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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1996
REGISTRATION NO. 333-15483
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CYPRESS BIOSCIENCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 22-2389839
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
4350 EXECUTIVE DRIVE, SUITE 325
SAN DIEGO, CA 92121
(619) 452-2323
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JAY D. KRANZLER
VICE CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER
CYPRESS BIOSCIENCE, INC.
4350 EXECUTIVE DRIVE, SUITE 325
SAN DIEGO, CA 92121
(619) 452-2323
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
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COPIES TO:
FREDERICK T. MUTO, ESQ.
COOLEY GODWARD LLP
4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CA 92121
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please
check the following box. [ ]
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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
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Common Stock, $.02 par value per share........ 5,510,798 $2.0625(1) $11,366,020.88(1) $3,444.25
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Warrants, each to purchase one share of Common
Stock....................................... 2,755,399 $2.00(2) $ 5,510,798.00(2) $1,669.94
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Common Stock, $.02 par value per share,
issuable upon exercise of the Warrants
included herein(3).......................... 2,755,399(3) $2.0625(1) $ 5,683,010.44(1) (4)
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Total Registration Fee................................................................................ $5,114.19(5)
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</TABLE>
(1) Estimated in accordance with Rule 457(c) solely for the purpose of computing
the amount of the registration fee.
(2) Calculated pursuant to Rule 457(g) solely for the purpose of computing the
amount of the registration fee.
(3) In addition to shares issuable upon exercise of warrants being registered
hereunder, includes pursuant to Rule 416(a), such indeterminate number of
shares of Common Stock as may be issuable pursuant to the antidilution
provisions contained therein.
(4) No separate registration fee required pursuant to Rule 457(g).
(5) Registration fee was previously paid upon the initial filing of this
registration statement.
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED NOVEMBER 12, 1996
SUBJECT TO COMPLETION
CYPRESS BIOSCIENCE, INC.
5,510,798 SHARES OF COMMON STOCK
2,755,399 COMMON STOCK PURCHASE WARRANTS
2,755,399 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
COMMON STOCK PURCHASE WARRANTS
This Prospectus relates to the offer and sale by certain securityholders
(the "Selling Securityholders") of Cypress Bioscience, Inc. (the "Company") of
up to 5,510,798 shares of Common Stock of the Company (the "Shares"), redeemable
warrants to purchase up to 2,755,399 shares of Common Stock of the Company at an
exercise price of $2.00 per share until October 1, 2001 or, if earlier, until
redemption of such warrants by the Company (the "Warrants"), and 2,755,399
shares of Common Stock of the Company issuable upon exercise of the Warrants
(the "Warrant Shares"). The Shares, Warrants and Warrant Shares are sometimes
referred to herein as the "Securities."
The Shares and Warrants were issued by the Company in the form of "Units"
(each Unit consisting of two Shares and one Warrant), in connection with the
Company's September 1996 private placement of Units (the "Private Placement")
and pursuant to the acquisition (the "Merger") by the Company of PRP, Inc., a
Delaware company ("PRP"), whereby the Company issued Units to certain holders of
indebtedness of PRP in cancellation of such indebtedness and to PRP's investment
advisor in satisfaction of amounts owed to such advisor for services rendered to
PRP in connection with the Merger. The offering price of the Units in the
Private Placement and the Merger was $4.00 per Unit. The price of the Units and
the exercise price of the Warrants were determined by the Company and do not
necessarily relate to the fair market value of the Company's Common Stock, book
value, net worth or any other established criteria of value. See "The Private
Placement," "The Warrants" and "The Merger."
The Shares, Warrants and Warrant Shares may be offered by the Selling
Securityholders from time to time in transactions on the Nasdaq SmallCap Market,
in privately negotiated transactions or a combination of such methods of sale,
at prices related to such prevailing market prices or at negotiated prices. The
Selling Securityholders may effect such transactions by selling the Shares,
Warrants or Warrant Shares to or through broker-dealers, and such broker-dealers
may receive compensation in the form of discounts, concessions or commissions
from the Selling Securityholders or the purchasers of the Shares, Warrants or
Warrant Shares for whom such broker-dealers may act as agent or to whom they
sell as principal or both (which compensation to a particular broker-dealer
might be in excess of customary commissions). See "Selling Securityholders" and
"Plan of Distribution."
None of the proceeds from the sale of the Shares, Warrants or Warrant
Shares by the Selling Securityholders will be received by the Company. The
Company has agreed to bear certain expenses (other than fees and expenses, if
any, of counsel or other advisors to the Selling Securityholders) in connection
with the registration of the Shares, Warrants and Warrant Shares being offered
by the Selling Securityholders. Such expenses are estimated to be $35,000. The
Company has agreed also to indemnify the Selling Securityholders against certain
liabilities, including certain liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Plan of Distribution."
The Common Stock of the Company is traded on the Nasdaq SmallCap Market
under the symbol "CYPB." The Warrants will be traded on the Nasdaq SmallCap
Market under the symbol "CYPBZ." The last reported sales price of the Company's
Common Stock on the Nasdaq SmallCap Market on November 1, 1996 was $1.9375 per
share.
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 3
No person is authorized in connection with any offering made hereby to give
any information or make any representation not contained or incorporated by
reference in this Prospectus, and any information not contained or incorporated
herein must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, by any person in any jurisdiction in which it is unlawful for such
person to make such offer or solicitation. Neither the delivery of this
Prospectus at any time nor any sale made hereunder shall, under any
circumstances, imply that the information herein is correct as of any date
subsequent to the date hereof.
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") that involve risks and uncertainties.
The Company's actual results could differ materially from those projected in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited, to those discussed in Risk Factors, as
well as those discussed elsewhere in this Prospectus. The information contained
in this Prospectus should be considered carefully before purchasing any of the
securities being offered hereby.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's following Regional Offices: Chicago Regional Office, Suite 1400,
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661; and
New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such material also can be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549. The Commission also makes electronic filings
publicly available on the Internet within 24 hours of acceptance. The
Commission's Internet address is http://www.sec.gov. The Commission Web site
also contains reports, proxy and information statements, and other information
regarding the registrant that has been filed electronically with the Commission.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act, with respect to the Shares, Warrants and Warrant
Shares being offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
are omitted in accordance with the rules and regulations of the Commission. For
further information pertaining to the Company and the Shares, Warrants and
Warrant Shares reference is made to the Registration Statement and the exhibits
and schedules thereto, which may be inspected without charge at, and copies
thereof may be obtained at prescribed rates from, the office of the Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549.
PROSORBA(@) column and IPM are registered trademarks of the Company. All
other brand names or trademarks appearing in this Prospectus are the property of
their respective holders.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1995, the Company's Proxy Statement for the 1996 Annual Meeting of
Stockholders filed pursuant to Rule 14a-6 of the Exchange Act, the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, the
Company's Current Report on Form 8-K dated as of March 8, 1996 and the Company's
Current Report on Form 8-K dated as of April 1, 1996 filed by the Company with
the Commission are hereby incorporated by reference in this Prospectus except as
superseded or modified herein. All documents filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus and prior to the termination of the offering
shall be deemed to be incorporated by reference into
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this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner of shares of Common Stock of the Company, to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any and all of the documents that have been or may be incorporated by reference
herein (other than exhibits to such documents which are not specifically
incorporated by reference into such documents). Such requests should be directed
to the Director of Finance at the Company's executive offices at 4350 Executive
Drive, Suite 325, San Diego, California 92121 (telephone (619) 452-2323).
3
<PAGE> 5
THE COMPANY
GENERAL
Cypress Bioscience, Inc. was incorporated under the laws of the State of
Delaware in 1981 to research, develop, manufacture and market medical devices
for the treatment and diagnosis of select immune-mediated diseases,
transplantations and cancers. The Company's first product, the PROSORBA column,
a medical device, treats a patient's defective immune system so that it can more
effectively respond to certain diseases. The Company received marketing approval
from the U.S. Food and Drug Administration (the "FDA") in December 1987 to
distribute the PROSORBA column for treatment of idiopathic thrombocytopenic
purpura ("ITP"), an immune-mediated bleeding disorder. Since 1987, the Company
has had approximately $24,000,000 of sales of the PROSORBA column.
The Company is in the process of completing a substantial restructuring of
its operations. To date, the restructuring has included a streamlining of
operations and a relocation of all operations of the Company, except
manufacturing operations, to San Diego, California. In addition, the Company has
elected to establish its own internal sales force dedicated solely to selling
the PROSORBA column. In this regard, the Company has hired six salespersons to
date and is in the process of training such sales force. There can be no
assurance that the restructuring, once completed, will be successfully
implemented.
In November 1996, the Company completed the acquisition, pursuant to a
merger (the "Merger"), of PRP, Inc. a Delaware corporation ("PRP"), a
Boston-based biopharmaceutical company engaged in the development of products to
treat disorders of blood platelet functions. In consideration of the purchase of
PRP, the Company issued Units with a value of approximately $4,585,645 to
certain holders of indebtedness and a creditor of PRP and is obligated to make a
certain milestone payment and payments on net sales of products based upon the
technology of PRP that was acquired in the Merger to the former holders of
equity securities and a creditor of PRP. In connection with the acquisition, the
Company has agreed to allocate certain amounts of funding to commercialize PRP's
lead product, Infusible Platelet Membranes ("IPM"). See "The Merger."
The Company's executive offices are located at 4350 Executive Drive, Suite
325, San Diego, California 92121 and its telephone number is (619) 452-2323.
THE PRIVATE PLACEMENT
In General. In October 1996, the Company completed a private placement of
1,734,000 Units which were sold to certain "accredited investors" (as defined in
Rule 501 of the Securities Act) (the "Private Placement") at a per Unit sales
price of $4.00. Net proceeds to the Company from the Private Placement (after
deducting placement agent fees of approximately $506,880) were $6,429,120. The
Private Placement was made in reliance on exemptions from the registration and
qualification requirements of the Securities Act and applicable state securities
laws.
Use of Proceeds. The Company intends to use the net proceeds from the
Private Placement (i) to fund clinical and product development, manufacturing
and administrative services in support of IPM, (ii) to fund the transition and
integration of PRP with and into the operations of the Company and (iii) for
general corporate and working capital purposes. The Company intends to use a
minimum of $4,000,000 of the net proceeds to commercialize and advance IPM as a
principal product of the Company. In addition, the Company may use some of the
proceeds of the Private Placement for the acquisition of businesses, products or
technologies complementary to the Company's current business. The Company has
not determined what other amounts it plans to expend on any of the foregoing
uses or the timing of such expenditures. The Company has made certain
assumptions with respect to how it intends to use the net proceeds from the
Private Placement. The amounts actually expended on any of the foregoing uses,
if any, may vary significantly depending on a number of factors including, but
not limited to, the results of Phase II clinical trials of IPM, the success of
the integration of PRP's operations into the Company and the amount of cash
generated by the Company's operations and other resources. The Company will not
receive any of the proceeds from the sale of the Shares, Warrants or Warrant
Shares being offered hereby.
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The Units. The Units sold in the Private Placement each consist of two
shares of Common Stock of the Company and one warrant to purchase one share of
Common Stock of the Company. The Shares and Warrants (including the Warrant
Shares) comprising the Units are separately transferable only upon the
effectiveness of a registration statement filed under the Securities Act
covering such securities.
THE WARRANTS
In General. The Warrants comprising the Units entitle the holder thereof to
purchase one share of Common Stock of the Company at a purchase price of $2.00
per share, subject to adjustment under certain circumstances. The Warrants are
evidenced by a warrant certificate (the "Warrant Certificate"). The terms of the
Warrants are set forth in the Warrant Certificate and in that certain Warrant
Agreement dated September 18, 1996 (the "Warrant Agreement") between the Company
and American Stock Transfer & Trust Company (the "Warrant Agent"). Reference is
made to the Warrant Agreement and Warrant Certificate filed as exhibits to the
registration statement of which this Prospectus is a part for a complete
description of the terms and conditions of the Warrants (the description
contained herein being qualified by reference thereto).
Term and Exercise of Warrants. The Warrants are exercisable immediately
upon issuance by the Company, but prior to redemption, until October 1, 2001
upon surrender of the Warrants to the Company (or the Company's Warrant Agent)
and receipt by the Company of payment of the exercise price for such Warrants
and any other documents reasonably requested by the Company. The Warrants may be
exercised in whole or in part with respect to the shares of Common Stock
underlying such Warrants. The exercise price of the Warrants may, at the option
of the Warrant holder, be paid by check or bank draft made payable to the order
of the Company. Certificates representing the Warrant Shares so purchased shall
be delivered to the holder of the Warrants within a reasonable time after
exercise.
Redemption. Warrants may be redeemed at the option of the Company, in whole
or in part, on either a selective or non-discriminatory basis, at a price equal
to $0.10 per Warrant (the "Redemption Price") at any time (i) commencing twelve
(12) months after September 18, 1996 if the First Average Closing Price
Requirement (as hereafter defined) is satisfied or (ii) after their initial
issuance by the Company if the Second Average Closing Price Requirement (as
hereafter defined) is satisfied (with any such date of redemption referred to
herein as the "Redemption Date"). The First Average Closing Price Requirement
will be satisfied if the average closing bid price of the Common Stock as
reported by the National Association of Securities Dealers, Inc. electronic
interdealer quotation system ("Nasdaq") (or average closing sales price, if the
Common Stock is quoted on the Nasdaq National Market System) equals or exceeds
$3.00 per share of Common Stock for any twenty (20) trading days within a period
of thirty (30) consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. The Second Average Closing Price
Requirement will be satisfied if the average closing bid, or if applicable,
closing sales price as determined and for the periods specified in the preceding
sentence exceeds $4.00. On the Redemption Date, the holders of record of
redeemed Warrants shall be entitled to payment of the Redemption Price upon
surrender of such redeemed Warrants to the Company at the principal office of
the Warrant Agent in New York, New York.
Notice of redemption of Warrants must be given at least twenty (20) and not
more than forty-five (45) calendar days prior to the Redemption Date by mailing,
by registered or certified mail, return receipt requested, a copy of such notice
to all holders of record of Warrants to be redeemed at their respective
addresses appearing on the books or transfer records of the Company or such
other address designated in writing by the holder of record to the Warrant Agent
not less than sixty (60) calendar days prior to the Redemption Date and will be
effective upon receipt.
In addition, notice of such redemption will be published in The Wall Street
Journal not less than ten (10) nor more than twenty (20) calendar days prior to
the mailing of the notice of redemption. Any Warrant so called for redemption
may be exercised until the close of business on the fifth business day preceding
the Redemption Date specified in such notice of redemption. If less than all the
Warrants are to be redeemed, the Warrant Agent shall select the Warrants to be
redeemed by a method the Warrant Agent considers fair and appropriate.
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From and after the Redemption Date, all rights of the holders of Warrants
(except the right to receive the Redemption Price) shall terminate, but only if
(i) on or prior to the Redemption Date the Company shall have irrevocably
deposited with the Warrant Agent (or its successor as Warrant Agent) a
sufficient amount to pay on the Redemption Date the Redemption Price for all
Warrants called for redemption and (ii) the notice of redemption shall have
stated the name and address of the Warrant Agent and the intention of the
Company to deposit such amount with the Warrant Agent on or before the
Redemption Date.
If the Company fails to make a sufficient deposit with the Warrant Agent as
provided above, the holder of any Warrants called for redemption may at the
option of the holder (i) by notice to the Company declare the notice of
redemption a nullity, or (ii) maintain an action against the Company for the
Redemption Price. If the holder brings such an action, the Company will pay
reasonable attorneys' fees of the holder. If the holder fails to bring an action
against the Company for the redemption price within sixty (60) days after the
Redemption Date, the holder shall be deemed to have elected to declare the
notice of redemption to be a nullity and such notice shall be without any force
or effect.
