<PAGE>
As filed with the Securities and Exchange Commission on March 13, 2000.
Registration No. 333-96333
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
ADOLOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 7841 31-1429198
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
--------------
371 Phoenixville Pike
Malvern, Pennsylvania 19355
(610) 889-5779
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
John J. Farrar, Ph.D.
Chief Executive Officer
Adolor Corporation
371 Phoenixville Pike
Malvern, Pennsylvania 19355
(610) 889-5779
(Name, address including zip code, and telephone number, including area code,
of agent for service)
--------------
With copies to:
James A. Lebovitz, Esquire Luci Staller Altman, Esquire
Stephen C. Costalas, Esquire David L. Concannon, Esquire
Dechert Price & Rhoads John Bessonette, Esquire
4000 Bell Atlantic Tower Brobeck, Phleger & Harrison LLP
1717 Arch Street 1633 Broadway, 47th Floor
Philadelphia, Pennsylvania 19103 New York, New York 10019
(215) 994-4000 (212) 581-1600
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS Subject to completion, dated March 13, 2000
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6,000,000 Shares
[LOGO OF ADOLOR]
Common Stock
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This is our initial public offering of shares of common stock. No public market
currently exists for our common stock. We expect the initial public offering
price to be between $12.00 and $14.00 per share.
We have applied to have our common stock listed on the Nasdaq National Market
under the symbol "ADLR."
Before buying any shares you should read the discussion of material risks of
investing in our common stock under "Risk Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price $ $
- -----------------------------------------------------------------------------------
Underwriting discounts and commissions $ $
- -----------------------------------------------------------------------------------
Proceeds, before expenses, to Adolor $ $
- -----------------------------------------------------------------------------------
</TABLE>
The underwriters may also purchase up to an additional 900,000 shares of common
stock from us at the public offering price, less the underwriting discounts and
commissions, within 30 days from the date of this prospectus. This option may
be exercised to cover over-allotments, if any. If the option is exercised in
full, the total underwriting discounts and commissions will be $ , and the
total proceeds, before expenses, to Adolor Corporation will be $ .
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about , 2000.
Warburg Dillon Read LLC
Robertson Stephens
Pacific Growth Equities, Inc.
The date of this prospectus is , 2000.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk Factors."
We discover, develop and plan to commercialize proprietary pharmaceutical
products for the treatment of pain and the side effects that are caused by
current narcotic pain treatments. We have a portfolio of product candidates in
development in Phase I to Phase II/III clinical trials as well as a number of
preclinical product candidates in research and development. Our analgesic
product candidates are designed to treat moderate-to-severe pain and itch.
Analgesics are used to reduce the perception of pain. We are also developing
product candidates that are intended to reduce the most prevalent and severe
side effects of current narcotics such as bowel dysfunction, constipation,
nausea and sedation. We believe our product candidates should not exhibit the
dose-limiting side effects of current narcotics.
Combined 1999 prescription sales in the pain management market were $9.1
billion in the United States and are estimated to be $25.8 billion worldwide.
However, currently marketed analgesics have significant side effects, limited
efficacy or both. We believe that by addressing these deficiencies, our product
candidates will satisfy unmet needs in the pain management market.
Most of our product candidates target peripheral opioid receptors, which are
pain relief receptors located outside of the central nervous system. Our
proprietary technology focuses on two of the three opioid receptor types, mu
and kappa, located in the peripheral nervous system. Utilizing our proprietary
technology, we intend our product candidates to provide the following benefits:
. reversal or prevention of the gastrointestinal side effects of narcotic
analgesics;
. creation of new analgesic products that do not enter the central nervous
system; and
. development of new analgesic products that have significantly reduced
side effects.
ADL 8-2698
We are developing orally-administered ADL 8-2698 to block the adverse
gastrointestinal side effects of narcotics without blocking the beneficial
pain-relieving effects. These gastrointestinal side effects include narcotic
bowel dysfunction, constipation, nausea and the effects of narcotics on
recovery of normal bowel function after surgery.
In Phase II trials, ADL 8-2698 has reversed narcotic bowel dysfunction in
100% of the patients treated. In Phase II trials of analgesia, ADL 8-2698 did
not inhibit the narcotic's pain relief. We have three Phase II/III clinical
trials evaluating efficacy for narcotic bowel dysfunction in progress. We have
also begun a Phase I clinical trial in the reduction of narcotic-induced nausea
and a Phase II clinical trial with ADL 8-2698 in post-surgical ileus, which is
the delayed recovery of bowel function following surgery and the application of
narcotics for the post-surgical pain.
ADL 10-0101
We have developed ADL 10-0101, which is a peripheral kappa analgesic, to
treat visceral and post-surgical pain, traumatic injury pain, and dermal and
ophthalmic itch. ADL 10-0101 does not readily cross the blood brain barrier and
enter the brain at therapeutic doses. We believe this compound is significantly
more effective than non-steroidal anti-inflammatory drugs, or NSAIDs, and
equally effective as narcotics, without producing adverse central nervous
system side effects.
1
<PAGE>
Additionally, we are developing two other peripheral kappa opioid
analgesics, ADL 10-0116 and ADL 1-0398. These analgesics have even greater
ability than ADL 10-0101 to remain outside of the central nervous system. These
two compounds are active when administered orally.
ADL 2-1294
We have targeted ADL 2-1294, a peripheral mu opioid analgesic, applied
topically or by injection as treatment for ophthalmic pain, dermal pain and
itch, and joint pain. The product candidates' active ingredient, loperamide,
does not readily cross the blood brain barrier to enter the central nervous
system. Loperamide does not cause sedation or depress respiratory function, is
not considered to be addictive, and is not scheduled as a controlled substance.
ADL 2-1294 has demonstrated in Phase II studies a reduction of pain
following corneal abrasions and surgeries. In Phase I safety and efficacy
trials, ADL 2-1294 has demonstrated efficacy in treating dermal burn pain.
Based in part on data generated in dermal pain trials, an affiliate of
SmithKline Beecham has licensed the rights to develop and market ADL 2-1294
topical formulations for dermal anti-itch and anti-pain applications.
Other Product Opportunities
We are developing ADL 8-2698 in combination with a narcotic to produce a
gastrointestinal side effect-free narcotic product candidate. In addition, ADL
1-0386 inhibits the sedating effects of narcotics in preclinical trials. We are
developing ADL 1-0386 in combination with a narcotic to produce a non-sedating
narcotic product candidate.
Our Strategy
We plan to become the leader in discovering, developing and marketing
proprietary pain management pharmaceuticals by:
. pioneering the use of peripheral opioid receptors;
. pursuing clinical indications that allow rapid demonstration of efficacy;
. developing and marketing our products effectively;
. managing risk by creating a portfolio of product candidates; and
. developing non-addictive product candidates for the treatment of
moderate-to-severe pain.
2
<PAGE>
This Offering
Unless otherwise indicated, information in this prospectus assumes
. the one-for-4.5 reverse stock split of our common stock and the
conversion of all outstanding shares of our mandatorily redeemable
convertible preferred stock into an aggregate of 15,514,667 shares of our
common stock, including the shares of series G mandatorily redeemable
convertible preferred stock issued in January 2000, on the closing of
this offering;
. no exercise of the underwriters' over-allotment option; and
. exercise and conversion of all outstanding warrants to purchase shares of
our mandatorily redeemable convertible preferred stock into an aggregate
of 80,688 shares of common stock on the closing of this offering.
<TABLE>
<C> <S>
Common stock we are offering............... 6,000,000 shares
Common stock to be outstanding after this
offering.................................. 22,767,591 shares
Proposed Nasdaq National Market symbol..... ADLR
Use of proceeds............................ We intend to use the net proceeds
from this offering for the
continued development of existing
product candidates, research and
development of additional product
candidates, manufacturing,
commercialization and marketing
expenditures, expansion of our
facilities, working capital and
potential acquisitions of
products, technologies or
businesses.
</TABLE>
This information above excludes shares of common stock we may issue upon
exercise of outstanding options, including:
. 1,280,790 shares issuable upon the exercise of options outstanding as of
December 31, 1999, at a weighted average exercise price of $0.30 per
share of which options to purchase 742,071 shares of common stock were
then exercisable; and
. 592,164 shares issuable upon exercise of options granted in January 2000,
at a weighted average exercise price of $2.03 per share.
As of February 4, 2000, an additional 1,020,356 shares of common stock are
reserved for issuance under our Amended and Restated 1994 Incentive
Compensation Plan.
If the underwriters exercise their over-allotment option, there will be
23,667,591 shares of common stock outstanding after this offering.
Our principal executive offices are located at 371 Phoenixville Pike,
Malvern, Pennsylvania 19355. Our telephone number is (610) 889-5779. Our
website is http://www.adolor.com. We do not intend the information found on our
website to be a part of this prospectus.
3
<PAGE>
Summary Financial Data
<TABLE>
<CAPTION>
Period from
Year ended December 31, August 9, 1993
--------------------------- (inception) to
Statement of operations data: 1997 1998 1999 December 31, 1999
- ----------------------------- ------- -------- -------- -----------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Grant and license revenues...... $ -- $ 150 $ 11 $ 161
Operating expenses incurred
during the development stage:
Research and development...... 3,700 7,074 7,178 23,858
General and administrative.... 1,585 2,277 3,368 8,278
------- -------- -------- --------
Total operating expenses........ 5,285 9,351 10,546 32,136
Net interest income (expense)... 486 385 404 1,521
------- -------- -------- --------
Net loss........................ (4,799) (8,816) (10,131) (30,454)
Undeclared dividends
attributable to mandatorily
redeemable convertible
preferred stock................ 1,408 1,704 2,430 6,444
------- -------- -------- --------
Net loss allocable to common
stockholders................... (6,207) (10,520) (12,561) (36,898)
======= ======== ======== ========
Basic and diluted net loss per
share allocable to common
stockholders................... $ (6.13) $ (9.54) $ (10.82)
Shares used in computing basic
and diluted net loss per share
allocable to common
stockholders................... 1,013 1,103 1,161
Pro forma basic and diluted net
loss per share allocable to
common stockholders
(unaudited).................... $ (.74)
========
Shares used in computing pro
forma basic and diluted share
allocable to common
stockholders (unaudited)....... 13,622
========
</TABLE>
Please see Note 2 to our financial statements for an explanation of the
method used to calculate the net loss and pro forma net loss per share and the
number of shares used in the computation of per share amounts.
The pro forma balance sheet data give effect to the conversion of the
outstanding shares of series A, B, C, D, E and F mandatorily redeemable
convertible preferred stock outstanding at December 31, 1999 into an aggregate
of 12,780,000 shares of common stock. The pro forma as adjusted balance sheet
data give effect to the sale of 12,306,000 shares of series G mandatorily
redeemable convertible preferred stock in January 2000 for proceeds of
$12,306,000 and the conversion of such shares into 2,734,667 shares of common
stock and the assumed exercise of all outstanding warrants for mandatorily
redeemable convertible preferred stock and the conversion of such shares into
80,688 shares of common stock for proceeds of $225,000, and reflects the pro
forma adjustments and the net proceeds of $71,540,000 from our sale of
6,000,000 shares of our common stock in this offering at an assumed offering
price to the public of $13.00 per share after deducting underwriting discounts
and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------
Pro Forma as
Balance sheet data: Actual Pro Forma adjusted
- ------------------- -------- -------------- ------------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short-term
investments............................ $ 5,264 $ 5,264 $ 89,335
Working capital......................... 3,069 3,069 87,140
Total assets............................ 6,258 6,258 90,329
Mandatorily redeemable convertible
preferred stock........................ 33,000 -- --
Deficit accumulated during the
development stage...................... (30,454) (30,454) (30,454)
Total stockholders' equity (deficit).... (29,590) 3,410 87,481
</TABLE>
4
<PAGE>
RISK FACTORS
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You should carefully consider the risks described below together with all
of the other information included in this prospectus before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or results of operations could be harmed. In
that case, the trading price of our common stock could decline, and you may
lose all or part of your investment.
Risks Related To Our Business
If we continue to incur operating losses for a period longer than anticipated,
we may be unable to continue our operations.
The extent of our future losses and the timing of profitability are highly
uncertain, and we may never achieve profitable operations. We have generated
operating losses since we began operations in November 1994. We have been
engaged in discovering and developing drugs since we began operations, which
requires significant research and development expenditures. We have no
products that have generated any revenue, and as of December 31, 1999, we had
an accumulated deficit of approximately $30.5 million. Even if we succeed in
developing a commercial product, we expect to incur losses for at least the
next several years and expect that these losses will increase as we expand our
research and development and sales and marketing activities. If the time
required to generate product revenues and achieve profitability is longer than
anticipated, we may be unable to continue our operations without additional
funding.
Our operating history provides you with a limited basis on which to make an
investment decision.
Successfully commercializing any of our product candidates entails
significant regulatory, manufacturing, sales and marketing, competitive and
financing risks. So far our operations have been limited to organizing and
staffing our company, conducting early stage research and development to
discover and develop drugs, and establishing strategic relationships we hope
will enable us successfully to develop and market drugs on a commercial basis.
These operations provide limited information for you to use in assessing our
ability to commercialize our product candidates and the advisability of
investing in our common stock.
Because our product candidates are in development, there is a high risk that
further development and testing will demonstrate that our product candidates
are not suitable for commercialization.
We have no products that have received regulatory approval for commercial
sale. All of our product candidates, including ADL 8-2698, ADL 2-1294 and ADL
10-0101 are in development, and we face the substantial risks of failure
inherent in developing drugs based on new technologies.
Our product candidates must satisfy rigorous standards of safety and
efficacy before the United States Food and Drug Administration, or FDA, and
foreign regulatory authorities will approve them for commercial use. We will
need to conduct significant additional research, animal testing, or
preclinical testing, and human testing, or clinical trials, to demonstrate the
safety and efficacy of our product candidates to the satisfaction of the FDA
and foreign regulatory authorities to obtain product approval.
Preclinical testing and clinical development are long, expensive and
uncertain processes. It may take us several years to complete our testing, and
failure can occur at any stage of testing. Success in preclinical testing and
early clinical trials does not ensure that later clinical trials will be
successful. We may suffer significant setbacks in advanced clinical trials,
even after promising results in earlier trials. Based on results at any stage
of clinical trials, we may decide to discontinue development of our product
candidates.
We do not know whether our existing or any future clinical trials will
demonstrate sufficient safety and efficacy necessary to obtain the requisite
regulatory approvals or will result in marketable products. Our failure to
adequately demonstrate the safety and efficacy of our products under
development will prevent receipt of FDA and foreign regulatory approvals and,
ultimately, commercialization of our product candidates.
5
<PAGE>
Because we are not certain we will obtain necessary regulatory approvals to
market our products in the United States and foreign jurisdictions, we cannot
predict whether or when we will be permitted to commercialize our products.
The pharmaceutical industry is subject to stringent regulation by a wide
range of authorities. We cannot predict whether we will obtain regulatory
clearance for any product candidate we develop. We cannot market a
pharmaceutical product in the United States until it has completed rigorous
preclinical testing and clinical trials and the FDA's extensive regulatory
clearance process. Satisfaction of regulatory requirements typically takes
many years, is dependent upon the type, complexity and novelty of the product
and requires the expenditure of substantial resources for research and
development, testing, manufacturing, quality control, labeling and promotion
of drugs for human use. Since neither the FDA nor international regulatory
authorities have approved peripherally restricted opioid analgesic or narcotic
antagonist drugs for marketing, we do not know whether our research and
clinical approaches to developing new products for the pain management market
will lead to drugs that the FDA will consider safe and effective for indicated
uses.
Before commencing clinical trials in humans, we must submit and receive
approval from the FDA of an Investigational New Drug, or IND, application.
Clinical trials are subject to oversight by institutional review boards and
the FDA and:
. must conform with the FDA's good laboratory practice regulations;
. must meet requirements for institutional review board oversight;
. must meet requirements for informed consent;
. must meet requirements for good clinical practices;
. are subject to continuing FDA oversight; and
. may require large numbers of test subjects.
We or the FDA may suspend clinical trials at any time if the subjects
participating in the trials are exposed to unacceptable health risks or if the
FDA finds deficiencies in the IND application or the conduct of the trials.
Before receiving FDA approval to market a product, we must demonstrate that
the product candidate is safe and effective on the patient population that
will be treated. If we fail to comply with applicable FDA or other applicable
regulatory requirements we could be subject to criminal prosecution, civil
penalties, recall or seizure of products, total or partial suspension of
production or injunction, as well as other regulatory actions against our
product candidates or us.
We have limited experience in conducting and managing the clinical trials nec-
essary to obtain regulatory approval.
Regulatory clearance that we may receive, if any, for a product candidate
will be limited to those diseases and conditions for which we have
demonstrated in clinical trials that the product candidate is safe and
efficacious. We cannot ensure that any compound developed by us, alone or with
others, will prove safe and efficacious in clinical trials and will meet all
of the applicable regulatory requirements needed to receive marketing
clearance.
Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. This foreign regulatory approval process includes all of the
risks associated with FDA clearance described above.
Failure to attract, retain and motivate skilled personnel and cultivate key
academic collaborations will delay our product development programs and our
research efforts.
We are a small company with approximately 34 employees, and our success
depends on our continued ability to attract, retain and motivate highly
qualified management and scientific personnel and on our ability to develop
and maintain important relationships with leading academic institutions and
scientists. Competition for personnel and academic collaborations is intense.
In particular, our product development programs depend on
6
<PAGE>
our ability to attract and retain highly skilled chemists, biologists and
clinical development personnel. If we lose the services of any of these
personnel, in particular, John J. Farrar, our President and Chief Executive
Officer, it could impede significantly the achievement of our research and
development objectives. The employment agreement that we have entered into
with Dr. Farrar can be terminated at any time by him or us. Failure to
negotiate additional acceptable collaborations with academic institutions and
scientists, or lack of success with respect to our existing academic
collaborations, may delay our product development programs. In addition, we
will need to hire additional personnel and develop additional academic
collaborations as we continue to expand our research and development
activities. We do not know if we will be able to attract, retain or motivate
personnel or maintain relationships.
The concept of developing peripherally restricted opioid analgesic and nar-
cotic antagonist drugs is relatively new and may not lead to commercially suc-
cessful drugs.
Since there are no products on the market comparable to our product
candidates, we do not have any historical or comparative sales data to rely
upon to indicate that peripherally restricted opioid analgesic or narcotic
antagonist drugs will achieve commercial success in the marketplace. Market
acceptance of our product candidates will depend on a number of factors,
including:
. perceptions by members of the health care community, including
physicians, of the safety and efficacy of our product candidates;
. cost-effectiveness of our product candidates relative to competing
products;
. the availability of government or third-party payor reimbursement for our
product candidates; and
. the effectiveness of marketing and distribution efforts by us and our
licensees and distributors.
Other products that are currently sold for pain management are already
recognized as safe and effective and have a history of successful sales in the
United States and elsewhere. Our new products, if any, will be competing with
drugs that have been approved by the FDA and have achieved commercial success
in the United States and elsewhere.
Third parties are conducting or will conduct many of our product development
activities and almost all of our manufacturing and marketing activities. If
these third parties fail to perform these functions satisfactorily, our prod-
uct development could be delayed.
We rely, to a significant extent, on third parties to provide funding in
support of our research, to jointly conduct some research and preclinical
testing functions and to manufacture certain of our product candidates. If any
of these third parties breaches or terminates their agreement with us or
otherwise fails to conduct their activities successfully and in a timely
manner, their actions could delay or terminate the preclinical or clinical
development or commercialization of the affected product candidates or
research programs. We cannot control the amount and timing of resources these
third parties devote to our programs or product candidates.
Our corporate collaborators may determine not to proceed with one or more
of our drug discovery and development programs. If one or more of our
corporate collaborators reduces or terminates funding, we will have to devote
additional internal resources to product development or scale back or
terminate some development programs or seek alternative corporate
collaborators.
We may not be able to negotiate additional corporate collaborations on
acceptable terms, if at all, and these collaborations may not have success.
Our quarterly operating results may fluctuate significantly depending on the
initiation of new corporate collaboration agreements or the termination of
existing corporate collaboration agreements.
If we do not realize value from our retained commercialization rights, we may
not achieve our commercial objectives.
If we do not effectively exploit the commercialization rights we have
retained, we may not achieve profitability. In most of our corporate
collaborations, we have retained various commercialization rights for the
7
<PAGE>
development and marketing of pharmaceutical products, including rights for
specific pharmaceutical indications or in specified geographical regions. We
may take advantage of these currently retained rights directly or through
collaborations with others. The value of these rights, if any, will largely
derive from our ability, directly or with collaborators, to develop and
commercialize drugs, the success of which is also uncertain. The exploitation
of retained commercialization rights requires:
. sufficient capital;
. significant technological, product development, manufacturing and
regulatory expertise and resources; and
. marketing and sales personnel.
We may not be able to develop or obtain these resources in sufficient
quantity or at a sufficient quality level to achieve our objectives. We will
need to rely on third parties for many of these resources. Our failure to
establish and maintain relationships to obtain these services cost-effectively
could materially reduce or eliminate our ability to realize value from our
retained commercialization rights.
If we fail to obtain the capital necessary to fund our operations, we will be
unable successfully to develop products.
We expect that we will require significant additional financing in the
future to fund operations. We do not know whether additional financing will be
available when needed, or that, if available, we will obtain financing on
terms favorable to our stockholders or to us. We have consumed substantial
amounts of cash to date and expect capital outlays and operating expenditures
to increase over the next several years as we expand our infrastructure and
research and development activities.
We believe that the net proceeds from the offering, existing cash and
investment securities and anticipated cash flow from existing collaborations
will be sufficient to support our current operating plan through the first
quarter of 2002. We have based this estimate on assumptions that may prove to
be wrong. Our future capital requirements depend on many factors that affect
our research, development, collaboration and sales and marketing activities.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
To the extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution. To the extent we raise
additional funds through collaboration and licensing arrangements, we may be
required to relinquish some rights to our technologies or product candidates,
or grant licenses on terms that are not favorable to us. If adequate funds are
not available, we will not be able to continue developing our product
candidates.
If our competitors develop and market products that are more effective, have
fewer side effects or are less expensive than our product candidates, that
will reduce our commercial opportunities.
Other companies have product candidates in clinical trials to treat each of
the conditions for which we are seeking to discover and develop product
candidates. These competing potential drugs may result in effective,
commercially successful products. Even if our collaborators or we are
successful in developing effective drugs, our products may not compete
effectively with these products or other successful products. Our competitors
may succeed in developing products either that are more effective than those
that we may develop, alone or with our collaborators, or that they market
before the marketing of any products we develop.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts
and universities and public and private research institutions. In addition,
companies pursuing research in different but related fields represent
substantial competition. Many of the organizations competing with us have
substantially greater capital resources, larger research and development
8
<PAGE>
staffs and facilities, greater experience in drug development and in obtaining
regulatory approvals and greater manufacturing and marketing capabilities than
we do. These organizations also compete with us to:
. attract qualified personnel;
. attract parties for acquisitions, joint ventures or other collaborations;
and
. license the proprietary technology of institutions that is competitive
with the technology we are practicing.
The successful entrance by our competitors into partnering arrangements or
license agreements with academic research institutions will preclude us from
pursuing those specific opportunities. Since each of these opportunities is
unique, we may not be able to find an acceptable substitute.
Companies and universities that have licensed product candidates to us for
clinical development and marketing are sophisticated competitors that could
develop similar products to compete with our products.
Licensing product candidates from other companies, universities, or
individuals does not prevent them from developing non-identical but
competitive products for their own commercial purposes, nor from pursuing
patent protection in areas that are competitive with us. The individuals who
created these technologies are sophisticated scientists and business people
who may continue to do research and development and seek patent protection in
the same areas that led to the discovery of the product candidates that they
licensed to us. The development and commercialization of successful new drugs
from our research program is likely to attract additional research by our
licensors and by other investigators who have experience in developing
products for the pain management market. By virtue of the previous research
that led to the discovery of the drugs or product candidates that they
licensed to us, these companies, universities, or individuals may be able to
develop and market competitive products in less time than might be required to
develop a product with which they have no prior experience.
Our agreement with an affiliate of SmithKline Beecham may not generate as much
revenue as we anticipate and may not generate any future revenue.
In July 1999 we granted SB Pharmaco Puerto Rico Inc., an affiliate of
SmithKline Beecham, an exclusive license to develop and commercialize certain
compounds for use in products designed to treat topical itch, muscle pain and
joint pain in all countries other than South Korea and North Korea. Assuming
defined clinical and regulatory milestones are met and sales are achieved, the
affiliate of SmithKline Beecham has full control and authority over the
development, registration and commercialization of these product candidates,
subject to its obligation to use its reasonable efforts to develop, obtain
regulatory approval and market these product candidates, taking into account
the prospects for the product candidates. As a result, we have no control over
the further development of these product candidates. Under our agreement, the
affiliate of SmithKline Beecham has the right in some circumstances to co-
promote products it develops pursuant to the license we granted it with other
partners. The affiliate of SmithKline Beecham may terminate this agreement at
its discretion on a country by country basis or on a product by product basis
upon written notice to us if it determines that circumstances do not warrant
further development of that product. Also, if the affiliate of SmithKline
Beecham determines that payment of any of the agreed-upon milestones or
royalties would make development of the product commercially infeasible, the
affiliate of SmithKline Beecham has the right to adjust those payments
downwards.
It is difficult and costly to protect our intellectual property rights, and we
cannot ensure their protection.
Our commercial success will depend in part on obtaining patent protection
on our products and successfully defending these patents against third party
challenges. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, we cannot predict the breadth of
claims allowed in our patents or that our collaborators may develop.
Others have filed and in the future are likely to file patent applications
covering products and technologies that are similar, identical or competitive
to ours. The patent office has informed us that others may have patent
9
<PAGE>
applications that may overlap with a patent application that we have in-
licensed covering certain receptors. We cannot assure you that any patent
application owned by a third party will not have priority over patent
applications filed or in-licensed by us, nor that we or our licensor will not
be involved in interference proceedings before the United States Patent and
Trademark Office. Any legal action against our collaborators or us claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could subject us to potential liability for damages and
require our collaborators or us to obtain a license to continue to manufacture
or market the affected products and processes. We cannot predict whether we or
our collaborators would prevail in any of these actions or that any license
required under any of these patents would be made available on commercially
acceptable terms, if at all. We believe that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If we become involved in litigation, it could consume a substantial
portion of our managerial and financial resources.
Although no third party has asserted a claim of infringement against us, we
are aware of an issued patent that relates to methods of treatment of symptoms
associated with the cold and flu. It is possible that a claim could be
asserted that certain ophthalmic uses of our ADL 2-1294 infringe this issued
patent. Based on our investigations to date, including discussions with
outside legal counsel, we do not believe that we infringe any valid and
enforceable claims of the patent, although we have not received an opinion of
patent counsel to that effect. If this patent is found to contain claims
infringed by the use of our ADL 2-1294 product and such claims are ultimately
found valid and enforceable, we may not be able to obtain a license at a
reasonable cost, or at all. In that event, we would have to use an alternative
method of delivery for ophthalmic products based on ADL 2-1294, which could
materially reduce or eliminate the commercial viability of our ADL 2-1294 for
ophthalmic uses.
We rely on trade secrets to protect technology in cases when we believe
patent protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require employees, academic collaborators and
consultants to enter into confidentiality agreements, we may not be able
adequately to protect our trade secrets or other proprietary information.
We are a party to various license agreements that give us rights to use
specified technologies in our research and development processes. If we are
not able to continue to license this technology on commercially reasonable
terms, our product development and research may be delayed. In addition, we
generally do not control the prosecution of in-licensed technology, and
accordingly are unable to exercise the same degree of control over this
intellectual property as we exercise over our internally developed technology.
For example, the University of California, San Diego is prosecuting the patent
for additional claims regarding the use of ADL 2-1294 for the treatment of
inflammatory pain.
Our research collaborators and scientific advisors have rights to publish
data and information in which we have rights. If we cannot maintain the
confidentiality of our technology and other confidential information in
connection with our collaborations, our ability to receive patent protection
or protect our proprietary information may be imperiled.
If we are unable to contract with third parties to manufacture our products in
sufficient quantities and at an acceptable cost, we may be unable to meet de-
mand for our products and lose potential revenues.
Completion of our clinical trials and commercialization of our product
candidates require access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We will depend on our
collaborators or third parties for the manufacture of compounds for
preclinical, clinical and commercial purposes in their FDA-approved
manufacturing facilities. Our products may be in competition with other
products for access to these facilities and suitable alternatives may be
unavailable. Consequently, our products may be subject to delays in
manufacture if collaborators or outside contractors give other products
greater priority than our products. For this and other reasons, our
collaborators or third parties may not be able to manufacture these products
in a cost-effective or timely manner. If the manufacture of these products is
not performed in a timely manner, the clinical trial development of our
product candidates or their submission for regulatory approval could be
delayed, and our ability to deliver products, if any are approved, on a timely
basis could be impaired or
10
<PAGE>
precluded. We may not be able to enter into necessary third-party
manufacturing arrangements on acceptable terms, if at all. Our dependence upon
others for the manufacture of our products may adversely affect our future
profit margin and our ability to commercialize products, if any are approved,
on a timely and competitive basis. We do not intend to develop or acquire
facilities for the manufacture of product candidates for clinical trials or
commercial purposes in the foreseeable future.
If we are unable to create sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will
not be able to commercialize products.
We currently have no sales, marketing or distribution capability. In order
to commercialize products, if any are approved, we must internally develop
sales, marketing and distribution capabilities or make arrangements with third
parties to perform these services. If we obtain FDA approval, we intend to
market some products directly and rely on relationships with one or more
pharmaceutical companies with established distributions systems and direct
sales forces to market other products. To market any of our products directly,
we must develop a marketing and sales force with technical expertise and with
supporting distribution capabilities. We may not be able to establish in-house
sales and distribution capabilities or relationships with third parties. To
the extent that we enter into co-promotion or other licensing arrangements,
our product revenues are likely to be lower than if we directly marketed and
sold our products, and any revenues we receive will depend upon the efforts of
third parties, which efforts may not be successful.
Our ability to generate revenues will be diminished if we fail to obtain ac-
ceptable prices or an adequate level of reimbursement for our products from
third-party payors.
The continuing efforts of government and third-party payors to contain or
reduce the costs of health care through various means will limit our
commercial opportunity. For example, in some foreign markets, pricing and
profitability of prescription pharmaceuticals are subject to government
control. In the United States, we expect that there will continue to be a
number of federal and state proposals to implement similar government control.
In addition, increasing emphasis on managed care in the United States will
continue to put pressure on the pricing of pharmaceutical products.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products. Cost control initiatives could decrease the
price that any of our collaborators or we would receive for any products in
the future and may impede patients' ability to obtain insurance. Further, cost
control initiatives could adversely affect our collaborators' ability to
commercialize our products, and our ability to realize royalties from this
commercialization.
Our ability to commercialize pharmaceutical products, alone or with
collaborators, may depend in part on the extent to which reimbursement for the
products will be available from:
. government and health administration authorities;
. private health insurers; and
. other third-party payors.
If conflicts arise between our collaborators or advisors and us, they may act
in their self-interest, which may be adverse to your best interests.
If conflicts arise between us and our corporate or academic collaborators
or scientific advisors, the other party may act in its self-interest and not
in the interest of our stockholders. Some of our corporate or academic
collaborators are conducting multiple product development efforts within each
disease area that is the subject of the collaboration with us. Generally, in
each of our collaborations, we have agreed not to conduct independently, or
with any third party, any research that is competitive with the research
conducted under our collaborations. Our collaborations may have the effect of
limiting the areas of research that we may pursue, either alone or with
others. Our collaborators, however, may develop, either alone or with others,
products in related fields that are competitive with the products or product
candidates that are the subject of these collaborations. Competing products,
either developed by the collaborators or to which the collaborators have
rights, may result in their withdrawal of support for our product candidates.
11
<PAGE>
If product liability lawsuits are successfully brought against us, we may in-
cur substantial liabilities and may have to limit commercialization of our
products.
The testing and marketing of medical products entail an inherent risk of
product liability. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. Our inability to obtain sufficient product
liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop, alone or with corporate collaborators. We
currently carry clinical trial insurance but do not carry product liability
insurance. Our corporate collaborators or we may not be able to obtain
insurance at a reasonable cost, if at all. While under various circumstances
our corporate collaborators will indemnify us against losses, indemnification
may not be available or adequate should any claim arise.
If we use biological and hazardous materials in a manner that causes injury or
violates laws, we may be liable for damages.
Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. We cannot completely eliminate
the risk of accidental contamination or injury from the use, storage, handling
or disposal of these materials. In the event of contamination or injury, we
could be held liable for damages that result, and any liability could exceed
our resources. We are subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of these materials and
specified waste products. The cost of compliance with these laws and
regulations could be significant.
Risks Related To This Offering
If our directors, officers and largest stockholders choose to act together,
they may be able to control our management and operations, acting in their
best interests and not necessarily those of other stockholders.
Following completion of the offering, our directors, executive officers and
principal stockholders and their affiliates will beneficially own
approximately 23.3% of our common stock, based on their beneficial ownership
as of January 31, 1999. Accordingly, they collectively will have the ability
to determine the election of all our directors and to determine the outcome of
most corporate actions requiring stockholder approval. They may exercise this
ability in a manner that advances their best interests and not necessarily
those of other stockholders.
Anti-takeover provisions in our charter documents and under Delaware law may
make an acquisition of us, which may be beneficial to our stockholders, more
difficult.
Provisions of our amended and restated certificate of incorporation and by-
laws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would benefit our stockholders.
In addition, until November 2000, Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a third party from acquiring
us.
Our stock price may be volatile, and your investment in our stock could de-
cline in value.
Prior to this offering, there has been no public market for our common
stock and an active public market for our common stock may not develop or
continue after the offering. The initial public offering price will be
determined by negotiations between the representatives of the underwriters and
us and may not be indicative of future market prices. Among the factors to be
considered in determining the initial public offering price of the common
stock, in addition to prevailing market conditions, will be:
. estimates of our business potential and earnings prospects;
. an assessment of our management; and
. the consideration of the above factors in relation to market valuations
of companies in related businesses.
12
<PAGE>
The market prices for securities of biotechnology companies in general have
been highly volatile and may continue to be highly volatile in the future. The
following factors, in addition to other risk factors described in this
section, may have a significant impact on the market price of our common
stock:
. announcements of technological innovations or new commercial products by
our competitors or us;
. developments concerning proprietary rights, including patents;
. developments concerning our collaborations;
. publicity regarding actual or potential medical results relating to
products under development by our competitors or us;
. regulatory developments in the United States and foreign countries;
. litigation;
. economic and other external factors or other disasters or crises; or
. period-to-period fluctuations in financial results.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against the company. We may become involved in this type of
litigation in the future. Litigation of this type is often extremely expensive
and diverts management's attention and resources.
If our stockholders sell substantial amounts of our common stock after this
offering, the market price of our common stock may fall.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, the market price of
our common stock may fall. These sales also might make it more difficult for
us to sell equity or equity-related securities in the future at a time and
price that we deem appropriate.
Our management will have broad discretion in using the proceeds from this of-
fering, and therefore investors will be relying on the judgment of our manage-
ment to invest those funds effectively.
We intend to use the net proceeds from this offering to continue our
research and development efforts, commercialize our products, hire marketing,
research, development and administrative personnel, expand our facilities, for
working capital and for potential acquisitions of products, technologies or
businesses. We have not yet finalized the amount of net proceeds to be used
specifically for each of these purposes. Investors will be relying on the
judgment of our management regarding the application of these proceeds.
New investors will experience immediate and substantial dilution.
The purchase price of the shares of common stock offered by this prospectus
will be substantially higher than the unaudited pro forma tangible book value
of our outstanding equity shares. Any shares of common stock that investors
purchase in this offering will have a post-closing net tangible book value per
share of $9.16 per share less than the initial public offering price paid,
assuming an initial public offering price of $13.00 per share. Investors who
purchase shares in this offering will therefore experience immediate and
substantial dilution in the tangible net book value of their investment.
13
<PAGE>
FORWARD-LOOKING INFORMATION AND MARKET DATA
- -------------------------------------------------------------------------------
This prospectus contains forward-looking statements under the captions
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These forward-
looking statements include statements about the following:
. our product development efforts;
. the commercialization of our products, including the development of a
sales and marketing force;
. our intentions regarding the establishment of collaborations;
. anticipated operating losses and capital expenditures;
. anticipated regulatory filing dates and clinical trial initiation dates
for our product candidates;
. the status of regulatory approval for our product candidates; and
. our intention to rely on third parties for manufacturing.
When used in this prospectus, we intend the words "believe," "anticipate,"
"estimate," "expect," "seek," "intend," and "may" to identify forward-looking
statements. Our forward-looking statements involve uncertainties and other
factors that may cause our actual results, performance or achievements to be
far different from that suggested by our forward-looking statements. We
discuss these factors in more detail elsewhere in this prospectus, including
under the captions "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business." You
should not place undue reliance on our forward-looking statements. We do not
intend to update any of these factors or to publicly announce the result of
any revisions to any of these forward-looking statements.
Market data and forecasts used in this prospectus, including, for example,
estimates of the size and growth rates of the pain management market, have
been obtained from independent industry sources. We have not independently
verified the data obtained from these sources and we cannot assure you of the
accuracy or completeness of the data. Forecasts and other forward-looking
information obtained from these sources are subject to the same qualifications
and the additional uncertainties accompanying any estimates of future market
size.
The safe harbor for forward-looking statements contained in the Securities
Litigation Reform Act of 1995 protects companies from liability for their
forward-looking statements if they comply with the requirements of the Act.
The Act does not provide this protection for initial public offerings and is
not available for our forward-looking statements.
14
<PAGE>
USE OF PROCEEDS
- -------------------------------------------------------------------------------
We estimate that the net proceeds from the sale of the 6,000,000 shares of
common stock that we are selling in this offering will be $71.5 million after
deducting underwriting discounts and commissions and estimated offering
expenses and assuming an initial public offering price of $13.00 per share. If
the underwriters' over-allotment option is exercised in full, we estimate that
the net proceeds will be $82.4 million.
We anticipate using the net proceeds from the offering for general
corporate purposes, including the continued development of existing product
candidates, manufacturing, commercialization expenditures, research and
development for additional product opportunities, hiring of sales, marketing,
development, research and administrative personnel, expansion of our
facilities and working capital. We may also use a portion of the net proceeds
to acquire or invest in businesses, products, or technologies that are
complimentary to our own. While we periodically engage in preliminary
discussions with respect to acquisitions, we are not currently a party to any
agreements or commitments, and we have no understandings with respect to any
acquisitions or investments.
The amounts and timing of our actual expenditures will depend on several
factors, including the progress of our product development efforts and the
amount of cash generated or used by our operations. We have not determined the
amount or timing of the expenditures in the areas listed above. Pending the
use of the net proceeds, we intend to invest the net proceeds in short-term,
investment-grade, interest-bearing instruments.
DIVIDEND POLICY
- -------------------------------------------------------------------------------
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain our future earnings, if any, to support the growth
and development of our business and do not anticipate paying cash dividends
for the foreseeable future.
15
<PAGE>
DILUTION
- -------------------------------------------------------------------------------
Our pro forma net tangible book value as of December 31, 1999 was
approximately $3.4 million, or $0.24 per share. This is based on a pro forma
number of shares outstanding as of December 31, 1999 of 13,952,236, consisting
of 1,172,236 shares of our common stock outstanding on December 31, 1999,
together with the 12,780,000 shares of common stock issuable upon conversion
of all outstanding shares of mandatorily redeemable convertible preferred
stock at December 31, 1999.
Dilution per share represents the difference between the amount per share
paid by purchasers of shares of our common stock in this offering and the pro
forma net tangible book value per share of our common stock immediately
afterwards, after giving effect to the sale of Series G mandatorily redeemable
convertible preferred stock (Series G) in January 2000, the assumed exercise
of preferred stock warrants and the automatic conversion of these shares into
2,815,355 shares of common stock, and the sale of 6,000,000 shares in this
offering. This represents an immediate increase in pro forma net tangible book
value of $2.89 per share to existing stockholders and immediate dilution in
net tangible book value of $9.16 per share to new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $13.00
Pro forma net tangible book value per share before the
offering...................................................... $0.24
Increase per share attributable to the Series G issuance and
assumed exercise of preferred stock warrants and conversion of
these shares into common stock................................ $0.71
Increase per share attributable to new investors............... $2.89
Pro forma net tangible book value per share of our common stock
after the offering................................................ $ 3.84
------
</TABLE>
<TABLE>
<S> <C> <C>
Dilution per share to new investors.................................. $9.16
=====
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1999, the total number of shares of common stock purchased from us and the
total consideration paid and the average price per share paid by existing
stockholders and by new investors in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders..... 16,767,591 73.6% $ 45,605,164 36.9% $ 2.72
New Investors............. 6,000,000 26.4% 78,000,000 63.1% $13.00
---------- ----- ------------ -----
Total..................... 22,767,591 100.0% $123,605,164 100.0%
========== ===== ============ =====
</TABLE>
The tables and calculations above assume no exercise of outstanding
options. At December 31, 1999, there were: 1,280,790 shares issuable upon the
exercise of options outstanding as of a weighted average exercise price of
$0.30 per share. In January 2000, we issued options for 592,164 shares of
common stock at a weighted average exercise price of $2.03. To the extent that
these options are exercised, there will be further dilution to new investors.
For a description of our stock option plan, please see "Management-Employee
benefit plans."
If the underwriters exercise their over-allotment option in full, the
following will occur:
. the number of shares of our common stock held by existing stockholders
will decrease to approximately 70.8% of the total number of shares of our
common stock outstanding after this offering;
. the number of shares of our common stock held by new public investors
will increase to 6,900,000, or approximately 29.2% of the total number of
shares of our common stock outstanding after this offering;
. an increase in pro forma tangible book value of $3.21 per share to
existing stockholders, and an immediate dilution of $8.84 per share to
new investors.
16
<PAGE>
CAPITALIZATION
- -------------------------------------------------------------------------------
The following table sets forth our capitalization as of December 31, 1999:
. On an actual basis;
. On a pro forma basis to give effect to:
. the conversion of all outstanding shares of our mandatorily redeemable
preferred stock, at December 31, 1999 into an aggregate of 12,780,000
shares of our common stock on the closing of this offering; and
. On a pro forma as adjusted basis to give effect to the aforementioned pro
forma adjustments and:
. The sale of shares of series G mandatorily redeemable convertible
preferred stock in January 2000 for $12,306,000 and the conversion of
such shares into 2,734,667 shares of common stock on the close of this
offering;
. The assumed exercise of all outstanding warrants for mandatorily
redeemable convertible preferred stock for an exercise price totalling
$225,000 and the conversion of such shares into 80,688 shares of common
stock on the close of this offering;
. the receipt of the estimated net proceeds of $71,540,000 from our sale
of 6,000,000 shares of common stock in this offering at an assumed
offering price of $13.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by
us.
