to receive, as consideration for any of such
holder's Preferred Stock or Common Stock, any payment,
consideration or exchange of cash, securities or other property
other than the consideration set forth in the Reorganization
Agreement."
3. The following new Subsection E.6(e) is added to Article IV,
immediately following Subsection E.6(d):
"(e) Notwithstanding any other provision of this Restated
Certificate, in the event of the Excluded Merger, no holder of
Designated Preferred Stock or Common Stock of the Corporation
shall be entitled to receive, as consideration for any of such
holder's Preferred Stock or Common Stock, any payment,
consideration or exchange of cash, securities or other property
other than the consideration set forth in the Reorganization
Agreement."
4. The following definition is inserted Subsection E.7 of Article IV,
immediately following the definition of "Designated Preferred Stock":
1.
<PAGE> 256
"EXCLUDED MERGER" shall mean the transactions contemplated by that
certain Agreement and Plan of Reorganization, dated June __, 1998,
by and between Cell Pathways, Inc. and Target."
FIFTH: Thereafter, pursuant to a resolution of the Board of Directors
of the Corporation, this Certificate of Amendment was submitted to the
stockholders of the Corporation for their approval in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to
be signed by its duly authorized officer this ___ day of _________, 1998.
Cell Pathways, Inc.
By:
--------------------------------------
Robert J. Towarnicki
President/Chief Executive Officer
2.
<PAGE> 257
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CELL PATHWAYS, INC.
<PAGE> 258
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CELL PATHWAYS, INC.
CELL PATHWAYS, INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation and the name under which the Corporation
was originally incorporated is Cell Pathways, Inc. The date of filing of its
original Certificate of Incorporation with the Secretary of State is November
24, 1992.
2. This Sixth Amended and Restated Certificate of Incorporation amends
and restates the Certificate of Incorporation of the Corporation as heretofore
amended or supplemented.
3. This Sixth Amended and Restated Certificate of Incorporation was
duly proposed by the Board of Directors of the Corporation and adopted by the
stockholders of the Corporation in accordance with Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware, and written notice of such
adoption by the stockholders without a meeting by less than unanimous written
consent has been given to those stockholders from whom such consent was not
received.
4. The text of the Certificate of Incorporation as amended or
supplemented prior hereto is hereby amended and restated to read as herein set
forth in full:
FIRST: The name of the Corporation is CELL PATHWAYS, INC.
1.
<PAGE> 259
SECOND: The registered office of the Corporation is to be located at
1013 Centre Road, City of Wilmington, County of New Castle, in the State of
Delaware. The name of its registered agent at that address is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware, as amended.
FOURTH: The classes of stock that the Corporation is authorized to
issue, and the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, are as follows:
A. AUTHORIZED STOCK. The Corporation is authorized to issue
three classes of stock designated, respectively, "Preferred Stock", "Redeemable
Preferred Stock" and "Common Stock." The total number of shares of all classes
of stock that the Corporation is authorized to issue is 40,861,250 shares,
consisting of 18,400,000 shares of Preferred Stock, $.01 par value, 61,250
shares of Redeemable Preferred Stock, $.01 par value and 22,400,000 shares of
Common Stock, $.01 par value.
B. COMMON STOCK. Subject to the rights of any Preferred Stock
or Redeemable Preferred Stock then outstanding, each issued and outstanding
share of Common Stock shall entitle the Holder thereof to receive such dividends
as may be declared from time to time by the Board of Directors of the
Corporation out of funds legally available therefor, and shall entitle the
Holder thereof to share ratably with other Holders of Common Stock in all assets
available for distribution in the event of any liquidation, dissolution or
winding up of the Corporation. Each issued and outstanding share of Common Stock
shall be identical to all other shares of that class, and shall entitle the
Holder thereof to cast one vote on each matter submitted
2.
<PAGE> 260
to a vote of the Corporation's stockholders. No Holder of Common Stock shall be
entitled to any cumulative voting rights or to any preemptive rights upon the
issuance or sale of any Securities.
C. REDEEMABLE PREFERRED STOCK. Each share of Redeemable
Preferred Stock shall be identical to all other shares of that class, and shall
have such powers, preferences and relative rights, and the qualifications,
limitations and restrictions as are set forth in Section E of this Article
FOURTH.
D. PREFERRED STOCK. The Preferred Stock shall be divided into
series. Each share of Preferred Stock of any series shall be identical with all
other shares of that series. The first six series of Preferred Stock (the
"Designated Preferred Stock") are set forth in the following table, with each
such series to have the designation listed below and to consist of the number of
authorized shares of Preferred Stock set forth opposite such series designation:
<TABLE>
<CAPTION>
SERIES DESIGNATION NUMBER OF SHARES
<S> <C>
Series A Convertible Preferred Stock 872,400
Series B Convertible Preferred Stock 848,100
Series C Convertible Preferred Stock 700,000
Series D Convertible Preferred Stock 675,350
Series E Convertible Preferred Stock 3,204,865
Series F Convertible Preferred Stock 4,934,788
Series G Convertible Preferred Stock 5,400,000
----------
Total 16,635,503
</TABLE>
The Board of Directors is expressly authorized to provide for
the issuance from time to time of all or any of the undesignated shares of
Preferred Stock in one or more additional series, and to fix the number of
shares of each such series and to determine or alter for each such series such
voting powers, full or limited, or no voting powers and such designations,
powers,
3.
<PAGE> 261
preferences and relative, participating, conversion or optional or other
rights, and such qualifications, limitations or restrictions thereof, as shall
be stated and expressed in the resolution or resolutions adopted by the Board of
Directors providing for the issuance of such shares and as may be permitted by
the Delaware General Corporation Law, as amended. The Board of Directors is also
expressly authorized to increase or decrease (but not below the number of shares
of such series then outstanding) the number of shares of Preferred Stock
comprising any series thereof so authorized subsequent to the issuance of shares
of that series. In the event that the number of shares of any such series shall
be so decreased, the shares constituting such decrease shall assume the status
of authorized but unissued shares of Preferred Stock without designation as to
series. Authorized shares of Series G Convertible Preferred Stock that have not
been issued, and for which unexercised warrants are not outstanding, as of July
31, 1998 shall assume the status of authorized but unissued shares of Preferred
Stock without designation as to series on such date, and the total number of
authorized shares of such series shall be reduced by such amount effective on
such date.
E. RIGHTS OF PREFERRED STOCK AND REDEEMABLE PREFERRED STOCK. The
powers, preferences and relative rights, and the qualifications, limitations and
restrictions, of each series of the Designated Preferred Stock and of the
Redeemable Preferred Stock are as follows:
1. VOTING AND PREEMPTIVE RIGHTS. Each Holder of Designated
Preferred Stock shall be entitled to cast the number of votes per share thereof
on each matter submitted to the Corporation's stockholders for voting as is
equal to the number of full shares of Common Stock into which such share is then
convertible pursuant to Section E.5 of this Article FOURTH. Such votes shall be
cast together with those cast by the Holders of Common Stock as one class except
as otherwise provided in this Certificate of Incorporation or by law. Holders of
Designated Preferred Stock shall be entitled to notice of any stockholders'
meetings in accordance with the Bylaws of the Corporation. Except as provided in
this Certificate of Incorporation or by law, the Holders of Redeemable Preferred
Stock shall not have any right to vote on matters submitted to the Corporation's
stockholders for voting. No Holder of Designated
4.
<PAGE> 262
Preferred Stock or Redeemable Preferred Stock shall be entitled to any
cumulative voting rights or to any preemptive rights upon the issuance or sale
of any Securities.
2. DIVIDEND RIGHTS.
(a) DIVIDENDS. No dividends (other than those payable solely
in Common Stock and/or rights to acquire Common Stock) shall be declared, paid
or set apart for payment on the Common Stock unless a dividend is concurrently
declared, paid or set apart for payment, as the case may be, on all outstanding
shares of Designated Preferred Stock in an amount for each share of Designated
Preferred Stock equal to the amount the Holder thereof would have received had
such share of Designated Preferred Stock been converted into Common Stock
pursuant to Section E.5 of this Article FOURTH immediately prior to the record
date of such dividend.
(b) OTHER DISTRIBUTIONS. In the event that the Corporation
shall declare a distribution on the Common Stock other than (i) cash dividends,
(ii) Common Stock dividends or (iii) any distribution described in Section E.3
of this Article FOURTH, then in each such case each Holder of the Designated
Preferred Stock shall be entitled to receive a proportionate share of any such
distribution determined as the amount thereof such Holder would have received
had his shares of Designated Preferred Stock been converted into Common Stock
pursuant to Section E.5 of this Article FOURTH immediately prior to the record
date of such distribution.
(c) NO OTHER RIGHTS. Except as provided in this Section E.2,
no dividend or distribution in cash or other property (other than for a
liquidating distribution or a redemption made pursuant to Section E.3 or Section
E.4 of this Article FOURTH, respectively) shall be declared, paid or set apart
for payment by the Corporation on the Designated Preferred Stock. No dividend or
distribution in cash or other property (other than for a liquidating
distribution or a redemption made pursuant to Section E.3 or Section E.4 of this
Article FOURTH, respectively) shall be declared, paid or set apart for payment
by the Corporation on the Redeemable Preferred Stock.
3. LIQUIDATION RIGHTS.
(a) PREFERENCES. If the Corporation shall be voluntarily or
involuntarily liquidated, dissolved or wound up, then the Holders of the
Designated Preferred Stock and Redeemable Preferred Stock shall be entitled to
receive in accordance with Subsection E.3(c) of this Article FOURTH, for each
share of such Stock held by them, prior and in preference to any distribution of
any of the assets or surplus funds of the Corporation to the Holders of Common
Stock by reason of their ownership thereof, the respective per share amounts set
forth for such Stock in the following table together with all declared but
unpaid dividends thereon:
5.
<PAGE> 263
<TABLE>
<CAPTION>
LIQUIDATION
CLASS/SERIES OF STOCK PREFERENCE
<S> <C>
Series A Convertible Preferred Stock $ 1.16
Series B Convertible Preferred Stock $ 1.24
Series C Convertible Preferred Stock $ 2.20
Series D Convertible Preferred Stock $ 3.0156
Series E Convertible Preferred Stock $ 3.15
Series F Convertible Preferred Stock $ 3.70
Series G Convertible Preferred Stock $ 4.75
Redeemable Preferred Stock $ 20.00
</TABLE>
The foregoing per share liquidation preference amounts shall be appropriately
adjusted for any stock dividends, combinations or splits with respect to such
shares.
(b) INSUFFICIENT ASSETS. If upon the occurrence of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the Corporation's property legally available for distribution among
the Holders of any class or series of Stock shall be insufficient to permit the
payment to such Holders of the full amount of their respective liquidation
preferences, then the entire property of the Corporation legally available for
distribution shall be distributed ratably among the Holders of such class or
series, as the case may be, in proportion to the aggregate preferential amounts
that each such Holder is otherwise entitled to receive.
(c) RANKING. All of the preferential amounts to be paid to the
Holders of the Series G Convertible Preferred Stock pursuant to this Section E.3
shall be paid or set apart for payment before the payment or setting apart for
payment of any amount for, or the distribution of any Corporation property to,
the Holders of the other Designated Preferred Stock, the Redeemable Preferred
Stock or the Common Stock pursuant to this Section E.3. All of the preferential
amounts to be paid to the Holders of the Series F Convertible Preferred Stock
pursuant to this Section E.3 shall be paid or set apart for payment before the
payment or setting apart for payment of any amount for, or the distribution of
any Corporation property to, the Holders of the Series A, B, C, D or E
Convertible Preferred Stock, the Redeemable Preferred Stock or the Common Stock
pursuant to this Section E.3. All of the preferential amounts to be paid to the
Holders of the Series E Convertible Preferred Stock pursuant to this Section E.3
shall be paid or set apart for payment before the payment or setting apart for
payment of any amount for, or the distribution of any Corporation property to,
the Holders of the Series A, B, C or D Convertible Preferred Stock, the
Redeemable Preferred Stock or the Common Stock pursuant to this Section E.3. All
of the preferential amounts to be paid to the Holders of the Series C
Convertible Preferred Stock pursuant to this Section E.3 shall be paid or set
apart for payment before the payment or setting apart for payment of any amount
for, or the distribution of any Corporation property to, the Holders of the
Series A, B, or D Convertible Preferred Stock, Redeemable Preferred Stock, or
the Common Stock pursuant to this Section E.3. All of the preferential amounts
to be paid to the Holders of the Series D Convertible Preferred Stock pursuant
to this Section E.3 shall be paid or set apart for payment before the payment or
setting
6.
<PAGE> 264
apart for payment of any amount for, or the distribution of any Corporation
property to, the Holders of the Series A or B Convertible Preferred Stock, the
Redeemable Preferred Stock or the Common Stock pursuant to this Section E.3. All
of the preferential amounts to be paid to the Holders of the Series B
Convertible Preferred Stock pursuant to this Section E.3 shall be paid or set
apart for payment before the payment or setting apart for payment of any amount
for, or the distribution of any Corporation property to, the Holders of the
Series A Convertible Preferred Stock, the Redeemable Preferred Stock or the
Common Stock pursuant to this Section E.3. All of the preferential amounts to be
paid to the Holders of the Series A Convertible Preferred Stock pursuant to this
Section E.3 shall be paid or set apart for payment before the payment or setting
apart for payment of any amount for, or the distribution of any Corporation
property to, the Holders of the Redeemable Preferred Stock or the Common Stock
pursuant to this Section E.3. Finally, all of the preferential amounts to be
paid to the Holders of the Redeemable Preferred Stock pursuant to this Section
E.3 shall be paid or set apart for payment before the payment or setting apart
for payment of any amount for, or the distribution of any Corporation property
to, the Holders of the Common Stock pursuant to this Section E.3.
(d) PARTICIPATION. After payment to the Holders of the
Designated Preferred Stock and the Redeemable Preferred Stock of the liquidation
preference amounts provided for above in this Section E.3, and the payment of
all liquidation preference amounts to all other series of Preferred Stock then
outstanding, then each Holder of Designated Preferred Stock shall be entitled to
receive such portion of the entire remaining property of the Corporation legally
available for distribution, if any, as (i) the number of shares of Common Stock
into which such Holder's Designated Preferred Stock is then convertible pursuant
to Section E.5 of this Article FOURTH bears to (ii) the number of shares of
Common Stock outstanding immediately prior to such liquidation, dissolution or
winding up assuming the exercise of all outstanding Options and the conversion
or exchange of all outstanding Convertible Securities (including, without
limitation, the conversion of all outstanding shares of Designated Preferred
Stock). Holders of Redeemable Preferred Stock shall have no right of
participation pursuant to this Subsection E.3(d).
(e) CERTAIN TRANSACTIONS. For purposes of this Section E.3,
(i) any acquisition of the Corporation by means of a merger, consolidation or
other form of corporate reorganization in which all of the outstanding shares of
Stock of the Corporation are exchanged for securities or other consideration
issued, or caused to be issued, by the acquiring corporation or its subsidiary
(other than solely a reincorporation transaction) or (ii) any sale of all or
substantially all of the assets of the Corporation, shall be deemed a
liquidation, dissolution or winding up of the Corporation. Upon the occurrence
of any such event, the Holders of Designated Preferred Stock and Redeemable
Preferred Stock shall be entitled to receive at the closing of such transaction
in cash, securities or other property (valued as provided in Subsection E.3(f)
of this Article FOURTH) the liquidation preferences as, and in the order,
provided for in this Section E.3, together with any participating distributions
from the Corporation to which they may thereafter be entitled pursuant to
Subsection E.3(d) of this Article FOURTH. Except as set forth in this Subsection
E.3(e), neither the consolidation or merger of the Corporation with or into any
other corporation or corporations, nor any reduction of the authorized or issued
shares of any class or series of Stock, whether now or hereafter authorized,
shall be deemed to be a
7.
<PAGE> 265
liquidation, dissolution or winding up of the Corporation within the meaning of
any of the provisions of this Section E.3.
(f) VALUATION. Whenever any distribution provided for in this
Section E.3 shall be payable in securities or property other than cash, the
value of such distribution shall be the fair market value of such securities or
property as determined in good faith by the Board of Directors.
4. REDEMPTION.
(a) OFFER OF REDEMPTION. Subject to Subsections E.6(b) and
E.6(d) of this Article FOURTH, the Corporation may, at its option, offer to
redeem, and thereafter redeem from accepting Holders out of funds of the
Corporation legally available therefor, some or all of the outstanding shares of
any class or series of Stock on such terms as the Corporation shall determine;
provided, that if such an offer is made to the Holders of any class or series of
Stock such offer shall be made to all Holders of such class or series (as the
case may be), for such Holders to have their shares of Stock redeemed on
identical terms, and any Holders of any such class may refuse any such offer in
their discretion. Notwithstanding the foregoing, and subject to Subsection
E.6(b), the Corporation may redeem the shares of Stock of any Holder, either in
whole or part, pursuant to any employment, consulting or other agreements
between the Corporation, on the one hand, and employees, officers or directors
of the Corporation, consultants to the Corporation or other Persons performing
services for the Corporation, on the other hand, pursuant to which the
Corporation has the option or obligation to purchase such shares upon the
occurrence of certain events, such as the termination of employment.
(b) MANDATORY REDEMPTION. Immediately upon the closing of any
sale of Common Stock in a firm commitment, underwritten public offering
registered under the Securities Act, the Corporation shall redeem all, but not
less than all, of the Redeemable Preferred Stock for the sum of $20.00 per
share, such sum to be appropriately adjusted for any stock dividends,
combinations or splits with respect to the Redeemable Preferred Stock (such sum
as so adjusted constituting the "Redemption Price"). At the option of the Board
of Directors of the Corporation, the Corporation may make payment of the
aggregate Redemption Price to each Holder of Redeemable Preferred Stock as a
result of any such public offering either (i) in cash, (ii) in shares of freely
transferable Common Stock registered under the Securities Act having an
aggregate offering price equal to the aggregate Redemption Price to which such
Holder is entitled, or (iii) partly in cash and partly in such shares of Common
Stock so long as each Holder of Redeemable Preferred Stock receives the same
proportion of cash and Common Stock.
(c) OPTIONAL REDEMPTION. Subject to Section E.6 (including
Subsection E.6(b)) of this Article FOURTH, the Corporation shall have the right,
upon notice given to all Holders of Redeemable Preferred Stock in accordance
with Subsection E.4(d) of this Article FOURTH, to redeem all (but not less than
all) of the shares of Redeemable Preferred Stock then outstanding for the then
Redemption Price.
8.
<PAGE> 266
(d) REDEMPTION DATE AND NOTICE. At least 15 but no more than
60 days prior to the closing of a public offering described in Subsection E.4(b)
of this Article FOURTH, or the date of any redemption to be made pursuant to
Subsection E.4(a) or Subsection E.4(c) of this Article FOURTH, the Corporation
shall mail written notice (the "Redemption Notice"), first class postage
prepaid, to each Holder (as at the close of business on the business day next
preceding the day on which such notice is given) of Stock to be redeemed
("Redemption Stock"), at the address last shown on the records of the
Corporation for such Holder, notifying such Holder of the prospective
redemption. The Redemption Notice shall contain the date for redemption of the
Redemption Stock (the "Redemption Date"), the Redemption Price, and the place at
which payment may be obtained, and shall call upon each Holder of Redemption
Stock to surrender to the Corporation, in the manner and at the place designated
in the Redemption Notice, such Holder's certificate or certificates representing
the Redemption Stock to be redeemed. Except as provided in Subsection E.4(e)
below, on or after the Redemption Date each Holder of Redemption Stock shall
surrender to the Corporation the certificate or certificates representing such
Holder's shares of such Stock in the manner and at the place designated in the
Redemption Notice. The Redemption Price of such shares shall thereupon be
payable to the order of the Person whose name appears on such certificate or
certificates of Redemption Stock as the owner thereof or, in the case where the
Redemption Price is to be paid in shares of Common Stock, such Common Stock
shall be issued in the name of such Person. Each share of Preferred Stock or
Redeemable Preferred Stock so redeemed shall be retired and canceled and shall
be restored to the status of an authorized but unissued share of Preferred Stock
without designation as to series, and may thereafter be reissued as a share of
Preferred Stock of any series other than a series of Designated Preferred Stock.