There have been reserved, and the Company shall at all times keep reserved,
out of the authorized and unissued shares of Common Stock, a number of shares
sufficient to provide for the exercise of the Warrants.
Transfer or Assignment of Warrants; Registration. No Warrant will be
subject to division or combination with other Warrants or be exchangeable,
transferable or assignable apart from the Common Stock with which it was sold as
a Unit unless, at such time of division, combination, exchange, transfer or
assignment, the Company has on file with the Commission an effective
registration statement covering the Warrants, or earlier if so notified by the
Company (the "Separation Date"). Absent an effective registration statement, the
Warrant Agent will not record an exchange, assignment or transfer of a Warrant
without certification that the Warrant holder has transferred its Common Stock
to the assignee or transferee. The Company is obligated to use commercially
reasonable efforts to keep the registration statement covering the Warrants
effective for a period of three years after the date of issuance of the Warrants
or, if earlier, until all of the securities covered by the registration
statement have been sold pursuant thereto.
Adjustment. The exercise price and the number of shares issuable upon
exercise of the Warrants will be subject to adjustment from time to time upon
the occurrence of certain events, including but not limited to
recapitalizations, stock splits, certain mergers or consolidations of the
Company and the payment of stock dividends.
THE MERGER
In General. On November 1, 1996, the Company completed the acquisition of
PRP pursuant to that certain Agreement and Plan of Merger and Reorganization
dated as of October 10, 1996 by and among the Company, Cypress Acquisition Sub,
Inc., a Delaware corporation and wholly-owned subsidiary of the Company ("Merger
Sub") and PRP. Of the Shares and Warrants (including the Warrant Shares) being
offered hereby, 2,292,798 Shares and Warrants to purchase up to 1,146,399 shares
of Common Stock (including up to 1,146,399 Warrant Shares) are being offered by
certain Selling Securityholders whom acquired such securities in connection with
the Merger.
CONSIDERATION PAID OR PAYABLE IN CONNECTION WITH THE MERGER.
Debt Holders of PRP. In connection with the Merger, the Company issued to
the holders of certain indebtedness of PRP (the "Bridge Debtholders") in full
satisfaction and settlement of such debt a total of 1,118,438 Units (consisting
of 2,236,876 Shares and Warrants to purchase up to 1,118,438 Shares of Common
Stock of the Company), with a total value equal to $4,473,799.85 (based upon a
price of $4.00 per Unit).
Equity Holders of PRP. Pursuant to the terms of the Merger, the holders of
PRP equity securities (including holders of options and warrants of PRP) (the
"Equity Holders") will be entitled to receive certain payments (the "Earn-Out
Payments"), if any, on a pro rata basis, on net sales of products developed
using PRP's technology (the "Earn-Out Products"). The Company's obligation to
make Earn-Out Payments with respect to Earn-Out Products shall commence on the
date of first commercial sale to any third party of such
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<PAGE> 8
Earn-Out Product by the Company, its affiliates or licensees and shall terminate
on a country-by-country basis upon the later of (i) the expiration or
invalidation of the last issued patent owned, licensed or otherwise controlled
by the Company in such country, or abandonment, disclaimer or rejection of the
last pending patent application owned, licensed or otherwise controlled by the
Company in such country, covering the manufacture, use or sale of such Earn-Out
Product, and (ii) fourteen years after the first commercial sale anywhere in the
world of the Earn-Out Product by the Company, its affiliates or sublicensees.
The amount of any Earn-Out Payment to be paid on Earn-Out Products sold in a
country in which, at the time of such sale, the Earn-Out Product is not covered
by and encompassed within the scope of one or more claims contained in an
unexpired patent or in a pending patent application included in the patents and
patent applications acquired by the Company pursuant to the Merger, shall be
reduced by 50%.
In addition to the Earn-Out Payments described above, the Company shall,
upon receipt by the Company of FDA approval of IPM for the treatment of
thrombocytopenia (the "FDA Approval"), make a single milestone payment of
$5,000,000 to the Equity Holders (the "Milestone Payment"). The Milestone
Payment may be made, at the option of the Company, in cash, shares of Common
Stock of the Company or a combination of cash and shares of Common Stock. In the
event the Company elects to make the Milestone Payment, in whole or in part, in
the form of Common Stock of the Company, the value of such Common Stock shall be
determined based upon the average closing sales prices, if the Company's Common
Stock is quoted on a stock exchange or the Nasdaq National Market System (or the
average of the bid and asked prices of the Company's Common Stock as reported by
the National Association of Securities Dealers, Inc. electronic interdealer
quotation system) for the 15 trading day period commencing on the 10 trading
days immediately prior to and including the day of receipt of the FDA Approval
and for the 5 trading days immediately after the day of receipt of the FDA
Approval. In the event the Company elects to make the Milestone Payment, in
whole or in part, in shares of Common Stock, the Company will be obligated, at
its own expense, to register such shares for resale under the Securities Act.
EGS Securities Corp. In consideration of certain investment banking
advisory services provided by EGS Securities Corp. ("EGS") to PRP in connection
with the transactions contemplated by the Merger, the Company issued to EGS
27,961 Units (consisting of 55,922 Shares and Warrants to purchase up to 27,961
Shares of Common Stock of the Company) with a total value equal to $118,845
(based upon a price of $4.00 per Unit). In addition, the Company is obligated,
upon the payment of the Milestone Payment, if any, and each time any Earn-Out
Payment is made to the Equity Holders, to pay to EGS, for services rendered to
PRP in connection with the Merger, from such Milestone Payment or Earn-Out
Payment, as the case may be, prior to any distribution to be made to the Equity
Holders, an amount in cash equal to two and one-half percent (2 1/2%) of the
Milestone Payment and each Earn-Out Payment.
Board Observation Rights. In connection with the Merger, the Company
granted to the Equity Holders the right to designate a representative to attend
meetings of the Board of Directors of the Company (the "Board") in a non-voting,
observer capacity (the "Observer"). The Observer is entitled to attend all
meetings of the Board and to receive all written materials and information
provided to members of the Board in their capacity as directors (the "Observer
Rights"). The Observer shall not be entitled to any compensation or
reimbursement for any expenses incurred in connection with attending Board
meetings or otherwise serving in an observer capacity, except as provided below
to the Equity Holders' Representatives. The Observer Rights shall terminate on
the earlier of (i) the date on which the Equity Holders no longer have a
material continuing financial interest in the Company, and (ii) October 1, 2005.
Equity Holders' Representatives. Under the terms of the Merger, the former
stockholders of PRP are entitled to appoint certain representatives (the "Equity
Holders' Representatives") to act as attorneys-in-fact of said stockholders with
authority to make all decisions on behalf of said stockholders with respect to
any matters arising in regard to any Milestone Payment or Earn-Out Payments. The
Company is entitled to deal exclusively with the Equity Holders' Representatives
on matters relating to the Merger and shall be entitled to rely conclusively on
any document executed or purported to be executed and on any other action taken
or purported to be taken on behalf of any Equity Holder by the Equity Holders'
Representatives, as fully binding upon such Equity Holder. The Company is
obligated to pay to the Equity Holders' Representatives the sum of $12,000 per
year. Upon payment by the Company of the initial Milestone Payment or Earn-Out
Payment, the
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Company will be entitled to reimbursement of all amounts previously paid to the
Equity Holders' Representatives. Upon the initial distribution of the Milestone
Payment or Earn-Out Payments to the Equity Holders, as the case may be, the
Company shall pay to the Equity Holders' Representatives out of the Milestone
Payment or Earn-Out Payment the sum of $12,000 per year.
Indemnification. With certain limited exceptions, the representations and
warranties made by the Company and Merger Sub and the representations and
warranties made by PRP in connection with the Merger expire on November 1, 1997.
Each of the Company and Merger Sub, on the one hand and PRP, on the other hand,
are entitled to indemnification for damages suffered as a result of a breach of
a representation or warranty made by the other party. The sole recourse of the
Company for any damages suffered as a result of a breach of a representation or
warranty made by PRP prior to the consummation of the Merger shall be to offset
any such damages against any Earn-Out Payments, Milestone Payment or any other
payments otherwise due to the Equity Holders in an aggregate amount not to
exceed (i) $500,000 plus (ii) an additional amount equal to ten percent (10%) of
any Earn-Out Payments, Milestone Payment or any other payments paid or otherwise
payable to the Equity Holders. Similarly, the indemnification obligations of the
Company for a breach of a representation or warranty made by the Company or
Merger Sub is limited to (i) $500,000 plus (ii) an additional amount equal to
ten percent (10%) of any Earn-Out Payments, Milestone Payment or any other
payments otherwise paid or payable to the Equity Holders.
In addition to the foregoing indemnification obligations, the Company is
also obligated to indemnify, defend and hold harmless the former officers and
directors of PRP and any persons who acted as fiduciaries under any employee
benefit plan of PRP, and the heirs, executors and administrators of any such
person against any action, suit or proceeding, whether commenced before or after
the consummation of the Merger.
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RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act that
involve risks and uncertainties. The Company's actual results could differ
materially from those projected in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited, to
those discussed in this section, as well as those discussed elsewhere in this
Prospectus. The following risk factors should be considered carefully in
addition to the other information contained in this Prospectus before purchasing
any of the Securities being offered hereby.
INTEGRATION OF OPERATIONS. If the Company is to realize the anticipated
benefits of the Merger, the operations of PRP and the Company must be integrated
and combined efficiently. The process of rationalizing management and
administrative resources, facilities, management information systems and other
aspects of operations, while managing a larger and geographically expanded
entity, will present a significant challenge to the management of the combined
company. There can be no assurance that the integration process will be
successful or that the anticipated benefits of the business combination will be
fully realized. The dedication of management resources to such integration may
detract attention from the day-to-day business of the combined company. The
difficulties of integration may be increased by the necessity of coordinating
geographically separated organizations, integrating personnel with disparate
business backgrounds and combining different corporate cultures. There can be no
assurance that there will not be substantial costs associated with the
integration process, that such activities will not result in a decrease in
revenues or that there will not be other material adverse effects of these
integration efforts.
NEED FOR ADDITIONAL CAPITAL. The Company is actively seeking opportunities
to raise additional capital to be used primarily to fund existing operations
related to the manufacture and sale of the PROSORBA column, to develop new and
complete existing research and development activities, and to fund clinical
trials related to the proposed use of the PROSORBA column for the treatment of
rheumatoid arthritis and certain platelet disorders. Except in very limited
circumstances, the Company is obligated to expend no less than $4,000,000 on the
development of IPM. In addition, the Company will require substantial additional
capital over a period of a number of years to further development and marketing
of IPM. To the extent the Company decides to continue the development of other
products previously being developed by PRP, it will be required to raise
additional capital. The amount of capital required by the Company is primarily
dependent upon the following factors: results of clinical trials, results of
current research and development efforts, the FDA regulatory process, potential
competitive and technological advances and levels of product sales. Because the
Company is unable to predict the outcome of the previously noted factors, some
of which are beyond the Company's control, the Company is unable to estimate,
with certainty, its mid- to long-term total capital needs. Although the Company
may seek to raise additional capital through a combination of additional equity
offerings, joint ventures, strategic alliances, borrowings and other available
sources, there can be no assurance that the Company will be able to raise
additional capital through such sources or that funds raised thereby will allow
the Company to maintain its current and planned operations as provided herein.
If the Company is unable to obtain additional financing, it may be required to
delay, scale back or eliminate some or all of its research and development
activities, including those activities associated with the acquisition of PRP,
to license to third parties technologies that the Company would otherwise seek
to develop itself, to seek financing through the debt market at potentially
higher costs to the Company and/or to seek additional methods of financing.
HISTORY OF OPERATING LOSSES. The Company has operated at a loss since its
formation in October 1981. As of September 30, 1996, the Company had an
accumulated deficit of approximately $49,000,000. The ability of the Company to
achieve profitability is dependent upon, among other things, successful
completion of anticipated clinical trials and obtaining FDA marketing approval
of the PROSORBA column in additional disease indications in a timely manner. The
Company would have to significantly scale back its plans, curtail clinical
trials, and limit its present operations in order to become profitable or
operate on a break-even basis if it does not receive marketing approval from the
FDA for the PROSORBA column for the treatment of diseases in addition to ITP.
There can be no assurance that the Company will successfully complete any
present or future clinical trials, gain approval to begin any new clinical
trials, meet applicable regulatory standards or successfully market its products
to generate sufficient revenues to render the Company profitable. See "-- Prior
Exclusive Agreement with Baxter; Necessity of Establishing a Sales Force."
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<PAGE> 11
MANAGEMENT CHANGES; RESTRUCTURING PLAN; DEPENDENCE UPON KEY PERSONNEL. The
Company has recently undergone changes in senior management. In December 1995,
Martin D. Cleary resigned as Chief Executive Officer and a member of the Board
of Directors of the Company. Mr. Cleary's resignation was a result of the
Company's determination that it would best be served by having senior management
resident on the West Coast near the Company's principal executive offices and
other operations. Mr. Cleary, resident on the East Coast, was unable to relocate
and consequently agreed to resign as Chief Executive Officer and as a director.
Also in December 1995, Harvey J. Hoyt, M.D. resigned as Executive Vice President
and as a director as a result of the appointments of new members of senior
management and the restructuring of the Company, which restructuring eliminated
Dr. Hoyt's position. In March 1996, Frank R. Jones resigned as Chief Scientific
Officer and as Chairman of the Board and in May 1996, Alex P. de Soto resigned
as the Company's Vice President, Chief Financial Officer, Secretary and
Treasurer. Messrs. Jones' and de Soto's resignations were a result of the
restructuring of the Company and the Company's relocation of its executive
offices to San Diego, California. In December 1995, Jay D. Kranzler, M.D., Ph.D.
was appointed as Chief Executive Officer and Vice Chairman of the Board of
Directors and Debby Jo Blank, M.D. was appointed as President, Chief Operating
Officer and a member of the Board of Directors of the Company. In April 1996,
Susan E. Feiner was appointed as the Company's Director of Finance, Controller,
Secretary and Treasurer.
The Company is in the process of completing a substantial restructuring
plan. The restructuring plan is intended to reduce the Company's overhead and
recurring costs by reducing the Company's work force and consolidating its two
manufacturing facilities into one central manufacturing facility located in
Redmond, Washington. By eliminating approximately 20 positions, the Company
expects to realize an annual salary savings in excess of $1,000,000. However, to
date the Company has incurred approximately $700,000 in connection with the
consolidation of its manufacturing operations and estimates it will incur a
total of approximately $1,000,000 in capital expenditures associated with such
consolidation. In connection with the restructuring plan, the Company has
relocated all of its operations, except manufacturing, from Seattle, Washington
to San Diego, California. The restructuring is not yet completed and there can
be no assurance that such a restructuring will be completed as scheduled, if at
all. Even if such a restructuring is completed, there can be no assurance that
it will be successfully implemented.
The Company's success is dependent upon certain key management and
technical personnel, including the new members of senior management. The loss of
the services of any of these key employees could have a material adverse effect
on the Company. The Company does not currently maintain any key employee
insurance coverage.
FDA APPROVAL AND REGULATIONS. The Company is currently conducting a
controlled clinical trial of the PROSORBA column for treatment of rheumatoid
arthritis. Although the FDA has approved the commercial sale of the PROSORBA
column for the treatment of ITP, there can be no assurance that current or
future clinical trials will produce data satisfactory to the FDA to establish
the effectiveness of the PROSORBA column for treatment of diseases other than
ITP, such as rheumatoid arthritis, transplantations and certain cancers, or that
the FDA will approve the PROSORBA column for treatment of such diseases in a
timely manner, if at all.
