<PAGE>
As filed with the Securities and Exchange Commission on February 7, 2000.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed
Amount maximum maximum Amount of
Title of each class of to be offering price aggregate registration
securities to be registered registered per unit offering price(1) fee
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.0001 per
share.................................. 6,900,000 shares $14.00 $96,600,000 $25,502.40
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
---------------
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 February 7, 2000
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6,000,000 Shares
Adolor Corporation
[LOGO]
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 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 "ADOR."
Before buying any shares you should read the discussion of material risks of
investing in our common stock under "Risk Factors" beginning on page 6.
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 $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to Adolor $ $
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</TABLE>
The underwriters may also purchase up to 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 the
"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."
Our Business
We discover, develop and plan to commercialize novel and 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
novel 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 bowel
dysfunction, nausea and sedation. Since most of our product candidates target
peripheral opioid receptors (pain relief receptors 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. The pain management market in the United States
grew 6% per year from 1994 to 1998 and then grew 24% between 1998 and 1999,
primarily due to new product introductions.
Currently marketed analgesics have significant side effects, limited
efficacy or both. We believe our product candidates address these significant
unmet needs in the pain management market. Additionally, we may create new pain
management markets because the novel mechanisms of action of our product
candidates may provide more effective pain relief or relief of narcotic side
effects that currently have no existing effective therapy.
Our pipeline of product candidates are originated through a combination of
internal research and development activities, in-licensed technologies and in-
licensed product candidates. Our research is focused on two of the three opioid
receptor types, mu and kappa, found in the peripheral nervous system. Our
initial drug discovery and development activities focus on three aspects of
pain management:
. reversal or prevention of gastrointestinal side effects of mu receptor
narcotic analgesics
. novel mu and kappa analgesics that act on peripheral opioid receptors
not in the central nervous system; and
. novel narcotic analgesic products with significantly reduced side
effects.
ADL 8-2698
ADL 8-2698 is a peripherally-acting, gastrointestinal tract-restricted mu
opioid receptor antagonist. We are developing orally-administered ADL 8-2698 to
block the adverse gastrointestinal side effects of narcotics without blocking
the beneficial analgesic effects. These gastrointestinal side effects include
narcotic bowel dysfunction, ileus, which is delayed recovery of bowel function
after surgery, and nausea.
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 for each clinical trial is
expected to be up to five weeks.
1
<PAGE>
We have completed three Phase II and five Phase I clinical trials for ADL 8-
2698 for narcotic bowel dysfunction. In these trials, ADL 8-2698 reversed
narcotic bowel dysfunction in 100% of the patients without blocking the
narcotics' pain relief or causing narcotic drug withdrawal. In these trials,
the range of effective doses was defined. We have also begun a Phase II
clinical trial with ADL 8-2698 in post-surgical ileus and expect to complete
enrollment in the third quarter of 2000. A preclinical trial suggested that ADL
8-2698 may prevent narcotic-induced delays in recovery of bowel function after
abdominal surgery. Additionally, we have initiated a Phase I clinical trial
with the intention of confirming that ADL 8-2698 reduces narcotic induced
nausea.
ADL 10-0101
ADL 10-0101 is our first peripheral kappa opioid analgesic product
candidate. Preclinical trials of ADL 10-0101 have suggested that the compound
may be effective for the treatment of inflammatory pain, itch and visceral
pain. Because ADL 10-0101 does not cross the blood-brain barrier and enter the
brain when administered at therapeutic doses, it is expected to avoid central
nervous system side effects.
We completed a Phase I clinical trial for ADL 10-0101 in the third quarter
of 1999 and began a Phase II clinical trial to evaluate the effectiveness of
ADL 10-0101 in the treatment of visceral pain. We expect to complete enrollment
by mid-year 2000. Additionally, we recently began two Phase I clinical trials
of ADL 10-0101 for relieving burn pain and dermal itch. We expect to complete
enrollment in these two trials by mid-year 2000.
ADL 2-1294
The active ingredient in ADL 2-1294 formulations is loperamide, a potent mu
opioid receptor stimulant that does not cross the blood-brain barrier to enter
the central nervous system. ADL 2-1294 therefore avoids the adverse central
nervous system side effects of mu narcotics.
An affiliate of SmithKline Beecham licensed the rights to develop and market
ADL 2-1294 topical formulations for dermal itch and pain, based in part on data
generated in our Phase I trials. Additionally, we have completed Phase II
clinical trials with ADL 2-1294 for the treatment of ophthalmic pain that
results from corneal abrasion or surgery. ADL 2-1294 is as effective as
morphine in preclinical models of inflammatory pain when applied locally to
sites of inflammation or irritation.
Other Product Opportunities
We are doing preclinical research and development work with two orally-
active peripheral kappa opioid analgesics, ADL 10-0116, ADL 1-0398 and an
injectable formulation of ADL 2-1294 for various pain indications.
Additionally, we are using our technology to create centrally-acting narcotic
analgesics with significantly fewer side effects or greater efficacy to more
effectively treat non-inflammatory pain indications that would be particularly
responsive to narcotics. We are developing ADL 1-0386 with a narcotic
analgesic, as a combination product that we expect to produce less sedation
than narcotics. If ultimately shown to be effective and approved by the United
States Food and Drug Administration, we believe these products will be
significant advances to current pain management therapy.
2
<PAGE>
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 products for the treatment of moderate-to-
severe pain.
3
<PAGE>
THIS OFFERING
Unless otherwise indicated, information in this prospectus assumes (i) 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; (ii) no exercise of the
underwriters' over-allotment option; and (iii) exercise and conversion of all
outstanding warrants for 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 offered by us................. 6,000,000 shares
Common stock to be outstanding after this
offering.................................. 22,767,591 shares
Proposed Nasdaq National Market symbol..... ADOR
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 are obligated to
issue upon exercise of options outstanding. These shares, if and when issued,
will include:
. 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 after December
31, 1999, at a weighted average exercise price of $2.03 per share.
Our principal executive offices are located at 371 Phoenixville Pike
Malvern, PA 19355. Our telephone number is (610) 889-5779. Our website is
http://www.adoler.com. The information found on our website is not a part of
this prospectus.
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Period from
Year ended December 31, August 9, 1993
-------------------------- (inception) to
1997 1998 1999 December 31, 1999
------- ------- -------- -----------------
<S> <C> <C> <C> <C>
Statement of operations
data: (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 allocable to
common stockholders..... (4,799) (8,816) (10,131) (30,454)
======= ======= ======== =======
Basic and diluted net
loss per share allocable
to common stockholders.. $ (4.74) $ (7.99) $ (8.73)
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>
The pro forma balance sheet data give effect to the sale after December 31,
1999 of series G mandatorily redeemable convertible preferred stock in January
2000 and the assumed exercise of all outstanding warrants for mandatorily
redeemable convertible preferred stock; and the conversion of the outstanding
shares of series A, B, C, D, E, F and G mandatorily redeemable convertible
preferred stock into an aggregate of 15,595,355 common shares. The pro forma as
adjusted balance sheet data reflects the aforementioned pro forma adjustments
and the net proceeds 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
Actual Pro Forma adjusted
------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Balance sheet data: (In thousands)
Cash, cash equivalents and short-term
investments................................ $5,264 $17,795 $89,335
Working capital............................. 3,069 15,600 87,140
Total assets................................ 6,258 18,789 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) 15,941 87,481
</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.
5
<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 or 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 inception, 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 technological risks of
failure inherent in developing drugs based on new technologies.
Our product candidates must satisfy rigorous standards of safety and
efficacy before they can be approved by the FDA and foreign regulatory
authorities for commercial use. We will need to conduct significant additional
research, animal testing, referred to as preclinical testing, and human
testing, referred to as clinical trials, to demonstrate the safety and
efficacy of our product candidates to the satisfaction of the United States
Food and Drug Administration, or 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.
6
<PAGE>
Our clinical trials may fail to produce results satisfactory to the FDA or
foreign regulatory authorities. Negative or inconclusive results or adverse
medical events during a clinical trial could cause a clinical trial to be
repeated or a program to be terminated.
We do not know whether planned clinical trials will begin on time or
whether any of our clinical trials will be completed on schedule or at all. We
do not know whether any clinical trials will result in marketable products.
Our product development costs will increase if we have delays in testing or
approvals or if we need to perform more or larger clinical trials than
planned. We typically rely on third-party clinical investigators to conduct
our clinical trials and other third-party organizations to perform data
collection and analysis, and as a result, we may face additional delaying
factors outside our control. If we experience significant delays, our
financial results and the commercial prospects for our products will be
harmed, our ability to become profitable will be delayed and our needs for
additional funding will increase.
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
adequately to 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.
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 permitted to commercialize our products.
The pharmaceutical industry is subject to stringent regulation by a wide
range of authorities. We cannot predict whether regulatory clearance will be
obtained for any product candidate we develop. A pharmaceutical product cannot
be marketed in the United States until it has completed rigorous preclinical
testing and clinical trials and an extensive regulatory clearance process
implemented by the FDA. 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 no peripherally restricted opioid analgesic or
narcotic antagonist drugs have been approved for marketing by the FDA or
international regulatory authorities, we do not know whether our research and
clinical approaches to developing new products for the pain management market
will lead to drugs that are considered safe and effective for indicated uses
by the FDA.
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 be conducted in conformance 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;
. may require large numbers of test subjects; and
7
<PAGE>
. may be suspended by us or the FDA at any time if it is believed that the
subjects participating in these trials are being exposed to unacceptable
health risks or if the FDA finds deficiencies in the IND application or
the conduct of these 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. In addition, we may encounter delays or rejections due to
additional government regulation, future legislation or administrative action
or changes in FDA policy that occur during the period of our product
development, clinical trials and FDA regulatory review. 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 action against our product candidates or us.
We have limited experience in conducting and managing the clinical trials nec-
essary to obtain regulatory approval.
If we receive regulatory clearance for a product candidate, this clearance
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 to be 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 and development 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 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. If we fail to negotiate additional acceptable collaborations with
academic institutions and scientists, or if our existing academic
collaborations were to be unsuccessful, our product development programs may
be delayed. 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;
8
<PAGE>
. 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
known to be 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.
Many of our product development activities and almost all of our manufacturing
and marketing activities are, or will be, conducted by third parties. If these
third parties fail to perform these functions satisfactorily, our product de-
velopment 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 were to breach or terminate their agreement with us or
otherwise fail to conduct their activities successfully and in a timely
manner, the preclinical or clinical development or commercialization of the
affected product candidates or research programs could be delayed or
terminated. 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 of our
drug discovery and development programs. If funding from one or more of our
corporate collaborations were reduced or terminated, we would be required to
devote additional internal resources to product development or scale back or
terminate some development programs or seek alternative corporate
collaborators.
There have been a significant number of recent business combinations among
large pharmaceutical companies that have resulted in a reduced number of
potential future corporate collaborators. In addition, business combinations
may result in the newly combined company discontinuing projects that no longer
fit in the plans of the business as combined. If business combinations
involving our corporate collaborators were to occur, the effect could be to
diminish, terminate or cause delays in one or more of our corporate
collaborations.
We may not be able to negotiate additional corporate collaborations on
acceptable terms, if at all, and these collaborations may not be successful.
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
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 through
collaborations with others. The value of these rights, if any, will be largely
derived 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
9
<PAGE>
many of these resources. As a result, if we fail to establish and maintain
relationships to obtain these services cost-effectively, our ability to
realize value from our retained commercialization rights could be materially
reduced or eliminated.
If we fail to obtain the capital necessary to fund our operations, we will be
unable successfully to develop products.
We expect that significant additional financing will be required 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 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.
Our commercial opportunity will be reduced or eliminated if our competitors
develop and market products that are more effective, have fewer side effects
or are less expensive than our product candidates.
Other companies have product candidates in clinical trials to treat each of
the diseases 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 and marketing products either that are more
effective than those that we may develop, alone or with our collaborators, or
that are marketed before any products we develop are marketed.
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 different but related fields represent substantial
competition. Many of the organizations competing with us have substantially
greater capital resources, larger research and development 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.
If our competitors successfully enter into partnering arrangements or
license agreements with academic research institutions, we will then be
precluded from pursuing those specific opportunities. Since each of these
opportunities is unique, we may not be able to find an acceptable substitute.
10
<PAGE>
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 in addition
to 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 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, an 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, an 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. An
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 an affiliate of SmithKline Beecham
determines that payment of any of the agreed-upon milestones or royalties would
make development of the product commercially infeasible, an 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 may be developed by our collaborators.
The degree of future protection for our proprietary rights is uncertain, and
we cannot ensure that:
. we were the first to make the inventions covered by each of our pending
patent applications;
. we were the first to file patent applications for these inventions;
. others will not independently develop similar or alternative
technologies or duplicate any of our technologies;
. any of our pending patent applications will result in issued patents;
. any patents issued to us or our collaborators will provide a basis for
commercially viable products or will provide us with any competitive
advantages or will not be challenged by third parties;
11
<PAGE>
. we will develop additional proprietary technologies that are patentable;
or
. the patents of others will not have an adverse effect on our ability to
do business.
In addition, we could incur substantial costs in litigation if we are
required to defend against patent suits brought by third parties or if we
initiate these suits.
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. We have been informed by the patent office that others may have
patent 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,
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 to be valid and enforceable, we may not be able to obtain a license at a
reasonable cost, or at all. In that event, we would be required to use an
alternative method of delivery for opthalmic products based on ADL 2-1294,
which could materially reduce or eliminate the commercial viability of our ADL
2-1294 for opthalmic 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
12
<PAGE>
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 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 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, if any are approved, directly and rely on relationships
with one or more pharmaceutical companies with established distributions
systems and direct sales forces to market other products, if any are approved.
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. Cost
control initiatives could decrease the price that any of our collaborators or
we would receive for any products in the future. 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.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products. Third-party payors, including Medicare, are
challenging the prices charged for medical products and services. Government
and other third-party payors increasingly are attempting to contain health
care
13
<PAGE>
costs by limiting both coverage and the level of reimbursement for new drugs
and by refusing, in some cases, to provide coverage for uses of approved
products for disease indications for which the FDA has not granted labeling
approval. Third-party insurance coverage may not be available to patients for
any products we discover and develop, alone or with collaborators. If
government and other third-party payors do not provide adequate coverage and
reimbursement levels for our products, market acceptance of these products
will be reduced.
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.
We may incur significant costs if Year 2000 compliance issues are not properly
addressed.
We use and rely on a wide variety of information technologies, computer
systems and scientific equipment containing computer chips dedicated to a
specific task. In addition to risks associated with our own computer systems
and equipment, we have relationships with, and are to varying degrees
dependent upon, a large number of third parties that provide information,
goods and services to us. These include financial institutions, suppliers,
vendors, research partners and governmental entities.
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 in
such a way as to 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.
If product liability lawsuits are successfully brought against us, we may in-
cur substantial liabilities and may be required 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
we are entitled to be indemnified against losses by our corporate
collaborators, indemnification may not be available or adequate should any
claim arise.
14
<PAGE>
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 % of our common stock, based on their beneficial ownership as
of December 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 the common
stock and an active public market for our common stock may not develop or be
sustained 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.
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;
15
<PAGE>
. 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 disaster or crisis; 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 divert's 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. After completion of this offering, we will
have outstanding 22,767,591 shares of common stock, assuming no exercise of
outstanding options after December 31, 1999 and no exercise of the
underwriters' over-allotment option and exercise of all warrants outstanding
for mandatorily redeemable convertible preferred stock and conversion of all
outstanding shares of mandatorily redeemable convertible preferred stock,
including series G issued in January 2000 into shares of our common stock.
If our stock price is volatile, we may become subject to securities litigation
that is expensive and could result in a diversion of resources.
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 that company. Many companies in the biotechnology
industry have been subject to this type of litigation in the past. We may also
become involved in this type of litigation. Litigation is often expensive and
diverts management's attention and resources, which could have a material
adverse effect upon our business, financial condition and results of
operations.
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 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.
16
<PAGE>
FORWARD-LOOKING INFORMATION AND MARKET DATA
- -------------------------------------------------------------------------------
This prospectus may contain forward-looking statements that address, among
other things: the development and commercialization of our product candidates;
regulatory approval for our product candidates; the efficacy and safety of our
product candidates; our ability to establish sales and marketing capabilities;
protection of our proprietary rights; and competition in our markets. When
used in this prospectus, the words "anticipate," "believe," "estimate,"
"plan", "will," "intend" and "expect" and similar expressions identify
forward-looking statements. Although we believe that our plans, intentions and
expectations reflected in any such forward-looking statements are reasonable,
we can give no assurance that these plans, intentions or expectations will be
achieved. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied, by any such forward-looking
statements contained in this prospectus. Important factors that could cause
actual results to differ materially from our forward-looking statements are
set forth in this prospectus, including under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." All forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements set forth in this prospectus. We are under no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise.
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.
17
<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 estimated underwriters' 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 of additional product opportunities, hiring of marketing
development, research and administrative personnel, expansion of our
facilities and working capital. We may also, if the opportunity arises, 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.
The amounts and timing of our actual expenditures 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.
18
<PAGE>
DILUTION
- -------------------------------------------------------------------------------
Our pro forma net tangible book value as of December 31, 1999 was
approximately $15,940,791, or $0.95 per share. This is based on the pro forma
number of shares outstanding as of December 31, 1999 of 16,767,591, consisting
of 1,172,236 shares of our common stock outstanding on December 31, 1999,
together with the 15,595,355 shares of common stock issuable upon conversion
of all outstanding shares of mandatorily redeemable convertible preferred
stock, including all shares of the series G mandatorily redeemable convertible
preferred stock issued in January and all shares upon the assumed exercise of
the preferred stock warrants.
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 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...................................................... $0.95
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
------
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. After December 31, 1999, options for 592,164 shares of common
stock were issued at a weighted average exercise price of $2.03. For a
description of our stock option plan, please see "Management-Employee benefit
plans."
To the extent that these options are exercised, there will be further
dilution to new investors. Please see "Management-Employee benefit plans" for
further information regarding our stock option plan and stock purchase plan.
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 to $3.21 per share to
existing stockholders and an immediate dilution of $8.84 per share to
new investors.
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<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 sale of shares of series G mandatorily redeemable convertible
preferred stock in January 2000 for $12,306,000;
. The assumed exercise of all outstanding warrants for mandatorily
redeemable convertible preferred stock for an exercise price
totalling $225,000;
. the conversion of all outstanding shares of our mandatorily
redeemable preferred stock, including the series G issued in January
and assuming the exercise of the preferred stock warrants, into an
aggregate of 15,595,355 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 receipt of the estimated net proceeds 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 a
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, 16,767,591 and
22,767,591 shares issued and outstanding
on an actual, pro forma and pro forma as
adjusted basis, respectively.............. -- 2 2
Additional paid-in capital................. 1,826 47,355 118,895
Deferred compensation...................... (962) (962) (962)
Deficit accumulated during the development
stage..................................... (30,454) (30,454) (30,454)
-------- ------- -------
Total stockholders' equity (deficit)..... (29,590) 15,941 87,481
-------- ------- -------
Total capitalization..................... 3,410 15,941 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.
20
<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 entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
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
August 9, 1993
Years ended December 31, (inception) to
----------------------------------------- December 31,
1995 1996 1997 1998 1999 1999
------ ------ ------- ------- ------- --------------
Statement of operations
data:
- ----------------------- (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 allocable to
common stockholders.... (2,392) (4,072) (4,799) (8,816) (10,131) (30,454)
====== ====== ======= ======= ======= =======
Basic and diluted net
loss per share
allocable to common
stockholders........... $(3.33) $(4.78) $ (4.74) $ (7.99) $ (8.73)
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,
-----------------------------------------
1995 1996 1997 1998 1999
------ ------ ------- ------- -------
Balance sheet data
- ------------------ (In thousands)
<S> <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>
21
<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 novel and
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 our
product candidates 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 file for
and 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 1999 represents a
portion of the $500,000 license fee received from an affiliate of
22
<PAGE>
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 to approximately $7.2 million for the year ended December 31, 1999
compared to approximately $7.1 million in the same period in 1998. In 1999,
research and development costs were primarily for the Phase I and Phase II
clinical trials for ADL 8-2698, the Phase I and initiation of the Phase II
clinical trial for ADL 10-0101 and the completion of the Phase II clinical
trial for ADL 2-1294 for ophthalmic pain. Clinical development costs for
dermal pain and itch indications of ADL 2-1294 were lower in 1999 compared to
1998 because SmithKline Beecham licensed the rights to those indications and
is now responsible for the development expenses. We also initiated development
efforts on other new product candidates in 1999. In 1998, research and
development expenses were primarily for the Phase I clinical trials for ADL 2-
1294 for dermal pain and itch, the Phase I clinical trial for ADL-2-1294 for
ophthalmic pain and the preclinical studies for ADL 10-0101.
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. This increase is
primarily due to higher personnel costs, higher facility costs, the cost of
preliminary marketing efforts for ADL 8-2698 and the pursuit of corporate
collaborations.
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.
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 to approximately $7.1 million for the year ended December 31, 1998
compared to $3.7 million for the period ended December 31, 1997. This increase
was due to the cost of initiation of Phase II clinical trials for ADL 2-1294
for the treatment of ophthalmic pain, clinical development costs for dermal
pain and itch indications of ADL 2-1294, initiation of a Phase I clinical
trial of ADL 10-0101, and a $300,000 licensing fee paid to Roberts.
General and administrative expenses. Our general and administrative
expenses increased to $2.3 million for the year ended December 31, 1998
compared to $1.6 million in the same period in 1997. This increase is due to
costs for the filing of foreign patents, expansion of clinical development
staff and increased office space.
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
23
<PAGE>
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.
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 significant beneficial conversion feature
which will increase net loss per share in the first quarter of 2000.
We anticipate that our capital expenditures will be approximately $250,000
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 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 substantial compensation charge will be recorded
over the respective vesting periods of the options.
24
<PAGE>
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. 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 in
such a way as to 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.
25
<PAGE>
BUSINESS
- -------------------------------------------------------------------------------
Overview of Our Business
We discover, develop and plan to commercialize novel and 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
novel 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
novel 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 are
originated 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 analgesics that act on peripheral opioid receptors not in the
central nervous system; and
. novel 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 additional clinical
results, we have initiated 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.
26
<PAGE>
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.
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
diagnoses: cancer, post-surgical 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 pains. 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 then 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.
27
<PAGE>
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>
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.
28
<PAGE>
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 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 treatments 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 novel peripherally-restricted products. We use our
biological, chemical and analytical technology expertise to create novel
proprietary peripheral opioid analgesics and GI tract-restricted narcotic
antagonists. Within our analgesia program, we use computer-assisted chemical
design
29
<PAGE>
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.
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 point.
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 an affiliate of
SmithKline Beecham to develop topical ADL 2-1294 for treatment of dermal pain
and itch.
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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, each of which is being developed for multiple
indications in clinical development. 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.
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 Status
------------------------------------ ------------------- ------------------
Reversal of Narcotic-Induced GI Side Effects
GI Tract-Restricted mu Antagonists
Narcotic bowel
ADL 8-2698 (oral) dysfunction Phase II/III
ADL 8-2698 (oral) Post-surgical ileus Phase II
Treatment of Pain or Itch
Peripherally Restricted kappa Analgesics
Visceral/post-surgical
ADL 10-0101 (injectable) pain Phase II
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
Inflammatory/visceral
ADL 1-0398 (oral) pain and itch Research
Peripherally Restricted mu Analgesics
ADL 2-1294 (topical) Ophthalmic pain Phase II
ADL 2-1294 (topical) Dermal pain Phase I/II
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>
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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 bowel function.]
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 compose our
potential population for the use of ADL 8-2698 to prevent or treat narcotic
bowel dysfunction.
Development Status. 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
for each clinical trial is expected to be up to five weeks. Our studies are
designed to
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further refine the optimal dose for reversing narcotic bowel dysfunction in
patients receiving long-term treatment with oral narcotics.
A total of 124 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 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, effectiveness of ADL 8-2698 increased
from 0% to 100% as the dose was increased from 0.125mg to 3mg (P<0.0001).
There were no adverse effects at therapeutic doses beyond the expected GI
symptoms, such as abdominal cramping, associated with restoring normal bowel
function. 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 additional Phase I ascending dose safety and
tolerance studies demonstrated safety of up to 120 mg per day for three days
and up to 54 mg per day for four days.
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. ADL 8-2698 also may result in considerable cost savings by speeding
recovery from ileus.
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 Status. 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
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psychological effects, 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.
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 cross
the blood-brain barrier and enter the brain when administered at therapeutic
doses, ADL 10-0101 is expected to avoid central nervous system side effects.
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. Pre-clinical 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 Status. We completed a Phase I clinical trial in the third
quarter of 1999 and began a Phase II clinical trial evaluating the 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 Status. We recently began a Phase I clinical trial 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 itch 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 Status. 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 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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Ophthalmic itch
Ophthalmic itch may be caused by allergies, colds, flu, inflamation,
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 Status. 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 generation 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 who we
believe will constitute a portion of the addressable market for an oral
peripheral kappa analgesic product.
Development Status. 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 Status. 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 as 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 cross the
blood-brain barrier and 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. ADL 2-1294
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<PAGE>
is as effective as morphine in preclinical models of inflammatory pain when
applied locally to sites of inflammation or irritation and is effective in
preclincial trials 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 a
peripheral kappa analgesic product.
Development Status. 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. 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 Status. 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.
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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
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 Status. 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 Status. 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 these wholesale units
contained sufficient medication for one to 20 prescriptions at the retail
level, so we project that there were over 100 million prescriptions for
narcotic analgesics in the United States in 1999. We believe this constitutes
our patient population for a GI side effect-free narcotic analgesic.
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Development Status. 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.
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 Status. 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, while
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 on 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. 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.
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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 and 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 a certain
regulatory milestone.
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 if certain clinical and regulatory milestones are met.
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 if certain
clinical and regulatory milestones are met. 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, if any, product sales. 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 receive
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 can not 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 be
required 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.
39
<PAGE>
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 our technologies.
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 are required 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 grant. 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
40
<PAGE>
and techniques or otherwise gain access to our trade secrets, or that we can
meaningfully protect our trade secrets. In the case of arrangements with our
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. These products are provided in
strict compliance 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: (i) preclinical studies,
(ii) submission to the FDA of an Investigational New Drug application (IND),
which must become effective before human clinical trials commence, (iii)
adequate and well-controlled human clinical trials to establish the safety and
efficacy of the product, (iv) submission of a New Drug Application (NDA) to
the FDA, and (v) 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 will become 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.
41
<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 below 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 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
contain ADL 8-2698 in combination with narcotics will be subject to DEA
regulations relating to manufacturing, storage,
42
<PAGE>
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.
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. 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 its 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 its 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 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. We
also 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.
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<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........... 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 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 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. from the College of Notre Dame of Maryland and a Ph.D.
from the Medical College of Virginia at Virginia Commonwealth University.
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<PAGE>
Alan L Maycock, Ph.D. Dr. Maycock joined us as our Vice President of
Exploratory Research and Drug Discovery in January 1995. From 1988 to 1995,
Dr. Maycock worked at the Research Division of Sterling Winthrop
Pharmaceuticals, where, during the last year of his employment he was Senior
Director of Biochemical 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. Dr. Baldino received a Ph.D. in Pharmacology from Temple
University and a B.S. in Biology from Muhlenberg College. He currently serves
as a director of ViroPharma, Inc., Pharmacopeia, Inc., The Jackson Laboratory
and the Biotechnology Industry Organization.
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 state pharmaceutical company, which 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 Environmental 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,
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<PAGE>
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. 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. Nelson 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. Nelson 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>
Professional
Advisor University Affiliation 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
</TABLE>
46
<PAGE>
We have also 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:
<TABLE>
<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>
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 Mr.
Madden and Ms. Feeney.
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
Messrs. Baldino, Nash and Nelsen.
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.
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<PAGE>
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 $7,210 110,502
President, Chief Executive
Officer and Director
Randall L. Carpenter............ 183,462 -- 25,723 28,098
Vice President, Clinical
Research & Development and
Regulatory Affairs
Deanne D. Garver................ 132,500 9,730 -- 23,309
Vice President, Preclinical
Development and Projects
Management
Alan L. Maycock................. 153,935 -- -- 57,738
Vice President, Exploratory
Research and Drug Discovery
Peter J. Schied................. 158,222 6,948 -- 46,808
Vice President, Chief Financial
Officer and Secretary
</TABLE>
- --------
(1) Includes life insurance premiums paid by us for Dr. Farrar and temporary
living expenses paid by us for Dr. Carpenter.
Employment agreements
In October 1994, we entered into an at will employment agreement with Dr.
Farrar in connection with which he purchased 503,644 shares of our common
stock for $1,150. 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. Dr. Maycock is
entitled to a $15,000 one-time severance payment if his employment with us is
terminated, 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. If Mr.
Schied is terminated 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.
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<PAGE>
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
9,195 1.35 11/15/09 182,297 297,630
Deanne D. Garver........ 16,666 10.39 $0.34 1/15/09 $ 347,288 $ 556,330
764 0.34 5/21/09 15,920 25,503
6,641 0.59 7/27/09 136,742 220,041
1,468 0.59 8/31/09 30,227 48,640
357 0.59 9/28/09 7,351 11,829
Alan L. Maycock......... 8,296 12.81 $0.34 1/1/09 $ 172,873 $ 276,930
50,000 0.34 1/15/09 1,041,907 1,669,058
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 5.17 $0.34 1/15/09 $ 810,353 $ 1,298,126
1,331 0.34 5/21/09 27,763 44,430
7,613 0.59 6/2/09 156,756 252,246
3,352 0.59 8/31/09 69,020 111,064
824 0.59 9/28/09 16,967 27,302
</TABLE>
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 86,534 89,761 $1,119,088 $1,158,465
Randall L. Carpenter.... 0 0 28,145 69,744 $ 363,091 $ 900,127
Deanne D. Garver........ 0 0 28,784 52,670 $ 371,831 $ 680,709
Alan L. Maycock......... 0 0 99,373 42,037 $1,286,972 $ 499,759
Peter J. Schied......... 0 0 98,170 77,569 $1,268,798 $ 463,780
</TABLE>
- --------
* On January 13, 2000, we granted stock options to purchase an aggregate of
592,134 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.
49
<PAGE>
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 will be authorized to grant options
to eligible individuals for up to a total of 3,277,778 shares of our common
stock. The plan will authorize 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 committee or the board of directors,
and the options will vest according to the vesting schedule which shall be
determined by the Board or the 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 1,280,790 shares of our common stock were
outstanding at December 31, 1999, at a weighted average exercise price of $.30
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 or the
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 the optionee shall be accelerated such that all
outstanding options are fully vested and exercisable and all Shares held by the
optionee are fully vested, and, if Adolor does not survive 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 rights of optionees with respect to
such options. The 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
50
<PAGE>
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 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.
51
<PAGE>
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.
52
<PAGE>
CERTAIN 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 27,776 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, 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.
53
<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>
Alta California Management Partners,
L.P.(1).............................. 2,485,711 14.82% 10.92
Robert T. Nelsen(2)................... 2,478,833 14.77 10.88
WPG Venture Partners III, L.P.(3)..... 2,449,730 14.59 10.75
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) 2,423,306 shares owned by Alta California Partners, L.P. and
(ii) 62,405 shares owned by Alta Embarcadero Partners, L.L.C. Alta
California Management Partners, L.P. is the General Partner of Alta
California Partners, L.P. and Alta Embarcadero Partners, L.L.C. The
address of Alta California Management Partners, L.P. is One Embarcadero
Center, Suite 4050, San Francisco, CA 94111.
54
<PAGE>
(2) 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.
(3) 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 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.
(4) Includes a warrant to purchase 13,227 shares. The address of Falcon
Technology Partners, L.P. is 600 Dorset Road, Devon, PA 19833.
(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 both of these
entities. The address of Technology Leaders Management, Inc. is 435 Devon
Park Drive, Building 700
(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.
(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.
(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.
(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.
(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.
55
<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. As of February 4, 2000, 3,277,778 shares of our common stock were
reserved for issuance pursuant to our Amended and Restated 1994 Incentive
Compensation Plan. 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 our common stock and
warrants exercisable for our common stock that had demand rights agreed not to
demand registration of their common stock until
56
<PAGE>
180 days after the effective date of this prospectus without the prior written
consent of Warburg Dillon Read LLC. After this 180-day period, any one of
these holders may require us to file a registration statement under the
Securities Act with respect to at least % of his, her or its shares eligible
for demand rights if the gross offering price would be expected to exceed
$ million. 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 December 31, 1999, options to purchase a total of 1,280,790 shares of
common stock were outstanding at a weighted average exercise price of $.30.
Options to purchase a total of 3,277,778 shares of common stock are reserved
under the Amended and Restated 1994 Incentive Compensation Plan. Please see
"Management--Employee benefit plans" and "Shares eligible for future sale."
Warrants
As of December 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
57
<PAGE>
. 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.
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 shareholders 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 shareholders 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 the
then outstanding stock of Adolor. 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.
58
<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:
. unless held by affiliates the 6,000,000 shares sold in the public
offering will be freely tradeable upon completion of the offering;
. 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; and
. shares will be eligible for sale upon the exercise of vested options
180 days after the date of this prospectus.
Lock-Up Agreements
All of our directors, officers, employees and the holders of 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 100% 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 [ ] 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.
59
<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 [ ] 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 [ ]
shares for possible future issuance under our Amended and Restated 1994
Incentive Compensation Plan.
60
<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 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 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>
61
<PAGE>
We estimate that the total expenses of this offering, excluding the
underwriting discounts and commissions, will be approximately $ .
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act.
We and our directors, executive officers, and 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
62
<PAGE>
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.
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 beneficially own an aggregate of 17,628 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.
63
<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>
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 16,003,164
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 17,985,588
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 18,789,390
=========== =========== ===========
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
----------- ----------- -----------
Mandatorily redeemable convertible pre-
ferred stock, at redemption value (ag-
gregate 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 out-
standing............................ 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 out-
standing............................ 9,670,000 9,670,000 --
Series D, $0.01 par value; 960,000
shares authorized, issued and out-
standing ........................... 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 (16,767,591
shares on an unaudited pro forma
basis at December 31, 1999 assuming
exercise of warrants and upon
automatic conversion)................ 114 117 1,677
Additional paid-in capital............ 702,483 1,825,245 47,354,685
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) 15,940,791
----------- ----------- -----------
Commitments
Total liabilities and stockholders'
deficit............................... $12,773,160 6,258,390 18,789,390
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
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 allocable to
common stockholders.... $(4,799,035) (8,815,531) (10,131,462) (30,453,689)
=========== ========== =========== ===========
Basic and diluted net loss
per share allocable to
common stockholders (note
2)....................... $ (4.74) (7.99) (8.73)
=========== ========== ===========
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>
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...... 111,111 11 12,489 (12,400) -- 100
Issuance of restricted
stock to an officer
and consultant........ 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.... 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..... 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.... 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>
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.
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. 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, including 12,306,000
shares of Series G issued in January 2000, automatically convert into
15,514,667 shares of common stock (see notes 6 and 12). If warrants for Series
B and F are exercised, at an exercise price totalling $225,000, those shares
would automatically convert into 80,688 shares of common stock. The December
31, 1999 unaudited pro forma balance sheet has been prepared assuming the
exercise of warrants for Series B and F which will expire upon the closing of
the Offering, the sale of the Series G for approximately $12,306,000 in
January 2000 and the conversion of the mandatorily redeemable convertible
preferred stock, including the Series B and F assumed to be issued on exercise
of the warrants and Series G, 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.
F-10
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
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 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. Upon the achievement of a defined regulatory event, SB will
purchase an additional $500,000 of either common stock or preferred stock at a
price per share as described in the agreement.
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.
F-11
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
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, 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
five-for-one (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
F-12
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
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
ange ofR average average average
xercisee Number of remaining exercise price Number exercise price
prices 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 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:
F-13
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
<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>
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
F-14
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
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 certain technology.
Upon signing the agreement the Company made a $300,000 nonrefundable payment
to Roberts which was recorded as research and development expense, and will 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 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 has 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.
Additionally, because U.S. tax laws limit the time during which these
carryforwards may be
F-15
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
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 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.
F-16
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
12. SUBSEQUENT EVENTS
Sale of Preferred Stock and Increase in Authorized Shares
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
significant beneficial conversion feature which will increase net loss per
share in the first quarter of 2000. 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. 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 stock options at exercise prices of $2.03 for which a substantial
compensation charge will be recorded over the respective vesting periods of
the options.
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.
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.............................................................. 6
Forward Looking Information and Market Data............................... 17
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Dilution.................................................................. 19
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 26
Management................................................................ 44
Certain Transactions...................................................... 53
Principal Stockholders.................................................... 54
Description of Capital Stock.............................................. 56
Shares Eligible for Future Sale........................................... 59
Underwriting.............................................................. 60
Legal Matters............................................................. 62
Experts................................................................... 62
Where You Can Find More Information....................................... 62
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
Adolor Corporation
[LOGO]
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........................................... *
Blue Sky Fees and Expenses............................................. *
Legal Fees and Expenses................................................ *
Transfer Agent and Registrar Fees and Expenses......................... *
Printing and Engraving Expenses........................................ *
Director and Officer Liability Insurance............................... *
Miscellaneous Fees and Expenses........................................ *
-------
Total................................................................ $ *
=======
</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.
II-1
<PAGE>
Adolor Corporation has to obtained a policy of directors' and officers'
liability insurance that insures the Company's 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.
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 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 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 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
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 exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act or Regulation D promulgated thereunder as
transactions by an issuer not involving a public offering, where the
purchasers were sophisticated investors who represented their intention to
acquire securities for investment only and not with a view to distribution and
received or had access to adequate information about the Registrant.
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.
II-2
<PAGE>
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.#
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 Amended and Restated 1994 Incentive 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.*
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
23.1 Consent of KPMG LLP.#
23.2 Consent of Dechert Price & Rhoads (included in Exhibit 5.1).*
24.1 Power of Attorney (included on signature page).#
27.1 Financial Data Schedule.#
</TABLE>
- --------
* To be filed by amendment.
# Filed herewith.
(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.
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 registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania on the 7th day of February, 2000.
ADOLOR CORPORATION
/s/ John J. Farrar
By: _________________________________
John J. Farrar
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John J. Farrar and Peter J. Schied, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and sign any
registration statement for the same offering covered by the Registration
Statement that is to be effective upon filing pursuant to Rule 462 promulgated
under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ John J. Farrar President, Chief Executive February 7, 2000
______________________________________ Officer and Director
John J. Farrar (Principal Executive
Officer)
/s/ Peter J. Schied Vice President, Chief February 7, 2000
______________________________________ Financial Officer and
Peter J. Schied Secretary (Principal
Financial and Accounting
Officer)
/s/ Frank Baldino, Jr. Director February 7, 2000
______________________________________
Frank Baldino, Jr.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ Ellen M. Feeney Director February 7, 2000
______________________________________
Ellen M. Feeney
/s/ David M. Madden Director February 7, 2000
______________________________________
David M. Madden
/s/ C. Christopher Moller Director February 7, 2000
______________________________________
C. Christopher Moller
/s/ Robert T. Nelsen Director February 7, 2000
______________________________________
Robert T. Nelsen
/s/ Claude H. Nash Director February 7, 2000
______________________________________
Claude H. Nash
</TABLE>
II-6
<PAGE>
- --------------------------------------------------------------------------------
Exhibit index
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of Adolor.*
3.2 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 Amended and Restated 1994 Incentive 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.*
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
23.1 Consent of KPMG LLP.#
23.2 Consent of Dechert Price & Rhoads (including Exhibit 5.1).*
24.1 Power of Attorney (included on signature page).#
27.1 Financial Data Schedule.#
</TABLE>
- --------
* To be filed by amendment.
#Filed herewith.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 4.1
- ----------------------------------------------------------------------------
SERIES A CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
between
OPIAN PHARMACEUTICALS, INC.
and
THE PURCHASERS NAMED IN SCHEDULE I
Dated as of November 7, 1994
- ----------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I................................................................................................. 1
SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares.................................. 1
----------------------------------------------------
SECTION 1.02 Initial Closing...................................................................... 1
---------------
SECTION 1.03 Additional Closing................................................................... 1
------------------
ARTICLE II................................................................................................ 2
SECTION 2.01 No Significant Operations............................................................ 2
-------------------------
SECTION 2.02 Organization, Qualifications and Corporate Power..................................... 2
------------------------------------------------
SECTION 2.03 Authorization of Agreements, Etc..................................................... 2
--------------------------------
SECTION 2.04 Validity............................................................................. 3
--------
SECTION 2.05 Authorized Capital Stock............................................................. 3
------------------------
SECTION 2.06 Third Party Approvals................................................................ 4
---------------------
ARTICLE III............................................................................................... 4
ARTICLE IV................................................................................................ 5
ARTICLE V................................................................................................. 6
SECTION 5.01 Financial Statements, Reports, Etc................................................... 6
----------------------------------
SECTION 5.02 Right of First Refusal............................................................... 8
----------------------
SECTION 5.03 Reserve for Conversion Shares........................................................ 9
-----------------------------
SECTION 5.04 Corporate Existence.................................................................. 9
-------------------
SECTION 5.05 Properties, Business, Insurance...................................................... 9
-------------------------------
SECTION 5.06 Inspection, Consultation and Advice.................................................. 9
-----------------------------------
SECTION 5.07 Restrictive Agreements Prohibited.................................................... 9
---------------------------------
SECTION 5.08 Transactions with Affiliates......................................................... 9
----------------------------
SECTION 5.09 Expenses of Directors................................................................ 10
---------------------
SECTION 5.10 Use of Proceeds...................................................................... 10
---------------
SECTION 5.11 Board of Directors Meetings.......................................................... 10
---------------------------
SECTION 5.12 By-Laws.............................................................................. 10
-------
SECTION 5.13 Performance of Contracts............................................................. 10
------------------------
SECTION 5.14 Vesting of Reserved Employee Shares.................................................. 10
-----------------------------------
SECTION 5.15 Employee Nondisclosure and Developments Agreements................................... 10
--------------------------------------------------
SECTION 5.16 Compliance With Laws................................................................. 11
--------------------
SECTION 5.17 Keeping of Records and Books of Account.............................................. 11
---------------------------------------
SECTION 5.18 Change in Nature of Business......................................................... 11
----------------------------
SECTION 5.19 Rule 144A Information................................................................ 11
---------------------
ARTICLE VI................................................................................................ 11
SECTION 6.01 Expenses............................................................................. 11
--------
SECTION 6.02 Survival of Agreements............................................................... 11
----------------------
SECTION 6.03 Brokerage............................................................................ 12
---------
SECTION 6.04 Parties in Interest.................................................................. 12
-------------------
SECTION 6.05 Notices.............................................................................. 12
-------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 6.06 Governing Law........................................................... 12
-------------
SECTION 6.07 Entire Agreement........................................................ 12
----------------
SECTION 6.08 Counterparts............................................................ 12
------------
SECTION 6.09 Amendments.............................................................. 12
----------
SECTION 6.10 Severability............................................................ 13
------------
SECTION 6.11 Titles and Subtitles.................................................... 13
--------------------
SECTION 6.12 Certain Defined Terms................................................... 13
---------------------
</TABLE>
ii
<PAGE>
INDEX TO SCHEDULES
SCHEDULE I Purchasers
SCHEDULE II Disclosure Schedule
SCHEDULE III Security Holders
INDEX TO EXHIBITS
EXHIBIT A Form of Registration Rights Agreement
EXHIBIT B Form of Stock Restriction Agreement
EXHIBIT C Form of Management Rights Agreement
EXHIBIT D Charter and All Amendments Thereto
EXHIBIT E Form of Non-Competition Agreement
EXHIBIT F Form of Employee Nondisclosure and
Developments Agreement
iii
<PAGE>
SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated as of
November 7, 1994 between Opian Pharmaceuticals, Inc., a Delaware corporation
(the "Company"), and the several purchasers named in the attached Schedule I
----------
(individually a "Purchaser" and collectively the "Purchasers").
WHEREAS, the Company wishes to issue and sell to the Purchasers up to an
aggregate of 8,200,000 shares (the "Preferred Shares") of the authorized but
unissued Series A Convertible Preferred Stock, $.01 par value, of the Company
(the "Series A Convertible Preferred Stock"); and
WHEREAS, the Purchasers, severally, wish to purchase the Preferred Shares
on the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties agree as follows:
ARTICLE I
THE PREFERRED SHARES
SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares.
---------------------------------------------------
The Company agrees to issue and sell to each Purchaser, and each Purchaser
hereby agrees to purchase from the Company, the number of Preferred Shares set
forth opposite the name of such Purchaser under the heading "Number of Preferred
Shares to be Purchased" on Schedule I, at the aggregate purchase price set forth
opposite the name of such Purchaser under the heading "Aggregate Purchase Price
for Preferred Shares" on Schedule I.
SECTION 1.02 Initial Closing. The initial closing shall take
---------------
place at the offices of Testa, Hurwitz & Thibeault, Exchange Place, 53 State
Street, Boston, Massachusetts 02109, at 10:00 a.m., Boston time, on November 7,
1994, or at such other location, date and time as may be agreed upon between the
Purchasers and the Company (such closing being called the "Closing" and such
date and time being called the "Closing Date"). At the Closing, the Company
shall issue and deliver to each Purchaser a stock certificate or certificates in
definitive form, registered in the name of such Purchaser, representing the
Preferred Shares being purchased by it at the Closing. As payment in full for
the Preferred Shares being purchased by it under this Agreement, and against
delivery of the stock certificate or certificates therefor as aforesaid, on the
Closing Date each Purchaser shall (i) deliver to the Company a check payable to
the order of the Company, in the amount set forth opposite the name of such
Purchaser under the heading "Aggregate Purchase Price for Preferred Shares" on
Schedule I, (ii) transfer such sum to the account of the Company by wire
- ----------
transfer, (iii) deliver to the Company for cancellation promissory notes issued
by the Company in the amount of such sum, or (iii) deliver or transfer such sum
to the Company by any combination of such methods of payments.
SECTION 1.03 Additional Closing. After the Closing Date and on or
------------------
prior to May 7, 1995 the Company may hold one or more additional closings (each
an "Additional Closing"; and collectively the "Additional Closings") at which
the Company may issue and sell up to the number of Preferred Shares equal to the
difference between 8,200,000 and the aggregate number of Preferred Shares
previously sold on the Closing Date and, as applicable, on the date of any prior
Additional Closing. The sale of Preferred Shares pursuant to this Section 1.03
shall be on the same
<PAGE>
terms and conditions (including price) as the sale of the Preferred Shares
pursuant to Section 1.02 hereof and shall be effected by the execution by any
investor of a counterpart signature page to this Agreement. Upon such execution:
(i) each such investor shall be deemed to be a Purchaser for all purposes of
this Agreement and Schedule I shall be amended to include Such Purchaser; and
----------
(ii) each such Additional Closing shall be deemed to be a Closing hereunder and
the date of each such Additional Closing shall be a "Closing Date" hereunder. If
necessary, the Company will provide an updated Disclosure Schedule to Purchasers
purchasing in any Additional Closing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchasers that, except as set
forth in the Disclosure Schedule attached as Schedule II:
-----------
SECTION 2.01 No Significant Operations. As of the date hereof,
-------------------------
the Company has not begun operations and has no real property, place of
business, assets, liabilities, customers or suppliers. There is no action,
suit, claim, proceeding or investigation pending or threatened against or
affecting the Company and the Company is not subject to any order, writ,
injunction or decree entered in any lawsuit or proceeding. The Company does not
own, license or have any right to any copyrights, patents, trademarks, service
marks, tradenames or applications for the same. The Company is not a party to
or otherwise bound by any written or oral agreement, instrument, commitment or
restriction. The Company does not have an Employee Benefit Plan as defined in
the Employee Retirement Income Security Act of 1974, as amended.
SECTION 2.02 Organization, Qualifications and Corporate Power.
------------------------------------------------
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and is or will be
duly licensed or qualified to transact business as a foreign corporation in each
jurisdiction in which the nature of the business transacted by it or the
character of the properties owned or leased by it, or proposed to be owned or
leased by it, requires such licensing or qualification. The Company has the
corporate power and authority to carry on its business as proposed to be
conducted, to execute, deliver and perform this Agreement, the Registration
Rights Agreement with the Purchasers in the form attached as Exhibit A (the
---------
"Registration Rights Agreement"), the several Stock Restriction Agreements with
the Purchasers and the other parties thereto named in paragraph (h) of Article
IV of this Agreement, in the form attached as Exhibit B (the "Stock Restriction
---------
Agreements") and the several Management Rights letter agreements between the
Company and certain of the Purchasers in the form attached as Exhibit C (the
---------
"Management Rights Agreements"), to issue, sell and deliver the Preferred Shares
and to issue and deliver the shares of Common Stock, $.01 par value, of the
Company ("Common Stock") issuable upon conversion of the Preferred Shares (the
"Conversion Shares").
SECTION 2.03 Authorization of Agreements, Etc.
---------------------------------
(a) The execution and delivery by the Company of this Agreement, the
Registration Rights Agreement, the Stock Restriction Agreements and the
Management Rights Agreements, the performance by the Company of its obligations
hereunder and thereunder, the
2
<PAGE>
issuance, sale and delivery of the Preferred Shares and the issuance and
delivery of the Conversion Shares have been duly authorized by all requisite
corporate action and will not violate any provision of law, any order of any
court or other agency of government, the Certificate of Incorporation of the
Company, (the "Charter") or the By-laws of the Company.
(b) The Preferred Shares have been duly authorized and, when issued
in accordance with this Agreement, will be validly issued, fully paid and
nonassessable shares of Series A Convertible Preferred Stock with no personal
liability attaching to the ownership thereof and will be free and clear of all
liens, charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in the Registration Rights Agreement. The Conversion
Shares have been duly reserved for issuance upon conversion of the Preferred
Shares and, when so issued, will be duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock with no personal liability attaching to
the ownership thereof and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company except
as set forth in the Registration Rights Agreement. Neither the issuance, sale or
delivery of the Preferred Shares nor the issuance or delivery of the Conversion
Shares is subject to any preemptive right of stockholders of the Company or to
any right of first refusal or other right in favor of any person.
SECTION 2.04 Validity. This Agreement has been duly executed and
--------
delivered by the Company and constitutes the legal, valid and binding obligation
of the Company, enforceable in accordance with its terms. The Registration
Rights Agreement, the Stock Restriction Agreements and the Management Rights
Agreements, when executed and delivered in accordance with this Agreement, will
constitute the legal, valid and binding obligations of the Company, enforceable
in accordance with their respective terms.
SECTION 2.05 Authorized Capital Stock. The authorized capital
------------------------
stock of the Company consists of (i) 8,200,000 shares of Preferred Stock, $.01
par value (the "Preferred Stock"), of which 8,200,000 shares have been
designated Series A Convertible Preferred Stock, and (ii) 14,000,000 shares of
Common Stock. Immediately prior to the Closing, 3,227,055 shares of Common Stock
will be validly issued and outstanding, fully paid and nonassessable with no
personal liability attaching to the ownership thereof and no shares of Preferred
Stock will have been issued. The stockholders of record and holders of
subscriptions, warrants, options, convertible securities, and other rights
(contingent or other) to purchase or otherwise acquire equity securities of the
Company, and the number of shares of Common Stock and the number of such
subscriptions, warrants, options, convertible securities, and other such rights
held by each, are as set forth in the attached Schedule III. The designations,
------------
powers, preferences, rights, qualifications, limitations and restrictions in
respect of each class and series of authorized capital stock of the Company are
as set forth in the Charter, a copy of which is attached as Exhibit D, and all
---------
such designations, powers, preferences, rights, qualifications, limitations and
restrictions are valid, binding and enforceable and in accordance with all
applicable laws. Except as set forth in the attached Schedule III, (i) no
------------
person owns of record or is known to the Company to own beneficially any share
of Common Stock, (ii) no subscription, warrant, option, convertible security, or
other right (contingent or other) to purchase or otherwise acquire equity
securities of the Company is authorized or outstanding and (iii) there is no
commitment by the Company to issue shares, subscriptions, warrants, options,
convertible securities, or other such rights or to distribute to holders of any
of its equity securities any evidence of indebtedness or asset. Except as
provided for in the Charter or as set forth in the attached Schedule III, the
------------
Company has no obligation
3
<PAGE>
(contingent or other) to purchase, redeem or otherwise acquire any of its equity
securities or any interest therein or to pay any dividend or make any other
distribution in respect thereof. Except for the Stock Restriction Agreements and
the Management Rights Agreements, to the best of the Company's knowledge there
are no voting trusts or agreements, stockholders' agreements, pledge agreements,
buy-sell agreements, rights of first refusal, preemptive rights or proxies
relating to any securities of the Company (whether or not the Company is a party
thereto). All of the outstanding securities of the Company were issued in
compliance with all applicable Federal and state securities laws.
SECTION 2.06 Third Party Approvals. No registration or filing
---------------------
with, or consent or approval of or other action by any third party, is or will
be necessary for the valid execution, delivery and performance by the Company of
this Agreement, the Registration Rights Agreement, the Stock Restriction
Agreements or the Management Rights Agreements, the issuance, sale and delivery
of the Preferred Shares or, upon conversion thereof, the issuance and delivery
of the Conversion Shares, will not require the approval of any third party other
than (i) filings pursuant to state securities laws (all of which filings have
been made by the Company, other than those which are required to be made after
the Closing and which will be duly made on a timely basis) in connection with
the sale of the Preferred Shares and (ii) with respect to the Registration
Rights Agreement, the registration of the shares covered thereby with the
Commission and filings pursuant to state securities laws.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser severally represents and warrants to the Company that:
(a) it is an "accredited investor" within the meaning of Rule 501 under the
Securities Act and was not organized for the specific purpose of acquiring
the Preferred Shares;
(b) it has sufficient knowledge and experience in investing in companies
similar to the Company in terms of the Company's stage of development so as
to be able to evaluate the risks and merits of its investment in the Company
and it is able financially to bear the risks thereof;
(c) it has had an opportunity to discuss the Company's proposed business,
management and financial affairs with the Company's management;
(d) the Preferred Shares being purchased by it are being acquired for its
own account for the purpose of investment and not with a view to or for sale
in connection with any distribution thereof;
(e) it understands that (i) the Preferred Shares and the Conversion Shares
have not been registered under the Securities Act by reason of their issuance
in a transaction exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof or Rule 505 or 506 promulgated under the
Securities Act, (ii) the Preferred Shares and, upon conversion thereof, the
Conversion Shares must be held indefinitely unless a subsequent disposition
thereof is registered under the Securities Act or is exempt from such
registration,
4
<PAGE>
(iii) the Preferred Shares and the Conversion Shares will bear a legend to
such effect and (iv) the Company will make a notation on its transfer books
to such effect; and
(f) if it sells any Conversion Shares pursuant to Rule 144A promulgated
under the Securities Act, it will take all necessary steps in order to
perfect the exemption from registration provided thereby, including (i)
obtaining on behalf of the Company information to enable the Company to
establish a reasonable belief that the purchaser is a qualified institutional
buyer and (ii) advising such purchaser that Rule 144A is being relied upon
with respect to such resale.