Each share of Common Stock so redeemed shall be retired and canceled and shall
be returned to the status of an authorized but unissued share of Common Stock.
Any Holder of Designated Preferred Stock that has received a Redemption Notice
may convert the securities which are the subject of the Redemption Notice
pursuant to Section 5 at any time prior to the Redemption Date set forth in the
Redemption Notice.
(e) RIGHTS FOLLOWING REDEMPTION. On or prior to the Redemption
Date the Corporation shall deposit with a bank or trust company selected by the
Board of Directors, as a trust fund for the benefit of Holders of Redemption
Stock, the aggregate Redemption Price required to redeem all outstanding shares
of Redemption Stock. The Corporation shall give to such bank or trust company
irrevocable instructions and authority to pay to each Holder of Redemption Stock
the Redemption Price for such Holder's shares thereof on or after the Redemption
Date upon receipt of notification from the Corporation that such Holder has
surrendered his share certificate or certificates to the Corporation in
accordance with the Redemption Notice. As of the Redemption Date the deposit
shall constitute full payment for the shares of Redemption Stock to the Holders
thereof, and from and after the Redemption Date the shares so called for
redemption shall be redeemed and shall be deemed to be no longer outstanding,
and the Holders thereof shall cease to be stockholders of the Corporation with
respect to such shares and shall have no rights with respect thereto except the
right to receive from the bank or trust company payment of the Redemption Price
for the shares, without interest, upon surrender of their certificates therefor.
If any certificate for Redemption Stock shall be lost, mutilated or destroyed,
then the Holder thereof may tender to the Corporation an affidavit to such
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effect together with an indemnity undertaking satisfactory to the Corporation,
which tender shall be deemed a tender of the certificate so lost, mutilated or
destroyed for all purposes of this Section E.4. The balance of any moneys or
shares of Common Stock deposited by the Corporation pursuant to this Subsection
E.4(e) remaining unclaimed at the expiration of 60 days following the Redemption
Date shall be returned to the Corporation upon its request expressed in a
resolution of the Board of Directors, and any claims for payment of the
Redemption Price of any shares of Redemption Stock shall thereafter be submitted
directly to the Corporation. Any interest earned on any funds so deposited by
the Corporation with any bank or trust company shall be the property of, and
shall be payable to, the Corporation.
(f) INSUFFICIENT REDEMPTION FUNDS. Where the Redemption Price
is to be paid other than in shares of Common Stock and where funds of the
Corporation legally available for payment of the Redemption Price on the
Redemption Date are insufficient to redeem the total number of shares of
Redemption Stock required to be redeemed, then those funds that are legally
available for payment of the Redemption Price shall be used to redeem the
maximum possible number of shares of such Redemption Stock that may be legally
redeemed. Any such redemption shall be made from the Holders of such Redemption
Stock ratably based on the number of shares of such Redemption Stock held by
each. The shares of such Redemption Stock not so redeemed shall remain
outstanding and shall be entitled to all of the rights and preferences provided
to such shares in this Certificate of Incorporation. At any time thereafter when
additional funds of the Corporation (or any corporation surviving any merger or
consolidation involving the Corporation) are legally available for the
redemption of shares of such Redemption Stock, such funds shall immediately be
used to redeem the balance of the shares of such Redemption Stock then
outstanding from the Holders thereof ratably based on the number of shares of
such Redemption Stock held by each.
5. CONVERSION. The Holders of the Designated Preferred Stock
shall have the following conversion rights:
(a) RIGHT TO CONVERT. Each share of Designated Preferred Stock
of any series shall be convertible, at the option of the Holder thereof at any
time after the issuance of such share, at the principal office of the
Corporation or any transfer agent for such Stock, into such number of fully paid
and nonassessable shares of Common Stock determined by dividing the Initial
Value for such series by the Conversion Price then in effect for such series
pursuant to this Section E.5. The "Initial Values" and initial "Conversion
Prices" for the various series of Designated Preferred Stock are set forth in
the following table:
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<TABLE>
<CAPTION>
SERIES OF PREFERRED STOCK INITIAL CONVERSION
VALUES PRICES
<S> <C> <C>
Series A Convertible Preferred Stock $ 1.16 $ 1.16
Series B Convertible Preferred Stock $ 1.24 $ 1.24
Series C Convertible Preferred Stock $ 2.20 $ 2.20
Series D Convertible Preferred Stock $ 3.0156 $ 3.0156
Series E Convertible Preferred Stock $ 3.15 $ 3.15
Series F Convertible Preferred Stock $ 3.70 $ 3.70
Series G Convertible Preferred Stock $ 4.75 $ 4.75
</TABLE>
Each Holder of Designated Preferred Stock may convert such Stock either in whole
or in part. The Conversion Prices for the various series of Designated Preferred
Stock shall be adjusted from time to time as provided in this Section E.5.
(b) MANDATORY CONVERSION. Each share of Designated Preferred
Stock of a particular series shall be automatically converted into fully paid
and nonassessable shares of Common Stock at the Conversion Price then in effect
for such series, without any action on the part of either the Corporation or the
Holder of such Stock, upon the earliest to occur of the following: (i) the date
specified by vote or written consent or agreement of the Holders of at least 67%
of the shares of such series then outstanding, (ii) the date specified by
resolution of the Board of Directors at such time as there are outstanding less
than 25% of the number of originally authorized shares of such series (as
adjusted for any stock dividends, combinations or splits with respect to such
series) and (iii) immediately upon the closing of the sale of Common Stock in a
firm commitment, underwritten public offering registered under the Securities
Act (other than a registration relating solely to either a transaction under
Rule 145 under the Securities Act (or any successor to such rule) or to any
employee benefit plan of the Corporation) at a public offering price (prior to
deduction of underwriter's discounts and expenses) equal to or exceeding $6.60
per share of Common Stock (as adjusted for any stock dividends, combinations or
splits with respect to such shares) and resulting in aggregate proceeds to the
Corporation and/or selling stockholders (prior to deduction of underwriter's
discounts and expenses and other expenses of the offering) of not less than
$10,000,000.
(c) METHOD OF CONVERSION.
(i) OPTIONAL CONVERSION. In order to convert
shares of Designated Preferred Stock into shares of Common Stock, the Holder of
Designated Preferred Stock shall surrender the certificates therefor, duly
endorsed, at the principal office of the Corporation or of any transfer agent
for such Stock, and shall give written notice to the Corporation at such office
that such Holder elects to convert the same and shall state therein the name or
names in which such Holder wishes the certificate or certificates for shares of
Common Stock to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such Holder of Designated
Preferred Stock a certificate or certificates for the number of shares of Common
Stock to which such Holder shall be entitled by reason of such conversion. Such
conversion shall be deemed to have been effected immediately prior to the close
of business on
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the date of surrender of the shares of Designated Preferred Stock to be
converted, and the Person or Persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
Holder or Holders of such shares of Common Stock on such date.
(ii) MANDATORY CONVERSION. If shares of
Designated Preferred Stock shall be automatically converted to Common Stock
pursuant to Subsection E.5(b) of this Article FOURTH, the Corporation shall
promptly mail written notice of such fact by first class mail, postage prepaid,
to each Holder of such shares at the address of such Holder as shown on the
books of the Corporation. Such notice shall specify the date on which the
automatic conversion occurred and shall call upon such Holder to surrender to
the Corporation, in the manner and at the place designated in such notice, the
certificate or certificates representing the shares of Designated Preferred
Stock so converted. The automatic conversion shall be deemed to have been
effected at the opening of business on the date specified therefor in Subsection
E.5(b) of this Article FOURTH.
(iii) UNAVAILABLE CERTIFICATES. If any
certificate for Designated Preferred Stock shall be lost, mutilated or
destroyed, then the Holder thereof may tender to the Corporation an affidavit to
such effect together with an indemnity undertaking satisfactory to the
Corporation, which tender shall be deemed a tender of the certificate so lost,
mutilated or destroyed for all purposes of this Section E.5.
(d) CONVERSION PRICE ADJUSTMENT: SUBDIVISION OR COMBINATION OF
SHARES. If the Corporation at any time or from time to time shall subdivide its
Common Stock into a greater number of shares of Common Stock, whether by stock
split, reclassification or otherwise, then the Conversion Price of each
outstanding series of Designated Preferred Stock shall be proportionately
reduced as of the effective date of such subdivision, or if the Corporation
shall take a record of Holders of its Common Stock for the purpose of effecting
such a subdivision, as of such record date, whichever is earlier. If the
Corporation at any time or from time to time shall combine its Common Stock into
a lesser number of shares of Common Stock, whether by consolidation,
reclassification or otherwise, then the Conversion Price of each outstanding
series of Designated Preferred Stock shall be proportionately increased as of
the effective date of such combination or, if the Corporation shall take a
record of Holders of its Common Stock for the purpose of effecting such a
combination, as of such record date, whichever is earlier.
(e) CONVERSION PRICE ADJUSTMENT: STOCK DIVIDENDS. If the
Corporation at any time or from time to time shall declare or pay, without
consideration, any dividend on the Common Stock payable in Common Stock, then
the Conversion Price of each outstanding series of Designated Preferred Stock
shall be proportionately decreased. If the Corporation shall declare or pay,
without consideration, any dividend on the Common Stock payable in any right to
acquire Common Stock for no consideration, then the Corporation shall be deemed
to have made a dividend payable in Common Stock (without consideration) in an
amount of shares thereof equal to the maximum number of shares issuable upon
exercise of such rights to acquire Common Stock.
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(f) CONVERSION PRICE ADJUSTMENT: RECLASSIFICATIONS AND
REORGANIZATIONS. If the Common Stock issuable upon conversion of the Designated
Preferred Stock shall be changed into the same or a different number of shares
of any other class or classes of Stock, Securities, the securities of any other
Person or any other property, whether by capital reorganization,
reclassification or otherwise (other than by a subdivision or combination of
shares provided for in Subsection E.5(d) of this Article FOURTH, or a merger or
other reorganization described in Subsection E.3(e) of this Article FOURTH),
then the terms of each outstanding share of Designated Preferred Stock shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted so that the Holder thereof shall receive upon
conversion thereof, in lieu of each share of Common Stock that such Holder would
otherwise have received, such number of shares of such other class or classes of
Stock, Securities, or other securities or property receivable upon such
reorganization or reclassification by the Holder of one share of Common Stock
issuable upon such conversion had conversion occurred immediately prior to such
reorganization or reclassification.
(g) CONVERSION PRICE ADJUSTMENT: ADDITIONAL SHARES OF
COMMON STOCK.
(i) ISSUE OF ADDITIONAL SHARES OF COMMON STOCK.
If the Corporation shall at any time or from time to time issue Additional
Shares of Common Stock (including Additional Shares of Common Stock deemed to be
issued pursuant to Subsection E.5(g)(iii) of this Article FOURTH) without
consideration or for a consideration per share less than the Conversion Price
with respect to any series of Designated Preferred Stock in effect immediately
prior to such issuance, then and in such event the Conversion Price for such
series of Designated Preferred Stock shall be reduced, concurrently with such
issuance, to a price (calculated to the nearest cent) determined by multiplying
such Conversion Price by a fraction, the numerator of which shall be the sum of
the number of shares of Common Stock into which all of the shares of Designated
Preferred Stock outstanding immediately prior to such issuance are then
convertible plus the number of shares of Common Stock that the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at such Conversion Price in
effect immediately prior to such issuance, and the denominator of which shall be
the sum of the number of shares of Common Stock into which all of the shares of
Designated Preferred Stock outstanding immediately prior to such issuance are
then convertible plus the number of such Additional Shares of Common Stock so
issued.
(ii) EXCLUDED ISSUANCES. For purposes of the
foregoing calculation, Additional Shares of Common Stock shall not include any
additional shares of Common Stock issuable with respect to Convertible
Securities or Options solely as a result of the adjustment to the respective
Conversion Prices (or other conversion ratios) thereof resulting from the
issuance of the Additional Shares of Common Stock causing such adjustment.
(iii) DEEMED ISSUE OF ADDITIONAL SHARES OF
COMMON STOCK. In the event that the Corporation at any time or from time to time
shall issue any Options or Convertible Securities or shall fix a record date for
the determination of Holders of any class of Securities then entitled to receive
any Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions
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contained therein designed to protect against dilution) of Common Stock issuable
upon the exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible Securities,
shall be deemed to be shares of Common Stock issued as of the time of such issue
or, in case such a record date shall have been fixed, as of the close of
business on such record date. In any such case in which Additional Shares of
Common Stock are deemed to be issued:
(1) no further adjustments in the Conversion
Price of any series of Designated Preferred Stock shall be made upon the
subsequent issue of Convertible Securities or shares of Common Stock upon the
exercise of such Options or conversion or exchange of such Convertible
Securities;
(2) if such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the Corporation, or
decrease or increase in the number of shares of Common Stock issuable by the
Corporation, upon the exercise, conversion or exchange thereof, then the
Conversion Price of any series of Designated Preferred Stock adjusted upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments to any such Conversion Price based
thereon, shall, upon any such increase or decrease becoming effective, be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities (provided, however, that no such adjustment of the Conversion Price
of any series of Designated Preferred Stock shall affect Common Stock previously
issued upon conversion of the shares of any series of Designated Preferred
Stock);
(3) upon the expiration of any such Options
or any rights of conversion or exchange under any such Convertible Securities
that shall not have been exercised, the Conversion Price of any series of
Designated Preferred Stock adjusted upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments to any such Conversion Price based thereon, shall, upon such
expiration, be recomputed as if:
(A) in the case of Convertible
Securities or Options the only Additional Shares of Common Stock issued were the
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the additional consideration, if any, actually received by the Corporation upon
such exercise, or for the issue of all such Convertible Securities that were
actually converted or exchanged, plus the additional consideration, if any,
actually received by the Corporation upon such conversion or exchange; and
(B) in the case of Options for
Convertible Securities only the Convertible Securities, if any, actually issued
upon the exercise thereof were issued at the time of issue of such Options, and
the consideration received by the Corporation for the
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Additional Shares of Common Stock deemed to have been then issued was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration deemed to have been
received by the Corporation (determined pursuant to Subsection E.5(g)(iv) of
this Article FOURTH) upon the issue of the Convertible Securities with respect
to which such Options were actually exercised;
(4) no readjustment pursuant to clause (2)
or (3) above shall have the effect of increasing the Conversion Price of any
series of Designated Preferred Stock to an amount that exceeds the lower of (a)
the Conversion Price of such series of Designated Preferred Stock on the
original adjustment date, and (b) the Conversion Price of such series of
Designated Preferred Stock that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date; and
(5) in the case of any Options that expire
by their terms not more than 30 days after the date of issue thereof, no
adjustment of the Conversion Price of any series of Designated Preferred Stock
shall be made until the expiration or exercise of all such Options, whereupon
such adjustment shall be made in the same manner provided in clause (3) above.
(iv) DETERMINATION OF CONSIDERATION. For purposes of
this Subsection E.5(g), the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration
shall:
(A) insofar as it consists of cash,
be computed as the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists of
property other than cash, be computed as the fair value thereof at the time of
such issue, as determined in good faith by the Board of Directors; and
(C) in the event Additional Shares
of Common Stock are issued together with other Securities or other assets of the
Corporation for consideration that covers both, be the proportion of such
consideration so received for the issue of Additional Shares of Common Stock,
determined as provided in clauses (A) and (B) above in good faith by the Board
of Directors.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Subsection E.5(g)(iii) of
this Article FOURTH (relating to Options and Convertible Securities) shall be
determined by dividing:
(A) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the
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minimum aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision contained therein
designed to protect against dilution) payable to the Corporation upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible Securities, the exercise
of such Options for Convertible Securities and the conversion or exchange of
such Convertible Securities, by
(B) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution)
issuable upon the exercise of such Options or conversion or exchange of such
Convertible Securities.
(v) NO ADJUSTMENT OF CONVERSION PRICE. Any
provision herein to the contrary notwithstanding, no adjustment in the
Conversion Price for any series of Designated Preferred Stock shall be made as a
result of the issuance of Additional Shares of Common Stock unless the
consideration per share (determined pursuant to Subsection E.5(g)(iv) of this
Article FOURTH) for the Additional Shares of Common Stock issued or deemed to be
issued by the Corporation is less than the Conversion Price for such series of
Designated Preferred Stock in effect on the date of, and immediately prior to,
such issuance.
(h) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Conversion Price of any series of
Designated Preferred Stock pursuant to this Section E.5, the Corporation at its
expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each Holder of such series of
Designated Preferred Stock a certificate executed by the Corporation's President
or Chief Financial Officer setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of the Holders of
not less than 20 percent of the outstanding shares of any series of Designated
Preferred Stock, furnish or cause to be furnished to such Holders a like
certificate setting forth (i) the adjustments and readjustments to the
Conversion Price of such series of Designated Preferred Stock, (ii) the
Conversion Price for such series of Designated Preferred Stock at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if any,
of other property that at the time would be received upon the conversion of
shares of such series of Designated Preferred Stock.
(i) ISSUE TAXES. The Corporation shall pay any and all issue
and other similar taxes that may be payable in respect of any issue or delivery
of shares of Common Stock upon conversion of Designated Preferred Stock pursuant
hereto; provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer of Stock requested by any Holder
in connection with any such conversion, nor any income or similar taxes as a
result of any such conversion or transfer.
(j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Designated Preferred Stock then
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outstanding, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all then outstanding shares of
Designated Preferred Stock at the then effective Conversion Prices thereof. If
at any time the number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all then outstanding shares of
Designated Preferred Stock, the Corporation shall take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose, including, without limitation, engaging in best efforts to
obtain the requisite stockholder approval of any necessary amendment to this
Certificate of Incorporation.
(k) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon the conversion of any share or shares of Designated
Preferred Stock. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Designated Preferred Stock by
a Holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issue of any fractional share of Common Stock.
If, after the aforementioned aggregation, the conversion would result in the
issue of a fractional share of Common Stock, then the Corporation shall, in lieu
of issuing such fractional share, pay to the Holder otherwise entitled to
receive such fractional share a sum in cash equal to such fraction multiplied by
the Conversion Price then in effect for such Holder's shares of Designated
Preferred Stock then being converted.
(l) NOTICES. Any notice required by the provisions of this
Section E.5 to be given to any Holder of Designated Preferred Stock shall be
deemed given if deposited in the United States mail, first class postage
prepaid, and addressed to such Holder at such Holder's address appearing on the
books of the Corporation.
(m) NO REISSUANCE OF DESIGNATED PREFERRED STOCK. Shares of
Designated Preferred Stock that have been converted into Common Stock shall not
be reissued by the Corporation as Designated Preferred Stock but shall rather be
retired and canceled; provided, however, that each such share, after being
retired and canceled, shall be restored to the status of an authorized but
unissued share of Preferred Stock without designation as to series and may
thereafter be reissued as a share of Preferred Stock of any series other than a
series of Designated Preferred Stock.