The Company plans to continue the Phase II clinical trials of IPM currently
underway. Clinical trials are vigorously regulated by the FDA and must meet
requirements for institutional review board oversight and informed consent as
well as FDA review and oversight and good clinical practice regulations. There
can be no assurance that the clinical trials being conducted for IPM will be
completed successfully within any specified period of time, if at all, or that
if successful the Company will be able to further develop IPM. Furthermore, the
Company or the FDA may delay or suspend clinical trials at any time if it is
determined that the subjects participating in such trials are being exposed to
unacceptable health risks. Any such delay or suspension could have a material
adverse effect on the Company's business.
The PROSORBA column is commercially distributed under a premarket approval
("PMA") application that was approved by the FDA in 1987. Changes to the product
and its manufacturing process, and certain types of labeling changes must be
approved by the FDA prior to implementation. The Company currently has one
supplement to the PMA pending with the FDA for a labeling change addressing the
use of ancillary
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equipment during the use of the PROSORBA column therapy. The FDA has indicated
to the Company that the PMA supplement would be approvable if certain additional
information is provided. There can be no assurance that the Company will receive
approval of its pending PMA supplement or any future PMA supplements will be
approved by the FDA.
Even if FDA approval is granted to market a product for the treatment of a
particular disease, subsequent discovery of previously unknown problems may
result in restrictions on the product's future use or withdrawal of the product
from the market. In addition, any other products developed in the future will
require clinical testing and FDA marketing approval before they can be
commercially exploited in the United States. Such approval process is typically
very lengthy and there is no assurance that FDA approvals will be obtained.
The manufacture and distribution of medical devices are subject to
continuing FDA regulation. In addition to the requirement that the device be
marketed only for its approved use, applicable law requires compliance with the
FDA's good manufacturing practices ("GMP") regulations. Failure to comply with
the GMP regulations or with other applicable legal requirements can lead to
federal seizure of non-complying products, injunctive actions brought by the
federal government, and potential criminal liability on the part of the Company
and of the officers and employees of the Company who are responsible for the
activities that lead to the violations.
To date, production of commercial quantities of the raw materials utilized
in production of the PROSORBA column has been performed at the Redmond facility.
Final assembly of the PROSORBA column has been performed at the Seattle
facility. In conjunction with the Company's restructuring plan and corresponding
reduction in facilities, the Seattle and Redmond, Washington facilities are
being consolidated into a single manufacturing facility in Redmond. The Company
has already subleased a major portion of its Seattle facility to a third party.
Under the terms of the Company's sub-lease of its Seattle facility, the Company
must vacate the remainder of the facility no later than December 31, 1996 or
else be subject to substantial financial penalties. The Redmond facility is
under renovation in order to enable both the production of raw materials, as
well as the final assembly of the PROSORBA column, to be performed in the
Redmond facility. The renovated Redmond facility, when complete, must comply
with the FDA's GMP regulations and must complete the GMP re-approval process.
There can be no assurance that the Company will complete the renovations in time
to sustain uninterrupted production of the PROSORBA column. In addition, there
can be no assurance that the renovated facility will receive GMP approval in a
timely manner, if at all.
Furthermore, PRP occupies a facility that includes a GMP-approved pilot
production plant where all phases of production of clinical-grade IPM occurs,
except for filling and lyophilization. There can be no assurance that the
Company will be able to maintain the facility's GMP-approved status or that, if
approval is not maintained, it will be able to find an alternate GMP-approved
production facility.
COMPETITIVE ENVIRONMENT; TECHNOLOGICAL CHANGE; EFFECTIVENESS OF
PRODUCTS. The field of medical devices in general and the particular areas in
which the Company will market its products are extremely competitive. In
developing and marketing medical devices to treat immune-mediated diseases and
cancers, the Company competes with other products, therapeutic techniques and
treatments which are offered by national and international healthcare and
pharmaceutical companies, many of which have greater marketing, human and
financial resources than the Company.
The immunological therapy market is characterized by rapid technological
change and potential introductions of new products or therapies. To respond to
these changes, the Company may be required to develop or purchase new products
to protect its technology from obsolescence. There can be no assurance that the
Company will be able to develop or obtain such products, or, if developed or
obtained, that such products will be commercially viable. In addition, there can
be no assurance that the Company's PROSORBA column will prove effective in the
treatment of diseases other than ITP or that IPM, if approved for sale by the
FDA, will be effective in treating thrombocytopenia or other blood platelet
disorders.
DEPENDENCE ON THIRD PARTY ARRANGEMENTS. The Company's commercial sale of
its proposed products and its future product development may be dependent upon
entering into arrangements with corporate
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partners and other third parties for the development, marketing, distribution
and/or manufacturing of products utilizing the Company's proprietary technology.
While the Company is currently seeking collaborative research and development
arrangements and joint venture opportunities with corporate sponsors and other
partners, there can be no assurance that the Company will be successful in
entering into such arrangements or joint ventures or that any such arrangements
will prove to be successful.
PRIOR EXCLUSIVE AGREEMENT WITH BAXTER; NECESSITY OF ESTABLISHING A SALES
FORCE. In February 1994, the Company entered into a 10-year exclusive
distribution agreement with Baxter, granting to Baxter distribution rights to
its PROSORBA column in the United States and Canada for the treatment of
thrombocytopenia and the first right to negotiate for new PROSORBA column
indications. Baxter, at its own expense, was to provide sales and marketing
support for the sale of the product during the term of the agreement. Baxter
assumed the Company's sales and distribution responsibilities in April 1994.
In March 1996, the Company and Baxter terminated the exclusive distribution
agreement, whereby, effective May 1, 1996, the Company regained the right, among
other things, to sell its PROSORBA column directly to customers who had
previously purchased PROSORBA columns through Baxter as well as to any other
potential customers who wish to purchase PROSORBA columns. As a result of the
termination of the distribution agreement, the Company is in the process of
establishing an internal domestic sales force dedicated solely to marketing and
selling its PROSORBA column. To date, the Company has hired six salespersons
whom are directed solely to selling and marketing the PROSORBA column. There can
be no assurance that the Company will be successful in selling its PROSORBA
columns directly to any new customers or to any customers who previously
purchased PROSORBA columns through Baxter.
LIMITED INTERNATIONAL SALES AND MARKETING. The Company conducts limited
marketing of the PROSORBA column outside the United States through foreign
distributors. Sales to foreign distributors have not been material to the
Company's results from operations. There can be no assurance that foreign sales
arrangements will become material to the Company's results of operations.
UNCERTAINTY OF PATENT PROTECTION AND CLAIMS TO TECHNOLOGY. With the
acquisition of PRP, the Company now holds 13 United States and 8 foreign patents
relating to its technology and has also filed other U.S. and foreign patent
applications related to its technology. In addition, the Company has an
exclusive license for a U.S. patent for a genetic screening test to predict
which rheumatoid arthritis patients will develop severe disease. Neither the
protection afforded by these patents nor their enforceability can be assured.
Furthermore, there can be no assurance that additional patents will be obtained
either in the United States or in foreign jurisdictions or that, if issued, such
additional patents will provide sufficient protection to the Company's
technology or be of commercial benefit to the Company. Insofar as the Company
relies on trade secrets and unpatented proprietary know-how, there can be no
assurance that others will not independently develop similar technology or that
secrecy will not be breached. There can be no assurance that the Company will be
able to develop further technological innovations.
Others have filed applications for, or have been issued, patents and may
obtain additional patents and other proprietary rights relating to products or
processes competitive with those of the Company. The scope and validity of all
such patents is presently unknown. However, the holder of one such patent has
challenged the use by the Company of certain technology covered by such patent.
Based on the advice of patent counsel, the Company doe not believe it is
infringing this patent. The Company, however, is currently in the process of
attempting to obtain a license agreement with such holder. There can be no
assurances that the Company will be successful in obtaining such a license on
favorable terms, if at all. If this or other existing or future patents are
challenged in litigation or interference proceedings, the Company may become
subject to significant liabilities to third parties or be required to seek
licenses from third parties. There can be no assurance that such licenses would
be available or, if available, obtainable on acceptable terms.
In connection with the Merger, the Company acquired certain exclusive
rights with respect to the use, manufacture and sale of products and/or
processes related to analogs of the compound diadenosine tetraphosphate
("AP4A"), which rights were granted to PRP in July 1992 pursuant to a license
agreement between PRP and a collaborator of PRP (the "Licensor"). Under the
terms of the license agreement, PRP was obligated to file an IND with respect to
the commercial application of such rights within four years of acquiring such
rights. Neither PRP nor the Company has filed such IND. Due to such failure,
Licensor has
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the right to cancel upon 30 days written notice the exclusive license or to
convert the exclusive license to a nonexclusive license. If Licensor elects to
cancel such license, there can be no assurance that the Company will be able to
acquire or license the similar rights on terms acceptable to the Company, if at
all.
Various scientific personnel of the Company were previously associated with
non-profit research or education institutions that typically require researchers
to execute agreements giving such institutions broad rights to inventions
created or developed during the period that the scientist is associated with
such institution. While no such institution has to date asserted rights to the
Company's technology, such assertions may be made in the future, and if made,
there can be no assurances that the Company will be successful in any such
litigation.
CONCENTRATION OF OWNERSHIP. As of November 1, 1996, Allen & Company
Incorporated and Mr. Richard M. Crooks, a director of the Company, beneficially
owned approximately 16% and 3.0%, respectively, of the outstanding Common Stock
of the Company. Mr. Crooks is also a director and consultant to Allen & Company
Incorporated. Together, Mr. Crooks and Allen & Company Incorporated own a
significant amount of the total outstanding Common Stock of the Company and may
be able to exert substantial influence over the outcome of matters requiring
stockholder approval.
RECOVERABILITY OF ENDING INVENTORIES. As of September 30, 1996, the
Company's ending inventory balances consisted of $335,856 of raw materials,
$686,392 of work in process and $261,720 of finished goods. In order to recover
such ending inventory balances, the Company would have to sell approximately 20%
more PROSORBA column units to customers than that amount sold to customers by
Baxter during 1995. Such increase represents approximately 60% of the total
sales made by the Company's sales force in fiscal year 1993 prior to entering
into the Baxter agreement. As a result of the termination of the distribution
agreement with Baxter, the Company is actively establishing a domestic sales
force to sell the PROSORBA column directly to customers who previously purchased
PROSORBA columns from Baxter and to other potential customers who wish to
purchase PROSORBA columns directly from the Company. To date, the Company has
hired 6 salespersons whom are dedicated solely to selling the PROSORBA column.
Although there can be no assurances that the Company's sales force will be
successful in selling the Company's product, the Company believes, based upon
historical sales figures, that it can generate sufficient sales to recover the
ending inventory balances described above with a sales force of between 5 and 7
salespersons dedicated solely to selling the Company's PROSORBA column. On May
1, 1996, the Company increased the sales price of the PROSORBA columns to be
sold directly to customers by approximately 9%. This is the first such price
increase implemented by the Company since January 1, 1994. The Company believes
that such price increase reflects a nominal price increase for a medical device
for the period covered by such increase. However, there can be no assurance that
the Company will be successful in selling the PROSORBA column at the increased
price, if at all. See "-- Prior Exclusive Agreement with Baxter; Necessity of
Establishing a Sales Force."
INSURANCE REIMBURSEMENT. Successful commercialization of a new medical
product, such as the PROSORBA column or IPM depends, in part, on reimbursement
by public and private health insurers to health care providers for use of such
products. The availability of such reimbursement is subject to a variety of
factors, many of which could affect the Company as it commercializes use of the
PROSORBA column and continues development and commercialization of IPM. Although
the Company has been generally successful in assisting health care providers in
arranging reimbursement for the use of the PROSORBA column in the treatment of
ITP, there can no assurance that public and private insurers will continue to
reimburse for the use of the PROSORBA column. In addition, there can be no
assurance that health care providers will reimburse for the use of IPM, when and
if commercialized.
UNCERTAINTY OF HEALTH CARE REFORM. There are widespread efforts to control
health care costs in the U.S. and worldwide. Various federal and state
legislative initiatives regarding health care reform and similar issues continue
to be at the forefront of social and political discussion. These trends may lead
third-party payors to decline or limit reimbursement for the Company's product,
which could negatively impact the pricing and profitability of, or demand for,
the Company's product. The Company believes that government and private efforts
to contain or reduce health care costs are likely to continue. There can be no
assurance concerning the likelihood that any such legislative or regulatory
initiative will be enacted, or market reform
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initiated, or that, if enacted such reform or initiative will not result in a
material adverse impact on the business, financial condition or results of
operations of the Company.
PRODUCT LIABILITY. The use of the PROSORBA column and, when and if approved
for use by the FDA, IPM, involve the possibility of adverse effects occurring to
end-users that could expose the Company to product liability claims. The Company
believes that its product liability insurance coverage is adequate in light of
the Company's business. However, although the Company currently maintains
product liability insurance coverage, there can be no assurance that such
coverage or any increased amount of coverage will be adequate to protect the
Company and there can be no assurance that the Company will have sufficient
resources to pay any liability resulting from such a claim.
EXERCISE PRICE OF WARRANTS; POSSIBLE VOLATILITY OF STOCK PRICE; ABSENCE OF
DIVIDENDS. The exercise price of the Warrants was determined by the Company in
its sole discretion and is not necessarily related to the fair market value of
the Company's Common Stock, the Company's book value, net worth or any other
established means of valuation.
There has been significant volatility in the market prices of securities of
biomedical companies in general, including the Company's securities. Factors
such as announcements by the Company or others of technological innovations,
results of clinical trials, new commercial products, regulatory approvals or
proprietary rights developments, coverage decisions by third-party payors for
therapies and public concerns regarding the safety and other implications of
biotechnology and biomedical products may have a significant impact on the
Company's business and market price of the Company's securities. In addition, in
connection with the Merger, the Company is obligated to make a $5,000,000
milestone payment to the former holders of equity securities (including holders
of warrants and options) of PRP upon the public announcement of an FDA
approvable letter relating to the use of IPM for the treatment of
thrombocytopenia. The Company has the option to make such milestone payment in
the form of Common Stock of the Company. The issuance of Common Stock with a
value of $5,000,000 could have a significant impact on the market price of the
Company's securities.
No dividends have been paid on the Company's Common Stock to date, and the
Company does not anticipate paying dividends on its Common Stock in the
foreseeable future.
HAZARDOUS MATERIAL. The Company's research and development programs involve
the controlled use of biohazardous materials such as viruses, and may include
the use of the HIV virus that causes AIDS. Although the Company believes that
its safety procedures for handling such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result, and any such liability could exceed the resources of the Company.
LIMITATION OF NET OPERATING LOSS CARRYFORWARDS. The Company's sale of
Common Stock in November 1990 and September 1991 when taken together with prior
issuances, caused the limitation of Section 382 of the Internal Revenue Code of
1986, as amended, to be applicable. This limitation will allow the Company to
use only a portion of the net operating loss carryforwards to offset future
taxable income, if any, for federal income tax purposes. Based on the
limitations of Section 382 and before consideration of the effect of the sale of
securities offered hereby, the Company may be allowed to use no more than
approximately $2,450,000 of such losses each year to reduce taxable income, if
any. To the extent not utilized by the Company, unused losses will carry forward
subject to the limitations to offset future taxable income, if any, until such
unused losses expire. All unused net operating losses will expire 15 years after
any year in which they were generated. The years in which such expiration will
take place range from 1998 to 2010.