ARTICLE IV
CONDITIONS TO THE OBLIGATIONS OF
THE PURCHASERS
The obligation of each Purchaser to purchase and pay for the Preferred
Shares being purchased by it on the Closing Date is, at its option, subject to
the satisfaction, on or before the Closing Date, of the following conditions:
(a) Representations and Warranties to be True and Correct. The
-----------------------------------------------------
representations and warranties contained in Article II shall be true,
complete and correct on and as of the Closing Date with the same effect as
though such representations and warranties had been made on and as of such
date, and the President and Treasurer of the Company shall have certified to
such effect to the Purchasers in writing.
(b) Performance. The Company shall have performed and complied with all
-----------
agreements contained herein required to be performed or complied with by it
prior to or at the Closing Date.
(c) All Proceedings to be Satisfactory. All corporate and other
----------------------------------
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory
in form and substance to the Purchasers and their counsel, and the Purchasers
and their counsel shall have received all such counterpart originals or
certified or other copies of such documents as they reasonably may request.
(d) Employment of Dr. John Farrar. Dr. John Farrar shall have accepted, in
-----------------------------
writing, the Company's offer of employment as President and Chief Executive
officer of the Company.
(e) Supporting Documents. The Purchasers and their counsel shall have
--------------------
received copies of the following documents:
(i) the Charter, certified as of a recent date by the Secretary of
State of the State of Delaware; and
(ii) (A) a complete copy of the By-laws of the Company as in effect on
the Closing Date; and (B) a complete copy of all resolutions adopted by the
Board of Directors or the stockholders of the Company authorizing the
execution, delivery and performance of this Agreement, the Registration
Rights Agreement, the Stock Restriction) Agreements and the Management
Rights Agreements, the issuance, sale and delivery of the Preferred Shares
5
<PAGE>
and the reservation, issuance and delivery of the Conversion Shares, and
that all such resolutions are in full force and effect and are all the
resolutions adopted in connection with the transactions contemplated by
this Agreement, the Registration Rights Agreement, the Stock Restriction
Agreements and the Management Rights Agreements.
(f) Registration Rights Agreement. The Company shall have executed and
-----------------------------
delivered the Registration Rights Agreement.
(g) Stock Restriction Agreements. The Stock Restriction Agreements shall
----------------------------
have been executed and delivered by the Company and each of the following
persons shall have executed and delivered the Stock Restriction Agreement
applicable to it: (1) Dr. John Farrar; (2) Dr. Michael Lewis and (3) ARCH
Development Corporation.
(h) Management Rights Agreements. The Company shall have executed and
----------------------------
delivered the Management Rights Agreements to those Purchasers who have made
a request to the Company therefor and are subject in any manner with respect
to their investment in the Company to ERISA.
(i) Non-Competition Agreement. Dr. John Farrar shall have entered into a
-------------------------
Non-Competition Agreement with the Company in the form attached as Exhibit E
---------
(the "Non-Competition Agreement"), and copies thereof shall have been
delivered to counsel for the Purchasers.
(j) Charter. The Charter shall read in its entirety as set forth in
-------
Exhibit D.
---------
(k) Employee Agreements. Copies of the Employee Nondisclosure and
-------- ----------
Developments Agreements shall have been delivered to counsel for the
Purchasers.
(l) Election of Directors. The number of directors constituting the entire
---------------------
Board of Directors shall have been fixed at five (5) and the following
persons shall have been elected as the directors and shall each hold such
position as of the Closing Date: (1) Ellen Feeney; (2) Robert Nelsen; (3) Dr.
John Farrar; and (4) a person to be elected by the Board of Directors and
experienced in the pharmaceutical industry. A fifth director shall be
elected at the Additional Closing and such director shall be elected by the
Series A Convertible Preferred Stockholders.
(m) Fees of Purchasers' Counsel. The Company shall have paid in accordance
---------------------------
with Section 6.01 the fees and disbursements of Purchasers' counsel invoiced
at the Closing.
All such documents shall be satisfactory in form and substance to the Purchasers
and their counsel.
ARTICLE V
COVENANTS OF THE COMPANY
The Company covenants and agrees with each of the Purchasers that:
SECTION 5.01 Financial Statements, Reports, Etc. The Company shall
----------------------------------
furnish to each Purchaser:
6
<PAGE>
(a) within ninety (90) days after the end of each fiscal year of the
Company a consolidated balance sheet of the Company and its subsidiaries as
of the end of such fiscal year and the related consolidated statements of
income, stockholders' equity and cash flows for the fiscal year then ended,
prepared in accordance with generally accepted accounting principles and
certified by a firm of independent public accountants of recognized national
standing selected by the Board of Directors of the Company;
(b) within thirty (30) days after the end of each month in each fiscal
year (other than the last month in each fiscal year) a consolidated balance
sheet of the Company and its subsidiaries and the related consolidated
statements of income, stockholders' equity and cash flows, unaudited but
prepared in accordance with generally accepted accounting principles and
certified by the Chief Financial Officer of the Company, such consolidated
balance sheet to be as of the end of such month and such consolidated
statements of income, stockholders' equity and cash flows to be for such
month and for the period from the beginning of the fiscal year to the end of
such month, in each case with comparative statements for the prior fiscal
year, provided that the Company's obligations under this Section 5.01(b)
shall terminate upon the completion of a firm commitment underwritten public
offering of the Company's securities;
(c) at the time of delivery of each annual financial statement pursuant to
Section 5.01(a), a certificate executed by the Chief Financial Officer of the
Company stating that such officer has caused this Agreement and the Series A
Convertible Preferred Stock to be reviewed and has no knowledge of any
default by the Company in the performance or observance of any of the
provisions of this Agreement or the Series A Convertible Preferred Stock or,
if such officer has such knowledge, specifying such default and the nature
thereof;
(d) at the time of delivery of each monthly statement pursuant to Section
5.01(b), a management narrative report explaining all significant variances
from forecasts and all significant current developments in staffing,
marketing, sales and operations;
(e) no later than sixty (60) days prior to the start of each fiscal year,
consolidated capital and operating expense budgets, cash flow projections and
income and loss projections for the Company and its subsidiaries in respect
of such fiscal year, all itemized in reasonable detail and prepared on a
monthly basis, and, promptly after preparation, any revisions to any of the
foregoing;
(f) promptly following receipt by the Company, each audit response letter,
accountant's management letter and other written report submitted to the
Company by its independent public accountants in connection with an annual or
interim audit of the books of the Company or any of its subsidiaries;
(g) promptly after the commencement thereof, notice of all actions, suits,
claims, proceedings, investigations and inquiries of the type described in
Section 2.07 that could materially adversely affect the Company or any of its
subsidiaries;
(h) promptly upon sending, making available or filing the same, all press
releases, reports and financial statements that the Company sends or makes
available to its stockholders or directors or files with the Commission; and
7
<PAGE>
(i) promptly, from time to time, such other information regarding the
business, prospects, financial condition, operations, property or affairs of
the Company and its subsidiaries as such Purchaser reasonably may request.
SECTION 5.02 Right of First Refusal. The Company shall, prior to
----------------------
any issuance by the Company of any of its securities (other than debt securities
with no equity feature), offer to each Purchaser by written notice the right,
for a period of twenty (20) days, to purchase all of such securities for cash at
an amount equal to the price or other consideration for which such securities
are to be issued; provided, however, that the first refusal rights of the
Purchasers pursuant to this Section 5.02 shall not apply to securities issued
(A) upon conversion of any of the Preferred Shares, (B) as a stock dividend or
upon any subdivision of shares of Common Stock, provided that the securities
issued pursuant to such stock dividend or subdivision are limited to additional
shares of Common Stock, (C) pursuant to subscriptions, warrants, options,
convertible securities, or other rights which are listed in Schedule m as being
----------
outstanding on the date of this Agreement, (D) solely in consideration for the
acquisition (whether by merger or otherwise) by the Company or any of its
subsidiaries of all or substantially all of the stock or assets of any other
entity, (E) pursuant to a firm commitment underwritten public offering, (F)
pursuant to the exercise of options to purchase Common Stock granted to
directors, officers, employees or consultants of the Company in connection with
their service to the Company or pursuant to the exercise of options to purchase
Common Stock granted to or Common Stock issued to licensors or transferors of
technology to the Company, not to exceed in the aggregate 2,135,945 shares
(appropriately adjusted to reflect stock splits, stock dividends, combinations
of shares and the like with respect to the Common Stock) (the shares exempted by
this clause (F) being hereinafter referred to as the "Reserved Employee and
Technology Shares"), and (G) upon the exercise of any right which was not itself
in violation of the terms of this Section 5.02. The Company's written notice to
the Purchasers shall describe the securities proposed to be issued by the
Company and specify the number, price and payment terms. Each Purchaser may
accept the Company's offer as to the full number of securities offered to it or
any lesser number, by written notice thereof given by it to the Company prior to
the expiration of the aforesaid thirty (30) day period, in which event the
Company shall promptly sell and such Purchaser shall buy, upon the terms
specified, the number of securities agreed to be purchased by such Purchaser.
Notwithstanding the foregoing, if the Purchasers agree, in the aggregate, to
purchase more than the full number of securities offered by the Company, then
each Purchaser accepting the Company's offer shall first be allocated the lesser
of (i) the number of securities which such Purchaser agreed to purchase and (ii)
the number of securities as is equal to the full number of securities offered by
the Company multiplied by a fraction, the numerator of which shall be the number
of shares of Common Stock held by such Purchaser as of the date of the Company's
notice of offer (treating such Purchaser, for the purpose of such calculation,
as the holder of the number of shares of Common Stock which would be issuable to
such Purchaser upon conversion, exercise or exchange of all securities
(including but not limited to the Preferred Shares) held by such Purchaser on
the date such offer is made, that are convertible, exercisable or exchangeable
into or for (whether directly or indirectly) shares of Common Stock) and the
denominator of which shall be the aggregate number of shares of Common Stock
(calculated as aforesaid) held on such date by all Purchasers who accepted the
Company's offer, and the balance of the securities (if any) offered by the
Company shall be allocated among the Purchasers accepting the Company's offer in
proportion to their relative equity ownership interests in the Company
(calculated as aforesaid), provided that no Purchaser shall be allocated more
than the number of securities which such Purchaser agreed to purchase and
8
<PAGE>
provided further that in cases covered by this sentence all Purchasers shall be
allocated among them the full number of securities offered by the Company. The
Company shall be free at any time prior to ninety (90) days after the date of
its notice of offer to the Purchasers, to offer and sell to any third party or
parties the number of such securities not agreed by the Purchasers to be
purchased by them, at a price and on payment terms no less favorable to the
Company than those specified in such notice of offer to the Purchasers. However,
if such third party sale or sales are not consummated within such ninety (90)
day period, the Company shall not sell such securities as shall not have been
purchased within such period without again complying with this Section 5.02.
SECTION 5.03 Reserve for Conversion Shares. The Company shall at
-----------------------------
all times reserve and keep available out of its authorized but unissued shares
of Common Stock, for the purpose of effecting the conversion of the Preferred
Shares and otherwise complying with the terms of this Agreement, such number of
its duly authorized shares of Common Stock as shall be sufficient to effect the
conversion of the Preferred Shares from time to time outstanding or otherwise to
comply with the terms of this Agreement. If at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of the Preferred Shares or otherwise to comply with the terms of this
Agreement, the Company will forthwith take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes. The Company will
obtain any authorization, consent, approval or other action by or make any
filing with any court or administrative body that may be required under
applicable state securities laws in connection with the issuance of shares of
Common Stock upon conversion of the Preferred Shares.
SECTION 5.04 Corporate Existence. The Company shall maintain
-------------------
corporate existence, rights and franchises in full force and effect.
SECTION 5.05 Properties, Business, Insurance. The Company shall
-------------------------------
maintain its properties and business, with financially sound and reputable
insurers, insurance against such casualties and contingencies and of such types
and in such amounts as is customary for companies similarly situated, which
insurance shall be deemed by the Company to be sufficient. The Company shall not
cause or permit any assignment or change in beneficiary and shall not borrow
against any such policy. If requested by Purchasers holding at least sixty
percent (60%) of the outstanding Preferred Shares, the Company will add one
designee of such Purchasers as a notice party for each such policy and shall
request that the issuer of each policy provide such designee with ten (10) days'
notice before such policy is terminated (for failure to pay premiums or
otherwise) or assigned or before any change is made in the beneficiary thereof.
SECTION 5.06 Inspection, Consultation and Advice. The Company
-----------------------------------
shall permit each Purchaser holding in excess of 10% of the Series A Convertible
Preferred Stock and such persons as it may designate, at such Purchaser's
expense, to visit and inspect any of the properties of the Company and its
subsidiaries, examine their books and take copies and extracts therefrom,
discuss the affairs, finances and accounts of the Company and its subsidiaries
with their officers, employees and public accountants (and the Company hereby
authorizes said accountants to discuss with such Purchaser and such designees
such affairs, finances and accounts), and consult with and advise the management
of the Company and its subsidiaries as to their affairs, finances and accounts,
all at reasonable times and upon reasonable notice.
9
<PAGE>
SECTION 5.07 Restrictive Agreements Prohibited. The Company shall
---------------------------------
not become a party to any agreement which by its terms restricts the Company's
performance of this Agreement, the Registration Rights Agreement, the Stock
Restriction Agreements, the Management Rights Agreements or the Charter.
SECTION 5.08 Transactions with Affiliates. Except for transactions
----------------------------
contemplated by this Agreement or as otherwise approved by the Board of
Directors, the Company shall not enter into any material transaction with any
director, officer, employee or holder of more than 5% of the outstanding capital
stock of any class or series of capital stock of the Company or any of its
subsidiaries, member of the family of any such person, or any corporation,
partnership, trust or other entity in which any such person, or member of the
family of any such person, is a director, officer, trustee, partner or holder of
more than 5% of the outstanding capital stock thereof, except for transactions
on customary terms related to such person's employment.
SECTION 5.09 Expenses of Directors. The Company shall promptly
---------------------
reimburse in full, each director of the Company who is not an employee of the
Company and who was elected as a director solely or in part by the holders of
Series A Convertible Preferred Stock, for all of his reasonable out-of-pocket
expenses incurred in attending each meeting of the Board of Directors of the
Company or any Committee thereof.
SECTION 5.10 Use of Proceeds. The Company shall use the proceeds
---------------
from the sale of the Preferred Shares solely for working capital and other
general corporate purposes.
SECTION 5.11 Board of Directors Meetings. The Company shall use
---------------------------
its best efforts to ensure that meetings of its Board of Directors are held at
least five times each year and at least once each quarter.
SECTION 5.12 By-laws. The Company shall at all times cause its
-------
By-laws to provide that, (a) unless otherwise required by the laws of the State
of Delaware, (i) any two directors and (ii) any holder or holders of at least
25% of the outstanding shares of Series A Convertible Preferred Stock, shall
have the right to call a meeting of the Board of Directors or stockholders and
(b) the number of directors fixed in accordance therewith shall in no event
conflict with any of the terms or provisions of the Series A Convertible
Preferred Stock as set forth in the Charter. The Company shall at all times
maintain provisions in its By-laws and/or Charter indemnifying all directors
against liability and absolving all directors from liability to the Company and
its stockholders to the maximum extent permitted under the laws of the State of
Delaware.
SECTION 5.13 Performance of Contracts. The Company shall not
------------------------
materially amend, modify, terminate, waive or otherwise alter, in whole or in
part, any of the Employee Nondisclosure and Developments Agreements or the
Non-Competition Agreements without the consent of the Company's Board of
Directors.
SECTION 5.14 Vesting of Reserved Employee Shares. The Company
-----------------------------------
shall not grant to any of its employees options to purchase Reserved Employee
Shares which will become exercisable at a rate in excess of 25% per annum from
the date of such grant without the unanimous written consent of those members of
the Company's Board of Directors elected solely by the holders of Series A
Convertible Preferred Stock.
10
<PAGE>
SECTION 5.15 Employee Nondisclosure and Developments Agreements.
--------------------------------------------------
The Company shall use its best efforts to obtain, and shall cause its
subsidiaries to use their best efforts to obtain, an Employee Nondisclosure and
Developments Agreement in substantially the form of Exhibit F, or in such other
---------
form as is approved by the Board of Directors, from all future officers, key
employees and other employees who will have access to confidential information
of the Company or any of its subsidiaries, upon their employment by the Company
or any of its subsidiaries.
SECTION 5.16 Compliance with Laws. The Company shall comply with
--------------------
all applicable laws, rules, regulations and orders, noncompliance with which
could materially adversely affect its business or condition, financial or
otherwise.
SECTION 5.17 Keeping of Records and Books of Account. The Company
---------------------------------------
shall keep, and cause each subsidiary to keep, adequate records and books of
account, in which complete entries will be made in accordance with generally
accepted accounting principles consistently applied, reflecting all financial
transactions of the Company and such subsidiary, and in which, for each fiscal
year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
SECTION 5.18 Change in Nature of Business. The Company shall not
----------------------------
make any material change in the nature of its business as set forth in the
Business Plan.
SECTION 5.19 Rule 144A Information. The Company shall, at all
---------------------
times during which it is neither subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), nor exempt from reporting pursuant to Rule 12g3-2(b) under the
Exchange Act, provide in writing, upon the written request of any Purchaser or a
prospective buyer of Preferred Shares or Conversion Shares from any Purchaser,
all information required by Rule 144A(d)(4)(i) of the General Regulations
promulgated by the Commission under the Securities Act ("Rule 144A
Information"). The Company also shall, upon the written request of any
Purchaser, cooperate with and assist such Purchaser or any member of the
National Association of Securities Dealers, Inc. PORTAL system in applying to
designate and thereafter maintain the eligibility of the Preferred Shares or
Conversion Shares, as the case may be, for trading through PORTAL. The
Company's obligations under this Section 5.23 shall at all times be contingent
upon the relevant Purchasers obtaining from the prospective buyer of Preferred
Shares or Conversion Shares a written agreement to take all reasonable
precautions to safeguard the Rule 144A Information from disclosure to anyone
other than a person who will assist such buyer in evaluating the purchase of any
Preferred Shares or Conversion Shares.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01 Expenses. Each party hereto will pay its own
--------
expenses in connection with the transactions contemplated hereby, whether or not
such transactions shall be consummated, provided, however, that the Company
shall pay the reasonable fees and disbursements, not to exceed $5,000, of the
Purchasers' special counsel, Testa, Hurwitz & Thibeault, in connection with such
transactions and any subsequent amendment, waiver, consent or enforcement
thereof.
11
<PAGE>
SECTION 6.02 Survival of Agreements. All covenants, agreements,
----------------------
representations and warranties made herein or in the Registration Rights
Agreement, the Stock Restriction Agreements, the Management Rights Agreements,
or any certificate or instrument delivered to the Purchasers pursuant to or in
connection with this Agreement, the Registration Rights Agreement, the Stock
Restriction Agreements or the Management Rights Agreements, shall survive the
execution and delivery of this Agreement, the Registration Rights Agreement, the
Stock Restriction Agreements and the Management Rights Agreements, the issuance,
sale and delivery of the Preferred Shares, and the issuance and delivery of the
Conversion Shares, and all statements contained in any certificate or other
instrument delivered by the Company hereunder or thereunder or in connection
herewith or therewith shall be deemed to constitute representations and
warranties made by the Company; provided that all such representations and
warranties shall terminate two years from the date they are made.
SECTION 6.03 Brokerage. Each party hereto will indemnify and hold
---------
harmless the others against and in respect of any claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements or understandings made or
claimed to have been made by such party with any third party.
SECTION 6.04 Parties in Interest. All representations, covenants
-------------------
and agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Without limiting the
generality of the foregoing, all representations, covenants and agreements
benefiting the Purchasers shall inure to the benefit of any and all subsequent
holders from time to time of Preferred Shares or Conversion Shares.
SECTION 6.05 Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, addressed as follows:
(a) if to the Company, at 5 Great Valley Parkway, Suite 322, Malvern, PA
19355, Attention: President, with a copy to David King, Esq., Morgan, Lewis &
Bockius, 2000 One Logan Square, Philadelphia, PA 19103; and
(b) if to any Purchaser, at the address of such Purchaser set forth in
Schedule I, with a copy to Robin A. Painter, Esq., Testa, Hurwitz &
----------
Thibeault, Exchange Place, 53 State Street, Boston, Massachusetts 02109;
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
SECTION 6.06 Governing Law. This Agreement shall be governed by
-------------
and construed in accordance with the laws of the State of Delaware.
SECTION 6.07 Entire Agreement. This Agreement, including the
----------------
Schedules and Exhibits hereto, constitutes the sole and entire agreement of the
parties with respect to the subject matter hereof. All Schedules and Exhibits
hereto are hereby incorporated herein by reference.
12
<PAGE>
SECTION 6.08 Counterparts. This Agreement may be executed in two
------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
SECTION 6.09 Amendments. This Agreement may not be amended or
----------
modified, and no provisions hereof may be waived, without the written consent of
the Company and the holders of at least sixty percent (60%) of the outstanding
shares of Common Stock issued or issuable upon conversion of the Preferred
Shares.
SECTION 6.10 Severability. If any provision of this Agreement
------------
shall be declared void or unenforceable by any judicial or administrative
authority, the validity of any other provision and of the entire Agreement shall
not be affected thereby.
SECTION 6.11 Titles and Subtitles. The tides and subtitles used
--------------------
in this Agreement are for convenience only and are not to be considered in
construing or interpreting any term or provision of this Agreement.
SECTION 6.12 Certain Defined Terms. As used in this Agreement,
---------------------
the following terms shall have the following meanings (such meanings to be
equally applicable to both the singular and plural forms of the terms defined):
(a) "person" shall mean an individual, corporation, trust, partnership,
joint venture, unincorporated organization, government agency or any agency
or political subdivision thereof, or other entity.
(b) "subsidiary" shall mean, as to the Company, any corporation of which
more than 30% of the outstanding stock having ordinary voting power to elect
sixty percent (60%) of the Board of Directors of such corporation
(irrespective of whether or not at the time stock of any other class or
classes of such corporation shall have or might have voting power by reason
of the happening of any contingency) is at the time directly or indirectly
owned by the Company, or by one or more of its subsidiaries, or by the
Company and one or more of its subsidiaries.
13
<PAGE>
EXHIBIT 4.2
- --------------------------------------------------------------------------------
SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
between
ADOLOR CORPORATION
and
THE PURCHASERS NAMED IN SCHEDULE I
Dated as of March 1, 1996
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I........................................................................ 1
SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares............ 1
SECTION 1.02 Initial Closing................................................ 1
SECTION 1.03 Additional Closing............................................. 1
ARTICLE II....................................................................... 2
SECTION 2.01 Organization, Qualifications and Corporate Power............... 2
SECTION 2.02 Authorization of Agreements, Etc............................... 3
SECTION 2.03 Validity....................................................... 4
SECTION 2.04 Authorized Capital Stock....................................... 4
SECTION 2.05 Financial Statements........................................... 5
SECTION 2.06 Events Subsequent to the Date of the Balance Sheet............. 5
SECTION 2.07 Litigation; Compliance with Law................................ 5
SECTION 2.08 Proprietary Information of Third Parties....................... 6
SECTION 2.09 Patents, Trademarks, Etc....................................... 6
SECTION 2.10 Title to Properties............................................ 7
SECTION 2.11 Leasehold Interests............................................ 7
SECTION 2.12 Insurance...................................................... 8
SECTION 2.13 Taxes.......................................................... 8
SECTION 2.14 Other Agreements............................................... 8
SECTION 2.15 Loans and Advances............................................. 10
SECTION 2.16 Assumptions, Guaranties, Etc of Indebtedness of Other Persons.. 10
SECTION 2.17 Significant Customers and Suppliers............................ 10
SECTION 2.18 Governmental Approvals......................................... 10
SECTION 2.19 Disclosure..................................................... 11
SECTION 2.20 Offering of the Preferred Shares............................... 11
SECTION 2.21 Brokers........................................................ 11
SECTION 2.22 Officers....................................................... 11
SECTION 2.23 Transactions With Affiliates................................... 12
SECTION 2.24 Employees...................................................... 12
SECTION 2.25 6901, et seq................................................... 13
SECTION 2.26 ERISA.......................................................... 13
ARTICLE III...................................................................... 14
ARTICLE IV....................................................................... 15
ARTICLE V........................................................................ 17
SECTION 5.01 Financial Statements, Reports, Etc............................. 17
SECTION 5.02 Right of First Refusal......................................... 18
SECTION 5.03 Reserve for Conversion Shares.................................. 19
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
SECTION 5.04 Corporate Existence............................................ 19
SECTION 5.05 Properties, Business, Insurance................................ 20
SECTION 5.06 Inspection, Consultation and Advice............................ 20
SECTION 5.07 Restrictive Agreements Prohibited.............................. 20
SECTION 5.08 Transactions with Affiliates................................... 20
SECTION 5.09 Expenses of Directors.......................................... 20
SECTION 5.10 Use of Proceeds................................................ 20
SECTION 5.11 Board of Directors Meetings.................................... 21
SECTION 5.12 By-laws........................................................ 21
SECTION 5.14 Vesting of Reserved Employee Shares............................ 21
SECTION 5.15 Employee Nondisclosure and Developments Agreements............. 21
SECTION 5.16 Compliance with Laws........................................... 21
SECTION 5.17 Keeping of Records and Books of Account........................ 21
SECTION 5.18 Change in Nature of Business................................... 21
SECTION 5.19 Rule 144A Information.......................................... 22
ARTICLE VI....................................................................... 22
SECTION 6.01 Expenses....................................................... 22
SECTION 6.02 Survival of Agreements......................................... 22
SECTION 6.04 Parties in Interest............................................ 23
SECTION 6.05 Notices........................................................ 23
SECTION 6.06 Governing Law.................................................. 23
SECTION 6.07 Entire Agreement............................................... 23
SECTION 6.08 Counterparts................................................... 23
SECTION 6.09 Amendments..................................................... 23
SECTION 6.10 Severability................................................... 23
SECTION 6.11 Titles and Subtitles........................................... 23
SECTION 6.12 Certain Defined Terms.......................................... 24
SECTION 6.13 Prior Agreements............................................... 24
</TABLE>
-ii-
<PAGE>
INDEX TO SCHEDULES
SCHEDULE I Purchasers
SCHEDULE II Disclosure Schedule
SCHEDULE III Security Holders
SCHEDULE IV(A)
AND IV(B) Agreements
INDEX TO EXHIBITS
EXHIBIT A Form of Amendment No. 1 to Registration Rights Agreement
EXHIBIT B Form of Management Rights Agreement
EXHIBIT C Charter and All Amendments Thereto
EXHIBIT D Form of Employee Nondisclosure and Developments Agreement
-iii-
<PAGE>
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated as of March
1, 1996 between Adolor Corporation, a Delaware corporation (the "Company'), and
the several purchasers named in the attached Schedule I (individually a
----------
"Purchaser" and collectively the "Purchasers").
WHEREAS, the Company wishes to issue and sell to the Purchasers up to an
aggregate of 23,809,524 shares (the "Preferred Shares") of the authorized but
unissued Series B Convertible Preferred Stock, $.01 par value, of the Company
(the "Series B Convertible Preferred Stock"); and
WHEREAS, the Purchasers, severally, wish to purchase the Preferred Shares
on the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties agree as follows:
ARTICLE I
THE PREFERRED SHARES
SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares. The
---------------------------------------------------
Company agrees to issue and sell to each Purchaser, and each Purchaser hereby
agrees to purchase from the Company, the number of Preferred Shares set forth
opposite the name of such Purchaser under the heading "Number of Preferred
Shares to be Purchased" on Schedule I, at the aggregate purchase price set forth
opposite the name of such Purchaser under the heading "Aggregate Purchase Price
for Preferred Shares" on Schedule I.
SECTION 1.02 Initial Closing. The initial closing shall take place at
---------------
the offices of Testa, Hurwitz & Thibeault, High Street Tower, 125 High Street,
Boston, Massachusetts 02110, at 10:00 am., Boston time, on February 27, 1996, or
at such other location, date and time as may be agreed upon between the
Purchasers and the Company (such closing being called the "Closing" and such
date and time being called the "Closing Date"). At the Closing, the Company
shall issue and deliver to each Purchaser a stock certificate or certificates in
definitive form, registered in the name of such Purchaser, representing the
Preferred Shares being purchased by it at the Closing. As payment in full for
the Preferred Shares being purchased by it under this Agreement, and against
delivery of the stock certificate or certificates therefor as aforesaid, on the
Closing Date each Purchaser shall (i) deliver to the Company a check payable to
the order of the Company, in the amount set forth opposite the name of such
Purchaser under the heading "Aggregate Purchase Price for Preferred Shares" on
Schedule I, (ii) transfer such sum to the account of the Company by wire
- ----------
transfer, (iii) deliver to the Company for cancellation promissory notes issued
by the Company in the amount of such sum, or (iii) deliver or transfer such sum
to the Company by any combination of such methods of payments.
SECTION 1.03 Additional Closing. After the Closing Date and on or prior
------------------
to March 15, 1996 the Company may hold one or more additional closings (each an
"Additional Closing"; and collectively the "Additional Closings") at which the
Company may issue and sell
<PAGE>
up to the number of Preferred Shares equal to the difference between 19,964,286
and the aggregate number of Preferred Shares previously sold on the Closing Date
and, as applicable, on the date of any prior Additional Closing. The sale of
Preferred Shares pursuant to this Section 1.03 shall be on the same terms and
conditions (including price) as the sale of the Preferred Shares pursuant to
Section 1.02 hereof and shall be effected by the execution by any investor of a
counterpart signature page to this Agreement. Upon such execution: (i) each such
investor shall be deemed to be a Purchaser for all purposes of this Agreement
and Schedule I shall be amended to include such Purchaser; and (ii) each such
----------
Additional Closing shall be deemed to be a Closing hereunder and the date of
each such Additional Closing shall be a "Closing Date" hereunder. If necessary,
the Company will provide an updated Disclosure Schedule to Purchasers purchasing
in any Additional Closing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Purchaser that, as of each
Closing Date on which such Purchaser purchases Preferred Shares hereunder,
except as set forth in the Disclosure Schedule attached as Schedule II, as may
-----------
be updated in writing prior to any Additional Closing hereunder, (which
Disclosure Schedule, (as updated, if applicable), makes explicit reference to
the particular representation or warranty as to which exception is taken, which
in each case shall constitute the sole representation and warranty as to which
such exception shall apply):
SECTION 2.01 Organization, Qualifications and Corporate Power.
------------------------------------------------
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and is duly
licensed or qualified to transact business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of the business
transacted by it or the character of the properties owned or leased by it
requires such licensing or qualification. The Company has the corporate power
and corporate authority to own and hold its properties and to carry on its
business as now conducted and as proposed to be conducted, to execute, deliver
and perform this Agreement, Amendment No. 1 to that certain Registration Rights
Agreement by and among the Company and the purchasers named therein dated as of
November 7, 1994, (the "Original Registration Rights Agreement") in the form
attached as Exhibit A (the "Registration Rights Agreement Amendment"), and the
---------
Management Rights letter agreement(s) between the Company and certain of the
Purchasers, if any, in the form attached as Exhibit C (the "Management Rights
---------
Agreements"), to issue, sell and deliver the Preferred Shares and to issue and
deliver the shares of Common Stock, $.0001 par value, of the Company ("Common
Stock") issuable upon conversion of the Preferred Shares (the "Conversion
Shares"). The Original Registration Rights Agreement as amended by the
Registration Rights Agreement Amendment is sometimes referred to herein as the
"Registration Rights Agreement."
(b) Schedule II contains a list of all subsidiaries of the Company.
Except for such subsidiaries, the Company does not (i) own of record or
beneficially, directly or
-2-
<PAGE>
indirectly, (A) any shares of capital stock or securities convertible into
capital stock of any other corporation or (B) any participating interest in any
partnership, joint venture or other non-corporate business enterprise or (ii)
control, directly or indirectly, any other entity. Each of the subsidiaries is a
corporation duly incorporated, validly existing and in good standing under the
laws of its respective jurisdiction of incorporation and is duly licensed or
qualified to transact business as a foreign corporation and is in good standing
in each jurisdiction in which the nature of the business transacted by it or the
character of the properties owned or leased by it requires such licensing or
qualification. Each of the subsidiaries has the corporate power and corporate
authority to own and hold its properties and to carry on its business as now
conducted and as proposed to be conducted. All of the outstanding shares of
capital stock of each of the subsidiaries are owned beneficially and of record
by the Company, one of its other subsidiaries, or any combination of the Company
and/or one or more of its other subsidiaries, in each case free and clear of any
liens, charges, restrictions, claims or encumbrances of any nature whatsoever;
and there are no outstanding subscriptions, warrants, options, convertible
securities, or other rights (contingent or other) pursuant to which any of the
subsidiaries is or may become obligated to issue any shares of its capital stock
to any person other than the Company or one of the other subsidiaries. As used
in Sections 2.06 through 2.09, 2.11 through 2.17, 2.21 and 2.23 through 2.28
inclusive, the term "Company" shall mean the Company and each of the
subsidiaries.
SECTION 2.02 Authorization of Agreements, Etc.
--------------------------------
(a) The execution and delivery by the Company of this Agreement, the
Registration Rights Agreement Amendment and the Management Rights Agreements,
the performance by the Company of its obligations hereunder and thereunder, the
issuance, sale and delivery of the Preferred Shares and the issuance and
delivery of the Conversion Shares have been duly authorized by all requisite
corporate action and will not violate any provision of law, any order of any
court or other agency of government, the Certificate of Incorporation of the
Company, as amended (the "Charter") or the By-laws of the Company, as amended,
or any provision of any indenture, agreement or other instrument to which the
Company, any of its subsidiaries or any of their respective properties or assets
is bound, or conflict with, result in a breach of or constitute (with due notice
or lapse of time or both) a default under any such indenture, agreement or other
instrument, or result in the creation or imposition of any lien, charge,
restriction, claim or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company or any of its subsidiaries.
(b) The Preferred Shares have been duly authorized and, when issued
in accordance with this Agreement, will be validly issued, fully paid and
nonassessable shares of Series B Convertible Preferred Stock with no personal
liability attaching to the ownership thereof and will be free and clear of all
liens, charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in the Registration Rights Agreement. The Conversion
Shares have been duly reserved for issuance upon conversion of the Preferred
Shares and, when so issued, will be duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock with no personal liability attaching to
the ownership thereof and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company except
as set forth in the Registration Rights Agreement.
-3-
<PAGE>
Neither the issuance, sale or delivery of the Preferred Shares nor the issuance
or delivery of the Conversion Shares is subject to any preemptive right of
stockholders of the Company or to any right of first refusal or other right in
favor of any person.
SECTION 2.03 Validity. This Agreement has been duly executed and
--------
delivered by the Company and constitutes the legal, valid and binding obligation
of the Company, enforceable in accordance with its terms. The Registration
Rights Agreement Amendment and the Management Rights Agreements, when executed
and delivered in accordance with this Agreement, will constitute the legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms.
SECTION 2.04 Authorized Capital Stock. The authorized capital stock of
------------------------
the Company consists of (i) 29,809,524 shares of Preferred Stock, $.01 par value
(the "Preferred Stock"), of which 6,000,000 shares have been designated Series A
Convertible Preferred Stock and 23,809,524 have been designated Series B
Convertible Preferred Stock, and (ii) 33,000,000 shares of Common Stock.
Immediately prior to the Closing, 3,507,877 shares of Common Stock, 6,000,000
shares of Series A Convertible Preferred Stock will be validly issued and
outstanding, fully paid and nonassessable with no personal liability attaching
to the ownership thereof and no shares of Preferred Stock will have been issued.
The stockholders of record and holders of subscriptions, warrants, options,
convertible securities, and other rights (contingent or other) to purchase or
otherwise acquire equity securities of the Company, and the number of shares of
Common Stock and the number of such subscriptions, warrants, options,
convertible securities, and other such rights held by each, are as set forth in
the attached Schedule III. The designations, powers, preferences, rights,
------------
qualifications, limitations and restrictions in respect of each class and series
of authorized capital stock of the Company are as set forth in the Charter, a
copy of which is attached as Exhibit C, and all such designations, powers,
---------
preferences, rights, qualifications, limitations and restrictions are valid,
binding and enforceable and in accordance with all applicable laws. Except as
set forth in the attached Schedule III, (i) no person owns of record or is known
------------
to the Company to own beneficially any share of Common Stock, (ii) no
subscription, warrant, option, convertible security, or other right (contingent
or other) to purchase or otherwise acquire equity securities of the Company is
authorized or outstanding and (iii) there is no commitment by the Company to
issue shares, subscriptions, warrants, options, convertible securities, or other
such rights or to distribute to holders of any of its equity securities any
evidence of indebtedness or asset. Except as provided for in the Charter or as
set forth in the attached Schedule III, the Company has no obligation
------------
(contingent or other) to purchase, redeem or otherwise acquire any of its equity
securities or any interest therein or to pay any dividend or make any other
distribution in respect thereof Except for those certain Stock Restriction
Agreements by and among the Company, the purchasers named therein and each of
Dr. John Farrar, Dr. Michael Lewis and ARCH Development Corporation dated as of
November 7, 1994 (the "1994 Stock Restriction Agreements") and the Management
Rights Agreements, to the best of the Company's knowledge there are no voting
trusts or agreements, stockholders' agreements, pledge agreements, buy-sell
agreements, rights of first refusal, preemptive rights or proxies relating to
any securities of the Company or any of its subsidiaries (whether or not the
Company or any of its subsidiaries is a party thereto). All of the outstanding
securities of the Company were issued in compliance with all applicable Federal
and state securities laws.
-4-
<PAGE>
SECTION 2.05 Financial Statements. The Company has furnished to the
--------------------
Purchasers the unaudited consolidated balance sheet of the Company and its
subsidiaries as of December 31, 1995, (the "Balance Sheet") and the related
unaudited consolidated statements of income and cash flows of the Company and
its subsidiaries for the year ended December 31, 1995. All such financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied (except that such unaudited financial statements
do not contain all of the required footnotes) and fairly present in all material
respects the consolidated financial position of the Company and its subsidiaries
as of December 31, 1995, and the consolidated results of their operations and
cash flows for the year ended December 31, 1995. Since the date of the Balance
Sheet, (i) there has been no change in the assets, liabilities or financial
condition of the Company and its subsidiaries (on a consolidated basis) from
that reflected in the Balance Sheet except for changes in the ordinary course of
business which in the aggregate have not been materially adverse and (ii) none
of the business, prospects, financial condition, operations, property or affairs
of the Company and its subsidiaries (on a consolidated basis) has been
materially adversely affected by any occurrence or development, individually or
in the aggregate, whether or not insured against.
SECTION 2.06 Events Subsequent to the Date of the Balance Sheet. Since
--------------------------------------------------
the date of the Balance Sheet, the Company has not (i) issued any stock, bond or
other corporate security, except pursuant to the exercise of stock options
outstanding as of the date of the Balance Sheet, (ii) borrowed any amount or
incurred or become subject to any liability (absolute, accrued or contingent),
except current liabilities incurred and liabilities under contracts entered into
in the ordinary course of business, (iii) discharged or satisfied any lien or
encumbrance or incurred or paid any obligation or liability (absolute, accrued
or contingent) other than current liabilities shown on the Balance Sheet and
current liabilities incurred since the date of the Balance Sheet in the ordinary
course of business, (iv) declared or made any payment or distribution to
stockholders or purchased or redeemed any share of its capital stock or other
security, (v) mortgaged, pledged, encumbered or subjected to lien any of its
assets, tangible or intangible, other than liens of current real property taxes
not yet due and payable, (vi) sold, assigned or transferred any of its tangible
assets except in the ordinary course of business, or canceled any debt or claim,
(vii) sold, assigned, transferred or granted any exclusive license with respect
to any patent, trademark, trade name, service mark, copyright, trade secret or
other intangible asset, (viii) suffered any loss of property or waived any right
of substantial value whether or not in the ordinary course of business, (ix)
made any change in officer compensation except in the ordinary course of
business and consistent with past practice, (x) made any material change in the
manner of business or operations of the Company, (xi) entered into any
transaction except in the ordinary course of business or as otherwise
contemplated hereby or (xii) entered into any commitment (contingent or
otherwise) to do any of the foregoing.
SECTION 2.07 Litigation; Compliance with Law. There is no (i) action,
-------------------------------
suit, claim, proceeding or investigation pending or, to the best of the
Company's knowledge, threatened against or affecting the Company, at law or in
equity, or before or by any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) arbitration proceeding relating to the Company pending under
collective bargaining agreements or otherwise or (iii) governmental inquiry
-5-
<PAGE>
pending or, to the best of the Company's knowledge, threatened against or
affecting the Company (including without limitation any inquiry as to the
qualification of the Company to hold or receive any license or permit). The
Company is not in default with respect to any order, writ, injunction or decree
known to or served upon the Company of any court or of any Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign. There is no action or suit by the Company
pending or threatened against others. The Company has complied with all laws,
rules, regulations and orders applicable to its business, operations,
properties, assets, products and services, the Company has all necessary
permits, licenses and other authorizations required to conduct its business as
conducted and as proposed to be conducted, and the Company has been operating
its business pursuant to and in compliance with the terms of all such permits,
licenses and other authorizations except where any instance of instances of
noncompliance do not, individually or in the aggregate, have a material adverse
effect on the Company's business, prospects, financial condition, operations,
property or affairs. There is no existing law, rule, regulation or order, and
the Company after due inquiry is not aware of any proposed law, rule, regulation
or order, whether Federal, state, county or local, which would prohibit or
restrict the Company from, or otherwise materially adversely affect the Company
in, conducting its business in any jurisdiction in which it is now conducting
business or in which it proposes to conduct business.
SECTION 2.08 Proprietary Information of Third Parties. To the best of
----------------------------------------
the Company's knowledge, no third party has claimed or has reason to claim that
any person employed by or affiliated with the Company has (a) violated or may be
violating any of the terms or conditions of his employment, non-competition or
non-disclosure agreement with such third party, (b) disclosed or may be
disclosing or utilized or may be utilizing any trade secret or proprietary
information or documentation of such third party or (c) interfered or may be
interfering in the employment relationship between such third party and any of
its present or former employees. No third party has requested information from
the Company which suggests that such a claim might be contemplated. To the best
of the Company's knowledge, no person employed by or affiliated with the Company
has employed or proposes to employ any trade secret or any information or
documentation proprietary to any former employer, and to the best of the
Company's knowledge, no person employed by or affiliated with the Company has
violated any confidential relationship which such person may have had with any
third party, in connection with the development, manufacture or sale of any
product or proposed product or the development or sale of any service or
proposed service of the Company, and the Company has no reason to believe there
will be any such employment or violation. To the best of the Company's
knowledge, none of the execution or delivery of this Agreement, or the carrying
on of the business of the Company as officers, employees or agents by any
officer, director or key employee of the Company, or the conduct or proposed
conduct of the business of the Company, will conflict with or result in a breach
of the terms, conditions or provisions of or constitute a default under any
contract, covenant or instrument under which any such person is obligated.
SECTION 2.09 Patents, Trademarks, Etc. Set forth in Schedule II is a
------------------------ -----------
list and brief description of all domestic and foreign patents, patent rights,
patent applications, trademarks, trademark applications, service marks, service
mark applications, trade names and copyrights,
-6-
<PAGE>
and all applications for such which are in the process of being prepared, owned
by or registered in the name of the Company, or of which the Company is a
licensor or licensee or in which the Company has any right, and in each case a
brief description of the nature of such right. The Company owns or possesses
adequate licenses or other rights to use all patents, patent applications,
trademarks, trademark applications, service marks, service mark applications,
trade names, copyrights, manufacturing processes, formulae, trade secrets,
customer lists and know how (collectively, "Intellectual Property") necessary to
the conduct of its business as conducted and as proposed to be conducted, and no
claim is pending or, to the best of the Company's knowledge, threatened to the
effect that the operations of the Company infringe upon or conflict with the
asserted rights of any other person under any Intellectual Property, and the
Company reasonably believes that there is no basis for any such claim (whether
or not pending or threatened). No claim is pending or threatened to the effect
that any such Intellectual Property owned or licensed by the Company, or which
the Company otherwise has the right to use, is invalid or unenforceable by the
Company, and there is no basis for any such claim (whether or not pending or
threatened). All prior art known to the Company which may be or may have been
pertinent to the examination of any United States patent or patent application
listed in Schedule II has been cited to the United States Patent and Trademark
-----------
Office. To the best of the Company's knowledge, all technical information
developed by and belonging to the Company which has not been patented has been
kept confidential. The Company has not granted or assigned to any other person
or entity any right to manufacture, have manufactured, assemble or sell the
products or proposed products or to provide the services or proposed services of
the Company.
SECTION 2.10 Title to Properties. The Company and its subsidiaries have
-------------------
good, clear and marketable title to their respective properties and assets
reflected on the Balance Sheet or acquired by them since the date of the Balance
Sheet (other than properties and assets disposed of in the ordinary course of
business since the date of the Balance Sheet), and all such properties and
assets are free and clear of mortgages, pledges, security interests, liens,
charges, claims, restrictions and other encumbrances (including without
limitation, easements and licenses), except for liens for or current taxes not
yet due and payable and minor imperfections of title, if any, not material in
nature or amount and not materially detracting from the value or impairing the
use of the property subject thereto or impairing the operations or proposed
operations of the Company and its subsidiaries, including without limitation,
the ability of the Company and its subsidiaries to secure financing using such
properties and assets as collateral. To the best of the Company's knowledge
after due inquiry, there are no condemnation, environmental, zoning or other
land use regulation proceedings, either instituted or planned to be instituted,
which would adversely affect the use or operation of the Company's and its
subsidiaries' properties and assets for their respective intended uses and
purposes, or the value of such properties, and neither the Company nor any
subsidiary has received notice of any special assessment proceedings which would
affect such properties and assets.
SECTION 2.11 Leasehold Interests. Each lease or agreement to which the
-------------------
Company is a party under which it is a lessee of any property, real or personal,
is a valid and subsisting agreement, duly authorized and entered into, without
any default of the Company thereunder and, to the best of the Company's
knowledge, without any default thereunder of any other party thereto. No event
has occurred and is continuing which, with due notice or lapse of
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<PAGE>
time or both, would constitute a default or event of default by the Company
under any such lease or agreement or, to the best of the Company's knowledge, by
any other party thereto. The Company's possession of such property has not been
disturbed and, to the best of the Company's knowledge after due inquiry, no
claim has been asserted against the Company adverse to its rights in such
leasehold interests.
SECTION 2.12 Insurance. The Company holds valid policies covering all of
---------
the insurance required to be maintained by it under Section 5.05.
SECTION 2.13 Taxes. The Company has filed all tax returns, Federal,
-----
state, county and local, required to be filed by it, and the Company has paid
all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or payable, including
without limitation all taxes which the Company is obligated to withhold from
amounts owing to employees, creditors and third parties. The Company has
established adequate reserves for all taxes accrued but not yet payable. The
Federal income tax returns of the Company have never been audited by the
Internal Revenue Service. No deficiency assessment with respect to or proposed
adjustment of the Company's Federal, state, county or local taxes is pending or,
to the best of the Company's knowledge, threatened. There is no tax lien,
whether imposed by any Federal, state, county or local taxing authority,
outstanding against the assets, properties or business of the Company. Neither
the Company nor any of its present or former stockholders has ever filed an
election pursuant to Section 1362 of the Internal Revenue Code of 1986, as
amended (the "Code"), that the Company be taxed as an S corporation.
SECTION 2.14 Other Agreements. Except as set forth in the attached
----------------
Schedule IV(A), (which Schedule IV(A) may be updated in writing prior to any
- -------------- --------------
Additional Closing hereunder) as of each Closing Date hereunder, the Company
reasonably believes after due investigation that it is not a party to or
otherwise bound by any written or oral agreement, instrument, commitment or
restriction which individually or in the aggregate could materially adversely
affect the business, prospects, financial condition, operations, property or
affairs of the Company. Except as set forth in the attached Schedule IV(B), the
--------------
Company is not a party to or otherwise bound by any written or oral:
(a) distributor, dealer, manufacturer's representative or sales
agency agreement which is not terminable on less than ninety (90) days' notice
without cost or other liability to the Company (except for agreements which, in
the aggregate, are not material to the business of the Company);
(b) sales agreement which entitles any customer to a rebate or right
of set-off, to return any product to the Company after acceptance thereof or to
delay the acceptance thereof, or which varies in any material respect from the
Company's standard form agreements;
(c) agreement with any labor union (and, to the knowledge of the
Company, no organizational effort is being made with respect to any of its
employees);
(d) agreement with any supplier containing any provision permitting
any party other than the Company to renegotiate the price or other terms, or
containing any pay-
-8-
<PAGE>
back or other similar provision, upon the occurrence of a failure by the Company
to meet its obligations under the agreement when due or the occurrence of any
other event;
(e) agreement for the future purchase of fixed assets or for the
future purchase of materials, supplies or equipment in excess of its normal
operating requirements;
(f) agreement for the employment of any officer, employee or other
person on a full-time or consulting basis which is not terminable by the Company
at will without liability to the Company, except pursuant to severance and
accrued vacation pay policies applicable to all employees of the Company;
(g) bonus, pension, profit-sharing, retirement, hospitalization,
insurance, stock purchase, stock option or other plan, agreement or
understanding pursuant to which benefits are provided to any employee of the
Company (other than group insurance plans applicable to employees generally);
(h) agreement relating to the borrowing of money or to the mortgaging
or pledging of, or otherwise placing a lien or security interest on, any asset
of the Company;
(i) guaranty of any obligation for borrowed money or otherwise;
(j) voting trust or agreement, stockholders' agreement, pledge
agreement, buy-sell agreement or first refusal or preemptive rights agreement
relating to any securities of the Company (other than this Agreement, the
Registration Rights Agreement Amendment, the 1994 Stock Restriction Agreements
and the Management Rights Agreements);
(k) agreement, or group of related agreements with the same party or
any group of affiliated parties, under which the Company has advanced or agreed
to advance money or has agreed to lease any property as lessee or lessor;
(l) agreement or obligation (contingent or otherwise) to issue, sell
or otherwise distribute or to repurchase or otherwise acquire or retire any
share of its capital stock or any of its other equity securities other than
pursuant to its Charter as in effect on any Closing Date hereunder;
(m) assignment, license or other agreement with respect to any form
of intangible property;
(n) agreement under which it has granted any person any registration
rights, other than the Registration Rights Agreement;
(o) agreement under which it has limited or restricted its right to
compete with any person in any respect; and
(p) other agreement or group of related agreements with the same
party involving more than $10,000 or continuing over a period of more than six
months from the date or dates thereof (including renewals or extensions optional
with another party), which
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<PAGE>
agreement or group of agreements is not terminable by the Company without
penalty upon notice of thirty (30) days or less, but excluding any agreement or
group of agreements with a customer of the Company for the sale, lease or rental
of the Company's products or services if such agreement or group of agreements
was entered into by the Company in the ordinary course of business.
The Company, and to the best of the Company's knowledge after due inquiry, each
other party thereto have in all material respects performed all the obligations
required to be performed by them to date (or each non-performing party has
received a valid, enforceable and irrevocable written waiver with respect to its
non-performance), have received no notice of default and are not in default
(with due notice or lapse of time or both) under any agreement, instrument,
commitment, plan or arrangement to which the Company is a party or by which it
or its property may be bound. The Company has no present expectation or
intention of not fully performing all its obligations under each such agreement,
instrument, commitment, plan or arrangement, and the Company has no knowledge of
any breach or anticipated breach by the other party to any agreement,
instrument, commitment, plan or arrangement to which the Company is a party.
The Company is in full compliance with all of the terms and provisions of its
Charter and By-laws, as amended.
SECTION 2.15 Loans and Advances. The Company does not have any
------------------
outstanding loans or advances to any person and is not obligated to make any
such loans or advances, except, in each case, for advances to employees of the
Company in respect of reimbursable business expenses anticipated to be incurred
by them in connection with their performance of services for the Company.
SECTION 2.16 Assumptions, Guaranties, Etc of Indebtedness of Other
-----------------------------------------------------
Persons. The Company has not assumed, guaranteed, endorsed or otherwise become
- -------
directly or contingently liable on any indebtedness of any other person
(including, without limitation, liability by way of agreement, contingent or
otherwise, to purchase, to provide funds for payment, to supply funds to or
otherwise invest in the debtor, or otherwise to assure the creditor against
loss), except for guaranties by endorsement of negotiable instruments for
deposit or collection in the ordinary course of business.
SECTION 2.17 Significant Customers and Suppliers. No customer or
-----------------------------------
supplier, or group of two or more thereof (whether or not affiliated) which was
material to the Company, individually or in the aggregate, during the period
covered by the financial statements referred to in Section 2.05 or which has
been material to the Company thereafter, has terminated, materially reduced or
threatened to terminate or materially reduce its or their purchases from or
provision of products or services to the Company, as the case may be.
SECTION 2.18 Governmental Approvals. Subject to the accuracy of the
----------------------
representations and warranties of the Purchasers set forth in Article III, no
registration or filing with, or consent or approval of or other action by, any
Federal, state or other governmental agency or instrumentality is or will be
necessary for the valid execution, delivery and performance by the Company of
this Agreement, the Registration Rights Agreement Amendment or the Management
Rights Agreements, the issuance, sale and delivery of the
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<PAGE>
Preferred Shares or, upon conversion thereof, the issuance and delivery of the
Conversion Shares, other than (i) filings pursuant to state securities laws (all
of which filings have been made by the Company, other than those which are
required to be made after the Closing and which will be duly made on a timely
basis) in connection with the sale of the Preferred Shares and (ii) with respect
to the Registration Rights Agreement, the registration of the shares covered
thereby with the Commission and filings pursuant to state securities laws.