6. RESTRICTIONS AND LIMITATIONS.
(a) GENERAL. The Corporation shall not, without the approval
by vote or written consent of each of (i) the Holders of more than 50% of the
shares of Common Stock then outstanding, (ii) the Holders of more than 50% of
the shares of the Senior Preferred Stock then outstanding, voting as one class,
and (iii) the Holders of more than 50% of the shares of the Junior Preferred
Stock then outstanding, voting as one class:
(A) sell, exchange, mortgage or pledge all or
substantially all of the assets of the Corporation, whether in one transaction
or in a series of related transactions;
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(B) merge or consolidate with any other Person; or
(C) make any assignment for the benefit of the
Corporation's creditors.
(b) WITHOUT BOARD APPROVAL. Unless the Board of Directors
shall have given its unanimous approval thereto (with all members voting except
for any members whose compensation as a Corporation officer is directly affected
by such vote), the Corporation shall not, without the approval by vote or
written consent of each of (i) the Holders of more than 50% of the shares of
Common Stock then outstanding, (ii) the Holders of more than 50% of the shares
of the Senior Preferred Stock then outstanding, voting as one class, and (iii)
the Holders of more than 50% of the shares of the Junior Preferred Stock then
outstanding, voting as one class:
(A) incur any indebtedness for borrowed money in
excess of $100,000 in any 12-month period, except for (i) any indebtedness
incurred within the limits of any budget approved by the Board of Directors and
then in effect and (ii) short-term bank borrowings for working capital;
(B) guarantee the indebtedness or other liabilities
or obligations of any other Person, except for any guaranty resulting from the
endorsement for collection or deposit of any instrument in the ordinary course
of business;
(C) form or participate in any limited or general
partnership or joint venture;
(D) make any acquisition of, or equity investment in,
another Person in excess of $100,000;
(E) permit any Subsidiary to issue or sell, or
obligate itself to issue or sell, any stock of such Subsidiary to any Person
other than the Corporation;
(F) enter into or adopt any salary, bonus or other
compensation plans or programs for executive officers of the Corporation,
including, without limitation, the grant of any stock options;
(G) enter into any agreement or transaction with any
officer or director of the Corporation out of the ordinary course of the
Corporation's business;
(H) enter into any business that does not involve the
research and development of pharmaceutical drugs;
(I) amend or repeal any provision of, or add any
provision to, the Corporation's Certificate of Incorporation or Bylaws;
(J) redeem, purchase or otherwise acquire for value
any shares of Stock other than (i) pursuant to Section 4(b), (ii) pursuant to
the terms of any agreement
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unanimously approved by the Corporation's Directors providing for the redemption
of Corporation Stock in whole or in part from the Holders thereof for an amount
not in excess of the amount of the liquidation preference or original purchase
price thereof, whichever is greater, or (iii) pursuant to employment, consulting
or other agreements between the Corporation, on the one hand, and employees,
officers or directors of the Corporation, consultants to the Corporation or
other Persons performing services for the Corporation, on the other hand,
pursuant to which the Corporation has the option or obligation to purchase such
shares upon the occurrence of certain events, such as the termination of
employment; or
(K) issue any shares of Preferred Stock other than
shares of Series A, B, C, D, E, F or G Convertible Preferred Stock.
(c) LAPSE OF RIGHT. The rights of approval set forth in
Sections 6(a) and 6(b) of this Article FOURTH shall lapse and expire as to the
Holders of the Senior Preferred Stock at such time as there shall be outstanding
less than 6,700,000 shares of Senior Preferred Stock (as adjusted for any stock
dividends, combinations or splits with respect to any series of Designated
Preferred Stock included in the Senior Preferred Stock), and shall lapse and
expire as to the Holders of the Junior Preferred Stock at such time after
September 30, 1993 as there shall be outstanding less than 860,250 shares of
Junior Preferred Stock (as adjusted for any stock dividends, combinations or
splits with respect to any series of Designated Preferred Stock included in the
Junior Preferred Stock).
(d) CLASS VOTING. Without the approval by vote or written
consent of the Holders of more than 50% of the shares of a given series of
Designated Preferred Stock, the Corporation shall not amend or repeal any
provision of, or add any provision to, this Certificate of Incorporation (other
than in connection with the adoption by the Board of Directors of a resolution
described in Section D of this Article FOURTH and the filing with the Delaware
Secretary of State of a certificate of designations with respect thereto) if
such action would change any of the express powers, preferences or special
rights provided for such series in this Certificate of Incorporation so as to
affect such series adversely under the Delaware General Corporation Law.
7. DEFINITIONS. As used in this Certificate of Incorporation
(including, without limitation, this Article FOURTH), the following terms shall
have the following meanings:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of
Common Stock issued (or deemed issued pursuant to Subsection E.5(g)(iii) of this
Article FOURTH) by the Corporation after the date of filing of this Sixth
Amended and Restated Certificate of Incorporation with the Delaware Secretary of
State, except shares thereof issued (or deemed issued):
(A) upon conversion of any shares of
Preferred Stock;
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(B) to officers, directors or employees of,
or consultants to, the Corporation pursuant to the Stock Pool or pursuant to
stock option or stock purchase plans or other similar agreements on terms
approved by the Board of Directors;
(C) as a dividend or distribution on
Preferred Stock;
(D) in any transaction as a result of which
an adjustment to the Conversion Price of any series of Preferred Stock may be
made other than pursuant to Subsection E.5(g) of this Article FOURTH; or
(E) pursuant to a warrant originally issued
to Mr. Thomas M. Gibson to purchase shares of the Corporation's Series D
Convertible Preferred Stock; or
(F) pursuant to any warrant issued in
respect of Series E Convertible Preferred Stock, Series F Convertible Preferred
Stock or Series G Convertible Preferred Stock.
"BOARD OF DIRECTORS" shall mean the Board of Directors of the
Corporation.
"COMMON STOCK" shall mean the Corporation's Common Stock, $.01
par value, and any Stock into which such Common Stock may hereafter be changed.
"CONVERTIBLE SECURITIES" shall mean any evidences of
indebtedness, shares of Stock (other than the Common Stock) or other Securities
that are or may be at any time convertible into or exchangeable for Common
Stock.
"DESIGNATED PREFERRED STOCK" shall mean any of the Series A,
B, C, D, E, F or G Convertible Preferred Stock.
"HOLDER" shall mean, as to any Security at any time, the
Person who shall own of record such Security at such time.
"JUNIOR PREFERRED STOCK" shall mean the Series A and B
Convertible Preferred Stock, treated as one class.
"OPTIONS" shall mean rights, options or warrants to subscribe
for, purchase or otherwise acquire either Common Stock or Convertible
Securities.
"PERSON" shall mean an individual, a corporation, a
partnership, a trust, a limited liability company, an unincorporated
organization or a government organization or an agency or political subdivision
thereof.
"PREFERRED STOCK" shall mean the Corporation's Preferred
Stock, $.01 par value, and any Stock into which such Preferred Stock may
hereafter be changed other than by exercise of the conversion right of such
Stock.
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"REDEEMABLE PREFERRED STOCK" shall mean the Corporation's
Redeemable Preferred Stock, $.01 par value, and any stock into which such
Redeemable Preferred Stock may hereafter be changed.
"SECURITY" shall mean any debt or equity security of the
Corporation, whether now or hereafter authorized, and any instrument convertible
into or exchangeable or exercisable for one or more debt or equity securities of
the Corporation.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
"SENIOR PREFERRED STOCK" shall mean the Series C, D, E, F and
G Convertible Preferred Stock, treated as one class.
"SERIES A CONVERTIBLE PREFERRED STOCK" shall mean the
Corporation's Series A Convertible Preferred Stock, $.01 par value, and any
Stock into which such Series A Convertible Preferred Stock may hereafter be
changed other than by exercise of the conversion right of such Stock.
"SERIES B CONVERTIBLE PREFERRED STOCK" shall mean the
Corporation's Series B Convertible Preferred Stock, $.01 par value, and any
Stock into which such Series B Convertible Preferred Stock may hereafter be
changed other than by exercise of the conversion right of such Stock.
"SERIES C CONVERTIBLE PREFERRED STOCK" shall mean the
Corporation's Series C Convertible Preferred Stock, $.01 par value, and any
Stock into which such Series C Convertible Preferred Stock may hereafter be
changed other than by exercise of the conversion right of such Stock.
"SERIES D CONVERTIBLE PREFERRED STOCK" shall mean the
Corporation's Series D Convertible Preferred Stock, $.01 par value, and any
Stock into which such Series D Convertible Preferred Stock may hereafter be
changed other than by exercise of the conversion right of such Stock.
"SERIES E CONVERTIBLE PREFERRED STOCK" shall mean the
Corporation's Series E Convertible Preferred Stock, $.01 par value, and any
Stock into which such Series E Convertible Preferred Stock may hereafter be
changed other than by exercise of the conversion right of such Stock.
"SERIES F CONVERTIBLE PREFERRED STOCK" shall mean the
Corporation's Series F Convertible Preferred Stock, $.01 par value, and any
Stock into which such Series F Convertible Preferred Stock may hereafter be
changed other than by exercise of the conversion right of such Stock.
"SERIES G CONVERTIBLE PREFERRED STOCK" shall mean the
Corporation's Series G Convertible Preferred Stock, $.01 par value, and any
Stock into which such Series F Convertible
21.
<PAGE> 279
Preferred Stock may hereafter be changed other than by exercise of the
conversion right of such Stock.
"STOCK" shall include any and all shares of capital stock of
the Corporation, however designated.
"STOCK POOL" shall mean up to 850,000 shares of Common Stock
(as adjusted for stock splits and combinations) issued or issuable to officers,
directors or employees of, or consultants to, the Corporation pursuant to the
Corporation's 1993 Stock Option Plan.
"SUBSIDIARY" shall mean any corporation more than 50% of the
outstanding voting Stock of which shall at the time be owned directly or
indirectly by the Corporation, by one or more Subsidiaries or by the Corporation
and one or more Subsidiaries.
FIFTH: The Corporation shall have such number of directors as shall
from time to time be fixed by, or in the manner provided in, the Bylaws.
Directors need not be elected by ballot unless the Bylaws so provide.
SIXTH: Unless the Board of Directors shall have approved the action to
be taken, no action taken by the stockholders without a meeting shall be
effective unless written notice thereof (which shall include a copy of the
action to be taken) shall be delivered to the Corporation's Chairman of the
Board of Directors and Secretary at the principal executive offices of the
Corporation not less than 10 days prior to the taking of such action.
SEVENTH: To the fullest extent that the General Corporation Law of the
State of Delaware, as it exists on the date hereof or as it may hereafter be
amended, permits the limitation or elimination of the liability of directors, no
Director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a Director. No
amendment to or repeal of this Article SEVENTH shall apply to or have any effect
on the liability or alleged liability of any Director of the Corporation for or
with respect to any acts or omissions of such Director occurring prior to such
amendment or repeal.
22.
<PAGE> 280
EIGHTH: Except as otherwise set forth in this Certificate of
Incorporation, the Board of Directors shall have the power without the assent or
vote of the stockholders to adopt, amend or repeal the Bylaws of the
Corporation.
IN WITNESS WHEREOF, the Corporation has caused this Sixth Amended and
Restated Certificate of Incorporation to be signed by Richard H. Troy, its
Senior Vice President and Secretary, this _____ day of April, 1998.
CELL PATHWAYS, INC.
By:____________________________________
Richard H. Troy
Senior Vice President and Secretary
23.
<PAGE> 281
APPENDIX C -- OPINION OF JANNEY MONTGOMERY SCOTT INC.
C-1
<PAGE> 282
APPENDIX C - OPINION OF JANNEY MONTGOMERY SCOTT INC.
[LETTERHEAD OF JANNEY MONTGOMERY SCOTT]
June 23, 1998
Board of Directors
Tseng Labs, Inc.
18 West Airy Street
Suite 100
Norristown, PA 19401
Gentlemen:
You have requested our opinion with respect to the fairness, from a
financial point of view, to the stockholders of Tseng Labs, Inc. ("Tseng") of
the consideration to be received by such stockholders under the Agreement and
Plan of Reorganization (the "Agreement") dated June 23, 1998 to be executed by
Cell Pathways, Inc. ("CPI") and Tseng. This letter is provided to the Board of
Directors for its confidential use.
Pursuant to the Agreement, CPI will cause the formation of a holding
company ("Holdco") and the formation of a wholly owned subsidiary of Holdco
("C-Sub") to be merged into CPI. CPI also will cause the formation of a wholly
owned subsidiary of Holdco ("T-Sub") to be merged into Tseng. At the closing
date (the "Closing Date"): (i) C-Sub shall be merged with and into CPI with CPI
continuing as a wholly owned subsidiary of Holdco (the "CPI Merger"); and (ii)
T-Sub shall be merged with and into Tseng with Tseng continuing as a wholly
owned subsidiary of Holdco (the "Tseng Merger"). The resultant mergers are
herein collectively referred to as the "Mergers."
In the CPI Merger, each share of CPI Common Stock, $0.01 par value
("CPI Common Stock"), and CPI Preferred Stock, $0.01 par value ("CPI Preferred
Stock"), outstanding prior to the Closing Date shall convert into one share of
Holdco Common Stock, $0.01 par value ("Holdco Common Stock"). In the Tseng
Merger, each share of Tseng Common Stock, $0.005 par value ("Tseng Common
Stock") outstanding prior to the Closing Date shall convert into 0.3631326 of a
share of Holdco Common Stock.
In rendering our opinion, we have among other things:
1. Reviewed the Agreement dated June 23, 1998, including the
exhibits thereto;
2. Reviewed audited financial statements for CPI for the fiscal
years ending December 31, 1995, 1996 and 1997;
3. Reviewed various descriptions of the business, operations,
cash flow and prospects of CPI, including the Confidential
Private Placement Memorandum dated April 1998;
<PAGE> 283
[LETTERHEAD OF JANNEY MONTGOMERY SCOTT]
4. Reviewed the reports prepared by Louis M. Weiner, M.D. from
the Fox Chase Cancer Center regarding the potential utility of
FGN-1 for the prevention or therapy of cancer and by Kathryn
Doyle Leary, Ph.D., J.D. from the law firm of Panitch Schwarze
Jacobs & Nadel, P.C. regarding the patent portfolio of CPI;
5. Reviewed selected financial and stock market data for certain
publicly traded companies comparable to CPI and the financial
terms of certain other recent relevant business combinations;
6. Participated in certain discussions and negotiations among
representatives of CPI and Tseng; and
7. Reviewed other financial studies and analyses, as we deemed
necessary.
In addition, we held discussions with the management of CPI regarding
their business, operating results, financial condition and prospects, and
undertook other analyses, studies and investigations, as we considered
appropriate.
In connection with our review, we have relied upon, without independent
verification, the accuracy and completeness of the financial and other
information provided to us by CPI, Tseng, their representatives and the experts
specified in Paragraph 4 above. We have not assumed any responsibility for
independent verification of the financial and other information provided to us.
We have relied upon the assessment of the management of CPI regarding CPI"s
business, business prospects and the Mergers. We have also assumed that the
budgets and financial projections of CPI were reasonably prepared by the
management of CPI on bases reflecting the best currently available estimates and
good faith judgments of the future financial performance of CPI. We have not
made an independent valuation or appraisal of CPI"s assets or liabilities, nor
were we furnished with any such valuations or appraisals. Our opinion is
necessarily based upon economic, market and other conditions as they exist on,
and can be reasonably evaluated as of, the date of this letter. We are
expressing no opinion as to the prices at which CPI will actually trade at any
time. Our opinion does not address the relative merits of the Mergers and the
other business strategies being considered by Tseng's Board of Directors, nor
does it address the Board's decision to proceed with the Tseng Merger. Our
opinion does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed transaction.
Janney Montgomery Scott Inc. ("JMS") is acting as the financial advisor
to Tseng in connection with the Mergers and will receive customary fees upon the
completion of the Mergers. In addition, Tseng has agreed to indemnify JMS
against certain liabilities arising out of the rendering of this opinion. JMS is
a nationally recognized investment banking firm and, as part of its investment
banking services, is regularly engaged in the valuation of businesses and
securities in connection with mergers, acquisitions, underwritings, private
placements and valuations for corporate and other purposes.
We understand that this opinion may be included in the proxy statement
of Tseng relating to the Mergers, subject to the approval in form and substance
by JMS and its legal
<PAGE> 284
[LETTERHEAD OF JANNEY MONTGOMERY SCOTT]
counsel, such approval not to be unreasonably withheld. Such approval shall
extend to any description of or reference to JMS, any summary of this opinion or
any presentation of JMS included in such proxy statement.
Based upon the foregoing and such other factors as we deem relevant, we
are of the opinion, as of the date of this letter and subject to the foregoing,
that the consideration to be received by the stockholders of Tseng in the
Mergers is fair from a financial point of view.
Very truly yours,
/s/ JANNEY MONTGOMERY SCOTT INC.
JANNEY MONTGOMERY SCOTT INC.
<PAGE> 285
APPENDIX D -- SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
D-1
<PAGE> 286
APPENDIX D - SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
SECTION 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds
shares of stock on the date of the making of a demand pursuant to subsection
(d) of this section with respect to such shares, who continuously holds such
shares through the effective date of the merger or consolidation, who has
otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to Sections 251 (other than a merger
effected pursuant to subsection (g) of Section 251 of this title), 252, 254,
257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under
this section shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the votes of the
stockholders of the surviving corporation as provided in subsection (f) of
Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof
are required by the terms of an agreement of merger or consolidation pursuant
to sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation
surviving or resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation,
or depository receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities exchange
or designated as a national market system security on a interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or
fractional depository receipts described in the foregoing subparagraphs a. and
b. of this paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs a., b. and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under Section 253 of this title
is not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary Delaware
corporation.
<PAGE> 287
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for such
meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of such stockholder's shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do so
by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of
2.
<PAGE> 288
the stock of all such stockholders. Notwithstanding the foregoing, at any time
within 60 days after the effective date of the merger or consolidation, any
stockholder shall have the right to withdraw such stockholder's demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after such stockholder's written
request for such a statement is received by the servicing or resulting
corporation or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the Register
in Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation,the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition,the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal,
the Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may proceed to
trial upon the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the list filed
by the surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted such stockholder's certificates of stock to the
Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not entitled
to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
3.
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(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded such stockholder's appraisal
rights as provided in subsection (d) of this section shall be entitled to vote
such stock for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions payable to
stockholders of record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition for an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an appraisal
and an acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
4.
<PAGE> 290
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law (the "Delaware
Code"), the Registrant has broad powers to indemnify its directors and officers
against liabilities they may incur in such capacities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). Generally,
the Registrant's Bylaws provide that the Registrant will indemnify each of its
directors and officers to the fullest extent not prohibited by Delaware law,
provided that 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 proceeding, had no reasonable cause
to believe his or her conduct was unlawful. With respect to a suit brought by or
in the right of the Registrant, indemnification will not be provided for
expenses incurred in connection with any claim, issue or matter as to which such
person shall have been adjudged liable to the Registrant unless and only to the
extent that the Court of Chancery of the State of Delaware or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery of the State of Delaware or such other court shall
deem proper. The Registrant's Bylaws also provide that CPHI may indemnify
employees and other agents of CPHI who are not directors or officers as set
forth in the Delaware Code.