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SELLING SECURITYHOLDERS
The Selling Securityholders represented in their purchase agreements that
they were acquiring the Shares, Warrants and Warrant Shares for investment and
with no present intention of distributing the Shares, Warrants and Warrant
Shares. In recognition of the fact that the Selling Securityholders, even though
purchasing the Shares, Warrants and Warrant Shares without a view to distribute,
may wish to be legally permitted to sell the Shares, Warrants and Warrant Shares
when each deems appropriate, the Company has filed with the Commission a
Registration Statement on Form S-3, which this Prospectus forms a part, with
respect to, among other things, the resale of the Shares, Warrants and Warrant
Shares from time to time at prevailing prices in the over-the-counter market or
in privately-negotiated transactions and has agreed to prepare and file such
amendments and supplements to the Registration Statement as may be necessary to
keep the Registration Statement effective until all Shares, Warrants and Warrant
Shares offered hereby have been sold pursuant thereto or until such Shares,
Warrants and Warrant Shares are no longer, by reason of Rule 144 under the
Securities Act or any other rule of similar effect, required to be registered
for the sale thereof by the Selling Securityholders.
The following table sets forth the (i) name of each Selling Securityholder,
(ii) number of shares of Common Stock (including Warrant Shares) and Warrants
beneficially owned by each Selling Securityholder as of November 1, 1996, (iii)
number of Shares (including Warrant Shares) and Warrants which may be offered
pursuant to this Prospectus and (iv) number of shares of Common Stock (including
Warrant Shares and Warrants beneficially owned by each Selling Securityholder
upon the completion of this offering). This information is based upon
information provided to the Company by the Selling Securityholders. Because the
Selling Securityholders may offer all, some or none of their Shares, Warrants or
Warrant Shares, no definitive estimate as to the number of shares thereof that
will be held by the Selling Securityholders after such offering can be provided.
<TABLE>
<CAPTION>
SHARES
WARRANTS BENEFICIALLY
SHARES BENEFICIALLY BENEFICIALLY NUMBER OF NUMBER OF OWNED
OWNED PRIOR TO OWNED PRIOR TO SHARES WARRANTS AFTER
OFFERING OFFERING BEING OFFERED BEING OFFERED OFFERING
NAME OF SELLING ---------------------- -------------------- ------------- ------------- ---------
SECURITYHOLDERS(1) NUMBER(2) PERCENT(3) NUMBER PERCENT(4) NUMBER(2) NUMBER NUMBER(5)
- ---------------------------------- --------- ---------- ------- ---------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Allen, Susan...................... 1,005,119 2.9% 125,000 4.3% 375,000 125,000 630,119
Altorfer, John.................... 7,599 * 2,533 * 7,599 2,533 0
Ambit & Co........................ 75,000 * 25,000 * 75,000 25,000 0
Anthony, Garner................... 300,000 * 100,000 3.5% 300,000 100,000 0
Aries Domestic Fund............... 1,009,166 2.9% 37,500 1.3% 112,500 37,500 896,666
Baradaran, Sharyar & Sharon....... 75,000 * 25,000 * 75,000 25,000 0
Battle Fowler LLP................. 29,121 * 9,707 * 29,121 9,707 0
Berger, Michael J................. 18,750 * 6,250 * 18,750 6,250 0
Bowles, Joanne.................... 9,045 * 3,015 * 9,045 3,015 0
Brady, Jane Wilde................. 18,750 * 6,250 * 18,750 6,250 0
Buono, Timothy.................... 1,356 * 452 * 1,356 452 0
Cato Holding Company.............. 224,412 * 74,804 2.6% 224,412 74,804 0
Chao, Johanna T................... 20,268 * 6,756 * 20,268 6,756 0
<CAPTION>
WARRANTS BENEFICIALLY
OWNED AFTER OFFERING
NAME OF SELLING ----------------------
SECURITYHOLDERS(1) PERCENT(3) NUMBER(6) PERCENT(5)
- ---------------------------------- ---------- --------- ----------
<S> <<C> <C> <C>
Allen, Susan...................... 1.8% 0 0%
Altorfer, John.................... 0% 0 0%
Ambit & Co........................ 0% 0 0%
Anthony, Garner................... 0% 0 0%
Aries Domestic Fund............... 2.6% 0 0%
Baradaran, Sharyar & Sharon....... 0% 0 0%
Battle Fowler LLP................. 0% 0 0%
Berger, Michael J................. 0% 0 0%
Bowles, Joanne.................... 0% 0 0%
Brady, Jane Wilde................. 0% 0 0%
Buono, Timothy.................... 0% 0 0%
Cato Holding Company.............. 0% 0 0%
Chao, Johanna T................... 0% 0 0%
Cless, Gerhard.................... 490,000 1.4% 50,000 1.7% 150,000 50,000 340,000
Cole, Lorelei..................... 21,000 * 7,000 * 21,000 7,000 0
Coolidge, Peter................... 9,000 * 3,000 * 9,000 3,000 0
Curran Partners LP................ 187,500 * 62,500 2.2% 187,500 62,500 0
D'Amato, Anthony.................. 18,750 * 6,250 * 18,750 6,250 0
David & Angella Nazarian Family
Trust............................ 37,500 * 12,500 * 37,500 12,500 0
Dickerson, Claire M............... 20,004 * 6,668 * 20,004 6,668 0
Dickerson, Thomas P............... 57,345 * 19,115 * 57,345 19,115 0
Doctor Thwack, Ltd................ 9,375 * 3,125 * 9,375 3,125 0
Douglas S. Winter, Inc. Profit
Sharing Plan..................... 9,375 * 3,125 * 9,375 3,125 0
Drobny/Fischer Partnership........ 421,500 1.2% 62,500 2.2% 187,500 62,500 234,000
Dynamics Technology, Inc.......... 825,174 2.4% 275,058 9.5% 825,174 275,058 0
EBC Investors, an Illinois general
partnership...................... 52,500 * 17,500 * 35,000 17,500 0
EGS Securities Corp............... 83,883 * 27,961 * 83,883 27,961 0
Emer, Randy....................... 9,375 * 3,125 * 9,375 3,125 0
Gelber, Howard.................... 30,000 * 5,000 * 15,000 5,000 15,000
Goby, Jeff........................ 38,000 * 6,000 * 18,000 6,000 20,000
<CAPTION>
Cless, Gerhard.................... 1.0% 0 0%
<S> <<C> <C> <C>
Cole, Lorelei..................... 0% 0 0%
Coolidge, Peter................... 0% 0 0%
Curran Partners LP................ 0% 0 0%
D'Amato, Anthony.................. 0% 0 0%
David & Angella Nazarian Family
Trust............................ 0% 0 0%
Dickerson, Claire M............... 0% 0 0%
Dickerson, Thomas P............... 0% 0 0%
Doctor Thwack, Ltd................ 0% 0 0%
Douglas S. Winter, Inc. Profit
Sharing Plan..................... 0% 0 0%
Drobny/Fischer Partnership........ * 0 0%
Dynamics Technology, Inc.......... 0% 0 0%
EBC Investors, an Illinois general
partnership...................... 0% 0 0%
EGS Securities Corp............... 0% 0 0%
Emer, Randy....................... 0% 0 0%
Gelber, Howard.................... * 0 0%
Goby, Jeff........................ * 0 0%
</TABLE>
17
<PAGE> 17
<TABLE>
<CAPTION>
SHARES
WARRANTS BENEFICIALLY
SHARES BENEFICIALLY BENEFICIALLY NUMBER OF NUMBER OF OWNED
OWNED PRIOR TO OWNED PRIOR TO SHARES WARRANTS AFTER
NAME OF SELLING OFFERING OFFERING BEING OFFERED BEING OFFERED OFFERING
SECURITYHOLDERS(1) NUMBER(2) PERCENT(3) NUMBER PERCENT(4) NUMBER(2) NUMBER NUMBER(5)
- ---------------------------------- --------- ---------- ------- ---------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
WARRANTS BENEFICIALLY
NAME OF SELLING OWNED AFTER OFFERING
SECURITYHOLDERS(1) PERCENT(3) NUMBER(6) PERCENT(5)
- ---------------------------------- ---------- --------- ----------
<S> <<C> <C> <C>
Goldberg, David S................. 37,500 * 12,500 * 12,500 12,500 0
Goulding, M.D., Richard E......... 47,450 * 6,250 * 18,750 6,250 28,700
Goulding, Randall S............... 53,684 * 9,500 * 28,500 9,500 25,184
Green, Richard.................... 23,375 * 3,125 * 9,375 3,125 14,000
Greenwald, Jonathan............... 18,750 * 6,250 * 18,750 6,250 0
Groh, James H., Sr................ 18,750 * 6,250 * 18,750 6,250 0
Gutman, Craig..................... 18,750 * 6,250 * 18,750 6,250 0
Heidenreich, Jenny................ 4,521 * 1,507 * 4,521 1,507 0
Horberg, Howard Todd.............. 75,000 * 25,000 * 75,000 25,000 0
Howard J. Bernstein Trustee under
Declaration of Trust dated April
28, 1987......................... 18,750 * 6,250 * 18,750 6,250 0
Incavo, Noel F.................... 85,000 * 25,000 * 75,000 25,000 10,000
Infinity Fund, L.P................ 300,000 * 100,000 3.5% 300,000 100,000 0
Jayhawk Institutional, L.P........ 45,000 * 15,000 * 45,000 15,000 0
Jayhawk Investments, L.P.......... 405,000 1.2% 135,000 4.7% 405,000 135,000 0
Jerome P. Seiden Revocable
Trust............................ 37,500 * 12,500 * 37,500 12,500 0
Jerome Schachter and Associates
Pension Plan and Trust........... 37,500 * 12,500 * 37,500 12,500 0
Kamensky, Marvin.................. 18,750 * 6,250 * 18,750 6,250 0
Katzman, Howard L................. 18,750 * 6,250 * 18,750 6,250 0
Katzman, Marshall................. 18,750 * 6,250 * 18,750 6,250 0
Kushnir, Richard D................ 60,000 * 10,000 * 20,000 10,000 30,000
Kornreich, Joseph................. 9,000 * 3,000 * 9,000 3,000 0
Leonard Loventhal Trust Account
U/A/D 9/24/92, Leonard Loventhal
& Mark Litner Trustees........... 45,000 * 15,000 * 45,000 15,000 0
LeVine, Fred...................... 18,750 * 6,250 * 18,750 6,250 0
Levy, Steve....................... 117,500 * 12,500 * 37,500 12,500 80,000
Liss, Arthur...................... 25,000 * 5,000 * 15,000 5,000 10,000
Lydon, Harris R. L., Jr........... 18,750 * 6,250 * 18,750 6,250 0
Mateles, Richard I................ 9,375 * 3,125 * 9,375 3,125 0
McCallion, Gerald A............... 37,500 * 12,500 * 37,500 12,500 0
Melohn, Alfons.................... 150,000 * 50,000 1.7% 150,000 50,000 0
Michael Associates................ 37,500 * 12,500 * 37,500 12,500 0
Miller, Richard J................. 9,045 3,015 * 9,045 3,015 0
Morgenstern, J.M.................. 22,000 * 4,000 * 12,000 4,000 10,000
Mullins, Jerome J................. 150,000 * 50,000 1.7% 150,000 50,000 0
Nagorsky, Sy...................... 25,000 * 5,000 * 15,000 5,000 10,000
Neuscheler, Joan P................ 13,083 * 4,361 * 13,083 4,361 0
Olson, Arthur M................... 29,375 * 3,125 * 9,375 3,125 20,000
Olshansky, Melvin A............... 85,000 * 25,000 * 75,000 25,000 10,000
Pelts, James J.................... 15,000 * 5,000 * 15,000 5,000 0
Philip C. Goldstick Revocable
Trust............................ 71,500 * 12,500 * 37,500 12,500 34,000
Platelet Productions
International, Ltd............... 261,768 * 87,256 3.0% 261,768 87,256 0
Polinsky, Mark.................... 18,750 * 6,250 * 18,750 6,250 0
Priority Investments, Inc......... 93,000 * 31,000 * 93,000 31,000 0
Pritikin, Mark.................... 26,750 * 6,250 * 18,750 6,250 8,000
Rabinowitz, Beryl................. 9,375 * 3,125 * 9,375 3,125 0
Rabuck, Vivian.................... 18,750 * 6,250 * 18,750 6,250 0
Richard E. Goulding, M.D. Profit
Sharing Plan..................... 10,875 * 3,625 * 10,875 3,625 0
Richcourt $ Strategies, Inc....... 129,000 * 43,000 1.5% 129,000 43,000 0
Rosenberg, Reuben................. 22,500 * 7,500 * 22,500 7,500 0
Rosin, Joseph A................... 46,700 * 10,000 * 30,000 10,000 16,700
Schachter, Jerome................. 57,500 * 12,500 * 37,500 12,500 20,000
Schwartz, Sarah................... 18,750 * 6,250 * 18,750 6,250 0
Seminer, Scott.................... 17,725 * 3,125 * 9,375 3,125 8,350
Shapland, George T................ 18,750 * 6,250 * 18,750 6,250 0
Sharon D. Gonsky DBA SDG
Associates....................... 59,500 * 6,500 * 19,500 6,500 40,000
<CAPTION>
Goldberg, David S................. 0% 0 0%
Goulding, M.D., Richard E......... * 0 0%
Goulding, Randall S............... * 0 0%
Green, Richard.................... * 0 0%
Greenwald, Jonathan............... 0% 0 0%
Groh, James H., Sr................ 0% 0 0%
Gutman, Craig..................... 0% 0 0%
Heidenreich, Jenny................ 0% 0 0%
Horberg, Howard Todd.............. 0% 0 0%
Howard J. Bernstein Trustee under
Declaration of Trust dated April
28, 1987......................... 0% 0 0%
Incavo, Noel F.................... * 0 0%
Infinity Fund, L.P................ 0% 0 0%
Jayhawk Institutional, L.P........ 0% 0 0%
Jayhawk Investments, L.P.......... 0% 0 0%
Jerome P. Seiden Revocable
Trust............................ 0% 0 0%
Jerome Schachter and Associates
Pension Plan and Trust........... 0% 0 0%
Kamensky, Marvin.................. 0% 0 0%
Katzman, Howard L................. 0% 0 0%
Katzman, Marshall................. 0% 0 0%
Kushnir, Richard D................ * 0 0%
Kornreich, Joseph................. 0% 0 0%
Leonard Loventhal Trust Account
U/A/D 9/24/92, Leonard Loventhal
& Mark Litner Trustees........... 0% 0 0%
LeVine, Fred...................... 0% 0 0%
Levy, Steve....................... * 0 0%
Liss, Arthur...................... * 0 0%
Lydon, Harris R. L., Jr........... 0% 0 0%
Mateles, Richard I................ 0% 0 0%
McCallion, Gerald A............... 0% 0 0%
Melohn, Alfons.................... 0% 0 0%
Michael Associates................ 0% 0 0%
Miller, Richard J................. 0% 0 0%
Morgenstern, J.M.................. * 0 0%
Mullins, Jerome J................. 0% 0 0%
Nagorsky, Sy...................... * 0 0%
Neuscheler, Joan P................ 0% 0 0%
Olson, Arthur M................... * 0 0%
Olshansky, Melvin A............... * 0 0%
Pelts, James J.................... 0% 0 0%
Philip C. Goldstick Revocable
Trust............................ * 0 0%
Platelet Productions
International, Ltd............... 0% 0 0%
Polinsky, Mark.................... 0% 0 0%
Priority Investments, Inc......... 0% 0 0%
Pritikin, Mark.................... * 0 0%
Rabinowitz, Beryl................. 0% 0 0%
Rabuck, Vivian.................... 0% 0 0%
Richard E. Goulding, M.D. Profit
Sharing Plan..................... 0% 0 0%
Richcourt $ Strategies, Inc....... 0% 0 0%
Rosenberg, Reuben................. 0% 0 0%
Rosin, Joseph A................... 0 0%
Schachter, Jerome................. 0 0%
Schwartz, Sarah................... 0% 0 0%
Seminer, Scott.................... 0 0%
Shapland, George T................ 0% 0 0%
Sharon D. Gonsky DBA SDG
Associates....................... * 0 0%
</TABLE>
18
<PAGE> 18
<TABLE>
<CAPTION>
SHARES
WARRANTS BENEFICIALLY
SHARES BENEFICIALLY BENEFICIALLY NUMBER OF NUMBER OF OWNED
OWNED PRIOR TO OWNED PRIOR TO SHARES WARRANTS AFTER
OFFERING OFFERING BEING OFFERED BEING OFFERED OFFERING
NAME OF SELLING ---------------------- -------------------- ------------- ------------- ---------
SECURITYHOLDERS(1) NUMBER(2) PERCENT(3) NUMBER PERCENT(4) NUMBER(2) NUMBER NUMBER(5)
- ---------------------------------- --------- ---------- ------- ---------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
WARRANTS BENEFICIALLY
OWNED AFTER OFFERING
NAME OF SELLING ----------------------
SECURITYHOLDERS(1) PERCENT(3) NUMBER(6) PERCENT(5)
- ---------------------------------- ---------- --------- ----------
<S> <<C> <C> <C>
Shepco............................ 18,750 * 6,250 * 18,750 6,250 0
Shepco Enterprises IncorporateD... 37,500 * 12,500 * 37,500 12,500 0
Sheppard, Neil.................... 18,750 * 6,250 * 18,750 6,250 0
Sherman, Lawrence A............... 25,000 * 5,000 * 15,000 5,000 10,000
Shiman, Stewart A................. 225,000 * 25,000 * 75,000 25,000 150,000
Simons, Aric and Corey............ 75,000 * 25,000 * 75,000 25,000 0
Sirazi, Semir..................... 57,500 * 12,500 * 37,500 12,500 20,000
Sutker, Allen..................... 18,750 * 6,250 * 18,750 6,250 0
Swager, Eugene.................... 9,045 * 3,015 * 9,045 3,015 0
Swager, Harriet................... 4,521 * 1,507 * 4,521 1,507 0
The Alfred J. Anzalone Family
Limited Partnership.............. 75,000 * 25,000 * 75,000 25,000 0
The Aries Trust................... 1,156,666 3.3% 87,500 3.0% 262,500 87,500 894,166
Tullis-Dickerson Capital Focus,
L.P.............................. 1,414,836 4.0% 471,612 16.4% 1,414,836 471,612 0
Tullis, James L.L................. 105,042 * 35,014 1.2% 105,042 35,014 0
Tullis, Linda A................... 4,521 * 1,507 * 4,521 1,507 0
Urban & Co........................ 9,375 * 3,125 * 9,375 3,125 0