SECTION 2.19 Disclosure. Neither this Agreement, nor any Schedule or
----------
Exhibit to this Agreement, nor the Business Plan of the Company dated August 16,
1995 (the "Business Plan"), contains an untrue statement of a material fact or
omits a material fact necessary to make the statements contained herein or
therein not misleading. None of the statements, documents, certificates or
other items prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained therein not misleading.
The financial projections and other estimates contained in the Business Plan
were prepared by the Company based on the Company's experience in the industry
and on assumptions of fact and opinion as to future events which the Company, at
the date of the issuance of the Business Plan, believed to be reasonable, but
which the Company cannot and does not assure or guarantee the attainment of in
any manner. As of the date hereof no facts have come to the attention of the
Company which would, in its opinion, require the Company to revise or amplify
the assumptions underlying such projections and other estimates or the
conclusions derived therefrom.
SECTION 2.20 Offering of the Preferred Shares. Neither the Company nor
--------------------------------
any person authorized or employed by the Company as agent, broker, dealer or
otherwise in connection with the offering or sale of the Preferred Shares or any
security of the Company similar to the Preferred Shares has offered the
Preferred Shares or any such similar security for sale to, or solicited any
offer to buy the Preferred Shares or any such similar security from, or
otherwise approached or negotiated with respect thereto with, any person or
persons, and neither the Company nor any person acting on its behalf has taken
or will take any other action (including, without limitation, any offer,
issuance or sale of any security of the Company under circumstances which might
require the integration of such security with Preferred Shares under the
Securities Act or the rules and regulations of the Commission thereunder), in
either case so as to subject the offering, issuance or sale of the Preferred
Shares to the registration provisions of the Securities Act.
SECTION 2.21 Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
SECTION 2.22 Officers. Set forth in Schedule II is a list of the names
--------
of the officers of the Company, together with the title or job classification of
each such person and the total compensation anticipated to be paid to each such
person by the Company and its subsidiaries in 1995.
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<PAGE>
SECTION 2.23 Transactions With Affiliates. Other than purchases of
----------------------------
Preferred Shares hereunder, no director, officer, employee or stockholder of the
Company, or member of the family of any such person, or any corporation,
partnership, trust or other entity in which any such person, or any member of
the family of any such person, has a substantial interest or is an officer,
director, trustee, partner or holder of more than 5% of the outstanding capital
stock thereof, is a party to any transaction with the Company, including any
contract, agreement or other arrangement providing for the employment of,
furnishing of services by, rental of real or personal property from or otherwise
requiring payments to any such person or firm, other than employment-at-will
arrangements in the ordinary course of business.
SECTION 2.24 Employees. Each of the officers of the Company, each key
---------
employee and each other employee now employed by the Company who has access to
confidential information of the Company has executed an Employee Nondisclosure
and Developments Agreement substantially in the form previously delivered to the
Purchasers and such agreements are in full force and effect. No officer or key
employee of the Company has advised the Company (orally or in writing) that he
intends to terminate employment with the Company. The Company has complied in
all material respects with all applicable laws relating to the employment of
labor, including provisions relating to wages, hours, equal opportunity,
collective bargaining and the payment of Social Security and other taxes, and
with the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
SECTION 2.25 Environmental Protection. The Company has not caused or
------------------------
allowed, or contracted with any party for, the generation, use, transportation,
treatment, storage or disposal of any Hazardous Substances (as defined below) in
connection with the operation of its business or otherwise. The Company, the
operation of its business, and any real property that the Company owns, leases
or otherwise occupies or uses (the "Premises") are in compliance with all
applicable Environmental Laws (as defined below) and orders or directives of any
governmental authorities having jurisdiction under such Environmental Laws,
including, without limitation, any Environmental Laws or orders or directives
with respect to any cleanup or remediation of any release or threat of release
of Hazardous Substances. The Company has not received any citation, directive,
letter or other communication, written or oral, or any notice of any proceeding,
claim or lawsuit, from any person arising out of the ownership or occupation of
the Premises, or the conduct of its operations, and the Company is not aware of
any basis therefor. The Company has obtained and is maintaining in full force
and effect all necessary permits, licenses and approvals required by all
Environmental Laws applicable to the Premises and the business operations
conducted thereon (including operations conducted by tenants on the Premises),
and is in compliance with all such permits, licenses and approvals. The Company
has not caused or allowed a release, or a threat of release, of any Hazardous
Substance unto, at or near the Premises, and, to the best of the Company's
knowledge, neither the Premises nor any property at or near the Premises has
ever been subject to a release, or a threat of release, of any Hazardous
Substance. For the purposes of this Agreement, the term "Environmental Laws"
shall mean any Federal, state or local law or ordinance or regulation pertaining
to the protection of human health or the environment, including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. Sections 9601, et seq., the Emergency Planning and Community
Right-to-Know Act, 42 U.S.C. Sections 11001, et seq., and the Resource
Conservation and Recovery Act, 42 U.S.C. Sections
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<PAGE>
6901, et seq. For purposes of this Agreement, the term "Hazardous Substances"
shall include oil and petroleum products, asbestos, polychlorinated biphenyls,
urea formaldehyde and any other materials classified as hazardous or toxic under
any Environmental Laws.
SECTION 2.26 ERISA.
-----
(a) Schedule II lists each Employee Plan that covers any employee of
-----------
the Company, copies or descriptions of all of which have previously been made
available or furnished to the Purchasers. With respect to each Employee Plan,
the Company has provided the most recently filed Form 5500 and an accurate
summary description of such plan. The Company has provided the Purchasers with
complete age, salary, service and related data as of the most recent practicable
date for employees of the Company.
(b) Schedule II also includes a list of each Benefit Arrangement of
-----------
the Company, copies or descriptions of all of which have been made available or
furnished previously to the Purchasers.
(c) No Employee Plan is a Multiemployer Plan and no Employee Plan is
subject to Title IV of ERISA. The Company and its Affiliates have not incurred
any liability under Title IV of ERISA arising in connection with the termination
of any plan covered or previously covered by Title IV of ERISA.
(d) None of the Employee Plans or other arrangements listed on
Schedule II covers any non-United States employee or former employee of the
- -----------
Company.
(e) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, has occurred with respect to any Employee Plan.
(f) Each Employee Plan which is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified during the period
from its adoption to date, and each trust forming a part thereof is exempt from
tax pursuant to Section 501(a) of the Code. The Company has furnished to the
Purchasers copies of the most recent Internal Revenue Service determination
letters with respect to each such plan. Each Employee Plan has been maintained
in compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such plan.
(g) Each Employee Plan and each Benefit Arrangement has been
maintained in substantial compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations which are
applicable to such Employee Plan and Benefit Arrangement.
(h) All contributions and payments accrued under each Employee Plan
and Benefit Arrangement, determined in accordance with prior funding and accrual
practices, as adjusted to include proportional accruals for the period ending on
the Closing Date, will be discharged and paid on or prior to the Closing Date
except to the extent reflected on the Balance Sheet. Except as disclosed in
writing to the Purchasers prior to the date hereof, there
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<PAGE>
has been no amendment to, written interpretation of or announcement (whether or
not written) by the Company or any of its ERISA Affiliates relating to, or
change in employee participation or coverage under, any Employee Plan or Benefit
Arrangement that would increase materially the expense of maintaining such
Employee Plan or Benefit Arrangement above the level of the expense incurred in
respect thereof for the fiscal year ended prior to the date hereof.
(i) There is no contract, agreement, plan or arrangement covering any
employee or former employee of the Company that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to the terms of Section 280G of the Code.
(j) No tax under Section 4980B of the Code has been incurred in
respect of any Employee Plan that is a group health plan, as defined in Section
5000(b)(l) of the Code.
(k) With respect to the employees and former employees of the Company,
there are no employee post-retirement medical or health plans in effect, except
as required by Section 4980B of the Code.
(l) No employee of the Company will become entitled to any bonus,
retirement, severance or similar benefit or enhanced benefit solely as a result
of the transactions contemplated hereby.
(m) The Company does not have, nor is it reasonably expected to have,
any liability under Title IV of ERISA.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser severally represents and warrants to the Company that:
(a) it is an "accredited investor" within the meaning of Rule 501
under the Securities Act and was not organized for the specific purpose of
acquiring the Preferred Shares;
(b) it has sufficient knowledge and experience in investing in
companies similar to the Company in terms of the Company's stage of development
so as to be able to evaluate the risks and merits of its investment in the
Company and it is able financially to bear the risks thereof;
(c) it has had an opportunity to discuss the Company's proposed
business, management and financial affairs with the Company's management;
(d) the Preferred Shares being purchased by it are being acquired for
its own account for the purpose of investment and not with a view to or for sale
in connection with any distribution thereof;
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<PAGE>
(e) it understands that (i) the Preferred Shares and the Conversion
Shares have not been registered under the Securities Act by reason of their
issuance in a transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof or Rule 505 or 506 promulgated
under the Securities Act, (ii) the Preferred Shares and, upon conversion
thereof, the Conversion Shares must be held indefinitely unless a subsequent
disposition thereof is registered under the Securities Act or is exempt from
such registration, (iii) the Preferred Shares and the Conversion Shares will
bear a legend to such effect and (iv) the Company will make a notation on its
transfer books to such effect; and
(f) if it sells any Conversion Shares pursuant to Rule 144A
promulgated under the Securities Act, it will take all necessary steps in order
to perfect the exemption from registration provided thereby, including (i)
obtaining on behalf of the Company information to enable the Company to
establish a reasonable belief that the purchaser is a qualified institutional
buyer and (ii) advising such purchaser that Rule 144A is being relied upon with
respect to such resale.
ARTICLE IV
CONDITIONS TO THE OBLIGATIONS
OF THE PURCHASERS
The obligation of each Purchaser to purchase and pay for the Preferred
Shares being purchased by it on the Closing Date is, at its option, subject to
the satisfaction, on or before the Closing Date, of the following conditions:
(a) Representations and Warranties to be True and Correct. The
-----------------------------------------------------
representations and warranties contained in Article II shall be true, complete
and correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date, and the
President and Treasurer of the Company shall have certified to such effect to
the Purchasers in writing.
(b) Performance. The Company shall have performed and complied with
-----------
all agreements contained herein required to be performed or complied with by it
prior to or at the Closing Date.
(c) All Proceedings to be Satisfactory. All corporate and other
----------------------------------
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory in
form and substance to the Purchasers and their counsel, and the Purchasers and
their counsel shall have received all such counterpart originals or certified or
other copies of such documents as they reasonably may request.
(d) Supporting Documents. The Purchasers and their counsel shall have
--------------------
received copies of the following documents:
(i) the Charter, certified as of a recent date by the Secretary
of State of the State of Delaware; and
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<PAGE>
(ii) (A) a complete copy of the By-laws of the Company as in
effect on the Closing Date; and (B) a complete copy of all resolutions
adopted by the Board of Directors and the stockholders of the Company
authorizing the execution, delivery and performance of this Agreement,
the Registration Rights Agreement Amendment and the Management Rights
Agreements, the issuance, sale and delivery of the Preferred Shares
and the reservation, issuance and delivery of the Conversion Shares,
and that all such resolutions are in full force and effect and are all
the resolutions adopted in connection with the transactions
contemplated by this Agreement, the Registration Rights Agreement
Amendment and the Management Rights Agreements.
(e) Registration Rights Agreement Amendment. The Company shall have
---------------------------------------
executed and delivered the Registration Rights Agreement Amendment.
(f) Management Rights Agreements. The Company shall have executed and
----------------------------
delivered the Management Rights Agreements to those Purchasers who have made a
request to the Company therefor and are subject in any manner with respect to
their investment in the Company to ERISA.
(g) Charter. The Charter shall read in its entirety as set forth in
-------
Exhibit C.
- ---------
(h) Employee Agreements. Copies of the Employee Nondisclosure and
-------------------
Developments Agreements shall have been delivered to counsel for the Purchasers.
(i) Series B Directors. In the event of an Additional Closing,
------------------
provision shall be made upon the mutual agreement of the Company, the Purchasers
purchasing on the date hereof and the Purchasers purchasing in such Additional
Closing regarding a director or directors (any such director a "Series B
Director") to be elected solely by the holders of Series B Convertible Preferred
Stock, such provision to include any necessary amendment to the Company's
Charter, By-laws or this Agreement, or the entering by the Company and the
Purchasers into any voting agreement necessary to implement the agreement
reached. Any such Series B director shall be elected as of such Additional
Closing, such director to be designated in accordance with the agreement reached
among the Company, the prior Purchasers and the Purchasers purchasing in such
Additional Closing.
(j) Opinion of Counsel. Purchasers participating in such Additional
------------------
Closing shall have received an opinion of Dechert, Price & Rhoads, dated the
date of such Additional Closing, satisfactory in form and substance to such
Purchasers and Purchasers' counsel.
(k) Fees of Purchasers' Counsel. The Company shall have paid in
---------------------------
accordance with Section 6.01 the fees and disbursements of Purchasers' counsel
invoiced at the Closing or any Additional Closing.
All such documents shall be satisfactory in form and substance to the Purchasers
and their counsel.
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<PAGE>
ARTICLE V
COVENANTS OF THE COMPANY
The Company covenants and agrees with each of the Purchasers that:
SECTION 5.01 Financial Statements, Reports, Etc. The Company shall furnish
----------------------------------
to each Purchaser:
(a) within ninety (90) days after the end of each fiscal year of the
Company a consolidated balance sheet of the Company and its subsidiaries as of
the end of such fiscal year and the related consolidated statements of income,
stockholders' equity and cash flows for the fiscal year then ended, prepared in
accordance with generally accepted accounting principles and certified by a firm
of independent public accountants of recognized national standing selected by
the Board of Directors of the Company;
(b) within thirty (30) days after the end of each month in each fiscal
year (other than the last month in each fiscal year) a consolidated balance
sheet of the Company and its subsidiaries and the related consolidated
statements of income, stockholders' equity and cash flows, unaudited but
prepared in accordance with generally accepted accounting principles and
certified by the Chief Financial Officer of the Company, such consolidated
balance sheet to be as of the end of such month and such consolidated statements
of income, stockholders' equity and cash flows to be for such month and for the
period from the beginning of the fiscal year to the end of such month, in each
case with comparative statements for the prior fiscal year, provided that the
Company's obligations under this Section 5.01(b) shall terminate upon the
completion of a firm commitment underwritten public offering of the Company's
securities;
(c) at the time of delivery of each annual financial statement
pursuant to Section 5.01(a), a certificate executed by the Chief Financial
Officer of the Company stating that such officer has caused this Agreement and
the Series B Convertible Preferred Stock to be reviewed and has no knowledge of
any default by the Company in the performance or observance of any of the
provisions of this Agreement or the Series B Convertible Preferred Stock or, if
such officer has such knowledge, specifying such default and the nature thereof;
(d) at the time of delivery of each monthly statement pursuant to
Section 5.01(b), a management narrative report explaining all significant
variances from forecasts and all significant current developments in staffing,
marketing, sales and operations;
(e) no later than sixty (60) days prior to the start of each fiscal
year, consolidated capital and operating expense budgets, cash flow projections
and income and loss projections for the Company and its subsidiaries in respect
of such fiscal year, all itemized in reasonable detail and prepared on a monthly
basis, and, promptly after preparation, any revisions to any of the foregoing;
(f) promptly following receipt by the Company, each audit response
letter, accountant's management letter and other written report submitted to the
Company by its
-17-
<PAGE>
independent public accountants in connection with an annual or interim audit of
the books of the Company or any of its subsidiaries;
(g) promptly after the commencement thereof, notice of all actions,
suits, claims, proceedings, investigations and inquiries of the type described
in Section 2.07 that could materially adversely affect the Company or any of its
subsidiaries;
(h) promptly upon sending, making available or filing the same, all
press releases, reports and financial statements that the Company sends or makes
available to its stockholders or directors or files with the Commission; and
(i) promptly, from time to time, such other information regarding the
business, prospects, financial condition, operations, property or affairs of the
Company and its subsidiaries as such Purchaser reasonably may request.
SECTION 5.02 Right of First Refusal. The Company shall, prior to any
----------------------
issuance by the Company of any of its securities (other than debt securities
with no equity feature), offer to each Purchaser by written notice the right,
for a period of twenty (20) days, to purchase all of such securities for cash at
an amount equal to the price or other consideration for which such securities
are to be issued; provided, however, that the first refusal rights of the
Purchasers pursuant to this Section 5.02 shall not apply to securities issued
(A) upon conversion of any of the Preferred Shares, (B) as a stock dividend or
upon any subdivision of shares of Common Stock, provided that the securities
issued pursuant to such stock dividend or subdivision are limited to additional
shares of Common Stock, (C) pursuant to subscriptions, warrants, options,
convertible securities, or other rights which are listed in Schedule III as
------------
being outstanding on the date of this Agreement, (D) solely in consideration for
the acquisition (whether by merger or otherwise) by the Company or any of its
subsidiaries of all or substantially all of the stock or assets of any other
entity, (E) pursuant to a firm commitment underwritten public offering, (F)
pursuant to the exercise of options to purchase Common Stock granted to
directors, officers, employees or consultants of the Company in connection with
their service to the Company or pursuant to the exercise of options to purchase
Common Stock granted to or Common Stock issued to licensors or transferors of
technology to the Company, not to exceed in the aggregate 2,135,945 shares
(appropriately adjusted to reflect stock splits, stock dividends, combinations
of shares and the like with respect to the Common Stock) (the shares exempted by
this clause (F) being hereinafter referred to as the "Reserved Employee and
Technology Shares"), and (G) upon the exercise of any right which was not itself
in violation of the terms of this Section 5.02. The Company's written notice to
the Purchasers shall describe the securities proposed to be issued by the
Company and specify the number, price and payment terms. Each Purchaser may
accept the Company's offer as to the full number of securities offered to it or
any lesser number, by written notice thereof given by it to the Company prior to
the expiration of the aforesaid twenty (20) day period, in which event the
Company shall promptly sell and such Purchaser shall buy, upon the terms
specified, the number of securities agreed to be purchased by such Purchaser.
Notwithstanding the foregoing, if the Purchasers agree, in the aggregate, to
purchase more than the full number of securities offered by the Company, then
each Purchaser accepting the Company's offer shall first be allocated the lesser
of (i) the number of securities which such Purchaser agreed to
-18-
<PAGE>
purchase and (ii) the number of securities as is equal to the full number of
securities offered by the Company multiplied by a fraction, the numerator of
which shall be the number of shares of Common Stock held by such Purchaser as of
the date of the Company's notice of offer (treating such Purchaser, for the
purpose of such calculation, as the holder of the number of shares of Common
Stock which would be issuable to such Purchaser upon conversion, exercise or
exchange of all securities (including but not limited to the Preferred Shares)
held by such Purchaser on the date such offer is made, that are convertible,
exercisable or exchangeable into or for (whether directly or indirectly) shares
of Common Stock) and the denominator of which shall be the aggregate number of
shares of Common Stock (calculated as aforesaid) held on such date by all
Purchasers who accepted the Company's offer, and the balance of the securities
(if any) offered by the Company shall be allocated among the Purchasers
accepting the Company's offer in proportion to their relative equity ownership
interests in the Company (calculated as aforesaid), provided that no Purchaser
shall be allocated more than the number of securities which such Purchaser
agreed to purchase and provided further that in cases covered by this sentence
all Purchasers shall be allocated among them the full number of securities
offered by the Company. The Company shall be free at any time prior to ninety
(90) days after the date of its notice of offer to the Purchasers, to offer and
sell to any third party or parties the number of such securities not agreed by
the Purchasers to be purchased by them, at a price and on payment terms no less
favorable to the Company than those specified in such notice of offer to the
Purchasers. However, if such third party sale or sales are not consummated
within such ninety (90) day period, the Company shall not sell such securities
as shall not have been purchased within such period without again complying with
this Section 5.02. For purposes of this Section 5.02, (x) the term "Purchasers"
shall include the Series A Purchasers (as defined in Section 6.13 hereof) and
(y) the term "Preferred Shares" shall include the shares of Series A Convertible
Preferred Stock purchased pursuant to the Series A Agreement (as defined in
Section 6.13).
SECTION 5.03 Reserve for Conversion Shares. The Company shall at all
-----------------------------
times reserve and keep available out of its authorized but unissued shares of
Common Stock, for the purpose of effecting the conversion of the Preferred
Shares and otherwise complying with the terms of this Agreement, such number of
its duly authorized shares of Common Stock as shall he sufficient to effect the
conversion of the Preferred Shares from time to time outstanding or otherwise to
comply with the terms of this Agreement. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of the Preferred Shares or otherwise to comply with the terms of
this Agreement, the Company will forthwith take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes. The Company will
obtain any authorization, consent, approval or other action by or make any
filing with any court or administrative body that may be required under
applicable state securities laws in connection with the issuance of shares of
Common Stock upon conversion of the Preferred Shares.
SECTION 5.04 Corporate Existence. The Company shall maintain corporate
-------------------
existence, rights and franchises in full force and effect.
-19-
<PAGE>
SECTION 5.05 Properties, Business, Insurance. The Company shall maintain
-------------------------------
its properties and business, with financially sound and reputable insurers,
insurance against such casualties and contingencies and of such types and in
such amounts as is customary for companies similarly situated, which insurance
shall be deemed by the Company to be sufficient. The Company shall not cause or
permit any assignment or change in beneficiary and shall not borrow against any
such policy. If requested by Purchasers holding at least sixty percent (60%) of
the outstanding Preferred Shares, the Company will add one designee of such
Purchasers as a notice party for each such policy and shall request that the
issuer of each policy provide such designee with ten (10) days' notice before
such policy is terminated (for failure to pay premiums or otherwise) or assigned
or before any change is made in the beneficiary thereof.
SECTION 5.06 Inspection, Consultation and Advice. The Company shall
-----------------------------------
permit each Purchaser holding in excess of 10% of the Series B Convertible
Preferred Stock and such persons as it may designate, at such Purchaser's
expense, to visit and inspect any of the properties of the Company and its
subsidiaries, examine their books and take copies and extracts therefrom,
discuss the affairs, finances and accounts of the Company and its subsidiaries
with their officers, employees and public accountants (and the Company hereby
authorizes said accountants to discuss with such Purchaser and such designees
such affairs, finances and accounts), and consult with and advise the management
of the Company and its subsidiaries as to their affairs, finances and accounts,
all at reasonable times and upon reasonable notice.
SECTION 5.07 Restrictive Agreements Prohibited. The Company shall not
---------------------------------
become a party to any agreement which by its terms restricts the Company's
performance of this Agreement, the Registration Rights Agreement, the Management
Rights Agreements or the Charter.
SECTION 5.08 Transactions with Affiliates. Except for transactions
----------------------------
contemplated by this Agreement or as otherwise approved by the Board of
Directors, the Company shall not enter into any material transaction with any
director, officer, employee or holder of more than 5% of the outstanding capital
stock of any class or series of capital stock of the Company or any of its
subsidiaries, member of the family of any such person, or any corporation,
partnership, trust or other entity in which any such person, or member of the
family of any such person, is a director, officer, trustee, partner or holder of
more than 5% of the outstanding capital stock thereof, except for transactions
on customary terms related to such person's employment.
SECTION 5.09 Expenses of Directors. The Company shall promptly reimburse
----------- ---------
in full, each director of the Company who is not an employee of the Company and
who is elected as a director solely or in part by the holders of Series B
Convertible Preferred Stock, for all of his reasonable out-of-pocket expenses
incurred in attending each meeting of the Board of Directors of the Company or
any Committee thereof.
SECTION 5.10 Use of Proceeds. The Company shall use the cash proceeds
---------------
from the sale of the Preferred Shares solely for working capital and other
general corporate purposes.
-20-
<PAGE>
SECTION 5.11 Board of Directors Meetings. The Company shall use its best
---------------------------
efforts to ensure that meetings of its Board of Directors are held at least five
times each year and at least once each quarter.
SECTION 5.12 By-laws. The Company shall at all times cause its By-laws
-------
to provide that, (a) unless otherwise required by the laws of the State of
Delaware, (i) any two directors and (ii) any holder or holders of at least 25%
of the outstanding shares of Series B Convertible Preferred Stock, shall have
the right to call a meeting of the Board of Directors or stockholders and (b)
the number of directors fixed in accordance therewith shall in no event conflict
with any of the terms or provisions of the Series B Convertible Preferred Stock
as set forth in the Charter. The Company shall at all times maintain provisions
in its By-laws and/or Charter indemnifying all directors against liability and
absolving all directors from liability to the Company and its stockholders to
the maximum extent permitted under the laws of the State of Delaware.
SECTION 5.13 Performance of Contracts. The Company shall not materially
------------------------
amend, modify, terminate, waive or otherwise alter, in whole or in part, any of
the Employee Nondisclosure and Developments Agreements without the consent of
the Company's Board of Directors.
SECTION 5.14 Vesting of Reserved Employee Shares. The Company shall not
-----------------------------------
grant to any of its employees options to purchase Reserved Employee Shares which
will become exercisable at a rate in excess of 25% per annum from the date of
such grant without the unanimous written consent of those members of the
Company's Board of Directors elected solely by the holders of Series B
Convertible Preferred Stock.
SECTION 5.15 Employee Nondisclosure and Developments Agreements. The
-------- -----------------------------------------
Company shall use its best efforts to obtain, and shall cause its subsidiaries
to use their best efforts to obtain, an Employee Nondisclosure and Developments
Agreement in substantially the form of Exhibit D, or in such other form as is
---------
approved by the Board of Directors, from all future officers, key employees and
other employees who will have access to confidential information of the Company
or any of its subsidiaries, upon their employment by the Company or any of its
subsidiaries.
SECTION 5.16 Compliance with Laws. The Company shall comply with all
--------------------
applicable laws, rules, regulations and orders, noncompliance with which could
materially adversely affect its business or condition, financial or otherwise.
SECTION 5.17 Keeping of Records and Books of Account. The Company shall
---------------------------------------
keep, and cause each subsidiary to keep, adequate records and books of account,
in which complete entries will be made in accordance with generally accepted
accounting principles consistently applied, reflecting all financial
transactions of the Company and such subsidiary, and in which, for each fiscal
year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
SECTION 5.18 Change in Nature of Business. The Company shall not make
----------------------------
any material change in the nature of its business as set forth in the Business
Plan.
-21-
<PAGE>
SECTION 5.19 Rule 144A Information. The Company shall, at all times
---------------------
during which it is neither subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange
Act, provide in writing, upon the written request of any Purchaser or a
prospective buyer of Preferred Shares or Conversion Shares from any Purchaser,
all information required by Rule 144A(d)(4)(i) of the General Regulations
promulgated by the Commission under the Securities Act ("Rule 144A
Information"). The Company also shall, upon the written request of any
Purchaser, cooperate with and assist such Purchaser or any member of the
National Association of Securities Dealers, Inc. PORTAL system in applying to
designate and thereafter maintain the eligibility of the Preferred Shares or
Conversion Shares, as the case may be, for trading through PORTAL. The
Company's obligations under this Section 5.23 shall at all times be contingent
upon the relevant Purchaser's obtaining from the prospective buyer of Preferred
Shares or Conversion Shares a written agreement to take all reasonable
precautions to safeguard the Rule 144A Information from disclosure to anyone
other than a person who will assist such buyer in evaluating the purchase of any
Preferred Shares or Conversion Shares.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01 Expenses. Each party hereto will pay its own expenses in
--------
connection with the transactions contemplated hereby, whether or not such
transactions shall be consummated, provided, however, that the Company shall pay
the reasonable fees and disbursements, not to exceed $10,000, of the Purchasers'
special counsel, Testa, Hurwitz & Thibeault, in connection with such
transactions and any subsequent amendment, waiver, consent or enforcement
thereof.
SECTION 6.02 Survival of Agreements. All covenants, agreements,
----------- ----------
representations and warranties made herein or in the Registration Rights
Agreement Amendment, the Management Rights Agreements, or any certificate or
instrument delivered to the Purchasers pursuant to or in connection with this
Agreement, the Registration Rights Agreement Amendment or the Management Rights
Agreements, shall survive the execution and delivery of this Agreement, the
Registration Rights Agreement Amendment and the Management Rights Agreements,
the issuance, sale and delivery of the Preferred Shares, and the issuance and
delivery of the Conversion Shares, and all statements contained in any
certificate or other instrument delivered by the Company hereunder or thereunder
or in connection herewith or therewith shall be deemed to constitute
representations and warranties made by the Company; provided that all such
representations and warranties shall terminate two years from the date they are
made.
SECTION 6.03 Brokerage. Each party hereto will indemnify and hold
---------
harmless the others against and in respect of any claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements or understandings made or
claimed to have been made by such party with any third party.
-22-
<PAGE>
SECTION 6.04 Parties in Interest. All representations, covenants and
-------------------
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Without limiting the
generality of the foregoing, all representations, covenants and agreements
benefiting the Purchasers shall inure to the benefit of any and all subsequent
holders from time to time of Preferred Shares or Conversion Shares.
SECTION 6.05 Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, addressed as follows:
(a) if to the Company, at 395 Phoenixville Pike, Malvern, PA 19355,
Attention: President, with a copy to Henry N. Nassau, Esq., Dechert, Price &
Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street, Philadelphia, PA 19103; and
(b) if to any Purchaser, at the address of such Purchaser set forth in
Schedule I, with a copy to Robin A. Painter, Esq., Testa, Hurwitz & Thibeault,
- ----------
High Street Tower, 125 High Street, Boston, Massachusetts 02110;
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
SECTION 6.06 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware.
SECTION 6.07 Entire Agreement. This Agreement, including the Schedules
----------------
and Exhibits hereto, constitutes the sole and entire agreement of the parties
with respect to the subject matter hereof. All Schedules and Exhibits hereto
are hereby incorporated herein by reference.
SECTION 6.08 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 6.09 Amendments. This Agreement may not be amended or modified,
----------
and no provisions hereof may be waived, without the written consent of the
Company and the holders of at least two-thirds (2/3) of the outstanding shares
of Common Stock issued or issuable upon conversion of the Preferred Shares.
SECTION 6.10 Severability. If any provision of this Agreement shall be
------------
declared void or unenforceable by any judicial or administrative authority, the
validity of any other provision and of the entire Agreement shall not be
affected thereby.
SECTION 6.11 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are for convenience only and are not to be considered in construing or
interpreting any term or provision of this Agreement.
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<PAGE>
SECTION 6.12 Certain Defined Terms. As used in this Agreement, the
---------------------
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
(a) "person" shall mean an individual, corporation, trust,
partnership, joint venture, unincorporated organization, government agency or
any agency or political subdivision thereof, or other entity.
(b) "subsidiary" shall mean, as to the Company, any corporation of
which more than 50% of the outstanding stock having ordinary voting power to
elect sixty percent (60%) of the Board of Directors of such corporation
(irrespective of whether or not at the time stock of any other class or classes
of such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time directly or indirectly owned by the
Company, or by one or more of its subsidiaries, or by the Company and one or
more of its subsidiaries.
SECTION 6.13 Prior Agreements. By their signature below, each of the
----------------
Purchasers who are also parties to that certain Series A Convertible Preferred
Stock Purchase Agreement (the "Series A Agreement") between the Company and the
purchasers named therein dated as of November 7, 1994, (each, a "Series A
Purchaser") hereby (i) waives, except to the extent set forth on Schedule I
----------
hereto, the right to purchase shares of Series B Convertible Preferred Stock
sold pursuant to this Agreement and (ii) consents to the sale of Preferred
Shares to Drs. Farrar and Maycock to the extent set forth on Schedule I hereto.
----------
The signature of each Series A Purchaser below shall also constitute such
party's agreement to the right of first refusal granted in Section 5.02 hereof
and the termination of Section 5.02 of the Series A Agreement.
[Signature pages follow immediately.]
-24-
<PAGE>
EXHIBIT 4.3
- --------------------------------------------------------------------------------
SERIES C CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
among
ADOLOR CORPORATION
and
THE PURCHASERS NAMED IN SCHEDULE I
Dated as of May 1, 1997
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE PREFERRED SHARES 1
Section 1.01. Issuance, Sale and Delivery of the Preferred Shares. 1
Section 1.02. Initial Closing..................................... 1
Section 1.03. Additional Closing.................................. 1
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY................. 2
Section 2.01. Organization, Qualifications and Corporate Power.... 2
Section 2.02. Authorization of Agreements......................... 3
Section 2.03. Validity............................................ 3
Section 2.04. Authorized Capital Stock............................ 4
Section 2.05. Financial Statements................................ 4
Section 2.06. Events Subsequent to the Date of the Balance Sheet.. 5
Section 2.07. Litigation: Compliance with Law..................... 5
Section 2.08. Proprietary Information of Third Parties............ 6
Section 2.09. Patents, Trademarks, Etc............................ 6
Section 2.10. Title to Properties................................. 7
Section 2.11. Leasehold Interests................................. 7
Section 2.12. Insurance........................................... 8
Section 2.13. Taxes............................................... 8
Section 2.14. Other Agreements.................................... 8
Section 2.15. Significant Customers and Suppliers................. 10
Section 2.16. Governmental Approvals.............................. 10
Section 2.17. Disclosure.......................................... 10
Section 2.18. Offering of the Preferred Shares.................... 10
Section 2.19. Brokers............................................. 11
Section 2.20. Officers............................................ 11
Section 2.21. Transactions With Affiliates........................ 11
Section 2.22. Employees........................................... 11
Section 2.23. Environmental Protection............................ 11
Section 2.24. ERISA............................................... 12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS............. 14
ARTICLE IV CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS.............. 14
ARTICLE V COVENANTS OF THE COMPANY..................................... 16
Section 5.01. Financial Statements, Reports, Etc.................. 16
Section 5.02. Right of First refusal.............................. 17
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 5.03. Reserve for Conversion Shares....................... 18
Section 5.04. Corporate Existence................................. 19
Section 5.05. Properties, Business, Insurance..................... 19
Section 5.06. Inspection, Consultation and Advice................. 19
Section 5.07. Restrictive Agreements Prohibited................... 19
Section 5.08. Transactions with Affiliates........................ 19
Section 5.09. Use of Proceeds..................................... 19
Section 5.10. By-laws............................................. 20
Section 5.11. Performance of Contracts............................ 20
Section 5.12. Vesting of Reserved Employee Shares................. 20
Section 5.13. Employee Nondisclosure and Developments Agreements.. 20
Section 5.14. Compliance with Laws................................ 20
Section 5.15. Keeping of Records and Books of Account............. 20
Section 5.16. Rule 144A Information............................... 20
Section 5.17. Future Subsidiaries................................. 21
ARTICLE VI MISCELLANEOUS................................................. 21
Section 6.01. Expenses............................................ 21
Section 6.02. Survival of Agreements.............................. 21
Section 6.03. Brokerage........................................... 21
Section 6.04. Parties in Interest................................. 21
Section 6.05. Notices............................................. 22
Section 6.06. Governing Law....................................... 22
Section 6.07. Entire Agreement.................................... 22
Section 6.08. Counterparts........................................ 22
Section 6.09. Amendments.......................................... 22
Section 6.10. Severability........................................ 22
Section 6.11. Titles and Subtitles................................ 22
Section 6.12. Certain Defined Term................................ 23
Section 6.13. Prior Agreements.................................... 23
</TABLE>
ii
<PAGE>
SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated as of
May 1, 1997 among Adolor Corporation, a Delaware corporation (the "Company"),
and the several purchasers named in the attached Schedule I (individually a
----------
"Purchaser" and collectively the "Purchasers").
WHEREAS, the Company wishes to issue and sell to the Purchasers up to
an aggregate of 14,285,714 shares (the "Preferred Shares") of the authorized but
unissued Series C Convertible Preferred Stock, $.01 par value, of the Company
(the "Series C Convertible Preferred Stock"); and
WHEREAS, the Purchasers, severally, wish to purchase the Preferred
Shares on the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, the parties agree as follows:
ARTICLE I
THE PREFERRED SHARES
Section 1.01. Issuance, Sale and Delivery of the Preferred Shares. The
---------------------------------------------------
Company agrees to issue and sell to each Purchaser, and each Purchaser hereby
agrees to purchase from the Company, the number of Preferred Shares set forth
opposite the name of such Purchaser under the heading "Number of Preferred
Shares to be Purchased" on Schedule I, at the aggregate purchase price set forth
opposite the name of such Purchaser under the heading "Aggregate Purchase Price
for Preferred Shares" on Schedule I.
Section 1.02. Initial Closing. The initial closing shall take place at
---------------
the offices of Dechert Price & Rhoads, 4000 Bell Atlantic Tower, 1717 Arch
Street, Philadelphia, PA 19103, at 10:00 a.m., Philadelphia time, on May 1,
1997, or at such other location, date and time as may be agreed upon between the
Purchasers and the Company (such closing being called the "Closing" and such
date and time being called the "Closing Date"). At the Closing, the Company
shall issue and deliver to each Purchaser a stock certificate or certificates in
definitive form, registered in the name of such Purchaser, representing the
Preferred Shares being purchased by it at the Closing. As payment in fill for
the Preferred Shares being purchased by it under this Agreement, and against
delivery of the stock certificate or certificates therefor as aforesaid, on the
Closing Date each Purchaser shah (i) deliver to the Company a check payable to
the order of the Company, in the amount set forth opposite the name of such
Purchaser under, the heading "Aggregate Purchase Price for Preferred Shares" on
Schedule I, (ii) transfer such sum to the account of the Company by wire
- ----------
transfer, or (iii) deliver or transfer such sum to the Company by any
combination of such methods of payments.
Section 1.03. Additional Closing. After the Closing Date and on or
------------------
prior to July 1, 1997 the Company may hold one or more additional closings (each
an "Additional Closing; and
<PAGE>
collectively the "Additional Closings") at which the Company may issue and sell
up to the number of Preferred Shares equal to the difference between 14,285,714
and the aggregate number of Preferred Shares previously sold on the Closing Date
and, as applicable, on the date of any prior Additional Closing. The sale of
Preferred Shares pursuant to this Section 1.03 shall be on the same terms and
conditions (including price) as the sale of the Preferred Shares pursuant to
Section 1.02 hereof and shall be effected by the execution by any investor of a
counterpart signature page to this Agreement. Upon such execution: (i) each such
investor shall be deemed to be a Purchaser for all purposes of this Agreement
and Schedule I shall be amended to include such Purchaser; and (ii) each such
----------
Additional Closing shall be deemed to be a Closing hereunder and the date of
each such Additional Closing shall be a "Closing Date" hereunder. If necessary,
the Company wilt provide an updated Disclosure Schedule to Purchasers purchasing
in any Additional Closing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Purchaser that, as of each
Closing Date on which such Purchaser purchases Preferred Shares hereunder,
except as set forth in the Disclosure Schedule attached as Schedule II, as may
-----------
be updated in writing prior to any Additional Closing hereunder, (which
Disclosure Schedule, (as updated, if applicable), makes explicit reference to
the particular representation or warranty as to which exception is taken, which
in each case shall constitute the sole representation and warranty as to which
such exception shall apply):
Section 2.01. Organization, Qualifications and Corporate Power.
------------------------------------------------
(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware and is
duly licensed or qualified to transact business as a foreign corporation and is
in good standing in each jurisdiction in which the nature of the business
transacted by it or the character of the properties owned or leased by it
requires such licensing or qualification. The Company has the corporate power
and corporate authority to own and hold its properties and to carry on its
business as now conducted and as proposed to be conducted, to execute, deliver
and perform this Agreement, Amendment No. 2 to that certain Registration Rights
Agreement by and among the Company and the purchasers named therein dated as of
November 7, 1994, and as amended by Amendment No. 1 to Registration Rights
Agreement dated as of February 27, 1996 (as amended, the "Original Registration
Rights Agreement") in the form attached as Exhibit A (the "Registration Rights
---------
Agreement Amendment"), and the Management Rights letter agreement(s) between the
Company and certain of the Purchasers, if any, in the form attached as Exhibit B
---------
(the "Management Rights Agreements"), to issue, sell and deliver the Preferred
Shares and to issue and deliver the shares of Common Stock, $0001 par value, of
the Company ("Common Stock") issuable upon conversion of the Preferred Shares
(the "Conversion Shares"). The Original
-2-
<PAGE>
Registration Rights Agreement as amended by the Registration Rights Agreement
Amendment is sometimes referred to herein as the "Registration Rights
Agreement."
(b) The Company does not (i) own of record or beneficially,
directly or indirectly, (A) any shares of capital stock or securities
convertible into capital stock of any other corporation or (B) any participating
interest in any partnership, joint venture or other non-corporate business
enterprise or (ii) control, directly or indirectly, any other entity.
Section 2.02. Authorization of Agreements. Etc.
---------------------------------
(a) The execution and delivery by the Company of this
Agreement, the Registration Rights Agreement Amendment and the Management Rights
Agreements, the performance by the Company of its obligations hereunder and
thereunder, the issuance, sale and delivery of the Preferred Shares and the
issuance and delivery of the Conversion Shares have been duly authorized by all
requisite corporate action and will not violate any provision of law, any order
of any court or other agency of government, the Certificate of Incorporation of
the Company, as amended (the "Charter") or the By-laws of the Company, as
amended, or any provision of any indenture, agreement or other instrument to
which the Company or any of its respective properties or assets is bound, or
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under any such indenture, agreement or other instrument,
or result in the creation or imposition of any lien, charge, restriction, claim
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company.
(b) The Preferred Shares have been duly authorized and, when
issued in accordance with this Agreement, will be validly issued, filly paid and
nonassessable shares of Series C Convertible Preferred Stock with no personal
liability attaching to the ownership thereof and will be free and clear of all
liens, charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in the Registration Rights Agreement. The Conversion
Shares have been duly reserved for issuance upon conversion of the Preferred
Shares and, when so issued, will be duly authorized, validly issued, filly paid
and nonassessable shares of Common Stock with no personal liability attaching to
the ownership thereof and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company except
as set forth in the Registration Rights Agreement. Neither the issuance, sale or
delivery of the Preferred Shares nor the issuance or delivery of the Conversion
Shares is subject to any preemptive right of stockholders of the Company or to
any right of first refusal or other right in favor of any person.
Section 2.03. Validity. This Agreement has been duly executed and
--------
delivered by the Company and constitutes the legal, valid and binding obligation
of the Company, enforceable in accordance with its terms. The Registration
Rights Agreement Amendment and the Management Rights Agreements, when executed
and delivered in accordance with this Agreement, will constitute the legal,
valid and binding obligations of the Company, enforceable in accordance with
their respective terms.
-3-
<PAGE>
Section 2.04. Authorized Capital Stock. The authorized capital stock of
------------------------
the Company consists of(i) 43,392,859 shares of Preferred Stock, $01 par value
(the "Preferred Stock"), of which 6,000,000 shares have been designated Series A
Convertible Preferred Stock, 23,107,145 have been designated Series B
Convertible Preferred Stock and 14,285,714 shares have been designated as Series
C Convertible Preferred Stock, and (ii) 52,000,000 shares of Common Stock.
Immediately prior to the Closing, 4,454,089 shares of Common Stock, 6,000,000
shares of Series A Convertible Preferred Stock and 23,107,145 shares of Series B
Convertible Preferred Stock will be validly issued and outstanding, filly paid
and nonassessable with no personal liability attaching to the ownership thereof
and no shares of Series C Convertible Preferred Stock will have been issued. The
stockholders of record and holders of subscriptions, warrants, options,
convertible securities, and other rights (contingent or other) to purchase or
otherwise acquire equity securities of the Company, and the number of shares of
Common Stock and the number of such subscriptions, warrants, options,
convertible securities, and other such rights held by each, are as set forth in
the attached Schedule III. The designations, powers, preferences, rights,
------------
qualifications, limitations and restrictions in respect of each class and series
of authorized capital stock of the Company are as set forth in the Charter, a
copy of which is attached as Exhibit C, and all such designations, powers,
---------
preferences, rights, qualifications, limitations and restrictions are 'valid,
binding and enforceable and in accordance with all applicable laws. Except as
set forth in the attached Schedule III, (i) no person owns of record or is known
------------
to the Company to own beneficially any share of Common Stock, (ii) no
subscription, warrant, option, convertible security, or other right (contingent
or other) to purchase or otherwise acquire equity securities of the Company is
authorized or outstanding that has been issued by the Company, and (iii) there
is no commitment by the Company to issue shares, subscriptions, warrants,
options, convertible securities, or other such rights or to distribute to
holders of any of its equity securities any evidence of indebtedness or asset.
Except as provided for in the Charter or as set forth in the attached Schedule
--------
III, the Company has no obligation (contingent or otherwise) to purchase, redeem
- ---
or otherwise acquire any of its equity securities or any interest therein or to
pay any dividend or make any other distribution in respect thereof. Except for
those certain Stock Restriction Agreements by and among the Company, the
purchasers named therein and each of Dr. John Farrar, Dr. Michael Lewis and ARCH
Development Corporation dated as of November 7, 1994 (the "1994 Stock
Restriction Agreements") and the Restricted Stock Agreement dated May 31, 1996
by and between the Company and Frank Baldino, and the Management Rights
Agreements, to the best of the Company's knowledge there are no voting trusts or
agreements, stockholders' agreements, pledge agreements, buy-sell agreements,
rights of first refusal, preemptive rights or proxies relating to any securities
of the Company (whether or not the Company is a party thereto). All of the
outstanding securities of the Company were issued in compliance with all
applicable Federal and state securities laws.
Section 2.05. Financial Statements. The Company has furnished to the
--------------------
Purchasers the unaudited consolidated balance sheet of the Company as of
December 31, 1996, (the "Balance Sheet") and the related unaudited consolidated
statements of income and cash flows of the Company for the year ended December
31, 1996. All such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied (except that such
unaudited financial statements do not contain all of the required footnotes) and
-4-
<PAGE>
fairly present in all material respects the consolidated financial position of
the Company as of December 31, 1996, and the consolidated results of their
operations and cash flows for the year ended December 31, 1996. Since the date
of the Balance Sheet, (i) there has been no change in the assets, liabilities or
financial condition of the Company (on a consolidated basis) from that reflected
in the Balance Sheet except for changes in the ordinary course of business which
in the aggregate have not been materially adverse and (ii) none of the business,
prospects, financial condition, operations, property or affairs of the Company
(on a consolidated basis) has been materially adversely affected by any
occurrence or development, individually or in the aggregate, whether or not
insured against.
Section 2.06. Events Subsequent to the Date of the Balance Sheet. Since
--------------------------------------------------
the date of the Balance Sheet, the Company has not (i) issued any stock, bond or
other corporate security, except pursuant to the exercise of stock options
outstanding as of the date of the Balance Sheet (ii) borrowed any amount or
incurred or become subject to any liability (absolute, accrued or contingent),
except current liabilities incurred and liabilities under contracts entered into
in the ordinary course of business, (iii) discharged or satisfied any lien or
encumbrance or incurred or paid any obligation or liability (absolute, accrued
or contingent) other than current liabilities shown on the Balance Sheet and
current liabilities incurred since the date of the Balance Sheet in the ordinary
course of business, (iv) declared or made any payment or distribution to
stockholders or purchased or redeemed any share of its capital stock or other
security, (v) mortgaged, pledged, encumbered or subjected to lien any of its
assets, tangible or intangible, other than liens of current real property taxes
not yet due and payable, (vi) sold, assigned or transferred any of its tangible
assets except in the ordinary course of business, or canceled any debt or claim,
(vii) sold, assigned, transferred or granted any exclusive license with respect
to any patent, trademark, trade name, service mark, copyright, trade secret or
other intangible asset, (viii) suffered any loss of property or waived any right
of substantial value whether or not in the ordinary course of business, (ix)
made any change in officer compensation except in the ordinary course of
business and consistent with past practice, (x) made any material change in the
manner of business or operations of the Company, (xi) entered into any
transaction except in the ordinary course of business or as otherwise
contemplated hereby or (xii) entered into any commitment (contingent or
otherwise) to do any of the foregoing.
Section 2.07. Litigation; Compliance with Law. There is no (1) action,
-------------------------------
suit, claim, proceeding or investigation pending or, to the best of the
Company's knowledge, threatened against or affecting the Company, at law or in
equity, or before or by any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) arbitration proceeding relating to the Company pending under
collective bargaining agreements or otherwise or (iii) governmental inquiry
pending or, to the best of the Company's knowledge, threatened against or
affecting the Company (including without limitation any inquiry as to the
qualification of the Company to hold or receive any license or permit). The
Company is not in default with respect to any order, writ, injunction or decree
known to or served upon the Company of any court or of any Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign. There is no action or suit by the Company
pending or threatened against others. The
-5-
<PAGE>
Company has complied with all laws, rules, regulations and orders applicable to
its business, operations, properties, assets, products and services, the Company
has all necessary permits, licenses and other authorizations required to conduct
its business as conducted and as proposed to be conducted, and the Company has
been operating its business pursuant to and in compliance with the terms of all
such permits, licenses and other authorizations except where any instance of
instances of noncompliance do not, individually or in the aggregate, have a
material adverse effect on the Company's business, prospects, financial
condition, operations, property or affairs. There is no existing law, rule,
regulation or order, and the Company after due inquiry is not aware of any
proposed law, rule, regulation or order, whether Federal, state, county or
local, which would prohibit or restrict the Company from, or otherwise
materially adversely affect the Company in, conducting its business in any
jurisdiction in which it is now conducting business or in which it proposes to
conduct business.
Section 2.08. Proprietary Information of Third Parties. To the best of
----------------------------------------
the Company's knowledge, no third party has claimed or has reason to claim that
any person employed by or affiliated with the Company has (a) violated or may be
violating any of the terms or conditions of his employment, non-competition or
non-disclosure agreement with such third party, (b) disclosed or may be
disclosing or utilized or may be utilizing any trade secret or proprietary
information or documentation of such third party or (c) interfered or may be
interfering in the employment relationship between such third party and any of
its present or former employees. No third party has requested information from
the Company which suggests that such a claim might be contemplated. To the best
of the Company's knowledge, no person employed by or affiliated with the Company
has employed or proposes to employ any trade secret or any information or
documentation proprietary to any former employer, and to the best of the
Company's knowledge, no person employed by or affiliated with the Company has
violated any confidential relationship which such person may have had with any
third party, in connection with the development, manufacture or sale of any
product or proposed product or the development or sale of any service or
proposed service of the Company, and the Company has no reason to believe there
will be any such employment or violation. To the best of the Company's
knowledge, none of the execution or delivery of this Agreement, or the carrying
on of the business of the Company as officers, employees or agents by any
officer, director or key employee of the Company, or the conduct or proposed
conduct of the business of the Company, will conflict with or result in a breach
of the terms, conditions or provisions of or constitute a default under any
contract, covenant or instrument under which any such person is obligated.
Section 2.09. Patents, Trademarks, Etc.. Set forth in Schedule II is a
------------------------- -----------
list and brief description of all domestic and foreign patents, patent rights,
patent applications, trademarks, trademark applications, service marks, service
mark applications, trade names and copyrights, and all applications for such
which are in the process of being prepared, owned by or registered in the name
of the Company, or of which the Company is a licensor or licensee or in which
the Company has any right, and in each case a brief description of the nature of
such right. The Company owns or possesses adequate licenses or other rights to
use all patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, trade names, copyrights, manufacturing
processes, formulae, trade secrets, customer lists and know
-6-
<PAGE>
how (collectively, "Intellectual Property") necessary to the conduct of its
business as conducted and as proposed to be conducted, and no claim is pending
or, to the best of the Company's knowledge, threatened to the effect that the
operations of the Company infringe upon or conflict with the asserted rights of
any other person under any Intellectual Property, and the Company reasonably
believes that there is no basis for any such claim (whether or not pending or
threatened). No claim is pending or threatened to the effect that any such
Intellectual Property owned or licensed by the Company, or which the Company
otherwise has the right to use, is invalid or unenforceable by the Company, and
there is no basis for any such claim (whether or not pending or threatened). All
prior art known to the Company which may be or may have been pertinent to the
examination of any United States patent or patent application listed in Schedule
--------
II has been cited to the United States Patent and Trademark Office. To the best
- --
of the Company's knowledge, all technical information developed by and belonging
to the Company which has not been patented has been kept confidential. The
Company has not granted or assigned to any other person or entity any right to
manufacture, have manufactured, assemble or sell the products or proposed
products or to provide the services or proposed services of the Company.
Section 2.10. Title to Properties. The Company has good, clear and
-------------------
marketable title to its properties and assets reflected on the Balance Sheet or
acquired by it since the date of the Balance Sheet (other than properties and
assets disposed of in the ordinary course of business since the date \\9\\f the
Balance Sheet), and all such properties and assets are free and clear of
mortgages, pledges, security interests, liens, charges, claims, restrictions and
other encumbrances (including without limitation, easements and licenses),
except for liens for or current taxes not yet due and payable and minor
imperfections of title, if any, not material in nature or amount and not
materially detracting from the value or impairing the use of the property
subject thereto or impairing the operations or proposed operations of the
Company, including without limitation, the ability of the Company to secure
financing using such properties and assets as collateral. To the best of the
Company's knowledge after due inquiry, there are no condemnation, environmental,
zoning or other land use regulation proceedings, either instituted or planned to
be instituted, which would adversely affect the use or operation of the
Company's and its subsidiaries' properties and assets for their respective
intended uses and purposes, or the value of such properties, and the Company has
not received notice of any special assessment proceedings which would affect
such properties and assets.
Section 2.11. Leasehold Interests. Each lease or agreement to which the
-------------------
Company is a party under which it is a lessee of any property, real or personal,
is a valid and subsisting agreement, duly authorized and entered into, without
any default of the Company thereunder and, to the best of the Company's
knowledge, without any default thereunder of any other party thereto. No event
has occurred and is continuing which, with due notice or lapse of time or both,
would constitute a default or event of default by the Company under any such
lease or agreement or, to the best of the Company's knowledge, by any other
party thereto. The Company's possession of such property has not been disturbed
and, to the best of the Company's knowledge after due inquiry, no claim has been
asserted against the Company adverse to its rights in such leasehold interests.
-7-
<PAGE>
Section 2.12. Insurance. The Company holds valid policies covering all
---------
of the insurance required to be maintained by it under Section 5.05.