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty of
care to the Registrant and its stockholders. These provisions do not eliminate
the directors' duty of care and, in appropriate circumstances, equitable
remedies such an injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
In addition, the Registrant will provide directors' and officers' insurance
to each of its directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
2.1* Agreement and Plan of Reorganization dated as of June 23,
1998 among Cell Pathways, Inc., and Tseng Labs, Inc.
(attached as Appendix A to Joint Proxy
Statement/Prospectus).
3.1* Certificate of Incorporation of Cell Pathways Holdings, Inc.
3.2* Bylaws of Cell Pathways Holdings, Inc.
3.3 Articles of Incorporation of Tseng Labs, Inc.
3.4 By-Laws of Tseng Labs, Inc.
3.5* Sixth Amended and Restated Certificate of Incorporation of
Cell Pathways, Inc. (attached as Appendix B to Joint Proxy
Statement/Prospectus)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen certificate of Registrant.
5.1 Legal opinion of Cooley Godward LLP.
</TABLE>
II-1
<PAGE> 291
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
8.1 Tax opinion of Cooley Godward LLP.
8.2 Tax opinion of Morgan, Lewis & Bockius LLP.
10.1* Fourth Amended and Restated Stockholders' Agreement, dated
April 1998, among Cell Pathways, Inc. and the stockholders
listed on the signature pages thereto.
10.2* Lease, dated June 25, 1998, between Cell Pathways, Inc. and
ARE-702 Electronic Drive, L.P.
10.3* 1997 Equity Incentive Plan of Cell Pathways, Inc.
10.4* Form of Incentive Stock Option Agreement.
10.5* 1997 Non-Employee Director Stock Option Plan of Cell
Pathways, Inc.
10.6* Form of Stock Option Agreement.
10.7 1997 Employee Stock Purchase Plan of Cell Pathways, Inc.(1).
10.8 Employment Agreement, dated November 6, 1997, between Cell
Pathways, Inc. and Brian J. Hayden (1).
10.9 1995 Stock Award Plan of Cell Pathways, Inc.(1).
10.10 Employment Agreement, dated October 12, 1996, between Cell
Pathways, Inc. and Robert J. Towarnicki(1).
10.11 Employment Agreement, dated February 1, 1993, between Cell
Pathways, Inc. and Rifat Pamukcu(1).
10.12 Memorandum of Employment, dated January 1, 1993, between
Cell Pathways, Inc. and Richard H. Troy(1).
10.13 Agreement, dated June 30, 1994, between Cell Pathways, Inc.
and the Division of Cancer Prevention and Control, National
Cancer Institute(1).
10.14 Amendment to Agreement, dated September 4, 1996, between
Cell Pathways, Inc. and the Division of Cancer Prevention
and Control, National Cancer Institute(1).
10.15 Research and License Agreement, dated June 26, 1991, between
Cell Pathways, Inc. and the University of Arizona, as
amended(1).
10.16 Lease, dated August 9, 1993, between Cell Pathways, Inc. and
WRC Properties, Inc.(1).
10.17* Severance Agreement, dated April 17, 1998, between Tseng
Labs, Inc. and John J. Gibbons.
10.18* Severance Agreement, dated April 17, 1998, between Tseng
Labs, Inc. and Mark Karsch.
10.19 Tseng Labs, Inc. Nonqualified Stock Option Plan.
10.20 Tseng Labs, Inc. 1991 Stock Option Plan.
10.21 Tseng Labs, Inc. 1991 Special Directors Stock Option Plan.
10.22* Tseng Labs, Inc. 1995 Stock Option Plan.
10.23* Asset Purchase Agreement between Tseng Labs, Inc. and ATI
Research, Inc. dated as of December 16, 1997.
10.24* Agreement of Sale and Purchase dated as of August 20, 1998
among Tseng International Labs, Inc. and Liberty Property
Limited Partnership.
22.1* Subsidiaries of Tseng Labs, Inc.
23.1 Consent of Cooley Godward LLP (included in opinions filed as
Exhibits 5.1 and 8.1).
23.2 Consent of Morgan, Lewis & Bockius LLP (included in opinions
filed as Exhibit 8.2).
23.3 Consent of Arthur Andersen LLP
23.4 Consent of Arthur Andersen LLP
23.5* Consent of Janney Montgomery Scott Inc.
24.1* Power of Attorney.
</TABLE>
II-2
<PAGE> 292
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
27.1* Financial Data Schedule as of and for the period ended
December 31, 1997.
27.2* Financial Data Schedule as of and for the period ended June
30, 1998.
99.1 Form of Proxy Card for the Cell Pathways, Inc. Special
Meeting.
99.2 Form of Proxy Card for the Tseng Labs, Inc. Special Meeting.
99.3* Consent of Director Nominee John J. Gibbons.
99.4* Consent of Director Nominee Louis M. Weiner, M.D.
99.5* Consent of Louis M. Weiner, M.D. to being named in the
Registration Statement.
99.6* Consent of Panitch Scharze Jacobs & Nadel, P.C. to being
named in the Registration Statement.
</TABLE>
- ---------------
* Previously filed.
(1) Filed as an exhibit to Cell Pathways, Inc.'s Registration Statement on Form
S-1, filed October 9, 1997, file number 333-37557, or amendments thereto and
incorporated by reference.
(b) FINANCIAL STATEMENT SCHEDULES.
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(2) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(3) That every prospectus: (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration
II-3
<PAGE> 293
Statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(4) Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 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 of 1933 and will be governed by the final adjudication of such
issue.
(5) To respond to requests for information that is incorporated by
reference into the Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and CPI being acquired involved therein, that was not
the subject of and included in the Registration Statement when it became
effective.
II-4
<PAGE> 294
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Horsham, County of Montgomery, Commonwealth of Pennsylvania, on the 21st day of
September, 1998.
CELL PATHWAYS HOLDINGS, INC.
By: /s/ ROBERT J. TOWARNICKI
------------------------------------
Robert J. Towarnicki
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT J. TOWARNICKI President, Chief Executive September 21, 1998
- --------------------------------------------------- Officer and Director
Robert J. Towarnicki (principal executive
officer)
/s/ BRIAN J. HAYDEN Chief Financial Officer; September 21, 1998
- --------------------------------------------------- Vice President -- Finance;
Brian J. Hayden Treasurer (principal
financial and accounting
officer)
* Senior Vice President -- September 21, 1998
- --------------------------------------------------- Corporate Development;
Richard H. Troy General Counsel, Secretary
and Director
* Chairman of the Board of September 21, 1998
- --------------------------------------------------- Directors
William A. Boeger
* Director September 21, 1998
- ---------------------------------------------------
Thomas M. Gibson
* Director September 21, 1998
- ---------------------------------------------------
Judith A. Hemberger, Ph.D.
* Director September 21, 1998
- ---------------------------------------------------
Roger J. Quy, Ph.D.
* Director September 21, 1998
- ---------------------------------------------------
Bruce R. Ross
</TABLE>
II-5
<PAGE> 295
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director September 21, 1998
- ---------------------------------------------------
Peter G. Schiff
* Director September 21, 1998
- ---------------------------------------------------
Randall M. Toig, M.D.
*By: /s/ ROBERT J. TOWARNICKI
---------------------------------------------
Robert J. Towarnicki
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 296
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ------------
<S> <C> <C>
2.1* Agreement and Plan of Reorganization dated as of June 23,
1998 among Cell Pathways, Inc., and Tseng Labs, Inc.
(attached as Appendix A to Joint Proxy
Statement/Prospectus).......................................
3.1* Certificate of Incorporation of Cell Pathways Holdings,
Inc. .......................................................
3.2* Bylaws of Cell Pathways Holdings, Inc. .....................
3.3 Articles of Incorporation of Tseng Labs, Inc. ..............
3.4 By-Laws of Tseng Labs, Inc. ................................
3.5* Sixth Amended and Restated Certificate of Incorporation of
Cell Pathways, Inc. (attached as Appendix B to Joint Proxy
Statement/Prospectus).......................................
4.1 Reference is made to Exhibits 3.1 and 3.2 ..................
4.2 Specimen certificate of Registrant..........................
5.1 Legal opinion of Cooley Godward LLP.........................
8.1 Tax opinion of Cooley Godward LLP...........................
8.2 Tax opinion of Morgan, Lewis & Bockius LLP..................
10.1* Fourth Amended and Restated Stockholders' Agreement, dated
April 1998, among Cell Pathways, Inc. and the stockholders
listed on the signature pages thereto.......................
10.2* Lease, dated June 25, 1998, between Cell Pathways, Inc. and
ARE-702 Electronic Drive, L.P. .............................
10.3* 1997 Equity Incentive Plan of Cell Pathways, Inc. ..........
10.4* Form of Incentive Stock Option Agreement....................
10.5* 1997 Non-Employee Director Stock Option Plan of Cell
Pathways, Inc. .............................................
10.6* Form of Stock Option Agreement..............................
10.7 1997 Employee Stock Purchase Plan of Cell Pathways,
Inc.(1).....................................................
10.8 Employment Agreement, dated November 6, 1997, between Cell
Pathways, Inc. and Brian J. Hayden(1).......................
10.9 1995 Stock Award Plan of Cell Pathways, Inc.(1).............
10.10 Employment Agreement, dated October 12, 1996, between Cell
Pathways, Inc. and Robert J. Towarnicki(1)..................
10.11 Employment Agreement, dated February 1, 1993, between Cell
Pathways, Inc. and Rifat Pamukcu(1).........................
10.12 Memorandum of Employment, dated January 1, 1993, between
Cell Pathways, Inc. and Richard H. Troy(1)..................
10.13 Agreement, dated June 30, 1994, between Cell Pathways, Inc.
and the Division of Cancer Prevention and Control, National
Cancer Institute(1).........................................
10.14 Amendment to Agreement, dated September 4, 1996, between
Cell Pathways, Inc. and the Division of Cancer Prevention
and Control, National Cancer Institute(1)...................
10.15 Research and License Agreement, dated June 26, 1991, between
Cell Pathways, Inc. and the University of Arizona, as
amended(1)..................................................
10.16 Lease, dated August 9, 1993, between Cell Pathways, Inc. and
WRC Properties, Inc.(1).....................................
</TABLE>
<PAGE> 297
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ------------
<S> <C> <C>
10.17* Severance Agreement, dated April 17, 1998, between Tseng
Labs, Inc. and John J. Gibbons..............................
10.18* Severance Agreement, dated April 17, 1998, between Tseng
Labs, Inc. and Mark Karsch..................................
10.19 Tseng Labs, Inc. Nonqualified Stock Option Plan.............
10.20 Tseng Labs, Inc. 1991 Stock Option Plan.....................
10.21 Tseng Labs, Inc. 1991 Special Directors Stock Option Plan...
10.22* Tseng Labs, Inc. 1995 Stock Option Plan.....................
10.23* Asset Purchase Agreement between Tseng Labs, Inc. and ATI
Research, Inc. dated as of December 16, 1997................
10.24* Agreement of Sale and Purchase dated as of August 20, 1998
among Tseng International Labs, Inc. and Liberty Property
Limited Partnership.........................................
22.1* Subsidiaries of Tseng Labs, Inc. ...........................
23.1 Consent of Cooley Godward LLP (included in opinions filed as
Exhibits 5.1 and 8.1).......................................
23.2 Consent of Morgan, Lewis & Bockius LLP (included in opinions
filed as Exhibit 8.2).......................................
23.3 Consent of Arthur Andersen LLP..............................
23.4 Consent of Arthur Andersen LLP..............................
23.5* Consent of Janney Montgomery Scott Inc. ....................
24.1* Power of Attorney...........................................
27.1* Financial Data Schedule as of and for the period ended
December 31, 1997...........................................
27.2* Financial Data Schedule as of and for the period ended June
30, 1998....................................................
99.1 Form of Proxy Card for the Cell Pathways, Inc. Special
Meeting.....................................................
99.2 Form of Proxy Card for the Tseng Labs, Inc. Special
Meeting.....................................................
99.3* Consent of Director Nominee of John J. Gibbons..............
99.4* Consent of Director Nominee Louis M. Weiner, M.D. ..........
99.5* Consent of Louis M. Weiner, M.D. to being named in the
Registration Statement......................................
99.6* Consent of Panitch Scharze Jacobs & Nadel, P.C. to being
named in the Registration Statement.........................
</TABLE>
- ---------------
* Previously filed.
(1) Filed as an exhibit to Cell Pathways, Inc.'s Registration Statement on Form
S-1, filed October 9, 1997, file number 333-37557, or amendments thereto and
incorporated by reference.
<PAGE> 1
EXHIBIT 3.3
ARTICLES OF INCORPORATION
OF
CAPITAL DEVELOPMENT CORP.
WE, THE UNDERSIGNED natural persons of the age of twenty-one (21) years
or more, acting as incorporators of a corporation under the Utah Business
Corporation Act, adopt the following Articles of Incorporation for such
corporation.
ARTICLE I - NAME
The name of the corporation is Capital Development Corp.
ARTICLE II - DURATION
The duration of the corporation is perpetual.
ARTICLE III - PURPOSES
The purpose or purposes for which this corporation is organized are:
(a) to conduct a public offering of its stock, and use the
proceeds therefrom to engage in and invest in any and all
types of assets, business or properties of any nature and kind
without limitation; whether alone or in conjunction with
others; and to acquire, develop and otherwise deal in and with
all kinds of assets, businesses or properties and all related
activities, for any and all lawful purposes.
(b) To acquire by purchase, exchange, gift, bequest, subscription,
or otherwise; and to hold, own, mortgage, pledge, hypothecate,
sell, assign, transfer, exchange, or otherwise dispose of or
deal in or with its own corporate securities or stock or other
securities including, without limitations, any shares of
stock, bonds,
-1-
<PAGE> 2
debentures, notes, mortgages, or other obligations, and any
certificates, receipt or other instruments representing rights
or interests therein on any property or assets created or
issued by any person, firm, associate, or corporation, or
instrumentalities thereof; to make payment therefor in any
lawful manner or to issue in exchange therefor its unreserved
earned surplus for the purchase of its own shares, and to
exercise as owner or holder of any securities, any and all
rights, powers, and privileges in respect thereof.
(c) To do each and everything necessary, suitable, or proper for
the accomplishment of any of the purposes or the attainment of
any one or more of the subjects herein enumerated, or which
may, at any time, appear conducive to or expedient for the
protection or benefit of this corporation, and to do said acts
as fully and to the same extent as natural persons might, or
could do in any part of the world as principals, agents,
partners, trustees, or otherwise, either alone or in
conjunction with any other person, association, or
corporation.
(d) The foregoing clauses shall be construed both as purposes and
powers and shall not be held to limit or restrict in any
manner the general powers of the corporation, and the
enjoyment and exercise thereof, as conferred by the laws of
the State of Utah; and it is the attention that the purposes
and powers specified in each of the paragraphs of this Article
III shall be regarded as independent purposes and powers.
-2-
<PAGE> 3
ARTICLE IV - STOCK
The aggregate number of shares which this corporation shall have
authority to issue is $50,000,000 shares of Common stock having $.001 par value
per share. All stock of the corporation shall be of the same class, common, and
shall have the same rights and preferences. Fully-paid stock of this corporation
shall not be liable to any further call or assessment.
ARTICLE V - AMENDMENT
These Articles of Incorporation may be amended by the affirmative vote
of "a majority" of the shares entitled to vote on each such amendment.
ARTICLE VI - SHAREHOLDERS RIGHTS
The authorized and treasury stock of this corporation may be issued at
such time, upon such terms and conditions and for such consideration as the
Board of Directors shall determine. Shareholders shall not have pre-emptive
rights to acquire unissued shares of the stock of this corporation.
ARTICLE VII - CAPITALIZATION
This corporation will not commence business until consideration of a
value of at least $1,000 has been received for the issuance of said shares.
ARTICLE VIII - --?-- OFFICE AND AGENT
K. Robert Johnson
4650 Meadow Road
Murray, Utah 84107
ARTICLE IX - DIRECTORS
The directors are hereby given the authority to do any act on behalf of
the corporation by law and in each instance where the Business Corporation Act
provides that the directors may act
-3-
<PAGE> 4
in certain instances where the Articles of Incorporation authorize such action
by the directors, the directors are hereby given authority to act in such
instances without specifically numerating such potential action or instance
herein.
The directors are specifically given the authority to mortgage or
pledge any or all assets of the business without stockholders' approval.
The number of directors constituting the initial Board of Directors of
this corporation is three. The names and addresses of persons who are to serve
as Directors until the first annual meeting of stockholders or until their
successors are elected and qualify, are:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
W. Robert Johnson 4650 Meadow Road
Murray, Utah 84107
Bradley J. Jorgensen 2797 South Main St.
Salt Lake City, Utah 34115
Kathy Eckenbrecht 217 2nd Ave.
Salt Lake City, Utah 84102
</TABLE>
ARTICLE X - INCORPORATORS
The name and address of each incorporator is:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
Thomas G. Kimble 311 South State, #440
Salt Lake City, UT 84191
Van L. Butler 311 South State, #440
Salt Lake City, UT 84191
Neil B. Smith 311 South State, $440
Salt Lake City, UT 84191
</TABLE>
-4-
<PAGE> 5
ARTICLE XI
COMMON DIRECTORS - TRANSACTIONS BETWEEN CORPORATIONS
No contract or other transaction between this corporation and any one
or more of its directors or any other corporation, firm, association, or entity
in which one or more of its directors or officers are financially interested,
shall be either void or voidable because of such relationship or interest, or
because such director or directors are present at the meeting of the Board of
Directors, or a committee thereof, which authorities, approves, or ratifies such
contract or transaction, or because his or their votes are counted for such
purpose if: (a) the fact of such relationship or interest is disclosed or known
to the Board of Directors or committee which authorizes, approves, or ratifies
the contract or transaction by vote or consent sufficient for the purpose
without counting the votes or consents of such interested director; or (b) the
fact of such relationship or interested is disclosed or known to the
stockholders entitled to vote and they authorize, approve, or ratify such
contract or transaction by vote or written consent, or (c) the contract or
transaction is fair and reasonable to the corporation.
Common or interested directors may be counted in determining the
present of a quorum at a meeting of the Board of Directors or committee thereof
which authorities, approves, or ratifies such contract or transaction.
Under penalties of perjury, we declare that these Articles of
Incorporation have been
-5-
<PAGE> 6
examined by us and are, to the best of our knowledge and belief, true, correct
and complete.
DATED this ___ day of January, 1983.
------------------------
Thomas G. Kimble
------------------------
Van L. Butler
------------------------
Neil B. Smith
-6-
<PAGE> 7
STATE OF UTAH
EXECUTIVE DEPARTMENT
Office of Lt. Governor/Secretary of State
CERTIFICATE OF AMENDMENT
OF
TSENG LABS, INC.
I, DAVID S. MONSON, Lt. Governor/Secretary of State of the State of
Utah, hereby certify that duplicate originals of Articles of Amendment to the
Articles of Incorporation of
TSENG LABS, INC. formerly
CAPITAL DEVELOPMENT CORP.
duly signed and verified pursuant to the provisions of the Utah Business
Corporation Act, have been received in my office and are found to conform to
law.
ACCORDINGLY, by virtue of the authority vested in me by law, I hereby
issue this Certificate of Amendment to the Articles of Incorporation of
TSENG LABS, INC.
and attached hereto a duplicate original of the Articles of Amendment.
File No. #102550
IN TESTIMONY WHEREOF, I have
hereunto set my hand and affixed the seal
<PAGE> 8
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
CAPITAL DEVELOPMENT CORP.