Vance, Carol...................... 9,045 * 3,015 * 9,045 3,015 0
Weber, Merrill.................... 22,500 * 7,500 * 22,500 7,500 0
Wholegainer Company Limited....... 150,048 * 50,016 1.7% 150,048 50,016 0
Wienckoski, Thomas J.............. 35,450 * 6,250 * 18,750 6,250 16,700
Wm. Smith & Co.................... 37,500 * 12,500 * 25,000 12,500 0
Wu, Johnny I-Mon.................. 175,515 * 58,505 2.0% 175,515 58,505 0
Yahav, Yigal...................... 52,750 * 6,250 * 18,750 6,250 34,000
Zipper, Lance..................... 9,000 * 3,000 * 9,000 3,000 0
<CAPTION>
Shepco............................ 0% 0 0%
Shepco Enterprises IncorporateD... 0% 0 0%
Sheppard, Neil.................... 0% 0 0%
Sherman, Lawrence A............... * 0 0%
Shiman, Stewart A................. 0 0%
Simons, Aric and Corey............ 0% 0 0%
Sirazi, Semir..................... 0 0%
Sutker, Allen..................... 0% 0 0%
Swager, Eugene.................... 0% 0 0%
Swager, Harriet................... 0% 0 0%
The Alfred J. Anzalone Family
Limited Partnership.............. 0% 0 0%
The Aries Trust................... 2.6% 0 0%
Tullis-Dickerson Capital Focus,
L.P.............................. 0% 0 0%
Tullis, James L.L................. 0% 0 0%
Tullis, Linda A................... 0% 0 0%
Urban & Co........................ 0% 0 0%
Vance, Carol...................... 0% 0 0%
Weber, Merrill.................... 0% 0 0%
Wholegainer Company Limited....... 0% 0 0%
Wienckoski, Thomas J.............. * 0 0%
Wm. Smith & Co.................... 0% 0 0%
Wu, Johnny I-Mon.................. 0% 0 0%
Yahav, Yigal...................... * 0 0%
Zipper, Lance..................... 0% 0 0%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated below, the persons named in the foregoing table
have sole voting and investment power with respect to all shares
beneficially owned by them, subject to community property laws where
applicable.
(2) Includes Warrant Shares issuable to each respective Selling Securityholder
upon exercise of Warrants held by such Selling Securityholders as of the
date hereof.
(3) Applicable percentage of ownership is based on 34,551,410 shares of Common
Stock of the Company outstanding on November 1, 1996, adjusted as required
by rules promulgated by the Commission.
(4) Applicable percentage of ownership is based on 2,880,399 Warrants of the
Company outstanding on November 1, 1996.
(5) Assumes the sale of all Shares offered hereby.
(6) Assumes the sale of all Warrants offered hereby.
17
<PAGE> 19
PLAN OF DISTRIBUTION
The Company has been advised that the Selling Securityholders or pledgees,
donees, tranferees of or other successors in interest to the Selling
Securityholders may sell Shares, Warrants and Warrant Shares from time to time
in transactions on the Nasdaq SmallCap Market, in privately negotiated
transactions or a combination of such methods of sale, at fixed prices which may
be changed, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Selling
Securityholders may effect such transactions by selling the Shares, Warrants and
Warrant Shares to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concession or commissions from the
Selling Securityholders or the purchasers of the Shares, Warrants and Warrant
Shares for whom such broker-dealers may act as agent or to whom they sell as
principal, or both (which compensation to a particular broker-dealer might be in
excess of customary commission).
At any time a particular offer of Shares, Warrants or Warrant Shares is
made, to the extent required, a supplemental Prospectus will be distributed
which will set forth the number of Shares, Warrants or Warrant Shares offered
and the terms of the offering including the names or names of any underwriters,
dealers or agents, the purchase price paid by any underwriter for the Shares,
Warrants or Warrant Shares purchased from the Selling Securityholders, any
discounts, commission and other items constituting compensation from the Selling
Securityholders and any discounts, concessions or commissions allowed or
reallowed or paid to dealers.
The Selling Securityholders and any broker-dealers who act in connection
with the sale of Shares, Warrants or Warrant Shares hereunder may be deemed to
be "underwriters" as that term is defined in the Securities Act, and any
commissions received by them and profit on any resale of the Shares, Warrants or
Warrant Shares as principal might be deemed to be underwriting discounts and
commissions under the Securities Act.
Any or all of the sales or other transactions involving the Shares,
Warrants or Warrant Shares described above, whether effected by the Selling
Securityholders, any broker-dealer or others, may be made pursuant to this
Prospectus. In addition, any Shares, Warrants or Warrant Shares that qualify for
sale pursuant to Rule 144 under the Act may be sold under rule 144 rather than
pursuant to this Prospectus.
In order to comply with the securities laws of certain states, if
applicable, the Shares, Warrants and Warrant Shares may be sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the Shares, Warrants and Warrant Shares may not be
sold unless they have been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Shares, Warrants or Warrant Shares may not
simultaneously engage in market making activities with respect to the Company's
Common Stock or Warrants for a period of two business days prior to the
commencement of such distribution. In addition and without limiting the
foregoing, the Selling Securityholders will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including without
limitation, Rules 10b-6 and 10b-7, which provisions may limit the timing of
purchases and sales of Shares, Warrants or Warrant Shares by the Selling
Securityholders.
Notwithstanding the foregoing, broker-dealers who are qualifying registered
market makers on the National Association of Securities Dealers Automated
Quotation System (the "Nasdaq") may engage in passive market making transactions
in the Common Stock of the Company on the Nasdaq Stock Market in accordance with
Rule 10b-6A under the Exchange Act, during the two business day period before
commencement of sales in this offering. The passive market making transactions
must comply with applicable price and volume limits and be identified as such.
In general, a passive market maker may display its bid at a price not in excess
of the highest independent bid for the security. If all independent bids are
lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded. Net purchases by a passive
market maker on each day are generally limited to a specified percentage of the
passive market maker's average daily trading volume in the Common Stock of the
Company
20
<PAGE> 20
during a prior period and must be discontinued when such limit is reached.
Passive market making may stabilize the market price of the Common Stock of the
Company at a level above that which might otherwise prevail and, if commenced,
may be discontinued at any time.
All costs and expenses associated with registering the Shares, Warrants and
Warrant Shares being offered hereunder with the Securities and Exchange
Commission will be paid by the Company. Such costs and expenses are estimated to
be $35,000.
The Company and the Selling Securityholders may agree to indemnify certain
persons including broker-dealers or others, against certain liabilities in
connection with any offering of the Shares, Warrants and Warrant Shares,
including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the Shares, Warrants and Warrant Shares
will be passed upon for the Company by Cooley Godward LLP, San Diego,
California.
EXPERTS
The consolidated financial statements of the Company incorporated herein by
reference from the Company's Annual Report (Form 10-K/A) for the years ended
December 31, 1995 and 1994, have been audited by Ernst & Young LLP, independent
auditors, and for the year ended December 31, 1993 by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their respective reports thereon
included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
19
<PAGE> 21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses payable by the Registrant in
connection with the sale of the Securities being registered. All the amounts
shown are estimates except for the SEC registration fee and the Nasdaq SmallCap
Market Listing fee.
<TABLE>
<S> <C>
SEC Registration fee............................................... $ 5,114
Nasdaq SmallCap Market Listing fee................................. 8,500
Legal fees and expenses............................................ 10,000
Blue sky qualification fees and expenses........................... 2,500
Accounting fees and expenses....................................... 5,000
Printing and engraving expenses.................................... 1,000
Miscellaneous...................................................... 2,886
-------
Total.............................................................. $35,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law (the "DGCL"), the
Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act").
The Registrant's Certificate of Incorporation and Bylaws include provisions
to (i) eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by
Section 102(b)(7) of the DGCL and (ii) require the Registrant to indemnify its
directors and officers to the fullest extent permitted by applicable law,
including circumstances in which indemnification is otherwise discretionary.
Pursuant to Section 145 of the DGCL, a corporation generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses incurred by them in connection with any suit to which they are
or are threatened to be made, a party by reason of their serving in such
positions so long as they acted in good faith and in a manner they reasonably
believed to be in or not opposed to, the best interests of the corporation and
with respect to any criminal action, they had no reasonable cause to believe
their conduct was unlawful. The Registrant believes that these provisions are
necessary to attract and retain qualified persons as directors and officers.
These provisions do not eliminate the directors' or officers' duty of care, and,
in appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under the DGCL. In addition,
each director will continue to be subject to liability pursuant to Section 174
of the DGCL, for breach of the director's duty of loyalty to the Registrant, for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for acts or omissions that the director believes to
be contrary to the best interests of the Registrant or its stockholders, for any
transaction from which the director derived an improper personal benefit, for
acts or omissions involving a reckless disregard for the director's duty to the
Registrant or its stockholders when the director was aware or should have been
aware of a risk of serious injury to the Registrant or its stockholders, for
acts or omission that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Registrant or its
stockholders, for improper transactions between the director and the Registrant
and for improper loans to directors and officers. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities law or state or federal environmental laws.
II-1
<PAGE> 22
The Registrant has an insurance policy covering the directors and officers
of the Registrant with respect to certain liabilities, including liabilities
arising under the Securities Act or otherwise.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------------------------------------------------------------------------
<C> <S>
* 5.1 Opinion of Cooley Godward LLP
*10.1 Warrant Agreement dated September 18, 1996 between the Registrant and American Stock
Transfer & Trust Company
*10.2 Form of Warrant Certificate
*10.3 Form of Units Purchase Agreement
**10.4 Agreement and Plan of Merger and Reorganization dated as of September 18, 1996 by and
among Registrant, Cypress Acquisition Sub, Inc. and PRP, Inc.
*10.5 Form of Exchange of Bridge Debt and Warrant Termination Agreement
*10.6 Modified Fee Agreement dated October 10, 1996 by and among Registrant, PRP, Inc. and EGS
Securities Corp.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Coopers & Lybrand LLP, Independent Auditors
*23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1
*24.1 Power of Attorney. Reference is made to page II-6
</TABLE>
- ---------------
(*) Previously filed.
(**) Confidential treatment has been requested for portions of the exhibit.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 15 or otherwise, the
Registrant has been advised that in the opinion of the 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:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to include
any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration statement.
(2) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To deliver or cause to be delivered with the Prospectus, to each
person to whom the Prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the Prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Exchange Act; and where interim financial information
required to be presented by Article 3 of Regulation S-X are not set forth
in the Prospectus, to deliver or caused
II-2
<PAGE> 23
to be delivered to each person to whom the Prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference in
the Prospectus to provide such interim financial information.
(4) That, for the purposes of determining liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(6) That, 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.
(7) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Diego, State of California, on
November 7, 1996.
CYPRESS BIOSCIENCE, INC.
By: /s/ Susan E. Feiner
------------------------------------
Susan E. Feiner
Director of Finance, Controller and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -----------------
<S> <C> <C>
*/s/ Jay D. Kranzler Vice Chairman of the Board November 7, 1996
- --------------------------------------------- of Directors and Chief
Jay D. Kranzler, M.D. Ph.D. Executive Officer
(Principal Executive
Officer)
/s/ Susan E. Feiner Director of Finance, November 7, 1996
- --------------------------------------------- Controller and Secretary
Susan E. Feiner (Principal Financial
Officer)
*/s/ Debby Jo Blank Director, President and November 7, 1996
- --------------------------------------------- Chief Operating Officer
Debby Jo Blank, M.D.
*/s/ Richard M. Crooks, Jr. Chairman of the Board November 7, 1996
- ---------------------------------------------
Richard M. Crooks, Jr.
*/s/ Philip J. O'Reilly Director November 7, 1996
- ---------------------------------------------
Philip J. O'Reilly
*/s/ Jack H. Vaughn Director November 7, 1996
- ---------------------------------------------
Jack H. Vaughn
</TABLE>
*By: /s/ Susan E. Feiner
-------------------------------
Susan E. Feiner
Attorney-in-Fact
II-4
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------ ------------------------------------------------------------------------ ------------
<S> <C> <C>
*5.1 Opinion of Cooley Godward LLP...........................................
*10.1 Warrant Agreement dated September 18, 1996 between the Registrant and
American Stock Transfer & Trust Company.................................
*10.2 Form of Warrant Certificate.............................................
*10.3 Form of Units Purchase Agreement........................................
**10.4 Agreement and Plan of Merger and Reorganization dated as of September
18, 1996 by and among Registrant, Cypress Acquisition Sub, Inc. and PRP,
Inc.....................................................................
*10.5 Form of Exchange of Bridge Debt and Warrant Termination Agreement.......
*10.6 Modified Fee Agreement dated October 10, 1996 by and among Registrant,
PRP, Inc. and EGS Securities Corp.......................................