Section 2.13. Taxes. The Company has filed all tax returns, Federal,
-----
state, county and local, required to be filed by it, and the Company has paid
all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or payable, including
without limitation all taxes which the Company is obligated to withhold from
amounts owing to employees, creditors and third parties. The Company has
established adequate reserves for all taxes accrued but not yet payable. The
Federal income tax returns of the Company have never been audited by the
Internal Revenue Service. No deficiency assessment with respect to or proposed
adjustment of the Company's Federal, state, county or local taxes is pending or,
to the best of the Company's knowledge, threatened. There is no tax lien,
whether imposed by any Federal, state, county or local taxing authority,
outstanding against the assets, properties or business of the Company. Neither
the Company nor any of its present or former stockholders has ever filed an
election pursuant to Section 1362 of the Internal Revenue Code of 1986, as
amended (the "Code"), that the Company be taxed as an S corporation.
Section 2.14. Other Agreements. Except as set forth in the attached
----------------
Schedule IV(A~. (which Schedule IV(A) may be updated in writing prior to any
- -------------- -------- ----
Additional Closing hereunder) as of each Closing Date hereunder, the Company
reasonably believes after due investigation that it is not a party to or
otherwise bound by any written or oral agreement, instrument, commitment or
restriction which individually or in the aggregate could materially adversely
affect the business, prospects, financial condition, operations, property or
affairs of the Company. Except as set forth in the attached Schedule W(B~, the
-------------
Company is not a party to or otherwise bound by any written or oral:
(a) distributor, dealer, manufacturer's representative or
sales agency agreement which is not terminable on less than ninety (90) days'
notice without cost or other liability to the Company (except for agreements
which, in the aggregate, are not material to the business of the Company);
(b) sales agreement which entitles any customer to a rebate
or right of set-off, to return any product to the Company after acceptance
thereof or to delay the acceptance thereof, or which varies in any material
respect from the Company's standard form agreements;
(c) agreement with any labor union (and, to the knowledge of
the Company, no organizational effort is being made with respect to any of its
employees);
(d) agreement with any supplier containing any provision
permitting any party other than the Company to renegotiate the price or other
terms, or containing any pay-back or other similar provision, upon the
occurrence of a failure by the Company to meet its obligations under the
agreement when due or the occurrence of any other event;
(e) agreement for the fixture purchase of fixed assets or
for the fixture purchase of materials, supplies or equipment in excess of its
normal operating requirements;
-8-
<PAGE>
(f) agreement for the employment of any officer, employee or
other person on a fill-time or consulting basis which is not terminable by the
Company at will without liability to the Company, except pursuant to severance
and accrued vacation pay policies applicable to all employees of the Company;
(g) bonus, pension, profit-sharing, retirement,
hospitalization, insurance, stock purchase, stock option or other plan,
agreement or understanding pursuant to which benefits are provided to any
employee of the Company (other than group insurance plans applicable to
employees generally);
(h) agreement relating to the borrowing of money or to the
mortgaging or pledging of, or otherwise placing a lien or security interest on,
any asset of the Company;
(i) guaranty of any obligation for borrowed money or
otherwise;
(j) voting trust or agreement, stockholders' agreement,
pledge agreement, buy-sell agreement or first refusal or preemptive rights
agreement relating to any securities of the Company (other than this Agreement,
the Registration Rights Agreement Amendment, the 1994 Stock Restriction
Agreements and the Management Rights Agreements);
(k) agreement, or group of related agreements with the same
party or any group of affiliated parties, under which the Company has advanced
or agreed to advance money or has agreed to lease any property as lessee or
lessor;
(l) agreement or obligation (contingent or otherwise) to
issue, sell or otherwise distribute or to repurchase or otherwise acquire or
retire any share of its capital stock or any of its other equity securities
other than pursuant to its Charter as in effect on any Closing Date hereunder;
(m) assignment, license or other agreement with respect to
any form of intangible property;
(n) agreement under which it has granted any person any
registration rights, other than the Registration Rights Agreement;
(o) agreement under which it has limited or restricted its
right to compete with any person in any respect; and
(p) other agreement or group of related agreements with the
same party involving more than $10,000 or continuing over a period of more than
six months from the date or dates thereof (including renewals or extensions
optional with another party), which agreement or group of agreements is not
terminable by the Company without penalty upon notice of thirty (30) days or
less, but excluding any agreement or group of agreements with a customer of the
Company for the sale, lease or rental of the Company's products or services if
such
-9-
<PAGE>
agreement or group of agreements was entered into by the Company in the ordinary
course of business.
The Company, and to the best of the Company's knowledge after due inquiry, each
other party thereto have in all material respects performed all the obligations
required to be performed by them to date (or each non-performing party has
received a valid, enforceable and irrevocable written waiver with respect to its
non-performance), have received no notice of default and are not in default
(with due notice or lapse of time or both) under any agreement, instrument,
commitment, plan or arrangement to which the Company is a party or by which it
or its property may be bound. The Company has no present expectation or
intention of not fully performing all its obligations under each such agreement,
instrument, commitment, plan or arrangement, and the Company has no knowledge of
any breach or anticipated breach by the other party to any agreement,
instrument, commitment, plan or arrangement to which the Company is a party. The
Company is in full compliance with all of the terms and provisions of its
Charter and By-laws, as amended.
Section 2.15. Significant Customers and Suppliers. No customer or
-----------------------------------
supplier, or group of two or more thereof (whether or not affiliated) which was
material to the Company, individually or in the aggregate, during the period
covered by the financial statements referred to in Section 2.05 or which has
been material to the Company thereafter, has terminated, materially reduced or
threatened to terminate or materially reduce its or their purchases from or
provision of products or services to the Company, as the case may be.
Section 2.16. Governmental Approvals. Subject to the accuracy of the
----------------------
representations and warranties of the Purchasers set forth in Article UI, no
registration or filing with, or consent or approval of or other action by, any
Federal, state or other governmental agency or instrumentality is or will be
necessary for the valid execution, delivery and performance by the Company of
this Agreement, the Registration Rights Agreement Amendment or the Management
Rights Agreements, the issuance, sale and delivery of the Preferred Shares or,
upon conversion thereof, the issuance and delivery of the Conversion Shares,
other than (i) filings pursuant to state securities laws (all of which filings
have been made by the Company, other than those which are required to be made
after the Closing and which will be duly made on a timely basis) in connection
with the sale of the Preferred Shares and (ii) with respect to the Registration
Rights Agreement, the registration of the shares covered thereby with the
Commission and filings pursuant to state securities laws.
Section 2.17. Disclosure. Neither this Agreement, nor any Schedule or
----------
Exhibit to this Agreement, contains an untrue statement of a material fact or
omits a material fact necessary to make the statements contained herein or
therein not misleading. None of the statements, documents, certificates or other
items prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained therein not misleading.
Section 2.18. Offering of the Preferred Shares. Neither the Company nor
--------------------------------
any person authorized or employed by the Company as agent, broker, dealer or
otherwise in connection with
-10-
<PAGE>
the offering or sale of the Preferred Shares or any security of the Company
similar to the Preferred Shares has offered the Preferred Shares or any such
similar security for sale to, or solicited any offer to buy the Preferred Shares
or any such similar security from, or otherwise approached or negotiated with
respect thereto with, any person or persons, and neither the Company nor any
person acting on its behalf has taken or will take any other action (including,
without limitation, any offer, issuance or sale of any security of the Company
under circumstances which might require the integration of such security with
Preferred Shares under the Securities Act or the rules and regulations of the
Commission thereunder), in either case so as to subject the offering, issuance
or sale of the Preferred Shares to the registration provisions of the Securities
Act.
Section 2.19. Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
Section 2.20. Officers. Set forth in Schedule U is a list of the names of
--------
the officers of the Company, together with the title or job classification of
each such person and the total compensation anticipated to be paid to each such
person by the Company in 1997.
Section 2.21. Transactions With Affiliates. Other than purchases of
----------------------------
Preferred Shares hereunder, no director, officer, employee or stockholder of the
Company, or member of the family of any such person, or any corporation,
partnership, trust or other entity in which any such person, or any member of
the family of any such person, has a substantial interest or is an officer,
director, trustee, partner or holder of more than 5% of the outstanding capital
stock thereof; is a party to any transaction with the Company, including any
contract, agreement or other arrangement providing for the employment of,
furnishing of services by, rental of real or personal property from or otherwise
requiring payments to any such person or firm, other than employment-at-will
arrangements in the ordinary course of business.
Section 2.22. Employees. Each of the officers of the Company, each key
---------
employee and each other employee now employed by the Company who has access to
confidential information of the Company has executed an Employee Nondisclosure
and Developments Agreement substantially in the form of Exhibit D and such
------- -
agreements are in fill force and effect. No officer or key employee of the
Company has advised the Company (orally or in writing) that he intends to
terminate employment with the Company. The Company has complied in all material
respects with all applicable laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity, collective bargaining
and the payment of Social Security and other taxes, and with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
Section 2.23. Environmental Protection. The Company has not caused or
------------------------
allowed, or contracted with any party for, the generation, use, transportation,
treatment, storage or disposal of any Hazardous Substances (as defined below) in
connection with the operation of its business or otherwise. The Company, the
operation of its business, and to the Company's knowledge, any real property
that the Company owns, leases or otherwise occupies or uses (the "Premises") are
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<PAGE>
in material compliance with all applicable Environmental Laws (as defined below)
and orders or directives of any governmental authorities having jurisdiction
under such Environmental Laws, including, without limitation, any Environmental
Laws or orders or directives with respect to any cleanup or remediation of any
release or threat of release of Hazardous Substances. The Company has not
received any citation, directive, letter or other communication, written or
oral, or any notice of any proceeding, claim or lawsuit, from any person arising
out of the ownership or occupation of the Premises, or the conduct of its
operations, and the Company is not aware of any basis therefor. The Company has
obtained and is maintaining in fill force and effect all necessary permits,
licenses and approvals required by all Environmental Laws applicable to the
Premises and the Company's business operations conducted thereon, and is in
compliance with all such permits, licenses and approvals. The Company has not
caused or allowed a release, or a threat of release, of any Hazardous Substance
unto, at or near the Premises, and, to the best of the Company's knowledge,
neither the Premises nor any property at or near the Premises has ever been
subject to a release, or a threat of release, of any Hazardous Substance. For
the purposes of this Agreement, the term "Environmental Laws" shall mean any
Federal, state or local law or ordinance or regulation pertaining to the
protection of human health or the environment, including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Sections 9601, et seq., the Emergency Planning and Community Right-to -
Know Act, 42 U.S.C. Sections 11001, et seq., and the Resource Conservation and
Recovery Act, 42 U.S.C. Sections 6901, et seq. For purposes of this Agreement,
the term "Hazardous Substances" shall include oil and petroleum products,
asbestos, polychlorinated biphenyls, urea formaldehyde and any other materials
classified as hazardous or toxic under any Environmental Laws.
Section 2.24. ERISA.
-----
(a) Schedule II lists each Employee Plan that covers any
-----------
employee of the Company, copies or descriptions of all of which have previously
been made available or furnished to the Purchasers. With respect to each
Employee Plan, the Company has provided the most recently filed Form 5500 and an
accurate summary description of such plan.
(b) Schedule 11 also includes a list of each Benefit
-----------
Arrangement of the Company, copies or descriptions of all of which have been
made available or furnished previously to the Purchasers.
(c) No Employee Plan is a Multiemployer Plan and no Employee
Plan is subject to Title IV of ERISA. The Company and its Affiliates have not
incurred any liability under Title IV of ERISA arising in connection with the
termination of any plan covered or previously covered by Title W of ERISA.
(d) None of the Employee Plans or other arrangements listed
on Schedule II covers any non-United States employee or former employee of the
-----------
Company.
(e) No "prohibited transaction," as defined in Section 406
of ERISA or Section 4975 of the Code, has occurred with respect to any Employee
Plan.
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<PAGE>
(f) Each Employee Plan which is intended to be qualified under Section
40 1(a) of the Code is so qualified and has been so qualified during the period
from its adoption to date, and each trust forming a part thereof is exempt from
tax pursuant to Section 501(a) of the Code. The Company has furnished to the
Purchasers copies of the most recent Internal Revenue Service determination
letters with respect to each such plan. Each Employee Plan has been maintained
in compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such plan.
(g) Each Employee Plan and each Benefit Arrangement has been
maintained in substantial compliance with its terms and with the requirements
prescribed by any and all statutes, orders, rules and regulations which are
applicable to such Employee Plan and Benefit Arrangement.
(h) All contributions and payments accrued under each Employee Plan
and Benefit Arrangement, determined in accordance with prior finding and accrual
practices, as adjusted to include proportional accruals for the period ending on
the Closing Date, will be discharged and paid on or prior to the Closing Date
except to the extent reflected on the Balance Sheet. Except as disclosed in
writing to the Purchasers prior to the date hereof, there has been no amendment
to, written interpretation of or announcement (whether or not written) by the
Company or any of its ERISA Affiliates relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit Arrangement that
would increase materially the expense of maintaining such Employee Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year ended prior to the date hereof
(i) There is no contract, agreement, plan or arrangement covering any
employee or former employee of the Company that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to the terms of Section 280G of the Code.
(j) No tax under Section 4980B of the Code has been incurred in
respect of any Employee Plan that is a group health plan, as defined in Section
5000(b)(l) of the Code.
(k) With respect to the employees and former employees of the Company,
there are no employee post-retirement medical or health plans in effect, except
as required by Section 4980B of the Code.
(l) No employee of the Company will become entitled to any bonus,
retirement, severance or similar benefit or enhanced benefit solely as a result
of the transactions contemplated hereby.
(m) The Company does not have, nor is it reasonably expected to have,
any liability under Title IV of ERISA.
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<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser severally represents and warrants to the Company that:
(a) it is an "accredited investor" within the meaning of Rule 501
under the Securities Act and was not organized for the specific purpose of
acquiring the Preferred Shares;
(b) it has sufficient knowledge and experience in investing in
companies similar to the Company in terms of the Company's stage of development
so as to be able to evaluate the risks and merits of its investment in the
Company and it is able financially to bear the risks thereof
(c) it has had an opportunity to discuss the Company's proposed
business, management and financial affairs with the Company's management;
(d) the Preferred Shares being purchased by it are being acquired for
its own account for the purpose of investment and not with a view to or for sale
in connection with any distribution thereof;
(e) it understands that (i) the Preferred Shares and the Conversion
Shares have not been registered under the Securities Act by reason of their
issuance in a transaction exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof or Rule 505 or 506 promulgated
under the Securities Act, (ii) the Preferred Shares and, upon conversion
thereof, the Conversion Shares must be held indefinitely unless a subsequent
disposition thereof is registered under the Securities Act or is exempt from
such registration, (iii) the Preferred Shares and the Conversion Shares will
bear a legend to such effect and (iv) the Company will make a notation on its
transfer books to such effect; and
(f) if it sells any Conversion Shares pursuant to Rule 1 44A
promulgated under the Securities Act, it will take all necessary steps in order
to perfect the exemption from registration provided thereby, including (i)
obtaining on behalf of the Company information to enable the Company to
establish a reasonable belief that the purchaser is a qualified institutional
buyer and (ii) advising such purchaser that Rule 1 44A is being relied upon with
respect to such resale.
ARTICLE IV
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS
The obligation of each Purchaser to purchase and pay for the Preferred
Shares being purchased by it on the Closing Date is, at its option, subject to
the satisfaction, on or before the Closing Date, of the following conditions:
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(a) Representations and Warranties to be True and Correct. The
-----------------------------------------------------
representations and warranties contained in Article II shall be true, complete
and correct in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
such date, and the President and Treasurer of the Company shall have certified
to such effect to the Purchasers in writing.
(b) Performance. The Company shall have performed and complied in all
-----------
material respects with all agreements contained herein required to be performed
or complied with by it prior to or at the Closing Date.
(c) All Proceedings to be Satisfactory. All corporate and other
----------------------------------
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory in
form and substance to the Purchasers and their counsel, and the Purchasers and
their counsel shall have received all such counterpart originals or certified or
other copies of such documents as they reasonably may request.
(d) Supporting Documents. The Purchasers and their counsel shall
--------------------
have received copies of the following documents:
(i) the Charter, certified as of a recent date by the Secretary
of State of the State of Delaware; and
(ii) (A) a complete copy of the By-laws of the Company as in
effect on the Closing Date; and (B) a complete copy of all resolutions adopted
by the Board of Directors and the stockholders of the Company authorizing the
execution, delivery and performance of this Agreement, the Registration Rights
Agreement Amendment and the Management Rights Agreements, the issuance, sale and
delivery of the Preferred Shares and the reservation, issuance and delivery of
the Conversion Shares, and a secretary's certificate to the effect that all such
resolutions are in fill force and effect and are all the resolutions adopted in
connection with the transactions contemplated by this Agreement, the
Registration Rights Agreement Amendment and the Management Rights Agreements.
(e) Registration Rights Agreement Amendment. The Company shall have
---------------------------------------
executed and delivered the Registration Rights Agreement Amendment.
(f) Management Rights Agreements. The Company shall have executed and
----------------------------
delivered the Management Rights Agreements to those Purchasers who have made a
request to the Company therefor and are subject in any manner with respect to
their investment in the Company to ERISA.
(g) Charter. The Charter shall read in its entirety as set forth in
-------
Exhibit C.
- ---------
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<PAGE>
(h) Opinion of Counsel. Purchasers participating in such Additional
------------------
Closing shall have received an opinion of Dechert, Price & Rhoads, dated the
date of such Additional Closing, satisfactory in form and substance to such
Purchasers and Purchasers' counsel.
(i) Fees of Purchasers' Counsel. The Company shall have paid in
---------------------------
accordance with Section 6.01 the fees and disbursements of Purchasers' counsel
invoiced at the Closing or any Additional Closing.
All such documents shall be satisfactory in form and substance to the Purchasers
and their counsel.
ARTICLE V
COVENANTS OF THE COMPANY
The Company covenants and agrees with each of the Purchasers that:
Section 5.01. Financial Statements, Reports. Etc. The Company shall
----------------------------------
furnish to each Purchaser:
(a) within ninety (90) days after the end of each fiscal
year of the Company a consolidated balance sheet of the Company as of the end of
such fiscal year and the related consolidated statements of income,
stockholders' equity and cash flows for the fiscal year then ended, prepared in
accordance with generally accepted accounting principles and certified by a firm
of independent public accountants of recognized national standing selected by
the Board of Directors of the Company;
(b) within thirty (30) days after the end of each month in
each fiscal year (other than the last month in each fiscal year) a consolidated
balance sheet of the Company and the related consolidated statements of income,
stockholders' equity and cash flows, unaudited but prepared in accordance with
generally accepted accounting principles and certified by the Chief Financial
Officer of the Company, such consolidated balance sheet to be as of the end of
such month and such consolidated statements of income, stockholders' equity and
cash flows to be for such month and for the period from the beginning of the
fiscal year to the end of such month, in each case with comparative statements
for the prior fiscal year, provided that the Company's obligations under this
Section 5.01(b) shall terminate upon the completion of a firm commitment
underwritten public offering of the Company's securities;
(c) at the time of delivery of each monthly statement
pursuant to Section 5.01(b), a management narrative report explaining all
significant variances from forecasts and all significant current developments in
staffing, marketing, sales and operations;
(d) no later than sixty (60) days prior to the start of
each fiscal year, consolidated capital and operating expense budgets, cash flow
projections and income and loss
-16-
<PAGE>
projections for the Company in respect of such fiscal year, all itemized in
reasonable detail and prepared on a monthly basis, and, promptly after
preparation, any revisions to any of the foregoing;
(e) promptly following receipt by the Company, each audit response
letter, accountant's management letter and other written report submitted to the
Company by its independent public accountants in connection with an annual or
interim audit of the books of the Company;
(f) promptly after the commencement thereof, notice of all actions,
suits, claims, proceedings, investigations and inquiries of the type described
in Section 2.07 that could materially adversely affect the Company,
(g) promptly upon sending, making available or filing the same, all
press releases, reports and financial statements that the Company sends or makes
available to its stockholders or directors or files with the Commission; and
(h) promptly, from time to time, such other information regarding the
business, prospects, financial condition, operations, property or affairs of the
Company as such Purchaser reasonably may request.
Section 5.02. Right of First refusal. The Company shall, prior to any
----------------------
issuance by the Company of any of its securities (other than debt securities
with no equity feature), offer to each Purchaser by written notice the right,
for a period of twenty (20) days, to purchase all of such securities for cash at
an amount equal to the price or other consideration for which such securities
are to be issued; provided, however, that the first refusal rights of the
Purchasers pursuant to this Section 5.02 shall not apply to securities issued
(A) upon conversion of any of the Preferred Shares, (B) as a stock dividend or
upon any subdivision of shares of Common Stock, provided that the securities
issued pursuant to such stock dividend or subdivision are limited to additional
shares of Common Stock, (C) pursuant to subscriptions, warrants, options,
convertible securities, or other rights which are listed in Schedule III as
------------
being outstanding on the date of this Agreement, but not including those
described in (F) below, (D) solely in consideration for the acquisition (whether
by merger or otherwise) by the Company of all or substantially all of the stock
or assets of any other entity, (B) pursuant to a firm commitment underwritten
public offering, (F) pursuant to the exercise of options to purchase Common
Stock granted to directors, officers, employees or consultants of the Company in
connection with their service to the Company or pursuant to the exercise of
options to purchase Common Stock granted to or Common Stock issued to licensors
or transferors of technology to the Company, not to exceed in the aggregate
5,000,000 shares (appropriately adjusted to reflect stock splits, stock
dividends, combinations of shares and the like with respect to the Common Stock)
(the shares exempted by this clause (F) being hereinafter referred to as the
"Reserved Employee and Technology Shares"), and (G) upon the exercise of any
right which was not itself in violation of the terms of this Section 5.02. The
Company's written notice to the Purchasers shall describe the securities
proposed to be issued by the Company and specify the number, price and payment
terms. Each Purchaser may accept the Company's offer as to the fill number of
securities offered
-17-
<PAGE>
to it or any lesser number, by written notice thereof given by it to the Company
prior to the expiration of the aforesaid twenty (20) day period, in which event
the Company shall promptly sell and such Purchaser shall buy, upon the terms
specified, the number of securities agreed to be purchased by such Purchaser.
Notwithstanding the foregoing, if the Purchasers agree, in the aggregate, to
purchase more than the fill number of securities offered by the Company, then
each Purchaser accepting the Company's offer shall first be allocated the lesser
of(i) the number of securities which such Purchaser agreed to purchase and (ii)
the number of securities as is equal to the fill number of securities offered by
the Company multiplied by a fraction, the numerator of which shall be the number
of shares of Common Stock held by such Purchaser as of the date of the Company's
notice of offer (treating such Purchaser, for the purpose of such calculation,
as the holder of the number of shares of Common Stock which would be issuable to
such Purchaser upon conversion, exercise or exchange of all securities
(including but not limited to the Preferred Shares) held by such Purchaser on
the date such offer is made, that are convertible, exercisable or exchangeable
into or for (whether directly or indirectly) shares of Common Stock) and the
denominator of which shall be the aggregate number of shares of Common Stock
(calculated as aforesaid) held on such date by all Purchasers who accepted the
Company's offer, and the balance of the securities (if any) offered by the
Company shall be allocated among the Purchasers accepting the Company's offer in
proportion to their relative equity ownership interests in the Company
(calculated as aforesaid), provided that no Purchaser shall be allocated more
than the number of securities which such Purchaser agreed to purchase and
provided further that in cases covered by this sentence all Purchasers shall be
allocated among them the fill number of securities offered by the Company. The
Company shall be free at any time prior to ninety (90) days after the date of
its notice of offer to the Purchasers, to offer and sell to any third party or
parties the number of such securities not agreed by the Purchasers to be
purchased by them, at a price and on payment terms no less favorable to the
Company than those specified in such notice of offer to the Purchasers. However,
if such third party sale or sales are not consummated within such ninety (90)
day period, the Company shall not sell such securities as shall not have been
purchased within such period without again complying with this Section 5.02. For
purposes of this Section 5.02, (x) the term "Purchasers" shall include the
Series A Purchasers and Series B Purchasers (as such terms are defined in
Section 6.13 hereof) and (y) the term "Preferred Shares" shall include the
shares of Series A Convertible Preferred Stock and the shares of Series B
Convertible Preferred Stock purchased pursuant to the Series A Agreement and the
Series B Agreement (as such terms are defined in Section 6.13).
Section 5.03. Reserve for Conversion Shares. The Company shall at all
-----------------------------
times reserve and keep available out of its authorized but unissued shares of
Common Stock, for the purpose of effecting the conversion of the Preferred
Shares and otherwise complying with the terms of this Agreement, such number of
its duly authorized shares of Common Stock as shall be sufficient to effect the
conversion of the Preferred Shares from time to time outstanding or otherwise to
comply with the terms of this Agreement. If at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of the Preferred Shares or otherwise to comply with the terms of this
Agreement, the Company will forthwith take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes. The Company will
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<PAGE>
obtain any authorization, consent, approval or other action by or make any
filing with any court or administrative body that may be required under
applicable state securities laws in connection with the issuance of shares of
Common Stock upon conversion of the Preferred Shares.
Section 5.04. Corporate Existence. The Company shall maintain corporate
-------------------
existence, rights and franchises in fill force and effect.
Section 5.05. Properties, Business Insurance. The Company shall
------------------------------
maintain its properties and business, with financially sound and reputable
insurers, insurance against such casualties and contingencies and of such types
and in such amounts as is customary for companies similarly situated, which
insurance shall be deemed by the Company to be sufficient. The Company shall not
cause or permit any assignment or change in beneficiary and shall not borrow
against any such policy. If requested by Purchasers holding at least sixty
percent (60%) of the outstanding Preferred Shares, the Company will add one
designee of such Purchasers as a notice party for each such policy and shall
request that the issuer of each policy provide such designee with ten (10) days'
notice before such policy is terminated (for failure to pay premiums or
otherwise) or assigned or before any change is made in the beneficiary thereof
Section 5.06. Inspection, Consultation and Advice. The Company shall
-----------------------------------
permit each Purchaser holding in excess of 10% of the Series C Convertible
Preferred Stock and such persons as it may designate, at such Purchaser's
expense, and subject to the execution of an appropriate confidentiality
agreement, to visit and inspect any of the properties of the Company, examine
their books and take copies and extracts therefrom, discuss the affairs,
finances and accounts of the Company with its officers, employees and public
accountants (and the Company hereby authorizes said accountants to discuss with
such Purchaser and such designees such affairs, finances and accounts), and
consult with and advise the management of the Company as to its affairs,
finances and accounts, all at reasonable times and upon reasonable notice.
Section 5.07. Restrictive Agreements Prohibited. The Company shall not
---------------------------------
become a party to any agreement which by its terms restricts the Company's
performance of this Agreement, the Registration Rights Agreement, the Management
Rights Agreements or the Charter.
Section 5.08. Transactions with Affiliates. Except for transactions
----------------------------
contemplated by this Agreement or as otherwise approved by the Board of
Directors, the Company shall not enter into any material transaction with any
director, officer, employee or holder of more than 5% of the outstanding capital
stock of any class or series of capital stock of the Company, member of the
family of any such person, or any corporation, partnership, trust or other
entity in which any such person, or member of the family of any such person, is
a director, officer, trustee, partner or holder of more than 5% of the
outstanding capital stock thereof, except for transactions on customary terms
related to such person's employment.
Section 5.09. Use of Proceeds. The Company shall use the cash proceeds
---------------
from the sale of the Preferred Shares solely for working capital and other
general corporate purposes.
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<PAGE>
Section 5.10. By-laws. The Company shall at all times cause its By-laws
-------
to provide that, (a) unless otherwise required by the laws of the State of
Delaware, (i) any two directors and (ii) any holder or holders of at least 25%
of the outstanding shares of Series C Convertible Preferred Stock, shall have
the right to call a meeting of the Board of Directors or stockholders and (b)
the number of directors fixed in accordance therewith shall in no event conflict
with any of the terms or provisions of the Series C Convertible Preferred Stock
as set forth in the Charter. The Company shall at all times maintain provisions
in its By-laws and/or Charter indemnifying all directors against liability and
absolving all directors from liability to the Company and its stockholders to
the maximum extent permitted under the laws of the State of Delaware.
Section 5.11. Performance of Contracts. The Company shall not
------------------------
materially amend, modify, terminate, waive or otherwise alter, in whole or in
part, any of the Employee Nondisclosure and Developments Agreements without the
consent of the Company's Board of Directors.
Section 5.12. Vesting of Reserved Employee Shares. The Company shall
-----------------------------------
not grant to any of its employees options to purchase Reserved Employee Shares
which will become exercisable at a rate in excess of 25% per annum from the date
of such grant without the approval of the Company's Board of Directors.
Section 5.13. Employee Nondisclosure and Developments Agreements. The
--------------------------------------------------
Company shall use its best efforts to obtain an Employee Nondisclosure and
Developments Agreement in substantially the form of Exhibit D. or in such other
---------
form as is approved by the Board of Directors, from all future officers, key
employees and other employees who will have access to confidential information
of the Company, upon their employment by the Company.
Section 5.14. Compliance with Laws. The Company shall comply with all
--------------------
applicable laws, rules, regulations and orders, noncompliance with which could
materially adversely affect its business or condition, financial or otherwise.
Section 5.15. Keeping of Records and Books of Account. The Company
---------------------------------------
shall keep adequate records and books of account, in which complete entries will
be made in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company, and in which, for
each fiscal year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
Section 5.16. Rule 144A Information. The Company shall, at all times
---------------------
during which it is neither subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), nor exempt from reporting pursuant to Rule 1 2g3 -2(b) under the Exchange
Act, provide in writing, upon the written request of any Purchaser or a
prospective buyer of Preferred Shares or Conversion Shares from any Purchaser,
all information required by Rule I 44A(d)(4)(i) of the General Regulations
promulgated by the Commission under the Securities Act ("Rule 144A Information).
The Company also shall, upon the written request of any Purchaser, cooperate
with and assist such Purchaser or any member of
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<PAGE>
the National Association of Securities Dealers, Inc. PORTAL system in applying
to designate and thereafter maintain the eligibility of the Preferred Shares or
Conversion Shares, as the case may be, for trading through PORTAL. The Company's
obligations under this Section 5.16 shall at all times be contingent upon the
relevant Purchaser's obtaining from the prospective buyer of Preferred Shares or
Conversion Shares a written agreement to take all reasonable precautions to
safeguard the Rule l44A Information from disclosure to anyone other than a
person who will assist such buyer in evaluating the purchase of any Preferred
Shares or Conversion Shares.
Section 5.17. Future Subsidiaries. In the event the Company shall
-------------------
acquire or create a subsidiary or subsidiaries, the Company agrees that the
covenants contained in this Article V shall apply to the Company and such
subsidiaries on a consolidated basis.
ARTICLE VI
MISCELLANEOUS
Section 6.01. Expenses. Each party hereto will pay its own expenses in
--------
connection with the transactions contemplated hereby, whether or not such
transactions shall be consummated, provided, however, that the Company shall pay
the reasonable fees and disbursements, not to exceed $10,000, of the Purchasers'
special counsel, Testa, Hurwitz & Thibeault, in connection with such
transactions and any subsequent amendment, waiver, consent or enforcement
thereof.
Section 6.02. Survival of Agreements. All covenants, agreements,
----------------------
representations and warranties made herein or in the Registration Rights
Agreement Amendment, the Management Rights Agreements, or any certificate or
instrument delivered to the Purchasers pursuant to or in connection with this
Agreement, the Registration Rights Agreement Amendment or the Management Rights
Agreements, shall survive the execution and delivery of this Agreement, the
Registration Rights Agreement Amendment and the Management Rights Agreements,
the issuance, sale and delivery of the Preferred Shares, and the issuance and
delivery of the Conversion Shares, and all statements contained in any
certificate or other instrument delivered by the Company hereunder or thereunder
or in connection herewith or therewith shall be deemed to constitute
representations and warranties made by the Company; provided that all such
representations and warranties shall terminate two years from the date they are
made.
Section 6.03. Brokerage. Each party hereto will indemnify and hold
---------
harmless the others against and in respect of any claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements or understandings made or
claimed to have been made by such party with any third party.
Section 6.04. Parties in Interest. All representations, covenants and
-------------------
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Without limiting the
generality of the foregoing, all representations, covenants and
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<PAGE>
agreements benefiting the Purchasers shall inure to the benefit of any and all
subsequent holders from time to time of Preferred Shares or Conversion Shares.
Section 6.05. Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, addressed as follows:
(a) if to the Company, at 371 Phoenixville Pike, Malvern,
PA 19355, Attention: President, with a copy to Henry N. Nassau, Esq., Dechert,
Price & Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street, Philadelphia, PA
19103; and
(b) if to any Purchaser, at the address of such Purchaser
set forth in Schedule I, with a copy to Robin A. Painter, Esq., Testa, Hurwitz &
----------
Thibeault, High Street Tower, 125 High Street, Boston, Massachusetts 02110; or,
in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
Section 6.06. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware.
Section 6.07. Entire Agreement. This Agreement, including the Schedules
----------------
and Exhibits hereto, constitutes the sole and entire agreement of the parties
with respect to the subject matter hereof. All Schedules and Exhibits hereto are
hereby incorporated herein by reference.
Section 6.08. Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shill constitute one and the same instrument.
Section 6.09. Amendments. This Agreement may be amended or modified,
----------
and provisions hereof may be waived, with the written consent of the Company and
the holders of at least two-thirds (2/3) of the outstanding shares of Common
Stock issued or issuable upon conversion of the Preferred Shares. Otherwise this
Agreement may not be amended or waived or any provision hereof waived.
Section 6.10. Severability. If any provision of this Agreement shall be
------------
declared void or unenforceable by any judicial or administrative authority, the
validity of any other provision and of the entire Agreement shall not be
affected thereby.
Section 6.11. Titles and Subtitles. The titles and subtitles used in
--------------------
this Agreement are for convenience only and are not to be considered in
construing or interpreting any term or provision of this Agreement.
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<PAGE>
Section 6.12. Certain Defined Term. As used in this Agreement, the
--------------------
following term shall have the following meaning (such meaning to be equally
applicable to both the singular and plural forms of the term defined):
"person" shall mean an individual, corporation, trust,
partnership, joint venture, unincorporated
organization, government agency or any agency or
political subdivision thereof, or other entity.
Section 6.13. Prior Agreements. By their signature below, each of the
----------------
Purchasers who are also parties to that certain Series A Convertible Preferred
Stock Purchase Agreement (the "Series A Agreement") between the Company and the
purchasers named therein dated as of November 7, 1994, (each, a "Series A
Purchaser") and that certain Series B Convertible Preferred Stock Purchase
Agreement (the "Series B Agreement") between the Company and the purchasers
named therein dated as of March 1, 1996, (each, a "Series B Purchaser") hereby
(i) waives, except to the extent set forth on Schedule I hereto, the right to
----------
purchase shares of Series C Convertible Preferred Stock sold pursuant to this
Agreement. The signature of each Series A Purchaser and Series B Purchaser below
shall also constitute such party's agreement to the right of first refusal
granted in Section 5.02 hereof and the termination of Sections 5.02 of the
Series A Agreement and the Series B Agreement; provided, however, the Company
acknowledges that upon any transfer of the Series B Preferred Stock owned by
Sonz Partners L.P. to Sonz Adolor, L.P., Sonz Adolor, L.P. shall have the rights
afforded Purchasers under Section 5.02 hereof.
[Signature pages follow immediately.]
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<PAGE>
EXHIBIT 4.4
STOCK PURCHASE AGREEMENT
------------------------
THIS AGREEMENT is made as of November 5, 1997, between ADOLOR CORPORATION,
a Delaware corporation, having its principal office at 371 Phoenixville Pike,
Malvern, PA 19355 USA (the "Company"), and KWANG DONG PHARMACEUTICAL COMPANY, a
Korean corporation having its principal office at 212-13 Kuro-dong, Kuro-Ku,
Seoul, South Korea (the "Purchaser").
BACKGROUND
----------
Purchaser and the Company have entered into a certain license agreement
dated November 5, 1997 (the "License Agreement"). In connection with entering
into the License Agreement, the Company has agreed to issue to Purchaser 960,000
shares of the Company's Series D Convertible Preferred Stock, $.001 par value
per share, on the terms and conditions herein set forth.
NOW THEREFORE, in consideration of the mutual covenants contained herein
and intending to be legally bound, the parties hereto agree as follows:
1. Sale of Stock.
-------------
(a) The Company hereby agrees to issue and deliver to Purchaser, and
Purchaser hereby agrees to purchase, 960,000 shares of the Company's Series D
Convertible Preferred Stock, par value $.001 per share (the "Purchased Shares")
with the terms set forth on Schedule 1 hereto, for the aggregate purchase price
of One Million Two Hundred Thousand United States dollars (U.S. $1,200,000) as
set forth below.
(b) Purchaser shall deliver to the Company the sum of Six Hundred
Thousand United States dollars (U.S. $600,000) by wire transfer on or before the
twentieth (20th) day following the Effective Date of the License Agreement to an
account specified by the Company.
(c) Purchaser shall deliver to the Company the sum of Six Hundred
Thousand United States dollars (U.S. $600,000) by wire transfer on or before the
fiftieth (50th) day following the Effective Date of the License Agreement (the
"Delivery Date") to an account specified by the Company.
(d) Upon receipt of the sums set forth in Sections 1(b) and 1(c)
above, the Company shall deliver to the Purchaser on the Delivery Date a stock
certificate in the name of Purchaser representing the Purchased Shares.
2. Investment Representations.
--------------------------
(a) In connection with the acquisition of the Purchased Shares,
Purchaser represents to the Company the following:
<PAGE>
(i) Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of Korea and has all requisite
corporate power and authority to carry on its business as now conducted;
(ii) all corporate action on the part of the Purchaser,
necessary for the authorization, execution and delivery of this Agreement, the
performance of all obligations of the Purchaser hereunder and the authorization,
issuance and delivery of the Purchased Shares being purchased hereunder has been
taken; and this Agreement constitutes a valid and legally binding obligation of
the Purchaser, enforceable in accordance with its terms except as enforcement
may be limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally and except that the availability of
equitable remedies, including Specific performance, is subject to the discretion
of the court before which any proceeding therefor may be brought;
(iii) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the company to
reach an informed and knowledgeable decision to acquire the securities;
(iv) the Purchased Shares being purchased by Purchaser are
being acquired for its own account for the purpose of investment and not with a
view to or for sale in connection with any distribution thereof;
(v) Purchaser understands that (i) the Purchased Shares have
not been registered under the Securities Act of 1933, as amended (the
"Securities Act"); (ii) the Purchased Shares must be held indefinitely unless a
subsequent disposition thereof is registered under the Securities Act or is
exempt from such registration; (iii) the Purchased Shares will bear a legend to
such effect; and (iv) the Company will make a notation on its transfer books to
such effect;
(vi) Purchaser is aware of the adoption of Rule 144 by the
Securities and Exchange Commission (the "Commission"), promulgated under the
Securities Act, which permits limited public resale of securities acquired in a
non-public offering subject to the satisfaction of certain conditions; and
Purchaser further represents that it has obtained all necessary governmental
approval with regard to purchase of shares in the Company; and
(vii) Purchaser further acknowledges that in the event all of
the requirements of Rule 144 are not met, compliance with Regulation A or some
other registration exemption under the Securities Act will be required; and that
although Rule 144 is not exclusive, the staff of the Commission has expressed
its opinion that persons proposing to sell private placement securities other
than in a registered offering and other than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales and that such persons and the brokers who
participate in the transactions do so at their own risk.
(b) Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants as follows.
-2-
<PAGE>
(i) Organization, Good Standing and Qualification. The Company
---------------------------------------------
is corporation, duly organized, validly existing and in good standing under the
laws of the state of Delaware.
(ii) Authorization. All corporate action on the part of the
-------------
Company necessary for the authorization, execution and delivery of this
Agreement, the performance of all obligations of the Company hereunder and the
authorization, issuance and delivery of the Purchased Shares being sold
hereunder has been taken, and this Agreement constitutes a valid and legally
binding obligation of the Company, enforceable in accordance with its terms
except as enforcement may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally. and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the Court before which any proceeding therefor may
be brought.
(iii) Valid Issuance of Shares. The Purchased Shares, when
------------------------
issued, sold and delivered in accordance with the term hereof for the
consideration expressed herein, will be duly and validly issued, fully paid and
nonassessable.
3. Lockup Agreement. Purchaser agrees that if, in connection with the
----------------
Company's initial public offering of the Company's securities, the Company or
the underwriters managing the offering so request, Purchaser shall not sell,
make short sale of, loan, grant any option for the purchase of, or otherwise
dispose of any Purchased Shares, shares of the Company's Common Stock issued
upon conversion of the Purchased Shares or any subsequent equity securities of
the Company acquired by Purchaser (together, the "Shares") (other than those
included in the registration) without the prior written consent of the Company
or such underwriters, as the case may be, for such period of time (not to exceed
180 days from the effective date of such registration) as may be requested by
the Company or the underwriters. This Section 3 shall be binding on all
transferees or assignees of any Shares.
4. Legends. The share certificate evidencing any of the Purchased Shares
-------
issued hereunder shall be endorsed with the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT. AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE
SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO
OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED."
(b) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND MAY NOT BE SOLD, EXCHANGED, TRANSFERRED,
PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE
WITH AND SUBJECT TO ALL THE TERMS AND CONDITIONS OF A CERTAIN
-3-
<PAGE>
STOCK PURCHASE AGREEMENT DATED AS OF AUGUST, 1997, A COPY OF WHICH THE
COMPANY WILL FURNISH TO THE HOLDER OF THIS CERTIFICATE UPON REQUEST
AND WITHOUT CHARGE."
5. Adjustment for Stock Split. All references to the number of Shares and
--------------------------
the consideration therefor in this Agreement shall be appropriately adjusted to
reflect any stock split, stock dividend or other change in the Shares which may
be made by the Company after the date of this Agreement.
6. Prohibited Transfers. Purchaser shall not sell, assign, transfer,
--------------------
pledge, hypothecate, mortgage, encumber or dispose of all or any of its Shares
except as expressly provided in this Agreement. Notwithstanding the foregoing,
Purchaser may transfer all or any of its Shares subject to the terms of this
Agreement to any wholly owned subsidiary of Purchaser or to any corporate parent
of Purchaser so long as such parent owns all of the outstanding voting
securities of Purchaser.
7. Right of First Refusal on Dispositions.
--------------------------------------
(a) If at any time Purchaser desires to sell for cash or cash
equivalents all or any part of its Shares, pursuant to a bona fide offer from a
third party (the "Proposed Transferee"), Purchaser shall submit a written offer
(the "Offer") to sell such Shares (the "Offered Shares") to the Company on terms
and conditions, including price, not less favorable to the Company than those on
which Purchaser proposes to sell such Offered Shares to the Proposed Transferee.
The Offer shall disclose the identity of the Proposed Transferee, the Offered
Shares proposed to be sold, the total number of Shares owned by Purchaser, the
terms and conditions, including price, of the proposed sale, and any other
material facts relating to the proposed sale. The Offer shall further state that
the Company may acquire, in accordance with the provisions of this Agreement,
all or any portion of the Offered Shares for the price and upon the other terms
and conditions, including deferred payment (if applicable), set forth therein.
(b) The Company shall have the option, but not the obligation, to
purchase all or any portion of the Offered Shares, on the same terms as
specified in the Offer. Within twenty (20) days after the giving of the Offer,
the Company shall give written notice to Purchaser stating whether or not it
elects to exercise its option, the number of Offered Shares to be purchased, and
a date and time for consummation of such purchase not more than ninety (90) days
after the giving of such Offer by Purchaser. Failure by the Company to give such
notice within such time period shall be deemed an election by it not to exercise
its option.
(c) If the Company does not exercise its option to purchase any
remaining Offered Shares, the Offered Shares not purchased may be sold by
Purchaser at any time within 90 days after the date the Offer was made. Any such
sale shall be to the Proposed Transferee, at not less than the price and upon
other terms and conditions, if any, not more favorable to the proposed
Transferee than those specified in the Offer and such transferred Offered Shares
shall remain subject to the terms of this Agreement. Any Offered Shares not sold
within such 90-day period shall not be sold without Purchaser again complying
with the terms and condition of this Section 7.
-4-
<PAGE>
8. Termination of Restrictions. The restrictions contained in Sections 6
---------------------------
and 7 shall terminate upon the Consummation of a firmly underwritten public
offering registered under the Securities Act, with an aggregate minimum gross
offering price to the public of $7,000,000.
9. Notice. Notices given hereunder shall be deemed to have been duly
------
given on the date of personal delivery or on the date of postmark if mailed by
certified or registered mail, return receipt requested, to the party being
notified at its address specified in the introductory paragraph of this
Agreement or such other address as the addressee may subsequently notify the
other parties of in writing.
10. Entire Agreement and Amendments. This Agreement constitutes the
-------------------------------
entire agreement of the parties with respect to the subject matter hereof and
neither this Agreement nor any provision hereof may be waived, modified, amended
or terminated except by a written agreement signed by the parties hereto. To the
extent any term or other provision of any other indenture, agreement or
instrument by which any party hereto is bound conflicts with this Agreement,
this Agreement shall have precedence over such conflicting term or provision.
11. Governing Law; Successors and Assigns. This Agreement shall be
-------------------------------------
governed by the laws of the State of Delaware and shall be binding upon the
heirs, personal representatives, executors, administrators, successors and
assigns of the parties.
12. Waivers. No Waiver of any breach or default hereunder shall be
-------
considered valid unless in writing, and no such waiver shall be deemed a waiver
of any subsequent breach or default of the same or similar nature.
13. Severability. If any provision of this Agreement shall be held to be
------------
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
14. Captions. Captions are for convenience only and are not deemed to be
--------
part of this Agreement.
15. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
--------------------------------------------
-5-
<PAGE>
EXHIBIT 4.5
================================================================================
SERIES E CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
among
ADOLOR CORPORATION
and
THE PURCHASERS NAMED IN SCHEDULE I
Dated as of December 8, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE PREFERRED SHARES............................................ 1
SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares.. 1
SECTION 1.02 Initial Closing...................................... 1
SECTION 1.03 Additional Closing................................... 1
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................. 2
SECTION 2.01 Organization, Qualifications and Corporate Power..... 2
SECTION 2.02 Authorization of Agreements, Etc..................... 3
SECTION 2.03 Validity............................................. 3
SECTION 2.04 Authorized Capital Stock............................. 3
SECTION 2.05 Financial Statements................................. 4
SECTION 2.06 Events Subsequent to the Date of the Balance Sheet... 5
SECTION 2.07 Litigation: Compliance with Law...................... 5
SECTION 2.08 Proprietary Information of Third Parties............. 6
SECTION 2.09 Patents, Trademarks, Etc............................. 6
SECTION 2.10 Title to Properties.................................. 7
SECTION 2.11 Leasehold Interests.................................. 7
SECTION 2.12 Insurance............................................ 7
SECTION 2.13 Taxes................................................ 7
SECTION 2.14 Other Agreements..................................... 8
SECTION 2.15 Significant Customers and Suppliers.................. 10
SECTION 2.16 Governmental Approvals............................... 10
SECTION 2.17 Disclosure........................................... 10
SECTION 2.18 Offering of the Preferred Shares..................... 10
SECTION 2.19 Brokers.............................................. 11
SECTION 2.20 Officers............................................. 11
SECTION 2.21 Transactions With Affiliates......................... 11
SECTION 2.22 Employees............................................ 11
SECTION 2.23 Environmental Protection............................. 11
SECTION 2.24 ERISA................................................ 12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS.............. 13
ARTICLE IV CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS................ 14
ARTICLE V COVENANTS OF THE COMPANY........................................ 16
SECTION 5.01 Financial Statements, Reports, Etc................... 16
SECTION 5.02 Right of First Refusal............................... 17
SECTION 5.03 Reserve for Conversion Shares........................ 18
SECTION 5.04 Corporate Existence.................................. 18
SECTION 5.05 Properties, Business, Insurance...................... 19
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 5.06 Inspection, Consultation and Advice.................. 19
SECTION 5.07 Restrictive Agreements Prohibited.................... 19
SECTION 5.08 Transactions with Affiliates......................... 19
SECTION 5.09 Use of Proceeds...................................... 19
SECTION 5.10 By-laws.............................................. 19
SECTION 5.11 Performance of Contracts............................. 20
SECTION 5.12 Vesting of Reserved Employee Shares.................. 20
SECTION 5.13 Employee Nondisclosure and Developments Agreements... 20
SECTION 5.14 Compliance with Laws................................. 20
SECTION 5.15 Keeping of Records and Books of Account.............. 20
SECTION 5.16 Rule 144A Information................................ 20
SECTION 5.17 Future Subsidiaries.................................. 21
ARTICLE VI MISCELLANEOUS.................................................. 21
SECTION 6.01 Expenses............................................. 21
SECTION 6.02 Survival of Agreements............................... 21
SECTION 6.03 Brokerage............................................ 21
SECTION 6.04 Parties in Interest.................................. 21
SECTION 6.05 Notices.............................................. 21
SECTION 6.06 Governing Law........................................ 22
SECTION 6.07 Entire Agreement..................................... 22
SECTION 6.08 Counterparts......................................... 22
SECTION 6.09 Amendments........................................... 22
SECTION 6.10 Severability......................................... 22
SECTION 6.11 Titles and Subtitles................................. 22
SECTION 6.12 Certain Defined Term................................. 22
SECTION 6.13 Prior Assignments.................................... 22
</TABLE>
ii
<PAGE>
INDEX TO SCHEDULES
SCHEDULE I Purchasers
SCHEDULE II Disclosure Schedule
SCHEDULE III Security Holders
SCHEDULE IV(A)
AND IV(B) Agreements
INDEX TO EXHIBITS
EXHIBIT A Form of Amendment No. 3 to Registration Rights Agreement
EXHIBIT B Form of Management Rights Agreement
EXHIBIT C Charter and All Amendments Thereto
EXHIBIT D Form of Employee Nondisclosure and Developments
Agreement
iii
<PAGE>
SERIES E CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated as of
December 8, 1998 among Adolor Corporation, a Delaware corporation (the
"Company"), and the several purchasers named in the attached Schedule I
----------
(individually a "Purchaser" and collectively the "Purchasers").
WHEREAS, the Company wishes to issue and sell to the Purchasers up to an
aggregate of 13,333,333 shares (the "Preferred Shares") of the authorized but
unissued Series E Convertible Preferred Stock, $01 par value, of the Company
(the "Series E Convertible Preferred Stock"); and
WHEREAS, the Purchasers, severally, wish to purchase the Preferred Shares
on the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties agree as follows:
ARTICLE I
THE PREFERRED SHARES
SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares. The
---------------------------------------------------
Company agrees to issue and sell to each Purchaser, and each Purchaser hereby
agrees to purchase from the Company, the number of Preferred Shares set forth
opposite the name of such Purchaser under the heading "Number of Preferred
Shares to be Purchased" on Schedule I, at the aggregate purchase price set forth
opposite the name of such Purchaser under the heading "Aggregate Purchase Price
for Preferred Shares" on Schedule I.
SECTION 1.02 Initial Closing. The initial closing shall take place at the
---------------
offices of Dechert Price & Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street,
Philadelphia, PA 19103, at 10:00 a.m., Philadelphia time, on November 30, 1998,
or at such other location, date and time as may be agreed upon between the
Purchasers and the Company (such closing being called the "Closing" and such
date and time being called the "Closing Date"). At the Closing, the Company
shall issue and deliver to each Purchaser a stock certificate or certificates in
definitive form, registered in the name of such Purchaser, representing the
Preferred Shares being purchased by it at the Closing. As payment in full for
the Preferred Shares being purchased by it under this Agreement, and against
delivery of the stock certificate or certificates therefor as aforesaid, on the
Closing Date each Purchaser shall (i) deliver to the Company a check payable to
the order of the Company, in the amount set forth opposite the name of such
Purchaser under the heading "Aggregate Purchase Price for Preferred Shares" on
Schedule I. (ii) transfer such sum to the account of the Company by wire
- ----------
transfer, or (iii) deliver or transfer such sum to the Company by any
combination of such methods of payments.
SECTION 1.03 Additional Closing. After the Closing Date and on or prior to
------------------
January 15, 1999 the Company may hold one or more additional closings (each an
"Additional Closing; and collectively the "Additional Closings") at which the
Company may issue and sell
<PAGE>
up to the number of Preferred Shares equal to the difference between 13,333,333
and the aggregate number of Preferred Shares previously sold on the Closing Date
and, as applicable, on the date of any prior Additional Closing. The sale of
Preferred Shares pursuant to this Section 1.03 shall be on the same terms and
conditions (including price) as the sale of the Preferred Shares pursuant to
Section 1.02 hereof and shall be effected by the execution by any investor of a
counterpart signature page to this Agreement. Upon such execution: (i) each such
investor shall be deemed to be a Purchaser for all purposes of this Agreement
and Schedule I shall be amended to include such Purchaser; and (ii) each such
----------
Additional Closing shall be deemed to be a Closing hereunder and the date of
each such Additional Closing shall be a "Closing Date" hereunder. If necessary,
the Company will provide an updated Disclosure Schedule to Purchasers purchasing
in any Additional Closing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Purchaser that, as of each
Closing Date on which such Purchaser purchases Preferred Shares hereunder,
except as set forth in the Disclosure Schedule attached as Schedule II, as may
-----------
be updated in writing prior to any Additional Closing hereunder, (which
Disclosure Schedule, (as updated, if applicable), makes explicit reference to
the particular representation or warranty as to which exception is taken, which
in each case shall constitute the sole representation and warranty as to which
such exception shall apply):
SECTION 2.01 Organization, Qualifications and Corporate Power.
------------------------------------------------
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and is duly
licensed or qualified to transact business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of the business
transacted by it or the character of the properties owned or leased by it
requires such licensing or qualification. The Company has the corporate power
and corporate authority to own and hold its properties and to carry on its
business as now conducted and as proposed to be conducted, to execute, deliver
and perform this Agreement, Amendment No. 3 to that certain Registration Rights
Agreement by and among the Company and the purchasers named therein dated as of
November 7, 1994, and as amended by Amendment No. 1 to Registration Rights
Agreement dated as of February 27, 1996 and Amendment No. 2 to Registration
Rights Agreement dated as of May 1, 1997 (as amended, the "Original Registration
Rights Agreement") in the form attached as Exhibit A (the "Registration Rights
---------
Agreement Amendment"), and the Management Rights letter agreement(s) between the
Company and certain of the Purchasers, if any, in the form attached as Exhibit B
---------
(the "Management Rights Agreements"), to issue, sell and deliver the Preferred
Shares and to issue and deliver the shares of Common Stock, $.0001 par value, of
the Company ("Common Stock") issuable upon conversion of the Preferred Shares
(the "Conversion Shares"). The Original Registration Rights Agreement as
amended by the Registration Rights Agreement Amendment is sometimes referred to
herein as the "Registration Rights Agreement."