Pursuant to the applicable provisions of the Utah Business Corporations
Act, the undersigned Corporation adopts the following Articles of Amendment to
its Articles of Incorporation by stating the following:
FIRST: The present name of the corporation is Capital Development Corp.
SECOND: The following amendments to its Articles of Incorporation were
adopted by the shareholders of the corporation on December 9, 1983, in the
manner prescribed by Utah law.
1. Article I is amended as follows:
ARTICLE I - NAME
The name of the corporation (hereinafter called the Corporation) is
Tseng Labs, Inc.
2. Article IV is amended as follows:
ARTICLE IV - STOCK
The aggregate number of shares which this corporation shall have
authority to issue is 50,000,000 shares of common stock having $.005 par value
per share. All stock of the corporation shall be of the same class, common, and
shall have the same rights and preferences. Fully-paid stock of this corporation
shall not be liable to any further call or assessment.
THIRD: The number of shares of the Corporation outstanding at the time
of the adoption of said amendment was 13,500,000 and the number of shares
entitled to vote thereon was 13,500,000.
<PAGE> 9
FOURTH: The number of shares voted for such amendments was 8,080,000
and the number voted against such amendments was none.
DATED this 9th day of December, 1983.
Attest: CAPITAL DEVELOPMENT CORP.
________________________________ By:_____________________________
Secretary President
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
Before me the undersigned Notary Public in and for the said County and
State, personally appeared the President and Secretary of Capital Development
Corp., a Utah corporation, and signed the foregoing Articles of Amendment as
their own free and voluntary act and deed pursuant to a corporate resolution for
the uses and purposes set forth.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 9th day
of December, 1983.
My Commission Expires: _____________________________
NOTARY PUBLIC, resident at
_____________________________ _____________________________
<PAGE> 10
VERIFICATION
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
The undersigned being first duly sworn, deposes and states: that he is
the Secretary of Capital Development Corp., that he has read the Articles of
Amendment and knows the contents thereof and that the same contains a truthful
statement of the amendment duly adopted by the stockholders of the Corporation.
------------------------------
Secretary
<PAGE> 1
EXHIBIT 3.4
BY-LAWS
OF
CAPITAL DEVELOPMENT CORP.
ARTICLE I - OFFICES
The principal office of the corporation in the State of _______________
shall be located in the City of Salt Lake, County of Salt Lake. The corporation
may have such other offices, either within or without the State of incorporation
as the board of directors may designate or as the business of the corporation
may from time to time require.
ARTICLE II - STOCKHOLDERS
1. ANNUAL MEETING.
The annual meeting of the stockholders shall be held on the 3rd day
March in each year, beginning with the year 1984 at the hour of 10:00 o'clock
P.M., for the purpose of electing directors and for the transaction of such
other business as may come before the meeting. if the day fixed for the annual
meeting shall be a legal holiday such meeting shall be held on the next
succeeding business day.
2. SPECIAL MEETINGS.
Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by statute, may be called by the president or by the
directors, and shall be called by the president at the request of the holders of
not less than ten percent of all the outstanding shares of the corporation
entitled to vote at the meeting.
3. PLACE OF MEETING.
The directors may designate any place, either within or without the
State unless otherwise prescribed by statute, as the place of meeting for any
annual meeting or for any special meeting called by the directors. A waiver of
notice signed by all stockholders entitled to vote at a meeting may designate
any place, either within or without the state unless otherwise prescribed
By-Laws 1
<PAGE> 2
by statute, as the place for holding such meeting. If no designation is made, or
if a special meeting be otherwise called, the place of meeting shall be the
principal office of the corporation.
4. NOTICE OF MEETING.
Written or printed notice stating the place, day and hour of the
meeting and, in case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten nor more than thirty
days before the date of the meeting, either personally or by mail, by or at the
direction of the president, or the secretary, or the officer or persons calling
the meeting, to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail, addressed to the stockholder at his address as it appears on the
stock transfer books of the corporation, with postage thereon pre-paid.
5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE.
For the purpose of determining stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or stockholders
entitled to receive payment of any dividend, or in order to make a determination
of stockholders for any other proper purpose, the directors of the corporation
may provide that the stock transfer books shall be closed for a stated period
but not to exceed, in any case, thirty days. If the stock transfer books shall
be closed for the purpose of determining stockholders entitled to notice of or
to vote at a meeting of stockholders, such books shall be closed for at least
ten days immediately preceding such meeting. In lieu of closing the stock
transfer books, the directors may fix in advance a date as the record date for
any such determination of stockholders, such date in any case to be not more
than thirty days and, in case of a meeting of stockholders, not less than ten
days prior to the date on which the particular action requiring such
determination of stockholders is to be taken. If the stock transfer books are
not closed and no record date is fixed for the determination of stockholders
entitled to notice of or to vote at a meeting of stockholders, or stockholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the directors declaring
such dividend is adopted, as the case may be, shall be the record date for such
determination of stockholders. When a determination of stockholders entitled to
vote at any meeting of stockholders has been made as provided in this section,
such determination shall apply to any adjournment thereof.
6. VOTING LISTS.
The officer or agent having charge of the stock transfer books for
shares of the corporation shall make, at least ten days before each meeting of
stockholders, a complete list of the stockholders entitled to vote at such
meeting, or any adjournment thereof, arranged in alphabetical order, with the
address of and the number of shares held by each, which list, for a period of
ten days prior to such meeting, shall be kept on file at the principal office of
the
By-Laws 2
<PAGE> 3
corporation and shall be subject to inspection by any stockholder at any time
during usual business hours. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to the inspection of any
stockholder during the whole time of the meeting. The original stock transfer
book shall be prima facie evidence as to who are the stockholders entitled to
examine such list or transfer books or to vote at the meeting of stockholders.
7. QUORUM.
At any meeting of stockholders one-third of the outstanding shares of
the corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than said number of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
8. PROXIES.
At all meetings of stockholders, a stockholder may vote by proxy
executed in writing by the stockholder or by his duly authorized attorney in
fact. Such proxy shall be filed with the secretary of the corporation before or
at the time of the meeting.
9. VOTING.
Each stockholder entitled to vote in accordance with the terms and
provisions of the certificate of incorporation and these by-laws shall be
entitled to one vote, in person or by proxy, for each share of stock entitled to
vote held by such stockholders. Upon the demand of any stockholder, the vote for
directors and upon any question before the meeting shall be by ballot. All
elections for directors shall be decided by plurality vote; all other questions
shall be decided by majority vote except as otherwise provided by the
Certificate of Incorporation or the laws of this State.
10. ORDER OF BUSINESS.
The order of business at all meetings of the stockholders, shall be as
follows:
1. Roll Call.
2. Proof of notice of meeting or waiver of notice.
By-Laws 3
<PAGE> 4
3. Reading of minutes of preceding meeting.
4. Reports of Officers.
5. Reports of Committees.
6. Election of Directors.
7. Unfinished Business.
8. New Business.
11. INFORMAL ACTION BY STOCKHOLDERS.
Unless otherwise provided by law, any action required to be taken at a
meeting of the shareholders, or any other action which may be taken at a meeting
of the shareholders, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the shareholders
entitled to vote with respect to the subject matter thereof.
By-Laws 4
<PAGE> 5
ARTICLE III - BOARD OF DIRECTORS
1. GENERAL POWERS.
The business and affairs of the corporation shall be managed by its
board of directors. The directors shall in all cases act as a board, and they
may adopt such rules and regulations for the conduct of their meetings and the
management of the corporation, as they may deem proper, not inconsistent with
these by-laws and the laws of this State.
2. NUMBER, TENURE AND QUALIFICATIONS.
The number of directors of the corporation shall be no less than three.
Each director shall held office until the next annual meeting of stockholders
and until his successor shall have been elected and qualified.
3. REGULAR MEETINGS.
A regular meeting of the directors, shall be held without other notice
than this by-law immediate after, and at the same place as, the annual meeting
of stockholders. The directors may provide, by resolution, the time and place
for the holding of additional regular meetings without other notice than such
resolution.
4. SPECIAL MEETINGS.
Special meetings of the directors may be called by or at the request of
the president or any two directors. The person or persons authorized to call
special meetings of the directors may fix the place for holding any special
meeting of the directors called by them.
5. NOTICE.
Notice of any special meeting shall be given at least three days
previously thereto by written notice delivered personally, or by telegram or
mailed to each director at his business address. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram is delivered to the telegraph
company. The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
By-Laws 5
<PAGE> 6
6. QUORUM.
At any meeting of the directors a majority shall constitute a quorum
for the transaction of business, but if less than said number is present at a
meeting, a majority of the directors present may adjourn the meeting from time
to time without further notice.
7. MANNER OF ACTING.
The act of the majority of the directors present at a meeting at which
a quorum is present shall be the act of the directors.
8. NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
Newly created directorships resulting from an increase in the number of
directors and vacancies occurring in the board for any reason except the removal
of directors without cause may be filled by a vote of a majority of the
directors then in office, although less than a quorum exists. Vacancies
occurring by reason of the removal of directors without cause shall be filled by
vote of the stockholders. A director elected to fill a vacancy caused by
resignation, death or removal shall be elected to hold office for the unexpired
term of his predecessor.
9. REMOVAL OF DIRECTORS.
Any or all of the directors may be removed for cause by vote of the
stockholders or by action of the board. Directors may be removed without cause
only by vote of the stockholders.
10. RESIGNATION.
A director may resign at any time by giving written notice to the
board, the president or the secretary of the corporation. Unless otherwise
specified in the notice, the resignation shall take effect upon receipt thereof
by the board or such officer, and the acceptance of the resignation shall not be
necessary to make it effective.
11. COMPENSATION.
No compensation shall be paid to directors, as such, for their
services, but by resolution of the board a fixed sum and expenses for actual
attendance at each regular or special meeting of the board may be authorized.
Nothing herein contained shall be construed to preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
By-Laws 6
<PAGE> 7
12. PRESUMPTION OF ASSENT.
A director of the corporation who is present at a meeting of the
directors at which action on any corporate matter is taken shall be presumed to
have assented to the action taken unless his dissent shall be entered in the
minutes of the meeting or unless he shall file his written dissent to such
action with the person acting as the secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
secretary of the corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director who voted in favor of such
action.
13. EXECUTIVE AND OTHER COMMITTEES.
The board, by resolution, may designate from among its members an
executive committee and other committees, each consisting of three or more
directors. Each such committee shall serve at the pleasure of the board.
By-Laws 7
<PAGE> 8
ARTICLE IV - OFFICERS
1. NUMBER.
The officers of the corporation shall be a president, a vice-president,
a secretary and a treasurer, each of whom shall be elected by the directors.
Such other officers and assistant officers as may be deemed necessary may be
elected or appointed by the directors.
2. ELECTION AND TERM OF OFFICE.
The officers of the corporation to be elected by the directors shall be
elected annually at the first meeting of the directors held after each annual
meeting of the stockholders. Each officer shall hold office until his successor
shall have been duly elected and shall have qualified or until his death or
until he shall resign or shall have been removed in the manner hereinafter
provided.
3. REMOVAL.
Any officer or agent elected or appointed by the directors may be
removed by the directors whenever in their judgment the best interests of the
corporation would be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the person so removed.
4. VACANCIES.
A vacancy in any office because of death, resignation, removal,
disqualification or otherwise, may be filled by the directors for the unexpired
portion of the term.
5. PRESIDENT.
The president shall be the principal executive officer of the
corporation and, subject to the control of the directors, shall in general
supervise and control all of the business and affairs of the corporation. He
shall, when present, preside at all meetings of the stockholders and of the
directors. He may sign, with the secretary or any other proper officer of the
corporation thereunto authorized by the directors, certificates for shares of
the corporation, any deeds, mortgages, bonds, contracts, or other instruments
which the directors have authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the directors or
by these by-laws to some other officer or agent of the corporation, or shall be
required by law to be otherwise signed or executed; and in general shall perform
all duties incident to the office of president and such other duties as may be
prescribed by the directors from time to time.
By-Laws 8
<PAGE> 9
6. VICE-PRESIDENT.
In the absence of the president or in event of his death, inability or
refusal to act, the vice-president shall perform the duties of the president,
and when so acting, shall have all the powers of and be subject to all the
restrictions upon the president. The vice-president shall perform such other
duties as from time to time may be assigned to him by the President or by the
directors.
7. SECRETARY.
The secretary shall keep the minutes of the stockholders' and of the
directors' meetings in one or more books provided for that purpose, see that all
notices are duly given in accordance with the provisions of these by-laws or as
required, be custodian of the corporate records and of the seal of the
corporation and keep a register of the post office address of each stockholder
which shall be furnished to the secretary by such stockholder, have general
charge of the stock transfer books of the corporation and in general perform all
duties incident to the office of secretary and such other duties as from time to
time may be assigned to him by the president or by the directors.
8. TREASURER.
If required by the directors, the treasurer shall give a bond for the
faithful discharge of his duties in such sum and with such surety or sureties as
the directors shall determine. He shall have charge and custody of and be
responsible for all funds and securities of the corporation; receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with these by-laws and in general perform all of the duties incident to the
office of treasurer and such other duties as from time to time may be assigned
to him by the president or by the directors.
9. SALARIES.
The salaries of the officers shall be fixed from time to time by the
directors and no officer shall be prevented from receiving such salary by reason
of the fact that he is also a director of the corporation.
By-Laws 9
<PAGE> 10
ARTICLE V - CONTRACTS, LOANS, CHECKS AND DEPOSITS
1. CONTRACTS.
The directors may authorize any officer or officers, agent or agents,
to enter into any contract or execute and deliver any instrument in the name of
and on behalf of the corporation, and such authority may be general or confined
to specific instances.
2. LOANS.
No loans shall be contracted on behalf of the corporation and no
evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the directors. Such authority may be general or confined to
specific instances.
3. CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the corporation, shall be
signed by such officer or officers, agent or agents of the corporation and in
such manner as shall from time to time be determined by resolution of the
directors.
4. DEPOSITS.
All funds of the corporation not otherwise employed shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies or other depositories as the directors may select.
ARTICLE VI - CERTIFICATES FOR SHARES AND THEIR TRANSFER
1. CERTIFICATES FOR SHARES.
Certificates representing shares of the corporation shall be in such
form as shall be determined by the directors. Such certificates shall be signed
by the president and by the secretary or by such other officers authorized by
law and by the directors. All certificates for shares shall be consecutively
numbered or otherwise identified. The name and address of the stockholders, the
number of shares and date of issue, shall be entered on the stock transfer books
of the corporation. All certificates surrendered to the corporation for transfer
shall be canceled and no new certificate shall be issued until the former
certificate for a like number of shares shall
By-Laws 10
<PAGE> 11
have been surrendered and canceled, except that in case of a lost, destroyed or
mutilated certificate a new one may be issued therefor upon such terms and
indemnity to the corporation as the directors may prescribe.
2. TRANSFERS OF SHARES.
(a) Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, and cancel the old certificate; every such transfer shall be entered on
the transfer book of the corporation which shall be kept at its principal
office.
(b) The corporation shall be entitled to treat the holder of record of
any share as the holder in fact thereof, and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person whether or not it shall have express or other notice
thereof, except as expressly provided by the laws of this state.
ARTICLE VII - FISCAL YEAR
The fiscal year of the corporation shall begin on the last day of the
month in each year as elected by the Directors.
ARTICLE VIII - DIVIDENDS
The directors may from time to time declare, and the corporation may
pay, dividends on its outstanding shares in the manner and upon the terms and
conditions provided by law.
ARTICLE IX - SEAL
The directors shall provide a corporate seal which shall be circular in
form and shall have inscribed thereon the name of the corporation, the state of
incorporation, year of incorporation and the words, "Corporate Seal".
By-Laws 11
<PAGE> 12
ARTICLE X - WAIVER OF NOTICE
Unless otherwise provided by law, whenever any notice is required to be
given to any stockholder or director of the corporation under the provisions of
these by-laws or under the provisions of the articles of incorporation, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice.
ARTICLE XI - AMENDMENTS
These by-laws may be altered, amended or repealed and new by-laws may
be adopted by a vote of the stockholders representing a majority of all the
shares issued and outstanding, at any annual stockholders' meeting or at any
special stockholders' meeting when the proposed amendment has been set out in
the notice of such meeting.
____________________________________
SECRETARY
By-Laws 12
<PAGE> 1
EXHIBIT 4.2
CELL PATHWAYS, INC.
Incorporated under the laws of the State of Delaware
COMMON STOCK COMMON STOCK
PAR VALUE $.01 CUSIP 15114R 10 0
See Reverse for Certain Definitions
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.01 PAR VALUE, OF
Cell Pathways, Inc.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. The Certificate and the shares represented hereby are issued under
and shall be subject to the laws of the State of Delaware and all the
provisions of the Certificate of Incorporation and the By-Laws of the
Corporation, and all the amendments from time to time made thereto. This
Certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[SEAL OF DELAWARE]
1998
Countersigned and Registrant:
BANKBOSTON, N.A.
Transfer Agent and Registrar
Authorized Signature
<PAGE> 2
CELL PATHWAYS, INC.
THIS CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS, A COPY OF THE DESIGNATIONS, POWERS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES
THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES
AND/OR RIGHTS. ANY SUCH REQUESTS MAY BE ADDRESSED TO THE SECRETARY OF THE
CORPORATION.
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship
and not as tenants in common
UNIF GIFT MIN ACT -- Custodian
--------------------------------------------
(Cust) (Minor)
under Uniform Gifts to Minors
Act
-----------------------------------------
(State)
ADDITIONAL ABBREVIATIONS MAY ALSO BE USED THOUGH NOT IN THE ABOVE LIST.
For value received, hereby sell, assign and transfer unto
-----------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING
POSTAL ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
----------------------------------------------------------
- --------------------------------------------------------------------------------
Attorney to transfer the said Stock on the books of the within-named
Corporation with full power of substitution in the premises.
Dated
-------------------------------- ---------------------------------------
Signature
---------------------------------------
THE SIGNATURES TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
BANKNOTE CORP. OF AMERICA WALL ST. 1-711039942 Prect #1
Cell Pathways, Inc. 11/26/97 JL/ALW
<PAGE> 1
EXHIBIT 5.1
[COOLEY GODWARD LLP LETTERHEAD]
September 21, 1998
Cell Pathways Holdings, Inc.
702 Electronic Drive
Horsham, Pennsylvania 19044
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Cell Pathways Holdings, Inc., a Delaware corporation (the
"Company"), of a Registration Statement on Form S-4 (the "Registration
Statement") with the Securities and Exchange Commission, with respect to up to
26,000,000 shares of the Common Stock, par value $.01 per share, of the Company
(the "Shares") issuable upon the effectiveness of the mergers of wholly-owned
subsidiaries of the Company with and into Cell Pathways, Inc., a Delaware
corporation, and Tseng Labs, Inc., a Utah corporation, pursuant to the Agreement
and Plan of Reorganization, dated as of June 23, 1998, filed as an exhibit to
the Registration Statement (the "Reorganization Agreement").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement, and (ii) reviewed the Company's Certificate of
Incorporation and Bylaws and the originals or copies certified to our
satisfaction of such records, documents, certificates, memoranda and other
instruments as in our judgment were necessary or appropriate to enable us to
render the opinion expressed below.
On the basis of the foregoing and in reliance thereon, we are of the opinion
that the Shares, when issued in accordance with the Reorganization Agreement,
will be validly issued, fully paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in the
Joint Proxy Statement/Prospectus included in the Registration Statement and to
the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
Cooley Godward LLP
By: /s/ James H. Carroll
-------------------------------------------
James H. Carroll
<PAGE> 1
EXHIBIT 8.1
[COOLEY GODWARD LLP letterhead]
September 21, 1998
Cell Pathways, Inc.