<TABLE>
<CAPTION>
As of December 31, 1999
---------------------------------
Pro Forma
Pro Forma As Adjusted
Actual (unaudited) (unaudited)
-------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Mandatorily redeemable convertible preferred
stock, at redemption value (aggregate
liquidation value of $39,443,518 at
December 31, 1999); $0.01 par value,
57,873,098 shares authorized, 57,510,002
issued and outstanding (none authorized,
issued or outstanding on a pro forma or pro
forma as adjusted basis)................... $ 33,000 -- --
Preferred stock; $0.01 par value, 1,000,000
shares authorized upon closing of this
offering, none issued and outstanding on an
actual, pro forma and pro forma as adjusted
basis...................................... -- -- --
Stockholders' Deficit:
Common stock, par value $.0001 per share;
21,338,849 shares authorized (99,000,000
shares authorized on a pro forma as
adjusted basis); 1,172,236, 13,952,236 and
22,767,591 shares issued and outstanding
on an actual, pro forma and pro forma as
adjusted basis, respectively.............. -- 1 2
Additional paid-in capital................. 1,826 34,825 118,895
Deferred compensation...................... (962) (962) (962)
Deficit accumulated during the development
stage..................................... (30,454) (30,454) (30,454)
-------- ------- -------
Total stockholders' equity (deficit)..... (29,590) 3,410 87,481
-------- ------- -------
Total capitalization..................... 3,410 3,410 87,481
======== ======= =======
</TABLE>
The table above excludes 1,280,790 shares issuable upon the exercise of
options outstanding as of December 31, 1999 at a weighted average exercise
price of $0.30 per share.
17
<PAGE>
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------
The following selected financial data should be read in conjunction with
our financial statements and the related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. The statement of operations data except as
otherwise indicated below for the three years ended December 31, 1999, for the
period from August 9, 1993 (inception) to December 31, 1999 and as of December
31, 1998 and 1999, are derived from our financial statements which have been
audited by KPMG LLP, independent certified public accountants, and are
included elsewhere in this prospectus. The statement of operations data for
the years ended December 31, 1995 and 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from audited financial statements
not included in this prospectus. Historical results are not necessarily
indicative of the results to be expected in the future and should be read in
conjunction with the financial statements and notes thereto that are
incorporated by reference into this prospectus.
Please see Note 2 to our financial statements for an explanation of the
method used to calculate the net loss and pro forma net loss per share and the
number of shares used in the computation of per share amounts.
<TABLE>
<CAPTION>
Period from
Years Ended December 31, August 9, 1993
---------------------------------------------- (inception) to
Statement of operations December 31,
data 1995 1996 1997 1998 1999 1999
- ----------------------- ------- ------- -------- -------- -------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Grant and license
revenues............... $ -- $ -- $ -- $ 150 $ 11 $ 161
Operating expenses
incurred during the
development stage:
Research and
development.......... 2,110 3,695 3,700 7,074 7,178 23,858
General and
administrative....... 254 649 1,585 2,277 3,368 8,278
------- ------- -------- -------- -------- --------
Total operating
expenses............... 2,364 4,344 5,285 9,351 10,546 32,136
------- ------- -------- -------- -------- --------
Net interest income
(expense).............. (28) 272 486 385 404 1,521
------- ------- -------- -------- -------- --------
Net loss.............. (2,392) (4,072) (4,799) (8,816) (10,131) (30,454)
Undeclared dividends
attributable to
mandatorily redeemable
convertible preferred
stock.................. 120 764 1,408 1,704 2,430 6,444
------- ------- -------- -------- -------- --------
Net loss allocable to
common stockholders.... $(2,512) $(4,836) $ (6,207) $(10,520) $(12,561) $(36,898)
======= ======= ======== ======== ======== ========
Basic and diluted net
loss per share
allocable to common
stockholders........... $ (3.50) $ (5.68) $ (6.13) $ (9.54) $ (10.82)
Shares used in computing
basic and diluted net
loss per share
allocable to common
stockholders........... 718 851 1,013 1,103 1,161
Pro forma basic and
diluted net loss per
share allocable to
common stockholders
(unaudited)............ $ (.74)
Shares used in computing
pro forma basic and
diluted net loss per
share allocable to
common stockholders
(unaudited)............ 13,622
<CAPTION>
Years Ended December 31,
----------------------------------------------
Balance sheet data 1995 1996 1997 1998 1999
- ------------------ ------- ------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents
and short-term
investments............ $ 335 $ 5,071 $ 10,710 $ 12,046 $ 5,264
Working capital......... (1,148) 4,378 9,670 10,024 3,069
Total assets............ 478 5,738 11,508 12,773 6,258
Total long-term
obligations............ 13 255 174 66 --
Mandatorily redeemable
convertible preferred
stock.................. 1,500 11,105 21,375 30,475 33,000
Deficit accumulated
during the development
stage.................. (2,636) (6,708) (11,507) (20,322) (30,454)
Total stockholders'
deficit................ (2,536) (6,568) (11,264) (19,913) (29,590)
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
You should read the following discussion and analysis in conjunction with
our "Selected Financial Data," our financial statements and the related notes
included elsewhere in this prospectus.
Background
We have devoted substantially all of our resources since we began our
operations in November 1994 to the discovery and development of proprietary
pharmaceutical products for the treatment of pain and the side effects that
are caused by current pain treatments. We are a development stage
pharmaceutical company and have not generated any revenues from product sales.
We have not been profitable and, since our inception, we have incurred a
cumulative net loss of approximately $30.5 million through December 31, 1999.
These losses have resulted principally from costs incurred in research and
development activities and general and administrative expenses. We have three
product candidates in Phase II clinical trials and several other compounds in
preclinical studies.
Our revenues in the near term are expected to consist primarily of
milestone payments on certain of our product candidates licensed to others for
development. The more significant of these licenses is to an affiliate of
SmithKline Beecham for the development of ADL 2-1294 for topical treatment of
dermal pain and itch. These payments are dependent on continued development
and achievement of certain clinical and regulatory milestones by licensees and
will not, in any event, be material relative to our operating expenses. In the
event that our development efforts or those of our licensees result in
regulatory approval and successful commercialization of our product
candidates, we will generate revenues from sales of our products and from the
receipt of royalties on sales of licensed products. Product revenue will
depend on our ability to receive regulatory approvals for, and successfully
market, our product candidates.
We expect to incur additional operating losses for at least the next
several years. Research, development and clinical trial costs relating to
product candidates will continue to increase. Manufacturing, marketing and
sales costs will increase as we prepare for the commercialization of ADL 8-
2698 which, assuming regulatory approval, we expect to occur in the year 2002.
We intend to expand our marketing activities in 2000 and 2001 in
preparation for the establishment of a sales force for our product candidates
in the United States. In international markets, we intend to rely on
collaborations with pharmaceutical companies to market and sell our product
candidates rather than establish our own sales force.
Milestone Payments, Royalties and License Fees
We paid Roberts Laboratories, Inc., which recently merged with Shire
Pharmaceuticals, plc, a total of $600,000 through December 31, 1999 for the
exclusive worldwide license to ADL 8-2698. Our license agreement with Roberts
requires us to make payments to Roberts if and when two milestones are
achieved. Roberts licensed the rights to ADL 8-2698 from Eli Lilly and
Company, and we assumed Roberts' obligations to Lilly. Under the agreement
with Lilly, we will make a milestone payment to Lilly if and when we receive
FDA approval to sell ADL 8-2698. We will be required to pay royalties to Lilly
and Roberts on any sales of ADL 8-2698.
Results Of Operations
Years Ended December 31, 1999 and 1998
Grant and license revenues. Our grant and license revenues were $10,965 for
the year ended December 31, 1999 compared to $149,983 in the same period in
1998, a decrease of $139,018. The revenue of $10,965 in
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1999 represents a portion of the $500,000 license fee received from an
affiliate of SmithKline Beecham on signing the agreement in July 1999. This
revenue is being recognized over the remaining life of the patents that were
licensed in that collaboration. Revenues in 1998 included $99,983 from a Phase
I federal Small Business Innovation Research, or SBIR, grant and $50,000 from
contract research revenue. We have no future obligations in connection with
these revenues.
Research and development expenses. Our research and development expenses
increased from approximately $7.1 million for the year ended December 31, 1998
to approximately $7.2 million in the same period in 1999. Clinical development
costs for dermal pain and itch indications of ADL 2-1294 were lower by
approximately $2.5 million in 1999 compared to 1998 because an affiliate of
SmithKline Beecham licensed the rights to those indications and is now
responsible for the development expenses. In 1999, research and development
costs increased by approximately $2.1 million for the initiation of the Phase
I and Phase II clinical program for ADL 8-2698 and increased by approximately
$1.0 million for the initiation of the Phase I and Phase II clinical trials
for ADL 10-0101. Research and development expenses for ADL 2-1294 for the
treatment of ophthalmic pain decreased in 1999 compared to 1998 by
approximately $0.2 million.
General and administrative expenses. Our general and administrative
expenses increased to approximately $3.4 million for the year ended December
31, 1999 compared to $2.3 million in the same period in 1998, an increase of
approximately $1.1 million. This increase is primarily due to approximately
$226,000 of higher compensation expense relating to stock option grants,
approximately $226,000 for higher payroll expenses related to additional
personnel and approximately $478,000 in increased consulting and professional
fees.
Net interest income (expense). Our interest income was approximately the
same for the years ended December 31, 1999 and 1998 at $424,667 and $412,975,
respectively, because we had approximately the same average invested balances
in both years. Our interest expense for the same periods was $21,142 and
$28,028. Interest expense represents interest incurred on an equipment
financing facility.
Net loss. Our net loss was approximately $10.1 million for the year ended
December 31, 1999 compared to approximately $8.8 million in the same period of
1998. The increase reflects costs associated with expanded Phase II clinical
development costs together with higher personnel related costs.
Net loss allocable to common stockholders. Our net loss allocable to common
stockholders was approximately $10.5 million for the year ended December 31,
1998 compared to approximately $12.6 million in the same period of 1999. The
increase reflects the increase in the net loss of approximately $1,315,000 and
an increase in undeclared dividends attributable to mandatorily redeemable
convertible preferred stock of approximately $726,000.
Years ended December 31, 1998 and December 31, 1997
Grant and license revenues. Our grant and license revenues were $149,983
for the year ended December 31, 1998 compared to no revenues in the same
period in 1997. Revenues in 1998 included $99,983 from a Phase I SBIR grant
and $50,000 from contract research revenue. We had no future obligations in
connection with these revenues as of December 31, 1998.
Research and development expenses. Our research and development expenses
increased from approximately $3.7 million for the year ended December 31, 1997
to approximately $7.1 million in the same period in 1998, an increase of
approximately $3.4 million. In 1998, research and development costs increased
by $0.5 million for the manufacture of ADL 8-2698 clinical supplies and the
payment of a $0.3 million license fee to Roberts. Research and development
expenses increased by approximately $1.6 million for the preclinical
activities for ADL 10-0101. In 1998, research and development costs increased
by approximately $0.7 million for the initiation of the Phase I and Phase II
clinical program for ADL 2-1294 for the treatment of ophthalmic pain.
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General and administrative expenses. Our general and administrative
expenses increased to approximately $2.3 million for the year ended December
31, 1998 compared to approximately $1.6 million in the same period in 1997, an
increase of approximately $0.7 million. This increase is primarily due to
$314,000 of higher patent filing expenses and approximately $267,000 in
increased consulting and professional fees.
Net interest income (expense). Our interest income for the year ended
December 31, 1998 was $412,975 compared to interest income of $531,487 in the
same period in 1997. The decrease in interest income was the result of higher
levels of cash available for investment in 1997 versus 1998. Our interest
expense for the same periods was $28,028 and $45,930, respectively. Interest
expense represents interest incurred on an equipment financing facility.
Net loss. Our net loss for the year ended December 31, 1998 was
approximately $8.8 million compared to a net loss of approximately $4.8
million in the same period in 1997. This increase was due to the expansion of
the Phase II clinical trials for ADL 2-1294 for the treatment of dermal pain
and itch and the progression of ADL 10-0101 from research into late
preclinical development.
Net loss allocable to common stockholders. Our net loss allocable to common
stockholders was approximately $6.2 million for the year ended December 31,
1997 compared to approximately $10.5 million in the same period of 1998. The
increase reflects the increase in the net loss of approximately $4,017,000 and
an increase in undeclared dividends attributable to mandatorily redeemable
convertible preferred stock of approximately $296,000.
Liquidity and capital resources
As of December 31, 1999, we had cash, cash equivalents and short term
investments of approximately $5.3 million, and working capital was
approximately $3.1 million. In January 2000 we sold series G mandatorily
redeemable convertible preferred stock, raising net proceeds of approximately
$12.3 million.
From inception through December 31, 1999, net cash used in operating
activities was approximately $26.4 million. Net cash used in investing
activities since inception was $3.3 million for the acquisition of laboratory
equipment, leasehold improvements and furniture and fixtures and office
equipment, and the purchases of short-term investments.
From inception through December 31, 1999, we have financed our operations
primarily from the net proceeds generated from the issuance of mandatorily
redeemable convertible preferred stock (preferred stock). As of December 31,
1999, we had received total net proceeds of approximately $33.0 million from
the sales of mandatorily redeemable convertible preferred stock. In addition,
we sold shares of series G mandatorily redeemable convertible preferred stock
in January 2000, raising total net proceeds of approximately $12.3 million.
The issuance of the shares of series G mandatorily redeemable convertible
preferred stock will result in a beneficial conversion feature of $12,306,000,
which will increase net loss allocable to common stockholders per share in the
first quarter of 2000.
We anticipate that our capital expenditures will be approximately $500,000
in 2000.
We lease our corporate and research and development facilities under an
operating lease expiring on November 30, 2001. We may extend this lease for
one additional four-year period at rental rates equal to the then fair rental
value as determined by our landlord. Current total minimum annual payments
under these leases are $224,290 for 2000 and $250,964 for 2001.
Research and development expenditures, including clinical trials, are
expected to increase as we continue to develop new product candidates. We
expect that our operating expenses and capital expenditures will increase in
future periods as a result of the manufacturing scale-up and in anticipation
of commercialization of our product
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candidates, assuming we receive the necessary regulatory approvals. The
initiation of commercial activities will require the hiring of additional
staff to coordinate contract manufacturing services at multiple locations.
Sales and marketing activities will require hiring and training of a sales and
marketing staff in late 2000 and 2001. As of December 31, 1999, we may be
required to pay up to an aggregate of $6.0 million upon the occurrence of
certain future clinical and regulatory events under various agreements
(including our agreement with Roberts). We also intend to hire additional
research and development, clinical and administrative staff. Our capital
expenditure requirements will depend on numerous factors, including the
progress of our research and development programs, the time required to file
and process regulatory approval applications, the development of commercial
manufacturing capability, the ability to obtain additional licensing
arrangements, and the demand for our product candidates, if and when approved
by the FDA or other regulatory authorities.
In January 2000, the Company granted 592,164 stock options at exercise
prices of $2.03 for which a total compensation charge of approximately
$5,726,000 will be recorded over the four year vesting periods of the options.
We believe that our current cash position, capital leases for equipment and
the proceeds of this offering will be sufficient to fund our operations and
capital expenditures through the first quarter of 2002.
Income taxes
As of December 31, 1999, we had approximately $11,200,000 of Federal and
$8,300,000 of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss carryforwards
will begin expiring in 2009 and 2005, respectively, if not utilized. In
addition, the utilization of the state net operating loss carryforwards is
subject to a $2 million annual limitation. At December 31, 1999, we also had
approximately $403,000 of Federal and $130,000 of state research and
development tax credit carryforwards, which begin expiring in 2011, and are
available to reduce Federal and state income taxes.
The Tax Reform Act of 1986 (the Act) provides for a limitation on the
annual use of net operating loss and research and development tax credit
carryforwards (following certain ownership changes, as defined by the Act)
that could significantly limit our ability to utilize these carryforwards. We
may have experienced various ownership changes, as defined by the Act, as a
result of past financings. Accordingly, our ability to utilize the
aforementioned carryforwards may be limited. We have not yet determined
whether or not ownership changes, as defined by the Act, have occurred.
Additionally, because United States tax laws limit the time during which these
carryforwards may be applied against future taxes, we may not be able to take
full advantage of these attributes for Federal income tax purposes.
Disclosure About Market Risk
Our exposure to market risk is principally confined to our cash equivalents
and investments, all of which have maturities of less than one year. We
maintain a non-trading investment portfolio of investment grade, liquid debt
securities that limits the amount of credit exposure to any one issue, issuer
or type of instrument. The fair value of these securities approximates their
cost.
Year 2000 Computer Systems Compliance
We completed our assessment of internal systems that could be affected by
the year 2000 issue prior to December 31, 1999 and found that our computer
systems would properly utilize dates past December 31, 1999. We have initiated
communications with our significant suppliers to determine the extent to which
we are vulnerable to those parties' failure to solve their own year 2000
issues. We will develop contingency plans in the event we become aware that
one or more of these third parties fails to solve their year 2000 issues such
that they
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may affect our operations. If significant numbers of these third parties
experience failures in their computer systems or equipment due to year 2000
non-compliance, it could affect our ability to engage in normal business
activities.
The statement contained in the foregoing year 2000 readiness disclosure is
subject to protection under the Year 2000 Information and Readiness Disclosure
Act.
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BUSINESS
- -------------------------------------------------------------------------------
Overview of Our Business
We discover, develop and plan to commercialize proprietary pharmaceutical
products for the treatment of pain and the side effects that are caused by
current pain treatments. We have a portfolio of product candidates in
development in Phase I to Phase II/III clinical trials. Our analgesic product
candidates are designed to treat moderate-to-severe pain and itch. We are also
developing products that are intended to reduce the most prevalent and severe
side effects of current narcotics, such as nausea, sedation and the treatment
of symptoms of narcotic induced bowel dysfunction such as constipation. Since
most of our product candidates target peripheral opioid receptors (those
outside of the central nervous system), they should not exhibit the dose-
limiting central nervous system side effects of existing narcotics. We believe
our product candidates and drug discovery and development expertise have
potential applicability to a broad range of pain conditions. Combined 1999
prescription sales in the pain management market were $9.1 billion in the
United States and are estimated to be $25.8 billion worldwide.
Currently marketed analgesics have well-defined adverse side effects that
limit their ability to meet the needs of physicians and their patients.
Moreover, the increased emphasis on treating pain has highlighted the need for
improved products. We believe our product candidates address significant unmet
needs in the pain management market. In addition, we believe we may create new
pain management markets with some of our product candidates because their
mechanisms of action may provide effective pain relief or relief of narcotic
side effects that currently have no existing effective therapy.
Our drug discovery capabilities and pipeline of product candidates
originate through a combination of internal research and development
activities, in-licensed technologies and in-licensed product candidates. Our
initial drug discovery and development activities focus on three aspects of
pain management:
. reversal or prevention of gastrointestinal, or GI, side effects of
narcotics;
. novel mu and kappa analgesics that act on peripheral opioid receptors not
in the central nervous system; and
. narcotic analgesic products with significantly reduced side effects.
Our compound ADL 8-2698 has completed multiple Phase I and Phase II
clinical trials that indicated that it may be effective in reversing the
severe constipating effects associated with narcotic bowel dysfunction. We are
currently conducting three Phase II/III trials for this indication and a Phase
II trial with ADL 8-2698 for the treatment of bowel dysfunction, or ileus,
that frequently follows abdominal surgery. Based on our initial clinical
results, we have started a Phase I clinical trial for ADL 8-2698 in
combination with a narcotic with a goal of producing a combination narcotic
product that treats pain and does not induce nausea.
We have additional compounds in clinical development that target peripheral
opioid analgesia receptors. Our compound ADL 10-0101, which is being developed
for the treatment of visceral and post-surgical pain, is in a Phase II
clinical trial for the treatment of visceral pain. In addition, ADL 10-0101 is
in a Phase I clinical trial for the treatment of traumatic injury pain. We
have completed Phase II clinical trials for ADL 2-1294 for the treatment of
pain from corneal abrasion or ophthalmic surgery. We have also completed two
Phase I clinical trials with ADL 2-1294 where it demonstrated preliminary
efficacy in the treatment of dermal burn pain. An affiliate of SmithKline
Beecham, our development partner for the commercialization of the dermal
product candidate, is developing topical ADL 2-1294 under an exclusive license
from us for the treatment of dermal pain and itch.
We plan to build a sales and marketing organization to sell our products to
hospitals, surgeons, oncologists and pain management specialists. We intend to
enter into strategic relationships with and grant additional licenses to
pharmaceutical companies to gain access to broader market segments, including
general practitioners and international markets.
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Overview Of Pain Management Industry
Approximately 106 million patients experience acute or chronic pain
annually in the United States resulting from the three most frequent causes:
cancer, surgery and back pain. Because pain impairs one's ability to carry out
a productive life, pain in general and chronic pain in particular are serious
health and economic problems.
Types of pain. Pain is commonly classified into three broad categories
based upon its presumed cause and sensory characteristics: somatic pain,
visceral pain and neurogenic pain. Somatic pain can be produced by injuries to
skin, muscle, bones or joints and is typically characterized as a sharp pain
that is localized to an area of injury. Visceral pain can be produced by
distention, injury or inflammation of internal organs and is typically
characterized by diffuse, poorly localized, dull and vague pain. Neurogenic
pain can be produced by injuries or inflammation of nerves and is typically
characterized by diffuse, burning pain. Patients may simultaneously experience
more than one type of pain.
Pain management market. Prescription pain management sales in 1999 were
$9.1 billion in the United States. Growth in the pain management market has
been significant in recent years and is expected to continue. The prescription
pain management market in the United States grew 6% per year from 1994 to
1998, and grew 24% between 1998 and 1999. This accelerating growth rate
appears to be primarily attributable to recent product introductions in this
market. For example, COX-2 inhibitors, non-narcotic prescription analgesics,
were introduced early in 1999 and had 1999 sales of $1.5 billion. We believe
that the rapid acceptance of COX-2 inhibitors illustrates that there are still
many unmet medical needs in the pain management market and that physicians are
willing to prescribe new and improved products as they become available.
There has been an increasing focus on pain management in the healthcare
industry. Recently published guidelines of the World Health Organization and
the United States Agency for Health Care Policy and Research encourage the use
of stronger analgesic therapy for treating cancer pain. In 1993, the American
Board of Medicine designated the treatment of pain as a recognized specialty
for physicians, and the number of physicians receiving specialty training in
pain management increased more than tenfold in the subsequent five years. In
addition, as of 1999, all United States hospitals and health care facilities
have been required to assess the adequacy of pain treatment for each patient
on a daily basis to achieve accreditation by the Joint Commission on
Accreditation of Healthcare Organizations.
The pain management market for drugs used to treat patients with moderate-
to-severe and mild-to-moderate pain is growing due to the following factors:
. increasing recognition of the need for effective pain management and its
therapeutic benefits;
. rapid market acceptance of new products with novel mechanisms of action;
. targeted markets that permit cost-effective selling and marketing; and
. growth in the aged population with an associated increased incidence of
pain.
Sales of prescription pain management products are shown in the following
table:
Pain Management Market -- United States
<TABLE>
<CAPTION>
U.S. Sales
--------------------
Market Segment 1997 1998 1999
- -------------- ------ ------ ------
(In millions)
<S> <C> <C> <C>
Moderate-to-severe pain (Narcotics)...................... $2,430 $2,720 $3,203
Mild-to-moderate pain (NSAIDs, COX-2 inhibitors)......... $2,973 $2,666 $3,755
Topical pain, itch and special purpose analgesics
(Corticosteroids, antihistamines)....................... $1,599 $1,915 $2,104
------ ------ ------
Total Pain Management Market............................. $7,002 $7,301 $9,062
====== ====== ======
</TABLE>
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Current therapies to counteract pain. Narcotics such as morphine are
considered the most effective analgesics and are widely used to treat patients
with moderate-to-severe pain. These narcotics produce pain relief by
stimulating opioid receptors in the central nervous system, which consists of
the brain and spinal cord. Advances in narcotics during the past 20 years have
primarily been in improved methods for the delivery of existing narcotics
rather than the discovery of new drugs. Patients who suffer severe pain may
simultaneously receive more than one formulation of narcotic and receive other
classes of analgesic medications.
Non-narcotic analgesics, including non-steroidal anti-inflammatory drugs,
or NSAIDs, such as ibuprofen or acetaminophen, are widely used to treat mild-
to-moderate pain. NSAIDs are thought to produce analgesia by inhibiting
activity of cyclooxygenase enzymes (COX-1 and COX-2), thereby reducing
inflammation at the site of injury or disease. Some NSAIDs require a
prescription, and others are available as over-the-counter medications. Recent
advances in NSAID analgesia have focused on reducing adverse GI side effects.
Deficiencies of current therapies to counteract pain. Although narcotics
are considered the most effective analgesics, many patients who use them do
not obtain complete pain relief, and they are ineffective for other patients.
Narcotic analgesics also produce a wide range of adverse side effects that may
include narcotic bowel dysfunction, sedation, nausea, vomiting, decreased
respiratory function, addiction and death. In addition, due to their potential
for abuse, narcotics are strictly regulated by the United States Drug
Enforcement Agency, or DEA, under the Controlled Substances Act, which imposes
on narcotics strict registration, record-keeping and reporting requirements,
security controls and restrictions on prescriptions.
Although NSAIDs are generally effective for mild or moderate pain, many
patients are unable to tolerate NSAIDs because of GI side effects. Traditional
NSAIDs can produce significant adverse effects on the stomach and GI tract,
including GI ulcers and bleeding. In addition, prolonged use can cause liver
and kidney failure. COX-2 inhibitors appear to produce fewer GI ulcers than
NSAIDs but may be less effective for acute pain. For most patients with
moderate-to-severe pain, NSAIDs and COX-2 inhibitors do not produce complete
pain relief.
Background On Opioid Analgesia
Pain transmission signals. When tissues such as the skin, muscles and
joints become inflamed or are injured, pain receptors in those tissues are
activated, and electrical pain signals are transmitted from the injured
tissues through nerve fibers into the spinal cord. Within the spinal cord, the
electrical pain signals are received by a second set of nerve fibers that
continue the transmission of the signal up the spinal cord and into the brain.
Within the brain, additional nerve fibers transmit the electrical signals to
the "pain centers" of the brain where these signals are perceived as pain.
Pain receptors are also present in internal, or visceral, organs such as the
intestines, uterus, cervix and bladder. These pain receptors also send pain
signals when the organs are inflamed or distended.
Opioid receptors block pain transmission signals. Opioid receptors are
receptors on the surface of nerves that block transmission of pain. There are
three types of opioid receptors, mu, kappa and delta, each of which produces
analgesia. All marketed narcotic drugs interact with mu opioid receptors in
the brain and spinal cord. When these central nervous system opioid receptors
are activated with narcotics such as morphine, the perception of pain is
reduced. However, activating these opioid receptors in the brain with
narcotics often results in serious side effects such as sedation, decreased
respiratory function and addiction. Because of the potential to cause
addiction, drugs that are able to activate mu opioid receptors in the brain
(narcotics) are regulated, or scheduled, under the Controlled Substances Act.
Compounds that activate kappa opioid receptors in the brain also produce
analgesia and sedation but are far less likely than narcotics to decrease
respiratory function. Studies in animals and humans suggest that opioid drugs
that activate the kappa receptors are unlikely to cause addiction. However,
prototype kappa opioid compounds that were designed to work in the brain have
produced adverse central nervous system side effects, including visual and
auditory disturbances, unpleasant mood changes and hallucinations. These side
effects have
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prevented the development of centrally-acting kappa analgesics that act on
receptors in the central nervous system.
Our Approach To Pain Management
Peripheral opioid analgesia. Scientists have shown that mu and kappa opioid
receptors are present on nerve endings in the skin, joints and visceral
organs. Activation of these opioid receptors, which are outside of the central
nervous system, with mu or kappa opioid analgesics reduces pain related to
injury or inflammation by decreasing pain transmission from the peripheral
nerves into the spinal cord. Proof-of-concept studies in animals and humans
have shown that small doses of morphine, applied locally to inflamed tissues
such as skin, joints and eyes are effective in reducing pain. These findings
demonstrate the effectiveness of stimulating peripheral mu opioid receptors to
produce pain relief. These findings have created the opportunity for us to
develop an entirely new class of analgesics that selectively stimulate opioid
receptors in inflamed tissues but do not stimulate receptors in the central
nervous system thereby avoiding central nervous system side effects. These
pain medications are called peripheral opioid analgesics. Our peripheral
opioid analgesics were effective in preclinical studies of itch, and our
peripheral kappa opioid analgesics are effective in blocking the visceral pain
originating from internal organs such as the bowel and cervix. In our
preclinical studies, our peripheral opioid analgesics have delivered near
complete pain relief without detectable side effects at therapeutic doses.
Because our peripheral analgesics do not cross the blood-brain barrier and
enter the brain at therapeutic doses, they do not cause addiction or other
adverse central nervous system side effects. These peripheral analgesics
should not cause sedation, decreased respiratory function or addiction. As a
result, we expect that these analgesics will not be subject to regulation
under the Controlled Substances Act.
Peripheral opioid receptors in the GI tract. Just as there are opioid
receptors on peripheral nerves that regulate the transmission of pain signals
into the spinal cord, there are also opioid receptors in the GI tract that
reduce bowel functions such as motility and water absorption. Stimulation of
these bowel mu opioid receptors by narcotics causes constipation associated
with narcotic bowel dysfunction. Scientists have shown that blocking these
receptors with opioid receptor antagonist drugs during administration of
narcotics prevents or reverses the effects of narcotic bowel dysfunction.
These findings have created the opportunity to develop a new class of
therapeutics called GI tract-restricted narcotic antagonists. GI tract-
restricted narcotic antagonists, when co-administered with narcotics, block
the side effects of the narcotics on the GI tract but do not block the
narcotics' analgesia because the antagonists do not cross the blood-brain
barrier.
Development of peripherally-restricted products. We use our biological,
chemical and analytical technology expertise to create proprietary peripheral
opioid analgesics and GI tract-restricted narcotic antagonists. Within our
analgesia program, we use computer-assisted chemical design technology and
medicinal chemistry to synthesize compounds that do not readily pass the
blood-brain barrier into the central nervous system. We then use cloned human
mu, kappa and delta opioid receptors to select the compounds that are
effective at very low concentrations and are highly specific for one receptor
type (usually kappa) over other receptor types. We conduct preclinical studies
to confirm the analgesic activity of the compounds and to confirm that the
compounds are not passing through the blood-brain barrier to give central
nervous system side effects. We have demonstrated in a number of preclinical
trials of inflammatory and visceral pain that our peripherally restricted
kappa analgesics are as effective as narcotics, such as morphine, without
causing central nervous system side effects. In addition, we have demonstrated
that our peripheral kappa analgesics are active in preclinical trials of itch.
Similarly, we have shown in preclinical and clinical trials that our GI tract-
restricted narcotic antagonists, including our lead compound ADL 8-2698, block
the adverse side effects of narcotics on the GI tract without blocking
analgesia.
Itch sensations are carried by the same nerves that carry pain signals to
the brain, and we have found that many of our peripherally-restricted
analgesics are effective in treating itch in preclinical trials. These drugs
may be effective as topical, injectable or oral medications for relieving itch
in a wide variety of diseases including eczema and allergic dermatitis.
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Peripherally-active opioid analgesics may not be effective in relieving all
types of pain. Therefore, the development of centrally-active opioid
analgesics with reduced side effects is one of our longer-term goals. We
believe that centrally-acting compounds have the ability to treat nerve damage
pain and some cancer pain.
Our Strategy
Our goal is to become the leading discoverer, developer and marketer of
proprietary pain management pharmaceuticals. We plan to pursue this objective
by implementing the following strategies:
Pioneer the use of peripheral opioid receptors in pain management. We focus
on clinical conditions that can be treated by either stimulating or blocking
peripheral opioid receptors. These conditions include narcotic induced bowel
dysfunction, inflammatory pain and itch and visceral pain. We have broad
biological and chemical expertise to support drug discovery. Our leading
technology includes our expertise in opioid receptors in analgesic pathways,
cloned human opioid, orphan and chimeric receptors and the chemical synthesis
of compounds that do not readily cross the blood-brain barrier. We are using
our knowledge about opioid receptors to develop ADL 8-2698, ADL 2-1294, ADL
10-0101, ADL 10-0116 and ADL 1-0398, all of which are peripherally restricted
opioid receptor compounds, for a variety of these clinical indications.
Pursue clinical indications that allow rapid demonstration of efficacy. We
try to expedite drug development by targeting pain management indications in
which animal pharmacology experiments are predictive of efficacy in humans,
established and reproducible clinical end points are available and relatively
short and inexpensive clinical trials are possible and appropriate. For
instance, in our peripheral kappa opioid analgesic program for inflammatory
pain, we have chosen to examine clinical indications like post-surgical pain
and burn pain rather than arthritis pain because the first two clinical
indications can be tested in much shorter and less expensive clinical trials.
We intend to study the arthritis pain indication at a later time.
Develop and market our products effectively. We plan to maintain commercial
rights in the United States for a number of our product candidates. We intend
to market certain of our product candidates to surgeons, hospitals,
oncologists and pain management specialists. In addition, we have established
and will continue selectively to establish collaborations with pharmaceutical
companies and leading academic institutions to enhance our research,
development and commercialization activities. We have licensed topical ADL 2-
1294 to an affiliate of SmithKline Beecham for treatment of dermal pain and
itch. We believe our broad biological and chemical expertise to support drug
discovery will continue to generate opportunities for collaborative
arrangements.
Manage risk by creating a portfolio of product candidates. We have a
portfolio of product candidates in clinical development, each of which is
being developed for multiple indications. We conduct multiple parallel
clinical trials and examine multiple clinical indications on all of our
product candidates. For example, ADL 8-2698 is being evaluated in parallel
clinical trials for reversal of narcotic bowel dysfunction, treatment of post-
surgical ileus and prevention of narcotic-induced nausea.
Develop non-DEA regulated products. We develop product candidates that do
not (unless used in combination with narcotics) contain regulated controlled
substances. We believe this lack of regulation by the DEA will give our
products a competitive advantage in markets like the out-patient care market
in which non-addictive products are favored. For example, patients with mild-
to-moderate pain are not routinely treated with narcotic analgesics because of
the addictive potential of these regulated products. We believe our peripheral
kappa analgesics will be effective in relieving pain and will not be regulated
by the DEA.
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Products in Development
Our current product candidates according to clinical indication and stage
of development are:
<TABLE>
<C> <S> <C>
Product Candidate (Mode of Delivery) Clinical Indication Development Stage
------------------------------------ ------------------- -----------------
Reversal of Narcotic-Induced GI Side Effects
GI Tract-Restricted mu Antagonists
ADL 8-2698 (oral) Narcotic bowel Phase II/III
dysfunction
ADL 8-2698 (oral) Post-surgical ileus Phase II
Treatment of Pain or Itch
Peripherally Restricted kappa Analgesics
ADL 10-0101 (injectable) Visceral/post-surgical Phase II
pain
ADL 10-0101 (injectable) Traumatic injury pain Phase I
ADL 10-0101 (injectable) Dermal itch Phase I
ADL 10-0101 (topical) Ophthalmic itch Preclinical
ADL 10-0116 (oral) Inflammatory/visceral Preclinical
pain and itch
ADL 1-0398 (oral) Inflammatory/visceral Research
pain and itch
Peripherally Restricted mu Analgesics
ADL 2-1294 (topical) Ophthalmic pain Phase II
ADL 2-1294 (topical) Dermal pain Phase I
ADL 2-1294 (topical) Dermal itch Phase I
ADL 2-1294 (injectable) Joint pain Preclinical
Central Analgesics
ADL 8-2698 combination with narcotic (oral) GI side effect-free Phase I
narcotic
ADL 1-0386 combination with narcotic (oral) Non-sedating narcotic Research
</TABLE>
GI-Restricted mu Antagonists
ADL 8-2698
ADL 8-2698 is a peripherally-acting, GI tract-restricted mu opioid receptor
antagonist. ADL 8-2698 is designed to block the adverse side effects of
narcotics on the GI tract without blocking the beneficial analgesic effects.
We are developing ADL 8-2698 to treat or prevent narcotic bowel dysfunction
and ileus.
Narcotic bowel dysfunction
Coordinated rhythmic contractions of the intestines move the intestinal
contents forward as a part of the normal digestive process.
[GRAPHIC depicting normal digestive process]
29
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When morphine or similar narcotic analgesics enter the intestines, they
activate narcotic receptors and disrupt the normal rhythmic movements. The
disruption may cause uncoordinated non-propulsive contractions or cramps. The
dose of morphine required to disrupt bowel function is lower than the dose of
morphine required to produce pain relief. The use of morphine can produce
symptoms of narcotic bowel dysfunction that include hard, dry stools,
straining with bowel movements and inability to completely evacuate the
bowels. Patients may also experience abdominal cramping or spasms with
bloating and abdominal distention. The discomfort associated with narcotic
bowel dysfunction can be so severe as to limit dosing of the narcotic and
therefore the degree of pain relief.
[GRAPHIC depicting narcotic bowel dysfunction]
When taken orally, ADL 8-2698 selectively blocks the intestinal narcotic
receptors, restoring normal bowel function. Because only traces of ADL 8-2698
are absorbed from the bowel into the bloodstream, it is considered a GI tract-
restricted narcotic antagonist. Narcotic analgesics are still absorbed
normally into the blood stream and produce their desired analgesic effects in
the brain.
[GRAPHIC depicting reversal of narcotic bowel dysfunction by ADL 8-2698.]
Laxative and stool lubricant medications are used in an attempt to treat
narcotic bowel dysfunction in patients receiving chronic narcotic therapy, but
they are only fully effective in a limited patient population. Clinical trials
and interviews with medical care givers indicate that as many as 80% of
patients receiving chronic narcotic analgesics experience moderate to severe
narcotic bowel dysfunction. Market research indicates that over 2.7 million
patients receive chronic narcotics for pain. These patients comprise our
potential population for the use of ADL 8-2698 to prevent or treat narcotic
bowel dysfunction.
Development stage. We have three Phase II/III clinical trials evaluating
efficacy for narcotic bowel dysfunction in progress. We expect to complete
enrollment for each Phase II/III clinical trial by mid-year 2000. The duration
of each clinical trial is expected to be up to five weeks. Our studies are
designed to further refine the optimal dose for reversing narcotic bowel
dysfunction in patients receiving long-term treatment with oral narcotics.
A total of 169 volunteers and patients have received ADL 8-2698 in the
three Phase II and five Phase I clinical trials completed to date. Two of the
Phase II trials were designed to identify the optimal dose of ADL 8-2698 for
reversing severe narcotic bowel dysfunction in patients receiving chronic
narcotic therapy. In these
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trials, ADL 8-2698 was found to effectively reverse narcotic bowel dysfunction
in 100% of the patients, and the range of effective doses was clearly defined.
Specifically, ADL 8-2698 was effective in all patients at a dose of 3 mg and
was completely ineffective at a dose of 0.125 mg (P<0.01). At therapeutic
doses, side effects were generally mild and consisted of those expected to
occur during acute reversal of narcotic bowel dysfunction such as abdominal
cramping, gas and nausea. After receiving a dose 12 times higher than the
minimally effective dose, one patient developed severe abdominal cramps,
diarrhea, nausea and vomiting. The third Phase II clinical trial demonstrated
that ADL 8-2698 does not reverse pain relief produced by morphine after dental
surgery (P=0.9). This high P value was a favorable response because it
demonstrated that ADL 8-2698 did not cross the blood-brain barrier to block
pain relief in the central nervous system.
In three Phase I clinical trials, ADL 8-2698 reversed the adverse GI side
effects of oral morphine (P<0.01), intravenous morphine (P<0.01) and oral
loperamide (P<0.01). Two Phase I ascending dose safety and tolerance studies
administered doses at least ten times greater than the expected therapeutic
dose without producing serious adverse side effects. The highest dose in one
study, 54 mg per day for four days, was associated with dose-limiting side
effects of abdominal cramps, gas and loose bowel movements in one patient. All
subjects in the other study tolerated the highest dose administered, 120 mg
per day for three days. Side effects which did not limit dosing included loose
bowel movements, gas, cramps, nausea and headaches.
Post-surgical ileus
Post-surgical ileus is a form of temporary bowel dysfunction that regularly
follows abdominal surgery. Symptoms of post-surgical ileus include abdominal
distention, nausea, vomiting, abdominal cramps and constipation. These
symptoms may prevent eating and prolong recovery from surgery. After abdominal
surgery, bowels generally resume normal function in three to five days.
Clinical trials indicate that the use of narcotics to treat post-surgical pain
delays recovery of normal bowel function by an average of one day. Since
virtually all patients receive narcotics for pain relief after major surgery,
current pain treatment may actually slow recovery, delay time until patients
can eat, delay hospital discharge and therefore increase the cost of medical
care. We believe ADL 8-2698 may result in considerable cost savings by
speeding recovery from ileus, which may result in earlier discharge of
patients from hospitals.
There are no current effective treatments for post-surgical ileus or the
effects of narcotics on ileus. Of the 30 million annual surgical procedures in
the United States, market research indicates that more than nine million have
an increased risk of post-surgical ileus. We believe that these patients will
comprise the addressable market for an ADL 8-2698 post-surgical ileus product.
Development stage. We have begun a Phase II clinical trial and expect to
complete enrollment in the third quarter of 2000. In a preclinical trial, ADL
8-2698 reversed narcotic-induced delays in recovery of bowel function after
abdominal surgery. These results suggest that ADL 8-2698 may speed recovery of
bowel function after surgery.
Peripherally Restricted kappa Analgesics
We use advanced chemical design technology to create proprietary topical,
injectable and oral peripheral kappa opioid receptor-specific compounds that
do not cross the blood-brain barrier at therapeutic doses. These compounds are
significantly more effective than NSAIDs and are equally effective as
narcotics in relieving inflammatory pain in preclinical trials. We expect to
develop oral formulations to address broader markets in chronic inflammatory
pain, such as prescription anti-arthritics. These markets include the anti-
arthritic pain market that accounted for over $2.9 billion in United States
prescription sales in 1999. We believe these peripheral kappa agonists will be
the first opioid analgesics to address the pain of chronic inflammatory
disease without producing adverse psychological effects associated with
central kappa agonists, including visual and auditory disturbances, unpleasant
mood changes and hallucinations. Preclinical studies show that our peripheral
kappa agonists are particularly effective against visceral pain. Because of
these preclinical results, we have begun clinical trials for the treatment of
visceral pain in humans.
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<PAGE>
ADL 10-0101
ADL 10-0101 is our first peripheral kappa analgesic product candidate.
Preclinical trials suggest that ADL 10-0101 may be effective in treatment of
inflammatory pain, itch and visceral pain. Because ADL 10-0101 does not
readily cross the blood-brain barrier and enter the brain, we expect ADL 10-
0101 to avoid central nervous system side effects at therapeutic doses.