2
<PAGE>
(b) The Company does not (i) own of record or beneficially, directly
or indirectly, (A) any shares of capital stock or securities convertible into
capital stock of any other corporation or (B) any participating interest in any
partnership, joint venture or other non-corporate business enterprise or (ii)
control, directly or indirectly, any other entity.
SECTION 2.02 Authorization of Agreements, Etc.
--------------------------------
(a) The execution and delivery by the Company of this Agreement, the
Registration Rights Agreement Amendment and the Management Rights Agreements,
the performance by the Company of its obligations hereunder and thereunder, the
issuance, sale and delivery of the Preferred Shares and the issuance and
delivery of the Conversion Shares have been duly authorized by all requisite
corporate action and will not violate any provision of law, any order of any
court or other agency of government, the Certificate of Incorporation of the
Company, as amended (the "Charter") or the By-laws of the Company, as amended,
or any provision of any indenture, agreement or other instrument to which the
Company or any of its respective properties or assets is bound, or conflict
with, result in a breach of or constitute (with due notice or lapse of time or
both) a default under any such indenture, agreement or other instrument, or
result in the creation or imposition of any lien, charge, restriction, claim or
encumbrance of any nature whatsoever upon any of the properties or assets of the
Company.
(b) The Preferred Shares have been duly authorized and, when issued
in accordance with this Agreement, will be validly issued, fully paid and
nonassessable shares of Series E Convertible Preferred Stock with no personal
liability attaching to the ownership thereof and will be free and clear of all
liens, charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in the Registration Rights Agreement. The Conversion
Shares have been duly reserved for issuance upon conversion of the Preferred
Shares and, when so issued, will be duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock with no personal liability attaching to
the ownership thereof and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company except
as set forth in the Registration Rights Agreement. Neither the issuance, sale or
delivery of the Preferred Shares nor the issuance or delivery of the Conversion
Shares is subject to any preemptive right of stockholders of the Company or to
any right of first refusal or other right in favor of any person which has not
been waived.
SECTION 2.03 Validity. This Agreement has been duly executed and delivered
--------
by the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms. The Registration Rights
Agreement Amendment and the Management Rights Agreements, when executed and
delivered in accordance with this Agreement, will constitute the legal, valid
and binding obligations of the Company, enforceable in accordance with their
respective terms.
SECTION 2.04 Authorized Capital Stock. The authorized capital stock of
------------------------
the Company consists of (i) 57,214,764 shares of Preferred Stock, 101 par value
(the "Preferred Stock"), of which 6,000,000 shares have been designated Series A
Convertible Preferred Stock, 23,107,145 have been designated Series B
Convertible Preferred Stock, 13,814,286 shares have been designated as Series C
Convertible Preferred Stock, 960,000 shares have been designated as Series D
Convertible Preferred Stock and 13,333,333 shares have been designated as Series
E
3
<PAGE>
Convertible Preferred Stock, and (ii) 54,750,000 shares of Common Stock.
Immediately prior to the Closing, 5,114,423 shares of Common Stock, 6,000,000
shares of Series A Convertible Preferred Stock, 23,107,145 shares of Series B
Convertible Preferred Stock, 13,814,286 shares of Series C Convertible Preferred
Stock and 960,000 shares of Series D Convertible Preferred Stock will be validly
issued and outstanding, fully paid and nonassessable with no personal liability
attaching to the ownership thereof and no shares of Series E Convertible
Preferred Stock will have been issued. The stockholders of record and holders
of subscriptions, warrants, options, convertible securities, and other rights
(contingent or other) to purchase or otherwise acquire equity securities of the
Company, and the number of shares of Common Stock and the number of such
subscriptions, warrants, options, convertible securities, and other such rights
held by each, are as set forth in the attached Schedule III. The designations,
------------
powers, preferences, rights, qualifications, limitations and restrictions in
respect of each class and series of authorized capital stock of the Company are
as set forth in the Charter, a copy of which is attached as Exhibit C, and all
---------
such designations, powers, preferences, rights, qualifications, limitations and
restrictions are valid, binding and enforceable and in accordance with all
applicable laws. Except as set forth in the attached Schedule III, (i) no
------------
person owns of record or is known to the Company to own beneficially any share
of Common Stock, (ii) no subscription, warrant, option, convertible security, or
other right (contingent or other) to purchase or otherwise acquire equity
securities of the Company is authorized or outstanding that has been issued by
the Company, and (iii) there is no commitment by the Company to issue shares,
subscriptions, warrants, options, convertible securities, or other such rights
or to distribute to holders of any of its equity securities any evidence of
indebtedness or asset. Except as provided for in the Charter or as set forth in
the attached Schedule III, the Company has no obligation (contingent or
------------
otherwise) to purchase, redeem or otherwise acquire any of its equity securities
or any interest therein or to pay any dividend or make any other distribution in
respect thereof. Except as set forth in the attached Schedule III and except
for those certain Stock Restriction Agreements by and among the Company, the
purchasers named therein and each of Dr. John Farrar, Dr. Michael Lewis and ARCH
Development Corporation dated as of November 7, 1994 (the "1994 Stock
Restriction Agreements") and the Restricted Stock Agreement dated May 31, 1996
by and between the Company and Frank Baldino, the Management Rights Agreements,
and the Management Rights letter agreements (the "Prior Management Rights
Agreements") between the Company and certain of the Series A Purchasers, the
Series B Purchasers and the Series C Purchasers (as such terms are defined in
Section 6.13 hereof), to the best of the Company's knowledge there are no voting
trusts or agreements, stockholders' agreements, pledge agreements, buy-sell
agreements, rights of first refusal, preemptive rights or proxies relating to
any securities of the Company (whether or not the Company is a party thereto).
All of the outstanding securities of the Company were issued in compliance with
all applicable Federal and state securities laws.
SECTION 2.05 Financial Statements. The Company has furnished to the
--------------------
Purchasers the unaudited consolidated balance sheet of the Company as of
December 31, 1997 and October 31, 1998 (the latter of which is herein referred
to as the "Balance Sheet"), and the related unaudited consolidated statements of
income and cash flows of the Company for the twelve months ended December 31,
1997 and the ten mouths ended October 31, 1998. All such financial statements
have been prepared in accordance with generally accepted accounting principles
consistently applied (except that such unaudited financial statements do not
contain all of the required footnotes) and fairly present in all material
respects the consolidated financial position of the Company as of December 31,
1997 and October 31, 1998, respectively, and the
4
<PAGE>
consolidated results of its operations and cash flows for the twelve months
ended December 31, 1997 and the ten months ended October 31, 1998, respectively.
Since the date of the Balance Sheet, (i) there has been no change in the assets,
liabilities or financial condition of the Company (on a consolidated basis) from
that reflected in the Balance Sheet except for changes in the ordinary course of
business which in the aggregate have not been materially adverse and (ii) none
of the business, prospects, financial condition, operations, property or affairs
of the Company (on a consolidated basis) has been materially adversely affected
by any occurrence or development, individually or in the aggregate, whether or
not insured against.
SECTION 2.06 Events Subsequent to the Date of the Balance Sheet.
--------------------------------------------------
Since the date of the Balance Sheet, the Company has not (i) issued any stock,
bond or other corporate security, except pursuant to the exercise of stock
options outstanding as of the date of the Balance Sheet (ii) borrowed any amount
or incurred or become subject to any liability (absolute, accrued or
contingent), except current liabilities incurred and liabilities under contracts
entered into in the ordinary course of business, (iii) discharged or satisfied
any lien or encumbrance or incurred or paid any obligation or liability
(absolute, accrued or contingent) other than current liabilities shown on the
Balance Sheet and current liabilities incurred since the date of the Balance
Sheet in the ordinary course of business, (iv) declared or made any payment or
distribution to stockholders or purchased or redeemed any share of its capital
stock or other security, (v) mortgaged, pledged, encumbered or subjected to lien
any of its assets, tangible or intangible, other than liens of current real
property taxes not yet due and payable, (vi) sold, assigned or transferred any
of its tangible assets except in the ordinary course of business, or canceled
any debt or claim, (vii) sold, assigned, transferred or granted any exclusive
license with respect to any patent, trademark, trade name, service mark,
copyright, trade secret or other intangible asset, (viii) suffered any loss of
property or waived any right of substantial value whether or not in the ordinary
course of business, (ix) made any change in officer compensation except in the
ordinary course of business and consistent with past practice, (x) made any
material change in the manner of business or operations of the Company, (xi)
entered into any transaction except in the ordinary course of-business or as
otherwise contemplated hereby or (xii) entered into any commitment (contingent
or otherwise) to do any of the foregoing.
SECTION 2.07 Litigation: Compliance with Law. There is no (i)
-------------------------------
action, suit, claim, proceeding or investigation pending or, to the best of the
Company's knowledge, threatened against or affecting the Company, at law or in
equity, or before or by any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) arbitration proceeding relating to the Company pending under
collective bargaining agreements or otherwise or (iii) governmental inquiry
pending or, to the best of the Company's knowledge, threatened against or
affecting the Company (including without limitation any inquiry as to the
qualification of the Company to hold or receive any license or permit). The
Company is not in default with respect to any order, writ, injunction or decree
known to or served upon the Company of any court or of any Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign. There is no action or suit by the Company
pending or threatened against others. The Company has complied with all laws,
rules, regulations and orders applicable to its business, operations,
properties, assets, products and services, the Company has all necessary
permits, licenses and other authorizations required to conduct its business as
conducted and as proposed to be conducted, and the Company has been operating
its business pursuant to and in compliance
5
<PAGE>
with the terms of all such permits, licenses and other authorizations except
where any instance or instances of noncompliance do not, individually or in the
aggregate, have a material adverse effect on the Company's business, prospects,
financial condition, operations, property or affairs. There is no existing law,
rule, regulation or order, and the Company after due inquiry is not aware of any
proposed law, rule, regulation or order, whether Federal, state, county or
local, which would prohibit or restrict the Company from, or otherwise
materially adversely affect the Company in, conducting its business in any
jurisdiction in which it is now conducting business or in which it proposes to
conduct business.
SECTION 2.08 Proprietary Information of Third Parties. To the best
----------------------------------------
of the Company's knowledge, no third party has claimed or has reason to claim
that any person employed by or affiliated with the Company has (a) violated or
may be violating any of the terms or conditions of his employment, non-
competition or non-disclosure agreement with such third party, (b) disclosed or
may be disclosing or utilized or may be utilizing any trade secret or
proprietary information or documentation of such third party or (c) interfered
or may be interfering in the employment relationship between such third party
and any of its present or former employees. No third party has requested
information from the Company which suggests that such a claim might be
contemplated. To the best of the Company's knowledge, no person employed by or
affiliated with the Company has employed or proposes to employ any trade secret
or any information or documentation proprietary to any former employer, and to
the best of the Company's knowledge, no person employed by or affiliated with
the Company has violated any confidential relationship which such person may
have had with any third party, in connection with the development, manufacture
or sale of any product or proposed product or the development or sale of any
service or proposed service of the Company, and the Company has no reason to
believe there will be any such employment or violation. To the best of the
Company's knowledge, none of the execution or delivery of this Agreement, or the
carrying on of the business of the Company as officers, employees or agents by
any officer, director or key employee of the Company, or the conduct or proposed
conduct of the business of the Company, will conflict with or result in a breach
of the terms, conditions or provisions of or constitute a default under any
contract, covenant or instrument under which any such person is obligated.
SECTION 2.09 Patents, Trademarks, Etc. Set forth in Schedule II is
------------------------ -----------
a list and brief description of all domestic and foreign patents, patent rights,
patent applications, trademarks, trademark applications, service marks, service
mark applications, trade names and copyrights, and all applications for such
which are in the process of being prepared, owned by or registered in the name
of the Company, or of which the Company is a licensor or licensee or in which
the Company has any right, and in each case a brief description of the nature of
such right. The Company owns or possesses adequate licenses or other rights to
use all patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, trade names, copyrights, manufacturing
processes, formulae, trade secrets, customer lists and know how (collectively,
"Intellectual Property") necessary to the conduct of its business as conducted
and as proposed to be conducted, and no claim is pending or, to the best of the
Company's knowledge, threatened to the effect that the operations of the Company
infringe upon or conflict with the asserted rights of any other person under any
Intellectual Property, and the Company reasonably believes that there is no
basis for any such claim (whether or not pending or threatened). No claim is
pending or threatened to the effect that any such Intellectual Property owned or
licensed by the Company, or which the Company otherwise has the right to use, is
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<PAGE>
invalid or unenforceable by the Company, and there is no basis for any such
claim (whether or not pending or threatened). All prior art known to the Company
which may be or may have been pertinent to the examination of any United
States patent or patent application listed in Schedule II has been cited to the
-----------
United States Patent and Trademark Office. To the best of the Company's
knowledge, all technical information developed by and belonging to the Company
which has not been patented has been kept confidential. The Company has not
granted or assigned to any other person or entity any right to manufacture, have
manufactured, assemble or sell the products or proposed products or to provide
the services or proposed services of the Company.
SECTION 2.10 Title to Properties. The Company has good, clear and
-------------------
marketable title to its properties and assets reflected on the Balance Sheet or
acquired by it since the date of the Balance Sheet (other than properties and
assets disposed of in the ordinary course of business since the date of the
Balance Sheet), and all such properties and assets are free and clear of
mortgages, pledges, security interests, liens, charges, claims, restrictions and
other encumbrances (including without limitation, easements and licenses),
except for liens for or current taxes not yet due and payable and minor
imperfections of title, if any, not material in nature or amount and not
materially detracting from the value or impairing the use of the property
subject thereto or impairing the operations or proposed operations of the
Company, including without limitation, the ability of the Company to secure
financing using such properties and assets as collateral. To the best of the
Company's knowledge after due inquiry, there are no condemnation, environmental,
zoning or other land use regulation proceedings, either instituted or planned to
be instituted, which would adversely affect the use or operation of the
Company's and its subsidiaries' properties and assets for their respective
intended uses and purposes, or the value of such properties, and the Company has
not received notice of any special assessment proceedings which would affect
such properties and assets.
SECTION 2.11 Leasehold Interests. Each lease or agreement to which
-------------------
the Company is a party under which it is a lessee of any property, real or
personal, is a valid and subsisting agreement, duly authorized and entered into,
without any default of the Company thereunder and, to the best of the Company's
knowledge, without any default thereunder of any other party thereto. No event
has occurred and is continuing which, with due notice or lapse of time or both,
would constitute a default or event of default by the Company under any such
lease or agreement or, to the best of the Company's knowledge, by any other
party thereto. The Company's possession of such property has not been disturbed
and, to the best of the Company's knowledge after due inquiry, no claim has been
asserted against the Company adverse to its rights in such leasehold interests.
SECTION 2.12 Insurance. The Company holds valid policies covering
---------
all of the insurance required to be maintained by it under Section 5.05.
SECTION 2.13 Taxes. The Company has filed all tax returns, Federal,
-----
state, county and local, required to be filed by it, and the Company has paid
all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or payable, including
without limitation all taxes which the Company is obligated to withhold from
amounts owing to employees, creditors and third parties. The Company has
established adequate reserves for all taxes accrued but not yet payable. The
Federal income tax
7
<PAGE>
returns of the Company have never been audited by the Internal Revenue Service.
No deficiency assessment with respect to or proposed adjustment of the Company's
Federal, state, county or local taxes is pending or, to the best of the
Company's knowledge, threatened. There is no tax lien, whether imposed by any
Federal, state, county or local taxing authority, outstanding against the
assets, properties or business of the Company. Neither the Company nor any of
its present or former stockholders has ever filed an election pursuant to
Section 1362 of the Internal Revenue Code of 1986, as amended (the "Code"), that
the Company be taxed as an S corporation.
SECTION 2.14 Other Agreements. Except as set forth in the attached
----------------
Schedule IV(A), (which Schedule IV(A) may be updated in writing prior to any
- -------------- --------------
Additional Closing hereunder) as of each Closing Date hereunder, the Company
reasonably believes after due investigation that it is not a party to or
otherwise bound by any written or oral agreement, instrument, commitment or
restriction which individually or in the aggregate could materially adversely
affect the business, prospects, financial condition, operations, property or
affairs of the Company. Except as set forth in the attached Schedule IV(B) the
--------------
Company is not a party to or otherwise bound by any written or oral:
(a) distributor, dealer, manufacturers representative or sales agency
agreement which is not terminable on less than ninety (90) days' notice without
cost or other liability to the Company (except for agreements which, in the
aggregate, are not material to the business of the Company);
(b) sales agreement which entitles any customer to a rebate or right
of set-off, to return any product to the Company after acceptance thereof or to
delay the acceptance thereof, or which varies in any material respect from the
Company's standard form agreements;
(c) agreement with any labor union (and, to the knowledge of the
Company, no organizational effort is being made with respect to any of its
employees);
(d) agreement with any supplier containing any provision permitting
any party other than the Company to renegotiate the price or other terms, or
containing any pay-back or other similar provision, upon the occurrence of a
failure by the Company to meet its obligations under the agreement when due or
the occurrence of any other event;
(e) agreement for the future purchase of fixed assets or for the
future purchase of materials, supplies or equipment in excess of its normal
operating requirements;
(f) agreement for the employment of any officer, employee or other
person on a full-time or consulting basis which is not terminable by the Company
at will without liability to the Company, except pursuant to severance and
accrued vacation pay policies applicable to all employees of the Company;
(g) bonus, pension, profit-sharing, retirement, hospitalization,
insurance, stock purchase, stock option or other plan, agreement or
understanding pursuant to which benefits are provided to any employee of the
Company (other than group insurance plans applicable to employees generally);
8
<PAGE>
(h) agreement relating to the borrowing of money or to the mortgaging
or pledging of, or otherwise placing a lien or security interest on, any asset
of the Company;
(i) guaranty of any obligation for borrowed money or otherwise;
(j) voting trust or agreement, stockholders' agreement, pledge
agreement, buy-sell agreement or first refusal or preemptive rights agreement
relating to any securities of the Company (other than this Agreement, the
Registration Rights Agreement Amendment, the 1994 Stock Restriction Agreements,
the Management Rights Agreements and the Prior Management Rights Agreements),
the Series A Agreement (as defined in Section 6.13 hereof), the Series B
Agreement (as defined in Section 6.13 hereof), the Series C Agreement (as
defined in Section 6.13 hereof) and the Stock Purchase Agreement, dated as of
November 5, 1997, between the Company and Kwang Dong Pharmaceutical Company);
(k) agreement, or group of related agreements with the same party or
any group of affiliated parties, under which the Company has advanced or agreed
to advance money or has agreed to lease any property as lessee or lessor;
(l) agreement or obligation (contingent or otherwise) to issue, sell
or otherwise distribute or to repurchase or otherwise acquire or retire any
share of its capital stock or any of its other equity securities other than
pursuant to its Charter as in effect on any Closing Date hereunder;
(m) assignment, license or other agreement with respect to any form
of intangible property;
(n) agreement under which it has granted any person any registration
rights, other than the Registration Rights Agreement;
(o) agreement under which it has limited or restricted its right to
compete with any person in any respect; and
(p) other agreement or group of related agreements with the same
party involving more than $40,000 or continuing over a period of more than six
months from the date or dates thereof (including renewals or extensions optional
with another party), which agreement or group of agreements is not terminable by
the Company without penalty upon notice of thirty (30) days or less, but
excluding any agreement or group of agreements with a customer of the Company
for the sale, lease or rental of the Company's products or services if such
agreement or group of agreements was entered into by the Company in the ordinary
course of business.
The Company, and to the best of the Company's knowledge after due inquiry, each
other party thereto have in all material respects performed all the obligations
required to be performed by them to date (or each non-performing party has
received a valid, enforceable and irrevocable written waiver with respect to its
non-performance), have received no notice of default and are not in default
(with due notice or lapse of time or both) under any agreement, instrument,
commitment, plan or arrangement to which the Company is a party or by which it
or its property may be bound. The Company has no present expectation or
intention of not fully performing all
9
<PAGE>
its obligations under each such agreement, instrument, commitment, plan or
arrangement, and the Company has no knowledge of any breach or anticipated
breach by the other party to any agreement, instrument, commitment, plan or
arrangement to which the Company is a party. The Company is in full compliance
with all of the terms and provisions of its Charter and By-laws, as amended.
SECTION 2.15 Significant Customers and Suppliers. No customer or
-----------------------------------
supplier, or group of two or more thereof (whether or not affiliated) which was
material to the Company, individually or in the aggregate, during the period
covered by the financial statements referred to in Section 2.05 or which has
been material to the Company thereafter, has terminated, materially reduced or
threatened to terminate or materially reduce its or their purchases from or
provision of products or services to the Company, as the case may be.
SECTION 2.16 Governmental Approvals. Subject to the accuracy of the
----------------------
representations and warranties of the Purchasers set forth in Article III, no
registration or filing with, or consent or approval of or other action by, any
Federal, state or other governmental agency or instrumentality is or will be
necessary for the valid execution, delivery and performance by the Company of
this Agreement, the Registration Rights Agreement Amendment or the Management
Rights Agreements, the issuance, sale and delivery of the Preferred Shares or,
upon conversion thereof, the issuance and delivery of the Conversion Shares,
other than (i) filings pursuant to state securities laws (all of which filings
have been made by the Company, other than those which are required to be made
after the Closing and which will be duly made on a timely basis) in connection
with the sale of the Preferred Shares and (ii) with respect to the Registration
Rights Agreement, the registration of the shares covered thereby with the
Commission and filings pursuant to state securities laws.
SECTION 2.17 Disclosure. Neither this Agreement, nor any Schedule
----------
or Exhibit to this Agreement, contains an untrue statement of a material fact or
omits a material fact necessary to make the statements contained herein or
therein not misleading. None of the statements, documents, certificates or other
items prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained therein not misleading.
SECTION 2.18 Offering of the Preferred Shares. Neither the Company
--------------------------------
nor any person authorized or employed by the Company as agent, broker, dealer or
otherwise in connection with the offering or sale of the Preferred Shares or any
security of the Company similar to the Preferred Shares has offered the
Preferred Shares or any such similar security for sale to, or solicited any
offer to buy the Preferred Shares or any such similar security from, or
otherwise approached or negotiated with respect thereto with, any person or
persons, and neither the Company nor any person acting on its behalf has taken
or will take any other action (including, without limitation, any offer,
issuance or sale of any security of the Company under circumstances which might
require the integration of such security with Preferred Shares under the
Securities Act of 1933, as amended (the "Securities Act") or the rules and
regulations of the Commission thereunder), in either case so as to subject the
offering, issuance or sale of the Preferred Shares to the registration
provisions of the Securities Act.
10
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SECTION 2.19 Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
SECTION 2.20 Officers. Set forth in Schedule II is a list of the
-------- -----------
names of the officers of the Company, together with the title or job
classification of each such person and the total cash compensation anticipated
to be paid to each such person by the Company in 1998.
SECTION 2.21 Transactions With Affiliates. Other than purchases of
----------------------------
Preferred Shares hereunder and under the Series A Agreement, Series B Agreement
and Series C Agreement (as such terms are defined in Section 6.13 hereof) and
except as set forth on Schedule III and Schedule IV(B) hereof, no director,
------------ -------------
officer, employee or stockholder of the Company, or member of the family of any
such person, or any corporation, partnership, trust or other entity in which any
such person, or any member of the family of any such person, has a substantial
interest or is an officer, director, trustee, partner or holder of more than 5%
of the outstanding capital stock thereof, is a party to any transaction with the
Company, including any contract, agreement or other arrangement providing for
the employment of, furnishing of services by, rental of real or personal
property from or otherwise requiring payments to any such person or firm, other
than employment-at-will arrangements in the ordinary course of business.
SECTION 2.22 Employees. Each of the officers of the Company, each
---------
key employee and each other employee now employed by the Company who has access
to confidential information of the Company has executed an Employee
Nondisclosure and Developments Agreement substantially in the form of Exhibit D
---------
and such agreements are in full force and effect. No officer or key employee of
the Company has advised the Company (orally or in writing) that he intends to
terminate employment with the Company. The Company has complied in all material
respects with all applicable laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity, collective bargaining
and the payment of Social Security and other taxes, and with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
SECTION 2.23 Environmental Protection. The Company has not caused
------------------------
or allowed, or contracted with any pasty for, the generation, use,
transportation, treatment, storage or disposal of any Hazardous Substances (as
defined below) in connection with the operation of its business or otherwise.
The Company, the operation of its business, and to the Company's knowledge, any
real property that the Company owns, leases or otherwise occupies or uses (the
"Premises") are in material compliance with all applicable Environmental Laws
(as defined below) and orders or directives of any governmental authorities
having jurisdiction under such Environmental Laws, including, without
limitation, any Environmental Laws or orders or directives with respect to any
cleanup or remediation of any release or threat of release of Hazardous
Substances. The Company has not received any citation, directive, letter or
other communication, written or oral, or any notice of any proceeding, claim or
lawsuit, from any person arising out of the ownership or occupation of the
Premises, or the conduct of its operations, and the Company is not aware of any
basis therefor. The Company has obtained and is maintaining in full force and
effect all necessary permits, licenses and approvals required by all
Environmental Laws applicable to the Premises and the Company's business
operations conducted thereon, and is in compliance with all such permits,
licenses and approvals. The
11
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Company has not caused or allowed a release, or a threat of release, of any
Hazardous Substance unto, at or near the Premises, and, to the best of the
Company's knowledge, neither the Premises nor any property at or near the
Premises has ever been subject to a release, or a threat of release, of any
Hazardous Substance. For the purposes of this Agreement, the term "Environmental
Laws" shall mean any Federal, state or local law or ordinance or regulation
pertaining to the protection of human health or the environment, including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Sections 9601, et seq., the Emergency Planning and
Community Right-to-Know Act, 42 U.S.C. Sections 11001, et seq., and the Resource
Conservation and Recovery Act, 42 U.S.C. Sections 6901, et seq. For purposes of
this Agreement, the term "Hazardous Substances" shall include oil and petroleum
products, asbestos, polychlorinated biphenyls, urea formaldehyde and any other
materials classified as hazardous or toxic under any Environmental Laws.
SECTION 2.24 ERISA.
-----
(a) Schedule II lists each Employee Plan that covers any employee of the
-----------
Company, copies or descriptions of all of which have previously been made
available or furnished to the Purchasers. With respect to each Employee Plan,
the Company has provided the most recently filed Form 5500 and an accurate
summary description of such plan.
(b) Schedule II also includes a list of each Benefit Arrangement of the
-----------
Company, copies or descriptions of all of which have been made available or
furnished previously to the Purchasers.
(c) No Employee Plan is a Multiemployer Plan and no Employee Plan is
subject to Title IV of ERISA. The Company and its Affiliates have not incurred
any liability under Title IV of ERISA arising in connection with the termination
of any plan covered or previously covered by Title IV of ERISA.
(d) None of the Employee Plans or other arrangements listed on Schedule II
-----------
covers any non-United States employee or former employee of the Company.
(e) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, has occurred with respect to any Employee Plan.
(f) Each Employee Plan which is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified during the period
from its adoption to date, and each trust forming a part thereof is exempt from
tax pursuant to Section 501(a) of the Code. The Company has furnished to the
Purchasers copies of the most recent Internal Revenue Service determination
letters with respect to each such plan. Each Employee Plan has been maintained
in compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such plan.
(g) Each Employee Plan and each Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations which are applicable to such
Employee Plan and Benefit Arrangement.
12
<PAGE>
(h) All contributions and payments accrued under each Employee Plan and
Benefit Arrangement, determined in accordance with prior funding and accrual
practices, as adjusted to include proportional accruals for the period ending on
the Closing Date, will be discharged and paid on or prior to the Closing Date
except to the extent reflected on the Balance Sheet. Except as disclosed in
writing to the Purchasers prior to the date hereof, there has been no amendment
to, written interpretation of or announcement (whether or not written) by the
Company or any of its ERISA Affiliates relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit Arrangement that
would increase materially the expense of maintaining such Employee Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year ended prior to the date hereof.
(i) There is no contract, agreement, plan or arrangement covering any
employee or former employee of the Company that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to the terms of Section 280G of the Code.
(j) No tax under Section 4980B of the Code has been incurred in respect of
any Employee Plan that is a group health plan, as defined in Section 5000(b)(1)
of the Code.
(k) With respect to the employees and former employees of the Company,
there are no employee post-retirement medical or health plans in effect, except
as required by Section 4980B of the Code.
(l) No employee of the Company will become entitled to any bonus,
retirement, severance or similar benefit or enhanced benefit solely as a result
of the transactions contemplated hereby.
(m) The Company does not have, nor is it reasonably expected to have, any
liability under Title IV of ERISA.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser severally represents and warrants to the Company that:
(a) it is an "accredited investor" within the meaning of Rule 501 under
the Securities Act and was not organized for the specific purpose of
acquiring the Preferred Shares;
(b) it has sufficient knowledge and experience in investing in companies
similar to the Company in terms of the Company's stage of development so as
to be able to evaluate the risks and merits of its investment in the Company
and it is able financially to bear the risks thereof;
(c) it has had an opportunity to discuss the Company's proposed business,
management and financial affairs with the Company's management;
13
<PAGE>
(d) the Preferred Shares being purchased by it are being acquired for its
own account for the purpose of investment and not with a view to or for sale
in connection with any distribution thereof;
(e) it understands that (i) the Preferred Shares and the Conversion Shares
have not been registered under the Securities Act by reason of their issuance
in a transaction exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof or Rule 505 or 506 promulgated under the
Securities Act, (ii) the Preferred Shares and, upon conversion thereof, the
Conversion Shares must be held indefinitely unless a subsequent disposition
thereof is registered under the Securities Act or is exempt from such
registration, (iii) the Preferred Shares and the Conversion Shares will bear
a legend to such effect and (iv) the Company will make a notation on its
transfer books to such effect; and
(f) if it sells any Conversion Shares pursuant to Rule 144A promulgated
under the Securities Act, it will take all necessary steps in order to
perfect the exemption from registration provided thereby, including (i)
obtaining on behalf of the Company information to enable the Company to
establish a reasonable belief that the purchaser is a qualified institutional
buyer and (ii) advising such purchaser that Rule 144A is being relied upon
with respect to such resale.
ARTICLE IV
CONDITIONS TO THE OBLIGATIONS
OF THE PURCHASERS
The obligation of each Purchaser to purchase and pay for the Preferred
Shares being purchased by it on the Closing Date is, at its option, subject to
the satisfaction, on or before the Closing Date, of the following conditions:
(a) Representations and Warranties to be True and Correct. The
-----------------------------------------------------
representations and warranties contained in Article II shall be true,
complete and correct in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been
made on and as of such date, and the President and Treasurer of the Company
shall have certified to such effect to the Purchasers in writing.
(b) Performance. The Company shall have performed and complied in all
-----------
material respects with all agreements contained herein required to be
performed or complied with by it prior to or at the Closing Date.
(c) All Proceedings to be Satisfactory. All corporate and other
----------------------------------
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory
in form and substance to the Purchasers and their counsel, and the Purchasers
and their counsel shall have received all such counterpart originals or
certified or other copies of such documents as they reasonably may request.
(d) Supporting Documents. The Purchasers and their counsel shall have
--------------------
received copies of the following documents:
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<PAGE>
(i) the Charter, certified as of a recent date by the Secretary of
State of the State of Delaware; and
(ii) (A) a complete copy of the By-laws of the Company as in effect on
the Closing Date; and (B) a complete copy of all resolutions adopted by
the Board of Directors and the stockholders of the Company authorizing
the execution, delivery and performance of this Agreement, the
Registration Rights Agreement Amendment and the Management Rights
Agreements, the issuance, sale and delivery of the Preferred Shares and
the reservation, issuance and delivery of the Conversion Shares, and a
secretary's certificate to the effect that all such resolutions are in
full force and effect and are all the resolutions adopted in connection
with the transactions contemplated by this Agreement, the Registration
Rights Agreement Amendment and the Management Rights Agreements.
(e) Registration Rights Agreement Amendment. The Company shall have
---------------------------------------
executed and delivered the Registration Rights Agreement Amendment.
(f) Management Rights Agreements. The Company shall have executed and
----------------------------
delivered the Management Rights Agreements to TGI Fund II, LC and to those
Purchasers who have made a request to the Company therefor and are subject in
any manner with respect to their investment in the Company to ERISA.
(g) Charter. The Charter shall read in its entirety as set forth in
-------
Exhibit C.
---------
(h) Opinion of Counsel. Purchasers participating in such Closing shall
------------------
have received an opinion of Dechert, Price & Rhoads, dated the date of such
Closing, satisfactory in form and substance to such Purchasers and
Purchasers' counsel.
(i) Fees of Purchasers' Counsel. The Company shall have paid in
---------------------------
accordance with Section 6.01 the fees and disbursements of Purchasers'
counsel invoiced at the Closing or any Additional Closing.
(j) Due Diligence. The Purchasers shall have completed their business,
-------------
tax, accounting, regulatory, legal and other due diligence review to the
reasonable satisfaction of the Purchasers.
(k) Approvals and Consents. The Company shall have received all
----------------------
governmental and regulatory approvals and consents and all other requisite
third party approvals and consents which are necessary to consummate this
Agreement and the transactions contemplated thereby.
All such documents shall be satisfactory in form and substance to the Purchasers
and their counsel.
15
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ARTICLE V
COVENANTS OF THE COMPANY
The Company covenants and agrees with each of the Purchasers that:
SECTION 5.01 Financial Statements, Reports, Etc. The Company shall furnish
----------------------------------
to each Purchaser (provided that such Purchaser signs a customary
confidentiality agreement with the Company):
(a) within ninety (90) days after the end of each fiscal year of the
Company a consolidated balance sheet of the Company as of the end of such
fiscal year and the related consolidated statements of income, stockholders'
equity and cash flows for the fiscal year then ended, prepared in accordance
with generally accepted accounting principles and certified by a firm of
independent public accountants of recognized national standing selected by
the Board of Directors of the Company;
(b) within thirty (30) days after the end of each month in each fiscal year
(other than the last month in each fiscal year) a consolidated balance sheet
of the Company and the related consolidated statements of income,
stockholders' equity and cash flows, unaudited but prepared in accordance
with generally accepted accounting principles and certified by the Chief
Financial Officer of the Company, such consolidated balance sheet to be as of
the end of such month and such consolidated statements of income,
stockholders' equity and cash flows to be for such month and for the period
from the beginning of the fiscal year to the end of such month, in each case
with comparative statements for the prior fiscal year, provided that the
Company's obligations under this Section 5.01(b) shall terminate upon the
completion of a firm commitment underwritten public offering of the Company's
securities;
(c) at the time of delivery of each monthly statement pursuant to Section
5.01(b), a management narrative report explaining all significant variances
from forecasts and all significant current developments in staffing,
marketing, sales and operations;
(d) no later than sixty (60) days prior to the start of each fiscal year,
consolidated capital and operating expense budgets, cash flow projections and
income and loss projections for the Company in respect of such fiscal year,
all itemized in reasonable detail and prepared on a monthly basis, and,
promptly after preparation, any revisions to any of the foregoing;
(e) promptly following receipt by the Company, each audit response letter,
accountant's management letter and other written report submitted to the
Company by its independent public accountants in connection with an annual or
interim audit of the books of the Company;
(f) promptly after the commencement thereof, notice of all actions, suits,
claims, proceedings, investigations and inquiries of the type described in
Section 2.07 that could materially adversely affect the Company;
16
<PAGE>
(g) promptly upon sending, making available or filing the same, all press
releases, reports and financial statements that the Company sends or makes
available to its stockholders or directors or files with the Commission; and
(h) promptly, from time to time, such other information regarding the
business, prospects, financial condition, operations, property or affairs of
the Company as such Purchaser reasonably may request.
SECTION 5.02 Right of First Refusal. So long as the Company has not
----------------------
consummated an Initial Public Offering (as hereafter defined), the Company
shall, prior to any issuance by the Company of any of its securities (other than
debt securities with no equity feature), offer to each Purchaser by written
notice the right, for a period of twenty (20) days, to purchase all of such
securities for cash at an amount equal to the price or other consideration for
which such securities are to be issued; provided, however, that the first
refusal rights of the Purchasers pursuant to this Section 5.02 shall not apply
to securities issued (A) upon conversion of any of the Preferred Shares, (B) as
a stock dividend or upon any subdivision of shares of Common Stock, provided
that the securities issued pursuant to such stock dividend or subdivision are
limited to additional shares of Common Stock, (C) pursuant to subscriptions,
warrants, options, convertible securities, or other rights which are listed in
Schedule III as being outstanding on the date of this Agreement, but not
- ------------
including those described in (F) below, (D) solely in consideration for the
acquisition (whether by merger or otherwise) by the Company of all or
substantially all of the stock or assets of any other entity, which such
acquisition has been approved by the Board of Directors of the Company, (E)
pursuant to a firm commitment underwritten public offering, (F) pursuant to the
exercise of options to purchase Common Stock granted to directors, officers,
employees or consultants of the Company in connection with their service to the
Company or pursuant to the exercise of options to purchase Common Stock granted
to or Common Stock issued to licensors or transferors of technology to the
Company, not to exceed in the aggregate 7,750,000 shares (appropriately adjusted
to reflect stock splits, stock dividends, combinations of shares and the like
with respect to the Common Stock) (the shares exempted by this clause (F) being
hereinafter referred to as the "Reserved Employee and Technology Shares"), and
(G) upon the exercise of any right which was not itself in violation of the
terms of this Section 5.02. The Company's written notice to the Purchasers
shall describe the securities proposed to be issued by the Company and specify
the number, price and payment terms. Each Purchaser may accept the Company's
offer as to the full number of securities offered to it or any lesser number, by
written notice thereof given by it to the Company prior to the expiration of the
aforesaid twenty (20) day period, in which event the Company shall promptly sell
and such Purchaser shall buy, upon the terms specified, the number of securities
agreed to be purchased by such Purchaser. Notwithstanding the foregoing, if the
Purchasers agree, in the aggregate, to purchase more than the full number of
securities offered by the Company, then each Purchaser accepting the Company's
offer shall first be allocated the lesser of (i) the number of securities which
such Purchaser agreed to purchase and (ii) the number of securities as is equal
to the full number of securities offered by the Company multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
held by such Purchaser as of the date of the Company's notice of offer (treating
such Purchaser, for the purpose of such calculation, as the holder of the number
of shares of Common Stock which would be issuable to such Purchaser upon
conversion, exercise or exchange of all securities (including but not limited to
the Preferred Shares) held by such Purchaser on the date such offer
17
<PAGE>
is made, that are convertible, exercisable or exchangeable into or for (whether
directly or indirectly) shares of Common Stock) and the denominator of which
shall be the aggregate number of shares of Common Stock (calculated as
aforesaid) held on such date by all Purchasers who accepted the Company's offer,
and the balance of the securities (if any) offered by the Company shall be
allocated among the Purchasers accepting the Company's offer in proportion to
their relative equity ownership interests in the Company (calculated as
aforesaid), provided that no Purchaser shall be allocated more than the number
of securities which such Purchaser agreed to purchase and provided further that
in cases covered by this sentence all Purchasers shall be allocated among them
the full number of securities offered by the Company. The Company shall be free
at any time prior to ninety (90) days after the date of its notice of offer to
the Purchasers, to offer and sell to any third party or parties the number of
such securities not agreed by the Purchasers to be purchased by them, at a price
and on payment terms no less favorable to the Company than those specified in
such notice of offer to the Purchasers. However, if such third party sale or
sales are not consummated within such ninety (90) day period, the Company shall
not sell such securities as shall not have been purchased within such period
without again complying with this Section 5.02. For purposes of this Section
5.02, (x) the term "Purchasers" shall include the Series A Purchasers, Series B
Purchasers and the Series C Purchasers (as such terms are defined in Section
6.13 hereof) and (y) the term "Preferred Shares" shall include the shares of
Series A Convertible Preferred Stock, the shares of Series B Convertible
Preferred Stock and the shares of Series C Convertible Preferred Stock purchased
pursuant to the Series A Agreement, the Series B Agreement and the Series C
Agreement (as such terms are defined in Section 6.13). "Initial Public Offering"
means a underwritten public offering pursuant to an effective registration
statement under the Securities Act in respect of the offer and sale of shares of
Common Stock for the account of the Company resulting in aggregate net proceeds
to the Company and any stockholder selling shares of Common Stock in such
offering of not less than $25,000,000 and a public offering price per share of
not less than $1.50 per share (as adjusted for any combination, division,
subdivision, stock split, reverse stock split or similar event relating to the
Common Stock).
SECTION 5.03 Reserve for Conversion Shares. The Company shall at all times
-----------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the conversion of the Preferred Shares and
otherwise complying with the terms of this Agreement, such number of its duly
authorized shares of Common Stock as shall be sufficient to effect the
conversion of the Preferred Shares from time to time outstanding or otherwise to
comply with the terms of this Agreement. If at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of the Preferred Shares or otherwise to comply with the terms of this
Agreement, the Company will forthwith take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes. The Company will
obtain any authorization, consent, approval or other action by or make any
filing with any court or administrative body that may be required under
applicable state securities laws in connection with the issuance of shares of
Common Stock upon conversion of the Preferred Shares.
SECTION 5.04 Corporate Existence. The Company shall maintain corporate
-------------------
existence, rights and franchises in full force and effect.
18
<PAGE>
SECTION 5.05 Properties, Business, Insurance. The Company shall maintain
-------------------------------
its properties and business, with financially sound and reputable insurers,
insurance against such casualties and contingencies and of such types and in
such amounts as is customary for companies similarly situated, which insurance
shall be deemed by the Company to be sufficient. The Company shall not cause or
permit any assignment or change in beneficiary and shall not borrow against any
such policy. If requested by Purchasers holding at least sixty percent (60%) of
the outstanding Preferred Shares, the Company will add one designee of such
Purchasers as a notice party for each such policy and shall request that the
issuer of each policy provide such designee with ten (10) days' notice before
such policy is terminated (for failure to pay premiums or otherwise) or assigned
or before any change is made in the beneficiary thereof.
SECTION 5.06 Inspection, Consultation and Advice. The Company shall permit
-----------------------------------
each Purchaser holding in excess of 10% of the Series E Convertible Preferred
Stock and such persons as it may designate, at such Purchaser's expense, and
subject to the execution of an appropriate confidentiality agreement, to visit
and inspect any of the properties of the Company, examine their books and take
copies and extracts therefrom, discuss the affairs, finances and accounts of the
Company with its officers, employees and public accountants (and the Company
hereby authorizes said accountants to discuss with such Purchaser and such
designees such affairs, finances and accounts), and consult with and advise the
management of the Company as to its affairs, finances and accounts, all at
reasonable times and upon reasonable notice.
SECTION 5.07 Restrictive Agreements Prohibited. The Company shall not
---------------------------------
become a party to any agreement which by its terms restricts the Company's
performance of this Agreement, the Registration Rights Agreement, the Management
Rights Agreements or the Charter.
SECTION 5.08 Transactions with Affiliates. Except for transactions
----------------------------
contemplated by this Agreement or as otherwise approved by the Board of
Directors, the Company shall not enter into any material transaction with any
director, officer, employee or holder of more than 5% of the outstanding capital
stock of any class or series of capital stock of the Company, member of the
family of any such person, or any corporation, partnership, trust or other
entity in which any such person, or member of the family of any such person, is
a director, officer, trustee, partner or holder of more than 5% of the
outstanding capital stock thereof, except for transactions on customary terms
related to such person's employment.
SECTION 5.09 Use of Proceeds. The Company shall use the cash proceeds from
---------------
the sale of the Preferred Shares solely for research and product development,
clinical trials, capital expenditures, working capital and other general
corporate purposes.
SECTION 5.10 By-laws. The Company shall at all times cause its By-laws to
-------
provide that, (a) unless otherwise required by the laws of the State of
Delaware, (i) any two directors and (ii) any holder or holders of at least 25%
of the outstanding shares of Series E Convertible Preferred Stock, shall have
the right to call a meeting of the Board of Directors or stockholders and (b)
the number of directors fixed in accordance therewith shall in no event conflict
with any of the terms or provisions of the Series E Convertible Preferred Stock
as set forth in the Charter. The Company shall at all times maintain provisions
in its By-laws and/or Charter indemnifying all directors against liability and
absolving all directors from liability to the
19
<PAGE>
Company and its stockholders to the maximum extent permitted under the laws of
the State of Delaware.
SECTION 5.11 Performance of Contracts. The Company shall not materially
------------------------
amend, modify, terminate, waive or otherwise alter, in whole or in part, any of
the Employee Nondisclosure and Developments Agreements without the consent of
the Company's Board of Directors.
SECTION 5.12 Vesting of Reserved Employee Shares. The Company shall not
-----------------------------------
grant to any of its employees options to purchase Reserved Employee Shares which
will become exercisable at a rate in excess of 25% per annum from the date of
such grant without the approval of the Company's Board of Directors.
SECTION 5.13 Employee Nondisclosure and Developments Agreements. The
--------------------------------------------------
Company shall use its best efforts to obtain an Employee Nondisclosure and
Developments Agreement in substantially the form of Exhibit D, or in such other
---------
form as is approved by the Board of Directors, from all future officers, key
employees and other employees who will have access to confidential information
of the Company, upon their employment by the Company.
SECTION 5.14 Compliance with Laws. The Company shall comply with all
--------------------
applicable laws, rules, regulations and orders, noncompliance with which could
materially adversely affect its business or condition, financial or otherwise.
SECTION 5.15 Keeping of Records and Books of Account. The Company shall
---------------------------------------
keep adequate records and books of account, in which complete entries will be
made in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company, and in which, for
each fiscal year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
SECTION 5.16 Rule 144A Information. The Company shall, at all times during
---------------------
which it is neither subject to the reporting requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), nor
exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, provide
in writing, upon the written request of any Purchaser or a prospective buyer of
Preferred Shares or Conversion Shares from any Purchaser, all information
required by Rule 144A(d)(4)(i) of the General Regulations promulgated by the
Commission under the Securities Act ("Rule 144A Information"). The Company also
shall, upon the written request of any Purchaser, cooperate with and assist such
Purchaser or any member of the National Association of Securities Dealers, Inc.
PORTAL system in applying to designate and thereafter maintain the eligibility
of the Preferred Shares or Conversion Shares, as the case may be, for trading
through PORTAL. The Company's obligations under this Section 5.16 shall at all
times be contingent upon the relevant Purchaser's obtaining from the prospective
buyer of Preferred Shares or Conversion Shares a written agreement to take all
reasonable precautions to safeguard the Rule 144A Information from disclosure to
anyone other than a person who will assist such buyer in evaluating the purchase
of any Preferred Shares or Conversion Shares.
20
<PAGE>
SECTION 5.17 Future Subsidiaries. In the event the Company shall acquire
-------------------
or create a subsidiary or subsidiaries, the Company agrees that the covenants
contained in this Article V shall apply to the Company and such subsidiaries on
a consolidated basis.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01 Expenses. Each party hereto will pay its own expenses in
--------
connection with the transactions contemplated hereby, whether or not such
transactions shall be consummated, provided, however, that in the event the
Closing occurs, the Company shall pay the reasonable invoiced, out of pocket
fees and expenses, not to exceed an aggregate amount of $15,000, incurred by the
Purchasers' attorneys in connection with legal, corporate and patent due
diligence.
SECTION 6.02 Survival of Agreements. All covenants, agreements,
----------------------
representations and warranties made herein or in the Registration Rights
Agreement Amendment, the Management Rights Agreements, or any certificate or
instrument delivered to the Purchasers pursuant to or in connection with this
Agreement, the Registration Rights Agreement Amendment or the Management Rights
Agreements, shall survive the execution and delivery of this Agreement, the
Registration Rights Agreement Amendment and the Management Rights Agreements,
the issuance, sale and delivery of the Preferred Shares, and the issuance and
delivery of the Conversion Shares, and all statements contained in any
certificate or other instrument delivered by the Company hereunder or thereunder
or in connection herewith or therewith shall be deemed to constitute
representations and warranties made by the Company; provided that all such
representations and warranties shall terminate two years from the date they are
made.
SECTION 6.03 Brokerage. Each party hereto will indemnify and hold harmless
---------
the others against and in respect of any claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements or understandings made or
claimed to have been made by such party with any third party.
SECTION 6.04 Parties in Interest. All representations, covenants and
-------------------
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Without limiting the
generality of the foregoing, all representations, covenants and agreements
benefiting the Purchasers shall inure to the benefit of any and all subsequent
holders from time to time of Preferred Shares or Conversion Shares.
SECTION 6.05 Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, addressed as follows:
21
<PAGE>
(a) if to the Company, at 371 Phoenixville Pike, Malvern, PA 19355,
Attention: President, with a copy to Henry N. Nassau, Esq., Dechert, Price &
Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street, Philadelphia, PA 19103;
and
(b) if to any Purchaser, at the address of such Purchaser set forth in
Schedule I
----------
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
SECTION 6.06 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware.
SECTION 6.07 Entire Agreement. This Agreement, including the Schedules and
----------------
Exhibits hereto, constitutes the sole and entire agreement of the parties with
respect to the subject matter hereof. All Schedules and Exhibits hereto are
hereby incorporated herein by reference.
SECTION 6.08 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 6.09 Amendments. This Agreement may be amended or modified, and
----------
provisions hereof may be waived, with the written consent of the Company and the
holders of at least two-thirds (2/3) of the outstanding shares of Common Stock
issued or issuable upon conversion of the Preferred Shares. Otherwise this
Agreement may not be amended or waived or any provision hereof waived.
SECTION 6.10 Severability. If any provision of this Agreement shall be
------------
declared void or unenforceable by any judicial or administrative authority, the
validity of any other provision and of the entire Agreement shall not be
affected thereby.
SECTION 6.11 Titles and Subtitles. The tides and subtitles used in this
--------------------
Agreement are for convenience only and are not to be considered in construing or
interpreting any term or provision of this Agreement.
SECTION 6.12 Certain Defined Term. As used in this Agreement, the
--------------------
following term shall have the following meaning (such meaning to be equally
applicable to both the singular and plural forms of the term defined):
"person" shall mean an individual, corporation, trust, partnership, joint
venture, unincorporated organization, government agency or any agency or
political subdivision thereof or other entity.
SECTION 6.13 Prior Assignments. By their signature below, each of the
-----------------
Purchasers who are also parties to that certain Series A Convertible Preferred
Stock Purchase Agreement (the "Series A Agreement") between the Company and the
purchasers named therein dated as of November 7, 1994, (each, a "Series A
Purchase?') and that certain Series B Convertible Preferred Stock Purchase
Agreement (the "Series B Agreement") between the Company and the purchasers
named therein dated as of March 1, 1996, (each, a "Series B
22
<PAGE>
Purchaser") and that certain Series C convertible Preferred Stock Purchase
Agreement (the "Series C Agreement") between the Company and the purchasers
named therein dated as of May 1, 1997 (each, a "Series C Purchaser") hereby (i)
waives, except to the extent set forth on Schedule I hereto, the right to
----------
purchase shares of Series E Convertible Preferred Stock sold pursuant to this
Agreement. The signature of each Series A Purchaser, Series B Purchaser and
Series C Purchaser below shall also constitute such party's agreement to the
right of first refusal granted in Section 5.02 hereof and the termination of
Sections 5.02 of the Series A Agreement, the Series B Agreement and the Series C
Agreement.
[Signature pages follow immediately.]
23
<PAGE>
EXHIBIT 4.6
EXECUTION VERSION
================================================================================
SERIES F CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
among
ADOLOR CORPORATION
and
SR. ONE, LIMITED
Dated as of July 26, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE PREFERRED SHARES........................................................................ 1
SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares............................ 1
SECTION 1.02 Closing........................................................................ 1
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................... 2
SECTION 2.01 Organization, Qualifications and Corporate Power............................... 2
SECTION 2.02 Authorization of Agreements, Etc............................................... 2
SECTION 2.03 Validity....................................................................... 3
SECTION 2.04 Authorized Capital Stock....................................................... 3
SECTION 2.05 Financial Statements........................................................... 4
SECTION 2.06 Events Subsequent to the Date of the Balance Sheet............................. 5
SECTION 2.07 Litigation; Compliance with Law................................................ 5
SECTION 2.08 Proprietary Information of Third Parties....................................... 6
SECTION 2.09 Patents, Trademarks, Etc....................................................... 6
SECTION 2.10 Title to Properties............................................................ 7
SECTION 2.11 Leasehold Interests............................................................ 7
SECTION 2.12 Insurance...................................................................... 7
SECTION 2.13 Taxes.......................................................................... 7
SECTION 2.14 Other Agreements............................................................... 8
SECTION 2.15 Significant Customers and Suppliers............................................ 10
SECTION 2.16 Governmental Approvals......................................................... 10
SECTION 2.17 Disclosure..................................................................... 10
SECTION 2.18 Offering of the Preferred Shares............................................... 10
SECTION 2.19 Brokers........................................................................ 10
SECTION 2.20 Officers....................................................................... 10
SECTION 2.21 Transactions With Affiliates................................................... 11
SECTION 2.22 Employees...................................................................... 11
SECTION 2.23 Environmental Protection....................................................... 11
SECTION 2.24 ERISA.......................................................................... 12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PURCHASER................................................. 13
ARTICLE IV CONDITIONS TO CLOSING; TERMINATION.......................................................... 14
SECTION 4.01 Conditions Precedent to Obligations of Purchaser............................... 14
SECTION 4.02 Conditions Precedent to Obligations of the Company............................. 16
SECTION 4.03 Termination.................................................................... 16
ARTICLE V COVENANTS OF THE COMPANY.................................................................... 16
SECTION 5.01 Financial Statements, Reports, Etc............................................. 16
SECTION 5.02 Right of First Refusal......................................................... 17
SECTION 5.03 Reserve for Conversion Shares.................................................. 19
SECTION 5.04 Corporate Existence............................................................ 19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 5.05 Properties, Business, Insurance............................................... 19
SECTION 5.06 Inspection, Consultation and Advice........................................... 19
SECTION 5.07 Restrictive Agreements Prohibited............................................. 20
SECTION 5.08 Use of Proceeds............................................................... 20
SECTION 5.09 By-laws....................................................................... 20
SECTION 5.10 Employee Nondisclosure and Developments Agreements............................ 20
SECTION 5.11 Compliance with Laws.......................................................... 20
SECTION 5.12 Keeping of Records and Books of Account....................................... 20
SECTION 5.13 Rule 144A Information......................................................... 20
SECTION 5.14 Future Subsidiaries........................................................... 21
SECTION 5.15 Milestone Stock Purchase...................................................... 21
ARTICLE VI MISCELLANEOUS.............................................................................. 22
SECTION 6.01 Expenses...................................................................... 22
SECTION 6.02 Survival of Agreements........................................................ 22
SECTION 6.03 Brokerage..................................................................... 23
SECTION 6.04 Parties in Interest........................................................... 23
SECTION 6.05 Notices....................................................................... 23
SECTION 6.06 Governing Law................................................................. 23
SECTION 6.07 Entire Agreement.............................................................. 23
SECTION 6.08 Counterparts.................................................................. 23
SECTION 6.09 Amendments.................................................................... 23
SECTION 6.10 Severability.................................................................. 24
SECTION 6.11 Titles and Subtitles.......................................................... 24
SECTION 6.12 Certain Defined Term.......................................................... 24
SECTION 6.13 Prior Agreements.............................................................. 24
</TABLE>
INDEX TO SCHEDULES
SCHEDULE I Disclosure Schedule
SCHEDULE II Security Holders
SCHEDULE III(A) Agreements
and III(B)
INDEX TO EXHIBITS
EXHIBIT A Form of Amendment No. 3 to Registration Rights Agreement
EXHIBIT B Form of Stock Purchase Warrant
EXHIBIT C Charter and All Amendments Thereto
EXHIBIT D Form of employee Nondisclosure and Developments
Agreement
EXHIBIT E Voting Agreement
<PAGE>
SERIES F CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated as of July
26, 1999 among Adolor Corporation, a Delaware corporation (the "Company"), and
S.R. One, Limited, a Pennsylvania business trust ("Purchaser").