702 Electronic Drive
Horsham, PA 94044
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Reorganization dated as of June 23, 1998 (the
"Reorganization Agreement") by and between Cell Pathways, Inc., a Delaware
corporation ("CPI"), and Tseng Labs, Inc., a Utah corporation ("Tseng").
Pursuant to the terms of the Reorganization Agreement, CPI Sub, Inc., a Delaware
corporation ("C-Sub"), is merging into CPI (the "CPI Merger"), Tseng Sub, Inc.,
a Utah corporation ("T-Sub") is merging into Tseng (the "Tseng Merger") and CPI
and Tseng will each become a wholly-owned subsidiary of Cell Pathways Holdings,
Inc., a Delaware corporation ("CPHI").
Except as otherwise provided, capitalized terms used but not defined herein
shall have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
We have acted as counsel to CPI in connection with the Mergers. As such, and for
the purpose of rendering this opinion, we have examined, and are relying upon
(without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in, the following documents (including all exhibits and
schedules attached thereto):
(a) the Reorganization Agreement;
(b) those certain tax representation letters delivered to us by CPHI,
Tseng, CPI, C-Sub and T-Sub and containing certain representations of CPHI,
Tseng, CPI, C-Sub and T-Sub (the "Tax Representation Letters"); and
(c) such other instruments and documents related to the formation,
organization and operation of CPHI, CPI, C-Sub, T-Sub and Tseng and related to
the consummation of the Mergers and the other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed (without any
independent investigation or review thereof) that:
<PAGE> 2
Cooley Godward LLP
Cell Pathways, Inc.
September 21, 1998
Page Two
(a) Original documents submitted to us (including signatures thereto)
are authentic, documents submitted to us as copies conform to the original
documents, and that all such documents have been (or will be by the Effective
Time) duly and validly executed and delivered where due execution and delivery
are a prerequisite to the effectiveness thereof;
(b) All representations, warranties and statements made or agreed to by
CPHI and CPI, their managements, employees, officers and directors in connection
with the Mergers, including, but not limited to, those set forth in the
Reorganization Agreement (including the exhibits thereto) and the Tax
Representation Letters are true and accurate at all relevant times;
(c) All covenants contained in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are performed without
waiver or breach of any material provision thereof;
(d) Any representation or statement made "to the best of knowledge" or
similarly qualified is correct without such qualification; and
(e) The opinion, dated September 21, 1998, from Morgan, Lewis & Bockius
LLP, in satisfaction of Section 5.8 of the Reorganization Agreement has been
delivered to Tseng and has not been withdrawn.
Based on our examination of the foregoing items and subject to the limitations,
qualifications, assumptions and caveats set forth herein, we are of the opinion
that, for federal income tax purposes, neither CPI nor any of its stockholders
will recognize gain or loss as a result of the CPI Merger except to the extent
CPI stockholders receive cash pursuant to the exercise of appraisal rights.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income tax
issues contained in the Registration Statement. We have reviewed the discussion
entitled "Material Federal Income Tax Consequences" contained in the
Registration Statement and believe that, insofar as it relates to statements of
law and legal conclusions, it is correct in all material respects.
We consent to the reference to our firm under the caption "Material Federal
Income Tax Consequences" in the Proxy Statement included in the Registration
Statement and to the filing of this opinion as an exhibit to the Proxy Statement
and to the Registration Statement.
This opinion does not address the various state, local or foreign tax
consequences that may result from the Mergers or the other transactions
contemplated by the Reorganization Agreement. In addition, no opinion is
expressed as to any federal income tax consequence of the Mergers or the other
transactions contemplated by the Reorganization Agreement except as specifically
set forth
<PAGE> 3
Cooley Godward LLP
Cell Pathways, Inc.
September 21, 1998
Page Three
herein, and this opinion may not be relied upon except with respect to the
consequences specifically discussed herein.
No opinion is expressed as to any transaction other than the CPI Merger as
described in the Reorganization Agreement, or as to any other transaction
whatsoever, including the CPI Merger, if all of the transactions described in
the Reorganization Agreement are not consummated in accordance with the terms of
the Reorganization Agreement and without waiver of any material provision
thereof. To the extent that any of the representations, warranties, statements
and assumptions material to our opinion and upon which we have relied are not
accurate and complete in all material respects at all relevant times, our
opinion would be adversely affected and should not be relied upon.
This opinion only represents our best judgment as to the federal income tax
consequences of the CPI Merger and is not binding on the Internal Revenue
Service or any court of law, tribunal, administrative agency or other
governmental body. The conclusions are based on the Code, existing judicial
decisions, administration regulations and published rulings. No assurance can be
given that future legislative, judicial or administrative changes or
interpretations would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, by rendering this opinion, we undertake no
responsibility to advise you of any new developments in the application or
interpretation of the federal income tax laws.
This opinion is being delivered in connection with the Registration Statement.
It is intended for the benefit of CPI and its stockholders and may not be relied
upon or utilized for any other purpose or by any other person and may not be
made available to any other person without our prior written consent.
Sincerely,
/s/ Webb B. Morrow III
- ----------------------
Webb B. Morrow III
WBM:dp
<PAGE> 1
Exhibit 8.2
[MORGAN, LEWIS & BOCKIUS LLP LETTERHEAD]
COUNSELORS AT LAW
September 21, 1998
TSENG LABS, INC.
18 West Airy Street, Suite 100
Norristown, Pennsylvania 19401
Re: Certain Federal Income Tax Consequences of the Reorganization of
Tseng Labs, Inc. and Cell Pathways, Inc.
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the Form S-4
Registration Statement (the "Registration Statement") filed pursuant to the
Agreement and Plan of Reorganization dated as of June 23, 1998 (the
"Reorganization Agreement") by and between Cell Pathways, Inc., a Delaware
corporation ("CPI"), and Tseng Labs, Inc., a Utah corporation ("Tseng").
Pursuant to the terms of the Reorganization Agreement, CPI Sub, Inc., a Delaware
corporation ("C-Sub"), will merge with and into CPI (the "CPI Merger"), Tseng
Sub, Inc., a Utah corporation ("T-Sub") will merge with and into Tseng (the
"Tseng Merger") (collectively, the CPI Merger and the Tseng Merger are referred
to herein as the "Mergers"), and CPI and Tseng will each become a wholly-owned
subsidiary of Cell Pathways Holdings, Inc., a Delaware corporation ("Holdco").
Except as otherwise provided herein, capitalized terms used but not defined
herein shall have the meanings set forth in the Reorganization Agreement. All
section references, unless otherwise indicated, are to the Internal Revenue Code
of 1986, as amended (the "Code").
We have acted as legal counsel to Tseng in connection with the Mergers. As such,
and for the purpose of rendering this opinion, we have examined and are relying
upon (without any independent investigation or review thereof) the truth and
accuracy, at all relevant times, of the statements, covenants, representations
and warranties contained in the following documents (including all exhibits and
schedules attached thereto):
<PAGE> 2
Tseng Labs, Inc.
September 21, 1998
Page 2
1. The Reorganization Agreement;
2. The tax representation letters delivered to us by Holdco,
Tseng, CPI, T-Sub, and C-Sub containing certain
representations of Holdco, Tseng, CPI, T-Sub, and C- Sub
(the "Tax Representations); and
3. Such other instruments and documents related to the
formation, organization and operation of Holdco, Tseng,
CPI, T-Sub, and C-Sub and to the consummation of the
Mergers and other transactions contemplated by the
Reorganization Agreement as we have deemed necessary or
appropriate.
In preparing our opinion, as set forth below, we have reviewed such other
documents relating to the Mergers and such federal income tax authority as we
deemed relevant under the circumstances. For purposes of this opinion, we have
assumed, with your permission and without independent investigation, that:
1. Original documents (including signatures thereto) are
authentic, documents submitted to us as copies conform to
the original documents, and there has been (or will be by
the Effective Time) due execution and delivery of all
documents where due execution and delivery are
prerequisites to the effectiveness of those documents;
2. All representations, warranties, and statements made or
agreed to by Holdco, Tseng, CPI, T-Sub, and C-Sub, their
managements, employees, officers, and directors in
connection with the Mergers, including, but not limited to,
those set forth in the Reorganization Agreement (including
exhibits thereto) and the Tax Representation Letters are
true and accurate at all relevant times;
3. All covenants contained in the Reorganization Agreement
(including exhibits thereto) and the Tax Representation
Letters are performed without waiver or breach of any
material provision thereof;
4. Any representation or statement made "to the best of
knowledge" or similarly qualified is correct without such
qualification; and
<PAGE> 3
Tseng Labs, Inc.
September 21, 1998
Page 3
5. The opinion, dated September 18, 1998 from Cooley Godward
LLP, in satisfaction of Section 5.8 of the Reorganization
Agreement has been delivered to CPI and has not been
withdrawn.
OPINION
Based upon the foregoing, it is our opinion that for federal income tax purposes
neither Tseng nor any of its stockholders will recognize gain or loss as a
result of the Tseng Merger except to the extent Tseng stockholders receive cash
in lieu of fractional shares as provided in the Reorganization Agreement.
In addition to your request for our opinion on this specific matter of federal
income tax law, you have asked us to review the discussion of federal income tax
issues contained in the Registration Statement. We have reviewed the discussion
entitled "Material Federal Income Tax Consequences" contained in the
Registration Statement and believe that, insofar as it relates to statements of
law and legal conclusions, it is correct in all material respects.
* * *
Our opinion set forth herein is based upon existing law, regulations,
administrative pronouncements and judicial decisions, all as in effect as of
today's date. All such authorities are subject to change, either prospectively
or retroactively. No assurance can be provided as to the effect of any such
change on our opinion. If any of the facts, assumptions, or Tax Representations
on which our opinion is based is incorrect, please advise us so that we may
consider the effect, if any, on our opinion.
The opinion set forth herein has no binding effect on the United States Internal
Revenue Service or the courts. Accordingly, no assurance can be given that, if
the matter were contested, a court would agree with the opinion set forth above.
<PAGE> 4
Tseng Labs, Inc.
September 21, 1998
Page 4
We consent to the reference to our firm under the caption "Material Federal
Income Tax Consequences" in the Proxy Statement included in the Registration
Statement and to the filing of this opinion as an exhibit to the Proxy Statement
and to the Registration Statement.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
- -------------------------------
Morgan, Lewis & Bockius LLP
<PAGE> 1
EXHIBIT 10.19
TSENG LABS, INC.
AMENDED AND RESTATED
NON-QUALIFIED STOCK OPTION PLAN
(1987)
1. Purpose. It is intended that this Non-Qualified Stock Option Plan
(the "Plan") shall (a) induce key employees and non-employee members of the
Board of Directors (together, the "Optionees") of Tseng Labs, Inc. (the
"Company") and any of its parent and subsidiary corporations within the meaning
of Section 425 of the Internal Revenue Code of 1986, as amended (the "Code")
("Affiliates") to become and remain employed by or to serve or continue to serve
on the Board of Directors of the Company and its Affiliates and (b) reward past
services of Optionees.
2. Administration. The Plan shall be administered by the Board of
Directors of the Company, without participation by any director in any matter
pertaining to him. The Board of Directors, however, may designate a Stock Option
Committee composed of one or more of its members to operate and administer the
Plan in its stead. Such Stock Option Committee or the Board of Directors in its
administrative capacity with respect to the Plan is referred to as the
"Committee".
The Committee shall hold meetings at such times and places as it may
determine. Acts approved at a meeting by a majority of the members of the
Committee, or acts approved in
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writing by the unanimous consent of the members of the Committee, shall be the
valid acts of the Committee.
The Committee from time to time at its discretion shall direct the
Company to grant options ("Options") pursuant to the terms of the Plan and shall
have plenty authority to determine the Optionees to receive Options, the times
at which Options shall be granted, the number of Option Shares (as defined in
Paragraph 4) to be covered by such Options and other terms and provisions of
such Options; subject, however, to the express provisions of the Plan. In making
such determinations the Committee may take into account the nature of the
Optionee's services and responsibilities, his present and potential contribution
to the Company's success and such other factors as it may deem relevant. The
interpretation and construction by the Committee of any provision of the Plan or
of any Option granted under the Plan shall be final, binding and conclusive.
3. Eligibility. All Optionees, whether or not they are officers and/or
directors of the Company of its Affiliates, shall be eligible to receive Options
hereunder. The Committee, in its sole discretion, shall determine whether an
individual qualifies as an Optionee. An Optionee may receive more than one
Option, but only on the terms and subject to the restrictions of the Plan.
4. Option Shares. The aggregate maximum number of shares of the
Company's Common Stock for which Options may be issued under the Plan is
1,500,000 shares, adjusted as provided in Section 8 (the "Option Shares").
Option Shares shall be issued from authorized and unissued Common Stock or
Common Stock held in or hereafter acquired for the treasury of the Company. If
any outstanding Option granted under the Plan expires, lapses or is terminated
for
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<PAGE> 3
any reason, the Option Shares allocable to the unexercised portion of such
Option may again be the subject of an Option granted pursuant to the Plan.
5. Term of Plan. The Plan as amended and restated is effective as of
December 26, 1936, the date on which it was adopted by the Board of Directors.
6. Terms and Conditions of Options. Options granted pursuant to the
Plan shall be evidenced by written documents (the "Option Documents") in such
form as the Committee from time to time shall approve. The Option Documents
shall comply with and be subject to the following terms and conditions and such
other terms and conditions not inconsistent with the terms of the Plan that are
determined by the Committee from time to time:
(a) Number of Option Shares. Each Option Document shall state
the number of Option Shares to which it pertains.
(b) Option Price. Each Option Document shall state the price
at which Option Shares may be purchased (the "Option Price"), which shall be at
least 100% of the fair market value of the Common Stock on the date the Option
is granted as determined by the Committee. Notwithstanding the foregoing, if the
Common Stock is actively traded on a stock exchange on the day of grant, the
fair market value per share shall be deemed to be the closing price thereof (as
reported in customary financial reporting services) on such date, and if the
Common Stock is otherwise actively traded in a public market on the day of the
grant, then the fair market value per share shall be the mean between the
closing "bid" and "asked" prices thereof (as reported in customary financial
reporting services) on such date.
(c) Medium of Payment. The Option Price shall be payable to
the Company in cash or by certified check, bank draft or money order payable to
the order of the Company.
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<PAGE> 4
(d) Exercise Period for Options. No Option shall be
exercisable after the first to occur of the following:
(i) Expiration of the Option term specified in the
Option Document;
(ii) Termination of the Optionee's employment with or
membership on the Board of Directors of the Company or its Affiliates for cause;
(iii) Expiration of three months from the date the
Optionee's employment with or membership on the Board of Directors of the
Company and its Affiliates terminates for any reason other than cause, death or
disability within the meaning of Section 22(e)(3) of the Code; or
(iv) Expiration of twelve months from the date the
Optionee's employment with or membership on the Board of Directors of the
Company and its Affiliates terminates by reason of the Optionee's death or
disability within the meaning of Section 22(e)(3) of the Code.
(e) Transfers. No Option granted under the Plan may be
transferred except by will or by the laws of descent and distribution. During
the lifetime of the Optionee to whom an Option is granted, such Option may be
exercised only by such Optionee.
(f) Other Provisions. The Option Documents shall contain such
other provisions including, without limitation, additional restrictions upon the
exercise of the Option or additional limitations upon the term of the Option, as
the Committee shall deem advisable.
7. Exercise. No Option shall be deemed to have been exercised prior to
the receipt by the Company of written notice of such exercise (the day of
receipt of such notice being referred to herein as the "Exercise Date") and of
payment in full of the Option Price of the
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<PAGE> 5
Option Shares to be purchased. Each such notice shall specify the number of
Option Shares to be purchased and, unless the Option Shares are covered by a
then current registration statement or a Notification under Regulation A
promulgated under the Securities Act of 1933 (the "Securities Act") and current
registrations under all applicable state securities laws, shall contain the
Optionee's acknowledgment in form and substance satisfactory to the Company that
(a) such Option Shares are being purchased for investment and not for
distribution or resale (other than a distribution or resale that, in the option
of counsel satisfactory to the Company, may be made without violating the
registration provisions of the Securities Act), (b) the Optionee has been
advised and understands that (i) the Option Shares have not been registered
under the Securities Act and are "restricted securities" within the meaning of
Rule 144 under the Securities Act and are subject to restrictions on transfer
and (ii) the Company is under no obligation to register the Option Shares under
the Securities Act or to take any action that would make available to the
Optionee any exemption from such registration, and (c) such Option Shares may
not be transferred without compliance with all applicable federal and state
securities laws. Option Shares shall contain such restrictive legends as are
deemed necessary by the Committee in order to assure compliance with applicable
securities laws.
8. Adjustments Upon Changes in Common Stock. The aggregate number of
shares of Common Stock as to which Options may be granted hereunder, the number
of Option Shares covered by each outstanding Option and the Option Price per
Option Share shall be appropriately adjusted in the event of a stock dividend,
stock split or other increase or decrease in the number of issued shares of
Common Stock resulting from a subdivision or consolidation of the Common Stock
or other capital adjustment (not including the issuance of Common Stock on the
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<PAGE> 6
conversion of any securities of the Company that are convertible into Common
Stock; effected without receipt of consideration by the Company, except that no
adjustments will be made until the cumulative effect per share of such
adjustments not theretofore made exceeds of $.25. The Committee shall have
authority to determine the adjustments to be made under this Paragraph and any
such determination by the Committee shall be final, binding and conclusive.
9. Amendment of the Plan or of Option Documents. The Board of Directors
of the Company may amend the Plan from time to time in such manner as it may
deem advisable. The Committee and the recipient of an Option may amend the
Option Documents with respect thereto at any time provided that the Option
Documents, as amended, are consistent with the terms of the Plan.
10. Continued Employment. The grant of an Option pursuant to the Plan
shall not be construed to imply or to constitute evidence of any agreement,
express or implied, on the part of the Company or any Affiliate to continue to
retain the Optionee in the employ of the Company or as a member of its Board of
Directors, whichever the case may be.
11. Rights of Company. No Optionee or his legal representative, legatee
or distributee, as the case may be, will be or will be deemed to be a holder of
any shares subject to Option unless and until certificates for such shares are
issued to him or them under the Plan. Except as provided in Paragraph 8 above,
no dividends shall be payable on any stock subject to the Plan or any Option
prior to the issuance of Option Shares on exercise of an Option.
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<PAGE> 1
EXHIBIT 10.20
TSENG LABS, INC.
1991 STOCK OPTION PLAN
1. Purpose. TSENG LABS, Inc. hereby adopts the 1991 Stock
Option Plan (the "Plan"). The Plan is intended to recognize the contributions
made to the Company by employees, including employees who are members of the
Board of Directors, of the company or any Affiliate, to provide such persons
with additional incentive to devote themselves to the future success of the
Company or an Affiliate, and to improve the ability of the Company or an
Affiliate to attract, retain, and motivate individuals upon whom the Company's
sustained growth and financial success depend, by providing such persons with an
opportunity to acquire the or increase their proprietary interest in the Company
through receipt of rights to acquire the Company's Common Stock, par value $.005
per Share (the "Common Stock").
2. Definitions. Unless the context clearly indicates
otherwise, the following terms shall have the following meanings:
(a) "Affiliate" means a corporation which is a parent
corporation or a subsidiary corporation with respect to the Company within the
meaning of section 424(e) or (f) of the Code.