Visceral and post-surgical pain
Visceral pain can be caused by inflammation or distention of abdominal
organs as a result of surgical or diagnostic procedures or from acute or
chronic disease. Preclinical data indicated that our peripheral kappa
analgesics are more effective than narcotics for blocking pain in visceral
organs. Data from the United States Center for Disease Control, or CDC,
indicate that there are over 12 million annual cases of acute abdominal pain
and 5.4 million GI endoscopy diagnostic office procedures that we believe will
comprise our addressable patient population for an injectable ADL 10-0101
product.
Development stage. We completed a Phase I clinical trial in the third
quarter of 1999. In this study, the dose was increased until a dose-limiting
adverse side effect was observed. At the highest dose, ADL 10-0101 produced
visual and auditory disturbances, unpleasant mood changes and hallucinations.
We began a Phase II clinical trial in patients, using doses below those which
caused adverse side effects in volunteers, to evaluate efficacy of ADL 10-0101
in the treatment of visceral pain. We expect to complete enrollment by mid-
year 2000.
Traumatic injury pain
Traumatic dermal injury pain may be caused by burns, abrasions or surgical
procedures. Minor traumatic injury pain is currently treated with over-the-
counter medications containing emollients or local anesthetics. Emollients are
soothing but have little or no analgesic activity; local anesthetics have a
relatively short duration of action and may be irritating to the skin.
Moderate-to-severe traumatic injury pain is frequently treated with NSAIDs or
narcotic analgesics. We believe that ADL 10-0101 may produce greater analgesia
with fewer side effects than existing medications for inflammatory pain. Data
from the CDC indicate that there are over 44 million annual cases of
inflammatory pain that we believe will comprise the addressable market for an
ADL 10-0101 product.
Development stage. We recently began a Phase I clinical trial, using doses
below those that cause adverse side effects in volunteers, to assess safety
and preliminary efficacy of ADL 10-0101 for relieving burn pain. We expect to
complete enrollment by mid-year 2000.
Dermal itch
Dermal itch results from eczema, allergic dermatitis, or exposure to harsh
chemicals or plants. Minor dermal itch is currently treated with over-the-
counter medications containing emollients, local anesthetics, antihistamines,
or corticosteriods. Local anesthetics may be irritating to the skin and
corticosteroids cause skin thinning and other adverse effects with chronic
use. Moderate-to-severe itch is frequently treated with prescription
corticosteroids or with oral antihistamines, both of which may cause serious
side effects when used acutely or chronically, including sedation and adverse
effects on the immune system and on the regulation of normal body hormones. We
believe that ADL 10-0101 for dermal itch may produce greater relief with fewer
side effects than existing medications. Data from the CDC indicate that there
are over 14 million annual cases of dermal itch that we believe will
constitute the addressable market for a dermal anti-itch product.
Development stage. Preclinical trials indicate that ADL 10-0101 may be
effective in treating itch. Based on these results, we recently began a Phase
I clinical trial, using doses below those that cause adverse side effects in
volunteers, to assess safety and preliminary efficacy of ADL 10-0101 for
relieving dermal itch. We expect to complete enrollment by mid-year 2000. If
our clinical trial shows that ADL 10-0101 is effective, we will develop a
topical product.
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<PAGE>
Ophthalmic itch
Ophthalmic itch may be caused by allergies, colds, flu, inflammation,
infection, surgery or exposure to irritants. Minor ophthalmic itch is
currently treated with over-the-counter eye drops and allergy medications.
More severe itch is treated with prescription corticosteroids, antihistamines
or other anti-inflammatory drugs formulated as either eye drops or oral
medications. Recent market research indicates that there are over 7.9 million
patients annually who have eye itch from conjunctivitis, keratitis, uveitis or
following ophthalmologic surgery. We believe these patients comprise our
potential population for use of ADL 10-0101 to treat ophthalmic itch.
Development stage. We have completed preclinical eye safety studies with an
ophthalmic solution of ADL 10-0101. Based on these results, we plan to file an
IND for this product in late 2000. If our clinical trial shows that ADL 10-
0101 is effective, we will develop a topical product.
ADL 10-0116
Chronic Inflammatory/Visceral Pain and Itch
ADL 10-0116 is our second-generation peripheral kappa analgesic compound.
In preclinical inflammatory pain trials, ADL 10-0116 demonstrated a long
duration of action and high peripheral selectivity. In addition, ADL 10-0116
was shown to be active when administered orally. As an orally-active drug, ADL
10-0116 may expand the market that can be achieved with ADL 10-0101 by
treating acute and chronic pain conditions in clinical indications where an
injectable product would not be used.
Moderate-to-severe pain often requires the use of narcotic analgesics.
Preclinical data indicated that our peripheral kappa analgesics are as
effective as narcotics for inflammatory pain and more effective than narcotics
for blocking pain in visceral organs. Data from the CDC indicate that there
are over 44 million patients who have chronic inflammatory musculoskeletal
pain and 12 million cases of acute abdominal pain that we believe will
constitute a portion of the addressable market for an oral peripheral kappa
analgesic product.
Development stage. This product candidate is in preclinical development.
ADL 1-0398
Chronic inflammatory/visceral pain
ADL 1-0398 is another second generation peripheral kappa analgesic similar
to ADL 10-0116. The compound is active in multiple types of inflammatory pain
in preclinical trials. In addition, ADL 1-0398 has greater peripheral
restriction than other peripheral kappa analgesics.
Development stage. This product candidate is in preclinical research.
Peripherally Restricted mu Analgesics
ADL 2-1294
The active ingredient in all of our formulations containing ADL 2-1294 is
loperamide, the same active ingredient in the over-the-counter anti-diarrheal
product, Imodium(R) A-D. The compound patent for loperamide has expired, and
we have secured method-of-use and formulation patents for a number of pain and
itch indications. Loperamide, like morphine, is a potent mu opioid receptor
stimulant. Unlike morphine, loperamide does not readily cross the blood-brain
barrier to enter the central nervous system. The compound is also very poorly
absorbed from the intestinal tract following oral administration. As a result,
the compound does not cause sedation or depress respiratory function, is not
considered to be addictive and is the only mu opioid agonist that is not
scheduled as a controlled substance. When applied locally to sites of
inflammation or irritation, ADL 2-1294 is as effective as morphine in
preclinical models of inflammatory pain and is effective in preclincial trials
33
<PAGE>
for the relief of itch. Pain from burns and other dermal injuries was selected
as the initial clinical target for topical formulations of ADL 2-1294. We are
also evaluating ophthalmic and injectable formulations for treatment of pain.
Based in part on data generated in our Phase I trials, an affiliate of
SmithKline Beecham licensed the rights to develop and market ADL 2-1294
topical formulations for dermal itch and pain.
Ophthalmic pain
We are targeting ophthalmic pain that results from corneal abrasion or
surgery. Eye drops containing corticosteroids or an anti-inflammatory NSAID
are often used following corneal surgery or corneal abrasion but may inhibit
wound healing and cause other adverse side effects. Our collaborators have
demonstrated the efficacy of eye drops containing morphine for pain control
following ophthalmic surgery. ADL 2-1294 activates the same receptors as
morphine and has the competitive advantage that it is not a controlled
substance and therefore will not have prescription restrictions. We believe
that eye drops containing ADL 2-1294 will be more effective and produce fewer
adverse side effects than current therapy. Data from the CDC indicate that
there are 5.7 million annual cases of surgery on eyes or injury to the cornea
that we believe will compose the addressable market for an ophthalmic
peripheral mu analgesic product.
Development stage. Our Phase II study demonstrated that ADL 2-1294 reduced
the severity of pain following corneal abrasions and surgeries to a greater
extent than placebo. ADL 2-1294 resulted in a 56% reduction of pain, but this
effect was not statistically significant (P=0.12). In addition, a Phase II
pilot study suggested that topical administration of ADL 2-1294 was as
effective as topical morphine in reducing corneal pain. Some patients
experienced transient stinging associated with administration of eye drops
containing ADL 2-1294. We believe we can improve the efficacy of ADL 2-1294 by
improving its formulation. Consequently, we intend to continue the clinical
development of this product candidate.
Dermal pain
Dermal pain may be caused by trauma, burns, abrasions or surgical
procedures. Minor dermal pain is currently treated with over-the-counter
medications containing emollients or local anesthetics. Moderate-to-severe
dermal pain is frequently treated with NSAIDs or narcotic analgesics. We
believe that a topical formulation of ADL 2-1294 for dermal pain may produce
greater analgesia with fewer side effects than existing medications. Data from
the CDC indicate that there are 14.5 million annual cases of dermal pain
requiring emergency room treatment that we believe will comprise our potential
patient population for a topical ADL 2-1294 dermal analgesic product.
Development stage. Topically applied ADL 2-1294 was determined to be safe
and had preliminary analgesic efficacy in burn pain (P<0.05) in our Phase I
safety and efficacy burn pain trials. These two Phase I studies demonstrated
statistically significant analgesic efficacy in burn pain (P<0.05) without
dermal or systemic side effects. We initiated a Phase II study evaluating
efficacy in treating pain associated with skin graft surgery but stopped the
study because of slow enrollment.
Based in part on preliminary data generated in our Phase I trials, an
affiliate of SmithKline Beecham licensed the rights to develop and market ADL
2-1294 topical formulations for dermal pain.
Dermal itch
Dermal itch results from eczema, allergic dermatitis, or exposure to harsh
chemicals or plants. Minor dermal itch is currently treated with over-the-
counter medications containing emollients, local anesthetics, antihistamines,
or corticosteriods. Local anesthetics may be irritating to the skin and
corticosteroids cause skin thinning and other adverse effects with chronic
use. Moderate-to-severe itch is frequently treated with prescription
corticosteroids or with oral antihistamines, both of which may cause serious
side effects when used acutely or chronically, including sedation and adverse
effects on the immune system and on the regulation of normal body hormones.
We believe that a topical formulation of ADL 2-1294 for dermal itch may
have greater efficacy and produce fewer side effects than existing
medications. ADL 2-1294 may be prepared in different formulations for use in
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<PAGE>
both the prescription and over-the-counter drug markets. Data from the CDC
indicate that there are 14 million annual cases of chronic dermal itch that we
believe will comprise our potential patient population for a dermal ADL 2-1294
anti-itch product.
Development stage. Based in part on preliminary data generated in our Phase
I trials, an affiliate of SmithKline Beecham licensed the rights to develop
and market ADL 2-1294 formulations for a topical ADL 2-1294 dermal anti-itch
product.
Joint pain
Joint pain after arthroscopic surgery limits mobility and recovery.
Injection of morphine into a joint can reduce pain and speed recovery from
arthroscopic surgery. ADL 2-1294 demonstrated analgesic efficacy in
preclinical studies of joint pain. We have incorporated ADL 2-1294 into two
prototypic formulations suitable for delivery to joints following surgical
procedures. These formulations may also provide benefits after injection into
painful inflamed joints as an alternative to cortisone therapy. In addition,
preclinical safety studies found no dose-limiting side effects that would
prevent advancement into clinical development. Recent market research
indicates that, in the United States, there are 1.1 million outpatient
arthroscopic knee surgical procedures and 2.7 million patients who receive
local injections of corticosteroids for joint pain that we believe will
comprise our potential patient population for a long acting analgesic ADL 2-
1294 injectable product.
Development stage. This product is in preclinical development.
Central Analgesics
We expect centrally-acting narcotics to be more effective than peripheral
opioid analgesics in a number of non-inflammatory painful conditions such as
nerve damage or neuropathic pain as well as most cancer pain. However,
narcotics have dose-limiting side effects that limit their effectiveness. One
of our longer-term goals is to use our technology to create centrally-acting
narcotic analgesics with significantly fewer side effects or greater efficacy
to more effectively treat non-inflammatory indications that would be
particularly responsive to narcotics. We are developing two narcotic
combination products that we expect to have fewer narcotic side effects. We
believe these products will provide significant advances on current narcotic
therapy.
ADL 8-2698 Combination With Narcotic
GI side effect-free narcotic analgesic
Acute nausea or vomiting occurs in up to 33% of patients who receive oral
narcotics and in up to 80% of patients who receive injectable narcotics
following surgery or trauma. This is due in part to direct effects of
narcotics on the GI tract. Data from a Phase I clinical trial suggested that
ADL 8-2698 may reduce the severity of nausea caused by morphine. We believe
that a combination of ADL 8-2698 with a short acting oral narcotic analgesic,
in a fixed dose, will produce a new narcotic analgesic combination product
that produces less nausea than currently available narcotic analgesics.
Recent market research shows that there were 34 million units of oral
prescription narcotics sold at the wholesale level in 1999 that were intended
for the treatment of acute or chronic pain, each of which contained sufficient
medication for one to 20 prescriptions at the retail level.
Development stage. A Phase I clinical trial suggested a trend for reduced
severity of morphine-induced nausea, but the difference was not statistically
significant (P=0.07). We recently began a larger Phase I clinical trial and
expect to complete enrollment by mid-year 2000.
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ADL 1-0386 Combination With Narcotic
Non-sedating narcotic analgesic
Sedation and decreased mental function are dangerous side effects of
current narcotic analgesics. Preclinical data indicates that ADL 1-0386 blocks
the sedation produced by morphine and centrally active kappa analgesics
without blocking the analgesic effects of these drugs. It also blocks the
sedation produced by other classes of sedating drugs. Unlike our other
analgesic and narcotic antagonist compounds, ADL 1-0386 does not stimulate or
block brain or peripheral opioid receptors. We believe that a combination
product containing ADL 1-0386 and a narcotic analgesic could be used in all
instances where oral narcotic drugs are used to treat acute or chronic pain
conditions, including non-inflammatory neuropathic or nerve damage pain and
cancer pain.
Development stage. This product candidate is in preclinical research.
Commercialization
We have developed a balanced commercialization strategy that combines
utilizing strategic alliances with major pharmaceutical partners to access
broad distribution networks or markets outside the United States, with
maintaining commercial rights within the United States to certain focused
distribution networks where a relatively small sales force can be effective.
We intend to develop a sales and marketing management team and may use a
contract sales force for marketing certain of our products to surgeons,
hospitals, oncologists and pain management specialists.
Our Strategic Relationships
We pursue strategic relationships that are intended to offer us
independence and flexibility in the development and commercialization of our
products. We have chosen to license technology to major pharmaceutical
companies that have broad marketing capabilities in therapeutic areas outside
of our focus and to companies in geographic areas where we do not expect to
have direct sales capabilities.
SmithKline Beecham Affiliate
In July 1999, we licensed worldwide rights (excluding South Korea and North
Korea) to the development and commercialization of our product candidate ADL
2-1294 to SB Pharmaco Puerto Rico Inc., an affiliate of SmithKline Beecham
plc, for the topical indications of dermal pain and itch. We retain the
prescription rights to ADL 2-1294 for certain topical dermal indications as
well as rights outside the topical dermal field, including ophthalmic,
mucosal, post-surgical and joint pain indications.
Under the license agreement, we received a $500,000 up-front license fee.
In the event that ADL 2-1294 receives regulatory approval in the United
States, the European Union and Japan for a total of at least six clinical
indications and is successfully launched commercially in prescription and
over-the-counter forms in each of those jurisdictions, we would be entitled to
up to $38.5 million of milestone payments prior to 2018. We could also earn
additional milestone payments of up to $6.0 million in the event that an
additional six indications using ADL 2-1294 are developed and approved for
sale in the United States, the European Union or Japan. Achieving these
milestones is subject to numerous uncertainties, including risks related to
product development and testing, regulatory approval and market acceptance. In
addition, we will receive royalties based on product sales, if any. SB
Pharmaco will be responsible for all development costs.
SB Pharmaco can terminate the agreement on a country by country basis, in
its entirety, or on a product by product basis if it determines that the
product is not marketable in a specified territory. Upon termination in this
circumstance, all of the rights granted to SB Pharmaco under the license
agreement in the relevant country or for the relevant product will terminate
and revert to us.
In connection with this collaboration, S.R. One, Limited, an affiliate of
SmithKline Beecham purchased $2.5 million in series F mandatorily redeemable
preferred stock, and we granted S.R. One a warrant to purchase shares
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of preferred stock convertible into an aggregate of 27,778 shares of common
stock for an aggregate exercise price of $125,000. The warrant is currently
exercisable and expires on the earlier to occur of the closing of an initial
public offering of our shares of common stock or August 24, 2004. S.R. One
also agreed to purchase an additional $500,000 of our capital stock upon the
successful completion of the second pivotal clinical trial for the first
prescription or over-the-counter product candidate under our license agreement
with SB Pharmaco.
Kwang Dong Pharmaceutical Company, Ltd.
In November 1997, we licensed rights to the development and
commercialization of our product candidate ADL 2-1294 to Kwang Dong
Pharmaceutical Company, Ltd. for the indication of topical dermal pain in
South Korea and North Korea. Kwang Dong has a right of first refusal to
acquire a license for other routes of administration of ADL 2-1294 in South
Korea and North Korea.
Under the license agreement and a stock purchase agreement, we received a
$1.2 million equity investment, and we may receive up to an aggregate $800,000
from milestone payments upon the satisfaction of certain clinical and
regulatory milestones. In addition, we will receive royalties based on product
sales, if any, in South Korea and North Korea. Kwang Dong will be responsible
for all development costs.
Roberts Laboratories Inc.
In June 1998, we entered into a license agreement with Roberts Laboratories
Inc. under which we licensed the compound that is the basis of our ADL 8-2698
product candidates. Roberts recently merged with Shire Pharmaceuticals, plc.
Roberts had licensed the compound from Eli Lilly and Company in November 1996.
The license agreement affords us an exclusive worldwide license to make, use,
sell or import the compound, subject to certain rights of Eli Lilly.
Under the license agreement, we paid a $300,000 up-front license fee to
Roberts, and Roberts is entitled to receive milestone payments upon the
satisfaction of certain clinical and regulatory milestones. In addition, we
are required to pay Eli Lilly a milestone payment on behalf of Roberts. Both
Roberts and Eli Lilly will receive royalties based on product sales, if any.
We will be responsible for all development costs. In 1999, we paid $300,000 to
Roberts to exercise certain licensing rights as defined in the agreement. We
may pay up to $1.9 million in additional future milestone payments under this
agreement.
The agreement expires upon the later of either the life of the last to
expire of Lilly's patents encompassing the licensed compound or fifteen years
from November 5, 1996. Upon termination of the agreement, we cannot make, use
or sell any compound or product, but we may sell whatever stock of the
compound we have on hand at the time. In this circumstance we would have to
make royalty payments provided for in the agreement.
Other relationships
We have licensed technology from academic institutions and entities
including the University of California at Los Angeles, the University of
California at San Diego and the University of Minnesota.
We licensed from the University of California at Los Angeles the right to
use cloned delta opioid receptors to discover new drugs. The expiration of the
license coincides with the expiration date of the last patent in 2016.
We licensed from the University of California at San Diego the right to
develop and commercialize ADL 2-1294, loperamide, as a peripheral opioid
analgesic for pain. The expiration of the license coincides with the
expiration date of the last patent in 2015.
We licensed from the University of Minnesota the right to develop and
commercialize peripheral kappa analgesics discovered at the University of
Minnesota. The expiration of the license coincides with the expiration date of
the last patent in 2017.
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Intellectual Property
We seek United States and international patent protection for major
components of our technology. We also rely on trade secret protection for
certain of our confidential and proprietary information, and we use license
agreements both to access external technologies and assets and to convey
certain intellectual property rights to others. Our commercial success will be
dependent in part on our ability to obtain commercially valuable patent claims
and to protect our intellectual property portfolio.
As of February 1, 2000, we had exclusive rights to 61 issued patents, 28 of
which are United States patents, and 132 patent applications, 16 of which are
United States patent applications, relating to technologies used in our
business.
We have or have licensed patents related to (i) ADL 2-1294, (ii) peripheral
kappa analgesics, (iii) ADL 8-2698 and (iv) opioid receptors. The patents
related to ADL 2-1294 expire between 2015 and 2018. The patents related to
kappa receptors expire between 2016 and 2019. The patents related to ADL 8-
2698 expire between 2008 and 2013. The patents related to opioid receptors
expire in 2016.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including ours, are generally uncertain and involve complex legal
and factual questions. Our business could be hurt by any of the following:
. the pending patent applications to which we have exclusive rights may not
result in issued patents;
. the claims of any patents which are issued may not provide meaningful
protection;
. we may not be successful in developing additional proprietary
technologies that are patentable;
. patents licensed or issued to us or our customers may not provide a basis
for commercially viable products or provide us with any competitive
advantages and may be challenged by third parties; and
. others may have patents that relate to our technology or business.
In addition, patent law relating to the scope of claims in the technology
field in which we operate is still evolving. The degree of future protection
for some of our rights, therefore, is uncertain. Furthermore, others may
independently develop similar or alternative technologies, duplicate any of
our technologies, and if patents are licensed or issued to us, design around
the patented technologies licensed to or developed by us. In addition, we
could incur substantial costs in litigation if we have to defend ourselves in
patent suits brought by third parties or if we initiate such suits.
Enactment of legislation implementing the General Agreement on Tariffs and
Trade has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of 17
years from the date of issuance. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years,
a 20-year term from the effective date of filing may result in a substantially
shortened period of patent protection which may harm our patent position. If
this change results in a shorter period of patent coverage, our business could
be harmed to the extent that the duration and level of the royalties we are
entitled to receive from our partners are based on the existence of a valid
patent covering the product subject to the royalty obligation.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade
protection and confidentiality agreements to protect our interests. We believe
that several elements of our drug discovery system involve proprietary know-
how, technology or data that are not covered by patents or patent
applications. We have taken security measures to protect our proprietary know-
how and technologies and confidential data and continue to explore further
methods of protection. While we require all employees, consultants and
customers to enter into confidentiality agreements, we cannot be certain that
proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, or that we can
meaningfully
38
<PAGE>
protect our trade secrets. In the case of arrangements with our customers that
require the sharing of data, our policy is to make available to our customers
only such data as is relevant to our agreements with such customers, under
controlled circumstances, and only during the contractual term of those
agreements, and subject to a duty of confidentiality on the part of our
customer. However, such measures may not adequately protect our data. Any
material leak of confidential data into the public domain or to third parties
may cause our business, financial condition and results of operations to be
harmed.
We are a party to various license agreements that give us rights to use
technologies and biological materials in our research and development
processes. We may not be able to maintain such rights on commercially
reasonable terms, if at all. Failure by us to maintain such rights could harm
our business.
Manufacturing
We have no manufacturing facilities. We contract with qualified third
parties for the manufacture of bulk active pharmaceutical ingredients and
production of clinical/commercial supplies. The ingredients and supplies
comply with standard certified good manufacturing practices procedures
reviewed by the FDA (cGMPs). We have entered into an agreement with Oread
Laboratories, Inc. under which Oread will manufacture ADL 8-2698 for trial and
commercial uses. We maintain confidentiality agreements with potential and
existing contract manufacturers for both active drug and formulated product in
order to protect our proprietary rights. Earlier stage new chemical entities
are synthesized in our laboratories, and scaleup quantities and good
manufacturing practices materials for preclinical toxicology evaluations are
conducted by qualified third parties in strict compliance with cGMPs.
Government Regulation
In the United States, pharmaceutical products intended for therapeutic or
diagnostic use in humans are subject to rigorous FDA regulation. The process
of completing clinical trials and obtaining FDA approvals for a new drug is
likely to take a number of years and require the expenditure of substantial
resources. There can be no assurance that any product will receive FDA
approval on a timely basis, if at all.
The drug approval process
The usual steps required before a new pharmaceutical product for use in
humans may be marketed in the United States include:
. preclinical studies,
. submission to the FDA of an Investigational New Drug application (IND),
which must become effective before human clinical trials commence,
. adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product,
. submission to the FDA of a New Drug Application (NDA), and
. FDA approval of the NDA prior to any commercial sale or shipment of the
product.
Preclinical studies include laboratory evaluation of product chemistry and
formulation, as well as preclinical studies, to assess the potential safety
and efficacy of the product. The results of the preclinical studies are
submitted to the FDA as a part of an IND and are reviewed by the FDA prior to
the commencement of human clinical trials. Unless the FDA objects to, or
otherwise responds to, an IND, the IND becomes effective 30 days following its
receipt by the FDA.
Human clinical trials are typically conducted in three sequential phases
that may overlap:
. Phase I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion. In addition, it is sometimes possible to
assess efficacy in Phase I trials for analgesia.
. Phase II: Involves studies in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy of
the product for specific targeted diseases and to determine dosage
tolerance and optimal dosage.
39
<PAGE>
. Phase II/III: Data from Phase II clinical trials can be considered to
fulfill Phase III criteria in certain situations. This can occur when a
dose tested in a Phase II study is proven to be the optimal dose and this
dose is also statistically more effective than placebo. Classification of
the data as Phase III can only be determined after the study is complete,
the data analyzed and presented to the FDA for review.
. Phase III: When Phase II evaluations demonstrate that a dosage range of
the product is effective and has an acceptable safety profile, Phase III
trials are undertaken to further evaluate dosage, clinical efficacy and
to further test for safety in an expanded patient population at
geographically dispersed clinical study sites.
Scientists use statistical techniques to compare responses produced by
drugs versus placebos in clinical trials of drug effectiveness. Statistical
analyses estimate the probability that a positive effect is actually produced
by our drug. This probability is expressed as a "P-value" which refers to the
likelihood that a drug response occurred just "by chance." When a P-value is
reported as P<0.05, the probability that the drug produced its effect "by
chance" is less than 5% and the probability that the drug produced a
reproducible positive effect is greater than 95%. When a P-value is reported
as P<0.01, the probability that the drug produced the positive effect is
greater than 99%. These values are reported in several instances above to
indicate how certain we are that we have obtained beneficial responses in our
clinical drug trials. P-values greater than 0.05 and equal to or less than
0.10 are generally not considered statistically significant by themselves but
may indicate a strong trend in data that provides support for further clinical
research.
Efficacy studies for analgesics
Analgesic efficacy can initially be assessed in Phase I clinical trials.
Human experimental pain models represent an important link between preclinical
research and clinical trials in patients. We use validated human experimental
pain models, such as the burn pain model, to evaluate efficacy of our products
during some of our Phase I clinical trials. Historical results from
preclinical and earlier clinical trials may not be predictive of the results
of later trials.
For analgesic drugs, Phase II efficacy studies have sometimes served as
pivotal studies. Phase III studies for these products normally focus greater
attention on safety in larger patient populations rather than on efficacy.
There can be no assurance that Phase I, Phase II, or Phase III testing will be
completed successfully within any specified time period, if at all, with
respect to any of our products subject to such testing. Furthermore, the FDA
may suspend clinical trials at any time if there is concern that the
participants are being exposed to an unacceptable health risk.
The results of pharmaceutical development, preclinical studies, and
clinical trials are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the product. The FDA may require
additional testing or information before approving the NDA. The FDA may deny
an NDA approval if safety, efficacy, or other regulatory requirements are not
satisfied. Moreover, if regulatory approval of the product is granted, such
approval may require post-marketing testing and surveillance to monitor the
safety of the product or may entail limitations on the indicated uses for
which the product may be marketed. Finally, product approval may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
following initial marketing.
Other regulatory requirements
The FDA mandates that drugs be manufactured in conformity with GMP
regulations. If approval is granted, requirements for labeling, advertising,
record keeping and adverse experience reporting will apply. Failure to comply
with these requirements could result, among other things, in suspension of
regulatory approval, recalls, injunctions or civil or criminal sanctions. We
may also be subject to regulations under other federal, state, and local laws,
including the Occupational Safety and Health Act, the Environmental Protection
Act, the Clean Air Act, national restrictions on technology transfer, and
import, export, and customs regulations. In addition, any of our products that
contains one of our product candidates in combination with narcotics will be
subject to DEA regulations relating to manufacturing, storage, distribution
and physician prescribing procedures. There can be no assurance that any
portion of the regulatory framework under which we currently operate will not
change and that such change will not have a material adverse effect on our
current and anticipated operations.
40
<PAGE>
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries
must be obtained prior to the commencement of clinical trials and subsequent
sales and marketing efforts in those countries. The approval procedure varies
in complexity from country to country, and the time required may be longer or
shorter than that required for FDA approval.
The Controlled Substances Act imposes various registration, record-keeping
and reporting requirements, procurement and manufacturing quotas, labeling and
packaging requirements, security controls and a restriction on prescription
refills on certain pharmaceutical products. A principal factor in determining
the particular requirements, if any, applicable to a product is its actual or
potential abuse profile. A pharmaceutical product may be "scheduled" as a
Schedule I, II, III, IV or V substance, with Schedule I substances considered
to present the highest risk of substance abuse and Schedule V substances the
lowest.
Competition
Our success will depend, in part, upon our ability successfully to achieve
market share at the expense of existing and established products in the
relevant target markets. We believe that our ability to compete successfully
is based on our technical expertise in peripheral opioid analgesia and our
ability to maintain advanced scientific technologies, to develop a
differentiated product pipeline, to obtain successful regulatory approval for
novel pain management pharmaceuticals, and to sustain patent protection for
our portfolio.
Many companies currently sell either generic or proprietary narcotic
formulations. In addition, a number of technologies are being developed to
increase narcotic potency as well as to provide alternatives to narcotic
therapy for pain management, several of which are in clinical trials or are
awaiting approval from the FDA. Several companies and one university are
developing new products for the treatment of narcotic induced bowel
dysfunction or chronic constipation.
In addition, Merck KGaA is developing asimadoline (Phase II) as a
peripherally selective kappa opioid analgesic for the treatment of pain
associated with rheumatoid arthritis.
There may be additional competitors or products under development which we
have not listed above or of which we are not aware.
Human Resources
As of January 18, 2000, we had 34 full-time employees and one part-time
employee, including ten employees with Ph.D. or M.D. degrees. Twenty-four of
our employees are engaged in research and development activities at our
laboratory facility. Most of our senior management and professional employees
have had prior experience in pharmaceutical or biotechnology companies. None
of our employees is covered by collective bargaining agreements. We believe
that our relations with our employees are good.
Facilities
We currently occupy 24,340 square feet of leased office and laboratory
space in Malvern, Pennsylvania. The lease expires in November 2001. We believe
the current facility will be adequate to meet our near-term space
requirements. As we continue the development of our product candidates and
establish sales and marketing capabilities in anticipation of the
commercialization of our product candidates, we expect to expand our facility.
We believe that suitable additional space will be available to use, when
needed, on commercially reasonable terms.
Legal Proceedings
We are not a party to any legal proceedings.
41
<PAGE>
MANAGEMENT
- -------------------------------------------------------------------------------
The following table provides information, as of January 31, 2000, regarding
our directors and executive officers:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
John J. Farrar................. 55 President, Chief Executive Officer and
Director
Randall L. Carpenter........... 46 Vice President, Clinical Research &
Development and Regulatory Affairs
Deanne D. Garver............... 42 Vice President, Preclinical Development and
Projects Management
Alan L. Maycock................ 58 Vice President, Exploratory Research and
Drug Discovery
Gwen A. Melincoff.............. 47 Vice President, Business Development
Peter J. Schied................ 57 Vice President, Chief Financial Officer and
Secretary
Frank Baldino, Jr.(2).......... 46 Director
Ellen M. Feeney(1)............. 40 Director
David M. Madden(1)............. 37 Director
C. Christopher Moller(1)....... 46 Director
Claude H. Nash(2).............. 56 Director
Robert T. Nelsen(2)............ 36 Director
</TABLE>
- ---------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
John J. Farrar, Ph.D. Dr. Farrar joined us as our President, Chief
Executive Officer and a Director in November 1994. Previously, Dr. Farrar was
Senior Vice President and Director of Biological Research at the Research
Division of Sterling Winthrop Pharmaceuticals, and had responsibility for
approximately 225 scientists conducting drug discovery research. Prior to
that, Dr. Farrar was Group Director of Biological Research at Hoffman-LaRoche
and oversaw research programs in the areas of immunology, cancer and virology.
Dr. Farrar received a B.A. in Zoology and an M.S. in Microbiology from Miami
University and a Ph.D. in Microbiology/Immunology from the University of Notre
Dame.
Randall L. Carpenter, M.D. Dr. Carpenter joined us as our Vice President of
Clinical Research & Development and Regulatory Affairs in November 1998. From
April 1997 to November 1998, he was Director and Associate Director of
Clinical Research, Astra, U.S.A. and Astra Pain Control, Sweden, and was
responsible for the Anesthesia, Pain Management and Intensive Care divisions
where he supervised a portfolio of 23 drugs and was medically responsible for
19 clinical trials, two NDAs and seven supplemental NDAs. From November 1994
to April 1997, Dr. Carpenter was an Associate Professor in the Department of
Anesthesia at the Bowman Gray School of Medicine of Wake Forest University.
Dr. Carpenter holds an adjunct faculty position in the Department of
Anesthesiology at Duke University Medical Center. Dr. Carpenter received an
M.D. from the University of Michigan Medical School.
Deanne D. Garver, Ph.D. Dr. Garver joined us as our Vice President,
Preclinical Development and Projects Management in July 1998. From March 1995
to July 1998, she was Associate Project Director, Cardiopulmonary Project
Management, at SmithKline Beecham Pharmaceuticals, where she led project teams
through clinical trials in Phases I-III and was responsible for development
strategy and operational plans for therapeutic approaches to asthma and
chronic obstructive pulmonary disease and for anticoagulation drugs.
Dr. Garver received a B.A. in Biology and Chemistry from the College of Notre
Dame of Maryland and a Ph.D. in Medicinal Chemistry from the Medical College
of Virginia at Virginia Commonwealth University.
Alan L Maycock, Ph.D. Dr. Maycock joined us as our Vice President of
Exploratory Research and Drug Discovery in January 1995. From April 1988 to
January 1995, Dr. Maycock worked at the Research Division of
42
<PAGE>
Sterling Winthrop Pharmaceuticals, where, during the last year of his
employment he was Senior Director of Biochemistry and directed drug discovery
programs targeted at specific enzymes and receptors in several therapeutic
areas, including inflammation, the central nervous system and
immunomodulation. From 1974 to 1988, Dr. Maycock held various positions at
Merck Sharp & Dohme Research Laboratories, most recently as Associate Director
of Inflammation Research. Dr. Maycock received a B.A. in Chemistry from
Harvard College and an M.S. and Ph.D. in Organic Chemistry from MIT.
Gwen A. Melincoff. Ms. Melincoff joined us as our Vice President, Business
Development in January 1999. From October 1994 to January 1999, she was
Director of Business Development at NanoSystems, a subsidiary of Eastman Kodak
and, after October 1998, a division of Elan Corporation, plc, where she was
responsible for identifying and implementing the marketing and business
development strategies. Ms. Melincoff received a B.S. in Biology from George
Washington University and a M.S. in Management--Health Care Administration
from Penn State University.
Peter J. Schied. Mr. Schied joined us as our Vice President, Chief
Financial Officer and Secretary in June 1997. From March 1993 to May 1997, he
was Chief Financial Officer and Vice President of Finance for Transcell
Technologies, Inc., a healthcare services company. Mr. Schied previously held
senior level finance positions for healthcare companies including Greenwich
Pharmaceuticals, Inc., Foster Medical Corporation, Rorer Group, Inc.,
International Division and Bristol-Myers Company, International Division. Mr.
Schied received a B.S. in Engineering and an M.B.A. in Finance and
International Business from Drexel University.
Frank Baldino, Jr., Ph.D. Dr. Baldino joined us as a Director in March
1996. Dr. Baldino is the founder of Cephalon, Inc. a biotechnology company
involved in the development of therapeutics for neurological disorders, sleep
disorders and cancer. He has served as President, Chief Executive Officer and
a Director of Cephalon since that company's inception in 1987. Dr. Baldino
holds adjunct academic appointments, including Adjunct Professor of
Pharmacology at Temple University Medical School, Adjunct Professor of
Physiology and Biophysics and Adjunct Professor of Neurology at Hahnemann
University Hospital. He currently serves as a Director of ViroPharma, Inc.,
Pharmacopeia, Inc., The Jackson Laboratory and the Biotechnology Industry
Organization. Dr. Baldino received a Ph.D. in Pharmacology from Temple
University and a B.S. in Biology from Muhlenberg College.
Ellen M. Feeney. Ms. Feeney joined us as a Director in November 1994. Ms.
Feeney is a private investor who focuses on investments in the life sciences
area. From 1989 to 1999, she was a General Partner of Weiss, Peck & Greer
Venture Partners. Prior to that, she was a partner of Hambrecht & Quist Life
Science Ventures. She serves as a Director of several privately-held
companies. Ms. Feeney received a B.S. in Biology from Duke University and an
M.S. in Human Genetics from the University of California.
David M. Madden. Mr. Madden joined us as a Director in January 2000. He has
been a Managing Member of Pharmaceutical Partners, LLC, a private investment
management firm specializing in the acquisition of royalty interests in
pharmaceutical products, since 1997. From 1992 to 1995, Mr. Madden was
President, Chief Executive Officer and a Director of Selectide Corporation, a
development stage pharmaceutical company, that was acquired by Marion Merrill
Dow in 1995. Mr. Madden was a consultant to Marion Merrill Dow during part of
1995. Mr. Madden has a B.S. in Electrical Engineering from Union College and
an M.B.A. from Columbia University.
C. Christopher Moller, Ph.D. Dr. Moller joined us as a Director in February
1996. Dr. Moller has been a Managing Director of TL Ventures since 1995, and
its predecessor funds since 1990, where he works extensively with early-stage
life sciences and bioinformatic companies providing business, technical and
strategic consulting. Dr. Moller currently serves on the boards of Assurance
Medical, eMerge Interactive, Inc., Genomics Collaborative, OraPharma, Inc.,
and Who? Vision Systems, Inc. and several privately-held companies. Dr. Moller
has a B.A. in Chemistry from Pomona College and a Ph.D. in Immunology from the
University of Pennsylvania.
Claude H. Nash, Ph.D. Dr. Nash joined us as a Director in January 2000. He
has served as Chief Executive Officer, President and a Director of ViroPharma
Incorporated since that company's inception in 1994.
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<PAGE>
From 1983 to 1994, Dr. Nash served as Vice President, Infectious Disease and
Tumor Biology at Schecing-Plough Research Institute. Dr. Nash has a B.S. in
Biology and Chemistry from Lamar University, an M.S. in Microbiology and a
Ph.D. in Microbial Genetics and Biochemistry from Colorado State University.
Robert T. Nelsen. Mr. Nelsen has been a Director since our inception. Since
July 1994, he has served as a managing director of various venture capital
funds associated with ARCH Venture Partners, including ARCH Venture Fund II,
L.P., ARCH Venture Fund III, L.P. and ARCH Venture Fund IV, L.P. From April
1987 to July 1994, Mr. Nelsen was a Senior Manager at ARCH Development
Corporation, a company affiliated with the University of Chicago, where he was
responsible for new company formation. Mr. Nelsen serves on the board of
directors of Caliper Technologies Corp., a publicly held, lab-chip systems
developer and manufacturer, and several privately-held companies. He received
a B.S. in Biology and Economics from the University of Puget Sound and an
M.B.A. from the University of Chicago.
Composition of Board of Directors
Currently we have seven members on our Board of Directors. Each of our
directors was elected in accordance with provisions of our Certificate of
Incorporation. Ms. Feeney and Mr. Nelsen were nominated to our Board of
Directors by holders of our series A mandatorily redeemable convertible
preferred stock and Mr. Moller was nominated to our Board of Directors by
holders of our series B mandatorily redeemable convertible preferred stock.
Upon the closing of this offering the provisions of our Certificate of
Incorporation pursuant to which Ms. Feeney and Messrs. Nelsen and Moller were
elected will terminate.
Scientific Advisors
We have established relationships with leading scholars in the fields of
chemistry, molecular biology, pharmacology and preclinical development. Our
scientific advisors consult on matters relating to the development of the
products described elsewhere in this prospectus. Our scientific advisors are
reimbursed for their reasonable expenses and may also receive options to
purchase shares of our common stock. Our scientific advisors are:
<TABLE>
<CAPTION>
Advisor University Affiliation Professional Concentration
- ------- ---------------------- --------------------------
<S> <C> <C>
Thomas Burks, Ph.D. University of Texas Opioid Pharmacology
Jerry Collins, Ph.D. Yale University Pharmacology
Alan Cowan, Ph.D. Temple University Pharmacology
James Eisenach, M.D. Wake Forest University Pharmacology
Mary Jeanne Kreek, M.D. The Rockefeller University Molecular Neurobiology
Mark Wentland, Ph.D. Rennselaer Polytechnic Institute Chemistry
Tony Yaksh, Ph.D. University of California, San Diego Pharmacology
Lei Yu, Ph.D. University of Cincinnati Molecular Biology
Clinical Advisors
We have established relationships with leading scholars who consult on
matters relating to clinical trial design, marketing and regulatory issues.
Our clinical advisors are reimbursed for their reasonable expenses and may
also receive options to purchase shares of our common stock. Our clinical
advisors are:
<CAPTION>
Advisor University Affiliation Professional Concentration
- ------- ---------------------- --------------------------
<S> <C> <C>
James Eisenach, M.D. Wake Forest University Pain Management
Rosemarie Fisher, M.D. Yale University Gastroenterology
Thomas Garvey, M.D. George Washington University Clinical Trial Design/
FDA Requirements
Jerry Jaffe, M.D. University of Maryland Opioid Pharmacology/Addiction
Henrik Kehlet, M.D.,
Ph.D. Hvidovre University, Denmark Surgical Recovery/Outcome
Mary Jeanne Kreek, M.D. The Rockefeller University Gastroenterology
</TABLE>
44
<PAGE>
Committees Of The Board
The compensation committee reviews and makes recommendations to the Board
regarding the compensation to be provided to our Chief Executive Officer and
our directors. In addition, the compensation committee reviews compensation
arrangements for our other executive officers and administers our equity
compensation plans. The current members of the compensation committee are
Messrs. Baldino, Nash and Nelsen.
The audit committee reviews and monitors our corporate financial reporting,
external audits, internal control functions and compliance with laws and
regulations that could have a significant effect on our financial condition or
results of operations. In addition, the audit committee has the responsibility
to consider and recommend the appointment of, and to review fee arrangements
with, our independent auditors. The current members of the audit committee are
Ms. Feeney and Messrs. Madden and Moller.
Director Compensation And Other Arrangements
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. We also have
granted stock options to each member of our board of directors.
Compensation Committee Interlocks And Insider Participation
Mr. Nelsen, a member of the board of directors of ARCH Venture Partners, is
a member of our compensation committee. See "Certain Transactions" for a
description of transactions between ARCH Venture Fund III, L.P., an affiliate
of ARCH Venture Partners, and us.