WHEREAS, the Company wishes to issue and sell to the Purchaser an aggregate
of 2,500,000 shares of the authorized but unissued Series F Convertible
Preferred Stock, $.01 par value, of the Company (the "Series F Convertible
Preferred Stock"); and
WHEREAS, the Purchaser wishes to purchase the Preferred Shares on the terms
and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties agree as follows:
ARTICLE I
THE PREFERRED SHARES
SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares. On the
---------------------------------------------------
Closing Date, the Company shall issue and sell to Purchaser, and Purchaser shall
purchase from the Company, 2,500,000 shares of Series F Convertible Preferred
Stock (the "Preferred Shares") at the aggregate purchase price of $2,500,000.
SECTION 1.02 Closing. The closing under this Agreement (the "Closing")
-------
shall take place at 10:00 a.m., Philadelphia time, on the date which is two
business days after the conditions to Closing set forth in Article IV of this
Agreement shall have been satisfied, or at such other location, date and time as
may be agreed upon between the Purchaser and the Company, at the offices of
Dechert Price & Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street,
Philadelphia, PA 19103. The date on which the Closing occurs is sometimes
referred to herein as the "Closing Date." At the Closing, the Company shall
issue and deliver to Purchaser a stock certificate or certificates in definitive
form, registered in the name of Purchaser, representing the Preferred Shares
being purchased by it at the Closing. As payment in full for the Preferred
Shares being purchased by it under this Agreement, and against delivery of the
stock certificate or certificates therefor as aforesaid, on the Closing Date
Purchaser shall (i) deliver to the Company a check payable to the order of the
Company, in the amount of $2,500,000, (ii) transfer such sum to the account of
the Company by wire transfer, or (iii) deliver or transfer such sum to the
Company by any combination of such methods of payments.
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Purchaser as of the date hereof,
except as set forth in the Disclosure Schedule attached as Schedule I, (which
----------
Disclosure Schedule makes explicit reference to the particular representation or
warranty as to which exception is taken, which in each case shall constitute the
sole representation and warranty as to which such exception shall apply):
SECTION 2.01 Organization, Qualifications and Corporate Power.
------------------------------------------------
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and is duly
licensed or qualified to transact business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of the business
transacted by it or the character of the properties owned or leased by it
requires such licensing or qualification. The Company has the corporate power
and corporate authority to own and hold its properties and to carry on its
business as now conducted and as proposed to be conducted, to execute, deliver
and perform this Agreement, Amendment No. 4 to that certain Registration Rights
Agreement by and among the Company and the Purchaser named therein dated as of
November 7, 1994, and as amended by Amendment No. 1 to Registration Rights
Agreement dated as of February 27, 1996, Amendment No. 2 to Registration Rights
Agreement dated as of May 1, 1997 and Amendment No. 3 to Registration Rights
Agreement dated as of December 8, 1998 (as amended, the "Original Registration
Rights Agreement") in the form attached as Exhibit A (the "Registration Rights
---------
Agreement Amendment"), the Stock Purchase Warrant in the form attached as
Exhibit B (the "Stock Purchase Warrant"), to issue, sell and deliver the
- ---------
Preferred Shares and to issue and deliver the shares of Common Stock, $.0001 par
value, of the Company ("Common Stock") issuable upon conversion of the Preferred
Shares (the "Conversion Shares"). The Original Registration Rights Agreement as
amended by the Registration Rights Agreement Amendment is sometimes referred to
herein as the "Registration Rights Agreement."
(b) The Company does not (i) own of record or beneficially, directly
or indirectly, (A) any shares of capital stock or securities convertible into
capital stock of any other corporation or (B) any participating interest in any
partnership, joint venture or other non-corporate business enterprise or (ii)
control, directly or indirectly, any other entity.
SECTION 2.02 Authorization of Agreements, Etc.
--------------------------------
(a) The execution and delivery by the Company of this Agreement, the
Registration Rights Agreement Amendment and the Stock Purchase Warrant, the
performance by the Company of its obligations hereunder and thereunder, have
been duly authorized by all requisite corporate action and will not violate any
provision of law, any order of any court or other agency of government, the
Certificate of Incorporation of the Company, as amended (the "Charter") or the
By-laws of the Company, as amended, or any provision of any indenture,
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agreement or other instrument to which the Company or any of its respective
properties or assets is bound, or conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument, or result in the creation or
imposition of any lien, charge, restriction, claim or encumbrance of any nature
whatsoever upon any of the properties or assets of the Company.
(b) On the Closing Date, the issuance, sale and delivery of the
Preferred Shares will have been duly authorized and, when issued in accordance
with this Agreement, will be validly issued, fully paid and nonassessable shares
of Series F Convertible Preferred Stock with no personal liability attaching to
the ownership thereof and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company except
as set forth in the Registration Rights Agreement. On the Closing Date, the
Conversion Shares will have been duly reserved for issuance upon conversion of
the Preferred Shares and, when so issued, will be duly authorized, validly
issued, fully paid and nonassessable shares of Common Stock with no personal
liability attaching to the ownership thereof and will be free and clear of all
liens, charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in the Registration Rights Agreement. Neither the
issuance, sale or delivery of the Preferred Shares nor the issuance or delivery
of the Conversion Shares will, on the Closing Date, be subject to any preemptive
right of stockholders of the Company or to any right of first refusal or other
right in favor of any person which will not have been waived.
SECTION 2.03 Validity. This Agreement has been duly executed and
--------
delivered by the Company and constitutes the legal, valid and binding obligation
of the Company, enforceable in accordance with its terms. The Registration
Rights Agreement Amendment and the Stock Purchase Warrant, when executed and
delivered in accordance with this Agreement, will constitute the legal, valid
and binding obligations of the Company, enforceable in accordance with their
respective terms.
SECTION 2.04 Authorized Capital Stock. As of the date hereof, the
------------------------
authorized capital stock of the Company consists of(i) 57,214,764 shares of
Preferred Stock, $.01 par value (the "Preferred Stock"), of which 6,000,000
shares have been designated Series A Convertible Preferred Stock, 23,107,145
have been designated Series B Convertible Preferred Stock, 13,814,286 shares
have been designated as Series C Convertible Preferred Stock, 960,000 shares
have been designated as Series D Convertible Preferred Stock and 13,333,333
shares have been designated as Series E Convertible Preferred Stock, and (ii)
54,750,000 shares of Common Stock. As of the date hereof, 5,210,979 shares of
Common Stock, 6,000,000 shares of Series A Convertible Preferred Stock,
23,107,145 shares of Series B Convertible Preferred Stock, 13,814,286 shares of
Series C Convertible Preferred Stock, 960,000 shares of Series D Convertible
Preferred Stock and 11,366,667 shares of Series E Convertible Preferred Stock
are validly issued and outstanding, fully paid and nonassessable with no
personal liability attaching to the ownership thereof and no shares of Series F
Convertible Preferred Stock have been issued. Immediately prior to the Closing,
assuming the receipt by the Company of the approvals set forth in Section
4.02(a), the authorized capital stock of the Company will consist of (i)
57,873,098 shares of Preferred Stock, of which 6,000,000 shares will have been
designated Series A Convertible Preferred Stock, 23,107,145 will have been
designated Series B Convertible Preferred Stock, 13,814,286 shares will have
been designated as Series C Convertible Preferred Stock, 960,000 shares will
have been designated as Series D Convertible Preferred Stock,
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11,366,667 shares will have been designated as Series E Convertible Preferred
Stock and 2,625,000 shares will have been designates as Series F Convertible
Preferred Stock, and (ii) 69,218,821 shares of Common Stock. The stockholders of
record and holders of subscriptions, warrants, options, convertible securities,
and other rights (contingent or other) to purchase or otherwise acquire equity
securities of the Company, and the number of shares of Common Stock and the
number of such subscriptions, warrants, options, convertible securities, and
other such rights held by each, are as set forth in the attached Schedule II.
-----------
Immediately prior to the Closing, assuming the receipt by the Company of the
approvals set forth in Section 4.02(a), the designations, powers, preferences,
rights, qualifications, limitations and restrictions in respect of each class
and series of authorized capital stock of the Company will be as set forth in
the Charter, a copy of which is attached as Exhibit C, and all such
---------
designations, powers, preferences, rights, qualifications, limitations and
restrictions will be valid, binding and enforceable and in accordance with all
applicable laws. Except as set forth in the attached Schedule II, (i) no person
-----------
owns of record or is known to the Company to own beneficially any share of
Common Stock, (ii) no subscription, warrant, option, convertible security, or
other right (contingent or other) to purchase or otherwise acquire equity
securities of the Company is authorized or outstanding that has been issued by
the Company, and (iii) there is no commitment by the Company to issue shares,
subscriptions, warrants, options, convertible securities, or other such rights
or to distribute to holders of any of its equity securities any evidence of
indebtedness or asset. Except as provided for in the Charter or as set forth in
the attached Schedule II, the Company has no obligation (contingent or
-----------
otherwise) to purchase, redeem or otherwise acquire any of its equity securities
or any interest therein or to pay any dividend or make any other distribution in
respect thereof Except as set forth in the attached Schedule II and except for
-----------
those certain Stock Restriction Agreements by and among the Company, the
purchasers named therein and each of Dr. John Farrar, Dr. Michael Lewis and ARCH
Development Corporation dated as of November 7, 1994 (the "1994 Stock
Restriction Agreements") and the Restricted Stock Agreement dated May 31, 1996
by and between the Company and Frank Baldino, and the Management Rights letter
agreements (the "Prior Management Rights Agreements") between the Company and
certain of its shareholders, to the best of the Company's knowledge there are no
voting trusts or agreements, stockholders' agreements, pledge agreements, buy-
sell agreements, rights of first refusal, preemptive rights or proxies relating
to any securities of the Company (whether or not the Company is a party
thereto). All of the outstanding securities of the Company were issued in
compliance with all applicable Federal and state securities laws.
SECTION 2.05 Financial Statements. The Company has furnished to the
--------------------
Purchaser the unaudited consolidated balance sheet of the Company as of December
31, 1998 and May 31, 1999 (the latter of which is herein referred to as the
"Balance Sheet"), and the related unaudited consolidated statements of
operations and cash flows of the Company for the twelve months ended December
31, 1998 and the five months ended May 31, 1999. All such financial statements
have been prepared in accordance with generally accepted accounting principles
consistently applied (except that such unaudited financial statements do not
contain all of the required footnotes) and fairly present in all material
respects the consolidated financial position of the Company as of December 31,
1998 and May 31, 1999, respectively, and the consolidated results of its
operations and cash flows for the twelve months ended December 31, 1998 and the
five months ended May 31, 1999, respectively. Since the date of the Balance
Sheet, (i) there has been no change in the assets, liabilities or financial
condition of the Company (on a consolidated basis) from that reflected in the
Balance Sheet except for changes in the ordinary
4
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course of business which in the aggregate have not been materially adverse and
(ii) none of the business, prospects, financial condition, operations, property
or affairs of the Company (on a consolidated basis) has been materially
adversely affected by any occurrence or development, individually or in the
aggregate, whether or not insured against.
SECTION 2.06 Events Subsequent to the Date of the Balance Sheet. Since
--------------------------------------------------
the date of the Balance Sheet, the Company has not (i) issued any stock, bond or
other corporate security, except pursuant to the exercise of stock options
outstanding as of the date of the Balance Sheet (ii) borrowed any amount or
incurred or become subject to any liability (absolute, accrued or contingent),
except current liabilities incurred and liabilities under contracts entered into
in the ordinary course of business, (iii) discharged or satisfied any lien or
encumbrance or incurred or paid any obligation or liability (absolute, accrued
or contingent) other than current liabilities shown on the Balance Sheet and
current liabilities incurred since the date of the Balance Sheet in the ordinary
course of business, (iv) declared or made any payment or distribution to
stockholders or purchased or redeemed any share of its capital stock or other
security, (v) mortgaged, pledged, encumbered or subjected to lien any of its
assets, tangible or intangible, other than liens of current real property taxes
not yet due and payable, (vi) sold, assigned or transferred any of its tangible
assets except in the ordinary course of business, or canceled any debt or claim,
(vii) sold, assigned, transferred or granted any exclusive license with respect
to any patent, trademark, trade name, service mark, copyright, trade secret or
other intangible asset, (viii) suffered any loss of property or waived any right
of substantial value whether or not in the ordinary course of business, (ix)
made any change in officer compensation except in the ordinary course of
business and consistent with past practice, (x) made any material change in the
manner of business or operations of the Company, (xi) entered into any
transaction except in the ordinary course of business or as otherwise
contemplated hereby or (xii) entered into any commitment (contingent or
otherwise) to do any of the foregoing.
SECTION 2.07 Litigation; Compliance with Law. There is no (i) action,
-------------------------------
suit, claim, proceeding or investigation pending or, to the best of the
Company's knowledge, threatened against or affecting the Company, at law or in
equity, or before or by any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) arbitration proceeding relating to the Company pending under
collective bargaining agreements or otherwise or (iii) governmental inquiry
pending or, to the best of the Company's knowledge, threatened against or
affecting the Company (including without limitation any inquiry as to the
qualification of the Company to hold or receive any license or permit). The
Company is not in default with respect to any order, writ, injunction or decree
known to or served upon the Company of any court or of any Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign. There is no action or suit by the Company
pending or threatened against others. The Company has complied with all laws,
rules, regulations and orders applicable to its business, operations,
properties, assets, products and services, the Company has all necessary
permits, licenses and other authorizations required to conduct its business as
conducted and as proposed to be conducted, and the Company has been operating
its business pursuant to and in compliance with the terms of all such permits,
licenses and other authorizations except where any instance or instances of
noncompliance do not, individually or in the aggregate, have a material adverse
effect on the Company's business, prospects, financial condition, operations,
property or affairs. There is no existing law, rule, regulation or order, and
the Company after due inquiry is not
5
<PAGE>
aware of any proposed law, rule, regulation or order, whether Federal, state,
county or local, which would prohibit or restrict the Company from, or otherwise
materially adversely affect the Company in, conducting its business in any
jurisdiction in which it is now conducting business or in which it proposes to
conduct business.
SECTION 2.08 Proprietary Information of Third Parties. To the best of the
----------------------------------------
Company's knowledge, no third party has claimed or has reason to claim that any
person employed by or affiliated with the Company has (a) violated or may be
violating any of the terms or conditions of his employment, non-competition or
non-disclosure agreement with such third party, (b) disclosed or may be
disclosing or utilized or may be utilizing any trade secret or proprietary
information or documentation of such third party or (c) interfered or may be
interfering in the employment relationship between such third party and any of
its present or former employees. No third party has requested information from
the Company which suggests that such a claim might be contemplated. To the best
of the Company's knowledge, no person employed by or affiliated with the Company
has employed or proposes to employ any trade secret or any information or
documentation proprietary to any former employer, and to the best of the
Company's knowledge, no person employed by or affiliated with the Company has
violated any confidential relationship which such person may have had with any
third party, in connection with the development, manufacture or sale of any
product or proposed product or the development or sale of any service or
proposed service of the Company, and the Company has no reason to believe there
will be any such employment or violation. To the best of the Company's
knowledge, none of the execution or delivery of this Agreement, or the carrying
on of the business of the Company as officers, employees or agents by any
officer, director or key employee of the Company, or the conduct or proposed
conduct of the business of the Company, will conflict with or result in a breach
of the terms, conditions or provisions of or constitute a default under any
contract, covenant or instrument under which any such person is obligated.
SECTION 2.09 Patents, Trademarks, Etc. Set forth in Schedule I is a list
------------------------ ----------
and brief description of all domestic and foreign patents, patent rights, patent
applications, trademarks, trademark applications, service marks, service mark
applications, trade names and copyrights, and all applications for such which
are in the process of being prepared, owned by or registered in the name of the
Company, or of which the Company is a licensor or licensee or in which the
Company has any right, and in each case a brief description of the nature of
such right. The Company owns or possesses adequate licenses or other rights to
use all patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, trade names, copyrights, manufacturing
processes, formulae, trade secrets, customer lists and know how (collectively,
"Intellectual Property") necessary to the conduct of its business as conducted
and as proposed to be conducted, and no claim is pending or, to the best of the
Company's knowledge, threatened to the effect that the operations of the Company
infringe upon or conflict with the asserted rights of any other person under any
Intellectual Property, and the Company reasonably believes that there is no
basis for any such claim (whether or not pending or threatened). No claim is
pending or threatened to the effect that any such Intellectual Property owned or
licensed by the Company, or which the Company otherwise has the right to use, is
invalid or unenforceable by the Company, and there is no basis for any such
claim (whether or not pending or threatened). All prior art known to the Company
which may be or may have been pertinent to the examination of any United States
patent or patent application listed in Schedule I has been cited to the United
----------
States Patent and Trademark Office. To the best of the Company's
6
<PAGE>
knowledge, all technical information developed by and belonging to the Company
which has not been patented has been kept confidential. The Company has not
granted or assigned to any other person or entity any right to manufacture, have
manufactured, assemble or sell the products or proposed products or to provide
the services or proposed services of the Company.
SECTION 2.10 Title to Properties. The Company has good, clear and
-------------------
marketable title to its properties and assets reflected on the Balance Sheet or
acquired by it since the date of the Balance Sheet (other than properties and
assets disposed of in the ordinary course of business since the date of the
Balance Sheet), and all such properties and assets are free and clear of
mortgages, pledges, security interests, liens, charges, claims, restrictions and
other encumbrances (including without limitation, easements and licenses),
except for liens for or current taxes not yet due and payable and minor
imperfections of title, if any, not material in nature or amount and not
materially detracting from the value or impairing the use of the property
subject thereto or impairing the operations or proposed operations of the
Company, including without limitation, the ability of the Company to secure
financing using such properties and assets as collateral. To the best of the
Company's knowledge after due inquiry, there are no condemnation, environmental,
zoning or other land use regulation proceedings, either instituted or planned to
be instituted, which would adversely affect the use or operation of the
Company's and its subsidiaries' properties and assets for their respective
intended uses and purposes, or the value of such properties, and the Company has
not received notice of any special assessment proceedings which would affect
such properties and assets.
SECTION 2.11 Leasehold Interests. Each lease or agreement to which the
-------------------
Company is a party under which it is a lessee of any property, real or personal,
is a valid and subsisting agreement, duly authorized and entered into, without
any default of the Company thereunder and, to the best of the Company's
knowledge, without any default thereunder of any other party thereto. No event
has occurred and is continuing which, with due notice or lapse of time or both,
would constitute a default or event of default by the Company under any such
lease or agreement or, to the best of the Company's knowledge, by any other
party thereto. The Company's possession of such property has not been disturbed
and, to the best of the Company's knowledge after due inquiry, no claim has been
asserted against the Company adverse to its rights in such leasehold interests.
SECTION 2.12 Insurance. The Company holds valid policies covering all of
---------
the insurance required to be maintained by it under Section 5.05.
SECTION 2.13 Taxes. The Company has filed all tax returns, Federal,
-----
state, county and local, required to be filed by it, and the Company has paid
all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or payable, including
without limitation all taxes which the Company is obligated to withhold from
amounts owing to employees, creditors and third parties. The Company has
established adequate reserves for all taxes accrued but not yet payable. The
Federal income tax returns of the Company have never been audited by the
Internal Revenue Service. No deficiency assessment with respect to or proposed
adjustment of the Company's Federal, state, county or local taxes is pending or,
to the best of the Company's knowledge, threatened. There is no tax lien,
whether imposed by any Federal, state, county or local taxing authority,
outstanding against the assets, properties or business of the Company. Neither
the Company nor any of its present or
7
<PAGE>
former stockholders has ever filed an election pursuant to Section 1362 of the
Internal Revenue Code of 1986, as amended (the "Code"), that the Company be
taxed as an S corporation.
SECTION 2.14 Other Agreements. Except as set forth in the attached
----------------
Schedule III(A). as of the Closing Date hereunder, the Company reasonably
believes after due investigation that it is not a party to or otherwise bound by
any written or oral agreement, instrument, commitment or restriction which
individually or in the aggregate could materially adversely affect the business,
prospects, financial condition, operations, property or affairs of the Company.
Except as set forth in the attached Schedule III(B). the Company is not a party
---------------
to or otherwise bound by any written or oral:
(a) distributor, dealer, manufacturer's representative or sales
agency agreement which is not terminable on less than ninety (90) days' notice
without cost or other liability to the Company (except for agreements which, in
the aggregate, are not material to the business of the Company);
(b) sales agreement which entitles any customer to a rebate or right
of set-off, to return any product to the Company after acceptance thereof or to
delay the acceptance thereof, or which varies in any material respect from the
Company's standard form agreements;
(c) agreement with any labor union (and, to the knowledge of the
Company, no organizational effort is being made with respect to any of its
employees);
(d) agreement with any supplier containing any provision permitting
any party other than the Company to renegotiate the price or other terms, or
containing any pay-back or other similar provision, upon the occurrence of a
failure by the Company to meet its obligations under the agreement when due or
the occurrence of any other event;
(e) agreement for the future purchase of fixed assets or for the
future purchase of materials, supplies or equipment in excess of its normal
operating requirements;
(f) agreement for the employment of any officer, employee or other
person on a full-time or consulting basis which is not terminable by the Company
at will without liability to the Company, except pursuant to severance and
accrued vacation pay policies applicable to all employees of the Company;
(g) bonus, pension, profit-sharing, retirement, hospitalization,
insurance, stock purchase, stock option or other plan, agreement or
understanding pursuant to which benefits are provided to any employee of the
Company (other than group insurance plans applicable to employees generally);
(h) agreement relating to the borrowing of money or to the mortgaging
or pledging of, or otherwise placing a lien or security interest on, any asset
of the Company;
(i) guaranty of any obligation for borrowed money or otherwise;
(j) voting trust or agreement, stockholders' agreement, pledge
agreement, buy-sell agreement or first refusal or preemptive rights agreement
relating to any securities of the
8
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Company (other than this Agreement, the Registration Rights Agreement Amendment,
the Voting Agreement (as defined in Section 4.01(k)), the Stock Purchase
Warrant, the 1994 Stock Restriction Agreements, the Prior Management Rights
Agreements, the Series A Agreement (as defined in Section 6.13 hereof), the
Series B Agreement (as defined in Section 6.13 hereof), the Series C Agreement
(as defined in Section 6.13 hereof), the Series D Agreement (as defined in
Section 6.13 hereof) and the Series E Agreement (as defined in Section 6.13
hereof);
(k) agreement, or group of related agreements with the same party or
any group of affiliated parties, under which the Company has advanced or agreed
to advance money or has agreed to lease any property as lessee or lessor;
(l) agreement or obligation (contingent or otherwise) to issue, sell
or otherwise distribute or to repurchase or otherwise acquire or retire any
share of its capital stock or any of its other equity securities other than
pursuant to its Charter as in effect on any Closing Date hereunder;
(m) assignment, license or other agreement with respect to any form
of intangible property;
(n) agreement under which it has granted any person any registration
rights, other than the Registration Rights Agreement;
(o) agreement under which it has limited or restricted its right to
compete with any person in any respect; and
(p) other agreement or group of related agreements with the same
party involving more than $40,000 or continuing over a period of more than six
months from the date or dates thereof (including renewals or extensions optional
with another party), which agreement or group of agreements is not terminable by
the Company without penalty upon notice of thirty (30) days or less, but
excluding any agreement or group of agreements with a customer of the Company
for the sale, lease or rental of the Company's products or services if such
agreement or group of agreements was entered into by the Company in the ordinary
course of business.
The Company, and to the best of the Company's knowledge after due inquiry, each
other party thereto have in all material respects performed all the obligations
required to be performed by them to date (or each non-performing party has
received a valid, enforceable and irrevocable written waiver with respect to its
non-performance), have received no notice of default and are not in default
(with due notice or lapse of time or both) under any agreement, instrument,
commitment, plan or arrangement to which the Company is a party or by which it
or its property may be bound. The Company has no present expectation or
intention of not fully performing all its obligations under each such agreement,
instrument, commitment, plan or arrangement, and the Company has no knowledge of
any breach or anticipated breach by the other party to any agreement,
instrument, commitment, plan or arrangement to which the Company is a party. The
Company is in full compliance with all of the terms and provisions of its
Charter and By-laws, as amended.
9
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SECTION 2.15 Significant Customers and Suppliers. No customer or
-----------------------------------
supplier, or group of two or more thereof (whether or not affiliated) which was
material to the Company, individually or in the aggregate, during the period
covered by the financial statements referred to in Section 2.05 or which has
been material to the Company thereafter, has terminated, materially reduced or
threatened to terminate or materially reduce its or their purchases from or
provision of products or services to the Company, as the case may be.
SECTION 2.16 Governmental Approvals. Subject to the accuracy of the
----------------------
representations and warranties of the Purchaser set forth in Article III, no
registration or filing with, or consent or approval of or other action by, any
Federal, state or other governmental agency or instrumentality is or will be
necessary for the valid execution, delivery and performance by the Company of
this Agreement, the Registration Rights Agreement Amendment, the Stock Purchase
Warrant, the issuance, sale and delivery of the Preferred Shares or, upon
conversion thereof, the issuance and delivery of the Conversion Shares, other
than (i) filings pursuant to state securities laws (all of which filings have
been made by the Company, other than those which are required to be made after
the Closing and which will be duly made on a timely basis) in connection with
the sale of the Preferred Shares and (ii) with respect to the Registration
Rights Agreement, the registration of the shares covered thereby with the
Commission and filings pursuant to state securities laws.
SECTION 2.17 Disclosure. Neither this Agreement, nor any Schedule or
----------
Exhibit to this Agreement, contains an untrue statement of a material fact or
omits a material fact necessary to make the statements contained herein or
therein not misleading. None of the statements, documents, certificates or other
items prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained therein not misleading.
SECTION 2.18 Offering of the Preferred Shares. Neither the Company nor
--------------------------------
any person authorized or employed by the Company as agent, broker, dealer or
otherwise in connection with the offering or sale of the Preferred Shares or any
security of the Company similar to the Preferred Shares has offered the
Preferred Shares or any such similar security for sale to, or solicited any
offer to buy the Preferred Shares or any such similar security from, or
otherwise approached or negotiated with respect thereto with, any person or
persons, and neither the Company nor any person acting on its behalf has taken
or will take any other action (including, without limitation, any offer,
issuance or sale of any security of the Company under circumstances which might
require the integration of such security with Preferred Shares under the
Securities Act of 1933, as amended (the "Securities Act") or the rules and
regulations of the Commission thereunder), in either case so as to subject the
offering, issuance or sale of the Preferred Shares to the registration
provisions of the Securities Act.
SECTION 2.19 Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
SECTION 2.20 Officers. Set forth in Schedule I is a list of the names of
-------- ----------
the officers of the Company, together with the title or job classification of
each such person and the total cash compensation anticipated to be paid to each
such person by the Company in 1999.
10
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SECTION 2.21 Transactions With Affiliates. Other than purchases of
----------------------------
Preferred Shares hereunder and under the Series A Agreement, Series B Agreement,
Series C Agreement, Series D Agreement and Series E Agreement (as such terms are
defined in Section 6.13 hereof) and except as set forth on Schedule II and
-----------
Schedule III(B) hereof, no director, officer, employee or stockholder of the
- ---------------
Company, or member of the family of any such person, or any corporation,
partnership, trust or other entity in which any such person, or any member of
the family of any such person, has a substantial interest or is an officer,
director, trustee, partner or holder of more than 5% of the outstanding capital
stock thereof, is a party to any transaction with the Company, including any
contract, agreement or other arrangement providing for the employment of,
furnishing of services by, rental of real or personal property from or otherwise
requiring payments to any such person or firm, other than employment-at-will
arrangements in the ordinary course of business.
SECTION 2.22 Employees. Each of the officers of the Company, each key
---------
employee and each other employee now employed by the Company who has access to
confidential information of the Company has executed an Employee Nondisclosure
and Developments Agreement substantially in the form of Exhibit D and such
---------
agreements are in full force and effect. No officer or key employee of the
Company has advised the Company (orally or in writing) that he intends to
terminate employment with the Company. The Company has complied in all material
respects with all applicable laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity, collective bargaining
and the payment of Social Security and other taxes, and with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
SECTION 2.23 Environmental Protection. The Company has not caused or
------------------------
allowed, or contracted with any party for, the generation, use, transportation,
treatment, storage or disposal of any Hazardous Substances (as defined below) in
connection with the operation of its business or otherwise. The Company, the
operation of its business, and to the Company's knowledge, any real property
that the Company owns, leases or otherwise occupies or uses (the "Premises") are
in material compliance with all applicable Environmental Laws (as defined below)
and orders or directives of any governmental authorities having jurisdiction
under such Environmental Laws, including, without limitation, any Environmental
Laws or orders or directives with respect to any cleanup or remediation of any
release or threat of release of Hazardous Substances. The Company has not
received any citation, directive, letter or other communication, written or
oral, or any notice of any proceeding, claim or lawsuit, from any person arising
out of the ownership or occupation of the Premises, or the conduct of its
operations, and the Company is not aware of any basis therefor. The Company has
obtained and is maintaining in full force and effect all necessary permits,
licenses and approvals required by all Environmental Laws applicable to the
Premises and the Company's business operations conducted thereon, and is in
compliance with all such permits, licenses and approvals. The Company has not
caused or allowed a release, or a threat of release, of any Hazardous Substance
unto, at or near the Premises, and, to the best of the Company's knowledge,
neither the Premises nor any property at or near the Premises has ever been
subject to a release, or a threat of release, of any Hazardous Substance. For
the purposes of this Agreement, the term "Environmental Laws" shall mean any
Federal, state or local law or ordinance or regulation pertaining to the
protection of human health or the environment, including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Sections 9601, et seq., the
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Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Sections 11001, et
seq., and the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901,
et seq. For purposes of this Agreement, the term "Hazardous Substances" shall
include oil and petroleum products, asbestos, polychlorinated biphenyls, urea
formaldehyde and any other materials classified as hazardous or toxic under any
Environmental Laws.
SECTION 2.24 ERISA.
-----
(a) Schedule I lists each Employee Plan that covers any employee of the
----------
Company, copies or descriptions of all of which have previously been made
available or furnished to the Purchaser. With respect to each Employee Plan, the
Company has provided the most recently filed Form 5500 and an accurate summary
description of such plan.
(b) Schedule I also includes a list of each Benefit Arrangement of the
Company, copies or descriptions of all of which have been made available or
furnished previously to the Purchaser.
(c) No Employee Plan is a Multiemployer Plan and no Employee Plan is
subject to Title IV of ERISA. The Company and its Affiliates have not incurred
any liability under Title IV of ERISA arising in connection with the termination
of any plan covered or previously covered by Title IV of ERISA.
(d) None of the Employee Plans or other arrangements listed on Schedule I
----------
covers any non-United States employee or former employee of the Company.
(e) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, has occurred with respect to any Employee Plan.
(f) Each Employee Plan which is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified during the period
from its adoption to date, and each trust forming a part thereof is exempt from
tax pursuant to Section 501(a) of the Code. The Company has furnished to the
Purchaser copies of the most recent Internal Revenue Service determination
letters with respect to each such plan. Each Employee Plan has been maintained
in compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such plan.
(g) Each Employee Plan and each Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations which are applicable to such
Employee Plan and Benefit Arrangement.
(h) All contributions and payments accrued under each Employee Plan and
Benefit Arrangement, determined in accordance with prior funding and accrual
practices, as adjusted to include proportional accruals for the period ending on
the Closing Date, will be discharged and paid on or prior to the Closing Date
except to the extent reflected on the Balance Sheet. Except as disclosed in
writing to the Purchaser prior to the date hereof, there has been no amendment
to, written interpretation of or announcement (whether or not written) by the
Company or any of its
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ERISA Affiliates relating to, or change in employee participation or coverage
under, any Employee Plan or Benefit Arrangement that would increase materially
the expense of maintaining such Employee Plan or Benefit Arrangement above the
level of the expense incurred in respect thereof for the fiscal year ended prior
to the date hereof.
(i) There is no contract, agreement, plan or arrangement covering any
employee or former employee of the Company that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to the terms of Section 280G of the Code.
(j) No tax under Section 4980B of the Code has been incurred in respect of
any Employee Plan that is a group health plan, as defined in Section 5000(b)(1)
of the Code.
(k) With respect to the employees and former employees of the Company,
there are no employee post-retirement medical or health plans in effect, except
as required by Section 4980B of the Code.
(l) No employee of the Company will become entitled to any bonus,
retirement, severance or similar benefit or enhanced benefit solely as a result
of the transactions contemplated hereby.
(m) The Company does not have, nor is it reasonably expected to have, any
liability under Title IV of ERISA.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser severally represents and warrants to the Company that:
(a) it is an "accredited investor" within the meaning of Rule 501 under
the Securities Act and was not organized for the specific purpose of
acquiring the Preferred Shares;
(b) it has sufficient knowledge and experience in investing in companies
similar to the Company in terms of the Company's stage of development so as
to be able to evaluate the risks and merits of its investment in the Company
and it is able financially to bear the risks thereof;
(c) it has had an opportunity to discuss the Company's proposed business,
management and financial affairs with the Company's management;
(d) the Preferred Shares, the Stock Purchase Warrant and, if any portion
of the Stock Purchase Warrant is exercised for shares (the "Warrant Shares"),
the Warrant Shares being purchased by it are being acquired for its own
account for the purpose of investment and not with a view to or for sale in
connection with any distribution thereof;
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(e) it understands that (i) the Preferred Shares, the Conversion Shares,
the Stock Purchase Warrant have not been registered, and, if any portion of
the Stock Purchase Warrant is exercised for Warrant Shares, the Warrant
Shares will not have been registered under the Securities Act by reason of
their issuance in a transaction exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof or Rule 505 or 506
promulgated under the Securities Act, (ii) the Preferred Shares and, upon
conversion thereof, the Conversion Shares, the Stock Purchase Warrant and, if
any portion of the Stock Purchase Warrant is exercised for Warrant Shares,
the Warrant Shares must be held indefinitely unless a subsequent disposition
thereof is registered under the Securities Act or is exempt from such
registration, (iii) the Preferred Shares, the Conversion Shares, the Stock
Purchase Warrant and the Warrant Shares will bear a legend to such effect and
(iv) the Company will make a notation on its transfer books to such effect;
and
(f) if it sells any Preferred Shares, any Conversion Shares, the Stock
Purchase Warrant or any Warrant Shares pursuant to Rule 144A promulgated
under the Securities Act, it will take all necessary steps in order to
perfect the exemption from registration provided thereby, including (i)
obtaining on behalf of the Company information to enable the Company to
establish a reasonable belief that the purchaser is a qualified institutional
buyer and (ii) advising Purchaser that Rule 144A is being relied upon with
respect to such resale.
ARTICLE IV
CONDITIONS TO CLOSING; TERMINATION
SECTION 4.01 Conditions Precedent to Obligations of Purchaser. The
------------------------------------------------
obligation of Purchaser to purchase and pay for the Preferred Shares being
purchased by it on the Closing Date is, at its option, subject to the
satisfaction, on or before the Closing Date, of the following conditions:
(a) Representations and Warranties to be True and Correct. The
-----------------------------------------------------
representations and warranties contained in Article II shall be true,
complete and correct in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been
made on and as of such date, and the President and Treasurer of the Company
shall have certified to such effect to the Purchaser in writing.
(b) Performance. The Company shall have performed and complied in all
-----------
material respects with all agreements contained herein required to be
performed or complied with by it prior to or at the Closing Date.
(c) All Proceedings to be Satisfactory. All corporate and other
----------------------------------
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory
in form and substance to the Purchaser and its counsel, and the Purchaser and
its counsel shall have received all such counterpart originals or certified
or other copies of such documents as they reasonably may request; provided,
that the Company has previously delivered to the Purchaser a copy of the
Waiver
14
<PAGE>
Letter (as defined in Section 4.02(a) hereof) which such letter is in a form
acceptable to Purchaser.
(d) Supporting Documents. The Purchaser and their counsel shall have
--------------------
received copies of the following documents:
(i) the Charter, certified as of a recent date by the Secretary of
State of the State of Delaware; and
(ii) (A) a complete copy of the By-laws of the Company as in effect on
the Closing Date; and (B) a complete copy of all resolutions adopted by
the Board of Directors and the stockholders of the Company authorizing
the execution, delivery and performance of this Agreement, the
Registration Rights Agreement Amendment and the Stock Purchase Warrant,
the issuance, sale and delivery of the Preferred Shares and the
reservation, issuance and delivery of the Conversion Shares, and a
secretary's certificate to the effect that all such resolutions are in
full force and effect and are all the resolutions adopted in connection
with the transactions contemplated by this Agreement, the Registration
Rights Agreement Amendment and the Stock Purchase Warrant.
(e) Registration Rights Agreement Amendment. The Company shall have
---------------------------------------
executed and delivered the Registration Rights Agreement Amendment.
(f) Charter. The Charter shall read in its entirety as set forth in
-------
Exhibit C.
---------
(g) Opinion of Counsel. Purchaser participating in such Closing shall have
------------------
received an opinion of Dechert Price & Rhoads, dated the date of such
Closing, satisfactory in form and substance to Purchaser and Purchaser's
counsel.
(h) Approvals and Consents. The Company shall have received all
----------------------
governmental and regulatory approvals and consents and all other requisite
third party approvals and consents which are necessary to consummate this
Agreement and the transactions contemplated thereby.
(i) Stock Purchase Warrant. The Company shall have executed and delivered
----------------------
the Stock Purchase Warrant.
(j) License Agreement. The License Agreement (as defined in Section 5.15
-----------------
hereof) shall have been duly executed by the Company and SB Pharmco Puerto
Rico Inc.
(k) Voting Agreement. The Purchaser shall have executed and delivered to
----------------
the Company the Voting Agreement in the form attached as Exhibit E hereto
(the "Voting Agreement").
All such documents shall be satisfactory in form and substance to the Purchaser
and their counsel.
15
<PAGE>
SECTION 4.02 Conditions Precedent to Obligations of the Company. The
--------------------------------------------------
obligation of the Company to issue and deliver the Preferred Shares being issued
and delivered by it on the Closing Date is, at its option, subject to the
satisfaction, on or before the Closing Date, of the following conditions:
(a) All Proceedings to be Satisfactory. All corporate and other
----------------------------------
proceedings to be taken by the Company in connection with the transactions
contemplated hereby, including receipt by the Company of all necessary board
and shareholder approvals (including, without limitation, the receipt of the
requisite shareholder approval of the Charter and the Registration Rights
Agreement and the receipt of waivers from the holders of the Preferred Stock
(other than the holders of the Series D Convertible Preferred Stock) of their
respective rights of first refusal or the termination of the twenty-day
period set forth in the letters (the "Waiver Letters") sent by the Company to
the such holders of Preferred Stock) and all documents incident thereto shall
be satisfactory in form and substance to the Company and its counsel.
SECTION 4.03 Termination.
-----------
(a) When Agreement May Be Terminated. This Agreement may be terminated at
--------------------------------
any time prior to Closing:
(i) By mutual consent of the Company and Purchaser; or
(ii) By the Company or Purchaser if Closing shall not have
occurred prior to September 15, 1999;
(b) Effect of Termination. In the event of termination of this Agreement
---------------------
by the Company or Purchaser, as provided in subparagraph (a) above, this
Agreement shall forthwith terminate and there shall be no liability on the
part of the Company or Purchaser or their respective officers or directors,
except for liabilities arising from a breach of this Agreement prior to such
termination.
ARTICLE V
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Purchaser that:
SECTION 5.01 Financial Statements, Reports, Etc. Following the Closing
----------------------------------
Date, the Company shall furnish to Purchaser (provided that Purchaser signs a
customary confidentiality agreement with the Company):
(a) within ninety (90) days after the end of each fiscal year of the
Company a consolidated balance sheet of the Company as of the end of such
fiscal year and the related consolidated statements of income, stockholders'
equity and cash flows for the fiscal year then ended, prepared in accordance
with generally accepted accounting principles and
16
<PAGE>
certified by a firm of independent public accountants of recognized national
standing selected by the Board of Directors of the Company;
(b) within thirty (30) days after the end of each month in each fiscal
year (other than the last month in each fiscal year) a consolidated balance
sheet of the Company and the related consolidated statements of income,
stockholders' equity and cash flows, unaudited but prepared in accordance
with generally accepted accounting principles and certified by the Chief
Financial Officer of the Company, such consolidated balance sheet to be as of
the end of such month and such consolidated statements of income,
stockholders' equity and cash flows to be for such month and for the period
from the beginning of the fiscal year to the end of such month, in each case
with comparative statements for the prior fiscal year, provided that the
Company's obligations under this Section 5.01(b) shall terminate upon the
completion of a firm commitment underwritten public offering of the Company's
securities;
(c) at the time of delivery of each monthly statement pursuant to Section
5.01(b), a management narrative report explaining all significant variances
from forecasts and all significant current developments in staffing,
marketing, sales and operations;
(d) no later than sixty (60) days prior to the start of each fiscal year,
consolidated capital and operating expense budgets, cash flow projections and
income and loss projections for the Company in respect of such fiscal year,
all itemized in reasonable detail and prepared on a monthly basis, and,
promptly after preparation, any revisions to any of the foregoing;
(e) promptly following receipt by the Company, each audit response letter,
accountant's management letter and other written report submitted to the
Company by its independent public accountants in connection with an annual or
interim audit of the books of the Company;
(f) promptly after the commencement thereof, notice of all actions, suits,
claims, proceedings, investigations and inquiries of the type described in
Section 2.07 that could materially adversely affect the Company;
(g) promptly upon sending, making available or filing the same, all press
releases, reports and financial statements that the Company sends or makes
available to its stockholders or directors or files with the Commission; and
(h) promptly, from time to time, such other information regarding the
business, prospects, financial condition, operations, property or affairs of
the Company as Purchaser reasonably may request.
SECTION 5.02 Right of First Refusal. Following the Closing Date, so long
----------------------
as the Company has not consummated an Initial Public Offering (as hereafter
defined), the Company shall, prior to any issuance by the Company of any of its
securities (other than debt securities with no equity feature), offer to each
Purchaser by written notice the right, for a period of twenty (20) days, to
purchase all of such securities for cash at an amount equal to the price or
other consideration for which such securities are to be issued; provided,
however, that the first refusal rights of the Purchasers pursuant to this
Section 5.02 shall not apply to securities issued (A) upon
17
<PAGE>
conversion of any of the Preferred Shares, (B) as a stock dividend or upon any
subdivision of shares of Common Stock, provided that the securities issued
pursuant to such stock dividend or subdivision are limited to additional shares
of Common Stock, (C) pursuant to subscriptions, warrants, options, convertible
securities, or other rights which are listed in Schedule II as being outstanding
-----------
on the date of this Agreement, but not including those described in (F) below,
(D) solely in consideration for the acquisition (whether by merger or otherwise)
by the Company of all or substantially all of the stock or assets of any other
entity, which such acquisition has been approved by the Board of Directors of
the Company, (E) pursuant to a firm commitment underwritten public offering, (F)
pursuant to the exercise of options to purchase Common Stock granted to
directors, officers, employees or consultants of the Company in connection with
their service to the Company or pursuant to the exercise of options to purchase
Common Stock granted to or Common Stock issued to licensors or transferors of
technology to the Company, not to exceed in the aggregate 7,750,000 shares
(appropriately adjusted to reflect stock splits, stock dividends, combinations
of shares and the like with respect to the Common Stock) (the shares exempted by
this clause (F) being hereinafter referred to as the "Reserved Employee and
Technology Shares"), and (G) upon the exercise of any right which was not itself
in violation of the terms of this Section 5.02. The Company's written notice to
the Purchasers shall describe the securities proposed to be issued by the
Company and specify the number, price and payment terms. The Purchasers may
accept the Company's offer as to the full number of securities offered to it or
any lesser number, by written notice thereof given by it to the Company prior to
the expiration of the aforesaid twenty (20) day period, in which event the
Company shall promptly sell and such Purchaser shall buy, upon the terms
specified, the number of securities agreed to be purchased by such Purchaser.
Notwithstanding the foregoing, if the Purchasers agrees, in the aggregate, to
purchase more than the full number of securities offered by the Company, then
each Purchaser accepting the Company's offer shall first be allocated the lesser
of (i) the number of securities which such Purchaser agreed to purchase and (ii)
the number of securities as is equal to the full number of securities offered by
the Company multiplied by a fraction, the numerator of which shall be the number
of shares of Common Stock held by such Purchaser as of the date of the Company's
notice of offer (treating such Purchaser, for the purpose of such calculation,
as the holder of the number of shares of Common Stock which would be issuable to
such Purchaser upon conversion, exercise or exchange of all securities
(including but not limited to the Preferred Shares) held by such Purchaser on
the date such offer is made, that are convertible, exercisable or exchangeable
into or for (whether directly or indirectly) shares of Common Stock) and the
denominator of which shall be the aggregate number of shares of Common Stock
(calculated as aforesaid) held on such date by all Purchasers who accepted the
Company's offer, and the balance of the securities (if any) offered by the
Company shall be allocated among the Purchasers accepting the Company's offer in
proportion to their relative equity ownership interests in the Company
(calculated as aforesaid), provided that no Purchaser shall be allocated more
than the number of securities which such Purchaser agreed to purchase and
provided further that in cases covered by this sentence all Purchasers shall be
allocated among them the full number of securities offered by the Company. The
Company shall be free at any time prior to ninety (90) days after the date of
its notice of offer to the Purchasers, to offer and sell to any third party or
parties the number of such securities not agreed by the Purchasers to be
purchased by them, at a price and on payment terms no less favorable to the
Company than those specified in such notice of offer to the Purchasers. However,
if such third party sale or sales are not consummated within such ninety (90)
day period, the Company shall not sell such
18
<PAGE>
securities as shall not have been purchased within such period without again
complying with this Section 5.02. For purposes of this Section 5.02, (x) the
term "Purchasers" shall include the Series A Purchasers, Series B Purchasers,
the Series C Purchasers and the Series E Purchasers (as such terms are defined
in Section 6.13 hereof) and (y) the term "Preferred Shares" shall include the
shares of Series A Convertible Preferred Stock, the shares of Series B
Convertible Preferred Stock, the shares of Series C Convertible Preferred Stock
and the shares of Series E Convertible Preferred Stock purchased pursuant to the
Series A Agreement, the Series B Agreement, the Series C Agreement and the
Series E Agreement (as such terms are defined in Section 6.13). "Initial Public
Offering" means a underwritten public offering pursuant to an effective
registration statement under the Securities Act in respect of the offer and sale
of shares of Common Stock for the account of the Company resulting in aggregate
net proceeds to the Company and any stockholder selling shares of Common Stock
in such offering of not less than $25,000,000 and a public offering price per
share of not less than $1.50 per share (as adjusted for any combination,
division, subdivision, stock split, reverse stock split or similar event
relating to the Common Stock).
SECTION 5.03 Reserve for Conversion Shares. The Company shall at all
-----------------------------
times reserve and keep available out of its authorized but unissued shares of
Common Stock, for the purpose of effecting the conversion of the Preferred
Shares and otherwise complying with the terms of this Agreement, such number of
its duly authorized shares of Common Stock as shall be sufficient to effect the
conversion of the Preferred Shares from time to time outstanding or otherwise to
comply with the terms of this Agreement. If at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of the Preferred Shares or otherwise to comply with the terms of this
Agreement, the Company will forthwith take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes. The Company will
obtain any authorization, consent, approval or other action by or make any
filing with any court or administrative body that may be required under
applicable state securities laws in connection with the issuance of shares of
Common Stock upon conversion of the Preferred Shares.
SECTION 5.04 Corporate Existence. The Company shall maintain corporate
-------------------
existence, rights and franchises in full force and effect.
SECTION 5.05 Properties, Business, Insurance. The Company shall maintain
-------------------------------
its properties and business, with financially sound and reputable insurers,
insurance against such casualties and contingencies and of such types and in
such amounts as is customary for companies similarly situated, which insurance
shall be deemed by the Company to be sufficient. The Company shall not cause or
permit any assignment or change in beneficiary and shall not borrow against any
such policy.
SECTION 5.06 Inspection, Consultation and Advice. Following the Closing
-----------------------------------
Date, the Company shall permit Purchaser and such persons as it may designate,
at Purchaser's expense, and subject to the execution of an appropriate
confidentiality agreement, to visit and inspect any of the properties of the
Company, examine their books and take copies and extracts therefrom, discuss the
affairs, finances and accounts of the Company with its officers, employees and
public accountants (and the Company hereby authorizes said accountants to
discuss with
19
<PAGE>
Purchaser and such designees such affairs, finances and accounts), and consult
with and advise the management of the Company as to its affairs, finances and
accounts, all at reasonable times and upon reasonable notice.
SECTION 5.07 Restrictive Agreements Prohibited. The Company shall not
---------------------------------
become a party to any agreement which by its terms restricts the Company's
performance of this Agreement, the Registration Rights Agreement, the Stock
Purchase Warrant or the Charter.
SECTION 5.08 Use of Proceeds. The Company shall use the cash proceeds
---------------
from the sale of the Preferred Shares solely for research and product
development, clinical trials, capital expenditures, working capital and other
general corporate purposes.
SECTION 5.09 By-laws. The Company shall at all times maintain provisions
-------
in its Bylaws and/or Charter indemnifying all directors against liability and
absolving all directors from liability to the Company and its stockholders to
the maximum extent permitted under the laws of the State of Delaware.
SECTION 5.10 Employee Nondisclosure and Developments Agreements. The
--------------------------------------------------
Company shall use its best efforts to obtain an Employee Nondisclosure and
Developments Agreement in substantially the form of Exhibit D. or in such other
---------
form as is approved by the Board of Directors, from all future officers, key
employees and other employees who will have access to confidential information
of the Company, upon their employment by the Company.
SECTION 5.11 Compliance with Laws. The Company shall comply with all
--------------------
applicable laws, rules, regulations and orders, noncompliance with which could
materially adversely affect its business or condition, financial or otherwise.
SECTION 5.12 Keeping of Records and Books of Account. The Company shall
---------------------------------------
keep adequate records and books of account, in which complete entries will be
made in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company, and in which, for
each fiscal year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
SECTION 5.13 Rule 144A Information. Following the Closing Date, the
---------------------
Company shall, at all times during which it is neither subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), nor exempt from reporting pursuant to Rule 12g3-
2(b) under the Exchange Act, provide in writing, upon the written request of
Purchaser or a prospective buyer of Preferred Shares or Conversion Shares from
Purchaser, all information required by Rule 144A(d)(4)(i) of the General
Regulations promulgated by the Commission under the Securities Act ("Rule 144A
Information"). The Company also shall, upon the written request of Purchaser,
cooperate with and assist Purchaser or any member of the National Association of
Securities Dealers, Inc. PORTAL system in applying to designate and thereafter
maintain the eligibility of the Preferred Shares or Conversion Shares, as the
case may be, for trading through PORTAL. The Company's obligations under this
Section 5.13 shall at all times be contingent upon the relevant Purchaser's
obtaining from the prospective buyer of Preferred Shares or Conversion Shares a
written
20
<PAGE>
agreement to take all reasonable precautions to safeguard the Rule 144A
Information from disclosure to anyone other than a person who will assist such
buyer in evaluating the purchase of any Preferred Shares or Conversion Shares.
SECTION 5.14 Future Subsidiaries. In the event the Company shall acquire
-------------------
or create a subsidiary or subsidiaries, the Company agrees that the covenants
contained in this Article V shall apply to the Company and such subsidiaries on
a consolidated basis.
SECTION 5.15 Milestone Stock Purchase.
------------------------
(a) Upon the occurrence of the Successful 2nd Pivotal Study (as
defined in Section 3.01(5) of the License Agreement (the "License Agreement"),
dated as of July 26, 1999, between the Company and SB Pharmco Puerto Rico Inc.)
(the "Milestone Event")), Purchaser shall, within 30 days of the occurrence of
the Milestone Event, purchase the Milestone Shares (as defined below) from the
Company at a price per share equal to the Milestone Price (as defined below).