(b) "Board of Directors" means the Board of Directors
of the Company.
(c) "Change of Control" shall have the meaning as set
forth in Section 9 of the Plan.
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<PAGE> 2
(d) "Code" means the Internal Revenue Code of 1986,
as amended.
(e) "Committee" means the non-employee members of the
Board of Directors or a committee or committees designated by the Board of
Directors as described in Section 3 of the Plan.
(f) "Company" means Tseng Labs, Inc., a Utah
corporation.
(g) "Disability" shall have the meaning set forth in
section 22(e)(3) of
the Code.
(h) "Fair Market Value" shall have the meaning set
forth in Section 8(b) of the Plan.
(i) "ISO" means an option granted under the Plan
which is intended to qualify as an "incentive stock option" within the meaning
of section 422(b) of the Code. (j) "Non-qualified stock Option" means an option
granted under the Plan which is not intended to qualify as an "incentive stock
option" within the meaning of section 422(b) of the Code.
(k) "Option" means either an ISO or a Non-qualified
Stock Option granted under the Plan.
(l) "Optionee" means a person to whom an Option has
been granted under the Plan, which option has not been exercised and has not
expired or terminated.
(m) "Option Document" means the document described in
Section 8 which sets forth the terms and conditions of each grant of Options.
(n) "Option Price" means the price at which Shares
may be purchased upon exercise of an Option, as calculated pursuant to section
a(b).
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<PAGE> 3
(o) "Shares" means the shares of Common Stock of the
Company which are the subject of Options.
3. Administration of the Plan. The Plan shall be administered
by a committee composed of two or more of the non-employee members of the
Company's Board of Directors; however, the Board may designate two committees to
operate and administer the Plan in its stead, one of such committees composed of
two or more of its non-employee directors to operate and administer the Plan
with respect to the Company's "Principal Officers" (as defined below), and the
other such committee composed of two or more directors (which may include
directors who are also employees of the Company) to operate and administer the
Plan with respect to persons other than "Principal Officers." Either of such
committees designated by the Board of Directors are referred to as the
"Committee." As used herein, the term "Principal Officer" means a person who is
an "Officer" as defined in Rule 16a-l(f) promulgated under the Securities
Exchange Act of 1934, as amended, or any successor regulation.
(a) Meetings. The Committee shall hold meetings at
such times and places as it may determine. Acts approved at a meeting by a
majority of the members of the Committee or acts approved in writing by the
unanimous consent of the members of the Committee shall be the valid acts of the
Committee.
(b) Grants. The Committee shall from time to time at
its discretion direct the Company to grant options pursuant to the terms of the
Plan. The Committee shall have plenary authority to (i) determine the optionees
to whom, the times at which, and the price at which Options shall be granted,
(ii) determine the type of Option to be granted and the number of Shares subject
thereto and (iii) approve the form and terms and conditions of the Option
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<PAGE> 4
Documents; all subject, however, to the express provisions of the Plan. In
making such determinations, the Committee may take into account the nature of
the optionee's services and responsibilities, the Optionee's present and
potential contribution to the company's success and such other factors as it may
deem relevant. The interpretation and construction by the Committee of any
provisions of the Plan or of any Option granted under it shall be final, binding
and conclusive.
(c) Exculpation. No member of the committee shall be
personally liable for monetary damages as such for any action taken or any
failure to take any action in connection with the administration of the Plan or
the granting of Options thereunder, provided that this subsection 3(C) shall not
apply to (i) any breach of such member's duty of loyalty to the Company or its
shareholders, (ii) acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law, (iii) acts or omissions that would
result in liability under Section 16-10-44 of the Utah Business Corporation Act,
and (iv) any transaction from which the member derived an improper personal
benefit.
(d) Indemnification. Service on the Committee shall
constitute service as a member of the Board of Directors of the Company. Each
member of the Committee shall be entitled without further act on his part to
indemnity from the Company to the fullest extent provided by applicable law and
the Company's Articles of Incorporation and/or By-laws in connection with or
arising out of any action, suit or proceeding with respect to the administration
of the Plan or the granting of Options thereunder in which he or she may be
involved by reason of his or her being or having been a member of the Committee,
whether or
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<PAGE> 5
not he or she continues to be such member of the Committee at the time of the
action, suit or proceeding.
4. Grants under the Plan. Grants under the Plan may be in the
form of a Non-qualified Stock Option, an ISO or a combination thereof, at the
discretion of the Committee.
5. Eligibility. All employees (including employees who are
members of the Board of Directors of the Company or its Affiliates) shall be
eligible to receive Options hereunder.
6. Shares Subject to Plan. The aggregate maximum number of
Shares for which Options may be granted pursuant to the Plan is 1,500,000,
subject to adjustment as provided in Section 10 of the Plan. The Shares shall be
issued from authorized and unissued Common Stock or Common Stock held in or
hereafter acquired for the treasury of the Company. If an option terminates or
expires without having been fully exercised for any reason, the Shares for which
the option was not exercised may again be the subject of an option granted
pursuant to the Plan.
7. Term of the Plan. The Plan is effective as of June 1, 1991,
the date on which it was adopted by the Board of Directors, subject to the
approval of the Plan on or before May 31, 1992 by a majority of the votes cast
at a duly called meeting of the shareholders at which a quorum representing a
majority of all outstanding voting stock of the Company is, either in person or
by proxy, present and voting. No Option may be granted under the Plan after May
31, 2001. No option granted pursuant to the Plan may be exercised before the
Plan is so approved by the Company's shareholders. If the Plan is not so
approved on or before May 31, 1992, all Options granted under the Plan shall be
null and void.
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<PAGE> 6
8. Option Documents and Terms. Each option granted under the
Plan shall be a Non-qualified Stock option unless the Option shall be
specifically designated at the time of grant to an ISO for Federal income tax
purposes. Options granted pursuant to the Plan shall be evidenced by the Option
Documents in such form as the Committee shall from time to time approve, which
option Documents shall comply with and be subject to the following terms and
conditions and such other terms and conditions as the Committee shall from time
to time require which are not inconsistent with the terms of the Plan.
(a) Number of Option Shares. Each Option Document
shall state the number of Shares to which it pertains. An optioned may receive
more than one Option, which may include options which are intended to be ISOs
and Options which are not intended to be ISOs, but only on the terms and subject
to the conditions and restrictions of the Plan.
(b) Option Price. Each option Document shall state
the Option Price which, for all Options, shall be at least 10% of the Fair
Market Value of the Shares at the time the Option is granted as determined by
the Committee; provided, however, that if an ISO is granted to an optionee who
then owns, directly or by attribution under section 424(d) of the Code, shares
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or an Affiliate, then the Option Price shall be at least
110% of the Fair Market Value of the Shares at the time the option is granted.
If the Shares are traded in a public market, then the Fair Market Value per
share shall be, if the Shares are listed on a national securities exchange or
included on the NASDAQ National Market System, the last reported sale price
thereof, or, if the Shares are not so listed or included, the mean between the
last reported
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<PAGE> 7
"bid" and "asked" prices thereof, as reported on NASDAQ, or if not so reported,
as reported by the National Daily Quotation Bureau, Inc. or other financial
reporting service, as applicable and as the committee determines, on the day the
option is granted.
(c) Exercise. No option shall be deemed to have been
exercised prior to the receipt by the Company of written notice of such exercise
and of payment in full of the Option Price for the Shares to be purchased. Each
such notice shall specify the number of Shares to be purchased and shall (unless
the Shares are covered by a then current registration statement or a
Notification under Regulation A under the Securities Act of 1933, as amended
(the "Act")), contain the Optionee's acknowledgment in form and substance
satisfactory to the Company that (a) such Shares are being purchased for
investment and not for distribution or resale (other than a distribution or
resale which, in the opinion of counsel satisfactory to the Company, may be made
without violating the registration provisions of the Act), (b) the Optionee has
been advised and understands that (i) the Shares have not been registered under
the Act and are "restricted securities" within the meaning of Rule 144 under the
Act and are subject to restrictions on transfer and (ii) the Company is under no
obligation to register the Shares under the Act or to take any action which
would make available to the Optionee any exemption from such registration, (c)
such Shares may not be transferred without compliance with all applicable
federal and state securities laws, and (d) an appropriate legend referring to
the foregoing restrictions on transfer and any other restrictions imposed under
the Option Documents may be endorsed on the certificates. Notwithstanding the
above, should the Company determine that issuance of Shares should be delayed
pending (A) registration under federal or state securities laws, (B) the receipt
of an opinion that an appropriate exemption from such registration is
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<PAGE> 8
available, (C) the listing or inclusion of the Shares on any securities exchange
or automated quotation system, or (D) the consent or approval of any
governmental regulatory body whose consent or approval is necessary in
connection with the issuance of such Shares, the Company may defer exercise of
any Option granted hereunder until any of the events described in this
subsection 8(c) has occurred.
(d) Medium of Payment. An Optionee shall pay for
Shares (i) in cash, (ii) by certified check payable to the order of the Company,
or (iii) by such other mode of payment as the committee may approve, including
payment through a broker in accordance with procedures permitted by Regulation T
of the Federal Reserve Board. Furthermore, the Committee may provide in an
Option Document that payment may be made in whole or in part in shares of the
Company's Common Stock held by the Optionee for at least six months. If payment
is made in whole or in part in shares of the Company's Common Stock, then the
Optionee shall deliver to the Company certificates registered in the name of
such Optionee representing the shares owned by such Optionee, free of all liens,
claims and encumbrances of every kind and having an aggregate Fair Market Value
on the date of delivery that is at least an great as the Option Price of the
Shares (or relevant portion thereof) with respect to which such option is to be
exercised by the payment in shares of Common stock, accompanied by stock powers
duly endorsed in blank by the Optionee. In the event that certificates for
shares of the Company's Common Stock delivered to the Company represent a number
of shares in excess of the number of shares required to make payment for the
Option Price of the Shares (or relevant portion thereof) with respect to which
such Option is to be exercised, the stock certificate issued to the Optionee
shall represent the sum of (i) the Option Shares in respect of which payment is
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<PAGE> 9
made and (ii) such excess number of shares. Notwithstanding the foregoing, the
Committee may impose from time to time such limitations and prohibitions on the
use of shares of the Common Stock to exercise an option as it deems appropriate.
(e) Termination of Options.
(i) Except as set forth in subsection
(e)(ii) of this Section 8, no Option shall be exercisable after the first to
occur of the following:
(A) Expiration of the Option term
specified in the Option Document, which shall not exceed (1) ten years from the
date of grant, or (2) five years from the date of grant of an ISO if the
optionee on the date of grant owns, directly or by attribution under section
424(d) of the Code, shares possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of an Affiliate;
(B) Expiration of ninety (90) days
from the date the Optionee's employment or service with the Company or its
Affiliates terminate for any reason other than Disability or death or as
otherwise specified in Subsection 8(e)(iv) or Section 9, below;
(C) Expiration of one year from the
date the Optionee's employment or service with the Company or its Affiliates
terminates due to the Optionee's Disability or death;
(D) A finding by the Committee,
after full consideration of the facts presented on behalf of both the Company
and the Optionee, that the Optionee has breached his employment or service
contract with the Company or an Affiliate, or has been engaged (i) in any sort
of disloyalty to the Company or an Affiliate, including, without
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<PAGE> 10
limitation, fraud, embezzlement, theft, commission of a felony or proven
dishonesty in the course of his employment or service, or has disclosed trade
secrets or confidential information of the Company or an Affiliate, including
without limitation, employment with or assistance to a competitor, either during
the term of employment or after the term of employment in violation of a
covenant not to compete signed by employee, or (ii) in any sort of willful
misconduct, including, without limitation, willful neglect of duties,
insubordination, or commission of conduct exposing the Company or an Affiliate
to civil or criminal liability. In such event, in addition to immediate
termination of the Option, the Optionee, upon a determination by the committee,
shall automatically forfeit all shares for which the Company has not yet
delivered the share certificates upon refund by the Company of the Option Price.
Notwithstanding anything herein to the contrary, the Company may withhold
delivery of share certificates pending the resolution of any inquiry that could
lend to a finding resulting in a forfeiture.
(E) the date, if any, set by the
Board of Directors as an accelerated expiration date pursuant to Section 9
hereof.
(ii) Notwithstanding the foregoing, the
committee may extend the period during which an Option may be exercised to a
date no later than the date of the expiration of the Option term specified in
the Option Document.
(f) Transfers. No Option granted under the Plan may
be transferred, except by will or by the laws of descent and distribution.
During the lifetime of the person to whom an Option is granted, such Option -may
be exercised only by him or her.
(g) Other Provisions. The Option Documents shall
contain such other provisions including, without limitation, provisions
authorizing the Committee to accelerate
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<PAGE> 11
the exercisability of all or any portion of an Option granted pursuant to the
Plan, additional restrictions upon the exercise of the Option or additional
limitations upon the term of the Option, as the committee shall deem advisable.
(h) Amendment. The Committee shall have the right to
amend Option Documents issued to an optionee, subject to his consent -if such
amendment is not favorable to the Optionee, except that the consent of the
Optionee shall not be required for any amendment made under Section 9 of the
Plan.
9. Change of Control. A "Change of Control" shall be deemed to
have occurred upon the earliest to occur of the following events: (i) the date
the shareholders of the Company (or the Board of Directors, if shareholder
action is not required) approve a plan or other arrangement pursuant to which
the Company will be dissolved or liquidated, or (ii) the date the shareholders
of the Company (or the Board of Directors, if shareholder action is not
required) approve a definitive agreement to sell or otherwise dispose of
substantially all of the assets of the Company, or (iii) the date the
shareholders of the Company (or the Board of Directors, if shareholder action is
not required) and the shareholders of the other constituent corporations (or
their respective Boards of Directors if shareholder action is not required) have
approved a definitive agreement to merge or consolidate the Company with or into
another corporation, other than, in either case, a merger or consolidation of
the Company in which holders of shares of the Company's Common Stock immediately
prior to the merger or consolidation will have at least a majority of the
ownership of common stock of the surviving corporation immediately after the
merger or consolidation, which common stock is to be held in the same proportion
as such holders' ownership of Common Stock of the Company immediately before the
merger or
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<PAGE> 12
consolidation, or (iv) the date any entity, person or group (within the meaning
of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934,
as amended), other than the company or any of its subsidiaries or any employee
benefit plan (or related trust) sponsored or maintained by the Company or any of
its subsidiaries, shall have become the beneficial owner of, or shall have
obtained voting control over, more than 50% of the outstanding shares of the
Company's Common or (v) the first day after the date of this Plan when directors
are elected such that a majority of the Board of Directors shall-have been
members of the Board of Directors for less than twelve (12) months, unless the
nomination for election of each new director who was not a director at the
beginning of such twelve (12) month period was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of such period. In the event of a Change of Control the Committee may
take whatever action with respect to the Options outstanding it deems necessary
or desirable, including, without limitation, accelerating the expiration or
termination date in the respective Option Documents.
10. Adjustments on Changes in Capitalization. The aggregate
number of Shares and class of shares as to which Options may be granted
hereunder, and the Option Price shall be appropriately adjusted in the event of
a stock dividend, stock split, recapitalization or other change in the number or
class of issued and outstanding equity securities of the Company resulting from
a subdivision or consolidation of the Common Stock and/or, if appropriate, other
outstanding equity security or a recapitalization or other capital adjustment
(not including the issuance of Common Stock on the conversion of other
securities of the Company which are convertible into Common Stock) affecting the
Common Stock which is effected without receipt of consideration by the Company.
The Committee shall have authority to determine the
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<PAGE> 13
adjustments to be made under this Section, and any such determination by the
Committee shall be shall be final, binding and conclusive; provided, however,
that no adjustment shall be made which will cause an ISO to lose its status an
such without the consent of the Optionee, except for adjustments made pursuant
to Section 9 hereof.
11. Amendment of the Plan. The Board of Directors of the
Company may amend the Plan from time to time in such manner as it may deem
advisable. Nevertheless the Board of Directors of the Company may not, without
obtaining approval by vote of majority of the votes cast at a duly called
meeting of the shareholders at which a quorum representing a majority of all
outstanding voting stock of the Company is, either in person by proxy, present
and voting on the matter, within twelve months before or after such action,
change the class of individuals eligible to receive an ISO, increase the maximum
number of shares as to which Options may be granted, or make any other change or
amendment as to which shareholder approval is required in order to satisfy the
conditions set forth in Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended. No amendment to the Plan shall adversely affect any
outstanding Option, however, without the consent the optionee.
12. No Continued Employment. The grant of an option pursuant
to the Plan shall not be construed to imply or to constitute evidence of any
agreement, express or implied, on the part of the Company or any Affiliate to
retain the Optionee in the employ of the Company or any Affiliate and/or as a of
the Company's Board of Directors or in any other capacity.
13. Withholding of Taxes. Whenever the Company proposes or is
required to deliver or transfer Shares in connection with the exercise of an
option, the Company shall have the right to (a) require the recipient to remit
or otherwise make available to the Company an
-13-
<PAGE> 14
amount sufficient to satisfy any federal, state and/or local withholding tax
requirements prior to the delivery or transfer of any certificate or
certificates for such Shares or (b) take whatever other action it deems
necessary to protect its interests with respect to tax liabilities. The
Company's obligation to make any delivery or transfer of Shares shall be
-14-
<PAGE> 1
EXHIBIT 10.21
TSENG LABS, INC.
1991 SPECIAL DIRECTORS STOCK OPTION PLAN
1. Establishment of Plan. Tseng Labs, Inc., a Utah corporation (the
"Company"), hereby adopts the 1991 Special Directors Stock Option Plan (the
"Plan"). The Plan is intended as an additional incentive to certain directors of
the Company who are not employees of the Company or an Affiliate (as defined
below) to serve on the Board of Directors of the Company and to devote
themselves to the Company's success by providing them with an opportunity to
acquire or increase their proprietary interest in the Company through receipt of
rights (the "Options") to acquire the Company's Common Stock, par value $.005
(the "Common Stock"). (Directors who are granted Options under the Plan are
sometimes hereinafter referred to as "Optionees"). For purposes of the Plan, the
term "Affiliate" shall mean a corporation which is a parent corporation or
subsidiary corporation with respect to the Company within the meaning of Section
425(e) or (f) of the Internal Revenue Code of 1986, as amended (the "Code").
2. Administration. The directors to whom Options will be granted, the
timing of grants for all Optionees, the price at which shares of Common Stock
covered by Options may be purchased and the number of shares of Common Stock to
be covered by Options granted to each Optionee shall be as specifically set
forth herein. Subject to the foregoing, and the other provisions set forth
herein, the Plan shall be administered by the Board of Directors of the Company
in accordance with the provisions of the Plan.
(a) Action By the Board. Acts with respect to the Plan approved at a
meeting by a majority of the members of the Board of Directors or acts approved
in writing by the unanimous consent of the members of the Board of Directors
shall be the valid acts of the Board of Directors for the purposes of the Plan.
1
<PAGE> 2
(b) Interpretation. The interpretation and construction by the Board
of Directors of the terms and provisions of the Plan or of any Option granted
hereunder shall be final, binding and conclusive.
(c) Exculpation. No member of the Board of Directors shall be
personally liable for monetary damages for any action taken or any failure to
take any action in connection with the administration of the Plan or the
granting of Options under the plan, provided that this subsection 2(c) shall not
apply to (I) any breach of such member's duty of loyalty to the Company or its
shareholders, (ii) acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law, (iii) acts or omissions that would
result in liability under Section 16-10-44 of the Utah Business Corporation Act,
and (iv) any transaction from which the member derived an improper personal
benefit.