Executive Compensation
The following table sets forth the total compensation earned by our chief
executive officer and each of our most highly compensated executive officers,
other than the chief executive officer, who earned more than $100,000 during
the fiscal year ended December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
---------------- ------------
Shares
Other Underlying
Name and Principal Position Salary Bonus Compensation(1) Options
- --------------------------- -------- ------- --------------- ------------
<S> <C> <C> <C> <C>
John J. Farrar.................. $211,319 $21,305 $7,210 122,779
President, Chief Executive
Officer and Director
Randall L. Carpenter............ 183,462 -- 25,723 31,219
Vice President, Clinical
Research & Development and
Regulatory Affairs
Deanne D. Garver................ 132,500 9,730 -- 25,895
Vice President, Preclinical
Development and Projects
Management
Alan L. Maycock................. 153,935 -- -- 64,153
Vice President, Exploratory
Research and Drug Discovery
Peter J. Schied................. 158,222 6,948 -- 52,007
Vice President, Chief Financial
Officer and Secretary
</TABLE>
- ---------------------
(1) Consists of life insurance premiums paid by us for Dr. Farrar and
temporary living expenses paid by us for Dr. Carpenter.
45
<PAGE>
Employment agreements
In October 1994, we entered into an at will employment agreement, an
employment agreement that permits us to terminate the employee at any time,
with Dr. Farrar in connection with which he purchased 503,644 shares of our
common stock for $1,150. Under the terms of the employment agreement, either
party can terminate the employment relationship at any time without any
continuing obligation. Dr. Farrar is eligible for an annual performance bonus
based on our attaining goals and objectives established by the Board of
Directors. We will use all reasonable good faith efforts to allow Dr. Farrar
the opportunity to maintain at least a 5% interest in the Company.
In January 1995, we entered into an at will employment agreement with Dr.
Maycock, in connection with which we granted him options to purchase 77,777
shares of our common stock at an exercise price of $.113 per share. Dr.
Maycock is eligible for an annual performance bonus based on our attaining
goals and objectives established by our Board of Directors. Under the terms of
the employment agreement, either party can terminate the employment
relationship at any time. Dr. Maycock is entitled to a $15,000 one-time
severance payment if we terminate his employment with us, subject to certain
qualifications with respect to the financial condition of Adolor.
In May 1997, we entered into an at will employment agreement with Mr.
Schied, in connection with which we granted him options to purchase 111,111
shares of our common stock at an exercise price of $.315 per share. We provide
Mr. Schied with term life insurance equal to two times his base salary. Under
the terms of the employment agreement, either party can terminate the
employment relationship at any time. If we terminate Mr. Schied pursuant to a
change of control or for any other reason other than just cause, we (or our
successor) are obligated to continue to pay Mr. Schied at his then current
base salary rate for six months following such termination. We may defer these
severance payments in certain circumstances.
The following table contains information concerning grants of stock options
to purchase shares of our common stock of each of the officers named in the
summary compensation table during the year ended December 31, 1999.
Option Grants During the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential Realizable
Percentage Value at Assumed Annual
Number of of Total Rates of Stock Price
Securities Options Exercise Appreciation for
Underlying Granted to Price Option Term
Options Employees (per Expiration ------------------------
Name Granted in 1999 Share) Date 5% 10%
- ---- ---------- ---------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
John J. Farrar.......... 106,666 24.50% $0.34 1/15/09 $2,222,120 $3,560,634
1,320 0.34 5/21/09 27,506 44,063
3,512 0.59 8/31/09 72,314 116,365
792 0.59 9/28/09 16,308 26,242
10,489 1.35 11/15/09 207,951 339,515
Randall L. Carpenter.... 16,666 6.24 $0.34 1/15/09 $ 347,288 $ 556,330
1,528 0.34 5/21/09 31,841 51,006
2,682 0.59 8/31/09 55,224 88,864
1,149 0.59 9/28/09 23,659 38,071
9,194 1.35 11/15/09 182,277 297,597
Deanne D. Garver........ 16,666 5.17 $0.34 1/15/09 $ 347,288 $ 556,330
764 0.34 5/21/09 15,920 25,503
6,640 0.59 7/27/09 136,722 220,007
1,468 0.59 8/31/09 30,227 48,640
357 0.59 9/28/09 7,351 11,829
Alan L. Maycock......... 8,295 12.81 $0.34 1/1/09 $ 172,852 $ 276,897
49,999 0.34 1/15/09 1,041,886 1,669,024
2,130 0.34 5/21/09 44,385 71,102
2,937 0.59 8/31/09 60,475 97,314
792 0.59 9/28/09 16,308 26,242
Peter J. Schied......... 38,888 10.39 $0.34 1/15/09 $ 810,353 $ 1,298,126
1,331 0.34 5/21/09 27,763 44,430
7,612 0.59 6/2/09 156,736 252,213
3,352 0.59 8/31/09 69,020 111,064
824 0.59 9/28/09 16,967 27,302
</TABLE>
46
<PAGE>
The following table contains information concerning stock options to
purchase common stock held as of December 31, 1999 by each of the officers
named in the summary compensation table who have stock options.
Year-End December 31, 1999 Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-The Money Options at
Shares End Fiscal Year-End
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. Farrar.......... 0 0 86,532 89,761 $1,098,520 $1,098,520
Randall L. Carpenter.... 0 0 28,142 69,743 $ 353,332 $1,128,760
Deanne D. Garver........ 0 0 28,780 52,669 $ 363,618 $ 876,981
Alan L. Maycock......... 0 0 99,367 42,036 $1,269,758 $ 666,652
Peter J. Schied......... 0 0 98,167 77,566 $1,242,526 $ 489,514
</TABLE>
On January 13, 2000, we granted stock options to purchase an aggregate of
592,164 shares of our common stock to certain of our employees. Drs. Farrar,
Carpenter, Garver and Maycock and Mr. Schied received options to purchase
213,333, 106,666, 33,333, 42,275, and 42,222 shares respectively. These
options have a weighted average exercise price of $2.03 per share, vest in
equal installments over four years, and expire on the tenth anniversary of the
date of grant.
Employee Benefit Plans
Amended and Restated 1994 Equity Compensation Plan
We adopted the Amended and Restated 1994 Equity Compensation Plan,
effective as of February 4, 2000. Under the plan, we are authorized to grant
options to eligible individuals for up to a total of 3,277,778 shares of our
common stock. The plan authorizes us to grant either options intended to
constitute incentive stock options under the Internal Revenue Code of 1986, as
amended, or non-qualified stock options. Under the plan, the committee or the
board of directors will determine the exercise price of each option granted,
provided that the minimum exercise price is equal to the fair market value of
the underlying stock on the date the option is granted. The maximum term of
any option will be ten years from the date of grant. Options granted will be
exercisable at the determination of the compensation committee of the Board of
Directors or the Board of Directors, and the options will vest according to
the vesting schedule which shall be determined by the Board or the
compensation committee. Within any one-year period, an employee may not
receive options to purchase more than 1,000,000 shares of our common stock.
Options to acquire 1,693,388 shares of our common stock were outstanding at
January 31, 2000, at a weighted average exercise price of $.92 per share.
Eligibility. Officers and other employees of ours, non-employee members of
the Board, and consultants are eligible to participate in the plan and receive
non-qualified stock options. Under the plan, only our officers and other
employees are eligible to receive incentive stock options.
Change in Control. The plan includes the following change in control
provisions which may result in the accelerated vesting of outstanding option
grants and stock issuances:
In a merger or consolidation, sale of all or substantially all assets, sale
of all or a majority of the outstanding stock, liquidation or dissolution or
any similar transactions, unless otherwise provided in an optionee's grant
letter, the vesting and exercisability of all options that are outstanding and
unexercised as of such change of control, to the extent unvested, and any
unvested shares held by an optionee will be accelerated such that all
outstanding options are fully vested and exercisable and all shares held by an
optionee are fully vested, and, if Adolor does not survive any such
transaction Adolor shall, if Adolor does not cash-out all outstanding options,
require the successor corporation to assume all outstanding options and to
substitute such options with awards involving the common stock of such
successor corporation on terms and conditions necessary to preserve the
47
<PAGE>
rights of optionees with respect to such options. The compensation committee
or the Board, in its sole discretion, may require the cancellation of all
outstanding vested options in exchange for a cash payment in an amount equal
to the excess, if any, of the fair market value of the common stock underlying
the unexercised portion of the option as of the date of the change of control
over the option price of such portion.
Federal Tax Consequences of Stock Options.
In general, neither the grant nor the exercise of an incentive stock option
will result in taxable income to an option holder or a deduction to us. To
receive special tax treatment as an incentive stock option under the Internal
Revenue Code as to shares acquired upon exercise of an incentive stock option,
an option holder must neither dispose of such shares within two years after
the incentive stock option is granted nor within one year after the exercise
of the option. In addition, the option holder must be an employee at all times
between the date of grant and the date three months, or one year in the case
of disability, before the exercise of the option. Special rules apply in the
case of the death of the option holder. Incentive stock option treatment under
the Internal Revenue Code generally allows the sale of our common stock
received upon the exercise of an incentive stock option to result in any gain
being treated as a capital gain to the option holder, but we will not be
entitled to a tax deduction. However, the exercise of an incentive stock
option, if the holding period rules described above are satisfied, will give
rise to income includable by the option holder in his or her alternative
minimum tax in an amount equal to the excess of the fair market value of the
stock acquired on the date of the exercise of the option over the exercise
price.
If the holding rules described above are not satisfied, gain recognized on
the disposition of the shares acquired upon the exercise of an incentive stock
option will be characterized as ordinary income. Such gain will be equal to
the difference between the exercise price and the fair market value of the
shares at the time of exercise. Special rules may apply to disqualifying
dispositions where the amount realized is less than the value at exercise. We
will generally be entitled to a deduction equal to the amount of such gain
included by an option holder as ordinary income. Any excess of the amount
realized upon such disposition over the fair market value at exercise will
generally be long-term or short-term capital gain depending on the holding
period involved. Notwithstanding the foregoing, in the event that the exercise
of the option is permitted other than by cash payment of the exercise price,
various special tax rules may apply.
No income will be recognized by an option holder at the time a non-
qualified stock option is granted. Generally, ordinary income will, however,
be recognized by an option holder at the time a vested non-qualified stock
option is exercised in an amount equal to the excess of the fair market value
of the underlying common stock on the exercise date over the exercise price.
We will generally be entitled to a deduction for federal income tax purposes
in the same amount as the amount included in ordinary income by the option
holder with respect to his or her non-qualified stock option. Gain or loss on
a subsequent sale or other disposition of the shares acquired upon the
exercise of a vested non-qualified stock option will be measured by the
difference between the amount realized on the disposition and the tax basis of
such shares, and will generally be long-term capital gain depending on the
holding period involved. The tax basis of the shares acquired upon the
exercise of any non-qualified stock option will be equal to the sum of the
exercise price of such non-qualified stock option and the amount included in
income with respect to such option. Notwithstanding the foregoing, in the
event that exercise of the option is permitted other than by cash payment of
the exercise price, various special tax rules apply.
Unless the holder of an unvested non-qualified stock option makes an 83(b)
election as described below, there generally will be no tax consequences as a
result of the exercise of an unvested option until the stock received upon
such exercise is no longer subject to a substantial risk of forfeiture or is
transferable. Generally, when the shares have vested, the holder will
recognize ordinary income, and we will be entitled to a deduction, equal to
the difference between the fair market value of the stock at such time and the
exercise price paid by the holder for the stock. Subsequently realized changes
in the value of the stock generally would be treated as long-term or short-
term capital gain or loss, depending on the length of time the shares were
held prior to disposition of such shares. In general terms, if a holder were
to make an 83(b) election under Section 83(b) of the Internal
48
<PAGE>
Revenue Code upon the exercise of the unvested option, the holder would
recognize ordinary income on the date of the exercise of such option, and we
would be entitled to a deduction, equal to:
. the fair market value of the stock received pursuant to such exercise as
though the stock were not subject to a substantial risk of forfeiture or
transferable, minus
. the exercise price paid for the stock.
If an 83(b) election were made, there would generally be no tax
consequences to the holder upon the vesting of the stock, and all subsequent
appreciation in the stock would generally be eligible for capital gains
treatment.
Additional special tax rules may apply to those option holders who are
subject to the rules set forth in Section 16 of the Securities Exchange Act of
1934. The foregoing tax discussion is a general description of certain
expected federal income tax results under current law, and all affected
individuals should consult their own advisors if they wish any further details
or have special questions.
Section 162(m). Section 162(m) of the Internal Revenue Code may preclude us
from claiming a federal income tax deduction if we pay total remuneration in
excess of $1 million to the chief executive officer or to any of the other
four most highly compensated officers in any one year. Total remuneration
would generally include amounts received upon the exercise of stock options
granted under the plan and the value of shares received when restricted shares
become transferable or such other time when income is recognized. An exception
does exist, however, for performance-based compensation which includes amounts
received upon the exercise of stock options pursuant to a plan approved by
stockholders that meets certain requirements. The Amended and Restated 1994
Equity Compensation Plan is intended to make grants of stock options and stock
appreciation rights that meet the requirements of performance-based
compensation. Other awards have been structured with the intent that such
awards may qualify as such performance based compensation if so determined by
the compensation committee.
49
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
- -------------------------------------------------------------------------------
In July 1999, we licensed worldwide rights (excluding South Korea and North
Korea) to the development and commercialization of our product candidate ADL
2-1294 to SB Pharmaco Puerto Rico Inc., an affiliate of SmithKline Beecham
plc, for the topical indications of dermal pain and itch. Under the license
agreement, we received a $500,000 up-front license fee. In the event that ADL
2-1294 meets specified regulatory approval requirements and is successfully
launched commercially in prescription and over-the-counter forms in each of
specified jurisdictions, we would be entitled to up to $38.5 million of
milestone payments, with the potential of additional milestone payments of up
to $6.0 million. In addition, we will receive royalties based on product
sales, if any. SB Pharmaco will be responsible for all development costs.
SB Pharmaco can terminate the agreement on a country by country basis, in
its entirety, or on a product by product basis if it determines that the
product is not marketable in a specified territory. Upon termination in this
circumstance, all of the rights granted to SB Pharmaco under the license
agreement in the relevant country or for the relevant product will terminate
and revert to us. In connection with the licensing of ADL 2-1294, S.R. One,
Limited, an affiliate of SmithKline Beecham purchased $2.5 million in series F
mandatorily redeemable Preferred Stock, was granted a warrant to purchase
shares of preferred stock convertible into an aggregate of 27,778 shares of
common stock for an aggregate exercise price of $125,000 and agreed to
purchase an additional $500,000 of our capital stock upon the achievement of
certain regulatory milestones.
In January 2000, we issued an aggregate of 12,306,000 shares of series G
mandatorily redeemable convertible preferred stock at a purchase price of
$1.00 per share, for aggregate consideration of $12,306,000. Of that amount,
we issued 250,000 shares to Technology Leaders II, L.P. Dr. Moller, one of our
directors, is the managing director of the general partner of the general
partner of Technology Leaders II, L.P. We also issued 2,500,000 shares to ARCH
Venture Fund III, L.P. Mr. Nelsen, a director of ours, is the general partner
of the general partner of the general partner of ARCH Venture Fund III, L.P.
We also issued 273,000 shares to WPG Enterprise Fund II, L.L.C. and 227,000
shares to Weiss, Peck & Greer Venture Associates III, L.L.C. Ms. Feeney, one
of our directors, nominated to our board by Weiss, Peck & Greer Venture
Partners III, the Fund Investment Advisory Member of WPG Enterprise Fund II,
L.L.C. and Weiss, Peck & Greer Venture Associates III, L.L.C., was a general
partner of Weiss, Peck & Greer Venture Partners, from 1989 to 1999. On the
closing of this offering, the series G preferred stock will automatically
convert into 2,734,656 shares of common stock.
We expect that in March 2000, some of our officers will exercise options to
purchase our common stock. Instead of paying us in cash, we expect the
officers to deliver promissory notes to us in the aggregate amount of
$940,500. The promissory notes will be full recourse and will be secured by
shares of our common stock. The following table sets forth the names of the
makers of the promissory notes, their relationship to us and the amounts we
expect will be owed to us by each of these makers.
<TABLE>
<CAPTION>
Amount of
Name of Maker Relationship to Adolor Corporation Promissory Note
- ------------- ---------------------------------------------------------------------- ---------------
<S> <C> <C>
John J. Farrar President, Chief Executive Officer and Director $432,000
Randall L. Carpenter Vice President, Clinical Research & Development and Regulatory Affairs 216,000
Deanne D. Garver Vice President, Preclinical Development and Projects Management 67,500
Alan L. Maycock Vice President, Exploratory Research and Drug Discovery 72,000
Gwen A. Melincoff Vice President, Business Development 67,500
Peter J. Schied Vice President, Chief Financial Officer and Secretary 85,500
</TABLE>
50
<PAGE>
PRINCIPAL STOCKHOLDERS
- -------------------------------------------------------------------------------
The following table sets forth certain information regarding beneficial
ownership of our common stock as of January 31, 2000, and as adjusted to
reflect the sale of shares offered hereby, and by:
. each person (or group of affiliated persons) who is known by us to own
more than five percent of the outstanding shares of our common stock,
. each of our directors and our executive officers named in the summary
compensation table and
. all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Unless otherwise noted, we believe that all
persons named in the table have sole voting and sole investment power with
respect to all shares beneficially owned by them. All figures include shares
of common stock issuable upon the exercise of options or warrants exercisable
within 60 days of January 31, 2000, which are deemed to be outstanding and to
be beneficially owned by the person holding those options or warrants for the
purpose of computing the percentage ownership of that person.
<TABLE>
<CAPTION>
Percent of Shares
Outstanding
--------------------
5% Beneficial Owners, Directors, Number of Shares Before the After the
Nominees for Director, Named Officers Beneficially Owned Offering Offering
- ------------------------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Robert T. Nelsen(1)................... 2,478,833 14.77% 10.88%
WPG Venture Partners III, L.P.(2)..... 2,449,730 14.59 10.75
Alta California Partners, L.P.(3)..... 2,423,306 14.45 10.64
Falcon Technology Partners, L.P.(4)... 2,050,262 12.22 9.00
Technology Leaders Management,
Inc.(5).............................. 1,727,509 10.30 7.59
Christopher Moller(6)................. 1,727,509 10.30 7.59
ARCH Venture Fund III, L.P.(7)........ 1,624,337 9.69 7.13
S.R. One, Limited(8).................. 1,533,067 9.13 6.73
One Liberty Partners III, L.P.(9)..... 961,639 5.72 4.21
ARCH Venture Fund II, L.P.(10)........ 841,269 5.01 3.69
John J. Farrar(11).................... 674,298 4.00 2.95
Alan L. Maycock(12)................... 244,205 1.45 1.07
Peter J. Schied(13)................... 109,080 * *
Randall L. Carpenter(14).............. 34,215 * *
Deanne D. Garver(15).................. 33,920 * *
Gwen A. Melincoff(16)................. 23,691 * *
Frank Baldino, Jr. ................... 22,222 * *
Ellen M. Feeney....................... 1,944 * *
David Madden.......................... 0 * *
Claude Nash........................... 0 * *
All directors and executive officers
as a group (12 persons).............. 5,430,602 31.42 23.32
</TABLE>
- ---------------------
* Less than 1%
(1) Includes (i) 814,629 shares and a warrant to purchase 13,227 shares
owned by ARCH Venture Fund II, L.P. and (ii) 1,624,337 shares owned by
ARCH Venture Fund III, L.P. Mr. Nelsen is the general partner of the
general partner of the general partner of ARCH Venture Fund III, L.P.
and a managing director of the general partner of ARCH Venture Fund II,
L.P. Mr. Nelsen disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest therein.
(2) Includes (i) 1,331,641 shares and a warrant to purchase 14,444 shares
owned by WPG Enterprise Fund II, LP; (ii) 1,065,180 shares and a warrant
to purchase 12,010 shares owned by Weiss, Peck & Greer Venture
Associates III, L.P.; and (iii) 26,455 shares owned by WPG LifeScience
Entrepreneur Fund. WPG Venture
51
<PAGE>
Partners III, L.P. is the Fund Investment Advisory Member of Weiss, Peck &
Greer Venture Associates III, L.P., WPG Enterprise Fund II, L.P. and WPG
LifeScience Entrepreneur Fund. The address for WPG Venture Partners III,
L.P. is 555 California Street, Suite 3130, San Francisco, CA 94104.
(3) Alta California Management Partners, L.P. is the General Partner of Alta
California Partners, L.P. The address of Alta California Management
Partners, L.P. is One Embarcadero Center, Suite 4050, San Francisco, CA
94111.
(4) Includes a warrant to purchase 13,227 shares. The address of Falcon
Technology Partners, L.P. is 600 Dorset Road, Devon, PA 19833. The
person who has investment control of these shares is James Rathman. Mr.
Rathman disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein.
(5) Includes (i) 956,374 shares owned by Technology Leaders II, L.P. and
(ii) 764,768 shares owned by Technology Leaders II Offshore C.V.
Technology Leaders Management, Inc. controls the general partner of each
of these entities. The address of Technology Leaders Management, Inc. is
435 Devon Park Drive, Building 700, Wayne, Pennsylvania 19087. The
people who have investment control of these shares are Robert Keith,
Gary Anderson, Mark DeNino, Christopher Moller and Robert Rabbio, each
of whom disclaims beneficial ownership except to the extent of their
pecuniary interest therein.
(6) Includes (i) 956,374 shares owned by Technology Leaders II, L.P. and
(ii) 764,768 shares owned by Technology Leaders II Offshore C.V. Mr.
Moller is a managing director of Technology Leaders Management, Inc.,
which controls the general partner of both Technology Leaders II, L.P.
and Technology Leaders II Offshore C.V. Mr. Moller disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein.
(7) The address of ARCH Venture Fund III, L.P. is 8725 West Higgens Rd.
Suite 290 Chicago, IL 60631. The people who have investment control of
these shares are Robert T. Nelsen, Steven Lazarus, Keith Krandall and
Clint Bybee, each of whom disclaims beneficial ownership except to the
extent of their pecuniary interest therein.
(8) Includes a warrant to purchase 27,777 shares. The address of S.R. One
Limited is 4 Tower Bridge, 200 Bar Harbor Drive, Suite 250, West
Conshohocken, PA 19428. The people who have investment control of these
shares are, Dr. Brenda Gavin, Donald Parman, Dr. Raymond Whitaker, Dr.
Barbara Dalton, William Mosher and Arlene Sothern, each of whom
disclaims beneficial ownership except to the extent of their pecuniary
interest therein.
(9) One Liberty Partners III, L.P. is the General Partner of One Liberty
Fund III, L.P. The address of One Liberty Ventures is 150 Cambridge Park
Drive, Cambridge, MA 02140. The people who have investment control of
these shares are, Edwin M. Kania, Jr. and Stephen J. Ricci, both of whom
disclaim beneficial ownership except to the extent of their pecuniary
interest therein.
(10) Includes a warrant to purchase 13,227 shares. The address of ARCH
Venture Fund II, L.P. is 8725 West Higgens Rd. Suite 290 Chicago, IL
60631. The people who have investment control of these shares are Robert
T. Nelsen, Steven Lazarus and Keith Krandall, each of whom disclaims
beneficial ownership except to the extent of their pecuniary interest
therein.
(11) Includes currently exercisable options to purchase 94,184 shares of
common stock.
(12) Includes currently exercisable options to purchase 103,402 shares of
common stock.
(13) Consists of currently exercisable options to purchase 109,080 shares of
common stock.
(14) Consists of currently exercisable options to purchase 34,215 shares of
common stock.
(15) Consists of currently exercisable options to purchase 33,920 shares of
common stock.
(16) Consists of currently exercisable options to purchase 23,691 shares of
common stock.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
- -------------------------------------------------------------------------------
General
The following summary assumes the amendment and restatement of our
certificate of incorporation and bylaws to read in their entirety as provided
in the forms of amended and restated certificate of incorporation and bylaws
filed as exhibits to the registration statement of which this prospectus forms
a part. It also reflects changes to our capital structure that will become
effective immediately prior to or upon the closing of this offering. Upon
completion of this offering, our authorized capital stock will consist of
99,000,000 shares of common stock, $0.0001 par value, and 1,000,000 shares of
undesignated preferred stock, $0.01 par value. The following description of
our capital stock does not purport to be complete and is subject to, and
qualified in it entirety by, our certificate of incorporation and bylaws,
which we have included as exhibits to the registration statement of which this
prospectus forms a part.
Common Stock
As of December 31, 1999, there were 1,172,236 shares of our common stock
outstanding. Upon completion of the offering, there will be 22,767,591 shares
of common stock outstanding.
The holders of our common stock are entitled to dividends as our board of
directors may declare from legally available funds, subject to the
preferential rights of the holders of our preferred stock. The holders of our
common stock are entitled to one vote per share on any matter to be voted upon
by stockholders. Our certificate of incorporation does not provide for
cumulative voting. No holder of our common stock will have any preemptive
right to subscribe for any shares of capital stock issued in the future.
Upon any voluntary or involuntary liquidation, dissolution, or winding up
of our affairs, the holders of our common stock are entitled to share ratably
in all assets remaining after payment of creditors and subject to prior
distribution rights of our preferred stock. All of the outstanding shares of
common stock are, and the shares offered by us will be, fully paid and non-
assessable.
Preferred Stock
As of the closing of this offering, no shares of our preferred stock will
be outstanding. Our certificate of incorporation provides that our board of
directors may by resolution establish one or more classes or series of
preferred stock having the number of shares and relative voting rights,
designation, dividend rates, liquidation, and other rights, preferences, and
limitations as may be fixed by them without further stockholder approval. The
holders of our preferred stock may be entitled to preferences over common
stockholders with respect to dividends, liquidation, dissolution, or our
winding up in such amounts as are established by our board of directors
resolutions issuing such shares.
The issuance of our preferred stock may have the effect of delaying,
deferring or preventing a change in control of us without further action by
the holders and may adversely affect voting and other rights of holders of our
common stock. In addition, issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire
a majority of the outstanding shares of voting stock. At present, we have no
plans to issue any shares of preferred stock.
Registration Rights
In conjunction with this offering the holders of substantially all of our
common stock and warrants exercisable for our common stock that had demand
rights agreed not to demand registration of their common stock until 180 days
after the effective date of this prospectus without the prior written consent
of Warburg Dillon
53
<PAGE>
Read LLC. After this 180-day period, these holders may, under certain
circumstances, require us to file a registration statement under the
Securities Act. We are required to use our best efforts to effect the
registration, subject to certain conditions and limitations. In addition, if
180 days after the date of this offering, we prepare to register any of our
securities under the Securities Act, for our own account or the account of our
other holders, we will send notice of this registration to holders of the
shares eligible for demand and piggy-back registration rights. Subject to
certain conditions and limitations, they may elect to register their eligible
shares. If we are able to file a registration statement on Form S-3, the
holders of shares eligible for demand rights may register their common stock
along with that registration. The expenses incurred in connection with such
registrations will be borne by us, except that we will pay expenses of only
one registration on Form S-3 at a holder's request per year.
Options
As of February 4, 2000, options to purchase a total of 1,693,388 shares of
common stock were outstanding at a weighted average exercise price of $.92.
Options to purchase a total of 1,020,356 shares of common stock are reserved
under the Amended and Restated 1994 Equity Compensation Plan. Please see
"Management--Employee benefit plans" and "Shares eligible for future sale."
Warrants
As of January 31, 1999, there were warrants outstanding to purchase 52,910
shares of series B convertible preferred stock and 27,778 shares of series F
convertible preferred stock. These warrants expire on the earlier of the
closing of an initial public offering or October 2000 and August 2004,
respectively.
Section 203 of the Delaware General Corporation Law; Certain Anti Takeover,
Limited Liability and Indemnification Provisions
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates acquisitions of Delaware corporations. In general, Section 203
prohibits a publicly-held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three years
following the date the person becomes an interested stockholder, unless:
. our board of directors approved the business combination or the
transaction in which the person became an interested stockholder prior to
the date the person attained this status;
. upon consummation of the transaction that resulted in the person becoming
an interested stockholder, the person owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to the date the person became an interested stockholder,
our board of directors approved the business combination and the
stockholders other than the interested stockholder authorized the
transaction at an annual or special meeting of stockholders.
Section 203 defines a "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. in general, any transaction that results in the issuance or transfer by
the corporation of any stock of the corporation to the interested
stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as any person
who, together with the person's affiliates and associates, owns, or within
three years prior to the determination of interested stockholder status did
own, 15% or more of a corporation's voting stock.
54
<PAGE>
No Stockholder Action by Written Consent; Special Meetings
Our certificate of incorporation provides that stockholder action can only
be taken at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. Our bylaws provide
that special meetings of stockholders may be called only by our Board of
Directors or our Chief Executive Officer. Our shareholders are not permitted
to call a special meeting of stockholders or to require that our Board of
Directors call a special meeting.
Number of Directors; Removal; Filling Vacancies
Our certificate of incorporation and bylaws provide that our Board of
Directors has the authority to determine the number of directors to constitute
the Board, and to fix their terms of office. Further, subject to the rights of
the holders of any series of our preferred stock, if any, our certificate of
incorporation and bylaws authorize our Board of Directors to elect additional
directors under specified circumstances and fill any vacancies that occur in
our Board of Directors by reason of death, resignation, removal, or otherwise.
A director so elected by our Board of Directors to fill a vacancy or a newly
created directorship holds office until the next election of the class for
which such director has been chosen and until his or her successor is elected
and qualified. Subject to the rights of the holders of any series of our
preferred stock, if any, our certificate of incorporation and bylaws also
provide that directors may be removed only for cause and only by the
affirmative vote of holders of a majority of the combined voting power of our
then outstanding stock. The effect of these provisions is to preclude a
stockholder from removing incumbent directors without cause and simultaneously
gaining control of our Board of Directors by filling the vacancies created by
such removal with its own nominees.
Indemnification
We have included in our certificate of incorporation and bylaws provisions
to (i) eliminate the personal liability of our directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by the
Delaware General Corporation Law and (ii) indemnify our directors and officers
to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law, including circumstances in which indemnification is otherwise
discretionary. We believe that these provisions are necessary to attract and
retain qualified persons as directors and officers.
By-laws
Our bylaws are subject to adoption, amendment, alteration, repeal, or
rescission either by our Board of Directors by a vote of a majority of all
directors in office, without the assent or vote of our stockholders, or by the
affirmative vote of the holders of a majority of the outstanding shares of
voting securities.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is StockTrans, Inc.
The Transfer Agent's address is 7 East Lancaster Avenue, Ardmore, PA 19003,
and its telephone number is (610) 649-7300.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
- -------------------------------------------------------------------------------
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could reduce prevailing market prices. Furthermore, since no shares
will be available for sale shortly after this offering because of contractual
and legal restrictions on resale as described below. Sales of substantial
amounts of our common stock in the public market after any restrictions on
sale lapse could adversely affect the prevailing market price of the common
stock and impair our ability to raise equity in the future.
Upon completion of this offering, we will have 22,767,591 outstanding
shares of common stock. Of these shares, the 6,000,000 shares sold in this
offering will be freely transferable without restriction or further
registration under the Securities Act, except for any shares purchased by an
affiliate of Adolor. The remaining 16,767,591 shares of common stock held by
existing stockholders are restricted securities. Restricted securities may be
sold in the public market only if registered or if they qualify for exemption
from registration described below under Rules 144, 144(k) or 701 promulgated
under the Securities Act.
As a result of contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, the restricted shares will be available for sale
in the public market as follows:
. 334,272 shares will be eligible for sale immediately following the
initial public offering;
. 240,517 shares will be eligible for sale beginning 90 days after the date
of the prospectus; and
. 13,458,146 shares will be eligible for sale upon the expiration of the
lock-up agreements, described below, beginning 180 days after the date of
this prospectus.
Lock-Up Agreements
All of our directors, officers, employees and the holders of substantially
all of our securities have entered into lock-up agreements in connection with
this offering. These lock-up agreements generally provide that these holders
will not offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of 180 days after
the date of this prospectus without the prior written consent of Warburg
Dillon Read LLC. Notwithstanding possible earlier eligibility for sale under
the provisions of Rules 144, 144(k) and 701, shares subject to lock-up
agreements may not be sold until these agreements expire or are waived by
Warburg Dillon Read LLC. Holders of approximately 15,836,387 shares of our
stock have entered into lock-up agreements.
Rule 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately 227,675 shares immediately after this
offering; and
. the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information
about us.
56
<PAGE>
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
Rule 701
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contract to resell such shares in reliance upon Rule 144,
but without compliance with certain restrictions. Rule 701 provides that
affiliates may sell their Rule 701 shares under Rule 144 90 days after
effectiveness without complying with the holding period requirement and that
non-affiliates may sell such shares in reliance on Rule 144 90 days after
effectiveness without complying with the holding period, public information,
volume limitation or notice requirements of Rule 144.
Registration Rights
Upon completion of this offering, the holders of 15,595,355 shares of
common stock, or their transferees, will be entitled to rights with respect to
the registration of their shares under the Securities Act. Registration of
their shares under the Securities Act would result in these shares becoming
freely tradeable without restriction under the Securities Act, except for
shares purchased by affiliates, immediately upon the effectiveness of such
registration.
Stock Options
We intend to file a registration statement under the Securities Act after
the effective date of this offering to register shares to be issued pursuant
to our employee and director benefit plans. As a result, any options or rights
exercised under the 1994 equity incentive plan will also be freely tradable in
the public market. However, shares held by affiliates will still be subject to
the volume limitation, manner of sale, notice and public information
requirements of Rule 144, unless otherwise resalable under Rule 701. As of
January 31, 2000, we had granted options to purchase shares of common stock
that had not been exercised. In addition, as of that date we had reserved
1,020,356 shares for possible future issuance under our Amended and Restated
1994 Equity Compensation Plan.
57
<PAGE>
UNDERWRITING
- -------------------------------------------------------------------------------
We have entered into an underwriting agreement with the underwriters named
below. Warburg Dillon Read LLC, FleetBoston Robertson Stephens Inc. and
Pacific Growth Equities, Inc. are acting as representatives of the
underwriters.
The underwriting agreement provides for the purchase of a specific number
of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below.
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
Warburg Dillon Read LLC.....................................
FleetBoston Robertson Stephens Inc..........................
Pacific Growth Equities, Inc................................
----
Total.....................................................
====
</TABLE>
This is a firm-commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other
than those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at that price less a
concession of $ per share. The underwriters may also allow to dealers, and
those dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the shares are released for sale to the public,
the representatives may change the offering price and other selling terms at
various times.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of 900,000 additional shares of
our common stock to cover over-allotments. If the underwriters exercise all or
part of this option, they will purchase shares covered by the option at the
public offering price that appears on the cover page of this prospectus, less
the underwriting discount. If this option is exercised in full, the
underwriters will purchase 6,900,000 shares from us, at the public offering
price and the total proceeds to us will be $ million. The underwriters have
severally agreed that, to the extent the over-allotment option is exercised,
each of the underwriters will purchase a number of additional shares
proportionate to its initial amount reflected in the above table.
The following table provides information regarding the amount of the
underwriting discounts and commissions to be paid to the underwriters by us:
<TABLE>
<CAPTION>
No Exercise of Over- Full Exercise of Over-
Allotment Option Allotment Option
-------------------- ----------------------
<S> <C> <C>
Per Share........................ $ $
Total............................ $ $
</TABLE>
We estimate that the total expenses of this offering, excluding the
underwriting discounts and commissions, will be approximately $ .
58
<PAGE>
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act.
We and our directors, executive officers, and substantially all of the
holders of our common stock and securities convertible into or exercisable or
exchangeable for common stock issued prior to this offering, have agreed
pursuant to certain "lock-up" agreements with the underwriters that we and
they will not offer, sell, contract to sell, pledge, grant any option to sell,
or otherwise dispose of, directly or indirectly, and shares of common stock or
securities convertible into or exercisable or exchangeable for common stock
for a period of 180 days after the date of this prospectus without the prior
written consent of Warburg Dillon Read LLC. Warburg Dillon Read LLC, in its
sole discretion, may release the shares subject to the lock-up agreements in
whole or in part at any time with or without notice. However, Warburg Dillon
Read LLC has no current plan to do so.
At our request, the underwriters have reserved for sale at the initial
public offering price up to shares of our common stock for our officers,
directors, employees, clients, friends and related persons who express an
interest in purchasing these shares. The number of shares of our common stock
available for sale to the general public will be reduced to the extent these
persons purchase these reserved shares. The underwriters will offer any shares
not so purchased by these persons to the general public on the same basis as
the other shares in this initial public offering.
Prior to his offering, there has been no public market for our common
stock. Consequently, the offering price for our common stock will be
determined by negotiations between us and the underwriters and will not
necessarily be related to our asset value, net worth or other established
criteria of value. The factors to be considered in these negotiations, in
addition to prevailing market conditions, are expected to include the history
of and prospects for the industry in which we compete, an assessment of our
management, our prospects, our capital structure and certain other factors as
were deemed relevant.
Rules of the Securities and Exchange Commission may limit the ability of
the underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
. Stabilizing transactions--The representatives may make bids for or
purchases of the shares for the purpose of pegging, fixing or maintaining
the price of the shares, so long as stabilizing bids do not exceed a
specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is
created in connection with this offering, the representatives may engage
in syndicate covering transactions by purchasing shares in the open
market. The representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option.
. Penalty bids--If the representatives purchase shares in the open market
in a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of these transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or
otherwise. If these transactions are commenced, they may be discontinued
without notice at any time.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the number of shares offered.
59
<PAGE>
LEGAL MATTERS
- -------------------------------------------------------------------------------
The validity of our common stock offered hereby will be passed upon for us
by Dechert Price & Rhoads, Philadelphia, Pennsylvania. Dechert Price & Rhoads
beneficially owns 44,444 shares of our common stock. Attorneys associated with
Dechert Price & Rhoads who provided legal advice in connection with this
offering beneficially own an aggregate of 12,073 shares of our common stock.
Certain legal matters in connection with the offering will be passed upon
for the underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
- -------------------------------------------------------------------------------
The financial statements of Adolor Corporation, a development stage
company, as of December 31, 1998 and 1999, and for each of the years in the
three-year period ended December 31, 1999 and for the period from August 9,
1993 (inception) to December 31, 1999, have been included herein in reliance
upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
- -------------------------------------------------------------------------------
We have filed with the Commission, Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act with respect to our common
stock offered hereby. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules to the
registration statement. For further information with respect to Adolor and our
common stock offered hereby, reference is made to the Registration Statement
and the exhibits and schedules filed as a part of the Registration Statement.
Statements contained in this prospectus concerning the contents of any
contract or any other document are not necessarily complete; reference is made
in each instance to the copy of such contract or any other document filed as
an exhibit to the registration statement. Each such statement is qualified in
all respects by such reference to such exhibit. The registration statement,
including exhibits and schedules thereto, may be inspected without charge at
the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048 after payment of fees prescribed by the
Commission. The Commission also maintains a World Wide Web site which provides
online access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Financial Statements:
Balance Sheets at December 31, 1998 and 1999............................ F-3
Statements of Operations for the years ended December 31, 1997, 1998 and
1999 and for the period from August 9, 1993 (inception) to December 31,
1999................................................................... F-4
Statements of Stockholders' Deficit for the period from August 9, 1993
(inception) to December 31, 1993 and for the years ended December 31,
1994, 1995, 1996, 1997, 1998 and 1999.................................. F-5
Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999 and for the period from August 9, 1993 (inception) to December 31,
1999................................................................... F-6
Notes to Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
When the transaction referred to in the second paragraph in Note 12 of the
Notes to Financial Statements has been consummated, we will be in a position
to render the following report.
KPMG LLP
Independent Auditors' Report
The Stockholders and Board of Directors
Adolor Corporation:
We have audited the accompanying balance sheets of Adolor Corporation (A
Development Stage Company) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' deficit and cash flows for each of the
years in the three-year period ended December 31, 1999 and for the period from
August 9, 1993 (inception) to December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 Adolor Corporation (A
Development Stage Company) as of December 31, 1998 and 1999, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1999 and for the period from August 9, 1993
(inception) to December 31, 1999, in conformity with generally accepted
accounting principles.