23.1 Consent of Ernst & Young LLP, Independent Auditors......................
23.2 Consent of Coopers & Lybrand LLP, Independent Auditors..................
*23.3 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.........
*24.1 Power of Attorney. Reference is made to page II-6.......................
</TABLE>
- ---------------
(*) Previously filed.
(**) Confidential treatment has been requested for portions of the exhibit.
<PAGE> 1
EXHIBIT 10.4
CONFIDENTIAL TREATMENT REQUESTED UNDER 17 C.F.R. SECTIONS 200.80(b)(4) 200.83
AND 230.406. * INDICATES OMITTED MATERIAL THAT IS THE SUBJECT OF A CONFIDENTIAL
TREATMENT REQUEST THAT IS FILED SEPARATELY WITH THE COMMISSION.
AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION
by and among:
CYPRESS BIOSCIENCE, INC.
a Delaware corporation;
CYPRESS ACQUISITION SUB, INC.
a Delaware corporation;
and
PRP, INC.
a Delaware corporation
----------------------------------
Dated as of October 10, 1996
----------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. DESCRIPTION OF TRANSACTION............................................................................. 1
1.1 Merger of Merger Sub into the Company......................................................... 1
1.2 Effect of the Merger.......................................................................... 1
1.3 Closing; Effective Time....................................................................... 2
1.4 Certificate of Incorporation and Bylaws; Directors and Officers............................... 2
1.5 Consideration/Merger Price.................................................................... 2
1.6 Conversion of Shares.......................................................................... 10
1.7 Closing of the Company's Transfer Books....................................................... 10
1.8 Surrender of Company Stock Certificates and Company Promissory Notes.......................... 11
1.9 Dissenting Shares............................................................................. 13
1.10 Board Observation Rights...................................................................... 13
1.11 Tax Consequences.............................................................................. 14
1.12 Accounting Treatment.......................................................................... 14
1.13 Further Action................................................................................ 14
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................................... 14
2.1 Due Organization; No Subsidiaries; Etc........................................................ 14
2.2 Certificate of Incorporation and Bylaws; Records.............................................. 15
2.3 Capitalization................................................................................ 15
2.4 Financial Statements.......................................................................... 16
2.5 Absence of Changes............................................................................ 17
2.6 Title to Assets............................................................................... 19
2.7 Bank Accounts; Receivables.................................................................... 19
2.8 Equipment; Leasehold.......................................................................... 19
2.9 Proprietary Assets............................................................................ 20
2.10 Contracts..................................................................................... 21
2.11 Liabilities................................................................................... 23
2.12 Compliance with Legal Requirements............................................................ 24
2.13 Governmental Authorizations................................................................... 24
2.14 Tax Matters................................................................................... 25
2.15 Employee and Labor Matters; Benefit Plans..................................................... 26
2.16 Environmental Matters......................................................................... 28
2.17 Insurance..................................................................................... 29
2.18 Related Party Transactions.................................................................... 29
2.19 Legal Proceedings; Orders..................................................................... 29
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
2.20 Authority; Binding Nature of Agreement................................................................. 30
2.21 Non-Contravention; Consents................................................................... 30
2.22 Brokers and Finders........................................................................... 31
2.23 Full Disclosure............................................................................... 31
3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB................................................ 31
3.1 Due Organization; Capitalization.............................................................. 31
3.2 Parent Financial Statements................................................................... 32
3.3 Authority; Binding Nature of Agreement; No Conflict........................................... 33
3.4 SEC Filings................................................................................... 33
3.5 Material Change............................................................................... 34
3.6 Approval of Merger............................................................................ 34
3.7 Full Disclosure............................................................................... 34
4. CERTAIN COVENANTS OF THE COMPANY....................................................................... 34
4.1 Access and Investigation...................................................................... 34
4.2 Operation of the Company's Business........................................................... 34
4.3 No Shop....................................................................................... 36
4.4 Approval of Merger............................................................................ 37
4.5 No Transfer of Shares......................................................................... 37
5. ADDITIONAL COVENANTS OF THE PARTIES.................................................................... 37
5.1 Filings and Consents.......................................................................... 37
5.2 Company Stockholders' Meeting................................................................. 38
5.3 Public Announcements.......................................................................... 38
5.4 Pre-Transaction Fee Payments.................................................................. 38
5.5 Best Efforts.................................................................................. 38
5.6 Termination of Employee Plans................................................................. 38
5.7 Break-Up Fee.................................................................................. 38
5.8 Director and Officer Liability................................................................ 39
5.9 Notification; Updates to Disclosure Schedule.................................................. 39
5.10 Securities and Blue Sky Laws.................................................................. 40
5.11 Employees and Employee Benefits............................................................... 40
6. POST-CLOSING COVENANTS OF PARENT....................................................................... 40
6.1 Use of Private Placement Proceeds; Commercially
Reasonable Efforts............................................................................ 40
6.2 Patent Matters................................................................................ 41
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
6.3 Status Reports................................................................................ 41
6.4 Transfer of Rights............................................................................ 41
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB........................................... 42
7.1 Accuracy of Representations................................................................... 42
7.2 Performance of Covenants...................................................................... 42
7.3 Stockholder Approval.......................................................................... 42
7.4 Consents...................................................................................... 42
7.5 Agreements and Documents...................................................................... 42
7.6 No Restraints................................................................................. 42
7.7 No Legal Proceedings.......................................................................... 43
7.8 Termination of Employee Plans................................................................. 43
7.9 Lock-Up Agreements............................................................................ 43
7.10 Exchange of Bridge Debt and Warrant Termination Agreement..................................... 43
7.11 Pre-Transaction Liabilities................................................................... 43
7.12 Dissenting Shares............................................................................. 43
7.13 No Material Change............................................................................ 43
7.14 Notice of Liquidation Preference Election..................................................... 43
7.15 Receipt of Company Promissory Notes or Affidavits and Indemnity Agreements.................... 44
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY..................................................... 44
8.1 Accuracy of Representations................................................................... 44
8.2 Performance of Covenants...................................................................... 44
8.3 No Restraints................................................................................. 44
8.4 Private Placement............................................................................. 44
8.5 Listing of Additional Shares.................................................................. 44
8.6 No Material Change............................................................................ 44
8.7 Delivery of Units............................................................................. 45
8.8 Cooley Godward LLP Legal Opinion.............................................................. 45
8.9 Stockholder Approval.......................................................................... 45
8.10 Consents...................................................................................... 45
8.11 No Legal Proceedings.......................................................................... 45
9. TERMINATION AND AMENDMENT.............................................................................. 45
9.1 Termination Events............................................................................ 45
</TABLE>
iii
<PAGE> 5
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
9.2 Termination Procedures........................................................................ 46
9.3 Effect of Termination......................................................................... 46
9.4 Amendment..................................................................................... 46
9.5 Extension; Waiver............................................................................. 46
10. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; INDEMNIFICATION................................. 46
10.1 Survival of Representations, Warranties and Covenants......................................... 46
10.2 Indemnification............................................................................... 47
10.3 Limitations on Indemnification................................................................ 48
10.4 No Contribution............................................................................... 48
10.5 Procedure for Indemnification................................................................. 49
10.6 Exercise of Remedies by Parent Indemnitees Other Than Parent.................................. 50
10.7 Limitations on Indemnification................................................................ 50
11. REGISTRATION OF THE SECURITIES; COMPLIANCE WITH THE SECURITIES ACT..................................... 50
11.1 Restrictions on Transfer...................................................................... 50
11.2 Registration Procedures and Expenses.......................................................... 51
11.3 Transfer of Securities After Registration..................................................... 52
11.4 Indemnification............................................................................... 53
11.5 Contribution.................................................................................. 54
11.6 Termination of Conditions and Obligations..................................................... 55
11.7 Information Available......................................................................... 55
11.8 Successors and Assigns........................................................................ 55
12. EQUITY HOLDERS' REPRESENTATIVES........................................................................ 55
12.1 Appointment................................................................................... 55
12.2 Compensation.................................................................................. 56
12.3 Succession.................................................................................... 57
12.4 Liability of the Equity Holders' Representatives to Each Other and to the
Equity Holders................................................................................ 57
12.5 Right of Parent to Rely; Exculpation of Parent................................................ 58
13. MISCELLANEOUS PROVISIONS............................................................................... 58
13.1 Further Assurances............................................................................ 58
13.2 Arbitration................................................................................... 58
</TABLE>
iv
<PAGE> 6
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
13.3 Fees and Expenses............................................................................. 58
13.4 Attorneys' Fees............................................................................... 59
13.5 Notices....................................................................................... 59
13.6 Confidentiality............................................................................... 60
13.7 Time of the Essence........................................................................... 60
13.8 Headings...................................................................................... 60
13.9 Counterparts.................................................................................. 60
13.10 Governing Law................................................................................. 60
13.11 Successors and Assigns........................................................................ 60
13.12 Remedies Cumulative; Specific Performance..................................................... 61
13.13 Waiver........................................................................................ 61
13.14 Amendments.................................................................................... 61
13.15 Severability.................................................................................. 61
13.16 Parties in Interest........................................................................... 61
13.17 Entire Agreement.............................................................................. 62
13.18 Construction.................................................................................. 62
13.19 Bridge Debtholders and Others as Third Party Beneficiaries.................................... 62
</TABLE>
v
<PAGE> 7
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the "Agreement")
is made and entered into as of October 10, 1996, by and among: CYPRESS
BIOSCIENCE, INC., a Delaware corporation ("Parent"); CYPRESS ACQUISITION SUB,
INC., a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger
Sub"); and PRP, INC., a Delaware corporation (the "Company"). Certain other
capitalized terms used in this Agreement are defined in Exhibit A.
RECITALS
A. Parent, Merger Sub and the Company intend to effect a merger of
Merger Sub into the Company in accordance with this Agreement and the Delaware
General Corporation Law (the "Merger"). Upon consummation of the Merger, Merger
Sub will cease to exist, and the Company will become a wholly-owned subsidiary
of Parent.
B. The parties agree that, in the event it is necessary for Parent to
acquire or license third party patent rights or know-how in order to develop,
manufacture, use or sell any Earn-Out Products (as defined herein), the parties
will in good faith discuss whether any adjustment to the amount of Earn-Out
Payments (as defined herein) would be appropriate in light of the costs of such
third party patent rights or know-how.
C. It is intended that the Merger be a taxable transaction for U.S.
federal income tax purposes. For accounting purposes, it is intended that the
Merger be treated as a "purchase transaction."
D. This Agreement has been approved by the respective boards of
directors of Parent, Merger Sub and the Company and by Parent as the sole
stockholder of Merger Sub.
AGREEMENT
The parties to this Agreement agree as follows:
1. DESCRIPTION OF TRANSACTION.
1.1 MERGER OF MERGER SUB INTO THE COMPANY. Upon the terms and subject
to the conditions set forth in this Agreement, at the Effective Time (as defined
in Section 1.3), Merger Sub shall be merged with and into the Company, and the
separate existence of Merger Sub shall cease. The Company will continue as the
surviving corporation in the Merger (the "Surviving Corporation").
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth
in this Agreement and the Certificate of Merger, substantially in the form of
Exhibit B (the "Certificate of Merger") and in the applicable provisions of the
Delaware General Corporation Law.
<PAGE> 8
1.3 CLOSING; EFFECTIVE TIME. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, San Diego, California
92121, at 10:00 a.m. PST on the second business day following the date all of
the conditions specified in Sections 7 and 8 have been satisfied or waived (the
"Closing Date"). Contemporaneously with or as promptly as practicable after the
Closing, the properly executed Certificate of Merger (conforming to the
requirements of Section 251 of the Delaware General Corporation Law) shall be
filed with the Secretary of State of the State of Delaware. The Merger shall
become effective at the time such Certificate of Merger is filed with and
accepted by the Secretary of State of the State of Delaware (the "Effective
Time").
1.4 CERTIFICATE OF INCORPORATION AND BYLAWS; DIRECTORS AND OFFICERS.
Unless otherwise determined by Parent and the Company prior to the Effective
Time:
(a) the Certificate of Incorporation of the Surviving
Corporation shall be amended and restated as of the Effective Time to conform to
Exhibit C;
(b) the Bylaws of the Surviving Corporation shall be amended
and restated as of the Effective Time to conform to the Bylaws of Merger Sub as
in effect immediately prior to the Effective Time; and
(c) the directors and officers of the Surviving Corporation
immediately after the Effective Time shall be the individuals identified on
Exhibit D.
1.5 CONSIDERATION/MERGER PRICE.
(a) PARENT EQUITY.
(i) At the Closing and in full satisfaction and
settlement of all outstanding indebtedness of each holder of bridge debt of the
Company set forth on Schedule 1.5(a) (the "Bridge Debtholders"), Parent shall
issue to each Bridge Debtholder and each Bridge Debtholder shall accept that
number of Units of Parent set forth opposite such Bridge Debtholders' name on
Schedule 1.5(a) (as updated through the Closing Date). The Bridge Debtholders
shall advance sufficient additional Bridge Debt (the "Additional Bridge Debt"),
following execution of this Agreement, such that the Additional Bridge Debt,
when combined with the Company's cash balances as of the Closing Date, will be
sufficient to pay the aggregate amount of all fees, costs and expenses which
were incurred in connection with the transactions contemplated by this Agreement
and paid or payable by the Company to (1) the Company's legal and accounting
advisors, and (2) the Bridge Debtholders' legal advisors; provided, however,
that any fees incurred by or on behalf of the Company under clause (1) in excess
of $100,000 and under clause (2) in excess of $15,000 shall be borne exclusively
by the stockholders of the Company and/or the Bridge Debtholders, as the case
may be, and such that the Company's representation and warranty in the last
sentence of Section 2.11(d) is accurate. The Company's cash balances shall be
exhausted before any such Additional Bridge Debt is advanced. The aggregate base
value of the Units to be issued to the Bridge Debtholders under this Section
1.5(a)(i) shall be increased by that number of Units which is equal in value to
any such
2
<PAGE> 9
*CONFIDENTIAL TREATMENT REQUESTED
Additional Bridge Debt advanced. In no event shall the aggregate amount of
Bridge Debt outstanding (including the Bridge Debt reflected on Schedule 1.5(a)
and the Additional Bridge Debt) and all accrued interest thereon exceed
$4,800,000 at the Closing. In consideration of the services provided by EGS
Securities Corp. to the Company in connection with the transactions contemplated
by this Agreement, at the Closing Parent shall issue to EGS Securities Corp.
that number of Units equal in value to 2-1/2% of the total Bridge Debt
(including accrued interest thereon) outstanding as of the Closing Date;
provided, however, that the aggregate value of all Units to be issued to EGS
Securities Corp. under this subsection (i) shall not exceed shall $120,000.
(ii) REGISTRATION RIGHTS. The Bridge Debtholders and
EGS Securities Corp. shall be entitled to those certain rights of registration
with respect to the Units received pursuant to Section 1.5(a)(i) as set forth in
Section 11.
(b) EARN-OUT PAYMENTS. Subject to the adjustments set forth in
subsection (iv) below, Parent shall distribute annually to each Equity Holder
(as defined below), in the manner set forth in subsection (iii) below and in
accordance with the percentages set forth in the Allocation Schedule (as defined
in Section 1.5(e)(i)), payments calculated pursuant to subsection (i) hereunder
(each, an "Earn-Out Payment," and collectively, "Earn-Out Payments"), as
follows:
(i) CALCULATION OF EARN-OUT PAYMENTS. The aggregate
amount of the Earn-Out Payments due under Section 1.5(b), subject to adjustment
pursuant to subsection (b)(iv), for each calendar year shall be based upon
annual Total Net Sales, as follows :
(1) If Total Net Sales for a calendar year
are less than or equal to $50,000,000, the Earn-Out Payment for such year shall
be an amount equal to [*****] of the Total Net Sales for such year.