(b) In the event that the Milestone Event occurs prior to the
completion by the Company of an Initial Public Offering (as defined below), (i)
"Milestone Shares" shall mean the number of shares of New Preferred Stock (as
----------------
defined below) of the Company equal to the amount obtained by dividing $500,000
by the Milestone Price; (ii) "Milestone Price" shall mean the fair market value
---------------
of the New Preferred Stock immediately following the Milestone Event as
determined in good faith by the Board of Directors of the Company, provided that
in no event will the Milestone Price be less than the price per share of the
Preferred Stock issued (other than pursuant to a Non-Investor Issuance (as
defined below) and as adjusted for stock splits, stock dividends and other
similar transactions) immediately prior to the Milestone Event; and (iii) "New
---
Preferred Stock" shall mean Series F Convertible Preferred Stock or, at the
- ---------------
election of the Company, a new series of Preferred Stock containing rights,
preferences and privileges which are substantially the same as those of the
Series F Convertible Preferred Stock, except that the New Preferred Stock will
not include a warrant to purchase shares of capital stock of the Company or any
additional rights. In the event that the Milestone Price as calculated pursuant
to this clause (b) is greater than the price per share of capital stock (the
"Next Price") paid in the first issuance of capital stock by the Company (other
than pursuant to a Non-Investor Issuance) immediately following the Milestone
Event (either pursuant to a preferred stock offering or an Initial Public
Offering, with such Next Price to be adjusted for stock splits, stock dividends
or other similar transactions) (the "Subsequent Issuance"), then Purchaser shall
be entitled to receive an additional amount of shares of New Preferred Stock at
the time of the Subsequent Issuance equal to (x) minus (y), where (x) equals
$500,000 divided by the Next Price and (y) equals the Milestone Shares. In the
event that the Subsequent Issuance is a Qualified Public Offering (as defined in
paragraph 6(O) of the Charter), the Company may, at its election, substitute
shares of Common Stock for shares of New Preferred Stock due under this clause
(b), with such substituted number of shares of Common Stock to be calculated on
the same basis as set forth in paragraph 6 of the Charter.
(c) In the event that the Milestone Event occurs after the completion by
the Company of an Initial Public Offering, (i) "Milestone Shares" shall mean the
----------------
number of shares of Common Stock of the Company equal to the amount obtained by
dividing $500,000 by the
21
<PAGE>
Milestone Price (as defined in this clause (c)) and (ii) "Milestone Price" shall
---------------
mean the average closing bid price per share of the Common Stock as listed on
the principal national securities exchange on which the Common Stock is then
listed or admitted to trading or, if not then listed or traded on any such
exchange, on the National Market System of NASDAQ or, if not listed or traded on
any such exchange or system, the average of the bid and asked price per share on
NASDAQ or, if such quotations are not available, the fair market value as
reasonably determined by the Board of Directors of the Company during the
twenty-day period comprised of the ten trading days immediately prior to, and
the ten trading days immediately after, the public announcement by the Company
about the Milestone Event, provided that in no event will the Milestone Price be
less than $1.00 per share (as adjusted for stock splits, stock dividends and
other similar transactions).
(d) As used herein, (i) "Initial Public Offering" shall mean the
-----------------------
initial public offering of the Company's Common Stock pursuant to a registration
statement (other than on Form S-4 or S-8 or a successor form thereto) under the
Securities Act of 1933, as amended; and (ii) "Non-Investor Issuance" means an
---------------------
issuance of securities issued (A) upon conversion of any of the Preferred
Shares, (B) as a stock dividend or upon any subdivision of shares of Common
Stock, provided that the securities issued pursuant to such stock dividend or
subdivision are limited to additional shares of Common Stock, (C) pursuant to
subscriptions, warrants, options, convertible securities, or other rights which
are listed in Schedule III as being outstanding on the date of this Agreement,
------------
(D) solely in consideration for the acquisition (whether by merger or otherwise)
by the Company of all or substantially all of the stock or assets of any other
entity, which such acquisition has been approved by the Board of Directors of
the Company, (E) pursuant to the exercise of options to purchase securities of
the Company or securities issued to directors, officers, employees or
consultants of the Company in connection with their service to the Company or
(F) to licensors or transferors of technology from or to the Company.
(e) Within 30 days following the occurrence of the Milestone Event,
Purchaser shall deliver to the Company, by check or wire transfer in immediately
available funds, an amount equal to $500,000. Within five days of receipt of
such amount, the Company shall issue and deliver to Purchaser a stock
certificate or certificates in definitive form, registered in the name of
Purchaser, representing the Preferred Shares being purchased by it pursuant to
this Section 5.15.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01 Expenses. Each party hereto will pay its own expenses in
--------
connection with the transactions contemplated hereby, whether or not such
transactions shall be consummated.
SECTION 6.02 Survival of Agreements. All covenants, agreements,
----------------------
representations and warranties made herein or in the Registration Rights
Agreement Amendment or the Stock Purchase Warrant, or any certificate or
instrument delivered to the Purchaser pursuant to or in connection with this
Agreement, the Registration Rights Agreement
22
<PAGE>
Amendment or the Stock Purchase Warrant, shall survive the execution and
delivery of this Agreement, the Registration Rights Agreement Amendment and the
Stock Purchase Warrant, the issuance, sale and delivery of the Preferred Shares,
and the issuance and delivery of the Conversion Shares, and all statements
contained in any certificate or other instrument delivered by the Company
hereunder or thereunder or in connection herewith or therewith shall be deemed
to constitute representations and warranties made by the Company; provided that
all such representations and warranties shall terminate two years from the date
they are made.
SECTION 6.03 Brokerage. Each party hereto will indemnify and hold
---------
harmless the others against and in respect of any claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements or understandings made or
claimed to have been made by such party with any third party.
SECTION 6.04 Parties in Interest. All representations, covenants and
-------------------
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Without limiting the
generality of the foregoing, all representations, covenants and agreements
benefiting the Purchaser shall inure to the benefit of any and all subsequent
holders from time to time of Preferred Shares or Conversion Shares.
SECTION 6.05 Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, addressed as follows:
(a) if to the Company, at 371 Phoenixville Pike, Malvern, PA 19355,
Attention: President, with a copy to James A. Lebovitz, Esq., Dechert Price &
Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street, Philadelphia, PA 19103;
and
(b) if to Purchaser, at Four Tower Bridge, 200 Barr Harbor Drive, Suite
250, W. Conshohocken, PA 19428-2977, Attention: Elaine V. Jones, Ph.D.
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
SECTION 6.06 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware.
SECTION 6.07 Entire Agreement. This Agreement, including the Schedules
----------------
and Exhibits hereto, constitutes the sole and entire agreement of the parties
with respect to the subject matter hereof. All Schedules and Exhibits hereto are
hereby incorporated herein by reference.
SECTION 6.08 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 6.09 Amendments. This Agreement may be amended or modified, and
----------
provisions hereof may be waived, with the written consent of the Company and the
holders of at
23
<PAGE>
least two-thirds (2/3) of the outstanding shares of Common Stock issued or
issuable upon conversion of the Preferred Shares. Otherwise this Agreement may
not be amended or waived or any provision hereof waived.
SECTION 6.10 Severability. If any provision of this Agreement shall be
------------
declared void or unenforceable by any judicial or administrative authority, the
validity of any other provision and of the entire Agreement shall not be
affected thereby.
SECTION 6.11 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are for convenience only and are not to be considered in construing or
interpreting any term or provision of this Agreement.
SECTION 6.12 Certain Defined Term. As used in this Agreement, the
--------------------
following term shall have the following meaning (such meaning to be equally
applicable to both the singular and plural forms of the term defined):
"person" shall mean an individual, corporation, trust, partnership, joint
venture, unincorporated organization, government agency or any agency or
political subdivision thereof, or other entity.
SECTION 6.13 Prior Agreements. By their signature below, the Purchaser,
----------------
to the extent it is also a party to that certain Series A Convertible Preferred
Stock Purchase Agreement (the "Series A Agreement") between the Company and the
purchasers named therein dated as of November 7, 1994, (each, a "Series A
Purchaser") and that certain Series B Convertible Preferred Stock Purchase
Agreement (the "Series B Agreement") between the Company and the purchasers
named therein dated as of March 1, 1996, (each, a "Series B Purchaser") and that
certain Series C Convertible Preferred Stock Purchase Agreement (the "Series C
Agreement") between the Company and the purchasers named therein dated as of May
1, 1997 (each, a "Series C Purchaser") and that certain Series E Convertible
Preferred Stock Purchase Agreement (the "Series E Agreement") between the
Company and the purchasers named therein dated as of December 8, 1998 (each, a
"Series E Purchaser") hereby (i) waives, except to the extent set forth in this
Agreement, the right to purchase shares of Series F Convertible Preferred Stock
sold pursuant to this Agreement. The signature of each Series A Purchaser,
Series B Purchaser, Series C Purchaser and Series E Purchaser below shall also
constitute such party's agreement to the right of first refusal granted in
Section 5.02 hereof and the termination of Sections 5.02 of the Series A
Agreement, the Series B Agreement, the Series C Agreement and the Series E
Agreement.
[Signature pages follow immediately.]
24
<PAGE>
EXHIBIT 4.7
================================================================================
SERIES G CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
among
ADOLOR CORPORATION
and
THE PURCHASERS NAMED IN SCHEDULE I
Dated as of January 10, 2000
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE PREFERRED SHARES......................................... 1
SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares 1
SECTION 1.02 Initial Closing....................................... 1
SECTION 1.03 Additional Closing.................................... 2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... 2
SECTION 2.01 Organization, Qualifications and Corporate Power...... 2
SECTION 2.02 Authorization of Agreements, Etc...................... 3
SECTION 2.03 Validity.............................................. 3
SECTION 2.04 Authorized Capital Stock.............................. 3
SECTION 2.05 Financial Statements.................................. 4
SECTION 2.06 Events Subsequent to the Date of the Balance Sheet.... 5
SECTION 2.07 Litigation; Compliance with Law....................... 5
SECTION 2.08 Proprietary Information of Third Parties.............. 6
SECTION 2.09 Patents, Trademarks, Etc.............................. 6
SECTION 2.10 Title to Properties................................... 7
SECTION 2.11 Leasehold Interests................................... 7
SECTION 2.12 Insurance............................................. 8
SECTION 2.13 Taxes................................................. 8
SECTION 2.14 Other Agreements...................................... 8
SECTION 2.15 Significant Customers and Suppliers................... 10
SECTION 2.16 Governmental Approvals................................ 10
SECTION 2.17 Disclosure............................................ 10
SECTION 2.18 Offering of the Preferred Shares...................... 11
SECTION 2.19 Brokers............................................... 11
SECTION 2.20 Officers.............................................. 11
SECTION 2.21 Transactions With Affiliates.......................... 11
SECTION 2.22 Employees............................................. 11
SECTION 2.23 Environmental Protection.............................. 12
SECTION 2.24 ERISA................................................. 12
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS........... 14
ARTICLE IV CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS............. 15
ARTICLE V COVENANTS OF THE COMPANY..................................... 16
SECTION 5.01 Financial Statements, Reports, Etc.................... 16
SECTION 5.02 Right of First Refusal................................ 17
SECTION 5.03 Reserve for Conversion Shares......................... 19
SECTION 5.04 Corporate Existence................................... 19
SECTION 5.05 Properties, Business, Insurance....................... 19
SECTION 5.06 Inspection, Consultation and Advice................... 19
SECTION 5.07 Restrictive Agreements Prohibited..................... 20
SECTION 5.08 Transactions with Affiliates.......................... 20
SECTION 5.09 Use of Proceeds....................................... 20
SECTION 5.10 By-laws............................................... 20
SECTION 5.11 Performance of Contracts.............................. 20
SECTION 5.12 Vesting of Reserved Employee Shares................... 20
SECTION 5.13 Employee Nondisclosure and Developments Agreements.... 20
SECTION 5.14 Compliance with Laws.................................. 21
SECTION 5.15 Keeping of Records and Books of Account............... 21
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 5.16 Rule 144A Information................................. 21
SECTION 5.17 Rule 144A Information................................. 21
ARTICLE VI MISCELLANEOUS............................................... 21
SECTION 6.01 Expenses.............................................. 21
SECTION 6.02 Survival of Agreements................................ 21
SECTION 6.03 Brokerage............................................. 22
SECTION 6.04 Parties in Interest................................... 22
SECTION 6.05 Notices............................................... 22
SECTION 6.06 Governing Law......................................... 22
SECTION 6.07 Entire Agreement...................................... 22
SECTION 6.08 Counterparts.......................................... 22
SECTION 6.09 Amendments............................................ 23
SECTION 6.10 Severability.......................................... 23
SECTION 6.11 Titles and Subtitles.................................. 23
SECTION 6.12 Certain Defined Terms................................. 23
SECTION 6.13 Prior Agreements...................................... 23
</TABLE>
iii
<PAGE>
INDEX TO SCHEDULES
SCHEDULE I Purchasers
SCHEDULE II Disclosure Schedule
SCHEDULE III Security Holders
SCHEDULE IV(A)
AND IV(B) Agreements
INDEX TO EXHIBITS
EXHIBIT A Form of Amendment No. 5 to Registration Rights Agreement
EXHIBIT B Charter and All Amendments Thereto
EXHIBIT C Form of Employee Nondisclosure and Developments
Agreement
iv
<PAGE>
SERIES G CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT dated as of January
10, 2000 among Adolor Corporation, a Delaware corporation (the "Company"), and
the several purchasers named in the attached Schedule I (individually a
----------
"Purchaser" and collectively the "Purchasers").
WHEREAS, the Company wishes to issue and sell to the Purchasers up to an
aggregate of 12,056,000 shares (the "Preferred Shares") of the authorized but
unissued Series G Convertible Preferred Stock, $.01 par value, of the Company
(the "Series G Convertible Preferred Stock"); and
WHEREAS, the Purchasers, severally, wish to purchase the Preferred Shares
on the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, the parties agree as follows:
ARTICLE I
THE PREFERRED SHARES
SECTION 1.01 Issuance, Sale and Delivery of the Preferred Shares. The
---------------------------------------------------
Company agrees to issue and sell to each Purchaser, and each Purchaser hereby
agrees to purchase from the Company, the number of Preferred Shares set forth
opposite the name of such Purchaser under the heading "Number of Preferred
Shares to be Purchased" on Schedule I, at the aggregate purchase price set forth
opposite the name of such Purchaser under the heading "Aggregate Purchase Price
for Preferred Shares" on Schedule I.
SECTION 1.02 Initial Closing. The initial closing shall take place at the
---------------
offices of Dechert Price & Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street,
Philadelphia, PA 19103, at 10:00 a.m., Philadelphia time, on January 10, 2000,
or at such other location, date and time as may be agreed upon between the
Purchasers and the Company (such closing being called the "Closing" and such
date and time being called the "Closing Date"). At the Closing, the Company
shall issue and deliver to each Purchaser a stock certificate or certificates in
definitive form, registered in the name of such Purchaser, representing the
Preferred Shares being purchased by such Purchaser at the Closing. As payment
in full for the Preferred Shares being purchased by it under this Agreement, and
against delivery of the stock certificate or certificates therefor as aforesaid,
on the Closing Date each Purchaser shall (i) deliver to the Company a check
payable to the order of the Company, in the amount set forth opposite the name
of such Purchaser under the heading "Aggregate Purchase Price for Preferred
Shares" on Schedule I, (ii) transfer such sum to the account of the Company by
----------
wire transfer, or (iii) deliver or transfer such sum to the Company by any
combination of such methods of payments.
<PAGE>
SECTION 1.03 Additional Closing. After the Closing Date and on or prior
------------------
to January 31, 2000 the Company may hold one or more additional closings (each
an "Additional Closing," and collectively the "Additional Closings") at which
the Company may issue and sell up to the number of Preferred Shares equal to the
difference between 12,056,000 and the aggregate number of Preferred Shares
previously sold on the Closing Date and, as applicable, on the date of any prior
Additional Closing. The sale of Preferred Shares pursuant to this Section 1.03
shall be on the same terms and conditions (including price) as the sale of the
Preferred Shares pursuant to Section 1.02 hereof and shall be effected by the
execution by any investor of a counterpart signature page to this Agreement.
Upon such execution: (i) each such investor shall be deemed to be a Purchaser
for all purposes of this Agreement and Schedule I shall be amended to include
----------
such Purchaser; and (ii) each such Additional Closing shall be deemed to be a
Closing hereunder and the date of each such Additional Closing shall be a
"Closing Date" hereunder. If necessary, the Company shall provide an updated
Disclosure Schedule to Purchasers purchasing in any Additional Closing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Purchaser that, as of each
Closing Date on which such Purchaser purchases Preferred Shares hereunder,
except as set forth in the Disclosure Schedule attached as Schedule II, as may
-----------
be updated in writing prior to any Additional Closing hereunder, (which
Disclosure Schedule, (as updated, if applicable), makes explicit reference to
the particular representation or warranty as to which exception is taken, which
in each case shall constitute the sole representation and warranty as to which
such exception shall apply):
SECTION 2.01 Organization, Qualifications and Corporate Power.
------------------------------------------------
(a) The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and is duly
licensed or qualified to transact business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of the business
transacted by it or the character of the properties owned or leased by it
requires such licensing or qualification. The Company has the corporate power
and corporate authority to own and hold its properties and to carry on its
business as now conducted and as proposed to be conducted, to execute, deliver
and perform this Agreement and Amendment No. 5 to that certain Registration
Rights Agreement by and among the Company and the purchasers named therein dated
as of November 7, 1994, and as amended by Amendment No. 1 to Registration Rights
Agreement dated as of February 27, 1996, Amendment No. 2 to Registration Rights
Agreement dated as of May 1, 1997, Amendment No. 3 to the Registration Rights
Agreement dated as of December 8, 1998 and Amendment No. 4 to the Registration
Rights Agreement dated as of July 22, 1999 (as amended, the "Original
Registration Rights Agreement") in the form attached as Exhibit A (the
---------
"Registration Rights Agreement Amendment"), to issue, sell and deliver the
Preferred Shares and to issue and deliver the shares of Common Stock, $.0001 par
value, of the Company ("Common Stock") issuable upon conversion of the Preferred
Shares (the "Conversion Shares"). The Original Registration Rights
2
<PAGE>
Agreement as amended by the Registration Rights Agreement Amendment is sometimes
referred to herein as the "Registration Rights Agreement".
(b) The Company does not (i) own of record or beneficially, directly
or indirectly, (A) any shares of capital stock or securities convertible into
capital stock of any other corporation or (B) any participating interest in any
partnership, joint venture or other non-corporate business enterprise or (ii)
control, directly or indirectly, any other entity.
SECTION 2.02 Authorization of Agreements, Etc.
--------------------------------
(a) The execution and delivery by the Company of this Agreement and
the Registration Rights Agreement Amendment, the performance by the Company of
its obligations hereunder and thereunder, the issuance, sale and delivery of the
Preferred Shares and the issuance and delivery of the Conversion Shares (as
defined in Section 5.03) have been duly authorized by all requisite corporate
action and will not violate any provision of law, any order of any court or
other agency of government, the Certificate of Incorporation of the Company, as
amended (the "Charter"), or the By-laws of the Company, as amended, or any
provision of any indenture, agreement or other instrument to which the Company
or any of its respective properties or assets is bound, or conflict with, result
in a breach of or constitute (with due notice or lapse of time or both) a
default under any such indenture, agreement or other instrument, or result in
the creation or imposition of any lien, charge, restriction, claim or
encumbrance of any nature whatsoever upon any of the properties or assets of the
Company.
(b) The Preferred Shares have been duly authorized and, when issued in
accordance with this Agreement, will be validly issued, fully paid and
nonassessable shares of Series G Convertible Preferred Stock with no personal
liability attaching to the ownership thereof and will be free and clear of all
liens, charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth in the Registration Rights Agreement. The
Conversion Shares have been duly reserved for issuance upon conversion of the
Preferred Shares and, when so issued, will be duly authorized, validly issued,
fully paid and nonassessable shares of Common Stock with no personal liability
attaching to the ownership thereof and will be free and clear of all liens,
charges, restrictions, claims and encumbrances imposed by or through the Company
except as set forth in the Registration Rights Agreement. Neither the issuance,
sale or delivery of the Preferred Shares nor the issuance or delivery of the
Conversion Shares is subject to any preemptive right of stockholders of the
Company or to any right of first refusal or other right in favor of any person
which has not been waived.
SECTION 2.03 Validity. This Agreement has been duly executed and
--------
delivered by the Company and constitutes the legal, valid and binding obligation
of the Company, enforceable in accordance with its terms. The Registration
Rights Agreement Amendment, when executed and delivered in accordance with this
Agreement, will constitute the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms.
SECTION 2.04 Authorized Capital Stock. The authorized capital stock of
------------------------
the Company consists of (i) 71,770,764 shares of Preferred Stock, $.01 par value
(the "Preferred Stock"), of which 6,000,000 shares have been designated as
Series A Convertible Preferred Stock,
3
<PAGE>
23,107,145 have been designated as Series B Convertible Preferred Stock,
13,814,286 shares have been designated as Series C Convertible Preferred Stock,
960,000 shares have been designated as Series D Convertible Preferred Stock,
13,333,333 shares have been designated as Series E Convertible Preferred Stock,
2,500,000 shares have been designated as Series F Convertible Preferred Stock
and 12,056,000 shares have been designated as Series G Convertible Preferred
Stock, and (ii) 96,024,821 shares of Common Stock. Immediately prior to the
Closing, 5,275,064 shares of Common Stock, 6,000,000 shares of Series A
Convertible Preferred Stock, 23,107,145 shares of Series B Convertible Preferred
Stock, 13,814,286 shares of Series C Convertible Preferred Stock, 960,000 shares
of Series D Convertible Preferred Stock, 11,366,667 shares of Series E
Convertible Preferred Stock and 2,500,000 shares of Series F Convertible
Preferred Stock will be validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership thereof and
no shares of Series G Convertible Preferred Stock will have been issued. The
stockholders of record and holders of subscriptions, warrants, options,
convertible securities, and other rights (contingent or other) to purchase or
otherwise acquire equity securities of the Company, and the number of shares of
Common Stock and the number of such subscriptions, warrants, options,
convertible securities, and other such rights held by each, are as set forth in
the attached Schedule III. The designations, powers, preferences, rights,
------------
qualifications, limitations and restrictions in respect of each class and series
of authorized capital stock of the Company are as set forth in the Charter, a
copy of which is attached as Exhibit B and all such designations, powers,
---------
preferences, rights, qualifications, limitations and restrictions are valid,
binding and enforceable and in accordance with all applicable laws. Except as
set forth in the attached Schedule III, (i) no person owns of record or is known
------------
to the Company to own beneficially any share of Common Stock, (ii) no
subscription, warrant, option, convertible security, or other right (contingent
or other) to purchase or otherwise acquire equity securities of the Company is
authorized or outstanding that has been issued by the Company, and (iii) there
is no commitment by the Company to issue shares, subscriptions, warrants,
options, convertible securities, or other such rights or to distribute to
holders of any of its equity securities any evidence of indebtedness or asset.
Except as provided for in the Charter or as set forth in the attached Schedule
--------
III, the Company has no obligation (contingent or otherwise) to purchase, redeem
- ---
or otherwise acquire any of its equity securities or any interest therein or to
pay any dividend or make any other distribution in respect thereof. Except as
set forth in the attached Schedule III and except for those certain Stock
Restriction Agreements by and among the Company, the purchasers named therein
and each of Dr. John Farrar, Dr. Michael Lewis and ARCH Development Corporation
dated as of November 7, 1994 (the "1994 Stock Restriction Agreements") and the
Restricted Stock Agreement dated May 31, 1996 by and between the Company and
Frank Baldino, and the Management Rights letter agreements (the "Prior
Management Rights Agreements") between the Company and certain of the Series A
Purchasers, the Series B Purchasers and the Series C Purchasers (as such terms
are defined in Section 6.13 hereof), to the best of the Company's knowledge
there are no voting trusts or agreements, stockholders' agreements, pledge
agreements, buy-sell agreements, rights of first refusal, preemptive rights or
proxies relating to any securities of the Company (whether or not the Company is
a party thereto). All of the outstanding securities of the Company were issued
in compliance with all applicable Federal and state securities laws.
SECTION 2.05 Financial Statements. The Company has furnished to the
--------------------
Purchasers the unaudited consolidated balance sheet of the Company as of
December 31, 1998 and October 31,
4
<PAGE>
1999 (the latter of which is herein referred to as the "Balance Sheet"), and the
related unaudited consolidated statements of income and cash flows of the
Company for the twelve months ended December 31, 1998 and the ten months ended
October 31, 1999. All such financial statements have been prepared in accordance
with generally accepted accounting principles consistently applied (except that
such unaudited financial statements do not contain all of the required
footnotes) and fairly present in all material respects the consolidated
financial position of the Company as of December 31, 1998 and October 31, 1999,
respectively, and the consolidated results of its operations and cash flows for
the twelve months ended December 31, 1998 and the ten months ended October 31,
1999, respectively. Since the date of the Balance Sheet, (i) there has been no
change in the assets, liabilities or financial condition of the Company (on a
consolidated basis) from that reflected in the Balance Sheet except for changes
in the ordinary course of business which in the aggregate have not been
materially adverse and (ii) none of the business, prospects, financial
condition, operations, property or affairs of the Company (on a consolidated
basis) has been materially adversely affected by any occurrence or development,
individually or in the aggregate, whether or not insured against.
SECTION 2.06 Events Subsequent to the Date of the Balance Sheet. Since
--------------------------------------------------
the date of the Balance Sheet, the Company has not (i) issued any stock, bond or
other corporate security, except pursuant to the exercise of stock options
outstanding as of the date of the Balance Sheet (ii) borrowed any amount or
incurred or become subject to any liability (absolute, accrued or contingent),
except current liabilities incurred and liabilities under contracts entered into
in the ordinary course of business, (iii) discharged or satisfied any lien or
encumbrance or incurred or paid any obligation or liability (absolute, accrued
or contingent) other than current liabilities shown on the Balance Sheet and
current liabilities incurred since the date of the Balance Sheet in the ordinary
course of business, (iv) declared or made any payment or distribution to
stockholders or purchased or redeemed any share of its capital stock or other
security, (v) mortgaged, pledged, encumbered or subjected to lien any of its
assets, tangible or intangible, other than liens of current real property taxes
not yet due and payable, (vi) sold, assigned or transferred any of its tangible
assets except in the ordinary course of business, or canceled any debt or claim,
(vii) sold, assigned, transferred or granted any exclusive license with respect
to any patent, trademark, trade name, service mark, copyright, trade secret or
other intangible asset, (viii) suffered any loss of property or waived any right
of substantial value whether or not in the ordinary course of business, (ix)
made any change in officer compensation except in the ordinary course of
business and consistent with past practice, (x) made any material change in the
manner of business or operations of the Company, (xi) entered into any
transaction except in the ordinary course of business or as otherwise
contemplated hereby or (xii) entered into any commitment (contingent or
otherwise) to do any of the foregoing.
SECTION 2.07 Litigation; Compliance with Law. There is no (i) action,
-------------------------------
suit, claim, proceeding or investigation pending or, to the best of the
Company's knowledge, threatened against or affecting the Company, at law or in
equity, or before or by any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) arbitration proceeding relating to the Company pending under
collective bargaining agreements or otherwise or (iii) governmental inquiry
pending or, to the best of the Company's knowledge, threatened against or
affecting the Company (including without limitation any inquiry as to the
qualification of the Company to hold or receive any
5
<PAGE>
license or permit). The Company is not in default with respect to any order,
writ, injunction or decree known to or served upon the Company of any court or
of any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign. There is no
action or suit by the Company pending or threatened against others. The Company
has complied with all laws, rules, regulations and orders applicable to its
business, operations, properties, assets, products and services, the Company has
all necessary permits, licenses and other authorizations required to conduct its
business as conducted and as proposed to be conducted, and the Company has been
operating its business pursuant to and in compliance with the terms of all such
permits, licenses and other authorizations except where any instance or
instances of noncompliance do not, individually or in the aggregate, have a
material adverse effect on the Company's business, prospects, financial
condition, operations, property or affairs. There is no existing law, rule,
regulation or order, and the Company after due inquiry is not aware of any
proposed law, rule, regulation or order, whether Federal, state, county or
local, which would prohibit or restrict the Company from, or otherwise
materially adversely affect the Company in, conducting its business in any
jurisdiction in which it is now conducting business or in which it proposes to
conduct business.
SECTION 2.08 Proprietary Information of Third Parties. To the best of the
----------------------------------------
Company's knowledge, no third party has claimed or has reason to claim that any
person employed by or affiliated with the Company has (a) violated or may be
violating any of the terms or conditions of his or her employment, non-
competition or non-disclosure agreement with such third party, (b) disclosed or
may be disclosing or utilized or may be utilizing any trade secret or
proprietary information or documentation of such third party or (c) interfered
or may be interfering in the employment relationship between such third party
and any of its present or former employees. To the best of the Company's
knowledge, no third party has requested information from the Company which
suggests that such a claim might be contemplated. To the best of the Company's
knowledge, no person employed by or affiliated with the Company has employed or
proposes to employ any trade secret or any information or documentation
proprietary to any former employer, and to the best of the Company's knowledge,
no person employed by or affiliated with the Company has violated any
confidential relationship which such person may have had with any third party,
in connection with the development, manufacture or sale of any product or
proposed product or the development or sale of any service or proposed service
of the Company, and the Company has no reason to believe there will be any such
employment or violation. To the best of the Company's knowledge, none of the
execution or delivery of this Agreement, or the carrying on of the business of
the Company as officers, employees or agents by any officer, director or key
employee of the Company, or the conduct or proposed conduct of the business of
the Company, will conflict with or result in a breach of the terms, conditions
or provisions of or constitute a default under any contract, covenant or
instrument under which any such person is obligated.
SECTION 2.09 Patents, Trademarks, Etc. Set forth in Schedule II is a
------------------------ -----------
list and brief description of all domestic and foreign patents, patent rights,
patent applications, trademarks, trademark applications, service marks, service
mark applications, trade names and copyrights, and all applications for such
which are in the process of being prepared, owned by or registered in the name
of the Company, or of which the Company is a licensor or licensee or in which
the Company has any right, and in each case a brief description of the nature of
such right. The
6
<PAGE>
Company owns or possesses adequate licenses or other rights to use all patents,
patent applications, trademarks, trademark applications, service marks, service
mark applications, trade names, copyrights, manufacturing processes, formulae,
trade secrets, customer lists and know how (collectively, "Intellectual
Property") necessary to the conduct of its business as conducted and as proposed
to be conducted, and no claim is pending or, to the best of the Company's
knowledge, threatened to the effect that the operations of the Company infringe
upon or conflict with the asserted rights of any other person under any
Intellectual Property, and the Company reasonably believes that there is no
basis for any such claim (whether or not pending or threatened). No claim is
pending or, to the best of the Company's knowledge, threatened to the effect
that any such Intellectual Property owned or licensed by the Company, or which
the Company otherwise has the right to use, is invalid or unenforceable by the
Company, and the Company reasonably believes that there is no basis for any such
claim (whether or not pending or threatened). All prior art known to the Company
which may be or may have been pertinent to the examination of any United States
patent or patent application listed in Schedule II has been cited to the
-----------
United States Patent and Trademark Office. To the best of the Company's
knowledge, all technical information developed by and belonging to the Company
which has not been patented has been kept confidential. The Company has not
granted or assigned to any other person or entity any right to manufacture, have
manufactured, assemble or sell the products or proposed products or to provide
the services or proposed services of the Company.
SECTION 2.10 Title to Properties. The Company has good, clear and
-------------------
marketable title to its properties and assets reflected on the Balance Sheet or
acquired by it since the date of the Balance Sheet (other than properties and
assets disposed of in the ordinary course of business since the date of the
Balance Sheet), and all such properties and assets are free and clear of
mortgages, pledges, security interests, liens, charges, claims, restrictions and
other encumbrances (including without limitation, easements and licenses),
except for liens for or current taxes not yet due and payable and minor
imperfections of title, if any, not material in nature or amount and not
materially detracting from the value or impairing the use of the property
subject thereto or impairing the operations or proposed operations of the
Company, including without limitation, the ability of the Company to secure
financing using such properties and assets as collateral. To the best of the
Company's knowledge, there are no condemnation, environmental, zoning or other
land use regulation proceedings, either instituted or planned to be instituted,
which would adversely affect the use or operation of the Company's and its
subsidiaries' properties and assets for their respective intended uses and
purposes, or the value of such properties, and the Company has not received
notice of any special assessment proceedings which would affect such properties
and assets.
SECTION 2.11 Leasehold Interests. Each lease or agreement to which the
-------------------
Company is a party under which it is a lessee of any property, real or personal,
is a valid and subsisting agreement, duly authorized and entered into, without
any default of the Company thereunder and, to the best of the Company's
knowledge, without any default thereunder of any other party thereto. No event
has occurred and is continuing which, with due notice or lapse of time or both,
would constitute a default or event of default by the Company under any such
lease or agreement or, to the best of the Company's knowledge, by any other
party thereto. The Company's possession of such property has not been disturbed
and, to the best of the Company's knowledge, no claim has been asserted against
the Company adverse to its rights in such leasehold interests.
7
<PAGE>
SECTION 2.12 Insurance. The Company holds valid policies covering all of
---------
the insurance required to be maintained by it under Section 5.05.
SECTION 2.13 Taxes. The Company has filed all tax returns, Federal,
-----
state, county and local, required to be filed by it, and the Company has paid
all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or payable, including
without limitation all taxes which the Company is obligated to withhold from
amounts owing to employees, creditors and third parties. The Company has
established adequate reserves for all taxes accrued but not yet payable. The
Federal income tax returns of the Company have never been audited by the
Internal Revenue Service. No deficiency assessment with respect to or proposed
adjustment of the Company's Federal, state, county or local taxes is pending or,
to the best of the Company's knowledge, threatened. There is no tax lien,
whether imposed by any Federal, state, county or local taxing authority,
outstanding against the assets, properties or business of the Company. Neither
the Company nor any of its present or former stockholders has ever filed an
election pursuant to Section 1362 of the Internal Revenue Code of 1986, as
amended (the "Code"), that the Company be taxed as an S corporation.
SECTION 2.14 Other Agreements. Except as set forth in the attached
----------------
Schedule IV(A), (which Schedule IV(A) may be updated in writing prior to any
- -------------- --------------
Additional Closing hereunder) as of each Closing Date hereunder, the Company
reasonably believes after due investigation that it is not a party to or
otherwise bound by any written or oral agreement, instrument, commitment or
restriction which individually or in the aggregate could materially adversely
affect the business, prospects, financial condition, operations, property or
affairs of the Company. Except as set forth in the attached Schedule IV(B), the
--------------
Company is not a party to or otherwise bound by any written or oral:
(a) distributor, dealer, manufacturer's representative or sales agency
agreement which is not terminable on less than ninety (90) days' notice without
cost or other liability to the Company (except for agreements which, in the
aggregate, are not material to the business of the Company);
(b) sales agreement which entitles any customer to a rebate or right
of set-off, to return any product to the Company after acceptance thereof or to
delay the acceptance thereof, or which varies in any material respect from the
Company's standard form agreements;
(c) agreement with any labor union (and, to the knowledge of the
Company, no organizational effort is being made with respect to any of its
employees);
(d) agreement with any supplier containing any provision permitting
any party other than the Company to renegotiate the price or other terms, or
containing any pay-back or other similar provision, upon the occurrence of a
failure by the Company to meet its obligations under the agreement when due or
the occurrence of any other event;
(e) agreement for the future purchase of fixed assets or for the
future purchase of materials, supplies or equipment in excess of its normal
operating requirements;
8
<PAGE>
(f) agreement for the employment of any officer, employee or other
person on a full-time or consulting basis which is not terminable by the Company
at will without liability to the Company, except pursuant to severance and
accrued vacation pay policies applicable to all employees of the Company;
(g) bonus, pension, profit-sharing, retirement, hospitalization,
insurance, stock purchase, stock option or other plan, agreement or
understanding pursuant to which benefits are provided to any employee of the
Company (other than group insurance plans applicable to employees generally);
(h) agreement relating to the borrowing of money or to the mortgaging
or pledging of, or otherwise placing a lien or security interest on, any asset
of the Company;
(i) guaranty of any obligation for borrowed money or otherwise;
(j) voting trust or agreement, stockholders' agreement, pledge
agreement, buy-sell agreement or first refusal or preemptive rights agreement
relating to any securities of the Company (other than this Agreement, the
Registration Rights Agreement Amendment, the 1994 Stock Restriction Agreements,
and the Prior Management Rights Agreements), the Series A Agreement (as defined
in Section 6.13 hereof), the Series B Agreement (as defined in Section 6.13
hereof), the Series C Agreement (as defined in Section 6.13 hereof), the Stock
Purchase Agreement, dated as of November 5, 1997, between the Company and Kwang
Dong Pharmaceutical Company), the Series E Agreement (as defined in Section 6.13
hereof) and the Series F Agreement (as defined in Section 6.13 hereof);
(k) agreement, or group of related agreements with the same party or
any group of affiliated parties, under which the Company has advanced or agreed
to advance money or has agreed to lease any property as lessee or lessor;
(l) agreement or obligation (contingent or otherwise) to issue, sell
or otherwise distribute or to repurchase or otherwise acquire or retire any
share of its capital stock or any of its other equity securities other than
pursuant to its Charter as in effect on any Closing Date hereunder;
(m) assignment, license or other agreement with respect to any form of
intangible property;
(n) agreement under which it has granted any person any registration
rights, other than the Registration Rights Agreement;
(o) agreement under which it has limited or restricted its right to
compete with any person in any respect; and
(p) other agreement or group of related agreements with the same party
involving more than $40,000 or continuing over a period of more than six months
from the date
9
<PAGE>
or dates thereof (including renewals or extensions optional with another party),
which agreement or group of agreements is not terminable by the Company without
penalty upon notice of thirty (30) days or less, but excluding any agreement or
group of agreements with a customer of the Company for the sale, lease or rental
of the Company's products or services if such agreement or group of agreements
was entered into by the Company in the ordinary course of business.
The Company, and to the best of the Company's knowledge, each other party
thereto have in all material respects performed all the obligations required to
be performed by them to date (or each non-performing party has received a valid,
enforceable and irrevocable written waiver with respect to its non-performance),
have received no notice of default and are not in default (with due notice or
lapse of time or both) under any agreement, instrument, commitment, plan or
arrangement to which the Company is a party or by which it or its property may
be bound. The Company has no present expectation or intention of not fully
performing all its obligations under each such agreement, instrument,
commitment, plan or arrangement, and the Company has no knowledge of any breach
or anticipated breach by the other party to any agreement, instrument,
commitment, plan or arrangement to which the Company is a party. The Company is
in full compliance with all of the terms and provisions of its Charter and By-
laws, as amended.
SECTION 2.15 Significant Customers and Suppliers. No customer or
-----------------------------------
supplier, or group of two or more thereof (whether or not affiliated) which was
material to the Company, individually or in the aggregate, during the period
covered by the financial statements referred to in Section 2.05 or which has
been material to the Company thereafter, has terminated, materially reduced or
threatened to terminate or materially reduce its or their purchases from or
provision of products or services to the Company, as the case may be.
SECTION 2.16 Governmental Approvals. Subject to the accuracy of the
----------------------
representations and warranties of the Purchasers set forth in Article III, no
registration or filing with, or consent or approval of or other action by, any
Federal, state or other governmental agency or instrumentality is or will be
necessary for the valid execution, delivery and performance by the Company of
this Agreement or the Registration Rights Agreement Amendment, the issuance,
sale and delivery of the Preferred Shares or, upon conversion thereof, the
issuance and delivery of the Conversion Shares, other than (i) filings pursuant
to state securities laws (all of which filings have been made by the Company,
other than those which are required to be made after the Closing and which will
be duly made on a timely basis) in connection with the sale of the Preferred
Shares and (ii) with respect to the Registration Rights Agreement, the
registration of the shares covered thereby with the Securities and Exchange
Commission (the "Commission") and filings pursuant to state securities laws.
SECTION 2.17 Disclosure. Neither this Agreement, nor any Schedule or
----------
Exhibit to this Agreement, contains an untrue statement of a material fact or
omits a material fact necessary to make the statements contained herein or
therein not misleading. None of the statements, documents, certificates or
other items prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained therein not misleading.
10
<PAGE>
SECTION 2.18 Offering of the Preferred Shares. Neither the Company nor
--------------------------------
any person authorized or employed by the Company as agent, broker, dealer or
otherwise in connection with the offering or sale of the Preferred Shares or any
security of the Company similar to the Preferred Shares has offered the
Preferred Shares or any such similar security for sale to, or solicited any
offer to buy the Preferred Shares or any such similar security from, or
otherwise approached or negotiated with respect thereto with, any person or
persons, and neither the Company nor any person acting on its behalf has taken
or will take any other action (including, without limitation, any offer,
issuance or sale of any security of the Company under circumstances which might
require the integration of such security with Preferred Shares under the
Securities Act of 1933, as amended (the "Securities Act") or the rules and
regulations of the Commission thereunder), in either case so as to subject the
offering, issuance or sale of the Preferred Shares to the registration
provisions of the Securities Act.
SECTION 2.19 Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
SECTION 2.20 Officers. Set forth in Schedule II is a list of the names of
-------- -----------
the officers of the Company, together with the title or job classification of
each such person and the total cash compensation anticipated to be paid to each
such person by the Company in 1999.
SECTION 2.21 Transactions With Affiliates. Other than purchases of
----------------------------
Preferred Shares hereunder and under the Series A Agreement, Series B Agreement,
Series C Agreement, Series D Agreement, Series E Agreement and Series F
Agreement (as such terms are defined in Section 6.13 hereof) and except as set
forth on Schedule III and Schedule IV(B) hereof, no director, officer, employee
------------ --------------
or stockholder of the Company, or member of the family of any such person, or
any corporation, partnership, trust or other entity in which any such person, or
any member of the family of any such person, has a substantial interest or is an
officer, director, trustee, partner or holder of more than 5% of the outstanding
capital stock thereof, is a party to any transaction with the Company, including
any contract, agreement or other arrangement providing for the employment of,
furnishing of services by, rental of real or personal property from or otherwise
requiring payments to any such person or firm, other than employment-at-will
arrangements in the ordinary course of business.
SECTION 2.22 Employees. Each of the officers of the Company, each key
---------
employee and each other employee now employed by the Company who has access to
confidential information of the Company has executed an Employee Nondisclosure
and Developments Agreement substantially in the form of Exhibit C, and such
---------
agreements are in full force and effect. No officer or key employee of the
Company has advised the Company (orally or in writing) that he or she intends to
terminate employment with the Company. The Company has complied in all material
respects with all applicable laws relating to the employment of labor, including
provisions relating to wages, hours, equal opportunity, collective bargaining
and the payment of Social Security and other taxes, and with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
11
<PAGE>
SECTION 2.23 Environmental Protection. The Company has not caused or
------------------------
allowed, or contracted with any party for, the generation, use, transportation,
treatment, storage or disposal of any Hazardous Substances (as defined below) in
connection with the operation of its business or otherwise. The Company, the
operation of its business, and to the Company's knowledge, any real property
that the Company owns, leases or otherwise occupies or uses (the "Premises") are
in material compliance with all applicable Environmental Laws (as defined below)
and orders or directives of any governmental authorities having jurisdiction
under such Environmental Laws, including, without limitation, any Environmental
Laws or orders or directives with respect to any cleanup or remediation of any
release or threat of release of Hazardous Substances. The Company has not
received any citation, directive, letter or other communication, written or
oral, or any notice of any proceeding, claim or lawsuit, from any person arising
out of the ownership or occupation of the Premises, or the conduct of its
operations, and the Company is not aware of any basis therefor. The Company has
obtained and is maintaining in full force and effect all necessary permits,
licenses and approvals required by all Environmental Laws applicable to the
Premises and the Company's business operations conducted thereon, and is in
compliance with all such permits, licenses and approvals. The Company has not
caused or allowed a release, or a threat of release, of any Hazardous Substance
unto, at or near the Premises, and, to the best of the Company's knowledge,
neither the Premises nor any property at or near the Premises has ever been
subject to a release, or a threat of release, of any Hazardous Substance. For
the purposes of this Agreement, the term "Environmental Laws" shall mean any
Federal, state or local law or ordinance or regulation pertaining to the
protection of human health or the environment, including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Sections 9601, et seq., the Emergency Planning and Community Right-to-
Know Act, 42 U.S.C. Sections 11001, et seq., and the Resource Conservation and
Recovery Act, 42 U.S.C. Sections 6901, et seq. For purposes of this Agreement,
the term "Hazardous Substances" shall include oil and petroleum products,
asbestos, polychlorinated biphenyls, urea formaldehyde and any other materials
classified as hazardous or toxic under any Environmental Laws.
SECTION 2.24 ERISA.
-----
(a) Schedule II lists each employee plan that covers any employee of the
-----------
Company (each, an "Employee Plan" and collectively, the "Employee Plans"),
copies or descriptions of all of which have previously been made available or
furnished to the Purchasers. With respect to each Employee Plan, the Company
has provided the most recently filed Form 5500 and an accurate summary
description of such plan.
(b) Schedule II also includes a list of each benefit arrangement of the
-----------
Company (each, a "Benefit Arrangement" and collectively, the "Benefit
Arrangements"), copies or descriptions of all of which have been made available
or furnished previously to the Purchasers.
(c) No Employee Plan is a Multiemployer Plan and no Employee Plan is
subject to Title IV of ERISA. The Company and its Affiliates have not incurred
any liability under Title IV of ERISA arising in connection with the termination
of any plan covered or previously covered by Title IV of ERISA.
12
<PAGE>
(d) None of the Employee Plans or other arrangements listed on Schedule II
-----------
covers any non-United States employee or former employee of the Company.
(e) No "prohibited transaction," as defined in Section 406 of ERISA or
Section 4975 of the Code, has occurred with respect to any Employee Plan.
(f) Each Employee Plan which is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified during the period
from its adoption to date, and each trust forming a part thereof is exempt from
tax pursuant to Section 501(a) of the Code. The Company has furnished to the
Purchasers copies of the most recent Internal Revenue Service determination
letters with respect to each such plan. Each Employee Plan has been maintained
in compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such plan.
(g) Each Employee Plan and each Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations which are applicable to such
Employee Plan and Benefit Arrangement.
(h) All contributions and payments accrued under each Employee Plan and
Benefit Arrangement, determined in accordance with prior funding and accrual
practices, as adjusted to include proportional accruals for the period ending on
the Closing Date, will be discharged and paid on or prior to the Closing Date
except to the extent reflected on the Balance Sheet. Except as disclosed in
writing to the Purchasers prior to the date hereof, there has been no amendment
to, written interpretation of or announcement (whether or not written) by the
Company or any of its ERISA Affiliates relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit Arrangement that
would increase materially the expense of maintaining such Employee Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year ended prior to the date hereof.
(i) There is no contract, agreement, plan or arrangement covering any
employee or former employee of the Company that, individually or collectively,
could give rise to the payment of any amount that would not be deductible
pursuant to the terms of Section 280G of the Code.
(j) No tax under Section 4980B of the Code has been incurred in respect of
any Employee Plan that is a group health plan, as defined in Section 5000(b)(1)
of the Code.
(k) With respect to the employees and former employees of the Company,
there are no employee post-retirement medical or health plans in effect, except
as required by Section 4980B of the Code.
(l) No employee of the Company will become entitled to any bonus,
retirement, severance or similar benefit or enhanced benefit solely as a result
of the transactions contemplated hereby.
13
<PAGE>
(m) The Company does not have, nor is it reasonably expected to have, any
liability under Title IV of ERISA.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser severally represents and warrants to the Company that:
(a) it is an "accredited investor" within the meaning of Rule 501 under
the Securities Act and was not organized for the specific purpose of
acquiring the Preferred Shares;
(b) it has sufficient knowledge and experience in investing in companies
similar to the Company in terms of the Company's stage of development so as
to be able to evaluate the risks and merits of its investment in the Company
and it is able financially to bear the risks thereof;
(c) it has had an opportunity to discuss the Company's proposed business,
management and financial affairs with the Company's management;
(d) the Preferred Shares being purchased by it are being acquired for its
own account for the purpose of investment and not with a view to or for sale
in connection with any distribution thereof;
(e) it understands that (i) the Preferred Shares and the Conversion Shares
have not been registered under the Securities Act by reason of their issuance
in a transaction exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof or Rule 505 or 506 promulgated under the
Securities Act, (ii) the Preferred Shares and, upon conversion thereof, the
Conversion Shares must be held indefinitely unless a subsequent disposition
thereof is registered under the Securities Act or is exempt from such
registration, (iii) the Preferred Shares and the Conversion Shares will bear
a legend to such effect and (iv) the Company will make a notation on its
transfer books to such effect; and
(f) if it sells any Conversion Shares pursuant to Rule 144A promulgated
under the Securities Act, it will take all necessary steps in order to
perfect the exemption from registration provided thereby, including (i)
obtaining on behalf of the Company information to enable the Company to
establish a reasonable belief that the purchaser is a qualified institutional
buyer and (ii) advising such purchaser that Rule 144A is being relied upon
with respect to such resale.
14
<PAGE>
ARTICLE IV
CONDITIONS TO THE OBLIGATIONS
OF THE PURCHASERS
The obligation of each Purchaser to purchase and pay for the Preferred
Shares being purchased by it on the Closing Date is, at its option, subject to
the satisfaction, on or before the Closing Date, of the following conditions:
(a) Representations and Warranties to be True and Correct. The
-----------------------------------------------------
representations and warranties contained in Article II shall be true,
complete and correct in all material respects on and as of the Closing Date
with the same effect as though such representations and warranties had been
made on and as of such date, and the President and Treasurer of the Company
shall have certified to such effect to the Purchasers in writing.
(b) Performance. The Company shall have performed and complied in all
-----------
material respects with all agreements contained herein required to be
performed or complied with by it prior to or at the Closing Date.
(c) All Proceedings to be Satisfactory. All corporate and other
----------------------------------
proceedings to be taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be satisfactory
in form and substance to the Purchasers and their counsel, and the Purchasers
and their counsel shall have received all such counterpart originals or
certified or other copies of such documents as they reasonably may request.
(d) Supporting Documents. The Purchasers and their counsel shall have
--------------------
received copies of the following documents:
(i) the Charter, certified as of a recent date by the Secretary of
State of the State of Delaware; and
(ii) (A) a complete copy of the By-laws of the Company as in effect
on the Closing Date; and (B) a complete copy of all resolutions adopted
by the Board of Directors and the stockholders of the Company authorizing
the execution, delivery and performance of this Agreement and the
Registration Rights Agreement Amendment, the issuance, sale and delivery
of the Preferred Shares and the reservation, issuance and delivery of the
Conversion Shares, and a secretary's certificate to the effect that all
such resolutions are in full force and effect and are all the resolutions
adopted in connection with the transactions contemplated by this
Agreement and the Registration Rights Agreement Amendment.
(e) Registration Rights Agreement Amendment. The Company shall have
---------------------------------------
executed and delivered the Registration Rights Agreement Amendment.
(f) Charter. The Charter shall read in its entirety as set forth in
-------
Exhibit B.
---------
15
<PAGE>
(g) Opinion of Counsel. Purchasers participating in such Closing shall
------------------
have received an opinion of Dechert Price & Rhoads, dated the date of such
Closing, satisfactory in form and substance to such Purchasers and
Purchasers' counsel.
(h) Fees of Purchasers' Counsel. The Company shall have paid in accordance
---------------------------
with Section 6.01 the fees and disbursements of Purchasers' counsel invoiced
at the Closing or any Additional Closing.
(i) Due Diligence. The Purchasers shall have completed their business,
-------------
tax, accounting, regulatory, legal and other due diligence review to the
reasonable satisfaction of the Purchasers.
(j) Approvals and Consents. The Company shall have received all
----------------------
governmental and regulatory approvals and consents and all other requisite
third party approvals and consents which are necessary to consummate this
Agreement and the transactions contemplated thereby.
All such documents shall be satisfactory in form and substance to the Purchasers
and their counsel.
ARTICLE V
COVENANTS OF THE COMPANY
The Company covenants and agrees with each of the Purchasers that:
SECTION 5.01 Financial Statements, Reports, Etc.. The Company shall
-----------------------------------
furnish to each Purchaser (provided that such Purchaser signs a customary
confidentiality agreement with the Company):
(a) within ninety (90) days after the end of each fiscal year of the
Company a consolidated balance sheet of the Company as of the end of such
fiscal year and the related consolidated statements of income, stockholders'
equity and cash flows for the fiscal year then ended, prepared in accordance
with generally accepted accounting principles and certified by a firm of
independent public accountants of recognized national standing selected by
the Board of Directors of the Company;
(b) within thirty (30) days after the end of each month in each fiscal
year (other than the last month in each fiscal year) a consolidated balance
sheet of the Company and the related consolidated statements of income,
stockholders' equity and cash flows, unaudited but prepared in accordance
with generally accepted accounting principles and certified by the Chief
Financial Officer of the Company, such consolidated balance sheet to be as of
the end of such month and such consolidated statements of income,
stockholders' equity and cash flows to be for such month and for the period
from the beginning of the fiscal year to the end of such month, in each case
with comparative statements for the prior
16
<PAGE>
fiscal year, provided that the Company's obligations under this Section
5.01(b) shall terminate upon the completion of a firm commitment underwritten
public offering of the Company's securities;
(c) at the time of delivery of each monthly statement pursuant to Section
5.01(b), a management narrative report explaining all significant variances
from forecasts and all significant current developments in staffing,
marketing, sales and operations;
(d) no later than sixty (60) days prior to the start of each fiscal year,
consolidated capital and operating expense budgets, cash flow projections and
income and loss projections for the Company in respect of such fiscal year,
all itemized in reasonable detail and prepared on a monthly basis, and,
promptly after preparation, any revisions to any of the foregoing;
(e) promptly following receipt by the Company, each audit response letter,
accountant's management letter and other written report submitted to the
Company by its independent public accountants in connection with an annual or
interim audit of the books of the Company;
(f) promptly after the commencement thereof, notice of all actions, suits,
claims, proceedings, investigations and inquiries of the type described in
Section 2.07 that could reasonably be expected to materially adversely affect
the Company;
(g) promptly upon sending, making available or filing the same, all press
releases, reports and financial statements that the Company sends or makes
available to its stockholders or directors or files with the Commission; and
(h) promptly, from time to time, such other information regarding the
business, prospects, financial condition, operations, property or affairs of
the Company as such Purchaser reasonably may request.