Princeton, New Jersey
January 28, 2000, except as to the third
through fifth paragraphs of
note 12 which are as of
February 4, 2000 and the second
paragraph which is as of
F-2
<PAGE>
Adolor Corporation
BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
Pro forma
December 31,
December 31 December 31 1999 (note
1998 1999 2)
----------- ----------- ------------
Assets (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 9,972,731 3,472,164 3,472,164
Short-term investments................ 2,073,322 1,791,531 1,791,531
Prepaid expenses and other current as-
sets................................. 122,709 190,893 190,893
----------- ----------- -----------
Total current assets................... 12,168,762 5,454,588 5,454,588
Equipment and leasehold improvements,
net.................................. 571,478 765,504 765,504
Other assets.......................... 32,920 38,298 38,298
----------- ----------- -----------
Total assets........................... $12,773,160 6,258,390 6,258,390
=========== =========== ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Notes payable--current portion........ $ 89,764 65,703 65,703
Accounts payable...................... 924,238 564,742 564,742
Accrued expenses...................... 1,131,242 1,729,119 1,729,119
Deferred licensing fees............... -- 26,316 26,316
----------- ----------- -----------
Total current liabilities.............. 2,145,244 2,385,880 2,385,880
Notes payable, less current portion... 65,703 -- --
Deferred licensing fees............... -- 462,719 462,719
----------- ----------- -----------
Total liabilities...................... 2,210,947 2,848,599 2,848,599
----------- ----------- -----------
Commitments
Mandatorily redeemable convertible pre-
ferred stock, at redemption value
(aggregate liquidation value of
$39,443,518 at December 31, 1999)
(converts into 12,780,000 common
shares on an unaudited pro forma basis
at December 31, 1999 upon consummation
of the offering contemplated herein):
Series A, $0.01 par value; 6,000,000
shares authorized, issued and
outstanding......................... 1,500,000 1,500,000 --
Series B, $0.01 par value; 23,107,145
shares authorized, 22,869,049 issued
and outstanding..................... 9,605,000 9,605,000 --
Series C, $0.01 par value; 13,814,286
shares authorized, issued and
outstanding......................... 9,670,000 9,670,000 --
Series D, $0.01 par value; 960,000
shares authorized, issued and
outstanding ........................ 1,200,000 1,200,000 --
Series E, $0.01 par value; 11,366,667
shares authorized, 11,333,334 and
11,366,667 shares issued and out-
standing at December 31, 1998 and
1999, respectively.................. 8,500,000 8,525,000 --
Series F, $0.01 par value, 2,625,000
shares authorized, none and
2,500,000 shares issued and out-
standing at December 31, 1998 and
1999, respectively.................. -- 2,500,000 --
----------- ----------- -----------
30,475,000 33,000,000 --
----------- ----------- -----------
Stockholders' deficit:
Common stock, par value $.0001 per
share. 21,338,849 shares authorized;
1,140,242 and 1,172,236 shares issued
and outstanding at December 31, 1998
and 1999, respectively (13,952,236
shares on an unaudited pro forma
basis at December 31, 1999 and upon
automatic conversion)................ 114 117 1,395
Additional paid-in capital............ 702,483 1,825,245 34,823,967
Deferred compensation................. (293,157) (961,882) (961,882)
Deficit accumulated during the devel-
opment stage......................... (20,322,227) (30,453,689) (30,453,689)
----------- ----------- -----------
Total stockholders' equity (deficit)... (19,912,787) (29,590,209) 3,409,791
----------- ----------- -----------
Total liabilities and stockholders'
deficit............................... $12,773,160 6,258,390 6,258,390
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Adolor Corporation
STATEMENTS OF OPERATIONS
Years ended December 31, 1998 and 1999, and for the period from August 9, 1993
(inception) to December 31, 1999
<TABLE>
<CAPTION>
Period from
August 9,
1993
Year ended December 31, (inception) to
------------------------------------- December 31,
1997 1998 1999 1999
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Grant and license
revenues............... $ -- 149,983 10,965 160,948
----------- ----------- ----------- -----------
Operating expenses
incurred during the
development stage:
Research and
development........... 3,699,720 7,074,011 7,178,468 23,857,942
General and
administrative........ 1,584,872 2,276,450 3,367,484 8,277,483
----------- ----------- ----------- -----------
Total operating
expenses............. 5,284,592 9,350,461 10,545,952 32,135,425
----------- ----------- ----------- -----------
Other income (expense):
Interest income........ 531,487 412,975 424,667 1,708,579
Interest expense....... (45,930) (28,028) (21,142) (187,791)
----------- ----------- ----------- -----------
485,557 384,947 403,525 1,520,788
----------- ----------- ----------- -----------
Net loss.............. (4,799,035) (8,815,531) (10,131,462) (30,453,689)
Undeclared dividends
attributable to
mandatorily redeemable
convertible preferred
stock.................. 1,407,666 1,704,022 2,429,884 6,443,518
----------- ----------- ----------- -----------
Net loss allocable to
common stockholders.. $(6,206,701) (10,519,553) (12,561,346) (36,897,207)
=========== =========== =========== ===========
Basic and diluted net
loss per share
allocable to common
stockholders (note 2).. $ (6.13) (9.54) (10.82)
=========== =========== ===========
Shares used in computing
basic and diluted net
loss per share
allocable to common
stockholders (note 2).. 1,012,984 1,103,230 1,160,634
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Adolor Corporation
STATEMENT OF STOCKHOLDERS' DEFICIT
For the period from August 9, 1993 (inception) to December 31, 1993
and for the years ended December 31, 1994, 1995, 1996, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Deficit
Common stock accumulated
---------------- Additional during the Total
Number of paid-in Deferred development stockholders'
shares Amount capital compensation stage deficit
--------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Inception, August 9,
1993................... -- $ -- -- -- -- --
Net income (loss)...... -- -- -- -- -- --
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1993................... -- -- -- -- -- --
Issuance of common
stock to founder in
November 1994 at $.001
per share............. 111,111 11 12,489 (12,400) -- 100
Issuance of restricted
stock to an officer
and consultant in
November 1994 at $.003
per share............. 606,012 61 68,151 (66,767) -- 1,445
Amortization of
deferred
compensation.......... -- -- -- 15,182 -- 15,182
Net loss............... -- -- -- -- (243,423) (243,423)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1994................... 717,123 72 80,640 (63,985) (243,423) (226,696)
Issuance of common
stock for technology
license agreements in
December 1995 at $.112
per share............. 55,556 5 6,245 -- -- 6,250
Value attributed to
issuance of warrants.. -- -- 60,000 -- -- 60,000
Amortization of
deferred
compensation.......... -- -- -- 16,692 -- 16,692
Exercise of common
stock options......... 5,460 1 615 -- -- 616
Net loss............... -- -- -- -- (2,392,480) (2,392,480)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1995................... 778,139 78 147,500 (47,293) (2,635,903) (2,535,618)
Issuance of restricted
stock to director in
May 1996 at $.189 per
share................. 22,222 2 4,198 -- -- 4,200
Deferred compensation
resulting from grant
of options............ -- -- 3,168 (3,168) -- --
Amortization of
deferred
compensation.......... -- -- -- 17,669 -- 17,669
Exercise of common
stock options......... 115,801 12 18,570 -- -- 18,582
Net loss............... -- -- -- -- (4,071,758) (4,071,758)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1996................... 916,162 92 173,436 (32,792) (6,707,661) (6,566,925)
Deferred compensation
resulting from grant
of options............ -- -- 270,720 (270,720) -- --
Amortization of
deferred
compensation.......... -- -- -- 82,249 -- 82,249
Exercise of common
stock options......... 113,066 11 19,427 -- -- 19,438
Net loss............... -- -- -- -- (4,799,035) (4,799,035)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1997................... 1,029,228 103 463,583 (221,263) (11,506,696) (11,264,273)
Deferred compensation
resulting from grant
of options............ -- -- 217,121 (217,121) -- --
Amortization of
deferred
compensation.......... -- -- -- 145,227 -- 145,227
Exercise of common
stock options......... 111,014 11 21,779 -- -- 21,790
Net loss............... -- -- -- -- (8,815,531) (8,815,531)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1998................... 1,140,242 114 702,483 (293,157) (20,322,227) (19,912,787)
Issuance of common
stock for services in
April 1999 at $3.362
per share............. 3,967 -- 13,339 -- -- 13,339
Deferred compensation
resulting from grant
of options............ -- -- 1,101,433 (1,101,433) -- --
Amortization of
deferred
compensation.......... -- -- -- 432,708 -- 432,708
Exercise of common
stock options......... 28,027 3 7,990 -- -- 7,993
Net loss............... -- -- -- -- (10,131,462) (10,131,462)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1999................... 1,172,236 $117 1,825,245 (961,882) (30,453,689) (29,590,209)
========= ==== ========= ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Adolor Corporation
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999, and for the
period from August 9, 1993 (inception) to December 31, 1999
<TABLE>
<CAPTION>
Period from
August 9 1993
Year ended December 31, (inception) to
------------------------------------ December 31,
1997 1998 1999 1999
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Net cash flows from
operating activities:
Net loss.................. $(4,799,035) (8,815,531) (10,131,462) (30,453,689)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Non-cash compensation
expense................. 82,249 145,227 446,047 723,066
Non-cash warrant value... -- -- -- 60,000
Depreciation and
amortization expense.... 143,898 202,346 254,283 701,775
Issuance of common stock
for technology license
agreements.............. -- -- -- 6,250
Changes in assets and
liabilities:
Prepaid expenses and
other current assets... 40,934 60,590 (68,184) (190,893)
Other assets............ (4,562) -- (5,378) (38,298)
Accounts payable........ 225,541 378,608 (359,496) 564,742
Accrued expenses........ 120,494 579,302 597,877 1,729,119
Deferred licensing
fees................... -- -- 489,035 489,035
----------- ---------- ----------- -----------
Net cash used in
operating activities.... (4,190,481) (7,449,458) (8,777,278) (26,408,893)
----------- ---------- ----------- -----------
Net cash flows from
investing activities:
Purchases of equipment
and leasehold
improvements............ (312,417) (191,357) (448,309) (1,467,279)
Purchases of short-term
investments............. (10,338,476) (3,045,281) (2,221,062) (22,535,287)
Maturities of short-term
investments............. 8,887,795 5,892,160 2,502,853 20,743,756
----------- ---------- ----------- -----------
Net cash provided by
(used in) investing
activities............. (1,763,098) 2,655,522 (166,518) (3,258,810)
----------- ---------- ----------- -----------
Net cash flows from
financing activities:
Proceeds from issuance of
mandatorily redeemable
convertible preferred
stock................... 9,670,000 9,100,000 2,525,000 31,400,000
Proceeds from Series D
mandatorily redeemable
convertible preferred
stock subscription...... 600,000 -- -- 600,000
Proceeds from issuance of
restricted common stock
and exercise of common
stock options........... 19,438 21,790 7,993 74,164
Proceeds from notes
payable--related
parties................. -- -- -- 1,000,000
Proceeds from notes
payable................. -- -- -- 444,985
Payment of notes
payable................. (135,062) (144,464) (89,764) (379,282)
Obligation under capital
lease................... (13,017) -- -- --
----------- ---------- ----------- -----------
Net cash provided by
financing activities... 10,141,359 8,977,326 2,443,229 33,139,867
----------- ---------- ----------- -----------
Net increase (decrease) in
cash and cash
equivalents.............. 4,187,780 4,183,390 (6,500,567) 3,472,164
Cash and cash equivalents
at beginning of period... 1,601,561 5,789,341 9,972,731 --
----------- ---------- ----------- -----------
Cash and cash equivalents
at end of period......... $ 5,789,341 9,972,731 3,472,164 3,472,164
=========== ========== =========== ===========
Supplemental disclosure of
cash flow information:
Cash paid for interest... $ 45,930 28,028 21,142 97,916
=========== ========== =========== ===========
Supplemental disclosure of
noncash financing
activities:
Deferred compensation
from issuance of common
stock, restricted common
stock and common stock
options................. $ 270,720 217,121 1,101,433 1,671,609
Issuance of common stock
for technology license
agreements or for
services................ -- -- 13,339 19,589
Conversion of stock
subscription to Series D
mandatorily redeemable
preferred stock......... -- 600,000 -- 600,000
Conversion of bridge
financing, including
accrued interest, to
Series B mandatorily
redeemable preferred
stock................... -- -- -- 1,019,787
=========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. ORGANIZATION AND BUSINESS ACTIVITIES
Adolor Corporation (the Company) was incorporated in the State of Delaware
on August 9, 1993 (inception). The Company is a development stage
pharmaceutical company engaged in the development of peripheral and central
analgesics based on opiate receptors and opiate-like receptors. The Company
commenced operations on November 7, 1994. The Company is currently devoting
substantially all of its efforts toward conducting pharmaceutical discovery
and development, licensing technology, obtaining regulatory approval for
products under development, negotiating strategic corporate relationships,
recruiting personnel and raising capital.
The accompanying financial statements include the results of operations of
the Company for the period from August 9, 1993 (inception) to December 31,
1999.
The Company has licensed its core technology from certain universities and
research institutions in exchange for present and future cash payments and, in
certain instances, common stock. The cost of obtaining such technology has
been charged as incurred, to research and development expense in the
accompanying statements of operations because the core technology which was
licensed had not reached technological feasibility and had no alternative
future uses.
The Company has not generated any product sales revenues and has not yet
achieved profitable operations. There is no assurance that profitable
operations, if ever achieved, could be sustained on a continuing basis. In
addition, development activities and clinical and pre-clinical testing and
commercialization of the Company's proprietary technology will require
significant additional financing. The Company's deficit accumulated during the
development stage through December 31, 1999, aggregated $30,453,689, and the
Company's management expects to incur substantial and increasing losses in
future periods. Further, the Company's future operations are dependent on the
success of the Company's research, development and licensing efforts and,
ultimately, upon regulatory approval and market acceptance of the Company's
proposed future products.
The Company plans to finance its future operations with a combination of
license payments and payments from strategic research and development and
marketing arrangements, private placements of equity, the initial public
offering contemplated herein (Offering), follow-on public offerings and
revenues from future product sales, if any. The Company has not generated
positive cash flows from operations, and there are no assurances that the
Company will be successful in obtaining an adequate level of financing for the
long-term development and commercialization of its planned products. As
described in note 12, in January 2000, the Company received approximately
$12,306,000 in net proceeds from the sale of its Series G mandatorily
redeemable convertible preferred stock (Series G). The Company believes that
its current financial resources and sources of liquidity are adequate to fund
operations for the next year based on a level of research and development and
administrative activities necessary to achieve its short-term objectives.
2. BASIS OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
cash and cash equivalents are held in United States financial institutions or
obligations of the United States Treasury. The carrying amount of cash and
cash equivalents approximates its fair value due to its short-term nature.
F-7
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
Short-Term Investments
Short-term investments consist primarily of debt securities backed by the
U.S. government with original maturities greater than three months but less
than one year. The Company's entire short-term investment portfolio is
currently classified as available for sale and is recorded at the fair value
as determined by quoted market values, which approximates cost.
Concentration of Credit Risk
The Company invests its excess cash and short-term investments in
accordance with a policy objective that seeks to ensure both liquidity and
safety of principal. The policy limits investments to certain types of
instruments issued by the U.S. government and institutions with strong
investment grade credit ratings and places restrictions on their terms and
concentrations by type and issuer.
Equipment and Leasehold Improvements
Equipment, consisting of computer, office and laboratory equipment,
furniture and fixtures and leasehold improvements, are recorded at cost.
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the assets or lease term, whichever is shorter,
generally three to seven years. Expenditures for repairs and maintenance are
expensed as incurred.
Revenue Recognition
Contract revenues are earned and recognized according to the provisions of
each agreement. Contract milestone payments are recognized as revenues upon
the completion of the milestone event or requirement and when the Company's
significant performance obligations have been satisfactorily completed.
Payments, if any, received in advance of performance under a contract are
deferred and recognized as revenue when earned. Up-front licensing fees are
deferred and amortized over the estimated performance period.
Research and Development
Research and product development costs are expensed as incurred. Costs
incurred under research agreements with third parties are expensed as incurred
and in accordance with the specific contractual performance terms of such
research agreements.
Accounting for Income Taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits which are not expected to be
realized. The effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in the period that such tax rate changes are
enacted.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation
The Company accounts for share option issuances to employees and members of
the Board of Directors in accordance with the provisions of APB No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. As
such, deferred compensation is recorded to the extent that the current
estimated fair value of the underlying stock exceeds the exercise price of the
options on the date of grant. Such deferred compensation is amortized over the
respective vesting periods of such option grants. The Company has adopted the
disclosure requirements of SFAS No. 123 "Accounting for Stock-Based
Compensation" which allows entities to continue to apply the provisions of APB
No. 25 for financial reporting purposes and provide pro forma net loss and net
loss per share footnote disclosures for employee stock option grants as if the
minimum value method defined in SFAS No. 123 has been applied. Transactions
with nonemployees, in which goods or services are the consideration received
for the issuance of equity instruments, are accounted for on a fair- value
basis in accordance with SFAS No. 123.
Segment Information
The Company is managed and operated as one business. The entire business is
managed by a single management team that reports to the chief executive
officer. The Company does not operate separate lines of business or separate
business entities with respect to any of its product candidates. Accordingly,
the Company does not prepare discrete financial information with respect to
separate product areas or by location and does not have separately reportable
segments as defined by SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
Net Loss per Share
Net loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share", by dividing the net loss allocable to common stockholders by the
weighted average number of shares of common stock outstanding. Net loss
allocable to common stockholders is calculated as the net loss plus preferred
dividends accrued for the respective period, whether or not declared. As of
December 31, 1999, the Company has certain options, warrants and mandatorily
redeemable convertible preferred stock (see notes 6 and 7), which have not
been used in the calculation of diluted net loss per share because to do so
would be anti-dilutive. As such, the numerator and the denominator used in
computing both basic and diluted net loss per share allocable to common
stockholders are equal.
Pro Forma Net Loss per Share (Unaudited)
The following pro forma basic and diluted net loss per share allocable to
common stockholders and shares used in computing pro forma basic and diluted
net loss per share allocable to common stockholders have been presented
reflecting the assumed exercise of warrants for Series B and F mandatorily
redeemable convertible preferred stock (Series B and F) which will expire upon
the closing of the Offering and the automatic conversion into shares of common
stock of the mandatorily redeemable convertible preferred stock upon
completion of the Offering (see notes 6 and 12), using the if converted method
from their respective dates of issuance:
<TABLE>
<CAPTION>
Year ended
December 31,
1999
------------
<S> <C>
Pro forma basic and diluted net loss per share allocable to
common stockholders............................................ $ (.74)
Shares used in computing pro forma basic and diluted net loss
per share allocable to common stockholders..................... 13,621,994
</TABLE>
F-9
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
Pro Forma Balance Sheet (Unaudited)
Upon the closing of the Offering, all of the outstanding shares of
mandatorily redeemable convertible preferred stock outstanding at December 31,
1999 automatically convert into 12,780,000 shares of common stock (see notes 6
and 12). The December 31, 1999 unaudited pro forma balance sheet has been
prepared assuming the automatic conversion of the mandatorily redeemable
convertible preferred stock outstanding as of December 31, 1999 into common
stock as of December 31, 1999.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1999
--------- ---------
<S> <C> <C>
Laboratory, computer and office equipment................... $ 821,175 1,244,665
Furniture, fixtures and leasehold improvements.............. 197,795 222,614
--------- ---------
1,018,970 1,467,279
Less accumulated depreciation and amortization.............. 447,492 701,775
--------- ---------
$ 571,478 765,504
========= =========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1999
---------- ---------
<S> <C> <C>
Consulting and contracted research......................... $ 875,814 1,443,774
Professional fees.......................................... 35,615 270,727
Payroll and related costs.................................. 56,020 31,475
Other...................................................... 163,793 23,351
---------- ---------
$1,131,242 1,769,327
========== =========
</TABLE>
5. NOTES PAYABLE
In 1995, the Company entered into an "emerging company" funding agreement
with the Ben Franklin Technology Center of Southeastern Pennsylvania (the
Center) to provide the Company with up to $50,000 in funding for research and
development through November 30, 1996. At December 31, 1997 outstanding
borrowings under the facility aggregated $45,000; this balance was repaid in
1998.
In October 1996, the Company executed a secured equipment loan agreement to
finance the purchase of computers, software, laboratory and office equipment,
and furniture. At December 31, 1998 and 1999, the Company had loan draws
totaling $155,467 and $65,703 outstanding under this agreement, respectively.
The loans are secured by the equipment financed at interest rates ranging from
13.55% to 19.13%. The remaining balance of $65,703 at December 31, 1999 is due
in 2000.
6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company issued 6,000,000 shares of its Series A mandatorily redeemable
convertible preferred stock (Series A) in November 1994 at a price of $.25 per
share. Total proceeds to the Company were $1,500,000.
In October 1995, the Company issued convertible promissory notes in the
principal amount of $1,000,000 to the Series A stockholders (Bridge Note).
These notes accrued interest at 5.75% per annum. Principal plus
F-10
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
accrued interest on the Bridge Note totaling $1,019,787 were converted into
2,428,063 shares of Series B at a price of $.42 per share in March 1996.
In conjunction with the Bridge Note, the Company issued warrants to
purchase 238,096 shares of Series B at the fair value of the Series B at the
date of issuance ($.42 per share). These warrants are exercisable until the
earlier of the closing of an initial public offering or October 2000. The
deemed fair value for financial reporting purposes of such warrants at their
issuance date aggregated $60,000, which amount was charged to interest expense
in 1995.
In March 1996, the Company issued 20,440,986 shares of its Series B at a
price of $.42 per share. Series B purchasers included the holders of the
Series A, certain officers of the Company and other investors.
In May 1997, the Company sold 13,814,286 shares of its Series C mandatorily
redeemable preferred stock (Series C) at a price of $.70 per share. The total
proceeds received by the Company was $9,670,000.
In November 1997, the Company entered into a certain license agreement (see
note 8) and a stock purchase agreement with Kwang Dong Pharmaceutical Co.
(Kwang Dong). Pursuant to the stock purchase agreement, the Company agreed to
issue to Kwang Dong 960,000 shares of the Company's Series D mandatorily
redeemable convertible preferred stock (Series D) for $1,200,000. As of
December 31, 1997, the Company had received $600,000. In February 1998, the
Company received the additional $600,000 from Kwang Dong and issued the
960,000 shares of Series D.
In December 1998, the Company sold 11,333,334 shares of its Series E
mandatorily redeemable convertible preferred stock (Series E) at a price of
$.75 per share. The total proceeds received by the Company was $8,500,000. An
additional 33,333 shares of Series E was sold in January 1999 for $25,000.
In July 1999, the Company entered into a license agreement (see note 8) and
a stock purchase agreement with an affiliate of SmithKline Beecham (SB).
Pursuant to the stock purchase agreement, the Company sold 2,500,000 shares of
its Series F at a price of $1.00 per share to SB. The total proceeds received
by the Company was $2,500,000. In connection with Series F, the Company
granted a warrant to purchase 125,000 shares of Series F at $1.00 per share at
any time prior to the earlier of the closing of an initial public offering or
August 2004. SB will purchase an additional $500,000 of either common stock
subsequent to an initial public offering of the Company's common stock or
preferred stock prior to an initial public offering of the Company's common
stock, upon the successful completion of the second pivotal clinical trial for
the first prescription or over-the-counter product candidate under the license
agreement that the Company has entered into with SB. If the purchase occurs
prior to an initial public offering of the Company's common stock, the
purchase price of the preferred stock will be the fair market value of the
Company's preferred stock at the date of purchase as determined by the
Company's Board of Directors. If the purchase occurs subsequent to an initial
public offering of the Company's common stock, the purchase price of the
common stock will be the fair value of the Company's common stock as listed on
the principal national securities exchange on which the common stock is then
listed.
The holders of Series A, B, C, D, E and F vote together with all other
classes and series of stock of the Company as a single class on all actions to
be taken by the stockholders of the Company. Each share of preferred stock
entitles the holder to an equal number of votes as the number of common shares
into which each share of preferred stock is convertible.
The holders of Series A, B, C, D, E and F are entitled to a liquidation
preference over all other types of capital stock, of $.25 per share, $.42 per
share, $.70 per share, $1.25 per share, $.75 per share, and $1.00 per share,
respectively, plus for the Series A, B, C, E and F, an amount equal to all
cumulative accrued and unpaid dividends thereon, whether or not declared, and
in the case of the Series A, B, C, D, E and F, plus an amount equal to all
dividends declared but unpaid. Such cumulative dividends totaled $6,443,518
for the Series A, B, C,
F-11
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
E and F at December 31, 1999. Each share of Series A, B, C, D, E and F is
convertible into common stock at a conversion ratio of 4.5-for-1 (subsequent
to the reverse split--see note 12), subject to certain anti-dilutive
adjustments, as defined. Further, such conversion becomes mandatory effective
upon to the closing of an initial public offering for the sale of the
Company's common stock with aggregate gross proceeds of at least $7,000,000
for the Series D and with aggregate gross proceeds of at least $25,000,000 and
a public offering price per share of at least $1.50 for the Series A, B, C, E
and F.
Commencing March 1, 2001, the holders of 60% of the Series A, B, C and E
then outstanding, taken as a whole, commencing March 1, 2005, the holders of
60% of the Series D then outstanding and commencing on August 1, 2002, the
holders of 60% of the Series F then outstanding, may require the Company to
redeem all or any part of the then outstanding Series A, B, C, D, E and F of
these respective holders at a redemption price equal to $.25 per share, $.42
per share, $.70 per share, $1.25 per share, $.75 per share and $1.00 per
share, respectively, plus an amount equal to all declared but unpaid
dividends.
The holders of Series A, B, C, E and F are entitled to cumulative dividends
at an annual rate of 8% of the original purchase price per share on the date
of issuance, if and when declared. The Series D are entitled to cumulative
dividends at the same rate and at the same time as dividends are declared and
paid on the common stock. No dividends or other distributions can be declared
or paid on other types of capital stock until all dividends on the Series A,
B, C, E and F have been paid. As of December 31, 1999 no such dividends have
been declared.
7. COMMON STOCK AND COMMON STOCK OPTIONS
In November 1994 (commencement of operations), the Company issued 111,111
shares of common stock to an investor at a price of $.001 per share. The
difference between the deemed fair value for financial reporting purposes of
such stock and the price paid at the issuance date aggregated $12,400, which
amount was charged to operations in 1994.
In November 1994, the Company issued 503,644 shares of restricted common
stock to an executive officer of the Company at a price of $.003 per share and
102,368 shares of restricted common stock to a scientific consultant at a
price of $.003 per share. These shares vested ratably over 48 months. The
difference between the deemed fair value for financial reporting purposes of
such stock and the per share price paid at the issuance date aggregated
$66,767 which amount was recorded as deferred compensation and was amortized
to operations over the vesting period. Compensation expense related to these
shares aggregated $16,692 in 1997, $13,910 in 1998 and none in 1999. In
addition, in May 1996, the Company issued 22,222 shares of restricted common
stock to a director for cash at a price of $.189 per share (the deemed fair
value at date of grant as determined by the Board of Directors). These shares
vest ratably over 48 months, and are subject to the Company's right of
repurchase of unvested shares in certain circumstances.
The Company's 1994 Equity Compensation Plan, as amended, (the 1994 Plan)
allows the granting of incentive and nonqualified stock options to employees,
directors, consultants and contractors to purchase an aggregate of 1,722,222
shares of the Company's common stock. The stock options are to be granted with
exercise prices at not less than fair value of the Company's common stock at
the time of grant, as determined by the Board of Directors. The options are
exercisable generally for a period of 6-7 years from the date of grant and
vest over terms ranging from immediately to 4 years.
F-12
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
A summary of activity under the 1994 Plan from January 1, 1997 to December
31, 1999 is as follows:
<TABLE>
<CAPTION>
Exercise
Number price
of options per share
---------- ----------
<S> <C> <C>
Balance, January 1, 1997................................ 607,832 $.113-.189
Granted................................................ 268,975 .189-.45
Exercised.............................................. (113,065) .113-.315
Cancelled.............................................. (4,026) .113-.189
---------
Balance, December 31, 1997.............................. 759,716 .113-.45
Granted................................................ 232,929 .315-.315
Exercised.............................................. (111,014) .113-.315
Cancelled.............................................. (72,238) .113-.315
---------
Balance, December 31, 1998.............................. 809,393 .113-.45
Granted................................................ 555,271 .338-1.35
Exercised.............................................. (28,027) .113-.338
Cancelled.............................................. (55,847) .189-.338
---------
Balance, December 31, 1999.............................. 1,280,790 .113-1.35
=========
</TABLE>
At December 31, 1999, the Plan had the following options outstanding and
exercisable by price range, as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted Weighted Weighted
average average average
Range of Number of remaining exercise price Number exercise price
exrciseeprices shares contractual life (per share) of shares per share
- --------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.113- .189 404,957 2.6 years $0.14 404,557 $0.14
$ .315- .338 789,329 5.7 years 0.32 297,197 0.32
$ .45- .585 44,821 6.5 years 0.58 34,929 0.58
$ .675-1.35 31,683 6.5 years 1.21 5,388 1.33
--------- -------
1,280,790 $0.30 742,071 $0.24
========= =======
</TABLE>
The Company applies APB No. 25 in accounting for its stock option plan. In
1997, 1998 and 1999, certain employees of the Company were granted options to
acquire 262,976, 223,596 and 500,641 shares of the Company's common stock,
respectively. The differences between the deemed fair value for financial
reporting purposes, as determined by the Board of Directors, and the
respective exercise prices at the grant dates has been recorded as deferred
compensation ($263,694, $205,651 and $771,524 for 1997, 1998 and 1999,
respectively) which is being amortized to expense over the vesting period of
the options.
Had the Company determined compensation cost for options granted during
1997, 1998 and 1999 based on the minimum value method at the grant date under
SFAS No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
Net loss:
As reported........................... $(4,799,035) (8,815,531) (10,131,462)
Pro forma under SFAS No. 123.......... $(4,806,114) (8,823,446) (10,145,518)
Basic and diluted net loss per share
allocable to common stockholders:
As reported........................... $ (4.74) (7.99) (8.73)
Pro forma under SFAS No. 123.......... $ (4.75) (8.00) (8.74)
</TABLE>
F-13
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
Pro forma net loss reflects only options granted since 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net loss amounts presented above because
compensation expense is recorded under SFAS 123 over the respective vesting
period of such options, and options granted by the Company prior to January 1,
1995 are not reflected in the pro forma net loss figures above.
In April 1995 and December 1995, the Company issued 19,444 shares and
36,111 shares of common stock to a research institution and a researcher,
respectively, as compensation for certain technology license agreements.
Research and development expense of $6,250 was recognized in 1995 related to
the issuance of these shares. In 1997, 1998 and 1999, the Company issued
6,000, 9,333 and 54,630 stock options, respectively, to non-employees. Such
options vest over future service periods. The Company recorded deferred
compensation of $7,026, $11,470 and $329,909 in 1997, 1998 and 1999,
respectively, based on the fair value as determined using a Black-Scholes
pricing model. Such deferred compensation is being amortized to expense over
the vesting period. The amount of amortization for the 1998 and 1999 grants is
subject to change each reporting period based upon changes in the deemed fair
value of the Company's common stock, estimated volatility and the risk free
interest rate until the non-employee completes his or her performance under
the option agreement.
All options were granted with exercise prices less than the deemed fair
value for financial reporting purposes of the Company's common stock. The per
share weighted-average minimum value of the stock options granted to employees
during 1997, 1998 and 1999 was $1.04, $1.30 and $1.70 per share, respectively,
on the date of grant. The per share weighted-average fair value of stock
options granted to non-employees during 1997, 1998 and 1999 was $1.13, $1.23
and $6.10 per share, respectively, on the date of grant. Such values were
determined using the minimum value method for employees and a Black Scholes
option-pricing model for non-employees with the following weighted average
assumptions: expected dividend yield 0%; risk free interest rate of 6.10% for
1997, 4.465% for 1998 and 5.49% for 1999; volatility of 0% for employees and
60% for non-employees; an expected option life of 4 years for employees and 10
years for non-employees.
8. LICENSE AND RESEARCH AGREEMENTS
On June 22, 1995, the Company and the University of California at San Diego
(UCSD) entered into an exclusive, worldwide license for certain technology
rights covered under UCSD patents. The Company paid a $10,000 license fee, and
committed to a $10,000 annual license maintenance fee. The Company also agreed
to bear UCSD's prosecution costs for patents covering the licensed technology.
Payments of $50,000 and $150,000 are payable upon commencement of Phase III
clinical trials and NDA filing, respectively, and the agreement provides for
royalties at various rates on sales proceeds of products resulting from the
licensed technology, if any.
In November 1997, the Company entered into a license agreement with Kwang
Dong which granted them the rights in Korea to develop and market one of the
Company's compounds for certain indications. Under the terms of the agreement,
the Company will receive payments upon the achievement of defined clinical and
regulatory milestones of up to an aggregate of $800,000, and royalties on any
future sales proceeds in Korea, if any, resulting from the licensed
technology. The Company will supply formulated bulk drug, including certain
free amounts during the first year of sales, and Kwang Dong will be
responsible for clinical development and regulatory approvals in Korea. Kwang
Dong also made an equity investment in the Company (see note 6).
On June 10, 1998, the Company entered into an exclusive, world-wide license
agreement with Roberts Laboratories Inc. (Roberts) for technology relating to
compound ADL 8-2698. Upon signing the agreement the Company made a $300,000
nonrefundable payment to Roberts which was recorded as research and
development expense because the licensed technology had not reached
technological feasibility and had no alternative future
F-14
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
uses. The Company will also be required to make payments totalling up to
$2,200,000 upon the occurrence of future events. In addition, royalties are
payable from the sale proceeds of products resulting from the licensed
technology, if any. In 1999, the Company paid $300,000 to Roberts to exercise
certain licensing rights as defined in the agreement, which was recorded as
research and development expense.
On July 26, 1999, the Company entered into a license agreement with SB
granting SB an exclusive license to certain of the Company's compounds for
certain indications in most of the world. SB may develop, at their own cost,
manufacture, market and sell any resulting products. Under the terms of the
agreement, the Company will receive milestone payments upon the achievement of
defined clinical and regulatory milestones, and royalties on any future sales
proceeds, if any, resulting from the licensed technology. The Company must
maintain the underlying patents and provide certain other information to SB.
Upon signing the agreement, the Company received a licensing fee of $500,000.
This licensing fee has been deferred and is being recognized over the
remaining life of the patents which is nineteen years. SB also made an equity
investment in the Company (see note 6). The proceeds received from the
licensing fee and the equity instrument have been allocated to their related
financial statement components based upon the amounts specified in the
separate agreements which represent management's estimate of the fair value of
such components.
The Company has entered into various licensing, research and other
agreements. Under these agreements, the Company is working in collaboration
with various other parties. Should any discoveries be made under such
arrangements, the Company would be required to negotiate the licensing of the
technology for the development of respective discoveries, and possible
royalties on future product sales, if any. Under these agreements, the Company
would be obligated to make payments aggregating up to approximately $3,900,000
upon the achievement of certain milestones and to make future royalty payments
on sales proceeds of products, if any, a portion of which could be offset by
previously made milestone payments.
9. INCOME TAXES
No Federal or state taxes are payable as of December 31, 1998 and 1999. As
of December 31, 1999, the Company had approximately $11,200,000 of Federal and
$8,300,000 of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss carryforwards
will begin expiring in 2009 and 2005, respectively, if not utilized. In
addition, the utilization of the state net operating loss carryforwards is
subject to a $2 million annual limitation. At December 31, 1999, the Company
also has approximately $403,000 of Federal and $130,000 of state research and
development tax credit carryforwards, which begin expiring in 2011, and are
available to reduce Federal and state income taxes.
The Tax Reform Act of 1986 (the Act) provides for a limitation on the
annual use of net operating loss and research and development tax credit
carryforwards (following certain ownership changes, as defined by the Act)
that could significantly limit the Company's ability to utilize these
carryforwards. The Company may have experienced various ownership changes, as
defined by the Act, as a result of past financings. Accordingly, the Company's
ability to utilize the aforementioned carryforwards may be limited. The
Company has not yet determined whether or not ownership changes, as defined by
the Act, have occurred. Additionally, because U.S. tax laws limit the time
during which these carryforwards may be applied against future taxes, the
Company may not be able to take full advantage of these attributes for Federal
income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are shown below. At December 31, 1999, a valuation allowance of $12,755,000
has been recognized to fully offset the deferred tax assets as realization of
such assets is uncertain. The change in the valuation allowance in 1998 and
1999 were increases
F-15
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
of $4,337,065 and $3,394,401, respectively, related primarily to additional
net operating losses and capitalized research and development costs incurred
by the Company.
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 3,570,672 4,368,000
Capitalized research and development costs........... 5,320,051 7,329,000
Tax credit carryforwards............................. 391,900 533,000
Accrued expenses and other........................... 139,171 586,000
----------- -----------
Total deferred tax assets........................... 9,421,794 12,816,000
Less valuation allowance............................. (9,360,599) (12,755,000)
----------- -----------
Net deferred tax assets............................. 61,195 61,000
Deferred tax liability................................ (61,195) (61,000)
----------- -----------
Net deferred tax.................................... $ -- --
=========== ===========
</TABLE>
10. COMMITMENTS
Future minimum lease payments under non-cancellable operating leases for
office and laboratory space are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- ------------------------
<S> <C>
2000.................................................................. $224,290
2001.................................................................. 250,964
--------
$475,254
========
</TABLE>
Rent expense was $160,232, $237,351 and $258,805 for 1997, 1998 and 1999,
respectively.
The Company has an agreement with an officer to provide for certain
payments upon certain forms of termination of employment.
11. 401(k) PROFIT SHARING PLAN
In 1995, the Company adopted a 401(k) Profit Sharing Plan (the 401(k) Plan)
available to all employees meeting certain eligibility criteria. The 401(k)
Plan permits participants to contribute up to 15% of their salary, not to
exceed the limits established by the Internal Revenue Code. All contributions
made by participants vest immediately into the participant's account. The
Company is not required to make and did not make any contributions to the
401(k) Plan in 1997, 1998 or 1999.
12. SUBSEQUENT EVENTS
Sale of Preferred Stock, Increase in Authorized Shares and Option Grants
In January 2000, the Company authorized and sold 12,306,000 shares of its
Series G mandatorily redeemable convertible preferred stock at a price of
$1.00 per share. The total net proceeds received by the Company was
approximately $12,306,000. The issuance of these securities will result in a
$12,306,000 beneficial conversion feature which will increase net loss per
share allocable to common stockholders in the first quarter of 2000. The
beneficial conversion feature cannot exceed the proceeds from the sale of the
securities. The Series G has the same rights and privileges as the Series E
but with the redemption date being on or after March 1, 2003,
F-16
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
and is convertible into 2,734,667 shares of common stock. The Company also
increased the number of authorized common shares to 21,338,849 and the number
of shares authorized to be granted under the 1994 Equity Compensation Plan to
3,277,778. The Company also granted 592,164 common stock options in January
2000 at exercise prices of $2.03 per share for which a compensation charge
amounting to approximately $5,726,000 will be recorded over the respective
vesting periods of the options based on a deemed fair value of $11.70 per
share on the grant date.
Reverse Stock Split
On February 4, 2000, the Board of Directors approved a reverse stock split
of its common stock on a 1-for-4.5 basis to be effective immediately prior to
the effectiveness of the Company's registration statement in connection with
this initial public offering. All common share, options, and per share amounts
in the accompanying financial statements have been retroactively adjusted to
reflect the reverse stock split for all periods presented.
Initial Public Offering
On February 4, 2000, the Board of Directors authorized the filing of a
registration statement for the Offering with the SEC for the sale of shares of
common stock. If the Offering is consummated under the terms presently
anticipated, all shares of Series A, B, C, D, E, F and G outstanding as of the
closing date of the Offering will convert into shares of common stock on a
4.5-for-one basis, as adjusted for the reverse split of the common stock, and
no dividends will be payable on any of the mandatorily redeemable convertible
preferred stock.
Authorized Shares
On February 4, 2000, the Company approved a Restated Certificate of
Incorporation which is to be filed immediately prior to the closing of this
offering which will increase the number of authorized shares of common stock
to 99,000,000 and authorize 1,000,000 shares of undesignated preferred stock.
Equity Compensation Plan
On February 4, 2000, the Board of Directors approved an Amended and
Restated 1994 Equity Compensation Plan with terms similar to those described
in note 7. A provision of this Amended and Restated 1994 Equity Compensation
Plan is that officers have the ability to deliver full recourse promisory
notes as consideration for the exercise of options.
F-17
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy shares of Adolor Corporation common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the Adolor common stock.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Forward Looking Information and Market Data............................... 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Dilution.................................................................. 16
Capitalization............................................................ 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 24
Management................................................................ 42
Certain Relationships and Related Party Transactions...................... 50
Principal Stockholders.................................................... 52
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 56
Underwriting.............................................................. 58
Legal Matters............................................................. 60
Experts................................................................... 60
Where You Can Find More Information....................................... 60
Index to Financial Statements............................................. F-1
</TABLE>
Through and including , 2000 (the 25th day after commencement of this
offering), all dealers effecting transactions in the common stock offered by
this prospectus, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
PRELIMINARY PROSPECTUS
6,000,000 Shares
[LOGO OF ADOLOR]
Common Stock
Warburg Dillon Read LLC
Robertson Stephens
Pacific Growth Equities, Inc.
<PAGE>
PART II
Information not required in prospectus
- -------------------------------------------------------------------------------
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by Adolor Corporation in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
Securities and Exchange Commission Registration Fee................. $ 25,502
NASD Filing Fee..................................................... 10,160
Nasdaq National Market Listing Fee.................................. 95,000
Accounting Fees and Expenses........................................ 200,000
Blue Sky Fees and Expenses.......................................... 15,000
Legal Fees and Expenses............................................. 250,000
Transfer Agent and Registrar Fees and Expenses...................... 25,000
Printing and Engraving Expenses..................................... 200,000
Miscellaneous Fees and Expenses..................................... 179,338
----------
Total............................................................. $1,000,000
==========
</TABLE>
- ---------------------
*To be filed by amendment.
All amounts are estimated except for the SEC fee, the Nasdaq National Market
fee and the NASD fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporate Law of the State of Delaware,
Adolor Corporation 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"). Adolor
Corporation's bylaws also provide for mandatory indemnification of its
directors and executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under Delaware law.
Adolor Corporation's certificate of incorporation provides that the
liability of its directors for monetary damages shall be eliminated to the
fullest extent permissible under Delaware law. Pursuant to Delaware law, this
includes elimination of liability for monetary damages for breach of the
directors' fiduciary duty of care to Adolor Corporation and its stockholders.
These provisions do not eliminate the directors' duty of care and, in
appropriate circumstances, equitable remedies such as 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 Adolor Corporation, 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
also does not affect a director's responsibilities under any other laws, such
as the federal securities laws or state or federal environmental laws.
Adolor Corporation has obtained a policy of directors' and officers'
liability insurance that insures its directors and officers against the cost
of defense, settlement or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of Adolor
Corporation and its officers and directors for certain liabilities arising
under the Securities Act or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the preceding three years, the Registrant has issued the following
securities that were not registered under the Act:
In May 1997, the Registrant sold an aggregate of 13,814,286 shares of its
series C mandatorily redeemable convertible preferred stock to investors at a
purchase price per share of $.70 for a total of $9,670,000. The shares of
series C mandatorily redeemable convertible preferred stock are convertible
into 3,069,841 shares of common stock.
On November 5, 1997, the Registrant sold 960,000 shares of its series D
mandatorily redeemable convertible preferred stock to Kwang Dong
Pharmaceuticals Company at a price per share of $1.25 for a total of
$1,200,000. The shares of series D mandatorily redeemable convertible
preferred stock are convertible into 213,333 shares of common stock.
In December 1998 and January 1999, the Registrant sold 11,366,667 shares of
its series E mandatorily redeemable convertible preferred stock to investors
at a purchase price per share of $.75 for a total of $8,525,000. The shares of
series E mandatorily redeemable convertible preferred stock are convertible
into 2,525,926 shares of common stock.
On July 26, 1999 the Registrant sold 2,500,000 shares of its series F
mandatorily redeemable convertible preferred stock and issued a warrant to
purchase 125,000 shares of series F mandatorily redeemable convertible
preferred stock to S.R. One, Limited at a purchase price per share of $1.00
for a total of $2,500,000. The shares of series F mandatorily redeemable
convertible preferred stock and the shares underlying the warrant are
convertible into 555,556 shares of common stock.
In January 2000, the Registrant sold 12,306,000 shares of its series G
mandatorily redeemable convertible preferred stock to investors at a purchase
price per share of $1.00 for a total of $12,306,000. The shares of series G
mandatorily redeemable convertible preferred stock are convertible into
2,734,667 shares of common stock.
The sale and issuance of securities in the transactions described above
were made under the exemption from registration provided under Section 4(2) of
the Securities Act.
Appropriate restrictive legends were affixed to the stock certificates
issued in the above transactions. Similar legends were imposed in connection
with any subsequent sales of any such securities. No underwriters were
employed in any of the above transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation of Adolor.*
3.2 Form of Amended and Restated Bylaws of Adolor.*
4.1 Series A Convertible Preferred Stock Purchase Agreement among Opian
Pharmaceuticals, Inc. and the parties set forth therein, dated
November 7, 1994.**
4.2 Series B Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated March 1, 1996.**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.3 Series C Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated May 1, 1997.**
4.4 Stock Purchase Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.**
4.5 Series E Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated December 8, 1998.**
4.6 Series F Convertible Preferred Stock Purchase Agreement between Adolor
and S.R. One, Limited dated July 26, 1999.**
4.7 Series G Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein dated January 10, 2000.**
4.8 Registration Rights Agreement among Opian Pharmaceuticals, Inc. and
the parties set forth therein dated November 7, 1994.**
4.9 Amendment No. 1 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated February 27, 1996.**
4.10 Amendment No. 2 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated May 1, 1997.**
4.11 Amendment No. 3 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated December 8, 1998.**
4.12 Amendment No. 4 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated July 26, 1999.**
4.13 Amendment No. 5 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated January 10, 2000.**
5.1 Opinion of Dechert Price & Rhoads.***
10.1 Form of Amended and Restated 1994 Equity Compensation Plan.**
10.2 Option and License Agreement between Adolor and Roberts Laboratories,
Inc., dated June 10, 1998.**@
10.3 License Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.**@
10.4 License Agreement between Adolor and SB Pharmaco Puerto Rico Inc.,
dated July 26, 1999.**@
23.1 Consent of KPMG LLP.*
23.2 Consent of Dechert Price & Rhoads (included in Exhibit 5.1).***
24.1 Powers of Attorney.****
27.1 Financial Data Schedule.**
</TABLE>
- ---------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
**** Included on signature page to Registrant's Registration Statement on Form
S-1 previously filed with the Securities and Exchange Commission on
February 7, 2000.