(2) If Total Net Sales for a calendar year
are greater than $50,000,000 but less than or equal to $100,000,000, the
Earn-Out Payment for such year shall be an amount equal to [*****] of the first
$50,000,000 of Total Net Sales for the year, plus [*****] of Total Net Sales
for the year in excess of $50,000,000.
(3) If Total Net Sales for a calendar year
are greater than $100,000,000 but less than or equal to $150,000,000, the
Earn-Out Payment for such year shall be an amount equal to [*****] of the first
$50,000,000 of Total Net Sales for the year, plus [*****] of Total Net Sales
for the year in excess of $50,000,000 but less than or equal to $100,000,000,
plus [*****] of Total Net Sales for the year in excess of $100,000,000.
(4) If Total Net Sales for a calendar year
are greater than $150,000,000 but less than or equal to $200,000,000, the
Earn-Out Payment for such year shall be an amount equal to [*****] of the first
$50,000,00 of Total Net Sales, plus [*****] of Total Net Sales for the year in
excess of $50,000,000 but less than or equal to $100,000,000, plus [*****] of
Total Net Sales for the year in excess of $100,000,000 but less than or equal to
$150,000,000, plus [*****] of Total Net Sales for the year in excess of
$150,000,000.
3
<PAGE> 10
*CONFIDENTIAL TREATMENT REQUESTED
(5) If Total Net Sales for a calendar year
are greater than $200,000,000, the Earn-Out Payment for such year shall be an
amount equal to [*****] of the first $50,000,000 of Total Net Sales for the
year, plus [*****] of Total Net Sales for the year in excess of $50,000,000 but
less than or equal to $100,000,000, plus [*****] of Total Net Sales for the year
in excess of $100,000,000 but less than or equal to $150,000,000, plus [*****]
of Total Net Sales in excess of $150,000,000 but less than or equal to
$200,000,000, plus [*****] of Total Net Sales for the year in excess of
$200,000,000.
(ii) TERMINATION OF EARN-OUT PAYMENTS. Parent's
obligation to make Earn-Out Payments pursuant to this Section 1.5(b) with
respect to any Earn-Out Product shall commence on the date of the first
commercial sale to any Third Party of such Earn-Out Product by Parent, its
affiliate or licensee and shall terminate on a country-by-country basis upon the
later of (1) the expiration or invalidation of the last issued patent owned,
licensed or otherwise controlled by Parent in such country, or abandonment,
disclaimer or rejection of the last pending patent application owned, licensed
or otherwise controlled by Parent in such country, covering the manufacture, use
or sale of such Earn-Out Product, and (2) fourteen (14) years after the first
commercial sale anywhere in the world of the Earn-Out Product by Parent, its
Affiliates or sublicensees (the "Earn-Out Period").
(iii) TIMING AND FORM OF EARN-OUT PAYMENTS. The
Earn-Out Payments shall be made within sixty (60) days following the end of each
calendar year (the "Distribution Date") during the Earn-Out Period. On the
Distribution Date, each Equity Holder shall be entitled to receive on a pro rata
basis the Earn-Out Payment, if any, with all amounts that Dissenting Equity
Holders would have otherwise been entitled to being payable to each Equity
Holder on a pro rata basis. The allocation among the Equity Holders of any
Earn-Out Payments to be made pursuant to this Section 1.5(b) shall be made in
accordance with the Allocation Schedule. The Earn-Out Payments shall be made by
Parent, at the sole and absolute discretion of Parent, either in the form of a
certified or official bank check payable to the order of the Equity Holder or by
wire transfer of immediately available funds to an account designated by the
Equity Holder. All payments due to Equity Holders hereunder shall be made in
United States dollars.
(iv) ADJUSTMENTS TO EARN-OUT PAYMENTS. The amount of
any Earn- Out Payment to be paid under Section 1.5(b) with respect to an
Earn-Out Product sold in a country in which, at the time of such sale, the
Earn-Out Product is not covered by and encompassed within the scope of one or
more claims contained in a unexpired patent or in a pending patent application
included in the Company Patents, in such country, shall be reduced by 50%.
(v) REPORTS; AUDITS; PENALTIES. Each Earn-Out Payment
shall be accompanied by a written report of the calculation of such payment in
sufficient detail to permit the Equity Holders' Representatives to confirm the
accuracy thereof. Upon the written request of the Equity Holders'
Representatives, Parent shall permit an independent public accountant selected
by the Equity Holders' Representatives from a nationally recognized public
accounting firm and acceptable to Parent, which acceptance shall not be
unreasonably withheld or delayed, to have access during normal business hours to
such records of Parent and its Affiliates as may
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be reasonably necessary to verify the accuracy of the written reports described
herein. In addition, Parent shall make available for verification all
information Parent may have relating to sales of any Earn-Out Products made by
Parent's licensees. All such verifications shall be conducted at the Equity
Holders' Representatives' expense and not more than once in each calendar year.
In the event it is finally determined that additional Earn-Out Payments (the
"Earn-Out Difference") were owed to Equity Holders during such period, the
Earn-Out Difference shall be paid by Parent to the Equity Holders in accordance
with the Allocation Schedule within thirty (30) days of the final determination.
If the audit discloses that the Earn-Out Difference payable by Parent for the
audited period is greater than ten percent (10%) of the Earn-Out Payments
actually paid, Parent shall pay the reasonable fees and expenses charged by the
independent public accountant. Any dispute with respect to the proper amount of
Earn-Out Payments to be paid to the Equity Holders shall be submitted by the
parties to arbitration in accordance with Section 13.2. Parent shall include in
each license granted by it with respect to Earn-Out Products provisions
requiring the licensee to make reports to Parent, to keep and maintain records
of sales made pursuant to such license and to allow Parent access to such
records on terms similar to those set forth in this Agreement. The Equity
Holders' Representatives agree that all information subject to review under this
Section is confidential and that the Equity Holders' Representatives shall cause
its representatives to retain all such information in confidence.
(vi) INTEREST ON LATE PAYMENTS. Any payments by
Parent to Equity Holders that are not paid on or before the fifth business day
after the date such payments are due under this Agreement shall bear interest,
at the lesser of (1) two percentage points above the Prime Rate of interest from
time-to-time reported in the Wall Street Journal, calculated on the number of
days payment is delinquent, based upon a 365 day year and (2) the maximum rate
permitted under applicable law.
(c) MILESTONE PAYMENT.
(i) TIMING AND FORM OF MILESTONE PAYMENT. Within 30
days of the earlier of the date of (1) public announcement of an FDA Approvable
Letter relating to the use of IPM for the treatment of thrombocytopenia and (2)
public announcement by the FDA of an equivalent approval of IPM, if any, Parent
shall make a payment of $5,000,000 (the "Milestone Payment") to the Equity
Holders in accordance with the Allocation Schedule with such payment being in
the form of, at Parent's sole and absolute discretion, (A) cash; (B) Parent
Common Stock; or (C) a combination of (A) and (B); provided, however, that each
Equity Holder shall be entitled to receive the same form or forms of
consideration in the same relative percentages paid by Parent to each other
Equity Holder hereunder.
(ii) CALCULATION OF COMMON STOCK PRICE. In the event
Parent elects to make the Milestone Payment, in whole or in part, in the form of
Parent Common Stock as provided in subsection (i) above, the value of such
Common Stock shall be determined based upon the average closing sales prices, if
Parent's Common Stock is quoted on a stock exchange or the Nasdaq National
Market System ("Nasdaq/NMS") (or the average of the bid and asked prices of
Parent's Common Stock as reported by the National Association of Securities
Dealers,
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Inc. ("NASD") electronic interdealer quotation system) for the fifteen (15)
trading day period commencing ten (10) trading days immediately prior to and
including the day of public announcement of the FDA Approvable Letter or the
public announcement by the FDA of an equivalent approval of IPM, as the case may
be, and for the five (5) trading days immediately after the day of the public
announcement of the FDA Approvable Letter or the public announcement by the FDA
of an equivalent approval of IPM, as the case may be.
(iii) REGISTRATION RIGHTS. In the event Parent elects
to make the Milestone Payment in the form of Parent Common Stock as provided in
subsection (i) above, the Equity Holders receiving shares of Common Stock shall
be entitled to those certain rights of registration with respect to the shares
of Common Stock received pursuant to subsection (i) as set forth in Section 11.
(d) SATISFACTION OF PARENT OBLIGATIONS. Any and all Earn-Out
Payments and any Milestone Payment properly made by Parent to the Equity Holders
in the percentages set forth in the Allocation Schedule shall be in full
satisfaction of the Equity Holders' right to receive any such Earn-Out Payment
or Milestone Payment and shall discharge in full any obligation Parent may have
hereunder to make such Earn-Out Payment or Milestone Payment to the Equity
Holders. Upon remitting any Earn-Out Payments or any Milestone Payment to the
Equity Holders, Parent shall have no further obligations to the Equity Holders
with respect to the receipt of their share of any Earn-Out Payment or Milestone
Payment.
(e) ALLOCATION OF EARN-OUT PAYMENTS AND MILESTONE PAYMENT
AMONG EQUITY HOLDERS.
(i) At the Closing, the Company shall deliver to
Parent a schedule (the "Allocation Schedule") setting forth the name and address
of each Equity Holder; the name of each Equity Holder, if any, who has elected
to receive his Liquidation Preference (as defined in subsection (iii) below);
the Common Stock Percentage (as defined in subsection (ii)(2) below), Non-Voting
Preferred Stock Percentage (as defined in subsection (ii)(3) below), Series A
Preferred Stock Percentage (as defined in subsection (ii)(4) below), Series B
Preferred Stock Percentage (as defined in subsection (ii)(5) below), Series C
Preferred Stock Percentage (as defined in subsection (ii)(6) below), Company
Option Percentage (as defined in subsection (ii)(7) below) and Company Warrant
Percentage (as defined in subsection (ii)(8), as appropriate, of each other
Equity Holder; and, for each holder of Company Options, the exercise price under
each of his Company Options and, for each holder of Company Warrants, the
exercise price under each of his Company Warrants.
(ii) For purposes of this Agreement:
(1) "Equity Holders' Total" shall be the sum
of (A) the number of outstanding shares of Company Common Stock held by Equity
Holders immediately prior to the Effective Time plus (B) the number of
outstanding shares of Company Non-Voting Preferred Stock held by Equity Holders
immediately prior to the Effective Time plus (C) the number of shares of Company
Common Stock into which outstanding shares of Company Series A Preferred Stock
held by Equity Holders immediately prior to the Effective Time (other than
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shares held by holders electing to be paid their "Liquidation Preference" (as
hereinafter defined) pursuant to subsection (iii) following) are convertible
plus (D) the number of outstanding shares of Company Series B Preferred Stock
held by Equity Holders immediately prior to the Effective Time plus (E) the
number of shares of Company Common Stock into which outstanding shares of
Company Series C Preferred Stock held by Equity Holders immediately prior to the
Effective Time (other than shares held by holders electing to be paid their
Liquidation Preference pursuant to subsection (iii) following) are convertible
plus (F) the number of shares of Company Common Stock which would be issuable if
outstanding Company Options immediately prior to the Effective Time were
exercised plus (G) the number of shares of Company Common Stock which would be
issuable if outstanding Company Warrants immediately prior to the Effective Time
were exercised assuming that the shares of Company Series C Preferred Stock
issuable upon exercise of such outstanding Company Warrants are immediately
converted into shares of Company Common Stock in accordance with the terms of
the Company Series C Preferred Stock.
(2) "Common Stock Percentage" shall be the
percentage determined by dividing (A) the number of shares of Company Common
Stock owned by a holder of Company Common Stock immediately prior to the
Effective Time by (B) the Equity Holders' Total.
(3) "Non-Voting Preferred Stock Percentage"
shall be the percentage determined by dividing (A) the number of shares of
Company Non-Voting Preferred Stock owned by a holder of Company Non-Voting
Preferred Stock immediately prior to the Effective Time by (B) the Equity
Holders' Total.
(4) "Series A Preferred Stock Percentage"
shall be the percentage determined by dividing (B) the number of shares of
Company Common Stock into which shares of Company Series A Preferred Stock owned
by a holder of Company Series A Preferred Stock immediately prior to the
Effective Time (other than shares held by holders electing to be paid their
Liquidation Preference pursuant to subsection (iii) following) are convertible
by (B) the Equity Holders' Total.
(5) "Series B Preferred Stock Percentage"
shall be the percentage determined by dividing (A) the number of shares of
Company Series B Preferred Stock owned by a holder of Company Series B Preferred
Stock immediately prior to the Effective Time by (B) the Equity Holders' Total.
(6) "Series C Preferred Stock Percentage"
shall be the percentage determined by dividing (A) the number of shares of
Company Common Stock into which shares of Company Series C Preferred Stock owned
by a holder of Company Series C Preferred Stock immediately prior to the
Effective Time (other than shares held by holders electing to be paid their
Liquidation Preference pursuant to subsection (iii) following) are convertible
by (B) the Equity Holders' Total.
(7) "Company Option Percentage" shall be the
percentage determined by dividing (A) the number of shares of Company Common
Stock which would be
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issuable if Company Options owned by a holder of Company Options immediately
prior to the Effective Time were exercised by (B) the Equity Holders' Total.
(8) "Company Warrant Percentage" shall be
the percentage determined by dividing (A) the number of shares of Company Common
Stock which would be issuable if Company Warrants owned by a holder of Company
Warrants immediately prior to the Effective Time were exercised (assuming that
the shares of Company Series C Preferred Stock issuable upon exercise of such
Company Warrants are immediately converted into shares of Company Common Stock
in accordance with the terms of the Company Series C Preferred Stock) by (B) the
Equity Holders' Total.
(iii) Subject to payments made pursuant to subsection
(v) below, there shall be paid from the Milestone Payment and each Earn-Out
Payment, if any, to Equity Holders who own shares of Company Series A Preferred
Stock and Company Series C Preferred Stock and who elect to receive payment
pursuant to this subsection (iii) by written notice received by the Company
prior to the Effective Time, prior to any payment of Milestone Payment and
Earn-Out Payments to any other Equity Holder, an amount equal to the liquidation
preference of the shares of Company Series A Preferred Stock and Company Series
C Preferred Stock owned by the electing Equity Holders at the Effective Time,
and no more (the "Liquidation Preference"). In the event that the Milestone
Payment and all Earn-Out Payments are not sufficient to pay in full all amounts
due under this subsection (iii), payment shall be made first to Equity Holders
who own shares of Company Series A Preferred Stock until such Equity Holders are
paid in full and the balance, if any, shall be paid to Equity Holders who own
shares of Company Series C Preferred Stock. In the event that the Milestone
Payment and all Earn-Out Payments are not sufficient to pay Equity Holders who
own shares of Company Series A Preferred Stock the full amount to which they are
entitled under this subsection (iii) or are not sufficient to pay Equity Holders
who own shares of Company Series C Preferred Stock the full amount to which they
are entitled under this subsection (iii), the Equity Holders who own shares of
Company Series A Preferred Stock shall share ratably in the Milestone Payment
and Earn-Out Payments in proportion to the respective amounts which would
otherwise be payable to them under this subsection (iii) if all amounts payable
to them under this subsection (iii) were paid in full and the Equity Holders who
own shares of Company Series C Preferred Stock shall share ratably in the
Milestone Payment and all Earn-Out Payments in proportion to the respective
amounts which would otherwise be payable to them under this subsection (iii) if
all amounts payable to them under this subsection (iii) were paid in full.