(d) Indemnification. Each member of the Board of Directors shall be
entitled without further act on his part to indemnity from the Company to the
fullest extent provided by applicable law and the Company's Articles of
Incorporation and/or By-laws in connection with or arising out of any action,
suit or proceeding with respect to the administration of the Plan or the
granting of Options under the Plan in which he may be involved by reason of his
being or having been a member of the Board of Directors, whether or not he
continues to be such member of the Board of Directors at the time of the action,
suit or proceeding.
3. Eligibility. All directors of the Company who are not employees of
the Company shall be eligible to receive Options hereunder. An Optionee may
receive more than one Option, but only on the terms and subject to the
restrictions of the Plan.
4. Option Shares. The aggregate maximum number of shares of the Common
Stock for which Options may be issued under the Plan is 200,000 shares, adjusted
as provided in Section 9 (the "Option Shares"). Option Shares shall be issued
from authorized and unissued Common Stock or Common Stock held in or hereafter
acquired for the treasury of the Company. If any outstanding Option granted
under the Plan expires, lapses or is terminated for any reason, the Option
Shares allocable to the
2
<PAGE> 3
unexercised portion of such Option may again be the subject of an Option granted
pursuant to the Plan.
5. Term of Plan. The Plan is effective as of June 1, 1991, the date on
which it was adopted by the Board of Directors, provided that the effectiveness
of the Plan shall be subject to approval by the stockholders of the Company. If
the Plan is not duly approved by the stockholders of the Company on or before
May 31, 1992 all Options theretofore granted under this Plan shall be null and
void. No Option may be granted under the Plan after May 31, 2001.
6. Grant of Options. Options shall be granted to Optionees, without any
further action by the Board of Directors, in accordance with the following terms
and conditions:
(a) Each Optionee first elected to the Board of Directors subsequent
to June 1, 1991 shall be granted Options to purchase 20,000 shares of Common
Stock upon becoming a director.
(b) Thereafter, each such Optionee shall be granted additional
Options to purchase 20,000 shares of Common Stock on the second anniversary of
the date of the next previous grant of stock options to directors.
(c) Each Option granted under the Plan pursuant to subsections 6(a)
and 6(b) shall be exercisable in two installments, each covering 10,000 of the
Option Shares. The first installment is exercisable on the date of grant and the
second installment will become exercisable on the first anniversary of the date
of grant. If an Optionee ceases to be a director prior to the date one or more
installments become exercisable, the Option will expire with respect to Option
Shares covered by installments that did not become exercisable unless the
Optionee ceases to be a director as a result of any of the transactions
described in Section 8 hereof.
7. Terms and Conditions of Options. Each Option granted pursuant to the
Plan shall be evidenced by a written document (the "Option Document"). The
following provisions shall be applicable to the Option Documents:
3
<PAGE> 4
(a) Number of Option Shares. Each Option Document shall state the
number of Option Shares to which it pertains, in accordance with the provisions
of Section 6.
(b) Option Price. Each Option Document shall state the price at
which Option Shares may be purchased (the "Option Price"), which Option Price
shall be the Fair Market Value of the Common Stock on the date the Option is
granted. If the Shares are traded in a public market, then the Fair Market Value
per share shall be, if the Shares are listed on a national securities exchange
or included on the NASDAQ National Market System, the last reported sale price
thereof, or, if the Shares are not so listed or included, the mean between the
last reported "bid" and "asked" prices thereof, as reported on NASDAQ, or if not
so reported, as reported by the National Daily Quotation Bureau, Inc. Or other
financial reporting service, as applicable and as the committee determines, on
the day the Option is granted.
(c) Medium of Payment. An Optionee shall pay for Option Shares in
cash, by certified check payable to the order of the Company, in shares of the
Common Stock held by the Optionee for more than six months or in any combination
of the foregoing. If payment is made in whole or in part in shares of the
Company's Common Stock, then the Optionee shall deliver to the Company
certificates registered in the name of such Optionee representing the shares
owned by such Optionee, free of all liens, claims and encumbrances of every kind
and having an aggregate Fair Market Value on the date of delivery that is at
least as great as the Option Price of the Shares (or relevant portion thereof)
with respect to which such Option is to be exercised by the payment in shares of
Common Stock, accompanied by stock powers duly endorsed in blank by the
Optionee. In the event that certificates for shares of the Company's Common
Stock delivered to the Company represent a number of shares in excess of the
number of shares required to make payment for the Option Price of the Shares (or
relevant portion thereof) with respect to which such Option is to be exercised,
the stock certificate issued to the Optionee shall represent the sum of (i) the
Option Shares in respect of which payment is made and (ii) such excess number of
shares.
4
<PAGE> 5
(d) Termination of Options. No Option shall be exercisable after the
first to occur of the following:
(i) Expiration of the Option term specified in the Option
Document, which shall be ten years from the date of grant.
(ii) Expiration of six months from the date the Optionee ceases
to be a director of the Company for any reason other than disability (within the
meaning of section 22(e) (3) of the Internal Revenue Code of 1986, as amended
(the "Code")), death or as specified in subsection 7(d) (iv) below;
(iii) Expiration of one year from the date the Optionee ceases
to be a director of the Company due to the Optionee's disability (within the
meaning of section 22(e) (3) of the Code) or death;
(iv) The date, if any, set by the Board of Directors as an
accelerated expiration date in accordance with the provisions of Section 8
hereof.
(e) Non-Transferability. The terms of each Option granted under the
Plan shall provide that the Option is not transferable, except by will or by the
laws of descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act ("ERISA"), or the rules thereunder.
(f) Amendment. Subject to the provisions of the Plan, the Board of
Directors shall have the right to amend Option Documents issued to an Optionee
subject to his consent if such amendment is not favorable to the Optionee,
except that the consent of the Optionee shall not be required for any amendment
made under Section 8.
8. Change of Control. A "Change of Control" shall be deemed to have
occurred upon the earliest to occur of the following events: (i) the date the
shareholders of the Company (or the Board of Directors, if shareholder action is
not required) approve a plan or other arrangement pursuant to which the Company
will be dissolved or liquidated, or (ii) the date the shareholders of the
Company (or the Board of Directors, if shareholder action is not required)
approve a definitive agreement to sell or otherwise dispose of substantially all
of the assets of the Company, or (iii) the date the shareholders
5
<PAGE> 6
of the Company (or the Board of Directors, if shareholder action is not
required) and the shareholders of the other constituent corporations (or their
respective Boards of Directors if shareholder action is not required) have
approved a definitive agreement to merge or consolidate the company with or into
another corporation, other that, in either case, a merger or consolidation of
the Company in which holders of shares of the Company's Common Stock immediately
prior to the merger or consolidation will have at least a majority of the
ownership of common stock of the surviving corporation immediately after the
merger or consolidation, which common stock is to be held in the same proportion
as such holders' ownership of Common Stock of the Company immediately before the
merger or consolidation, or (iv) the date any entity, person or group (within
the meaning of Section 13(d) (3) or Section 14(d) (2) of the Securities Exchange
Act of 1934, as amended), other than the Company or any of its subsidiaries or
any employee benefit plan (or related trust) sponsored or maintained by the
Company or any of its subsidiaries, shall have become the beneficial owner of,
or shall have obtained voting control over, more than 50% of the outstanding
shares of the Company's Common Stock, or (v) the first day after the date this
Plan is effective when directors are elected such that a majority of the Board
of Directors shall have been members of the Board of Directors for less than
twelve (12) months, unless the nomination for election of each new director who
was not a director at the beginning of such twelve (12) month period was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period. In the event of a Change of
Control, the Board of Directors may take whatever other action with respect to
options granted under the Plan, consistent with actions taken with respect to
the Reference Options (as defined below), as it deems necessary or appropriate.
For the purposes of this Plan, the term Reference Options means those options
(i) granted under the Company's other stock option plans that provide discretion
to the Board of Directors or a committee thereof to adjust the terms of options
upon a "change of control," defined in a manner similar to the definition set
forth herein and (ii) which represent the largest class of such options
(determined on the basis
6
<PAGE> 7
of the number of shares issuable upon exercise of such options) that are treated
identically with respect to acceleration (or lack of acceleration) under such
plans.
9. Exercise. No Option shall be deemed to have been exercised prior to
the receipt by the Company of written notice of such exercise and of payment in
full of the Option Price for the Option Shares to be purchased. Each such notice
shall specify the number of Option Shares to be purchased and shall (unless the
Option Shares are covered by a then current registration statement or a
Notification under Regulation A under the Securities Act of 1933, as amended
(the "Act")), contain the Optionee's acknowledgment in form and substance
satisfactory to the Company that (a) such Option Shares are being purchased for
investment and not for distribution or resale, (b) the Optionee has been advised
and understands that (i) the Option Shares have not been registered under the
Act and are "restricted securities" within the meaning of Rule 144 under the Act
and are subject to restrictions on transfer and (ii) the Company is under no
obligation to register the Option Shares under the Act or to take any action
which would make available to the Optionee any exemption from such registration,
(c) such Option Shares may not be transferred without compliance with all
applicable federal and state securities laws, and (d) an appropriate legend
referring to the foregoing restrictions on transfer may be endorsed on the
certificates. Notwithstanding the foregoing, if the Company determines that it
is advisable to delay the issuance of shares pending (A) registration under
federal or state securities laws or (B) the receipt of an opinion satisfactory
to the Company that an appropriate exemption therefrom is available, the Board
of Directors may refuse to permit the exercise of any Option granted hereunder
until either such event has occurred. Without limiting the foregoing, if the
listing, inclusion, registration or qualification of the Option Shares upon any
securities exchange, in any automated quotation system or under any federal or
state law, or the consent or approval of any government regulatory body is
necessary as a condition of or in connection with the purchase of such Option
Shares, the Company shall not be obligated to issue or deliver the certificates
representing the Option Shares as to which the Option has been exercised unless
and until such listing, inclusion, registration, qualification, consent or
approval shall have been effected or obtained. If
7
<PAGE> 8
registration is considered unnecessary by the Company or its counsel, the
Company may cause a legend to be placed on the Option Shares being issued
calling attention to the fact that they have been acquired for investment and
have not been registered.
10. Adjustments on Changes in Capitalization. The aggregate number of
shares and class of shares as to which Options may be granted hereunder, the
number of shares covered by each outstanding Option and the Option Price thereof
shall be appropriately adjusted in the event of a stock dividend, stock split,
recapitalization or other change in the number of class of issued and
outstanding equity securities of the Company resulting from a subdivision or
consolidation of the Common Stock and/or, if appropriate, other outstanding
equity security or a recapitalization or other capital adjustment (not including
the issuance of Common Stock on the conversion of other securities of the
Company which are convertible into Common Stock) affecting the Common Stock or
other equity security of the Company which is effected without receipt of
consideration by the Company. The Board of Directors shall have authority to
determine the adjustments to be made under this Section and any such
determination by the Board of Directors shall be final, binding and conclusive.
11. Amendment of the Plan. The Board of Directors of the Company may
amend the Plan from time to time in such manner as it may deem advisable.
Nevertheless, provisions of the Plan which (i) determine which directors may be
awarded grants of Options; (ii) determine the timing of grants of Options for
all Optionees; and (iii) determine the amount of Option Shares subject to
Options to be granted to Optionees and the Option Price relating to Options
granted under the Plan shall not be amended more than once every six months,
other than to comport with changes in the Code, ERISA, or rules thereunder. In
addition, the Board of Directors may not, without stockholder approval, amend
the Plan if the amendment would (a) materially increase the benefits accruing to
Optionees under the Plan; (b) materially increase the number of securities which
may be issued under the Plan; (c) materially modify the requirements as to
eligibility for participation in the Plan; or (d) make any other change or
amendment as
8
<PAGE> 9
to which shareholder approval is required in order to satisfy the conditions set
forth in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended.
12. Other Agreements. The grant of an Option pursuant to the Plan shall
not be construed to imply or to constitute evidence of an agreement, express or
implied, on the part of the Company and the Optionee to retain the Optionee as a
member of the Board of Directors or in any other capacity.
13. Withholding of Taxes. Whenever the Company shall deliver or
transfer Option Shares in connection with the exercise of an Option, the Company
shall have the right to (a) require the recipient to remit or otherwise make
available to the Company an amount sufficient to satisfy any federal, state
and/or local withholding tax requirements prior to the delivery or transfer of
any certificate or certificates for such Option Shares or (b) take whatever
other action it deems necessary to protect its interests with respect to tax
liabilities. The Company's obligation to make any delivery or transfer of Option
Shares shall be conditioned on the Optionee's compliance with any withholding
requirement to the Company's satisfaction.
14. Interpretation. The Plan is intended to satisfy the conditions of
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended;
any provision of the Plan that would conflict with the conditions of such Rule
shall be deemed null and void to the extent permitted by applicable law and in
the discretion of the Board of Directors.
9
<PAGE> 1
Exhibit 23.3
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cell Pathways, Inc.:
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Denver, Colorado
September 21, 1998
<PAGE> 1
Exhibit 23.4
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our firm included or made a part of this Registration
Statement.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
September 21, 1998
<PAGE> 1
CELL PATHWAYS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 2, 1998
The undersigned stockholder of Cell Pathways, Inc., a Delaware corporation
("CPI"), hereby acknowledges receipt of the Notice of Special Meeting of the
Stockholders of CPI and Joint Proxy Statement/Prospectus of CPI, Tseng Labs,
Inc. and Cell Pathways Holdings, Inc., a Delaware corporation ("CPHI"), and
hereby appoints Robert J. Towarnicki, Brian J. Hayden and Richard H. Troy, and
each of them, proxies and attorneys-in-fact with full power of substitution to
each, on behalf and in the name of the undersigned, to represent the undersigned
at the Special Meeting of the Stockholders of CPI, to be held at the offices of
CPI, located at 702 Electronic Drive, Horsham, Pennsylvania, on November 2, 1998
at 10:00 a.m., local time, and at any and all postponements, continuations and
adjournments thereof, and to vote all shares of common stock and/or preferred
stock which the undersigned may be entitled to vote if then and there personally
present, with all powers that the undersigned would possess if personally
present, upon and in respect of the following matters and in accordance with the
following instructions, with discretionary authority as to any and all other
matters that may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED "FOR"
PROPOSALS 1 AND 2, AS MORE SPECIFICALLY DESCRIBED IN THE JOINT PROXY
STATEMENT/PROSPECTUS. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE
VOTED IN ACCORDANCE THEREWITH. IF ANY OTHER MATTERS SHOULD PROPERLY COME BEFORE
THE CPI SPECIAL MEETING, THIS PROXY WILL BE VOTED WITH RESPECT TO SUCH MATTERS
IN ACCORDANCE WITH THE JUDGMENT OF THE PERSONS VOTING SUCH PROXIES.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE PROPOSALS DESCRIBED
BELOW.
PROPOSAL 1: TO: (i) approve and adopt the Agreement and Plan of Reorganization,
dated as of June 23, 1998, by and between CPI and Tseng Labs, Inc.,
a Utah corporation (the "Reorganization Agreement"), (ii) approve
the merger of CPI Merger Sub, Inc., a Delaware corporation and
wholly-owned subsidiary of CPHI, with and into CPI pursuant to which
CPI will become a wholly-owned subsidiary of CPHI and (iii) approve
the other transactions contemplated by the Reorganization Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on other side)
<PAGE> 2
(Continued from other side)
PROPOSAL 2: To approve and adopt an amendment to the CPI Certificate of
Incorporation which provides that the holders of CPI Preferred Stock
will only receive the consideration for their shares set forth in
the Reorganization Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Dated
-----------------------------------, 19
-------------------------------------------
-----------------------------------
-----------------------------------
Signature(s)
Please sign exactly as your name
appears hereon. If the stock is
registered in the names of two or
more persons, each should sign.
Executors, administrators,
trustees, guardians and
attorneys-in-fact should add their
titles. If signer is a corporation,
please give full corporate name and
have a duly authorized officer
sign, stating title. If signer is a
partnership, please sign in
partnership name by authorized
person.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE
WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
<PAGE> 1
TSENG LABS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 3, 1998
The undersigned shareholder of Tseng Labs, Inc., a Utah corporation
("Tseng"), hereby acknowledges receipt of the Notice of Special Meeting of the
Shareholders of Tseng and Joint Proxy Statement/Prospectus of Tseng, Cell
Pathways, Inc. and Cell Pathways Holdings, Inc., a Delaware corporation
("CPHI"), and hereby appoints John J. Gibbons and Mark Karsch, and each of them,
proxies and attorneys-in-fact with full power of substitution to each, on behalf
and in the name of the undersigned, to represent the undersigned at the Special
Meeting of the Shareholders of Tseng, to be held at the Hotel DuPont, 11th and
Market Streets, Wilmington, Delaware 19801, on November 3, 1998 at 10:00 a.m.,
local time, and at any and all postponements, continuations and adjournments
thereof (the "Tseng Special Meeting"), and to vote all shares of common stock
which the undersigned may be entitled to vote if then and there personally
present, with all powers that the undersigned would possess if personally
present, upon and in respect of the following matters and in accordance with the
following instructions, with discretionary authority as to any and all other
matters that may properly come before the meeting.
UNLESS A CONTRARY DIRECTION IS INDICATED, THE SHARES OF TSENG COMMON STOCK OF
THE UNDERSIGNED WILL BE VOTED "FOR" PROPOSAL 1 AND PROPOSAL 2, AS MORE
SPECIFICALLY DESCRIBED IN THE JOINT PROXY STATEMENT/PROSPECTUS. IF SPECIFIC
INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH. IF
ANY OTHER MATTERS SHOULD PROPERLY COME BEFORE THE TSENG SPECIAL MEETING, SUCH
SHARES WILL BE VOTED WITH RESPECT TO SUCH MATTERS IN ACCORDANCE WITH THE
JUDGMENT OF THE PERSONS VOTING SUCH PROXIES.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE PROPOSALS DESCRIBED
BELOW.
PROPOSAL 1: TO: (i) approve and adopt the Agreement and Plan of Reorganization,
dated as of June 23, 1998, between Tseng and Cell Pathways, Inc. a
Delaware corporation (the "Reorganization Agreement"), (ii) approve
the merger of Tseng Sub, Inc., a Utah corporation and wholly-owned
subsidiary of CPHI, with and into Tseng (the "Tseng Merger") and the
filing of Articles of Merger with the Secretary of State of Utah
pursuant to which Tseng will become a wholly-owned subsidiary of
CPHI and the stockholders of Tseng will receive shares of CPHI
Common Stock in exchange for their Tseng Common Stock and (iii)
approve the other transactions contemplated by the Reorganization
Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed other side)
<PAGE> 2
(Continued from other side)
PROPOSAL 2: TO: vote upon and authorize the adjournment of the Tseng Special
Meeting, if necessary, to allow for the collection of additional
stockholder votes to obtain a quorum or in order to obtain more
votes in favor of the approval and adoption of the Reorganization
Agreement and the approval of the Tseng Merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PROPOSAL 3: TO: transact such other business as may properly come before the
Tseng Special Meeting.
Dated:
-----------------------------------, 19
------------------------------------------
-----------------------------------
-----------------------------------
Signature(s)
Please sign exactly as your name
appears hereon. If the stock is
registered in the names of two or
more persons, each should sign.
Executors, administrators,
trustees, guardians and
attorneys-in-fact should add their
titles. If signer is a corporation,
please give full corporate name and
have a duly authorized officer
sign, stating title. If signer is a
partnership, please sign in
partnership name by authorized
person.
PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.