@ Confidential Treatment Requested.
(b) Financial Statement Schedules
None.
Schedules other than those listed above have been omitted since they are
not required or are not applicable or the required information is shown in the
financial statements or related notes. Columns omitted from schedules filed
have been omitted since the information is not applicable.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide the underwriters at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
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
Philadelphia, Commonwealth of Pennsylvania on the 13th day of March, 2000.
ADOLOR CORPORATION
/s/ John J. Farrar
By: _________________________________
John J. Farrar
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ John J. Farrar President, Chief Executive March 13, 2000
______________________________________ Officer and Director
John J. Farrar (Principal Executive
Officer)
/s/ Peter J. Schied Vice President, Chief March 13, 2000
______________________________________ Financial Officer and
Peter J. Schied Secretary (Principal
Financial and Accounting
Officer)
* Director March 13, 2000
______________________________________
Frank Baldino, Jr.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
* Director March 13, 2000
______________________________________
Ellen M. Feeney
* Director March 13, 2000
______________________________________
David M. Madden
* Director March 13, 2000
______________________________________
C. Christopher Moller
* Director March 13, 2000
______________________________________
Robert T. Nelsen
* Director March 13, 2000
______________________________________
Claude H. Nash
</TABLE>
* John J. Farrar, pursuant to a Power of Attorney executed by each of the
directors and officers noted above and included in the signature page of the
initial filing of this Registration Statement, by signing his name hereto,
does hereby sign and execute this Amendment No. 2 to the Registration
Statement on behalf of each of the persons noted above, in the capacities
indicated, and does hereby sign and execute this Amendment No. 2 to the
Registration Statement on his own behalf, in the capacities indicated.
/s/ John J. Farrar
_____________________________________
John J. Farrar
II-6
<PAGE>
Exhibit index
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation of Adolor.*
3.2 Form of Amended and Restated Bylaws of Adolor.*
4.1 Series A Convertible Preferred Stock Purchase Agreement among Opian
Pharmaceuticals, Inc. and the parties set forth therein, dated
November 7, 1994.**
4.2 Series B Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated March 1, 1996.**
4.3 Series C Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated May 1, 1997.**
4.4 Stock Purchase Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.**
4.5 Series E Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated December 8, 1998.**
4.6 Series F Convertible Preferred Stock Purchase Agreement between Adolor
and S.R. One, Limited dated July 26, 1999.**
4.7 Series G Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein dated January 10, 2000.**
4.8 Registration Rights Agreement among Opian Pharmaceuticals, Inc. and
the parties set forth therein dated November 7, 1994.**
4.9 Amendment No. 1 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated February 27, 1996.**
4.10 Amendment No. 2 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated May 1, 1997.**
4.11 Amendment No. 3 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated December 8, 1998.**
4.12 Amendment No. 4 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated July 26, 1999.**
4.13 Amendment No. 5 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated January 10, 2000.**
5.1 Opinion of Dechert Price & Rhoads.***
10.1 Form of Amended and Restated 1994 Equity Compensation Plan.**
10.2 Option and License Agreement between Adolor and Roberts Laboratories,
Inc., dated June 10, 1998.**@
10.3 License Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.**@
10.4 License Agreement between Adolor and SB Pharmaco Puerto Rico Inc.,
dated July 26, 1999.**@
23.1 Consent of KPMG LLP.*
23.2 Consent of Dechert Price & Rhoads (including Exhibit 5.1).***
24.1 Power of Attorney.****
27.1 Financial Data Schedule.**
</TABLE>
- ---------------------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
**** Included on signature page to Registrant's Registration Statement on
Form S-1 previously filed with the Securities and Exchange Commission on
February 7, 2000.
@ Confidential Treatment Requested.
<PAGE>
Exhibit 1.1
ADOLOR CORPORATION
6,000,000 Shares
Common Stock
$.0001 Par Value
UNDERWRITING AGREEMENT
, 2000
<PAGE>
UNDERWRITING AGREEMENT
, 2000
Warburg Dillon Read LLC
FleetBoston Robertson Stephens Inc.
Pacific Growth Equities, Inc.,
as Managing Underwriters
299 Park Avenue
New York, New York 10171-0026
Ladies and Gentlemen:
Adolor Corporation, a Delaware corporation (the Company), proposes to
issue and sell to the underwriters named in Schedule A annexed hereto (the
Underwriters) an aggregate of 6,000,000 shares (the Firm Shares) of Common
Stock, $.0001 par value (the Common Stock), of the Company. In addition, solely
for the purpose of covering over-allotments, the Company proposes to grant to
the Underwriters the option to purchase from the Company up to an additional
900,000 shares of Common Stock (the Additional Shares). The Firm Shares and the
Additional Shares are hereinafter collectively sometimes referred to as the
Shares. The Shares are described in the Prospectus which is referred to below.
The Company has filed, in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively called the Act), with the Securities and Exchange Commission (the
Commission) a registration statement on Form S-1 (File No. 333-96333) including
a prospectus, relating to the Shares. The Company has furnished to you, for use
by the Underwriters and by dealers, copies of one or more preliminary
prospectuses (each thereof being herein called a Preliminary Prospectus)
relating to the Shares. Except where the context otherwise requires, the
registration statement, as amended when it becomes effective, including all
documents filed as a part thereof, and including any information contained in a
prospectus subsequently filed with the Commission pursuant to Rule 424(b) under
the Act and deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430(A) under the Act and also including any
registration statement filed pursuant to Rule 462(b) under the Act, is herein
called the Registration Statement, and the prospectus, in the form filed by the
Company with the Commission pursuant to Rule 424(b) under the Act on or before
the second business day after the date hereof (or such earlier time as may be
required under the Act) or, if no such filing is required, the form of final
prospectus included in the Registration Statement at the time it became
effective, is herein called the Prospectus.
The Company and the Underwriters agree as follows:
1. Sale and Purchase. Upon the basis of the warranties and
-----------------
representations and subject to the terms and conditions herein set forth, the
Company agrees to sell to the respective Underwriters and each of the
Underwriters, severally and not jointly, agrees to
<PAGE>
purchase from the Company the aggregate number of Firm Shares set forth opposite
the name of such Underwriter in Schedule A attached hereto in each case at a
purchase price of $ per Share. The Company is advised by you that the
Underwriters intend (i) to make a public offering of their respective portions
of the Firm Shares as soon after the effective date of the Registration
Statement as in your judgment is advisable and (ii) initially to offer the Firm
Shares upon the terms set forth in the Prospectus. You may from time to time
increase or decrease the public offering price after the initial public offering
to such extent as you may determine.
You have advised us that, at the Company's request, the Underwriters
have reserved for sale at the initial public offering price up to of the
Firm Shares (the Reserved Shares) for the officers, directors, employees,
clients, business associates and other persons related to or affiliated with the
foregoing (the Participants) as part of the distribution of the Firm Shares by
the Underwriters, subject to the terms of this Agreement, the applicable rules,
regulations and interpretations of the National Association of Securities
Dealers, Inc. (NASD) and all other applicable laws, rules and regulations. To
the extent that such Reserved Shares are not orally confirmed for purchase by
such Participants by the end of the first business day after the date of this
Agreement, such Reserved Shares may be offered to the public as part of the
public offering contemplated hereby.
In addition, the Company hereby grants to the several Underwriters the
option to purchase, and upon the basis of the warranties and representations and
subject to the terms and conditions herein set forth, the Underwriters shall
have the right to purchase, severally and not jointly, from the Company, ratably
in accordance with the number of Firm Shares to be purchased by each of them,
all or a portion of the Additional Shares as may be necessary to cover over-
allotments made in connection with the offering of the Firm Shares, at the same
purchase price per share to be paid by the Underwriters to the Company for the
Firm Shares. This option may be exercised by you on behalf of the several
Underwriters at any time (but not more than once) on or before the thirtieth day
following the date hereof, by written notice to the Company. Such notice shall
set forth the aggregate number of Additional Shares as to which the option is
being exercised, and the date and time when the Additional Shares are to be
delivered (such date and time being herein referred to as the additional time of
purchase); provided, however, that the additional time of purchase shall not be
--------- -------
earlier than the time of purchase (as defined below) nor earlier than the second
business day after the date on which the option shall have been exercised nor
later than the tenth business day after the date on which the option shall have
been exercised. The number of Additional Shares to be sold to each Underwriter
shall be the number which bears the same proportion to the aggregate number of
Additional Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter on Schedule A hereto bears to the total
number of Firm Shares (subject, in each case, to such adjustment as you may
determine to eliminate fractional shares).
2. Payment and Delivery. Payment of the purchase price for the
--------------------
Firm Shares shall be made to the Company by Federal Funds wire transfer, against
delivery of the certificates for the Firm Shares to you through the facilities
of the Depository Trust Company (DTC) for the respective accounts of the
Underwriters. Such payment and delivery shall be made at 10:00
- ----------
* As used herein, "business day" shall mean a day on which the New York
Stock Exchange is open for trading.
3
<PAGE>
A.M., New York City time, on ,2000 (unless another time shall be
agreed to by you and the Company or unless postponed in accordance with the
provisions of Section 8 hereof). The time at which such payment and delivery are
actually made is hereinafter sometimes called the time of purchase. Certificates
for the Firm Shares shall be delivered to you in definitive form in such names
and in such denominations as you shall specify on the second business day
preceding the time of purchase. For the purpose of expediting the checking of
the certificates for the Firm Shares by you, the Company agrees to make such
certificates available to you for such purpose at least one full business day
preceding the time of purchase.f
Payment of the purchase price for the Additional Shares shall be made
at the additional time of purchase in the same manner and at the same office as
the payment for the Firm Shares. Certificates for the Additional Shares shall
be delivered to you in definitive form in such names and in such denominations
as you shall specify no later than the second business day preceding the
additional time of purchase. For the purpose of expediting the checking of the
certificates for the Additional Shares by you, the Company agrees to make such
certificates available to you for such purpose at least one full business day
preceding the additional time of purchase.
3. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to each of the Underwriters that:
(a) the Company has not received, and has no notice of, any order of
the Commission preventing or suspending the use of any Preliminary
Prospectus, or instituting proceedings for that purpose, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act; and when the Registration
Statement becomes effective, the Registration Statement and the Prospectus
will fully comply in all material respects with the provisions of the Act,
and the Registration Statement will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and the
Prospectus will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; any statutes, regulations, contracts or other
documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement
have been so described or filed; provided, however, that the Company makes
--------- -------
no warranty or representation with respect to any statement contained in
the Registration Statement or the Prospectus in reliance upon and in
conformity with information concerning the Underwriters and furnished in
writing by or on behalf of any Underwriter through you to the Company
expressly for use in the Registration Statement or the Prospectus; and the
Company has not distributed any offering material in connection with the
offering or sale of the Shares other than the Registration Statement, the
Preliminary Prospectus, the Prospectus or any other materials, if any,
permitted by the Act;
(b) as of the date of this Agreement, the Company has an authorized
capitalization as set forth under the heading entitled "Actual" in the
section of the Registration Statement and the Prospectus entitled
"Capitalization" and, as of the time of
4
<PAGE>
purchase and the additional time of purchase, as the case may be, the
Company shall have an authorized capitalization as set forth under the
heading entitled "Pro Forma As Adjusted" in the section of the Registration
Statement and the Prospectus entitled "Capitalization," all of the issued
and outstanding shares of capital stock including Common Stock of the
Company have been duly and validly authorized and issued and are fully paid
and non-assessable, have been issued in compliance with all federal and
state securities laws and were not issued in violation of any preemptive
right, resale right, right of first refusal or similar right; there are no
authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of
the Company other than those accurately described in the Prospectus; the
description of the Company's stock option, stock bonus and other stock
plans or arrangements, and the options or other rights granted thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights;
(c) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with full corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Registration
Statement;
(d) the Company is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction where the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to so qualify would not have a
material adverse effect on the operations, business, prospects, properties,
financial condition or results of operations of the Company (a Material
Adverse Effect); and the Company is in compliance in all material respects
with the laws, orders, rules, regulations and directives issued or
administered by such jurisdictions; the Company has no subsidiaries (as
defined in the rules and regulations under the Act); the Company does not
own, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation or have any equity interest in
any firm, partnership, joint venture, association or other entity; complete
and correct copies of the certificate of incorporation and of the bylaws of
the Company and all amendments thereto have been delivered to you, and
except as set forth in the exhibits to the Registration Statement no
changes therein will be made subsequent to the date hereof and prior to the
Closing Date;
(e) the Common Stock has been approved for quotation on the National
Association of Securities Dealers Automated Quotation (Nasdaq) National
Market, subject only to official notice of issuance;
(f) the Company is not in breach of, or in default under (nor has
any event occurred which with notice, lapse of time, or both would result
in any breach of, or constitute a default under), its charter or by-laws or
in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of trust,
bank loan or credit agreement or other evidence of indebtedness, or any
lease, contract or other agreement or instrument to which the Company is a
party
5
<PAGE>
or by which it or any of its properties is bound, and the execution,
delivery and performance of this Agreement, the issuance and sale of the
Shares and the consummation of the transactions contemplated hereby will
not conflict with, or result in any breach of or constitute a default under
(nor constitute any event which with notice, lapse of time, or both would
result in any breach of, or constitute a default under), any provisions of
the charter or by-laws, of the Company or under any provision of any
material license, indenture, mortgage, deed of trust, bank loan or credit
agreement or other evidence of indebtedness, or any material lease,
contract or other agreement or instrument to which the Company is a party
or by which it or its respective properties may be bound or affected, or
under any federal, state, local or foreign law, regulation or rule or any
decree, judgment or order applicable to the Company;
(g) this Agreement has been duly authorized, executed and delivered
by the Company and is a legal, valid and binding agreement of the Company
enforceable in accordance with its terms (except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization or other
similar laws relating to enforcement of creditors' rights generally, and
general equitable principles relating to the availability of remedies, and
except as rights to indemnity or contribution may be limited by federal or
state securities laws and the public policy underlying such laws);
(h) the capital stock of the Company, including the Shares, conforms
in all material respects to the description thereof contained in the
Registration Statement and Prospectus and the certificates for the Shares
are in due and proper form and the holders of the Shares will not be
subject to personal liability by reason of being such holders;
(i) the Shares have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and non-assessable;
(j) no approval, authorization, consent or order of or filing with
any national, state or local governmental or regulatory commission, board,
body, authority or agency is required in connection with the issuance and
sale of the Shares or the consummation by the Company of the transactions
as contemplated hereby other than registration of the Shares under the Act
and any necessary qualification under the securities or blue sky laws of
the various jurisdictions in which the Shares are being offered by the
Underwriters or under the rules and regulations of the NASD;
(k) no person has the right, contractual or otherwise, to cause the
Company to issue to it, or register pursuant to the Act, any shares of
capital stock of the Company upon the issue and sale of the Shares to the
Underwriters hereunder, nor does any person have preemptive rights, co-sale
rights, rights of first refusal or other rights to purchase any of the
Shares other than those that have been expressly waived prior to the date
hereof;
(l) to the best knowledge of the Company, KPMG LLP, whose report on
the audited financial statements of the Company is filed with the
Commission as part of the
6
<PAGE>
Registration Statement and Prospectus, are independent public accountants
as required by the Act;
(m) the Company has all necessary licenses, authorizations, permits,
consents and approvals and has made all necessary filings required under
any federal, state, local or foreign law, regulation or rule, and has
obtained all necessary licenses, authorizations, permits, consents and
approvals from other persons, in order to conduct its business; the Company
is not in violation of, or in default under, any such license,
authorization, permit, consent or approval or any federal, state, local or
foreign law, regulation or rule or any decree, order or judgment applicable
to the Company the effect of which could have a Material Adverse Effect;
(n) all executed agreements or copies of executed agreements filed
as exhibits to the Registration Statement to which the Company is a party
or by which it is or may be bound or to which any of its assets, properties
or businesses is or may be subject have been duly and validly authorized,
executed and delivered by the Company and, assuming such agreements are the
legal, valid, binding and enforceable agreements of the other parties
thereto, constitute the legal, valid and binding agreements of the Company,
enforceable against the Company in accordance with their respective terms
(except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws relating to enforcement of
creditors' rights generally, and general equitable principles relating to
the availability of remedies, and except as rights to indemnity or
contribution may be limited by federal or state securities laws and the
public policy underlying such laws); the descriptions in the Registration
Statement of contracts and other documents are accurate in all material
respects and fairly present the information required to be shown with
respect thereto by the Act and the rules and regulations thereunder, legal
or governmental proceedings, all contracts or other documents which are
required by the Act or the rules and regulations thereunder to be described
in the Registration Statement or filed as exhibits to the Registration
Statement have been so described or filed as required, and the exhibits
which have been filed are complete and correct copies of the documents of
which they purport to be copies;
(o) there are no actions, suits, claims, investigations or
proceedings pending or, to the best of the Company's knowledge, threatened
to which the Company or any of its officers is a party or of which any of
its properties is subject at law or in equity, or before or by any federal,
state, local or foreign governmental or regulatory commission, board, body,
authority or agency which could result in a judgment, decree or order
having a Material Adverse Effect or prevent consummation of the
transactions contemplated hereby;
(p) the financial statements and the related notes and schedules
thereto included in the Registration Statement and the Prospectus present
fairly the financial position of the Company as of the dates indicated and
the results of operations and cash flows of the Company for the periods
specified; such financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
during the periods involved; no other financial statements or supporting
schedules are required to be included in the Registration Statement or the
Prospectus; the
7
<PAGE>
selected financial information set forth in the Registration Statement and
the Prospectus under the captions "Summary Financial Data," Capitalization"
and "Selected Financial Data" fairly present the information set forth
therein on a basis consistent with the financial statements included in the
Registration Statement and the Prospectus;
(q) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been
(i) any material adverse change, or any development which, in the Company's
reasonable judgment, is likely to cause a material adverse change, in the
operations, business, prospects, properties or assets described or referred
to in the Registration Statement, or the results of operations, condition
(financial or otherwise), business or operations of the Company, (ii) any
transaction which is material to the Company, except transactions in the
ordinary course of business, (iii) any obligation, direct or contingent,
which is material to the Company incurred by the Company, except
obligations incurred in the ordinary course of business, (iv) any change in
the capital stock or outstanding indebtedness of the Company or (v) any
dividend or distribution of any kind declared, paid or made on the capital
stock of the Company; the Company does not have any material contingent
obligation which is not disclosed in the Registration Statement;
(r) the Company has obtained the agreement of each of its directors
and officers and certain of its stockholders designated by you not to sell,
offer to sell, contract to sell, hypothecate, grant any option to sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
securities convertible into or exchangeable for Common Stock or warrants or
other rights to purchase Common Stock for a period of 180 days after the
date of the Prospectus;
(s) the Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended (the Investment Company Act);
(t) except as set forth in the Prospectus: (i) the Company owns or
possesses valid and enforceable licenses for all inventions, patents,
patent applications, trademarks (registered or unregistered), trademark
applications, tradenames, copyrights, manufacturing processes, formulae,
trade secrets, know-how, and other intangible property and assets necessary
to the conduct of its business now conducted as described in the Prospectus
(collectively, Intellectual Property) and the Company does not know of any
facts which would form a reasonable basis for a claim that the Company does
not own or possess valid and enforceable licenses for all Intellectual
Property necessary to the conduct of its business proposed to be conducted
as described in the Prospectus; (ii) the expiration of any Intellectual
Property would not result in a Material Adverse Effect; (iii) the Company
has no knowledge that it lacks or will be unable to obtain any rights or
licenses to use any of the Intellectual Property; (iv) the Company does not
know of any third parties who have or will be able to establish rights to
any of the Intellectual Property; (v) to the best of the Company's
knowledge, there is no infringement by third parties of any of the
Intellectual Property; (vi) there is no pending or, to the best of the
Company's knowledge, threatened action, suit, proceeding or claim by others
challenging
8
<PAGE>
the Company's right of title or other interest in or to any Intellectual
Property, and the Company does not know of any facts which would form a
reasonable basis for any such claim; (vii) there is no pending, or, to the
best of the Company's knowledge, threatened action, suit, proceeding or
claim by others challenging the validity and scope of any Intellectual
Property, and the Company does not know of any facts which would form a
reasonable basis for any such claim; (viii) there is no pending or, to the
best of the Company's knowledge, threatened action, suit, proceeding or
claim by others that the Company or any of its products or processes
infringe or otherwise violate any patent, trademark, copyright, trade
secret or other proprietary right of others, and the Company is unaware of
any facts which would form a reasonable basis for any such claim; (ix) to
the best of the Company's knowledge, there are no grounds for an
interference proceeding before the United States Patent and Trademark
Office (USPTO) in relation to any of the patents or patent applications
currently owned by the Company; (x) to the best of the Company's knowledge,
there are no facts which would bar the grant of a patent from each of the
patent applications within the Intellectual Property; (xi) there is no
pending or, to the best of the Company's knowledge, threatened action,
suit, proceeding or claim by any current or former employee, consultant or
agent of the Company seeking either ownership rights to any invention or
compensation from the Company for any invention made by such employee,
consultant or agent in the course of his/her employment with the Company,
nor, to the best of the Company's knowledge, can any such action, suit,
proceeding or claim, if instituted, be sustained; and (xii) there is no act
or omission by the Company or its agents or representatives of which the
Company has knowledge that may render any patent or patent application
within the Intellectual Property unpatentable, unenforceable or invalid;
(u) the Prospectus fairly and accurately describes in all material
respects the Company's rights with respect to the Intellectual Property;
(v) except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed
therein by Item 404 of Regulation S-K of the Commission;
(w) the Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences;
(x) the Company has not at any time during the last five years (i)
made any unlawful contribution to any candidate for foreign office, or
failed to disclose fully any contribution in violation of law, or (ii) made
any payment to any foreign, United States or state governmental officer or
official, or other person charged with similar public or
9
<PAGE>
quasi-public duties, other than payments required or permitted by the laws
of the United States;
(y) the Company has good and marketable title to all the properties
and assets reflected as owned in the financial statements referred to in
Section 3(p) above (or elsewhere in the Prospectus), in each case free and
clear of any security interests, mortgages, liens, encumbrances, equities,
claims and other defects, except such as do not materially and adversely
affect the value of such property and do not materially interfere with the
use made or proposed to be made of such property by the Company; the real
property, improvements, equipment and personal property held under lease by
the Company are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the use
made or proposed to be made of such real property, improvements, equipment
or personal property by the Company;
(z) the Company has filed all necessary federal, state and foreign
income and franchise tax returns and has paid all taxes required to be paid
by it and, if due and payable, any related or similar assessment, fine or
penalty levied against it; the Company has made adequate charges, accruals
and reserves in the applicable financial statements referred to in Section
3(p) above in respect of all federal, state and foreign income and
franchise taxes for all periods as to which the tax liability of the
Company has not been finally determined; the Company is not aware of any
tax deficiency that has been or might be asserted or threatened against the
Company that could result in a Material Adverse Effect;
(aa) there are no transfer taxes or other similar fees or charges
under federal law or any material transfer taxes or other similar fees or
charges under the laws of any state, or any political subdivision thereof,
required to be paid in connection with the execution and delivery of this
Agreement or the issuance and sale by the Company of the Shares;
(bb) the Company is insured by recognized, financially sound and
reputable institutions with policies in such amounts and with such
deductibles and covering such risks as are generally deemed adequate and
customary for their businesses including, but not limited to, policies
covering real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and earthquakes, general
liability, products liability and directors and officers liability; the
Company has no reason to believe that it will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Effect; the Company has not been
denied any insurance coverage which it has sought or for which it has
applied;
(cc) to the best of Company's knowledge, no labor disturbance by the
employees of the Company exists or is imminent; and the Company is not
aware of any existing or imminent labor disturbance by the employees of any
of its principal suppliers, licensees, collaboration partners, consultants
or subcontractors that might be expected to result in a Material Adverse
Effect;
10
<PAGE>
(dd) (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment (Environmental Laws)
which are applicable to its business, except where the failure to comply
would not result in a Material Adverse Effect, (ii) the Company has
received no notice from any governmental authority or third party of an
asserted claim under Environmental Laws, which claim is required to be
disclosed in the Registration Statement and the Prospectus, (iii) the
Company is not currently aware that it will be required to make future
material capital expenditures to comply with Environmental Laws and (iv) no
property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et
seq.), or otherwise designated as a contaminated site under applicable
state or local law;
(ee) the Company and any "employee benefit plan" (as defined under
the Employee Retirement Income Security Act of 1974, as amended, and the
regulations and published interpretations thereunder (collectively, ERISA))
established or maintained by the Company or its ERISA Affiliates (as
defined below) are in compliance in all material respects with ERISA; ERISA
Affiliate means, with respect to the Company, any member of any group of
organizations described in Sections 414(b),(c),(m) or (o) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the Code) of which the Company is a member; no
"reportable event" (as defined under ERISA) has occurred or is reasonably
expected to occur with respect to any "employee benefit plan" established
or maintained by the Company or any of its ERISA Affiliates; no "employee
benefit plan" established or maintained by the Company or any of its ERISA
Affiliates, if such "employee benefit plan" were terminated, would have any
"amount of unfounded benefit liabilities" (as defined under ERISA); neither
the Company nor any of its ERISA Affiliates has incurred or reasonably
expects to incur any liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "employee benefit plan" or (ii)
Sections 412, 4971, 4975 or 4980B of the Code; each "employee benefit plan"
established or maintained by the Company or any of its ERISA Affiliates
that is intended to be qualified under Section 401(a) of the Code is so
qualified and nothing has occurred, whether by action or failure to act,
which would cause the loss of such qualification;
(ff) the Company has filed with the U.S. Food and Drug Administration
(the FDA), and all applicable state and local regulatory bodies, for and
received approval of all registrations, applications, licenses, requests
for exemptions, permits and other regulatory authorizations, necessary to
conduct the Company's business as of the date hereof as it is described in
the Registration Statement and the Prospectus; the Company is in compliance
with all such registrations, applications, licenses, requests for
exemptions, permits and other regulatory authorizations, and all applicable
FDA, state and local rules, regulations, guidelines and policies,
including, without limitation, applicable FDA, state and local rules,
regulations and policies relating to good manufacturing practice (GMP) and
good laboratory practice (GLP); the Company has no reason to believe that
any party granting any such registration, application, license, request for
exemptions, permit or other regulatory authorization is considering
limiting, suspending or revoking the same and knows of no basis for any
such limitation, suspension or revocation;
11
<PAGE>
(gg) the human clinical trials, animal studies and other preclinical
tests conducted by the Company or in which the Company has participated
that are described in the Registration Statement and Prospectus or the
results of which that are referred to in the Registration Statement or
Prospectus, and such studies and tests conducted on behalf of the Company,
were and, if still pending, are, being conducted in accordance with
experimental protocols, procedures and controls generally used by qualified
experts in the preclinical or clinical study of new drugs or diagnostics as
applied to comparable products to those being developed by the Company; the
descriptions of the results of such studies, test and trials contained in
the Registration Statement and Prospectus are accurate and complete in all
material respects, and the Company has no knowledge of any other trials,
studies or tests, the results of which the Company believes reasonably call
into question the clinical trial results described or referred to in the
Registration Statement and Prospectus; and the Company has not received any
notices or correspondence from the FDA or any other governmental agency
requiring the termination, suspension or modification of any animal
studies, preclinical tests or clinical trials conducted by or on behalf of
the Company or in which the Company has participated that are described in
the Registration Statement or Prospectus or the results of which are
referred to in the Registration Statement or Prospectus;
(hh) no consent approval, authorization or order of, or qualification
with, any governmental body or agency, other than those obtained, is
required in connection with the offering of the Reserved Shares in any
jurisdiction where the Reserved Shares are being offered;
(ii) the Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the distribution of the Reserved
Shares with the specific intent to unlawfully influence (i) a customer or
supplier of the Company to alter the customer's or supplier's level or type
of business with the Company or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products;
(jj) Except as disclosed in the Prospectus or as would not be
expected to cause a Material Adverse Effect, each hardware, software and
firmware product used in or developed by or for the Company in its business
(collectively, the Software) will accurately process date data (including,
but not limited to, calculating, comparing and sequencing) from, into and
between the twentieth and twenty-first centuries, including, without
limitation, leap year calculations, without a decrease in the functionality
of the Software. The Software is designed to be used prior to, during and
after the calendar year 2000 A.D. and will operate during each such time
period without breach of this Section (jj). Without limiting the generality
of the foregoing, the Software (i) will not abnormally end or provide
invalid or incorrect results as a result of correctly entered date data,
specifically including date data which represents or references different
centuries or more than one century; (ii) has been designed to ensure date
data century recognition, calculations which accommodate same century and
multi-century formulas and date values, and date data interface values that
reflect the century; and (iii) provides that all date-related user
interface functionalities and data fields include the indication of
century; and
12
<PAGE>
(kk) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
4. Certain Covenants of the Company. The Company hereby agrees:
--------------------------------
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offering and sale under the
securities or blue sky laws of such states as you may designate and to
maintain such qualifications in effect so long as required for the
distribution of the Shares; provided that the Company shall not be required
to qualify as a foreign corporation or to consent to the service of process
under the laws of any such state (except service of process with respect to
the offering and sale of the Shares); and to promptly advise you of the
receipt by the Company of any notification with respect to the suspension
of the qualification of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose;
(b) to make available to the Underwriters in New York City, as soon
as practicable after the Registration Statement becomes effective, and
thereafter from time to time to furnish to the Underwriters, as many copies
of the Prospectus (or of the Prospectus as amended or supplemented if the
Company shall have made any amendments or supplements thereto after the
effective date of the Registration Statement) as the Underwriters may
request for the purposes contemplated by the Act; in case any Underwriter
is required to deliver a prospectus within the nine-month period referred
to in Section 10(a)(3) of the Act in connection with the sale of the
Shares, the Company will prepare promptly upon request, but at the expense
of such Underwriter, such amendment or amendments to the Registration
Statement and such prospectuses as may be necessary to permit compliance
with the requirements of Section 10(a)(3) of the Act;
(c) to advise you promptly and (if requested by you) to confirm such
advice in writing, (i) when the Registration Statement has become effective
and when any post-effective amendment thereto becomes effective and (ii) if
Rule 430A under the Act is used, when the Prospectus is filed with the
Commission pursuant to Rule 424(b) under the Act (which the Company agrees
to file in a timely manner under such Rules);
(d) to advise you promptly, confirming such advice in writing, of
any request by the Commission for amendments or supplements to the
Registration Statement or Prospectus or for additional information with
respect thereto, or of notice of institution of proceedings for, or the
entry of a stop order suspending the effectiveness of the Registration
Statement and, if the Commission should enter a stop order suspending the
effectiveness of the Registration Statement, to make every reasonable
effort to obtain the lifting or removal of such order as soon as possible;
to advise you promptly of any
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proposal to amend or supplement the Registration Statement or Prospectus
and to file no such amendment or supplement to which you shall object in
writing;
(e) to file promptly all reports and any definitive proxy or
information statement required to be filed by the Company with the
Commission in order to comply with the Exchange Act subsequent to the date
of the Prospectus and for so long as the delivery of a prospectus is
required in connection with the offering or sale of the Shares, and to
promptly notify you of such filing;
(f) if necessary or appropriate, to file a registration statement
pursuant to Rule 462(b) under the Act;
(g) to furnish to you and, upon request, to each of the other
Underwriters for a period of five years from the date of this Agreement (i)
copies of any reports or other communications which the Company shall send
to its stockholders or shall from time to time publish or publicly
disseminate, (ii) copies of all annual, quarterly and current reports filed
with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar form
as may be designated by the Commission, (iii) copies of documents or
reports filed with any national securities exchange on which any class of
securities of the Company is listed, and (iv) such other information as you
may reasonably request regarding the Company;
(h) to advise the Underwriters promptly of the happening of any
event known to the Company within the time during which a Prospectus
relating to the Shares is required to be delivered under the Act which, in
the judgment of the Company, would require the making of any change in the
Prospectus then being used so that the Prospectus would not include an
untrue statement of material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they are made, not misleading, and, during such time, to
prepare and furnish, at the Company's expense, to the Underwriters promptly
such amendments or supplements to such Prospectus as may be necessary to
reflect any such change and to furnish you a copy of such proposed
amendment or supplement before filing any such amendment or supplement with
the Commission;
(i) to the extent not included in any report filed pursuant to
paragraph (g) above, to make generally available to its security holders,
and to deliver to you, an earnings statement of the Company (which will
satisfy the provisions of Section 11(a) of the Act) covering a period of
twelve months beginning after the effective date of the Registration
Statement (as defined in Rule 158(c) of the Act) as soon as is reasonably
practicable after the termination of such twelve-month period but not later
than , 2001;
(j) to furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, shareholders' equity and of cash flow of the Company
for such fiscal year, accompanied by a copy of the certificate or report
thereon of nationally recognized independent certified public accountants);
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(k) to furnish to you four (4) signed copies of the Registration
Statement, as initially filed with the Commission, and of all amendments
thereto (including all exhibits thereto) and sufficient conformed copies of
the foregoing (other than exhibits) for distribution of a copy to each of
the other Underwriters;
(l) to furnish to you as early as practicable prior to the time of
purchase and the additional time of purchase, as the case may be, but not
later than two business days prior thereto, a copy of the latest available
unaudited interim consolidated financial statements, if any, of the Company
which have been read by the Company's independent certified public
accountants, as stated in their letter to be furnished pursuant to Section
6(b) hereof;
(m) to apply the net proceeds from the sale of the Shares in the
manner set forth under the caption "Use of Proceeds" in the Prospectus and
to include in the Company's reports filed with the Commission such
information with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required under Rule 463 under the Act;
(n) to pay all costs, expenses, fees and taxes (other than any
transfer taxes and fees and disbursements of counsel for the Underwriters
except as set forth under Section 5 hereof and (iii), (iv) and (vi) below)
in connection with (i) the preparation and filing of the Registration
Statement, each Preliminary Prospectus, the Prospectus, and any amendments
or supplements thereto, and the printing and furnishing of copies of each
thereof to the Underwriters and to dealers (including costs of mailing and
shipment), (ii) the registration, issue, sale and delivery of the Shares,
(iii) the producing, word processing and/or printing of this Agreement, any
Agreement Among Underwriters, any dealer agreements, any Powers of Attorney
and any closing documents (including compilations thereof) and the
reproduction and/or printing and furnishing of copies of each thereof to
the Underwriters and (except closing documents) to dealers (including costs
of mailing and shipment), (iv) the qualification of the Shares for offering
and sale under state laws and the determination of their eligibility for
investment under state law as aforesaid (including the legal fees and
filing fees and other disbursements of counsel for the Underwriters) and
the printing and furnishing of copies of any blue sky surveys or legal
investment surveys to the Underwriters and to dealers, (v) any listing of
the Shares on any securities exchange or qualification of the Shares for
quotation on Nasdaq and any registration thereof under the Exchange Act,
(vi) any filing for review of the public offering of the Shares by the
NASD, including the distribution of the Reserved Shares and (vii) the
performance of the Company's other obligations hereunder; and
(o) not to sell, offer or agree to sell, contract to sell, grant any
option to sell or otherwise dispose of, directly or indirectly, any shares
of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock or warrants or other rights to purchase Common
Stock or permit the registration under the Act of any shares of Common
Stock, except for the registration of the Shares and the sales to the
Underwriters pursuant to this Agreement and except for issuances of Common
Stock upon the exercise of outstanding options, warrants and debentures,
for a period of 180
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days after the date hereof, without the prior written consent of Warburg
Dillon Read, LLC.
5. Reimbursement of Underwriters' Expenses. If the Shares are not
---------------------------------------
delivered for any reason other than the termination of this Agreement pursuant
to the first two paragraphs of Section 8 hereof or the default by one or more of
the Underwriters in its or their respective obligations hereunder, the Company
shall, in addition to paying the amounts described in Section 4(n) hereof,
reimburse the Underwriters for all of their out-of-pocket expenses, including
the reasonable fees and disbursements of their counsel.
6. Conditions of Underwriters' Obligations. The several obligations of
---------------------------------------
the Underwriters hereunder are subject to the accuracy of the representations
and warranties on the part of the Company on the date hereof and at the time of
purchase (and the several obligations of the Underwriters at the additional time
of purchase are subject to the accuracy of the representations and warranties on
the part of the Company on the date hereof and at the time of purchase (unless
previously waived) and at the additional time of purchase, as the case may be),
the performance by the Company of its obligations hereunder and to the following
additional conditions precedent:
(a) The Company shall furnish to you at the time of purchase and at
the additional time of purchase, as the case may be, an opinion of Dechert
Price & Rhoads, counsel for the Company, addressed to the Underwriters, and
dated the time of purchase or the additional time of purchase, as the case
may be, with reproduced copies for each of the other Underwriters and in
form satisfactory to Brobeck, Phleger & Harrison LLP, counsel for the
Underwriters, stating that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with full corporate power and authority to own, lease and
operate its properties and conduct its business as described in the
Registration Statement and the Prospectus, to execute and deliver this
Agreement and to issue, sell and deliver the Shares as herein
contemplated;
(ii) the Company is duly qualified to do business in the
Commonwealth of Pennsylvania and in _______________________;
(iii) the Company has the corporate power and authority to enter
into the Underwriting Agreement and to issue, sell and deliver the
Shares to the Underwriters as provided in the Underwriting Agreement;
this Agreement has been duly authorized, executed and delivered by the
Company;
(iv) the Shares have been duly authorized and, when issued and
delivered to and paid for by the Underwriters, will be validly issued
and will be fully paid and non-assessable and free of (A) any
preemptive rights arising under the Restated Certificate or the
Delaware General Corporation Law or (B) to our knowledge, similar
rights that entitle or will entitle any person to acquire any
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shares of capital stock of the Company upon the issuance and sale of the Shares
by the Company;
(v) the Company has an authorized capitalization as set forth in the
Registration Statement and the Prospectus; the outstanding shares of capital
stock of the Company have been duly and validly authorized and issued and are
fully paid, nonassessable and free of statutory and contractual preemptive
rights, resale rights, rights of first refusal and similar rights; the Shares
when issued will be free of statutory and contractual preemptive rights; the
certificates for the Shares are in due and proper form and the holders of the
Shares will not be subject to personal liability by reason of being such
holders;
(vi) the Company does not own or control, directly or indirectly, any
corporation, association or other entity;
(vii) the capital stock of the Company, including the Shares, conforms in
all material respects to the description thereof contained in the Registration
Statement and Prospectus;
(viii) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial and statistical data
contained therein, as to which such counsel need express no opinion) comply as
to form in all material respects with the requirements of the Act;
(ix) the Registration Statement has become effective under the Act and,
to the best of such counsel's knowledge, no stop order proceedings with respect
thereto are pending or threatened under the Act and any required filing of the
Prospectus and any supplement thereto pursuant to Rule 424 under the Act has
been made in the manner and within the time period required by such Rule 424;
(x) no approval, authorization, consent or order of or filing with any
national, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the issuance and sale of the
Shares and consummation by the Company of the transactions as contemplated
hereby other than registration of the Shares under the Act (except such counsel
need express no opinion as to any necessary qualification under the state
securities or blue sky laws of the various jurisdictions in which the Shares are
being offered by the Underwriters);
(xi) the execution, delivery and performance of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby do not and will not conflict with, or result in any breach of, or
constitute a default under (nor constitute any event which with notice, lapse of
time, or both, would result in any breach of, or constitute a default under),
any provisions of the charter or by-laws of the Company or under any provision
of any material license, indenture, mortgage, deed of trust, bank loan or credit
agreement or other evidence of indebtedness, or any material lease, contract or
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other agreement or instrument to which the Company is a party or by which it or
any of its properties may be bound or affected, or under any federal, state,
local or foreign law, regulation or rule or any decree, judgment or order
applicable to the Company;
(xii) to the best of such counsel's knowledge, the Company is not in
violation of its charter or by-laws or in breach of, or in default under (nor
has any event occurred which with notice, lapse of time, or both would result in
any breach of, or constitute a default under), any license, indenture, mortgage,
deed of trust, bank loan or credit agreement or other evidence of indebtedness,
or any lease, contract or other agreement or instrument to which the Company is
a party or by which it or its properties may be bound or affected or under any
federal, state, local or foreign law, regulation or rule or any decree, judgment
or order applicable to the Company;
(xiii) to the best of such counsel's knowledge, there are no contracts,
licenses, agreements, leases or documents of a character which are required to
be filed as exhibits to the Registration Statement or to be summarized or
described in the Prospectus which have not been so filed, summarized or
described;
(xiv) to the best of such counsel's knowledge, there are no actions,
suits, claims, investigations or proceedings pending, threatened or contemplated
to which the Company is subject or of which any of its properties is subject at
law or in equity or before or by any federal, state, local or foreign
governmental or regulatory commission, board, body, authority or agency which
are required to be described in the Prospectus but are not so described;
(xv) the Company will not, upon consummation of the transactions
contemplated by this Agreement, be an "investment company," or a "promoter" or
"principal underwriter" for, a "registered investment company," as such terms
are defined in the Investment Company Act of 1940, as amended;
(xvi) the Common Stock has been approved for quotation on the Nasdaq
National Market, upon issuance as contemplated by the Underwriting Agreement;
(xvii) the statements set forth under the caption "Description of Capital
Stock" in the Prospectus, insofar as such statements purport to summarize
certain provisions of the capital stock of the Company, provide a fair summary
of such provisions in all material respects; the statements set forth under the
captions "Risk Factors --Anti-takeover provisions in our charter documents and
under Delaware law may make an acquisition of us, which may be beneficial to our
stockholders, more difficult" and "--If our stockholders sell substantial
amounts of our common stock after this offering, the market price of our common
stock may fall;" "Management--Employee Benefit Plans;" "Certain Transactions;"
and "Shares Eligible for Future Sale" in the Prospectus, and in the Registration
Statement under Item 15, insofar as such statements constitute a summary of the
legal matters, documents or proceedings referred to therein, provide a fair
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<PAGE>
summary of such legal matters, documents and proceedings in all material
respects; the description in the Registration Statement and the Prospectus of
the Restated Certificate and the By-laws fairly presents the information
required to be presented by the Securities Act and the applicable rules and
regulations thereunder in all material respects;
(xviii) to the best of such counsel's knowledge, except as described in
the Prospectus, no holder of any securities of the Company or any other person
has the right, contractual or otherwise, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Stock or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require the Company to register under the
Securities Act any shares of Common Stock or other securities of the Company,
and any registration rights in connection with the offering contemplated by the
Registration Statement have been waived;
[(xix) to the best of such counsel's knowledge, the Company has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names currently employed by
them in connection with the business now operated by them which, singly or in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in any Material Adverse Effect on the Company;]
(xx) the issuance and sale of the Company's Series G Preferred Stock in
the private placement completed on or about January __, 2000 was exempt from the
registration requirements of the Act;
(xxi) such counsel have participated in conferences with officers and
other representatives of the Company, representatives of the independent public
accountants of the Company and representatives of the Underwriters at which the
contents of the Registration Statement and Prospectus were discussed and,
although such counsel is not passing upon and does not assume responsibility for
the accuracy, completeness or fairness of the statements contained in the
Registration Statement or Prospectus (except as and to the extent stated in
subparagraphs (v), (vii) and (xvii) above), on the basis of the foregoing
nothing has come to the attention of such counsel that causes them to believe
that the Registration Statement or any amendment thereto at the time such
Registration Statement or amendment became effective contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus or any supplement thereto at the date of such Prospectus or
such supplement, and at all times up to and including the time of purchase or
additional time of purchase, as the case may be, contained an untrue statement
of a material fact or omitted to
19
<PAGE>
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
opinion with respect to the financial statements and schedules and other
financial and statistical data included in the Registration Statement or
Prospectus.