SECTION 5.02 Right of First Refusal. So long as the Company has not
----------------------
consummated an Initial Public Offering (as hereafter defined), the Company
shall, prior to any issuance by the Company of any of its securities (other than
debt securities with no equity feature), offer to each Purchaser by written
notice the right, for a period of twenty (20) days, to purchase all of such
securities for cash at an amount equal to the price or other consideration for
which such securities are to be issued; provided, however, that the first
refusal rights of the Purchasers pursuant to this Section 5.02 shall not apply
to securities issued (A) upon conversion of any of the Preferred Shares, (B) as
a stock dividend or upon any subdivision of shares of Common Stock, provided
that the securities issued pursuant to such stock dividend or subdivision are
limited to additional shares of Common Stock, (C) pursuant to subscriptions,
warrants, options, convertible securities, or other rights which are listed in
Schedule III as being outstanding on the date of this Agreement, but not
- ------------
including those described in (F) below, (D) solely in consideration for the
acquisition (whether by merger or otherwise) by the Company of all or
substantially all of the stock or assets of any other entity, which such
acquisition has been approved by the Board of Directors of the Company, (E)
pursuant to a firm commitment
17
<PAGE>
underwritten public offering, (F) pursuant to the exercise of options to
purchase Common Stock granted to directors, officers, employees or consultants
of the Company in connection with their service to the Company or pursuant to
the exercise of options to purchase Common Stock granted to or Common Stock
issued to licensors or transferors of technology to the Company, not to exceed
in the aggregate 14,750,000 shares (appropriately adjusted to reflect stock
splits, stock dividends, combinations of shares and the like with respect to the
Common Stock) (the shares exempted by this clause (F) being hereinafter referred
to as the "Reserved Employee and Technology Shares"), and (G) upon the exercise
of any right which was not itself in violation of the terms of this Section
5.02. The Company's written notice to the Purchasers shall describe the
securities proposed to be issued by the Company and specify the number, price
and payment terms. Each Purchaser may accept the Company's offer as to the full
number of securities offered to it or any lesser number, by written notice
thereof given by it to the Company prior to the expiration of the aforesaid
twenty (20) day period, in which event the Company shall promptly sell and such
Purchaser shall buy, upon the terms specified, the number of securities agreed
to be purchased by such Purchaser. Notwithstanding the foregoing, if the
Purchasers agree, in the aggregate, to purchase more than the full number of
securities offered by the Company, then each Purchaser accepting the Company's
offer shall first be allocated the lesser of (i) the number of securities which
such Purchaser agreed to purchase and (ii) the number of securities as is equal
to the full number of securities offered by the Company multiplied by a
fraction, the numerator of which shall be the number of shares of Common Stock
held by such Purchaser as of the date of the Company's notice of offer (treating
such Purchaser, for the purpose of such calculation, as the holder of the number
of shares of Common Stock which would be issuable to such Purchaser upon
conversion, exercise or exchange of all securities (including but not limited to
the Preferred Shares) held by such Purchaser on the date such offer is made,
that are convertible, exercisable or exchangeable into or for (whether directly
or indirectly) shares of Common Stock) and the denominator of which shall be the
aggregate number of shares of Common Stock (calculated as aforesaid) held on
such date by all Purchasers who accepted the Company's offer, and the balance of
the securities (if any) offered by the Company shall be allocated among the
Purchasers accepting the Company's offer in proportion to their relative equity
ownership interests in the Company (calculated as aforesaid), provided that no
Purchaser shall be allocated more than the number of securities which such
Purchaser agreed to purchase and provided further that in cases covered by this
sentence all Purchasers shall be allocated among them the full number of
securities offered by the Company. The Company shall be free at any time prior
to ninety (90) days after the date of its notice of offer to the Purchasers, to
offer and sell to any third party or parties the number of such securities not
agreed by the Purchasers to be purchased by them, at a price and on payment
terms no less favorable to the Company than those specified in such notice of
offer to the Purchasers. However, if such third party sale or sales are not
consummated within such ninety (90) day period, the Company shall not sell such
securities as shall not have been purchased within such period without again
complying with this Section 5.02. For purposes of this Section 5.02, (x) the
term "Purchasers" shall include the Series A Purchasers, the Series B
Purchasers, the Series C Purchasers, the Series E Purchasers and the Series F
Purchasers (as such terms are defined in Section 6.13 hereof) and (y) the term
"Preferred Shares" shall include the shares of Series A Convertible Preferred
Stock, the shares of Series B Convertible Preferred Stock, the shares of Series
C Convertible Preferred Stock, the shares of Series E Convertible Preferred
Stock and the shares of Series F Convertible Preferred Stock purchased pursuant
to the Series A Agreement,
18
<PAGE>
the Series B Agreement, the Series C Agreement, the Series E Agreement and the
Series F Agreement, respectively (as such terms are defined in Section 6.13).
"Initial Public Offering" means a underwritten public offering pursuant to an
effective registration statement under the Securities Act in respect of the
offer and sale of shares of Common Stock for the account of the Company
resulting in aggregate net proceeds to the Company and any stockholder selling
shares of Common Stock in such offering of not less than $25,000,000 and a
public offering price per share of not less than $1.50 per share (as adjusted
for any combination, division, subdivision, stock split, reverse stock split or
similar event relating to the Common Stock).
SECTION 5.03 Reserve for Conversion Shares. The Company shall at all
-----------------------------
times reserve and keep available out of its authorized but unissued shares of
Common Stock, for the purpose of effecting the conversion of the Preferred
Shares and otherwise complying with the terms of this Agreement, such number of
its duly authorized shares of Common Stock as shall be sufficient to effect the
conversion of the Preferred Shares from time to time outstanding or otherwise to
comply with the terms of this Agreement (the "Conversion Shares"). If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of the Preferred Shares or otherwise to
comply with the terms of this Agreement, the Company will forthwith take such
corporate action as may be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes. The Company will obtain any authorization, consent, approval or other
action by or make any filing with any court or administrative body that may be
required under applicable state securities laws in connection with the issuance
of shares of Common Stock upon conversion of the Preferred Shares.
SECTION 5.04 Corporate Existence. The Company shall maintain its
-------------------
corporate existence, rights and franchises in full force and effect.
SECTION 5.05 Properties, Business, Insurance. The Company shall maintain
-------------------------------
its properties and business with insurance from financially sound and reputable
insurers against such casualties and contingencies and of such types and in such
amounts as is customary for companies similarly situated, which insurance shall
be deemed by the Company to be sufficient. The Company shall not cause or
permit any assignment or change in beneficiary and shall not borrow against any
such policy. If requested by Purchasers holding at least sixty percent (60%) of
the outstanding Preferred Shares, the Company shall add one designee of such
Purchasers as a notice party for each such policy and shall request that the
issuer of each policy provide such designee with ten (10) days' notice before
such policy is terminated (for failure to pay premiums or otherwise) or assigned
or before any change is made in the beneficiary thereof.
SECTION 5.06 Inspection, Consultation and Advice. The Company shall
-----------------------------------
permit each Purchaser holding, in aggregate with its partners, shareholders or
other affiliates, in excess of 10% of the Series G Convertible Preferred Stock
and such persons as it may designate, at such Purchaser's expense, and subject
to the execution of an appropriate confidentiality agreement, to visit and
inspect any of the properties of the Company, examine their books and take
copies and extracts therefrom, discuss the affairs, finances and accounts of the
Company with its officers, employees and public accountants (and the Company
hereby authorizes said accountants to discuss with such Purchaser and such
designees such affairs, finances and accounts), and consult
19
<PAGE>
with and advise the management of the Company as to its affairs, finances and
accounts, all at reasonable times and upon reasonable notice.
SECTION 5.07 Restrictive Agreements Prohibited. The Company shall not
---------------------------------
become a party to any agreement which by its terms restricts the Company's
performance of this Agreement, the Registration Rights Agreement or the Charter.
SECTION 5.08 Transactions with Affiliates. Except for transactions
----------------------------
contemplated by this Agreement or as otherwise approved by the Board of
Directors, the Company shall not enter into any material transaction with any
director, officer, employee or holder of more than 5% of the outstanding capital
stock of any class or series of capital stock of the Company, member of the
family of any such person, or any corporation, partnership, trust or other
entity in which any such person, or member of the family of any such person, is
a director, officer, trustee, partner or holder of more than 5% of the
outstanding capital stock thereof, except for transactions on customary terms
related to such person's employment.
SECTION 5.09 Use of Proceeds. The Company shall use the cash proceeds
---------------
from the sale of the Preferred Shares solely for research and product
development, clinical trials, capital expenditures, working capital and other
general corporate purposes.
SECTION 5.10 By-laws. The Company shall at all times cause its By-laws to
-------
provide that, (a) unless otherwise required by the laws of the State of
Delaware, (i) any two directors and (ii) any holder or holders of at least 25%
of the outstanding shares of Series G Convertible Preferred Stock, shall have
the right to call a meeting of the Board of Directors or stockholders and (b)
the number of directors fixed in accordance therewith shall in no event conflict
with any of the terms or provisions of the Series G Convertible Preferred Stock
as set forth in the Charter. The Company shall at all times maintain provisions
in its By-laws and/or Charter indemnifying all directors against liability and
absolving all directors from liability to the Company and its stockholders to
the maximum extent permitted under the laws of the State of Delaware.
SECTION 5.11 Performance of Contracts. The Company shall not materially
------------------------
amend, modify, terminate, waive or otherwise alter, in whole or in part, any of
the Employee Nondisclosure and Developments Agreements without the consent of
the Company's Board of Directors.
SECTION 5.12 Vesting of Reserved Employee Shares. The Company shall not
-----------------------------------
grant to any of its employees options to purchase Reserved Employee Shares which
will become exercisable at a rate in excess of 25% per annum from the date of
such grant without the approval of the Company's Board of Directors.
SECTION 5.13 Employee Nondisclosure and Developments Agreements. The
--------------------------------------------------
Company shall use its best efforts to obtain an Employee Nondisclosure and
Developments Agreement in substantially the form of Exhibit C, or in such other
---------
form as is approved by the Board of Directors, from all future officers, key
employees and other employees who will have access to confidential information
of the Company, upon their employment by the Company.
20
<PAGE>
SECTION 5.14 Compliance with Laws. The Company shall comply with all
--------------------
applicable laws, rules, regulations and orders, noncompliance with which could
reasonably be expected to materially adversely affect its business or condition,
financial or otherwise.
SECTION 5.15 Keeping of Records and Books of Account. The Company shall
---------------------------------------
keep adequate records and books of account, in which complete entries will be
made in accordance with generally accepted accounting principles consistently
applied, reflecting all financial transactions of the Company, and in which, for
each fiscal year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
SECTION 5.16 Rule 144A Information. The Company shall, at all times
---------------------
during which it is neither subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange
Act, provide in writing, upon the written request of any Purchaser or a
prospective buyer of Preferred Shares or Conversion Shares from any Purchaser,
all information required by Rule 144A(d)(4)(i) (or any successor provision
thereto) of the General Regulations promulgated by the Commission under the
Securities Act ("Rule 144A Information"). The Company also shall, upon the
written request of any Purchaser, cooperate with and assist such Purchaser or
any member of the National Association of Securities Dealers, Inc. PORTAL system
in applying to designate and thereafter maintain the eligibility of the
Preferred Shares or Conversion Shares, as the case may be, for trading through
PORTAL. The Company's obligations under this Section 5.16 shall at all times be
contingent upon the relevant Purchaser's obtaining from the prospective buyer of
Preferred Shares or Conversion Shares a written agreement to take all reasonable
precautions to safeguard the Rule 144A Information from disclosure to anyone
other than a person who will assist such buyer in evaluating the purchase of any
Preferred Shares or Conversion Shares.
SECTION 5.17 Future Subsidiaries. In the event the Company shall acquire
-------------------
or create a subsidiary or subsidiaries, the Company agrees that the covenants
contained in this Article V shall apply to the Company and such subsidiaries on
a consolidated basis.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01 Expenses. Each party hereto will pay its own expenses in
--------
connection with the transactions contemplated hereby, whether or not such
transactions shall be consummated, provided, however, that in the event the
Closing occurs, the Company shall pay the reasonable invoiced, out of pocket
fees and expenses, not to exceed an aggregate amount of $15,000, incurred by the
Purchasers' attorneys in connection with legal, corporate and patent due
diligence.
SECTION 6.02 Survival of Agreements. All covenants, agreements,
----------------------
representations and warranties made herein or in the Registration Rights
Agreement Amendment, or any certificate
21
<PAGE>
or instrument delivered to the Purchasers pursuant to or in connection with this
Agreement or the Registration Rights Agreement Amendment, shall survive the
execution and delivery of this Agreement and the Registration Rights Agreement
Amendment, the issuance, sale and delivery of the Preferred Shares, and the
issuance and delivery of the Conversion Shares, and all statements contained in
any certificate or other instrument delivered by the Company hereunder or
thereunder or in connection herewith or therewith shall be deemed to constitute
representations and warranties made by the Company; provided that all such
representations and warranties shall terminate two years from the date they are
made.
SECTION 6.03 Brokerage. Each party hereto will indemnify and hold
---------
harmless the others against and in respect of any claim for brokerage or other
commissions relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements or understandings made or
claimed to have been made by such party with any third party.
SECTION 6.04 Parties in Interest. All representations, covenants and
-------------------
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not. Without limiting the
generality of the foregoing, all representations, covenants and agreements
benefiting the Purchasers shall inure to the benefit of any and all subsequent
holders from time to time of Preferred Shares or Conversion Shares.
SECTION 6.05 Notices. All notices, requests, consents and other
-------
communications hereunder shall be in writing and shall be delivered in person,
mailed by certified or registered mail, return receipt requested, or sent by
telecopier or telex, addressed as follows:
(a) if to the Company, at 371 Phoenixville Pike, Malvern, PA 19355,
Attention: President, with a copy to James A. Lebovitz, Esq., Dechert Price &
Rhoads, 4000 Bell Atlantic Tower, 1717 Arch Street, Philadelphia, PA 19103;
and
(b) if to any Purchaser, at the address of such Purchaser set forth in
Schedule I;
----------
or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.
SECTION 6.06 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware.
SECTION 6.07 Entire Agreement. This Agreement, including the Schedules
----------------
and Exhibits hereto, constitutes the sole and entire agreement of the parties
with respect to the subject matter hereof. All Schedules and Exhibits hereto
are hereby incorporated herein by reference.
SECTION 6.08 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
22
<PAGE>
SECTION 6.09 Amendments. This Agreement may be amended or modified, and
----------
provisions hereof may be waived, with the written consent of the Company and the
holders of at least two-thirds (2/3) of the outstanding shares of Common Stock
issued or issuable upon conversion of the Preferred Shares. Otherwise this
Agreement may not be amended or waived or any provision hereof waived.
SECTION 6.10 Severability. If any provision of this Agreement shall be
------------
declared void or unenforceable by any judicial or administrative authority, the
validity of any other provision and of the entire Agreement shall not be
affected thereby.
SECTION 6.11 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are for convenience only and are not to be considered in construing or
interpreting any term or provision of this Agreement.
SECTION 6.12 Certain Defined Term. As used in this Agreement, the
--------------------
following term shall have the following meaning (such meaning to be equally
applicable to both the singular and plural forms of the term defined):
"person" shall mean an individual, corporation, trust, partnership, joint
venture, unincorporated organization, government agency or any agency or
political subdivision thereof, or other entity.
SECTION 6.13 Prior Agreements. By their signature below, each of the
----------------
Purchasers who are also parties to that certain Series A Convertible Preferred
Stock Purchase Agreement (the "Series A Agreement") between the Company and the
purchasers named therein dated as of November 7, 1994, (each, a "Series A
Purchaser") and that certain Series B Convertible Preferred Stock Purchase
Agreement (the "Series B Agreement") between the Company and the purchasers
named therein dated as of March 1, 1996, (each, a "Series B Purchaser"), that
certain Series C Convertible Preferred Stock Purchase Agreement (the "Series C
Agreement") between the Company and the purchasers named therein dated as of May
1, 1997 (each, a "Series C Purchaser"), that certain Series E Convertible
Preferred Stock Purchase Agreement (the "Series E Agreement") between the
Company and the purchasers named therein dated as of December 8, 1998 (each, a
"Series E Purchaser") and that certain Series F Convertible Preferred Stock
Purchase Agreement (the "Series F Agreement") between the Company and the
purchaser named therein dated as of July 22, 1999, (the "Series F Purchaser")
hereby (i) waives, except to the extent set forth on Schedule I hereto, the
----------
right to purchase shares of Series G Convertible Preferred Stock sold pursuant
to this Agreement. The signature of each Series A Purchaser, Series B
Purchaser, Series C Purchaser, Series E Purchaser and Series F Purchaser below
shall also constitute such party's agreement to the right of first refusal
granted in Section 5.02 hereof and the termination of Sections 5.02 of the
Series A Agreement, the Series B Agreement, the Series C Agreement, the Series E
Agreement and the Series F Agreement.
[Signature pages follow immediately.]
23
<PAGE>
EXHIBIT 4.8
REGISTRATION RIGHTS AGREEMENT
Agreement made as of this 7th day of November, 1994 by and among Opian
Pharmaceuticals, Inc., a Delaware corporation (the "Company"), the purchasers
listed in Schedule I to the Series A Convertible Preferred Stock Purchase
Agreement (the "Purchase Agreement") dated as of November 7, 1994 (collectively
including such purchasers who participate in Additional Closings (as defined in
the Purchase Agreement) and who execute a counterpart to this Agreement, the
"Purchasers") and ARCH Development Corporation (the "Founder").
1. Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission, or any
----------
other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Common Stock, $.0001 par value, of the
------------
Company, as constituted as of the date of this Agreement.
"Conversion Shares" shall mean shares of Common Stock issued upon
-----------------
conversion of the Preferred Shares.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time,
"Founder Stock" shall mean the aggregate of 500,000 shares of Common
-------------
Stock now owned by the Founder, but excluding any such Common Stock that has
been (a) registered under the Securities Act pursuant to an effective
registration statement filed thereunder and disposed of in accordance with the
registration statement covering them or (b) publicly sold pursuant to Rule 144
under the Securities Act.
"Registration Expenses" shall mean the expenses so described in
---------------------
Section 8.
"Restricted Stock" shall mean the Conversion Shares, excluding
----------------
Conversion Shares which have-been (a) registered under the Securities Act
pursuant to an effective registration statement filed thereunder and disposed of
in accordance with the registration statement covering them or (b) publicly sold
pursuant to Rule 144 under the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
<PAGE>
-2-
"Selling Expenses" shall mean the expenses so described in Section 8.
----------------
2. Restrictive Legend. Each certificate representing Preferred
------------------
Shares or Conversion Shares shall, except as otherwise provided in this Section
2 or in Section 3, be stamped or otherwise imprinted with a legend substantially
in the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND
MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT
HAS BEEN REGISTERED UNDER SUCH ACT AND ALL SUCH APPLICABLE
LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE."
A certificate shall not bear such legend if in the opinion of counsel
satisfactory to the Company (it being agreed that Testa, Hurwitz & Thibeault
shall be satisfactory) the securities being sold thereby may be publicly sold
without registration under the Securities Act and any applicable state
securities laws.
3. Notice of Proposed Transfer. Prior to any proposed transfer of
---------------------------
any Preferred Shares or Conversion Shares (other than under the circumstances
described in Sections 4, 5 or 6), the holder thereof shall give written notice
to the Company of its intention to effect such transfer. Each such notice shall
describe the manner of the proposed transfer and, if requested by the Company,
shall be accompanied by an opinion of counsel satisfactory to the Company to the
effect that the proposed transfer may be effected without registration under the
Securities Act and any applicable state securities laws, whereupon the holder of
such stock shall be entitled to transfer such stock in accordance with the terms
of its notice; provided, however, that no such opinion of counsel shall be
-------- -------
required for a transfer to one or more partners of the transferor (in the case
of a transferor that is a partnership) or to an affiliated corporation (in the
case of a transferor that is a corporation). Each certificate for Preferred
Shares or Conversion Shares transferred as above provided shall bear the legend
set forth in Section 2, except that such certificate shall not bear such legend
if (i) such transfer is in accordance with the provisions of Rule 144 (or any
other rule permitting public sale without registration under the Securities Act)
or (ii) the opinion of counsel referred to above is to the further effect that
the transferee and any subsequent transferee (other than an affiliate of the
Company) would be entitled to transfer such securities in a public sale without
registration under the Securities Act. The restrictions provided for in this
Section 3 shall not apply to securities which are not required to bear the
legend prescribed by Section 2 in accordance with the provisions of that
Section.
4. Required Registration. (a) At any time after the earliest of
---------------------
(i) six months after any registration statement covering a public offering of
securities of the Company under the Securities Act shall have become effective,
(ii) six months after the Company shall have become a reporting company under
Section 12 of the Exchange Act, and (iii) the third anniversary of the date of
this Agreement, the holders of Restricted Stock constituting at least 40% of the
total shares of Restricted Stock then outstanding may request the Company to
register under the Securities Act all or any portion of the shares of Restricted
Stock held by such requesting holder
<PAGE>
-3-
or holders for sale in the manner specified in such notice, provided that the
--------
shares of Restricted Stock for which registration has been requested shall
constitute at least 20% of the total shares of Restricted Stock originally
issued if such holder or holders shall request the registration of less than all
shares of Restricted Stock then held by such holder or holders (or any lesser
percentage if the reasonably anticipated aggregate price to the public of such
public offering would exceed $5,000,000). For purposes of this Section 4 and
Sections 5, 6, 13(a) and 13(d), the term "Restricted Stock" shall be deemed to
include the number of shares of Restricted Stock which would be issuable to a
holder of Preferred Shares upon conversion of all shares of Preferred Stock held
by such holder at such time, provided, however, that the only securities which
-------- -------
the Company shall be required to register pursuant hereto shall be shares of
Common Stock, and provided, further, however, that, in any underwritten public
-------- ------- -------
offering contemplated by this Section 4 or Sections 5 and 6, the holders of
Preferred Shares shall be entitled to sell such Preferred Shares to the
underwriters for conversion and sale of the shares of Common Stock issued upon
conversion thereof. Notwithstanding anything to the contrary contained herein,
no request may be made under this Section 4 within 120 days after the effective
date of a registration statement filed by the Company covering a firm commitment
underwritten public offering in which the holders of Restricted Stock shall have
been entitled to join pursuant to Sections 5 or 6 and in which there shall have
been effectively registered all shares of Restricted Stock as to which
registration shall have been requested.
(b) Following receipt of any notice under this Section 4, the
Company shall immediately notify all holders of Restricted Stock from whom
notice has not been received and the Founder and shall use its best efforts to
register under the Securities Act, for public sale in accordance with the method
of disposition specified in such notice from requesting holders, the number of
shares of Restricted Stock specified in such notice (and in all notices received
by the Company from other holders of Restricted Stock or the Founder within 20
days after the giving of such notice by the Company). If such method of
disposition shall be an underwritten public offering, the Board of Directors of
the Company may designate the managing underwriter of such offering. The Company
shall be obligated to register Restricted Stock and Founder Stock pursuant to
this Section 4 on two occasions only, provided, however, that such obligation
-------- -------
shall be deemed satisfied only when a registration statement covering all shares
of Restricted Stock and Founder Stock specified in notices received as
aforesaid, for sale in accordance with the method of disposition specified by
the requesting holders, shall have become effective and, if such method of
disposition is a firm commitment underwritten public offering, all such shares
shall have been sold pursuant thereto.
(c) The Company shall be entitled to include in any registration
statement referred to in this Section 4, for sale in accordance with the method
of disposition specified by the requesting holders, shares of Common Stock to be
sold by the Company for its own account, except as and to the extent that, in
the opinion of the managing underwriter (if such method of disposition shall be
an underwritten public offering), such inclusion would adversely affect the
marketing of the Restricted Stock to be sold. Except for registration
statements on Form S-4, S-8 or any successor thereto, the Company will not file
with the Commission any other registration statement with respect to its Common
Stock, whether for its own account or
<PAGE>
-4-
that of other stockholders, from the date of receipt of a notice from requesting
holders pursuant to this Section 4 until the completion of the period of
distribution of the registration contemplated thereby.
5. Incidental Registration. If the Company at any time (other than
-----------------------
pursuant to Section 4 or Section 6) proposes to register any of its securities
under the Securities Act for sale to the public, whether for its own account or
for the account of other security holders or both (except with respect to
registration statements on Forms S-4, S-8 or another form not available for
registering the Restricted Stock for sale to the public), each such time it will
give written notice to all holders of outstanding Restricted Stock and to the
Founder of its intention so to do. Upon the written request of any such holder
of Restricted Stock or the Founder, received by the Company within 30 days after
the giving of any such notice by the Company, to register any of the Restricted
Stock or the Founder Stock, the Company will use its best efforts to cause the
Restricted Stock and/or the Founder Stock as to which registration shall have
been so requested to be included in the securities to be covered by the
registration statement proposed to be filed by the Company, all to the extent
requisite to permit the sale or other disposition by the holder of such
Restricted Stock and/or Founder Stock so registered. In the event that any
registration pursuant to this Section 5 shall be, in whole or in part, an
underwritten public offering of Common Stock, the number of shares of Restricted
Stock and/or Founder Stock to be included in such an underwriting may be reduced
(pro rata among the requesting holders of Restricted Stock and Founder Stock
based upon the number of shares of Restricted Stock or Founder Stock owned by
such holders) if and to the extent that the managing underwriter shall be of the
opinion that such inclusion would adversely affect the marketing of the
securities to be sold by the Company therein, provided, however, that such
-------- -------
number of shares of Restricted Stock and/or Founder Stock shall not be reduced
if any shares are to be included in such underwriting for the account of any
person other than the Company or requesting holders of Restricted Stock and/or
Founder Stock, and provided, further, however, that in no event may less than
-------- ------- -------
one-third of the total number of shares of Common Stock to be included in such
underwriting be made available for shares of Restricted Stock and Founder Stock.
Notwithstanding the foregoing provisions, the Company may withdraw any
registration statement referred to in this Section 5 without thereby incurring
any liability to the holders of Restricted Stock or to the Founder.
6. Registration on Form S-3. If at any time (i) a holder or
------------------------
holders of Preferred Shares or Restricted Stock request that the Company file a
registration statement on Form S-3 or any successor thereto for a public
offering of all or any portion of the shares of Restricted Stock held by such
requesting holder or holders, the reasonably anticipated aggregate price to the
public of which would exceed $1,000,000, and (ii) the Company is a registrant
entitled to use Form S-3 or any successor thereto to register such shares, then
the Company shall use its best efforts to register under the Securities Act on
Form S-3 or any successor thereto, for public sale in accordance with the method
of disposition specified in such notice, the number of shares of Restricted
Stock specified in such notice. Whenever the Company is required by this
Section 6 to use its best efforts to effect the registration of Restricted
Stock, each of the procedures and requirements of Section 4 (including but not
limited to the requirement that the Company notify all holders of Restricted
Stock from whom notice has not been received and the
<PAGE>
-5-
Founder and provide them with the opportunity to participate in the offering)
shall apply to such registration, provided, however, that there shall be no
-------- -------
limitation on the number of registrations on Form S-3 which may be requested and
obtained under this Section 6, and provided, further, however, that the
-------- ------- -------
requirements contained in the first sentence of Section 4(a) shall not apply to
any registration on Form S-3 which may be requested and obtained under this
Section 6.
7. Registration Procedures. If and whenever the Company is
-----------------------
required by the provisions of Sections 4, 5 or 6 to use its best efforts to
effect the registration of any shares of Restricted Stock under the Securities
Act, the Company will, as expeditiously as possible:
(a) prepare and file with the Commission a registration
statement (which, in the case of an underwritten public offering pursuant to
Section 4, shall be on Form S-1 or other form of general applicability
satisfactory to the managing underwriter selected as therein provided) with
respect to such securities and use its best efforts to cause such registration
statement to become and remain effective for the period of the distribution
contemplated thereby (determined as hereinafter provided);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified in paragraph (a) above and comply with the provisions of
the Securities Act with respect to the disposition of all Restricted Stock
covered by such registration statement in accordance with the sellers intended
method of disposition set forth in such registration statement for such period;
(c) furnish to each seller of Restricted Stock, to the Founder
and to each underwriter such number of copies of the registration statement and
the prospectus included therein (including each preliminary prospectus) as such
persons reasonably may request in order to facilitate the public sale or other
disposition of the Restricted Stock and/or Founder Shares covered by such
registration statement
(d) use its best efforts to register or qualify the Restricted
Stock and/or Founder Stock covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the sellers of Restricted
Stock and/or Founder Stock or, in the case of an underwritten public offering,
the managing underwriter reasonably shall request, provided, however, that the
-------- --------
Company shall not for any such purpose be required to qualify generally to
transact business as a foreign corporation in any jurisdiction where it is not
so qualified or to consent to general service of process in any such
jurisdiction
(e) use its best efforts to list the Restricted Stock and/or
Founder Stock covered by such registration statement with any securities
exchange on which the Common Stock of the Company is then listed;
(f) immediately notify each seller of Restricted Stock and/or
Founder Stock and each underwriter under such registration statement, at any
time when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any
<PAGE>
-6-
event of which the Company has knowledge as a result of which the prospectus
contained in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing;
(g) if the offering is underwritten and at the request of any
seller of Restricted Stock and/or Founder Stock, use its best efforts to furnish
on the date that Restricted Stock and/or Founder Stock is delivered to the
underwriters for sale pursuant to such registration: (i) an opinion dated such
date of counsel representing the Company for the purposes of such registration,
addressed to the underwriters and to such seller, stating that such registration
statement has become effective under the Securities Act and that (A) to the best
knowledge of such counsel, no stop order suspending the effectiveness thereof
has been issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act, and (B) the registration
statement, the related prospectus and each amendment or supplement thereof
comply as to form in all material respects with the requirements of the
Securities Act (except that such counsel need not express any opinion as to
financial statements contained therein) and (ii) a letter dated such date from
the independent public accountants retained by the Company, addressed to the
underwriters and to such seller, stating that they are independent public
accountants within the meaning of the Securities Act and that, in the opinion of
such accountants, the financial statements of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Securities Act, and such letter shall
additionally cover such other financial matters (including information as to the
period ending no more than five business days prior to the date of such letter)
with respect to such registration as such underwriters reasonably may request;
and
(h) make available for inspection by each seller of Restricted
Stock and/or Founder Stock, any underwriter participating in any distribution
pursuant to such registration statement, and any attorney, accountant or other
agent retained by such seller or underwriter, all financial and other records,
pertinent corporate documents and properties of the Company, and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or agent in
connection with such registration statement.
For purposes of Section 7(a) and 7(b) and of Section 4(c), the period
of distribution of Restricted Stock and/or Founder Stock in a firm commitment
underwritten public offering shall be deemed to extend until each underwriter
has completed the distribution of all securities purchased by it, and the period
of distribution of Restricted Stock and/or Founder Stock in any other
registration shall be deemed to extend until the earlier of the sale of all
Restricted Stock and/or Founder Stock covered thereby and 120 days after the
effective date thereof.
In connection with each registration hereunder, the sellers of
Restricted Stock and the Founder will furnish to the Company in writing such
information with respect to themselves
<PAGE>
-7-
and the proposed distribution by them as reasonably shall be necessary in order
to assure compliance with federal and applicable state securities laws.
In connection with each registration pursuant to Sections 4, 5 or 6
covering an underwritten public offering, the Company and each seller agree to
enter into a written agreement with the managing underwriter selected in the
manner herein provided in such form and containing such provisions as are
customary in the securities business for such an arrangement between such
underwriter and companies of the Company's size and investment stature.
8. Expenses. All expenses incurred by the Company in complying
--------
with Sections 4, 5 and 6, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws, fees of the National Association of Securities Dealers, Inc.,
transfer taxes, fees of transfer agents and registrars, costs of insurance and
fees and disbursements of one counsel for the sellers of Restricted Stock and
Founder Stock, but excluding any Selling Expenses, are called "Registration
Expenses". All underwriting discounts and selling commissions applicable to the
sale of Restricted Stock and Founder Stock are called "Selling Expenses".
The Company will pay all Registration Expenses in connection with each
registration statement under Sections 4, 5 or 6. All Selling Expenses in
connection with each registration statement under Sections 4, 5 or 6 shall be
borne by the participating sellers in proportion to the number of shares sold by
each, or by such participating sellers other than the Company (except to the
extent the Company shall be a seller) as they may agree.
9. Indemnification and Contribution. (a) In the event of a
--------------------------------
registration of any of the Restricted Stock and/or Founder Stock under the
Securities Act pursuant to Sections 4, 5 or 6, the Company will indemnify and
hold harmless each seller of such Restricted Stock and/or Founder Stock
thereunder, each underwriter of such Restricted Stock and/or Founder Stock
thereunder and each other person, if any, who controls such seller or
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller,
underwriter or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Restricted Stock and/or Founder Stock was registered under the
Securities Act pursuant to Sections 4, 5 or 6, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse each such seller, each
such underwriter and each such controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
-------- -------
<PAGE>
-8-
that the Company will not be liable in any such case if and to the extent that
any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by any such seller, any such
underwriter or any such controlling person in writing specifically for use in
such registration statement or prospectus.
(b) In the event of a registration of any of the Restricted Stock
and/or the Founder Stock under the Securities Act pursuant to Sections 4, 3 or
6, each seller of such Restricted Stock and/or Founder Stock, as the case may
be, thereunder, severally and not jointly, will indemnify and hold harmless the
Company, each person, if any, who controls the Company within the meaning of the
Securities Act, each officer of the Company who signs the registration
statement, each director of the Company, each underwriter and each person who
controls any underwriter within the meaning of the Securities Act, against all
losses, claims, damages or liabilities, joint or several, to which the Company
or such officer, director, underwriter or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the registration statement under which such Restricted Stock and/or Founder
Stock was registered under the Securities Act pursuant to Sections 4, 5 or 6,
any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse the Company and each such officer, director, underwriter and
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action, provided, however, that such seller will be liable
-------- -------
hereunder in any such case if and only to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such seller, as such, furnished
in writing to the Company by such seller specifically for use in such
registration statement or prospectus, and provided, further, however, that the
-------- ------- -------
liability of each seller hereunder shall be limited to the proportion of any
such loss, claim, damage, liability or expense which is equal to the proportion
that the public offering price of the shares sold by such seller under such
registration statement bears to the total public offering price of all
securities sold thereunder, but not in any event to exceed the proceeds received
by such seller from the sale of Restricted Stock or Founder Stock, as the case
may be, covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section 9 and shall only relieve
it from any liability which it may have to such indemnified party under this
Section 9 if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the
<PAGE>
-9-
commencement thereof, the indemnifying party shall be entitled to participate in
and, to the extent it shall wish, to assume and undertake the defense thereof
with counsel satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
such indemnified party under this Section 9 for any legal expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation and of liaison with counsel so selected,
provided, however, that, if the defendants in any such action include both the
- -------- -------
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that the interests of the indemnified party reasonably
may be deemed to conflict with the interests of the indemnifying party, the
indemnified party shall have the right to select a separate counsel and to
assume such legal defenses and otherwise to participate in the defense of such
action, with the expenses and fees of such separate counsel and other expenses
related to such participation to be reimbursed by the indemnifying party as
incurred.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) any
holder of Restricted Stock and/or Founder Stock, as the case may be, exercising
rights under this Agreement, or any controlling person of any such holder, makes
a claim for indemnification pursuant to this Section 9 but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 9 provides for indemnification in
such case, or (ii) contribution under the Securities Act may be required on the
part of any such selling holder or any such controlling person in circumstances
for which indemnification is provided under this Section 9; then, and in each
such case, the Company and such holder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that such holder is responsible for the
portion represented by the percentage that the public offering price of its
Restricted Stock and/or Founder Stock, as the case may be, offered by the
registration statement bears to the public offering price of all securities
offered by such registration statement, and the Company is responsible for the
remaining portion; provided, however, that, in any such case, (A) no such holder
-------- -------
will be required to contribute any amount in excess of the public offering price
of all such Restricted Stock or Founder Stock, as the case may be, offered by it
pursuant to such registration statement; and (B) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any person or entity who
was not guilty of such fraudulent misrepresentation.
<PAGE>
-10-
10. Changes in Common Stock or Preferred Stock. If, and as often as,
------------------------------------------
there is any change in the Common Stock or the Preferred Stock by way of a stock
split, stock dividend, combination or reclassification, or through a merger,
consolidation, reorganization or recapitalization, or by any other means,
appropriate adjustment shall be made in the provisions hereof so that the rights
and privileges granted hereby shall continue with respect to the Common Stock or
the Preferred Stock as so changed.
11. Rule 144 Reporting. With a view to making available the benefits
------------------
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Stock or the Founder Stock to the public without
registration, at all times after 90 days after any registration statement
covering a public offering of securities of the Company under the Securities Act
shall have become effective, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to each holder of Restricted Stock and Founder Stock
forthwith upon request a written statement by the Company as to its compliance
with the reporting requirements of such Rule 144 and of the Securities Act and
the Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed by the Company as such
holder may reasonably request in availing itself of any rule or regulation of
the Commission allowing such holder to sell any Restricted Stock without
registration.
12. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to you as follows:
(a) The execution, delivery and performance of this Agreement by
the Company have been duly authorized by all requisite corporate action and will
not violate any provision of law, any order of any court or other agency of
government, the Charter or By-laws of the Company or any provision of any
indenture, agreement or other instrument to which it or any or its properties or
assets is bound, conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or result in the creation or imposition of any lien, charge
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms.
<PAGE>
-11-
13. Miscellaneous.
-------------
(a) All covenants and agreements contained in this Agreement by
or on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto (including without
Limitation transferees of any Preferred Shares, Restricted Stock or Founder
Stock), whether so expressed or not, provided, however, that registration rights
-------- --------
conferred herein on the holders of Preferred Shares, Restricted Stock, or
Founder Stock shall only inure to the benefit of a transferee of Preferred
Shares, Restricted Stock or Founder Stock if (i) there is transferred to such
transferee at least 20% of the total shares of Restricted Stock or Founder
Stock, as the case may be, originally issued pursuant to the Purchase Agreement
in the case of Restricted Stock or originally issued to the Founder with respect
to the Founder Stock, to the direct or indirect transferor of such transferee or
(ii) such transferee is a partner, shareholder or affiliate of a party hereto
(or with respect to the Founder Stock, such transferred is an affiliate of the
Founder as defined in a certain Stock Restriction Agreement between the Company
and the Founder as of the date hereof).
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, addressed as follows:
if to the Company or any other party hereto, at the address of such
party set forth in the Purchase Agreement;
if to any subsequent holder of Preferred Shares or Restricted Stock,
to it at such address as may have been furnished to the Company in writing by
such holder;
if to the Founder, at such address as may have been furnished to the
Company in writing by the Founder;
or, in any case, at such other address or addresses as shall have been furnished
in writing to the Company (in the case of a holder of Preferred Shares or
Restricted Stock) or to the holders of Preferred Shares or Restricted Stock (in
the case of the Company) in accordance with the provisions of this paragraph.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
(d) This Agreement may not be amended or modified, and no
provision hereof may be waived, without the written consent of the Company and
the holders of at least sixty percent (60%) of the outstanding shares of
Restricted Stock; provided, however that any of the rights of the Founder
hereunder may not be amended without the prior written consent of Founder.
<PAGE>
-12-
(e) This Agreement may be executed in two or more counterparts
or additional signature pages to the Agreement, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
(f) The obligations of the Company to register shares of
Restricted Stock and Founder Stock under Sections 4, 5 or 6 shall terminate on
the earlier of the fifteenth anniversary of the date of this Agreement or four
years following a firm commitment underwritten public offering.
(g) If requested in writing by the underwriters for an
underwritten public offering of securities of the Company, each holder of
Restricted Stock who is a party to this Agreement and the Founder shall agree
not to sell publicly any shares of Restricted Stock or Founder Stock or any
other shares of Common Stock (other than shares of Restricted Stock or Founder
Stock or other shares of Common Stock being registered in such offering),
without the consent of such underwriters, for a period of not more than 180 days
following the effective date of the registration statement relating to such
offering; provided, however, that all persons entitled to registration rights
-------- -------
with respect to shares of Common Stock who are not parties to this Agreement,
all other persons selling shares of Common Stock in such offering, all persons
holding in excess of 5% of the capital stock of the Company on a fully diluted
basis and all executive officers and directors of the Company shall also have
agreed not to sell publicly their Common Stock under the circumstances and
pursuant to the terms set forth in this Section 13(g).
(h) Notwithstanding the provisions of Section 7(a), the
Company's obligation to file a registration statement, or cause such
registration statement to become and remain effective, shall be suspended for a
period not to exceed 90 days in any 24-month period if there exists at the time
material non-public information relating to the Company which, in the reasonable
opinion of the Company, should not be disclosed.
(i) The Company shall not grant to any third party any
registration rights more favorable than or inconsistent with any of those
contained herein, so long as any of the registration rights under this Agreement
remains in effect.
(j) If any provision of this Agreement shall be held to be
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
<PAGE>
EXHIBIT 4.9
EXECUTION COPY
--------------
AMENDMENT NO. 1
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 1, dated as of February 27, 1996 by and among Adolor
Corporation, a Delaware corporation (the "Company"), certain holders of the
Company's outstanding securities (collectively, the "Existing Investors") and
those purchasers listed in Schedule I to the Series B Convertible Preferred
Stock Purchase Agreement (the "Purchase Agreement") dated the date hereof
(collectively, including such purchasers who participate in any Additional
Closing (as defined in the Purchase Agreement) and who execute a counterpart to
this Agreement, the "Purchasers").
WHEREAS, the Company and the Existing Investors are parties to that
Registration Rights Agreement (the "Registration Rights Agreement") by and among
the Company and the parties named therein dated as of the 7th day of November
1994; and
WHEREAS, the Purchasers are purchasing from the Company and the Company is
issuing and selling to the Purchasers up to 19,964,286 shares (the "Series B
Shares") of Series B Convertible Preferred Stock, par value $.01, ("Series B
Stock") of the Company at the aggregate purchase price of up to $8,385,000
pursuant to the Purchase Agreement, and
WHEREAS, it is a condition to the sale of the Series B Stock that the
Registration Rights Agreement be amended to grant the Purchasers certain rights
thereunder, and the parties hereto desire to amend the Registration Rights
Agreement as set forth below;
NOW, THEREFORE in consideration of the foregoing and the promises and
covenants contained herein, the parties hereby agree as follows:
1. That Section 1 be and hereby is amended to add the following definition in
appropriate alphabetical order:
"Preferred Shares" shall mean shares of the Company's Series A
Convertible Preferred Stock, par value $.01 and Series B Convertible
Preferred Stock, par value $.01.
2. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Registration Rights Agreement.
3. In all other respects, the Registration Rights Agreement is hereby
ratified, confirmed and approved, and all terms thereof shall remain in
fill force and effect.
<PAGE>
4. This Amendment No. 1 may be executed in counterparts, each of which shall
constitute an original, but all of which, when taken together, shall
constitute but one agreement.
[Signature Pages Follow Immediately]
-2-
<PAGE>
EXHIBIT 4.10
AMENDMENT NO. 2
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 2, dated as of May 1, 1997 by and among Adolor Corporation, a
Delaware corporation (the "Company"), certain holders of the Company's
outstanding securities (collectively, the "Existing Investors") and those
purchasers listed in Schedule I to the Series C Convertible Preferred Stock
Purchase Agreement (the "Purchase Agreement") dated the date hereof
(collectively, including such purchasers who participate in any Additional
Closing (as defined in the Purchase Agreement) and who execute a counterpart to
this Agreement, the "Purchasers").
WHEREAS, the Company and the Existing Investors are parties to that
Registration Rights Agreement (the "Registration Rights Agreement") by and among
the Company and the parties named therein dated as of the 7th day of November
1994, as amended by Amendment No. 1 to Registration Rights Agreement dated as of
February 27, 1996; and
WHEREAS, the Purchasers are purchasing from the Company and the Company is
issuing and selling to the Purchasers up to 14,285,714 shares (the "Series C
Shares") of Series C Convertible Preferred Stock, par value $.01, ("Series C
Stock") of the Company at the aggregate purchase price of up to $10,000,000
pursuant to the Purchase Agreement, and
WHEREAS, it is a condition to the sale of the Series C Shares that the
Registration Rights Agreement be amended to grant the Purchasers certain rights
thereunder, and the parties hereto desire to amend the Registration Rights
Agreement as set forth below;
NOW, THEREFORE in consideration of the foregoing and the promises and
covenants contained herein, the parties hereby agree as follows:
1. That Section 1 of the Registration Rights Agreement, as amended to date,
be and hereby is further amended to delete the definition of "Preferred
Shares" therein and replace it with the following:
"Preferred Shares" shall mean shares of the Company's Series A
Convertible Preferred Stock, par value $.01, per share Series B
Convertible Preferred Stock, par value $.01 per share and Series C
Convertible Preferred Stock, par value $.01 per share.
2. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Registration Rights Agreement.
3. In all other respects, the Registration Rights Agreement is hereby
ratified, confirmed and approved, and all terms thereof shall remain in
full force and effect.
<PAGE>
4. This Amendment No. 2 may be executed in counterparts, each of which shall
constitute an original, but all of which, when taken together, shall
constitute but one agreement.
[Signature Pages Follow Immediately]
-2-
<PAGE>
EXHIBIT 4.11
AMENDMENT NO.3
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 3, dated as of December 8, 1998 by and among Adolor
Corporation, a Delaware corporation (the "Company"), certain holders of the
Company's outstanding securities (collectively, the "Existing Investors") and
those purchasers listed in Schedule I to the Series E Convertible Preferred
Stock Purchase Agreement (the "Purchase Agreement") dated the date hereof
(collectively, including such purchasers who participate in any Additional
Closing (as defined in the Purchase Agreement) and who execute a counterpart to
this Agreement, the "Purchasers").
WHEREAS, the Company and the Existing Investors are parties to that
Registration Rights Agreement (the "Registration Rights Agreement") by and among
the Company and the parties named therein dated as of the 7th day of November
1994, as amended by Amendment No. 1 to Registration Rights Agreement dated as of
February 27, 1996 and Amendment No. 2 to Registration Rights Agreement dated as
of May 1, 1997; and
WHEREAS, the Purchasers are purchasing from the Company and the Company is
issuing and selling to the Purchasers up to 13,333,333 shares (the "Series E
Shares") of Series E Convertible Preferred Stock, par value $01, ("Series E
Stock") of the Company at the aggregate purchase price of up to $10,000,000
pursuant to the Purchase Agreement, and
WHEREAS, it is a condition to the sale of the Series (Pounds) Shares that
the Registration Rights Agreement be amended to grant the Purchasers certain
rights thereunder, and the parties hereto desire to amend the Registration
Rights Agreement as set forth below;
NOW, THEREFORE in consideration of the foregoing and the promises and
covenants contained herein, the parties hereby agree as follows:
1. That Section 1 of the Registration Rights Agreement, as amended to date, be
and hereby is further amended to delete the definition of "Preferred
Shares" therein and replace it with the following:
"Preferred Shares" shall mean shares of the Company's Series A
Convertible Preferred Stock, par value $.01 per share, Series B
Convertible Preferred Stock, par value $.01 per share, Series C
Convertible Preferred Stock, par value $01 per share and Series E
Convertible Preferred Stock, par value $01 per share.
2. That Section 3 of the Registration Rights Agreement, as amended to date, be
and hereby is further amended by inserting the phrase "or to one or more
members of the transferor (in the case of a transferor that is a limited
liability company)" after the phrase "(in the case of a transferor that is
a corporation)" on line 11 of said section.
<PAGE>
3. That Section 13(a) of the Registration Rights Agreement, as amended to
date, be and hereby is further amended by inserting the words", member"
after the word "shareholder" on line 11 of said section.
4. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Registration Rights Agreement.
5. In all other respects, the Registration Rights Agreement is hereby
ratified, confirmed and approved, and all terms thereof shall remain in
full force and effect.
6. This Amendment No. 3 may be executed in counterparts, each of which shall
constitute an original, but all of which, when taken together, shall
constitute but one agreement.
[Signature Pages Follow Immediately]
-2-
<PAGE>
EXHIBIT 4.12
AMENDMENT NO.4
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 4, dated as of August 1999 by and among Adolor Corporation, a
Delaware corporation (the "Company"), certain holders of the Company's
outstanding securities (collectively, the "Existing Investors") and S. R. One,
Limited (the "Purchaser").
WHEREAS, the Company and the Existing Investors are parties to that
Registration Rights Agreement (the "Registration Rights Agreement") by and among
the Company and the parties named therein dated as of the 7th day of November
1994, as amended by Amendment No. 1 to Registration Rights Agreement dated as of
February 27, 1996, Amendment No. 2 to Registration Rights Agreement dated as of
May 1, 1997 and Amendment No. 3 to Registration Rights Agreement dated as of
December 8, 1998; and
WHEREAS, the Purchaser is purchasing from the Company and the Company is
issuing and selling to the Purchaser 2,500,000 shares (the "Series F Shares") of
Series F Convertible Preferred Stock, par value $.01, ("Series F Stock") of the
Company at the aggregate purchase price of $2,500,000 pursuant to the Series F
Convertible Preferred Stock Purchase Agreement dated the date hereof between the
Company and Purchaser (the "Purchase Agreement:); and
WHEREAS, it is a condition to the sale of the Series F Shares that the
Registration Rights Agreement be amended to grant the Purchaser certain rights
thereunder, and the parties hereto desire to amend the Registration Rights
Agreement as set forth below
NOW, THEREFORE in consideration of the foregoing and the promises and
covenants contained herein, the parties hereby agree as follows:
1. That Section 1 of the Registration Rights Agreement, as amended to date, be
and hereby is further amended to delete the definition of "Preferred
Shares" therein and replace it with the following:
"Preferred Shares" shall mean shares of the Company's Series A
Convertible Preferred Stock, par value $01 per share, Series B
Convertible Preferred Stock, par value $01 per share, Series C
Convertible Preferred Stock, par value $01 per share, Series E
Convertible Preferred Stock, par value $01 per share and Series F
Convertible Preferred Stock, par value $01 per share.
2. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Registration Rights Agreement.
3. In all other respects, the Registration Rights Agreement is hereby
ratified, confirmed and approved, and all terms thereof shall remain in
full force and effect.
<PAGE>
4. This Amendment No. 4 may be executed in counterparts, each of which shall
constitute an original, but all of which, when taken together, shall
constitute but one agreement.
[Signature Pages Follow Immediately]
-2-
<PAGE>
EXHIBIT 4.13
AMENDMENT NO. 5
TO
REGISTRATION RIGHTS AGREEMENT
AMENDMENT NO. 5, dated as of January 10, 2000 by and among Adolor
Corporation, a Delaware corporation (the "Company"), certain holders of the
Company's outstanding securities (collectively, the "Existing Investors") and
those purchasers listed in Schedule Ito the Series G Convertible Preferred Stock
Purchase Agreement (the "Purchase Agreement") dated the date hereof
(collectively, including such purchasers who participate in any Additional
Closing (as defined in the Purchase Agreement) and who execute a counterpart to
this Agreement, the "Purchasers").
WHEREAS, the Company and the Existing Investors are parties to that
Registration Rights Agreement (the "Registration Rights Agreement") by and among
the Company and the parties named therein dated as of the 7th day of November
1994, as amended by Amendment No. 1 to the Registration Rights Agreement dated
as of February 27, 1996, Amendment No. 2 to the Registration Rights Agreement
dated as of May 1, 1997, Amendment No. 3 to the Registration Rights Agreement
dated as of December 8, 1998, and Amendment No. 4 to the Registration Rights
Agreement dated as of July 22, 1999; and
WHEREAS, the Purchasers are purchasing from the Company and the Company is
issuing and selling to the Purchasers up to 12,306,000 shares (the "Series G
Shares") of Series G Convertible Preferred Stock, par value $.01, ("Series G
Stock") of the Company at the aggregate purchase price of up to $12,306,000
pursuant to the Purchase Agreement, and
WHEREAS, it is a condition to the sale of the Series G Shares that the
Registration Rights Agreement be amended to grant the Purchasers certain rights
thereunder, and the parties hereto desire to amend the Registration Rights
Agreement as set forth below
NOW, THEREFORE in consideration of the foregoing and the promises and
covenants contained herein, the parties hereby agree as follows:
1. That Section 1 of the Registration Rights Agreement, as amended to date, be
and hereby is further amended to delete the definition of "Preferred
Shares" therein and replace it with the following:
"Preferred Shares" shall mean shares of the Company's Series A
Convertible Preferred Stock, par value $.01 per share, Series B
Convertible Preferred Stock, par value $.01 per share, Series C
Convertible Preferred Stock, par value $.01 per share, Series E
Convertible Preferred Stock, par value $.01 per share, Series F
Convertible Preferred Stock, par value $.01 per share, and Series G
Convertible Preferred Stock, par value $.01 per share.
2. That any Purchasers who have not previously been made parties to the
Registration Rights Agreement, as amended, shall become parties to the
Registration Rights Agreement, as amended; and that any Existing Investors
who have not previously been
<PAGE>
made parties to the Registration Rights Agreement, as amended, shall become
parties to the Registration Rights Agreement, as amended.
3. Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Registration Rights Agreement.
4. In all other respects, the Registration Rights Agreement is hereby
ratified, confirmed and approved, and all terms thereof shall remain in
full force and effect.
5. This Amendment No. 5 may be executed in counterparts, each of which shall
constitute an original, but all of which, when taken together, shall
constitute but one agreement.
[Signature Pages Follow Immediately]
<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
Accountants' Consent
The Board of Directors
Adolor Corporation
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
Princeton, New Jersey
February 6, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ADOLOR
CORPORATION'S DECEMBER 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,472,164
<SECURITIES> 1,791,531
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,454,588
<PP&E> 1,467,279
<DEPRECIATION> 701,775
<TOTAL-ASSETS> 6,258,390
<CURRENT-LIABILITIES> 2,385,880
<BONDS> 0
33,000,000
0
<COMMON> 117
<OTHER-SE> (29,590,092)
<TOTAL-LIABILITY-AND-EQUITY> 6,258,390
<SALES> 0
<TOTAL-REVENUES> 10,965
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,545,952
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,142
<INCOME-PRETAX> (10,131,462)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,131,462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,131,462)
<EPS-BASIC> (8.73)
<EPS-DILUTED> (8.73)
</TABLE>