(b) The Company shall furnish to you at the time of purchase and at the
additional time of purchase, as the case may be, an opinion of [Company FDA
counsel], special FDA counsel for the Company, addressed to the Underwriters,
and dated the time of purchase or the additional time of purchase, as the case
may be, with reproduced copies for each of the other Underwriters and in form
satisfactory to Brobeck, Phleger & Harrison LLP, counsel for the Underwriters,
stating that such counsel are familiar with the FDA regulatory matters of the
Company and its business and have read the Registration Statement and the
Prospectus, including particularly, the portions of the Registration Statement
and the Prospectus relating to such matters included under the captions "Risk
Factors - Because obtaining necessary regulatory approvals to market our
products [in the United States and foreign jurisdictions] is uncertain, we
cannot predict whether or when we will be able to commercialize our products;"
and "Business - Government Regulation;" (the Regulatory Disclosure Sections)
and:
(i) there are no enforcement actions pending against the Company
or any of its officers or directors by the FDA and, to such counsel's
knowledge, no such actions are threatened;
(ii) the statements in the Registration Statement and Prospectus
under the Regulatory Disclosure Sections, insofar as such statements
purport to summarize applicable provisions of the Federal Food, Drug, and
Cosmetic Act, as amended (the FDC Act) and the regulations promulgated
thereunder, have been reviewed by such counsel and are accurate summaries
in all material respects of the provisions purported to be summarized under
such captions in the Registration Statement and Prospectus;
(iii) as to the statements made in the Regulatory Disclosure
Section, nothing has come to the attention of such counsel which leads them
to believe that, at the time the Registration Statement became effective
and at all times subsequent thereto up to and on the time of purchase or
the additional time of purchase, as the case may be, the Regulatory
Disclosure Sections of the Registration Statement and any amendment or
supplement thereto contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, or at the time of purchase
or the additional time of purchase, as the case may be, the Regulatory
Disclosure Sections of the Registration Statement, the Prospectus and any
amendment or supplement thereto (except as aforesaid), on the date hereof,
contains any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
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(c) The Company shall furnish to you at the time of purchase and at the
additional time of purchase, as the case may be, an opinion of ___________,
patent counsel for the Company, addressed to the Underwriters, and dated the
time of purchase or the additional time of purchase, as the case may be, with
reproduced copies for each of the other Underwriters and in form satisfactory to
Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, stating that:
(i) The statements in the Prospectus relating to U.S. patent
matters, under the captions "RISK FACTORS -- If we cannot adequately
protect our patent and proprietary rights, our business will suffer" and
["BUSINESS -- Patents and Proprietary Rights"], insofar as such statements
constitute matters of law, legal conclusions, or summaries of legal matters
or proceedings, are correct in all material respects and present fairly the
facts and information purported to be shown.
(ii) With respect to the Patents and Patent Applications referred
to in the Registration Statement, and the License Agreements referred to in
the Registration Statement which are listed in Schedule I to such opinion,
the sections of the Registration Statement entitled "RISK FACTORS -- If we
cannot adequately protect our patent and proprietary rights, our business
will suffer" and ["BUSINESS --Patents and Proprietary Rights", at the time
the Registration Statement became effective, did not contain any untrue
statement of material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(iii) With respect to the Patents and Patent Applications, and the
License Agreements referred to in the Prospectus which are listed in
Schedule I to such opinion, the sections of the Prospectus entitled "RISK
FACTORS -- If we cannot adequately protect our patent and proprietary
rights, our business will suffer" and ["BUSINESS --Patents and Proprietary
Rights"], as of its date and as of the Closing Date (as defined in the
Underwriting Agreement), do not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading.
(iv) To the best of such counsel's knowledge, except as described
in the Prospectus, and with the exception of proceedings before the PTO,
there are no pending, or threatened, legal or governmental proceedings
relating to any of the Patents and Patent Applications.
(v) To the best of such counsel's knowledge, the License
Agreements listed in Schedule I to such opinion grant the Company rights in
the patents and/or patent applications, as applicable referred to in the
Prospectus which are listed in Schedule I to such opinion, and such License
Agreements are validly binding and enforceable under federal case law
relating to the licensing of patent rights.
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(vi) To the best of such counsel's knowledge, the Company owns
each of the Patents and Patent Applications.
(vii) To the best of such counsel's knowledge, no security
interests have been recorded in the PTO with respect to any of the
Patents and Patent Applications.
(viii) To the best of such counsel's knowledge, no liens have
been recorded against the Company with respect to any of the Patents
and Patent Applications.
(ix) To the best of such counsel's knowledge, except as
described in the Prospectus, and except for any rights reserved to the
United States Government, no third party has any rights to any of the
Patents and Patent Applications that are referred to in the Prospectus
and listed in Schedule I to such opinion.
(x) To the best of such counsel's knowledge, except as
described in the Prospectus, no interference has been declared or
provoked with respect to any of the Patents and Patent Applications.
(xi) To the best of such counsel's knowledge, the Company has
not received any notice challenging the validity or enforceability of
any of the Patents and Patent Applications.
(xii) While there can be no guarantee that any particular patent
application will issue as a patent, each of the U.S. Patent
Applications that are referred to in the Prospectus and listed in
Schedule I to such opinion, was property filed, and is being properly
and diligently prosecuted, in the PTO.
(xiii) For each U.S. patent application listed in Schedule I to
such opinion, all information known, to date, to be "material to
patentability", as defined in 37 C.F.R. (S) 1.56(b), has been
disclosed, or will be disclosed pursuant to 37 C.F.R. (S) 1.97, to the
PTO.
(xiv) Without any searches specifically having been conducted,
or having been required to have been conducted, for the purpose of
rendering such opinion, and while there can be no guarantee that any
particular patent application will issue as a patent, each of the U.S.
patent applications that are referred to in the Prospectus, discloses
patentable subject matter.
(xv) To the best of such counsel's knowledge, without any
searches having been conducted for the purpose of rendering this
opinion, no third party is infringing any of the Patents and Patent
Applications.
(xvi) To the best of such counsel's knowledge, no claim, which
is presently pending, has been asserted against the Company relating
to the potential
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<PAGE>
infringement of, or conflict with, any patents, trademarks,
copyrights, trade secrets, or proprietary rights, of others.
(xvii) To the best of such counsel's knowledge, the Company is
not infringing the intellectual property rights of any third party.
(d) You shall have received from KPMG, LLP letters dated,
respectively, the date of this Agreement and the time of purchase and
additional time of purchase, as the case may be, and addressed to the
Underwriters (with reproduced copies for each of the Underwriters) in the
forms heretofore approved by Warburg Dillon Read LLP.
(e) You shall have received at the time of purchase and at the
additional time of purchase, as the case may be, the favorable opinion of
Brobeck, Phleger & Harrison LLP, counsel for the Underwriters, dated the
time of purchase or the additional time of purchase, as the case may be, as
to the matters referred to in subparagraphs (iii), (iv) and (ix) of
paragraph (a) of this Section 6.
In addition, such counsel shall state that such counsel have
participated in conferences with officers and other representatives of the
Company, counsel for the Company, representatives of the independent public
accountants of the Company and representatives of the Underwriters at which
the contents of the Registration Statement and Prospectus and related
matters were discussed and, although such counsel is not passing upon and
does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and
Prospectus (except as to matters referred to with respect to the Shares
under subparagraph (vii) of paragraph (a) of this Section 6), on the basis
of the foregoing (relying as to materiality to a large extent upon the
opinions of officers and other representatives of the Company), no facts
have come to the attention of such counsel which lead them to believe that
the Registration Statement or any amendment thereto at the time such
Registration Statement or amendment became effective contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus as of its date or any supplement thereto
as of its date contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
comment with respect to the financial statements and schedules and other
financial and statistical data included in the Registration Statement or
Prospectus.
(f) No amendment or supplement to the Registration Statement or
Prospectus shall be filed prior to the time the Registration Statement
becomes effective to which you object in writing.
(g) The Registration Statement shall become effective, or if Rule
430A under the Act is used, the Prospectus shall have been filed with the
Commission pursuant to Rule 424(b) under the Act, at or before 5:00 P.M.,
New York City time, on the date of this Agreement, unless a later time (but
not later than 5:00 P.M., New York City time, on
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the second full business day after the date of this Agreement) shall be agreed
to by the Company and you in writing or by telephone, confirmed in writing;
provided, however, that the Company and you and any group of Underwriters,
including you, who have agreed hereunder to purchase in the aggregate at least
50% of the Firm Shares may from time to time agree on a later date.
(h) Prior to the time of purchase or the additional time of purchase, as
the case may be, (i) no stop order with respect to the effectiveness of the
Registration Statement shall have been issued under the Act or proceedings
initiated under Section 8(d) or 8(e) of the Act; (ii) the Registration Statement
and all amendments thereto, or modifications thereof, if any, shall not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and (iii) the Prospectus and all amendments or supplements thereto, or
modifications thereof, if any, shall not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they are made, not misleading.
(i) Between the time of execution of this Agreement and the time of
purchase or the additional time of purchase, as the case may be, (i) no material
and unfavorable change, financial or otherwise (other than as referred to in the
Registration Statement and Prospectus), in the business, condition or prospects
of the Company shall occur or become known and (ii) no transaction which is
material and unfavorable to the Company shall have been entered into by the
Company.
(j) The Company will, at the time of purchase or additional time of
purchase, as the case may be, deliver to you a certificate of two of its
executive officers to the effect that the representations and warranties of the
Company as set forth in this Agreement are true and correct as of each such
date, that the Company shall perform such of its obligations under this
Agreement as are to be performed at or before the time of purchase and at or
before the additional time of purchase, as the case may be and the conditions
set forth in paragraphs (h) and (i) of this Section 6 have been met.
(k) You shall have received signed letters, dated the date of this
Agreement, from each of the directors and officers of the Company and certain
stockholders of the Company designated by you to the effect that such persons
shall not sell, offer or agree to sell, contract to sell, grant any option to
sell or otherwise dispose of, directly or indirectly, any shares of Common Stock
of the Company or securities convertible into or exchangeable or exercisable for
Common Stock or warrants or other rights to purchase Common Stock or any other
securities of the Company that are substantially similar to the Common Stock for
a period of 180 days after the date of the Prospectus without Warburg Dillon
Read's prior written consent.
(l) The Company shall have furnished to you such other documents and
certificates as to the accuracy and completeness of any statement in the
Registration Statement and the Prospectus as of the time of purchase and the
additional time of purchase, as the case may be, as you may reasonably request.
24
<PAGE>
(m) The Shares shall have been approved for quotation on Nasdaq,
subject only to notice of issuance at or prior to the time of purchase or
the additional time of purchase, as the case may be.
(n) Between the time of execution of this Agreement and the time of
purchase or additional time of purchase, as the case may be, there shall
not have occurred any downgrading, nor shall any notice or announcement
have been given or made of (i) any intended or potential downgrading or
(ii) any review or possible change that does not indicate an improvement,
in the rating accorded any securities of or guaranteed by the Company by
any "nationally recognized statistical rating organization," as that term
is defined in Rule 436(g)(2) under the Act.
7. Effective Date of Agreement; Termination. This Agreement shall
----------------------------------------
become effective (i) if Rule 430A under the Act is not used, when you shall have
received notification of the effectiveness of the Registration Statement, or
(ii) if Rule 430A under the Act is used, when the parties hereto have executed
and delivered this Agreement.
The obligations of the several Underwriters hereunder shall be subject
to termination in the absolute discretion of you or any group of Underwriters
(which may include you) which has agreed to purchase in the aggregate at least
50% of the Firm Shares, if, since the time of execution of this Agreement or the
respective dates as of which information is given in the Registration Statement
and Prospectus, (y) there has been any material adverse and unfavorable change,
financial or otherwise (other than as referred to in the Registration Statement
and Prospectus), in the operations, business, condition or prospects of the
Company which would, in your judgment or in the judgment of such group of
Underwriters, make it impracticable to market the Shares, or (z) there shall
have occurred any downgrading, or any notice shall have been given of (i) any
intended or potential downgrading or (ii) any review or possible change that
does not indicate an improvement, in the rating accorded any securities of or
guaranteed by the Company by any "nationally recognized statistical rating
organization", as that term is defined in Rule 436(g)(2) under the Act or, if,
at any time prior to the time of purchase or, with respect to the purchase of
any Additional Shares, the additional time of purchase, as the case may be,
trading in securities on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market shall have been suspended or limitations
or minimum prices shall have been established on the New York Stock Exchange,
the American Stock Exchange or the Nasdaq National Market, or if a banking
moratorium shall have been declared either by the United States or New York
State authorities, or if the United States shall have declared war in accordance
with its constitutional processes or there shall have occurred any material
outbreak or escalation of hostilities or other national or international
calamity or crisis of such magnitude in its effect on the financial markets of
the United States as, in your judgment or in the judgment of such group of
Underwriters, to make it impracticable to market the Shares.
If you or any group of Underwriters elects to terminate this Agreement
as provided in this Section 7, the Company and each other Underwriter shall be
notified promptly by letter or telegram.
If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such
25
<PAGE>
sale is not carried out because the Company shall be unable to comply with any
of the terms of this Agreement, the Company shall not be under any obligation or
liability under this Agreement (except to the extent provided in Sections 4(n),
5 and 9 hereof), and the Underwriters shall be under no obligation or liability
to the Company under this Agreement (except to the extent provided in Section 9
hereof) or to one another hereunder.
8. Increase in Underwriters' Commitments. Subject to Sections 6 and
-------------------------------------
7, if any Underwriter shall default in its obligation to take up and pay for the
Firm Shares to be purchased by it hereunder (otherwise than for a reason
sufficient to justify the termination of this Agreement under the provisions of
Section 7 hereof) and if the number of Firm Shares which all Underwriters so
defaulting shall have agreed but failed to take up and pay for does not exceed
10% of the total number of Firm Shares, the non-defaulting Underwriters shall
take up and pay for (in addition to the aggregate number of Firm Shares they are
obligated to purchase pursuant to Section 1 hereof) the number of Firm Shares
agreed to be purchased by all such defaulting Underwriters, as hereinafter
provided. Such Shares shall be taken up and paid for by such non-defaulting
Underwriter or Underwriters in such amount or amounts as you may designate with
the consent of each Underwriter so designated or, in the event no such
designation is made, such Shares shall be taken up and paid for by all non-
defaulting Underwriters pro rata in proportion to the aggregate number of Firm
Shares set opposite the names of such non-defaulting Underwriters in Schedule A.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Firm Shares hereunder unless all of the Firm Shares are purchased
by the Underwriters (or by substituted Underwriters selected by you with the
approval of the Company or selected by the Company with your approval).
If a new Underwriter or Underwriters are substituted by the
Underwriters or by the Company for a defaulting Underwriter or Underwriters in
accordance with the foregoing provision, the Company or you shall have the right
to postpone the time of purchase for a period not exceeding five business days
in order that any necessary changes in the Registration Statement and Prospectus
and other documents may be effected.
The term Underwriter as used in this Agreement shall refer to and
include any Underwriter substituted under this Section 8 with like effect as if
such substituted Underwriter had originally been named in Schedule A.
If the aggregate number of Shares which the defaulting Underwriter or
Underwriters agreed to purchase exceeds 10% of the total number of Shares which
all Underwriters agreed to purchase hereunder, and if neither the non-defaulting
Underwriters nor the Company shall make arrangements within the five business
day period stated above for the purchase of all the Shares which the defaulting
Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall
be terminated without further act or deed and without any liability on the part
of the Company to any non-defaulting Underwriter and without any liability on
the part of any non-defaulting Underwriter to the Company. Nothing in this
paragraph, and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
26
<PAGE>
9. Indemnity and Contribution.
--------------------------
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter, its partners, directors and officers, and any person who controls
any Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, and the successors and assigns of all of the foregoing persons
from and against any loss, damage, expense, liability or claim (including the
reasonable cost of investigation) which, jointly or severally, any such
Underwriter or any such person may incur under the Act, the Exchange Act, the
common law or otherwise, insofar as such loss, damage, expense, liability or
claim (i) arises out of or is based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or in the
Registration Statement as amended by any post-effective amendment thereof by the
Company) or in a Prospectus (the term Prospectus for the purpose of this Section
9 being deemed to include any Preliminary Prospectus, the Prospectus and the
Prospectus as amended or supplemented by the Company) or arises out of or is
based upon any omission or alleged omission to state a material fact required to
be stated in either such Registration Statement or Prospectus or necessary to
make the statements made therein not misleading, except insofar as any such
loss, damage, expense, liability or claim arises out of or is based upon any
untrue statement or alleged untrue statement of a material fact contained in and
in conformity with information furnished in writing by or on behalf of any
Underwriter through you to the Company expressly for use with reference to such
Underwriter in such Registration Statement or such Prospectus or arises out of
or is based upon any omission or alleged omission to state a material fact in
connection with such information required to be stated in such Registration
Statement or such Prospectus or necessary to make such information not
misleading; (ii) arises out of or is based upon any untrue statement or alleged
untrue statement of a material fact contained in any material prepared by or
with the consent of the Company for distribution to Participants in connection
with the distribution of the Reserved Shares, or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading; (iii) arises out of
or is based upon the failure of any Participant to pay for and accept delivery
of Reserved Shares that the Participant has agreed to purchase; or (iv) relates
to, or arises out of, or in connection with, the distribution of the Reserved
Shares, other than losses, claims, damages or liabilities (or expenses relating
thereto) that are finally judicially determined to have resulted from the bad
faith or gross negligence of the Underwriters.
The foregoing indemnity with respect to any untrue statement contained
in or any omission from a Preliminary Prospectus shall not inure to the benefit
of the Underwriter (or any person controlling such Underwriter) from whom the
person asserting any such loss, liability, claim, damage or expense purchased
any of the Shares that are the subject thereof if the Company shall sustain the
burden of proving that such person was not sent or given a copy of the
Prospectus (or the Prospectus as amended or supplemented) at or prior to the
written confirmation of the sale of such Shares to such person and the untrue
statement contained or the omission from such Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as amended or supplemented).
27
<PAGE>
If any action, suit or proceeding (together, a Proceeding) is brought
against an Underwriter or any such person in respect of which indemnity may be
sought against the Company pursuant to the foregoing paragraph, such Underwriter
or such person shall promptly notify the Company in writing of the institution
of such Proceeding and the Company shall assume the defense of such Proceeding,
including the employment of counsel reasonably satisfactory to such indemnified
party and payment of all fees and expenses; provided, however, that the omission
-------- -------
to so notify the Company shall not relieve the Company from any liability which
the Company may have to any Underwriter or any such person or otherwise. Such
Underwriter or such person shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such Underwriter or of such person unless the employment of such
counsel shall have been authorized in writing by the Company in connection with
the defense of such Proceeding or the Company shall not have, within a
reasonable period of time in light of the circumstances, employed counsel to
have charge of the defense of such Proceeding or such indemnified party or
parties shall have reasonably concluded that there may be defenses available to
it or them which are different from, additional to or in conflict with those
available to the Company (in which case the Company shall not have the right to
direct the defense of such Proceeding on behalf of the indemnified party or
parties), in any of which events such fees and expenses shall be borne by the
Company and paid as incurred (it being understood, however, that the Company
shall not be liable for the expenses of more than one separate counsel (in
addition to any local counsel) in any one Proceeding or series of related
Proceedings in the same jurisdiction representing the indemnified parties who
are parties to such Proceeding). The Company shall not be liable for any
settlement of any Proceeding effected without its written consent but if settled
with the written consent of the Company, the Company agrees to indemnify and
hold harmless any Underwriter and any such person from and against any loss or
liability by reason of such settlement. Notwithstanding the foregoing sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second sentence of this paragraph, then the indemnifying
party agrees that it shall be liable for any settlement of any Proceeding
effected without its written consent if (i) such settlement is entered into more
than 60 business days after receipt by such indemnifying party of the aforesaid
request, (ii) such indemnifying party shall not have reimbursed the indemnified
party in accordance with such request prior to the date of such settlement and
(iii) such indemnified party shall have given the indemnifying party at least 30
days' prior notice of its intention to settle. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened Proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such Proceeding and does not include an admission
of fault, culpability or a failure to act, by or on behalf of such indemnified
party.
(b) Each Underwriter severally agrees to indemnify, defend and hold
harmless the Company, its directors and officers, and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, and the
28
<PAGE>
successors and assigns of all of the foregoing persons from and against any
loss, damage, expense, liability or claim (including the reasonable cost of
investigation) which, jointly or severally, the Company or any such person may
incur under the Act, the Exchange Act, the common law or otherwise, insofar as
such loss, damage, expense, liability or claim arises out of or is based upon
any untrue statement or alleged untrue statement of a material fact contained in
and in conformity with information furnished in writing by or on behalf of such
Underwriter through you to the Company expressly for use with reference to such
Underwriter in the Registration Statement (or in the Registration Statement as
amended by any post-effective amendment thereof by the Company) or in a
Prospectus, or arises out of or is based upon any omission or alleged omission
to state a material fact in connection with such information required to be
stated in such Registration Statement or such Prospectus or necessary to make
such information not misleading.
If any Proceeding is brought against the Company or any such person in
respect of which indemnity may be sought against any Underwriter pursuant to the
foregoing paragraph, the Company or such person shall promptly notify such
Underwriter in writing of the institution of such Proceeding and such
Underwriter shall assume the defense of such Proceeding, including the
employment of counsel reasonably satisfactory to such indemnified party and
payment of all fees and expenses; provided, however, that the omission to so
-------- -------
notify such Underwriter shall not relieve such Underwriter from any liability
which such Underwriter may have to the Company or any such person or otherwise.
The Company or such person shall have the right to employ its own counsel in any
such case, but the fees and expenses of such counsel shall be at the expense of
the Company or such person unless the employment of such counsel shall have been
authorized in writing by such Underwriter in connection with the defense of such
Proceeding or such Underwriter shall not have, within a reasonable period of
time in light of the circumstances, employed counsel to have charge of the
defense of such Proceeding or such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them which
are different from or additional to or in conflict with those available to such
Underwriter (in which case such Underwriter shall not have the right to direct
the defense of such Proceeding on behalf of the indemnified party or parties,
but such Underwriter may employ counsel and participate in the defense thereof
but the fees and expenses of such counsel shall be at the expense of such
Underwriter), in any of which events such fees and expenses shall be borne by
such Underwriter and paid as incurred (it being understood, however, that such
Underwriter shall not be liable for the expenses of more than one separate
counsel (in addition to any local counsel) in any one Proceeding or series of
related Proceedings in the same jurisdiction representing the indemnified
parties who are parties to such Proceeding). No Underwriter shall be liable for
any settlement of any such Proceeding effected without the written consent of
such Underwriter but if settled with the written consent of such Underwriter,
such Underwriter agrees to indemnify and hold harmless the Company and any such
person from and against any loss or liability by reason of such settlement.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second sentence of this
paragraph, then the indemnifying party agrees that it shall be liable for any
settlement of any Proceeding effected without its written consent if (i) such
29
<PAGE>
settlement is entered into more than 60 business days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such
request prior to the date of such settlement and (iii) such indemnified
party shall have given the indemnifying party at least 30 days' prior
notice of its intention to settle. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of
any pending or threatened Proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such Proceeding.
(c) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under subsections (a) and (b) of this
Section 9 in respect of any losses, damages, expenses, liabilities or
claims referred to therein, then each applicable indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
damages, expenses, liabilities or claims (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and of the
Underwriters on the other in connection with the statements or omissions
which resulted in such losses, damages, expenses, liabilities or claims, as
well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other
shall be deemed to be in the same respective proportions as the total
proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company and the total
underwriting discounts and commissions received by the Underwriters, bear
to the aggregate public offering price of the Shares. The relative fault of
the Company on the one hand and of the Underwriters on the other shall be
determined by reference to, among other things, whether the untrue
statement or alleged untrue statement of a material fact or omission or
alleged omission relates to information supplied by the Company or by the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
damages, expenses, liabilities and claims referred to in this subsection
shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating, preparing to
defend or defending any Proceeding.
(d) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by
pro rata allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does not take
account of the equitable considerations referred to in subsection (c)
above. Notwithstanding the provisions of this Section 9, no Underwriter
shall be required to contribute any amount in excess of the amount by which
the total price at which the Shares underwritten by such Underwriter and
distributed to the public were offered to the public exceeds the amount of
any damage which such Underwriter
30
<PAGE>
has otherwise been required to pay by reason of such untrue statement or
alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 9 are several in proportion to their
respective underwriting commitments and not joint.
(e) The indemnity and contribution agreements contained in this
Section 9 and the covenants, warranties and representations of the Company
contained in this Agreement shall remain in full force and effect
regardless of any investigation made by or on behalf of any Underwriter,
its partners, directors or officers or any person (including each partner,
officer or director of such person) who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, or by
or on behalf of the Company, its directors or officers or any person who
controls the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, and shall survive any termination of this Agreement
or the issuance and delivery of the Shares. The Company and each
Underwriter agree promptly to notify each other of the commencement of any
Proceeding against it and, in the case of the Company, against any of the
Company's officers or directors in connection with the issuance and sale of
the Shares, or in connection with the Registration Statement or Prospectus.
10. Notices. Except as otherwise herein provided, all statements,
-------
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
Warburg Dillon Read LLC, 299 Park Avenue, New York, N.Y. 10171-0026, Attention:
Syndicate Department and, if to the Company, shall be sufficient in all respects
if delivered or sent to the Company at the offices of the Company at Adolor
Corporation, 371 Phoenixville Pike, Malvern, Pennsylvania, 19355 Attention:
Chief Executive Officer.
11. Governing Law; Construction. This Agreement and any claim,
---------------------------
counterclaim or dispute of any kind or nature whatsoever arising out of or in
any way relating to this Agreement ("Claim"), directly or indirectly, shall be
governed by, and construed in accordance with, the laws of the State of New York
without giving effect to any laws that would require the application of the laws
of a jurisdiction other than the State of New York. The Section headings in this
Agreement have been inserted as a matter of convenience of reference and are not
a part of this Agreement.
12. Submission to Jurisdiction. Except as set forth below, no Claim
--------------------------
may be commenced, prosecuted or continued in any court other than the courts of
the State of New York located in the City and County of New York or in the
United States District Court for the Southern District of New York, which courts
shall have jurisdiction over the adjudication of such matters, and the Company
consents to the jurisdiction of such courts and personal service with respect
thereto. The Company hereby consents to personal jurisdiction, service and venue
in any court in which any Claim arising out of or in any way relating to this
Agreement is brought by any third party against Warburg Dillon Read LLC or any
indemnified party. Each of Warburg Dillon Read LLC and the Company (on its
behalf and, to the extent permitted by applicable law, on behalf of its
stockholders and affiliates) waives all right to trial by jury in any action,
31
<PAGE>
proceeding or counterclaim (whether based upon contract, tort or otherwise) in
any way arising out of or relating to this Agreement. The Company agrees that a
final judgment in any such action, proceeding or counterclaim brought in any
such court shall be conclusive and binding upon the Company and may be enforced
in any other courts in the jurisdiction of which the Company is or may be
subject, by suit upon such judgment.
13. Parties at Interest. The Agreement herein set forth has been and
-------------------
is made solely for the benefit of the Underwriters and the Company and to the
extent provided in Section 9 hereof the controlling persons, partners, directors
and officers referred to in such section, and their respective successors,
assigns, heirs, personal representatives and executors and administrators. No
other person, partnership, association or corporation (including a purchaser, as
such purchaser, from any of the Underwriters) shall acquire or have any right
under or by virtue of this Agreement.
14. Counterparts. This Agreement may be signed by the parties in one
------------
or more counterparts which together shall constitute one and the same agreement
among the parties.
15. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Underwriters and the Company and their successors and assigns and any successor
or assign of any substantial portion of the Company's and any of the
Underwriters' respective businesses and/or assets.
16. Miscellaneous. Warburg Dillon Read LLC, an indirect, wholly
-------------
owned subsidiary of [ ], is not a bank and is separate from any affiliated
bank, including any U.S. branch or agency of Warburg Dillon Read LLC. Because
Warburg Dillon Read LLC is a separately incorporated entity, it is solely
responsible for its own contractual obligations and commitments, including
obligations with respect to sales and purchases of securities. Securities sold,
offered or recommended by Warburg Dillon Read LLC are not deposits, are not
insured by the Federal Deposit Insurance Corporation, are not guaranteed by a
branch or agency, and are not otherwise an obligation or responsibility of a
branch or agency.
32
<PAGE>
If the foregoing correctly sets forth the understanding among the
Company and the Underwriters, please so indicate in the space provided below for
the purpose, whereupon this letter and your acceptance shall constitute a
binding agreement among the Company and the Underwriters, severally.
Very truly yours,
ADOLOR CORPORATION
By:
-----------------------------
Title:
---------------------------
Accepted and agreed to as of the
date first above written, on
behalf of themselves
and the other several Underwriters
named in Schedule A
WARBURG DILLON READ LLC, on behalf of itself
and as representative of the Co-Managers
By:
---------------------------------
Name:
33
<PAGE>
SCHEDULE A
Number of
Underwriter Firm Shares
- ----------- -----------
WARBURG DILLON READ LLC
FLEETBOSTON ROBERTSON STEPHENS INC.
PACIFIC GROWTH EQUITIES, INC.
-------------
Total
=============
34
<PAGE>
Exhibit 3.1
-----------
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ADOLOR CORPORATION
FIRST: The name of the corporation is Adolor Corporation.
SECOND: The registered office of the corporation in the State of
Delaware is to be located at 1013 Centre Road, City of Wilmington, County of New
Castle, Delaware, 19805. The name of the registered agent of the corporation at
such 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 from time to time.
FOURTH: The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 166,203,919 shares,
consisting of 96,024,821 shares of Common Stock with a par value of $.0001 per
share (the "Common Stock") and 70,179,098 shares of Preferred Stock with a par
value of $.01 per share (the "Preferred Stock").
Each four and one-half (4 1/2) shares of the Corporation's Common
Stock issued and outstanding as of the date this Amended and Restated
Certificate of Incorporation is filed shall be converted and reclassified into
one (1) share of the Corporation's Common Stock, so that each share of the
Corporation's Common Stock issued and outstanding is hereby converted and
reclassified. No fractional interests resulting from such conversion shall be
issued.
A description of the respective classes of stock and a statement of
designations, powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock and Common Stock are as
follows:
A. COMMON STOCK
------------
1. General. All shares of Common Stock will be identical and will
-------
entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are subject to
and qualified by the rights of holders of the Preferred Stock.
<PAGE>
2. Dividends. Dividends may be declared and paid on the Common
---------
Stock from funds lawfully available therefor as and when determined by the Board
of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. Dissolution, Liquidation or Winding Up. In the event of any
--------------------------------------
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of Common
Stock shall entitle the holder thereof to receive an equal portion of the net
assets of the Corporation available for distribution to the holders of Common
Stock, subject to any preferential rights of any then outstanding Preferred
Stock.
4. Voting Rights. Except as otherwise required by law or this
-------------
Amended and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by such
holder on the books of the Corporation for the election of directors and on all
matters submitted to a vote of stockholders of the Corporation. Except as
otherwise required by law or provided herein, holders of Common Stock shall vote
together with holders of the Preferred Stock as a single class, subject to any
special or preferential voting rights of any then outstanding Preferred Stock.
There shall be no cumulative voting.
B. PREFERRED STOCK
---------------
The Preferred Stock may be issued in one or more series at such time
or times and for such consideration or considerations as the Board of Directors
of the Corporation may determine. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation or under applicable law, different series of Preferred Stock shall
not be construed to constitute different classes of shares for the purpose of
voting by classes.
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the undesignated Preferred Stock in one or more
series, each with such designations, preferences, voting powers (or special,
preferential or no voting powers), relative participating, optional or other
special rights and privileges and such qualifications, limitations or
restrictions thereof as shall be stated in the resolution or resolutions adopted
by the Board of Directors to create such series, and a certificate of said
resolution or resolutions (a "Certificate of Designation") shall be filed in
accordance with the General Corporation Law of the State of Delaware. The
authority of the Board of Directors with respect to each such series shall
include, without limitation of the foregoing, the right to provide that the
shares of each such series may be: (i) subject to redemption at such time or
times and at such price or prices; (ii) entitled to receive dividends (which may
be cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; (iv) convertible into, or exchangeable for, shares of any other
class or classes of stock, or of any other series of the same or any other class
or classes of stock of the Corporation at such price or prices or at such rates
of exchange and with such adjustments, if any; (v) entitled to the benefit of
such limitations, if any,
-2-
<PAGE>
on the issuance of additional shares of such series or shares of any other
series of Preferred Stock; or (vi) entitled to such other preferences, powers,
qualifications, rights and privileges, all as the Board of Directors may deem
advisable and as are not inconsistent with law and the provisions of this
Amended and Restated Certificate of Incorporation.
C. CONVERTIBLE PREFERRED STOCK
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1. Number of Shares. The series of Preferred Stock designated and
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known as "Series A Convertible Preferred Stock" shall consist of 6,000,000
shares. The Series of Preferred Stock designated and known as "Series B
Convertible Preferred Stock" shall consist of 22,869,049 shares. The series of
Preferred Stock designated and known as "Series C Convertible Preferred Stock"
shall consist of 13,814,286 shares. The series of Preferred Stock designated
and known as "Series D Convertible Preferred Stock" shall consist of 960,000
shares. The series of Preferred Stock designated and known as "Series E
Convertible Preferred Stock" shall consist of 11,366,667 shares. The series of
Preferred Stock designated and known as "Series F Convertible Preferred Stock"
shall consist of 2,500,000 shares. The series of Preferred Stock designated and
known as "Series G Convertible Preferred Stock" shall consist of 12,306,000
shares. Except as the context otherwise requires, 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 are sometimes hereinafter referred to collectively as the
"Convertible Preferred Stock."
2. Voting.
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2A. General. Except as may be otherwise provided in the terms
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of 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 or by law, the Convertible
Preferred Stock shall vote together with all other classes and series of stock
of the Corporation as a single class on all actions to be taken by the
stockholders of the Corporation. Each share of Convertible Preferred Stock
shall entitle the holder thereof to such number of votes per share on each such
action as shall equal the number of shares of Common Stock (including fractions
of a share) into which each share of Convertible Preferred Stock is then
convertible.
2B. Board Size. The Corporation shall not, without the written
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consent or affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock, Series E Convertible
Preferred Stock and Series G Convertible Preferred Stock, each voting as a
separate series, given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a series, increase the maximum number of
directors constituting the Board of Directors to a number in excess of seven
(7).
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2C. Board Seats. The holders of the Series A Convertible
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Preferred Stock, voting as a separate series, shall be entitled to elect three
(3) directors of the Corporation. A vacancy in any directorship elected by the
holders of the Series A Convertible Preferred Stock shall be filled only by vote
or written consent of the holders of the Series A Convertible Preferred Stock.
Notwithstanding the foregoing, so long as ARCH Venture Fund, II, L.P. (or any
successor thereto) ("ARCH") continues to hold 10% of the outstanding Series A
Convertible Preferred Stock, ARCH shall be entitled to appoint a representative
to the Corporation's Board of Directors and so long as Weiss, Peck & Greer
Venture Associates III, L.P. and WPG Enterprise Fund II, L.P., (together,
"WP&G") together continue to hold 10% of the outstanding Series A Convertible
Preferred Stock, WP&G shall be entitled to appoint a representative to the
Corporation's Board of Directors. The holders of Series B Convertible Preferred
Stock, voting as a separate series, shall be entitled to elect one (1) director
of the Corporation. A vacancy in the directorship elected by the holders of the
Series B Convertible Preferred Stock shall be filled only by vote or written
consent of the holders of the Series B Convertible Preferred Stock.
Notwithstanding the foregoing, so long as Technology Leaders, II L.P. (or any
successor thereto) ("Tech Leaders") continues to hold (together with any
affiliate of Tech Leaders) in the aggregate 10% of the outstanding Series B
Convertible Preferred Stock, Tech Leaders shall be entitled to appoint a
representative to the Corporation's Board of Directors. Notwithstanding the
foregoing or anything else to the contrary provided in the Certificate of
Incorporation, if the Corporation fails or refuses, for any reason or for no
reason, to redeem on the Redemption Date (as defined in paragraph 7) all of the
then outstanding shares of the Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock, Series E
Convertible Preferred Stock and Series G Convertible Preferred Stock in
accordance with the terms and provisions of paragraph 7, the holders of the
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series E Convertible Preferred Stock and
Series G Convertible Preferred Stock, voting as a separate class shall be
entitled to elect all of the directors of the Corporation. At any meeting (or
in a written consent in lieu thereof) held for the purpose of electing
directors, the presence in person or by proxy (or the written consent) of the
holders of sixty percent (60%) of the shares of Series A Convertible Preferred
Stock or Series B Convertible Preferred Stock then outstanding, as the case may
be, shall constitute a quorum of the Series A Convertible Preferred Stock or
Series B Convertible Preferred Stock, as the case may be, for the election of
directors to be elected solely by the holders of the Series A Convertible
Preferred Stock or Series B Convertible Preferred Stock, and the presence in
person or by proxy (or written consent) of the holders of sixty percent (60%) of
the shares of Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock, Series E Convertible
Preferred Stock and Series G Convertible Preferred Stock then outstanding shall
constitute a quorum of the Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock, Series E
Convertible Preferred Stock and Series G Convertible Preferred Stock for the
election of directors to be elected solely by the holders of the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series E Convertible Preferred Stock and Series G
Convertible Preferred Stock.
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3. Dividends. The holders of Convertible Preferred Stock shall be
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entitled to receive, out of funds legally available therefor, when and if
declared by the Board of Directors, quarterly dividends at the rate per annum of
$.02 per share, with respect to the Series A Convertible Preferred Stock, $.0336
per share, with respect to the Series B Convertible Preferred Stock, $.056 per
share, with respect to the Series C Convertible Preferred Stock, $.06 per share,
with respect to the Series E Convertible Preferred Stock, $.08 per share, with
respect to the Series F Convertible Preferred Stock, and $.08 per share, with
respect to the Series G Convertible Preferred Stock, and, at the same rate and
at the same time as dividends are declared and paid on the Common Stock, with
respect to the Series D Convertible Preferred Stock (the "Accruing Dividends").
Accruing Dividends shall accrue from day to day, whether or not earned or
declared, and shall be cumulative.
4. Liquidation. Upon any liquidation, dissolution or winding up of
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the Corporation, whether voluntary or involuntary, the holders of the shares of
Convertible Preferred Stock shall be entitled, before any distribution or
payment is made upon any stock ranking on liquidation junior to the Convertible
Preferred Stock, to be paid an amount equal to the greater of (i) $.25 per
share, with respect to the Series A Convertible Preferred Stock, $.42 per share
with respect to the Series B Convertible Preferred Stock, $.70 per share with
respect to the Series C Convertible Preferred Stock, $1.25 per share with
respect to the Series D Convertible Preferred Stock, $.75 per share with respect
to the Series E Convertible Preferred Stock, $1.00 per share with respect to the
Series F Convertible Preferred Stock and $1.00 per share with respect to the
Series G Convertible Preferred Stock, plus, (a) in the case of each share of
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series E Convertible Preferred Stock,
Series F Convertible Preferred Stock and Series G Convertible Preferred Stock,
an amount equal to all Accruing Dividends unpaid thereon (whether or not
declared) and any other dividends declared but unpaid thereon, computed to the
date payment thereof is made available, and (b) in the case of each share of
Series D Convertible Preferred Stock, an amount equal to all dividends declared
but unpaid thereon, computed to the date payment thereof is made available, or
(ii) such amount per share as would have been payable had each such share been
converted to Common Stock pursuant to paragraph 6 immediately prior to such
liquidation, dissolution or winding up, and the holders of Convertible Preferred
Stock shall not be entitled to any further payment, such amount payable with
respect to one share of Convertible Preferred Stock being sometimes referred to
as the "Liquidation Payment" and with respect to all shares of Convertible
Preferred Stock being sometimes referred to as the "Liquidation Payments." If
upon such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Convertible Preferred Stock shall be insufficient to permit payment to the
holders of Convertible Preferred Stock of the amount distributable as aforesaid,
then the entire assets of the Corporation to be so distributed shall be
distributed ratably among the holders of Convertible Preferred Stock. Upon any
such liquidation, dissolution or winding up of the Corporation, after the
holders of Convertible Preferred Stock shall have been paid in full the amounts
to which they shall be entitled, the remaining net assets of the Corporation may
be distributed to the holders of stock ranking on liquidation junior to the
Convertible Preferred Stock.
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Written notice of such liquidation, dissolution or winding up, stating
a payment date, the amount of the Liquidation Payments and the place where said
Liquidation Payments shall be payable, shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, not less than 20 days prior to the payment date stated therein, to the
holders of record of Convertible Preferred Stock, such notice to be addressed to
each such holder at its address as shown by the records of the Corporation. The
consolidation or merger of the Corporation with or into another entity or
entities which results in the exchange of outstanding shares of the Corporation
for securities or other consideration issued or paid or caused to be issued or
paid by any such entity or affiliate thereof (other than a merger to
reincorporate the Corporation in a different jurisdiction), and the sale, lease,
abandonment, transfer or other disposition by the Corporation of all or
substantially all its assets, shall be deemed to be a liquidation, dissolution
or winding up of the Corporation within the meaning of the provisions of this
paragraph 4.
5. Restrictions. At any time when shares of Series A Convertible
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Preferred Stock, Series B Convertible Preferred Stock, the Series C Convertible
Preferred Stock, the Series E Convertible Preferred Stock, the Series F
Convertible Preferred Stock or the Series G Convertible Preferred Stock are
outstanding, except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by law or by the
Certificate of Incorporation, and in addition to any other vote required by law
or the Certificate of Incorporation, without approval of the holders of at least
sixty percent (60%) of the then outstanding shares of each of the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series E Convertible Preferred Stock, Series F
Convertible Preferred Stock and/or Series G Convertible Preferred Stock, as the
case may be, given in writing or by vote at a meeting, each consenting or voting
(as the case may be) separately as a series, the Corporation will not:
5A. Create or authorize the creation of any additional class or
series of shares of stock unless the same ranks junior to the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series E Convertible Preferred Stock, Series F
Convertible Preferred Stock or Series G Convertible Preferred Stock, as the case
may be, or increase the authorized amount of any additional class or series of
shares of stock unless the same ranks junior to the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series E Convertible Preferred Stock, Series F Convertible
Preferred Stock or Series G Convertible Preferred Stock, as the case may be, as
to the distribution of assets on the liquidation, dissolution or winding up of
the Corporation, or increase the authorized amount of the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series E Convertible Preferred Stock, Series F Convertible
Preferred Stock or Series G Convertible Preferred Stock, as the case may be, as
to the distribution of assets on the liquidation, dissolution or winding up of
the Corporation, or create or authorize any obligation or security convertible
into shares of Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock, Series E Convertible
Preferred Stock, Series F Convertible Preferred Stock or Series G Convertible
Preferred Stock, as the case may be, or into shares of any other class or
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series of stock unless the same ranks junior to the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series E Convertible Preferred Stock, Series F Convertible
Preferred Stock or Series G Convertible Preferred Stock, as the case may be, as
to the distribution of assets on the liquidation, dissolution or winding up of
the Corporation, whether any such creation, authorization or increase shall be
by means of amendment to the Certificate of Incorporation or by merger,
consolidation or otherwise;
5B. Consent to any liquidation, dissolution or winding up of the
Corporation or consolidate or merge into or with any other entity or entities or
sell, lease, abandon, transfer or otherwise dispose of all or substantially all
its assets;
5C. Amend, alter or repeal its Certificate of Incorporation or
amend, alter or repeal its By-laws if such amendment, alteration or repeal,
directly or indirectly, impacts any rights and preferences of the holders of the
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series E Convertible Preferred Stock,
Series F Convertible Preferred Stock or Series G Convertible Preferred Stock, as
the case may be;
5D. Purchase or set aside any sums for the purchase of, or pay
any dividend or make any distribution on, any shares of stock other than the
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series E Convertible Preferred Stock,
Series F Convertible Preferred Stock or Series G Convertible Preferred Stock, as
the case may be, except for (i) dividends or other distributions described in
this Section C of Article Fourth, (ii) dividends payable on the Common Stock
solely in the form of additional shares of Common Stock and (iii) the purchase
of shares of Common Stock from former employees of the Corporation who acquired
such shares directly from the Corporation, if each such purchase is made
pursuant to contractual rights held by the Corporation relating to the
termination of employment of such former employee and the purchase price does
not exceed the original issue price paid by such former employee to the
Corporation for such shares; or
5E. Redeem or otherwise acquire any shares of Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series E Convertible Preferred Stock, Series F
Convertible Preferred Stock or Series G Convertible Preferred Stock, as the case
may be, except pursuant to a purchase offer made pro rata to all holders of the
shares of Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock, Series C Convertible Preferred Stock, Series E Convertible Preferred
Stock, Series F Convertible Preferred Stock or Series G Convertible Preferred
Stock, as the case may be, on the basis of the aggregate number of outstanding
shares of Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock, Series C Convertible Preferred Stock, Series E Convertible Preferred
Stock, Series F Convertible Preferred Stock or Series G Convertible Preferred
Stock, as the case may be, then held by each such holder.
6. Conversions. The holders of shares of Convertible Preferred
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Stock shall have the following conversion rights:
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6A. Right to Convert. Subject to the terms and conditions of
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this paragraph 6, the holder of any share or shares of Convertible Preferred
Stock shall have the right, at its option at any time, to convert any such
shares of Convertible Preferred Stock (except that upon any liquidation of the
Corporation the right of conversion shall terminate at the close of business on
the business day fixed for payment of the amount distributable on the
convertible Preferred Stock) into such number of fully paid and nonassessable
shares of Common Stock as is obtained by (a) with respect to the Series A
Convertible Preferred Stock, (i) multiplying the number of shares of Series A
Convertible Preferred Stock to be converted by $0.25 and (ii) dividing the
result by the conversion price of $0.25 per share or, in case an adjustment of
such price has taken place pursuant to the further provisions of this paragraph
6, then by the conversion price as last adjusted and in effect at the date any
share or shares of Series A Convertible Preferred Stock are surrendered for
conversion (such price, or such price as last adjusted, being referred to as the
"Series A Conversion Price"), (b) with respect to the Series B Convertible
Preferred Stock, (i) multiplying the number of shares of Series B Convertible
Preferred Stock to be converted by $.42 and (ii) dividing the result by the
conversion price of $.42 per share, or, in case an adjustment of such price has
taken place pursuant to the further provisions of this paragraph 6, then by the
conversion price as last adjusted and in effect at the date any share or shares
of Series B Convertible Preferred Stock are surrendered for conversion (such
price, or such price as adjusted, being referred to as the "Series B Conversion
Price"), (c) with respect to the Series C Convertible Preferred Stock, (i)
multiplying the number of shares of Series C Convertible Preferred Stock to be
converted by $.70 and (ii) dividing the result by the conversion price of $.70
per share or, in case an adjustment of such price has taken place pursuant to
the further provisions of this paragraph 6, then by the conversion price as last
adjusted and in effect at the date any share or shares of Series C Convertible
Preferred Stock are surrendered for conversion (such price, or such price as
last adjusted, being referred to as the "Series C Conversion Price"), (d) with
respect to the Series D Convertible Preferred Stock, (i) multiplying the number
of shares of Series D Convertible Preferred Stock to be converted by $1.25 and
(ii) dividing the result by the conversion price of $1.25 per share or, in case
an adjustment of such price has taken place pursuant to the further provisions
of subparagraph 6F, then by the conversion price as last adjusted and in effect
at the date any share or shares of Series D Convertible Preferred Stock are
surrendered for conversion (such price, or such price as last adjusted, being
referred to as the "Series D Conversion Price"), (e) with respect to the Series
E Convertible Preferred Stock, (i) multiplying the number of shares of Series E
Convertible Preferred Stock to be converted by $.75 and (ii) dividing the result
by the conversion price of $.75 per share or, in case an adjustment of such
price has taken place pursuant to the further provisions of this paragraph 6,
then by the conversion price as last adjusted and in effect at the date any
share or shares of Series E Convertible Preferred Stock are surrendered for
conversion (such price, or such price as last adjusted, being referred to as the
"Series E Conversion Price"), (f) with respect to the Series F Convertible
Preferred Stock, (i) multiplying the number of shares of Series F Convertible
Preferred Stock to be converted by $1.00 and (ii) dividing the result by the
conversion price of $1.00 per share or, in case an adjustment of such price has
taken place pursuant to the further provisions of this paragraph 6, then by the
conversion price as last adjusted and in effect at the date any share or shares
of Series F Convertible Preferred Stock are surrendered for conversion (such
price, or such price as last adjusted, being referred to as the
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"Series F Conversion Price") and (g) with respect to the Series G Convertible
Preferred Stock, (i) multiplying the number of shares of Series G Convertible
Preferred Stock to be converted by $1.00 and (ii) dividing the result by the
conversion price of $1.00 per share or, in case an adjustment of such price has
taken place pursuant to the further provisions of this paragraph 6, then by the
conversion price as last adjusted and in effect at the date any share or shares
of Series G Convertible Preferred Stock are surrendered for conversion (such
price, or such price as last adjusted, being referred to as the "Series G
Conversion Price"). Such rights of conversion shall be exercised by the holder
thereof by giving written notice that the holder elects to convert a stated
number of shares of Convertible Preferred Stock into Common Stock and by
surrender of a certificate or certificates for the shares so to be converted to
the Corporation at its principal office (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the holders
of the Convertible Preferred Stock) at any time during its usual business hours
on the date set forth in such notice, together with a statement of the name or
names (with address) in which the certificate or certificates for shares of
Common Stock shall be issued.
6B. Issuance of Certificates: Time Conversion Effected.
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Promptly after the receipt of the written notice referred to in subparagraph 6A
and surrender of the certificate or certificates for the share or shares of
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 or
Series G Convertible Preferred Stock to be converted, the Corporation shall
issue and deliver, or cause to be issued and delivered, to the holder,
registered in such name or names as such holder may direct, a certificate or
certificates for the number of whole shares of Common Stock issuable upon the
conversion of such share or shares of Convertible Preferred Stock. To the
extent permitted by law, such conversion shall be deemed to have been effected
and the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price, Series F
Conversion Price or Series G Conversion Price, as the case may be, shall be
determined as of the close of business on the date on which such written notice
shall have been received by the Corporation and the certificate or certificates
for such share or shares shall have been surrendered as aforesaid, and at such
time the rights of the holder of such share or shares of Convertible Preferred
Stock shall cease, and the person or persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or holders of record
of the shares represented thereby.
6C. Fractional Shares; Dividends: Partial Conversion. No
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fractional shares shall be issued upon conversion of Convertible Preferred Stock
into Common Stock and no payment or adjustment shall be made upon any conversion
on account of any cash dividends on the Common Stock issued upon such
conversion. At the time of each conversion, the Corporation shall pay in cash
an amount equal to all dividends, excluding Accruing Dividends, accrued and
unpaid on the shares of Convertible Preferred Stock surrendered for conversion
to the date upon which such conversion is deemed to take place as provided in
subparagraph 6B. In case the number of shares of Convertible Preferred Stock
represented by the certificate or
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certificates surrendered pursuant to subparagraph 6A exceeds the number of
shares converted, the Corporation shall, upon such conversion, execute and
deliver to the holder, at the expense of the Corporation, a new certificate or
certificates for the number of shares of Convertible Preferred Stock represented
by the certificate or certificates surrendered which are not to be converted. If
any fractional share of Common Stock would, except for the provisions of the
first sentence of this subparagraph 6C, be delivered upon such conversion, the
Corporation, in lieu of delivering such fractional share, shall pay to the
holder surrendering the Convertible Preferred Stock for conversion an amount in
cash equal to the current market price of such fractional share as determined in
good faith by the Board of Directors of the Corporation.
6D. Adjustment of Price Upon Issuance of Common Stock. So long
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as the Company has not consummated a Qualified Public Offering (as defined in
paragraph 6O), except as provided in subparagraph 6E, if and whenever the
Corporation shall issue or sell, or is, in accordance with subparagraphs 6D(1)
through 6D(7), deemed to have issued or sold, any shares of Common Stock for a
consideration per share less than the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series E Conversion Price, Series F
Conversion Price and/or Series G Conversion Price in effect immediately prior to
the time of such issue or sale, then, forthwith upon such issue or sale, the
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price,
Series E Conversion Price, Series F Conversion Price and/or Series G Conversion
Price, as the case may be, shall be reduced to the price determined by dividing
(i) an amount equal to the sum of (a) the number of shares of Common Stock
outstanding immediately prior to such issue or sale multiplied by the then
existing Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series E Conversion Price, Series F Conversion Price and/or
Series G Conversion Price, as the case may be, and (b) the consideration, if
any, received by the Corporation upon such issue or sale, by (ii) the total
number of shares of Common Stock outstanding immediately after such issue or
sale.
For purposes of this subparagraph 6D, the following subparagraphs 6D(1) to
6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time the
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Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exerciseable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange of
such Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or
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exchange thereof, by (ii) the total maximum number of shares or Common Stock
issuable upon the exercise of such Options or upon the conversion or exchange of
all such Convertible Securities issuable upon the exercise of such Options)
shall be less than the Series A Conversion Price, Series B Conversion Price,
Series C Conversion Price, Series E Conversion Price, Series F Conversion Price
and/or Series G Conversion Price in effect immediately prior to the time of the
granting of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon the
exercise of such Options shall be deemed to have been issued for such price per
share as of the date of granting of such Options or the issuance of such
Convertible Securities and thereafter shall be deemed to be outstanding. Except
as otherwise provided in subparagraph 6D(3), no adjustment of the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series E
Conversion Price, Series F Conversion Price and/or Series G Conversion Price, as
the case may be, shall be made upon the actual issue of such Common Stock or of
such Convertible Securities upon exercise of such Options or upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities.
6D(2) Issuance of Convertible Securities. In case the
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Corporation shall in any manner issue (whether directly or by assumption in a
merger or otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities)
shall be less than the Series A Conversion Price, Series B Conversion Price,
Series C Conversion Price, Series E Conversion Price, Series F Conversion Price
and/or Series G Conversion Price in effect immediately prior to the time of such
issue or sale, as the case may be, then the total maximum number of shares of
Common Stock issuable upon conversion or exchange of all such Convertible
Securities shall be deemed to have been issued for such price per share as of
the date of the issue or sale of such Convertible Securities and thereafter
shall be deemed to be outstanding, provided that (a) except as otherwise
provided in subparagraph 6D(3), no adjustment of the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series E Conversion Price,
Series F Conversion Price and/or Series G Conversion Price, as the case may be,
shall be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities and (b) if any such issue or sale of
such Convertible Securities is made upon exercise of any Options to purchase any
such Convertible Securities for which adjustments of the Series A Conversion
Price, Series B Conversion Price, Series C Conversion Price, Series E Conversion
Price, Series F Conversion Price and/or Series G Conversion Price have been or
are to be made pursuant to other provisions of this subparagraph 6D, no further
adjustment of the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series E Conversion Price, Series F Conversion Price and/or
Series G Conversion Price, as the case may be, shall be made by reason of such
issue or sale.
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6D(3) Change in Option Price or Conversion Rate. Upon the
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happening of any of the following events, namely, if the purchase price provided
for in any Option referred to in subparagraph 6D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 6D(1) or 6D(2), or the rate
at which Convertible Securities referred to in subparagraph 6D(1) or 6D(2) are
convertible into or exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason of provisions
designed to protect against dilution), the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series E Conversion Price, Series F
Conversion Price and/or Series G Conversion Price, as the case may be, in effect
at the time of such event shall forthwith be readjusted to the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series E
Conversion Price, Series F Conversion Price and/or Series G Conversion Price, as
the case may be, which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold, but only if as a result of such
adjustment the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series E Conversion Price, Series F Conversion Price and/or
Series G Conversion Price, as the case may be, then in effect hereunder is
thereby reduced; and on the termination of any such Option or any such right to
convert or exchange such Convertible Securities, the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series E Conversion Price,
Series F Conversion Price and/or Series G Conversion Price, as the case may be,
then in effect hereunder shall forthwith be increased to the Series A Conversion
Price, Series B Conversion Price, Series C Conversion Price, Series E Conversion
Price, Series F Conversion Price and/or Series G Conversion Price, as the case
may be, which would have been in effect at the time of such termination had such
Option or Convertible Securities, to the extent outstanding immediately prior to
such termination, never been issued.
6D(4) Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock (except for dividends or distributions upon the Common
Stock), Options or Convertible Securities, any Common Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such dividend
or distribution shall be deemed to have been issued or sold.
6D(5) Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors of the Corporation, without
deduction of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith. In case
any Options shall be issued in connection with the issue and sale of other
securities of the
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<PAGE>
Corporation, together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties thereto, such Options
shall be deemed to have been issued for such consideration as determined in good
faith by the Board of Directors of the Corporation.
6D(6) Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to receive
a dividend or other distribution payable in Common Stock, Options or Convertible
Securities or (ii) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
6D(7) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation, and the disposition of any such shares shall be
considered an issue or sale of Common Stock for the purpose of this subparagraph
6D.
6E. Certain Issues of Common Stock Excepted. Anything herein to
---------------------------------------
the contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series E Conversion Price, Series F Conversion Price and/or
Series G Conversion Price in the case of (a) the issuance of up to any aggregate
of 14,750,000 shares (appropriately adjusted to reflect the occurrence of any
event described in subparagraph 6F) of Common Stock to directors, officers,
employees or consultants of the Corporation in connection with their service as
directors of the Corporation, their employment by the Corporation or their
retention as consultants by the Corporation, or to licensors or transferors of
technology to the Corporation, in each case pursuant to such arrangements,
contracts or plans as are approved by the Board of Directors, plus such number
of shares of Common Stock which are repurchased by the Corporation from such
persons after such date pursuant to contractual rights held by the Corporation
and at repurchase prices not exceeding the respective original purchase prices
paid by such persons to the Corporation therefor, (b) the issuance of Common
Stock in connection with a Qualified Public Offering (as defined in paragraph 6O
hereof) or (c) upon the issuance of Common Stock upon conversion of any
Convertible Preferred Stock.
6F. Subdivision or Combination of Common Stock. In case the
------------------------------------------
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price, Series F
Conversion Price and Series G Conversion Price in effect immediately prior to
such subdivision shall be proportionately reduced, and, conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price, Series F
Conversion Price and Series G
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<PAGE>
Conversion Price in effect immediately prior to such combination shall be
proportionately increased. In the case of any such subdivision, no further
adjustment shall be made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital
----------------------------------
reorganization or reclassification of the capital stock of the Corporation shall
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization or reclassification, lawful
and adequate provisions shall be made whereby each holder of share or shares of
Convertible Preferred Stock shall thereupon have the right to receive, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore receivable upon the conversion of
such share or shares Convertible Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such Common Stock immediately theretofore receivable upon such
conversion had such reorganization or reclassification not taken place, and in
any such case appropriate provisions shall be made with respect to the rights
and interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series D Conversion Price,
Series E Conversion Price, Series F Conversion Price and Series G Conversion
Price) shall thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
of such conversion rights.
6H. Notice of Adjustment. Upon any adjustment of the Conversion
--------------------
Price, then and in each such case the Corporation shall give written notice
thereof, by delivery in person, certified or registered mail, return receipt
requested, telecopier or telex, addressed to each holder of shares of
Convertible Preferred Stock at the address of such holder as shown on the books
of the Corporation, which notice shall state the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series D Conversion Price,
Series E Conversion Price, Series F Conversion Price and/or Series G Conversion
Price resulting from such adjustment, setting forth in reasonable detail the
method upon which such calculation is based.
6I. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or other
rights;
(3) there shall be any capital reorganization or reclassification
of the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into another entity or entities, or a sale, lease,
abandonment, transfer or other disposition of all or substantially all its
assets; or
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<PAGE>
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Convertible Preferred Stock at
the address of such holder as shown the books of the Corporation, (a) at least
20 days' prior written notice of the date on which the books of the Corporation
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up and (b) in the case of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written notice
of the date when at the same shall take place. Such notice in accordance with
the foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the foregoing
clause (b) shall also specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, as the case may be.
6J. Stock to be Reserved. The Corporation will at all times
--------------------
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issuance upon the conversion of Convertible Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Convertible Preferred Stock. The
Corporation covenants that all shares of Common Stock which shall be so issued
shall be duly and validly issued and fully paid and nonassessable and free from
all taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Corporation covenants that it will
from time to time take all such action as may be requisite to assure that the
par value per share of the Common Stock is at all times equal to or less than
the Series A Conversion Price, Series B Conversion Price, Series C Conversion
Price, Series D Conversion Price, Series E Conversion Price, Series F Conversion
Price and Series G Conversion Price in effect at the time. The Corporation will
take all such action as may be necessary to assure that all such shares of
Common Stock may be so issued without violation of any applicable law or
regulation, or of any requirement of any national securities exchange upon which
the Common Stock may be listed. The Corporation will not take any action which
results in any adjustment of the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price, Series E Conversion
Price, Series F Conversion Price or Series G Conversion Price if the total
number of shares of Common Stock issued and issuable after such action upon
conversion of the Convertible Preferred Stock would exceed the total number of
shares of Common Stock then authorized by the Certificate of Incorporation.
6K. No Reissuance of Convertible Preferred Stock. Shares of
--------------------------------------------
Convertible Preferred Stock which are converted into shares of Common Stock as
provided herein shall not be reissued.
-15-
<PAGE>
6L. Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of Convertible Preferred Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof, provided
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Convertible Preferred
Stock which is being converted.
6M. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Convertible Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Convertible Preferred Stock in any manner which interferes with the timely
conversion of such Convertible Preferred Stock, except as may otherwise be
required to comply with applicable securities laws.
6N. Definition of Common Stock. As used in this paragraph 6,
--------------------------
the term "Common Stock" shall mean and include the Corporation's authorized
Common Stock, par value $.0001 per share, as constituted on the date of filing
of these terms of the Convertible Preferred Stock, and shall also include any
capital stock of any class of the Corporation thereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; provided that the shares of Common Stock receivable upon
conversion of shares of Convertible Preferred Stock shall include only shares
designated as Common Stock of the Corporation on the date of filing of this
instrument, or in case of any reorganization or reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
subparagraph 6G.
6O. Mandatory Conversion. If at any time the Corporation shall
--------------------
effect a firm commitment underwritten public offering of shares of Common Stock
in which the aggregate price paid for such shares by the public shall be at
least $7,000,000, then effective upon the closing of the sale of such shares by
the Corporation pursuant to such public offering, all outstanding shares of
Series D Convertible Preferred Stock shall automatically convert to shares of
Common Stock on the basis set forth in this paragraph 6. If at any time the
Corporation shall effect a firm commitment underwritten public offering of
shares of Common Stock in which the aggregate price paid for such shares by the
public shall be at least $25,000,000 and the public offering price per share
shall be at least $1.50 per share (as adjusted for any combination, division
subdivision, stock split, reverse stock splits or similar event relating to the
Common Stock) (a "Qualified Public Offering"), then effective upon the closing
of the sale of such shares by the Corporation pursuant to such public offering,
all outstanding shares of Convertible Preferred Stock shall automatically
convert to shares of Common Stock on the basis set forth in this paragraph 6.
Holders of shares of Series D Convertible Preferred Stock or any other
Convertible Preferred Stock so converted may deliver to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to such holders) during its usual
business hours, the certificate or certificates for the shares so converted. As
promptly as practicable thereafter, the Corporation shall issue and deliver to
such holder a certificate or certificates for the number of whole shares of
Common
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<PAGE>
Stock to which such holder is entitled, together with any cash dividends and
payment in lieu of fractional shares to which such holder may be entitled
pursuant to subparagraph 6C. Until such time as a holder of shares of Series D
Convertible Preferred Stock or any other Convertible Preferred Stock shall
surrender his or its certificates therefor as provided above, such certificates
shall be deemed to represent the shares of Common Stock to which such holder
shall be entitled upon the surrender thereof.
7. Redemption. The shares of Convertible Preferred Stock shall be
----------
redeemed as follows:
7A. Optional Redemption. On or after March 1, 2001, the holders
-------------------
of sixty percent (60%) of the Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and Series C Convertible Preferred Stock then
outstanding, taken as a whole, may require the Corporation to redeem from each
such holder of shares of Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and/or Series C Convertible Preferred Stock, all or
any portion of the shares of Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and/or Series C Convertible Preferred Stock then
held by such holders by delivering a notice to the Company thereof. The
Corporation shall give prompt written notice of any such election to all other
holders of Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock and Series C Convertible Preferred Stock who are entitled to require
redemption hereunder at the time of such notice within five (5) business days
after receipt of notice thereof, and each such holder shall have until ten (10)
business days after receipt of such second notice, to request redemption (by
giving written notice to the Corporation) of all or any portion of such Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock and/or Series
C Convertible Preferred Stock owned by such holder.
On or after March 1, 2005, the holders of sixty percent (60%) of
the Series D Convertible Preferred Stock then outstanding may require the
Corporation to redeem from each such holder of shares of Series D Convertible
Preferred Stock, all or any portion of the shares of Series D Convertible
Preferred Stock then held by such holders by delivering a notice to the Company
thereof. The Corporation shall give prompt written notice of any such election
to all other holders of Series D Convertible Preferred Stock who are entitled to
require redemption hereunder at the time of such notice within five (5) business
days after receipt of notice thereof, and each such holder shall have until ten
(10) business days after receipt of such second notice, to request redemption
(by giving written notice to the Corporation) of all or any portion of such
Series D Convertible Preferred Stock owned by such holder.
On or after March 1, 2001, the holders of sixty percent (60%) of
the Series E Convertible Preferred Stock then outstanding may require the
Corporation to redeem from each such holder of shares of Series E Convertible
Preferred Stock, all or any portion of the shares of Series E Convertible
Preferred Stock then held by such holders by delivering a notice to the Company
thereof. The Corporation shall give prompt written notice of any such election
to all other holders of Series E Convertible Preferred Stock who are entitled to
require redemption hereunder at the time of such notice within five (5) business
days after receipt of
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<PAGE>
notice thereof, and each such holder shall have until ten (10) business days
after receipt of such second notice, to request redemption (by giving written
notice to the Corporation) of all or any portion of such Series E Convertible
Preferred Stock owned by such holder.
On or after August 1, 2002, the holders of sixty percent (60%) of
the Series F Convertible Preferred Stock then outstanding may require the
Corporation to redeem from each such holder of shares of Series F Convertible
Preferred Stock, all or any portion of the shares of Series F Convertible
Preferred Stock then held by such holders by delivering a notice to the Company
thereof. The Corporation shall give prompt written notice of any such election
to all other holders of Series F Convertible Preferred Stock who are entitled to
require redemption hereunder at the time of such notice within five (5) business
days after receipt of notice thereof, and each such holder shall have until ten
(10) business days after receipt of such second notice, to request redemption
(by giving written notice to the Corporation) of all or any portion of such
Series F Convertible Preferred Stock owned by such holder.
On or after March 1, 2003, the holders of sixty percent (60%) of
the Series G Convertible Preferred Stock then outstanding may require the
Corporation to redeem from each such holder of shares of Series G Convertible
Preferred Stock, all or any portion of the shares of Series G Convertible
Preferred Stock then held by such holders by delivering a notice to the Company
thereof. The Corporation shall give prompt written notice of any such election
to all other holders of Series G Convertible Preferred Stock who are entitled to
require redemption hereunder at the time of such notice thereof, and each such
holder shall have until ten (10) business days after receipt of such second
notice, to request redemption (by giving written notice to the Corporation) of
all or any portion of such Series G Convertible Preferred Stock owned by such
holder.
Upon receipt of such election(s), the Corporation shall be
obligated to redeem the aggregate number of shares specified therein within 30
days after the Corporation's receipt of such election(s) (the "Redemption Date")
and according to the Redemption Mechanics specified in paragraph 7C below.
7B. Redemption Price and Payment. The Convertible Preferred
----------------------------
Stock to be redeemed on the Redemption Date shall be redeemed by paying for each
share in cash an amount equal to, with respect to a share of Series A
Convertible Preferred Stock, $.25 per share, with respect to a share of Series B
Convertible Preferred Stock, $.42 per share, with respect to a share of Series C
Convertible Preferred Stock, $.70 per share, with respect to a share of Series D
Convertible Preferred Stock, $1.25 per share, with respect to a share of Series
E Convertible Preferred Stock, $.75 per share, with respect to a share of Series
F Convertible Preferred Stock, $1.00 per share and with respect to a share of
Series G Convertible Preferred Stock, $1.00 per share, plus in the case of each
share, an amount equal to all dividends, excluding Accruing Dividends, declared
but unpaid thereon, computed to the Redemption Date, such amount being referred
to as the "Redemption Price." Such payment shall be made in full on the
Redemption Date to the holders entitled thereto.
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<PAGE>
7C. Redemption Mechanics. At least 20 but not more than 30 days
--------------------
prior to the Redemption Date, written notice (the "Redemption Notice") shall be
given by the Corporation by delivery in person, certified or registered mail,
return receipt requested, telecopier or telex, to each holder (at the close of
business on the business day next preceding the day on which the Redemption
Notice is given) of shares of Convertible Preferred Stock requesting redemption,
notifying such holder of the Redemption and specifying the Redemption Price, the
Redemption Date and the place where said Redemption Price shall be payable. The
Redemption Notice shall be addressed to each redeeming holder at his address as
shown by the records of the Corporation. From and after the close of business
on the Redemption Date, unless there shall have been a default in the payment of
the Redemption Price, all rights of redeeming holders of shares of Convertible
Preferred Stock (except the right to receive the Redemption Price) shall cease
with respect to such shares, and such shares shall not thereafter be transferred
on the books of the Corporation or be deemed to be outstanding for any purpose
whatsoever. If the funds of the Corporation legally available for redemption of
shares of Convertible Preferred Stock on the Redemption Date are insufficient to
redeem the total number of all of the shares of Convertible Preferred Stock to
be redeemed, the holders of such shares of Convertible Preferred Stock shall
share ratably in any funds legally available for redemption of such shares
according to the respective amounts which would be payable with respect to the
full number of shares owned by them if all such outstanding shares were redeemed
in full. The shares of Convertible Preferred Stock not redeemed shall remain
outstanding and entitled to all rights and preferences provided herein. At any
time thereafter when additional funds of the Corporation are legally available
for the redemption of such shares of Convertible Preferred Stock, such funds
will be used, at the end of the next succeeding fiscal quarter, to redeem the
balance of such shares, or such portion thereof for which funds are then legally
available, on the basis set forth above.
7D. Redeemed or Otherwise Acquired Shares to be Retired. Any
---------------------------------------------------
shares of Convertible Preferred Stock redeemed pursuant to this paragraph 7 or
otherwise acquired by the Corporation in any manner whatsoever shall be canceled
and shall not under any circumstances be reissued; and the Corporation may from
time to time take such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of Convertible Preferred
Stock.
8. Amendments. No provision of the terms of a series of
----------
Convertible Preferred Stock (other than the Series E Convertible Preferred
Stock) may be amended, modified or waived without the written consent or
affirmative vote of the holders of at least two-thirds of the then outstanding
shares of such series of Convertible Preferred Stock. No provision of the terms
of the Series E Convertible Preferred Stock may be amended, modified or waived
without the written consent or affirmative vote of the holders of at least
seventy percent (70%) of the then outstanding shares of Series E Convertible
Preferred Stock.
D. QUALIFIED PUBLIC OFFERING
-------------------------
In the event of a Qualified Public Offering, then, effective upon the
closing of the sales of shares of Common Stock of the Corporation pursuant to
such Qualified Public Offering,
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<PAGE>
(i) the first paragraph of this FOURTH Article of this Amended and Restated
Certificate of Incorporation of Adolor Corporation shall be replaced in its
entirety with the following:
FOURTH: The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 100,000,000
shares, consisting of 99,000,000 shares of Common Stock with a par
value of $.0001 per share (the "Common Stock") and 1,000,000 shares of
Preferred Stock with a par value of $.01 per share (the "Preferred
Stock").
and (ii) Sections B and C of this FOURTH Article of this Amended and Restated
Certificate of Incorporation of Adolor Corporation shall be replaced in their
entirety with the following:
B. PREFERRED STOCK
---------------
1. Issue in Series. Preferred Stock may be issued from time to time
---------------
in one or more series, each such series to have the terms stated herein and in
the resolution of the board of directors of the Corporation providing for its
issue. All shares of any one series of Preferred Stock will be identical, but
shares of different series of Preferred Stock need not be identical or rank
equally except insofar as provided by law or herein.
2. Creation of Series. The board of directors will have authority
------------------
by resolution to cause to be created one or more series of Preferred Stock, and
to determine and fix with respect to each series prior to the issuance of any
shares of the series to which such resolution relates:
2A. The distinctive designation of the series and the number of
shares which will constitute the series, which number may be increased or
decreased (but not below the number of shares then outstanding) from time to
time by action of the board of directors;
2B. The dividend rate and the times of payment of dividends on
the shares of the series, whether dividends will be cumulative, and if so, from
what date or dates;
2C. The price or prices at which, and the terms and conditions
on which, the shares of the series may be redeemed at the option of the
Corporation;
2D. Whether or not the shares of the series will be entitled to
the benefit of a retirement or sinking fund to be applied to the purchase or
redemption of such shares and, if so entitled, the amount of such fund and the
terms and provisions relative to the operation thereof;
2E. Whether or not the shares of the series will be convertible
into, or exchangeable for, any other shares of stock of the Corporation or other
securities, and if so convertible or exchangeable, the conversion price or
prices, or the rates of exchange, and any adjustments thereof, at which such
conversion or exchange may be made, and any other terms and conditions of such
conversion or exchange;
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<PAGE>
2F. The rights of the shares of the series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation;
2G. Whether or not the shares of the series will have priority
over or be on a parity with or be junior to the shares of any other series or
class in any respect or will be entitled to the benefit of limitations
restricting the issuance of shares of any other series or class having priority
over or being on a parity with the shares of such series in any respect, or
restricting the payment of dividends on or the making of other distributions in
respect of shares of any other series or class ranking junior to the shares of
the series as to dividends or assets, or restricting the purchase or redemption
of the shares of any such junior series or class, and the terms of any such
restriction;
2H. Whether the series will have voting rights, in addition to
any voting rights provided by law, and, if so, the terms of such voting rights;
and
2I. Any other preferences, qualifications, privileges, options
and other relative or special rights and limitations of that series.
3. Dividends. Holders of Preferred Stock shall be entitled to
---------
receive, when and as declared by the board of directors, out of funds legally
available for the payment thereof, dividends at the rates fixed by the board of
directors for the respective series, and no more, before any dividends shall be
declared and paid, or set apart for payment, on Common Stock with respect to the
same dividend period.
4. Preference on Liquidation. In the event of the voluntary or
-------------------------
involuntary liquidation, dissolution or winding up of the Corporation, holders
of each series of Preferred Stock will be entitled to receive the amount fixed
for such series plus, in the case of any series on which dividends will have
been determined by the board of directors to be cumulative, an amount equal to
all dividends accumulated and unpaid thereon to the date of final distribution
whether or not earned or declared before any distribution shall be paid, or set
aside for payment, to holders of Common Stock. If the assets of the Corporation
are not sufficient to pay such amounts in full, holders of all shares of
Preferred Stock will participate in the distribution of assets ratably in
proportion to the full amounts to which they are entitled or in such order or
priority, if any, as will have been fixed in the resolution or resolutions
providing for the issue of the series of Preferred Stock. Neither the merger
nor consolidation of the Corporation into or with any other corporation, nor a
sale, transfer or lease of all or part of its assets, will be deemed a
liquidation, dissolution or winding up of the corporation within the meaning of
this paragraph except to the extent specifically provided for herein.
5. Redemption. The Corporation, at the option of the board of
----------
directors, may redeem all or part of the shares of any series of Preferred Stock
on the terms and conditions fixed for such series.
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<PAGE>
6. Voting Rights. Except as otherwise required by law, or as
-------------
otherwise determined by the board of directors as to the shares of any series of
Preferred Stock prior to the issuance of any such shares, the holders of
Preferred Stock shall have no voting rights and shall not be entitled to any
notice of any meeting of stockholders.
FIFTH: The corporation shall have perpetual existence.
SIXTH: The number of directors of the corporation shall be such as
from time to time shall be fixed by, or in the manner provided, in the by-laws
of the corporation. No election of directors need be ballot unless the by-laws
so provide.
SEVENTH: To the fullest extent that the general corporate 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 the
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 shall apply to or have any
effect on 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.
EIGHTH: The corporation shall, to the fullest extent permitted by
subsection 145 of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any and all of
the expenses, liabilities, or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders, or disinterested directors or
otherwise, both as to action in their official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person.
NINTH: The Board of Directors shall have power without the assent
or vote of the stockholders to make, alter, amend, change, add to or repeal the
by-laws of the corporation.
-22-
<PAGE>
RESTATED BYLAWS
OF
ADOLOR CORPORATION
(fka Opian Pharmaceutical, Inc.)
ARTICLE I
STOCKHOLDERS
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1.1 Meetings.
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1.1.1 Place. Meetings of the stockholders shall be held at such place
-----
as may be designated by the board of directors.
1.1.2 Annual Meeting. An annual meeting of the stockholders for the
--------------
election of directors and for other business shall be held on such date and at
such time as may be fixed by the board of directors.
1.1.3 Special Meetings. Special meetings of the stockholders may be
----------------
called at any time by the president, or by any two members of the board of
directors, or by the holders of a majority of the outstanding shares of Common
Stock of the Company entitled to vote at the meeting.
1.1.4 Quorum. The presence, in person or by proxy, of the holders of a
------
majority of the outstanding shares of stock of the Company entitled to vote on a
particular matter shall constitute a quorum for the purpose of considering such
matter.
1.1.5 Voting Rights. Except as otherwise provided herein, in the
-------------
certificate of incorporation or by law, every stockholder shall have the right
at every meeting of stockholders to one vote for every share standing in the
name of such stockholder on the books of the Company which is entitled to vote
at such meeting. Every stockholder may vote either in person or by proxy.
ARTICLE II
DIRECTORS
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2.1 Number and Term. The board of directors shall have authority to (1)
---------------
determine the number of directors to constitute the board and (ii) fix the terms
of office of the directors.
2.2 Meetings.
--------
<PAGE>
2.2.1 Place. Meetings of the board of directors shall be held at such
-----
place as may be designated by the board or in the notice of the meeting.
2.2.2 Regular Meetings. Regular meetings of the board of directors
----------------
shall be held at such times as the board may designate. Notice of regular
meetings need not be given.
2.2.3 Special Meetings. Special meetings of the board may be called by
----------------
direction of the president or by any two members of the board, in either case on
three days' notice to each director, either personally or by mail, telegram or
facsimile transmission.
2.2.4 Quorum. A majority of all the directors in office shall
------
constitute a quorum for the transaction of business at any meeting.
2.2.5 Voting. Except as otherwise provided herein, in the certificate
------
of incorporation or by law, the vote of a majority of the directors present at
any meeting at which a quorum is present shall constitute the act of the board
of directors.
2.2.6 Committees. The board of directors may, by resolution adopted by
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a majority of the whole board, designate one or more committees, each committee
to consist of one or more directors and such alternate members (also directors)
as may be designated by the board. Unless otherwise provided herein, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
such member or members constitute a quorum, may unanimously appoint another
director to act at the meeting in the place of any such absent or disqualified
member. Except as otherwise provided herein, in the certificate of incorporation
or by law, any such committee shall have and may exercise the powers of the full
board of directors to the extent provided in the resolution of the board
directing the committee.
ARTICLE III
OFFICERS
--------
3.1 Election. At its first meeting after each annual meeting of the
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stockholders, the board of directors shall elect a president, treasurer,
secretary and such other officers as it deems advisable.
3.2 Authority, Duties and Compensation. The officers shall have such
----------------------------------
authority, perform such duties and serve for such compensation as may be
determined by resolution of the board of directors. Except as otherwise provided
by board resolution, (i) the president shall be the chief executive officer of
the Company, shall have general supervision over the business and operations of
the Company, may perform any act and execute any instrument for the conduct of
such business and operations and shall preside at all meetings of the board and
stockholders, (ii) the other officers shall have the duties customarily related
to their respective offices, and (iii) any vice president, or vice presidents in
the order determined by the board, shall in the absence of the president have
the authority and perform the duties of the president.
<PAGE>
ARTICLE IV
INDEMNIFICATION
---------------
4.1 Right to Indemnification. The Company shall indemnify any person who was
------------------------
or is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that such person is or was
a director or officer of the Company or a constituent corporation absorbed in a
consolidation or merger, or is or was serving at the request of the Company or a
constituent corporation absorbed in a consolidation or merger, as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, or is or was a director or officer of the Company serving at its
request as an administrator, trustee or other fiduciary of one or more of the
employee benefit plans of the Company or other enterprise, against expenses
(including attorneys' fees), liability and loss actually and reasonably incurred
or suffered by such person in connection with such proceeding, whether or not
the indemnified liability arises or arose from any threatened, pending or
completed proceeding by or in the right of the Company, except to the extent
that such indemnification is prohibited by applicable law.
4.2 Advance of Expenses. Expenses incurred by a director or officer of the
-------------------
Company in defending a proceeding shall be paid by the Company in advance of the
final disposition of such proceeding subject to the provisions of any applicable
statute.
4.3 Procedure for Determining Permissibility. To determine whether any
----------------------------------------
indemnification or advance of expenses under this Article IV is permissible, the
board of directors by a majority vote of a quorum consisting of directors not
parties to such proceeding may, and on request of any person seeking
indemnification or advance of expenses shall be required to, determine in each
case whether the applicable standards in any applicable statute have been met,
or such determination shall be made by independent legal counsel if such quorum
is not obtainable, or, even if obtainable, a majority vote of a quorum of
disinterested directors so directs, provided that, if there has been a change in
control of the Company between the time of the action or failure to act giving
rise to the claim for indemnification or advance of expenses and the time such
claim is made, at the option of the person seeking indemnification or advance of
expenses, the permissibility of indemnification or advance of expenses shall be
determined by independent legal counsel. The reasonable expenses of any director
or officer in prosecuting a successful claim for indemnification, and the fees
and expenses of any special legal counsel engaged to determine permissibility of
indemnification or advance of expenses, shall be borne by the Company.
4.4 Contractual Obligation. The obligations of the Company to indemnify a
----------------------
director or officer under this Article IV, including the duty to advance
expenses, shall be considered a contract between the Company and such director
or officer, and no modification or repeal of any provision of this Article IV
shall affect, to the detriment of the director or officer, such obligations of
the Company in connection with a claim based on any act or failure to act
occurring before such modification or repeal.
<PAGE>
4.5 Indemnification Not Exclusive; Inuring of Benefit. The indemnification
-------------------------------------------------
and advance of expenses provided by this Article IV shall not be deemed
exclusive of any other right to which one indemnified may be entitled under any
statute, provision of the Certificate of Incorporation, these bylaws, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in such person's official capacity and as to action in another capacity while
holding such office, and shall inure to the benefit of the heirs, executors and
administrators of any such person.
4.6 Insurance and Other Indemnification. The board of directors shall have
-----------------------------------
the power to (i) authorize the Company to purchase and maintain, at the
Company's expense, insurance on behalf of the Company and on behalf of others to
the extent that power to do so has not been prohibited by statute, (ii) create
any fund of any nature, whether or not under the control of a trustee, or
otherwise secure any of its indemnification obligations, and (iii) give other
indemnification to the extent permitted by statute.
ARTICLE V
TRANSFER OF SHARE CERTIFICATES
------------------------------
Transfers of share certificates and the shares represented thereby
shall be made on the books of the Company only by the registered holder or by
duly authorized attorney. Transfers shall be made only on surrender of the share
certificate or certificates.
ARTICLE VI
AMENDMENTS
----------
These bylaws may be amended or repealed at any regular or special
meeting of the board of directors by vote of a majority of all directors in
office or at any annual or special meeting of stockholders by vote of holders of
a majority of the outstanding stock entitled to vote. Notice of any such annual
or special meeting of stockholders shall set forth the proposed change or a
summary thereof.
<PAGE>
Exhibit 23.1
When the transaction referred to in the second paragraph in Note 12 of the
Notes to Financial Statements has been consummated, we will be in a position to
render the following consent.
KPMG LLP
Princeton, New Jersey
March 13, 2000
Accountants' Consent
The Board of Directors
Adolor Corporation
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
Princeton, New Jersey