(iv) Subject to payments made pursuant to subsection
(v) below, after payment of all amounts (if any) due pursuant to the immediately
preceding subsection (iii), the Milestone Payment and each Earn-Out Payment, if
any, augmented by the amounts determined pursuant to subsection (6) and (7)
below, shall be paid to the Equity Holders as follows without priority or
preference to any Equity Holder:
(1) Each holder of Company Common Stock
shall receive his Common Stock Percentage of the of the payment.
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(2) Each holder of Non-Voting Preferred
Stock shall receive his Non-Voting Preferred Stock Percentage of the payment.
(3) Each holder of Series A Preferred Stock
(other than holders electing to be paid pursuant to the immediately preceding
subsection (iii) shall receive his Series A Preferred Stock Percentage of the
payment.
(4) Each holder of Series B Preferred Stock
shall receive his Series B Preferred Stock Percentage of the payment.
(5) Each holder of Series C Preferred Stock
(other than holders electing to be paid pursuant to the immediately preceding
subsection (iii)) shall receive his Series C Preferred Stock Percentage of the
payment.
(6) Each holder of Company Options shall
receive his Company Option Percentage of the payment minus the aggregate
exercise price under his Company Options with the same exercise price. To the
extent the aggregate exercise price under his Company Options exceeds his
Company Option Percentage of the payment, the holder of the Company Option shall
receive no portion of the payment and the excess shall be credited against such
exercise price remaining until the sum of his Company Option Percentage of
Milestone Payment and Earn-Out Payments which he is otherwise entitled to
receive shall equal the exercise price. Any portion of a payment not paid to a
holder of Company Options pursuant to the foregoing provisions of this
subsection (6) shall be added to the amounts otherwise payable to other Equity
Holders at the time and allocated and paid to them as provided in this
subsection (iv). Once the aggregate exercise price has been deducted pursuant to
this subclause (6) for all Company Options with the same exercise price, each
holder of Company Options shall thereafter receive his Company Option Percentage
of the payment due him for Company Options with the same exercise price without
deduction.
(7) Each holder of Company Warrants shall
receive his Company Warrant Percentage of the payment minus the aggregate
exercise price under his Company Warrants with the same exercise price. To the
extent the aggregate exercise price under his Company Warrants exceeds his
Company Warrant Percentage of the payment, the holder of the Company Warrant
shall receive no portion of the payment and the excess shall be credited against
such exercise price remaining until the sum of his Company Warrant Percentage of
Milestone Payment and Earn-Out Payments which he is otherwise entitled to
receive shall equal the exercise price. Any portion of a payment not paid to a
holder of Company Warrants pursuant to the foregoing provisions of this
subsection (7) shall be added to the amounts otherwise payable to other Equity
Holders at the time and allocated and paid to them as provided in this
subsection (iv). Once the aggregate exercise price has been deducted pursuant to
this subsection (7) for all Company Warrants with the same exercise price, each
holder of Company Warrants shall thereafter receive his Company Warrant
Percentage of the payment due him for Company Warrants with the same exercise
price without deduction.
(v) Upon the payment of the Milestone Payment, if
any, and each time any Earn-Out Payment is paid to Equity Holders, there shall
be paid to EGS Securities Corp.,
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from such Milestone Payment or Earn-Out Payment, as the case may be, prior to
any distribution to be made pursuant to subsection (iii) and/or subsection (iv)
above in full satisfaction of all monetary obligations owed to EGS Securities
Corp. by the Company for services rendered in connection with the Merger, an
amount equal to two and one-half percent (2-1/2%) of the Milestone Payment and
each Earn-Out Payment. Each payment to EGS Securities Corp. shall be made in
cash at the same time payment of the Milestone Payment and each Earn-Out Payment
is made to the Equity Holders. Any such payments to EGS will be netted against
any payments made to the Equity Holders.
(f) Except as otherwise provided in this Agreement, Earn-Out
Payments, Milestone Payment and all other payments otherwise due to the Equity
Holders pursuant to this Agreement shall be made without set-off, recoupment or
other deduction.
1.6 CONVERSION OF SHARES. Subject to Sections 1.8 and 1.9, at the
Effective Time, by virtue of the Merger and without any further action on the
part of Parent, Merger Sub, the Company or any stockholder of the Company:
(a) each share of Company Common Stock, Non-Voting Preferred
Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock outstanding immediately prior to the Effective Time shall be converted
into the right to receive a portion of the payments due Equity Holders under
this Agreement determined as provided in this Agreement;
(b) each Company Option and Company Warrant outstanding
immediately prior to the Effective Time shall be canceled and the holders
thereof shall be entitled to receive a portion of the payments due Equity
Holders under this Agreement determined and adjusted as provided in this
Agreement; and
(c) each share of the Common Stock ($.001 par value) of Merger
Sub outstanding immediately prior to the Effective Time shall be converted into
one share of common stock of the Surviving Corporation.
1.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time,
holders of certificates representing shares of the Company's capital stock that
were outstanding immediately prior to the Effective Time shall cease to have any
rights as stockholders of the Company, and the stock transfer books of the
Company shall be closed with respect to all shares of such capital stock
outstanding immediately prior to the Effective Time. No further transfer of any
such shares of the Company's capital stock shall be made on such stock transfer
books after the Effective Time. If, after the Effective Time, a valid
certificate previously representing any of such shares of the Company's capital
stock (a "Company Stock Certificate") is presented to the Surviving Corporation
or Parent, such Company Stock Certificate shall be canceled and shall be
entitled to the rights granted to Equity Holders under this Agreement.
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1.8 SURRENDER OF COMPANY STOCK CERTIFICATES AND COMPANY PROMISSORY
NOTES.
(a) EXCHANGE PROCEDURES FOR BRIDGE DEBTHOLDERS. At or prior to
the Closing, all Bridge Debtholders will surrender to Parent for cancellation
all Company Promissory Notes held by such Bridge Debtholder and will execute an
Exchange of Bridge Debt and Warrant Termination Agreement in substantially the
form of Exhibit E. Upon the surrender of a Company Promissory Note, an Exchange
of Bridge Debt and Warrant Termination Agreement and such other documents as may
be reasonably required by Parent, the holder of such Company Promissory Note
shall receive certificates representing the number of shares of Parent Common
Stock and the number of Parent Warrants comprising the number of Units set forth
opposite such Bridge Debtholders' name on Schedule 1.5(a) (as updated through
the Closing Date). If any Company Promissory Note shall have been lost, stolen
or destroyed, Parent may, in its discretion and as a condition precedent to the
issuance of any certificates representing shares of Parent Common Stock or
Parent Warrants, require the owner of such lost, stolen or destroyed Company
Promissory Note to provide an affidavit and indemnity agreement as indemnity
against any claim that may be made against Parent or the Surviving Corporation
with respect to such Company Promissory Note.
(b) EXCHANGE PROCEDURES FOR EQUITY HOLDERS. At or as soon as practicable after
the Effective Time, Parent will send to the holders of Company Stock
Certificates, Company Warrants and Company Options (i) a letter of transmittal
in customary form and containing such provisions as Parent may reasonably
specify, and (ii) instructions for use in effecting the surrender of Company
Stock Certificates, Company Warrants and Company Options in exchange for the
rights granted under this Agreement. Upon surrender of a Company Stock
Certificate, Company Warrants or Company Options to Parent, together with a duly
executed letter of transmittal an executed Equity Holder's Consent and Release
substantially in the form of Exhibit F and such other documents as may be
reasonably required by Parent, the holder of such Company Stock Certificate,
Company Warrants or Company Options shall be entitled to receive in exchange
therefor the rights granted under this Agreement, and the Company Stock
Certificate, Company Warrants or Company Options so surrendered shall be
canceled. Until surrendered as contemplated by this Section 1.8, each Company
Stock Certificate, Company Warrants and Company Options shall be deemed, from
and after the Effective Time, to represent only the right to receive upon such
surrender the rights granted under this Agreement. If any Company Stock
Certificate, Company Warrants or Company Options shall have been lost, stolen or
destroyed, Parent may, in its discretion, require the owner of such lost, stolen
or destroyed Company Stock Certificate, Company Warrants or Company Options to
provide an appropriate affidavit and indemnity agreement as indemnity against
any claim that may be made against Parent or the Surviving Corporation with
respect to such Company Stock Certificate, Company Warrants or Company Options.
(c) DIVIDENDS. No dividends or other distributions declared or
made with respect to Parent Common Stock with a record date after the Effective
Time shall be paid to any Bridge Debtholders receiving Parent Common Stock under
Section 1.5(a) with respect to the shares of Parent Common Stock due to such
Bridge Debtholder under Section 1.5(a) until such holder surrenders the Company
Promissory Notes or affidavit and indemnity agreement, as the
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case may be (at which time such holder shall be entitled to receive all such
dividends and distributions, without interest).
(d) FRACTIONAL SHARES. No fractional shares of Parent Common
Stock shall be issued in connection with the satisfaction of any of the terms of
the Merger, and no certificates for any such fractional shares shall be issued.
In lieu of such fractional shares, any Bridge Debtholder or Equity Holder of the
Company who would otherwise be entitled to receive a fraction of a share of
Parent Common Stock (after aggregating all fractional shares of Parent Common
Stock issuable to such holder) shall, with respect to Bridge Debtholders only,
upon surrender of such holder's Company Promissory Notes or an affidavit and
indemnity agreement, as the case may be, be paid in cash the dollar amount
(rounded to the nearest whole cent), without interest, determined by multiplying
such fraction by the closing sales price of Parent's Common Stock if such Common
Stock is quoted on the Nasdaq/NMS on the day immediately prior to the Closing
Date (or, if not quoted on the Nasdaq/NMS, the average of the bid and asked
prices of Parent's Common Stock as quoted on the NASD electronic interdealer
quotation system).
(e) WITHHOLDING REQUIREMENTS. Parent and the Surviving
Corporation shall be entitled to deduct and withhold from any consideration
payable or otherwise deliverable to any Equity Holder or Bridge Debtholder
pursuant to this Agreement such amounts as Parent or the Surviving Corporation
may be required to deduct or withhold therefrom under the Code or under any
provision of state, local or foreign tax law. To the extent such amounts are so
deducted or withheld, such amounts shall be treated for all purposes under this
Agreement as having been paid to the Person to whom such amounts would otherwise
have been paid.
(f) LIABILITY. Neither Parent nor the Surviving Corporation
shall be liable to any Equity Holder or Bridge Debtholder for any shares of
Parent Common Stock (or dividends or distributions with respect thereto), or for
any cash amounts, delivered to any public official pursuant to any applicable
abandoned property, escheat or similar law.
(g) NO FURTHER OWNERSHIP RIGHTS. All shares of Parent's Common
Stock and all Parent Warrants issued to the Bridge Debtholders upon the
surrender of the Company Promissory Notes in accordance with this Agreement and
the Certificate of Merger (including any cash paid pursuant to Section 1.8(d))
shall be deemed to have been issued in full satisfaction of all rights
pertaining to the Company Promissory Notes. The right to receive Earn-Out
Payments and any Milestone Payment granted to the Equity Holders upon surrender
for exchange of Company Stock Certificate, Company Warrants and Company Options
in accordance with the terms of this Agreement and the Certificate of Merger
shall be deemed to be granted in full satisfaction of all rights pertaining to
such equity of the Company represented by such Company Stock Certificates,
Company Warrants and Company Options which were outstanding immediately prior to
the Closing Date. If, after the Closing Date, Company Stock Certificates,
Company Warrants or Company Options are presented to Parent for any reason, they
shall be canceled and exchanged for as provided in Section 1.8(b) and in the
Certificate of Merger.
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1.9 DISSENTING SHARES.
(a) Notwithstanding anything to the contrary contained in this
Agreement, any shares of capital stock of the Company that, as of the Effective
Time, are or may become entitled to "appraisal rights" as provided under Section
262 of the Delaware General Corporations Law shall not be converted into or
represent the right to receive Earn-Out Payments or Milestone Payment in
accordance with Sections 1.5(b) or 1.5(c), and the holder or holders of such
shares (the "Dissenting Equity Holders") shall be entitled only to such rights
as may be granted to such holder or holders in Section 262 of the Delaware
General Corporation Law; provided, however, that if the rights of holders of any
such shares shall not be perfected, or if any such shares shall lose their
rights to appraisal, then, as of the later of the Effective Time or the time of
the failure to perfect such appraisal rights or the loss of such appraisal
rights, such shares shall automatically be converted into and shall represent
only rights accorded to Equity Holders under this Agreement.
(b) The Company shall give Parent (i) prompt notice of any
written demand received by the Company prior to the Effective Time to require
the Company to purchase shares of capital stock of the Company pursuant to
Section 262 of the Delaware General Corporation Law and of any other demand,
notice or instrument delivered to the Company prior to the Effective Time
pursuant to the Delaware General Corporation Law, and (ii) the opportunity to
participate in all negotiations and proceedings with respect to any such demand,
notice or instrument. The Company shall not make any payment or settlement offer
prior to the Effective Time with respect to any such demand unless Parent shall
have consented in writing to such payment or settlement offer.
1.10 BOARD OBSERVATION RIGHTS. As of the Effective Time, the Equity
Holders' Representatives shall have the right to designate Thomas Dickerson,
Richard Whiting, Denny Ko or Johanna Chao or another person acceptable to Parent
to attend meetings of the Board of Directors of Parent (the "Board") in a
non-voting, observer capacity (the "Observer"). Thomas Dickerson shall serve as
the initial Observer. The Observer shall be entitled to attend all meetings of
the Board, receive all notices of meetings of the Board, receive all written
materials and information provided to members of the Board in their capacities
as directors (the "Observer Rights"); provided, however, that the Observer shall
be obligated to maintain the same level of confidentiality with respect to any
information received by such Observer, whether oral or written or while
attending a meeting of the Board of Directors of the Company or otherwise, as
that required of the members of the Board of Directors of Parent. In addition,
the Observer shall be subject to the insider trading and any other similar
policies to which members of the Board are subject. The Equity Holders'
Representatives may transfer the Observer Rights to another Observer; provided
however, that only one individual shall be present as an Observer at each Board
meeting. The Observer shall not be entitled to any compensation or reimbursement
for any expenses incurred in connection with attending Board meetings or
otherwise serving in an observer capacity, except as expressly provided to the
Equity Holders' Representatives pursuant to Section 12.2. The Observer Rights
granted hereunder shall terminate on the earlier of (i) the date on which the
Equity Holders no longer have a material continuing financial interest in
Parent, and (ii) October 1, 2005.
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1.11 TAX CONSEQUENCES. For federal income tax purposes, the Merger is
intended to constitute a taxable transaction.
1.12 ACCOUNTING TREATMENT. For accounting purposes, the Merger is
intended to be treated as a "purchase transaction."
1.13 FURTHER ACTION. If, at any time after the Effective Time, any
further action is determined by Parent to be necessary or desirable to carry out
the purposes of this Agreement or to vest the Surviving Corporation or Parent
with full right, title and possession of and to all rights and property of
Merger Sub and the Company, the officers and directors of the Surviving
Corporation and Parent shall be fully authorized (in the name of Merger Sub, in
the name of the Company and otherwise) to take such action.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants, to and for the benefit of the
Parent Indemnitees, as follows:
2.1 DUE ORGANIZATION; NO SUBSIDIARIES; ETC.
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all necessary power and authority to: (i) conduct its business in the manner in
which its business is currently being conducted; (ii) own and use its assets in
the manner in which its assets are currently owned and used; and (iii) perform
its obligations under all Company Contracts.
(b) Except as set forth in Schedule 2.1 of the Disclosure
Schedule, the Company has not conducted any business under or otherwise used,
for any purpose or in any jurisdiction, any fictitious name, assumed name, trade
name or other name, other than the name "PRP, Inc."
(c) The Company is not and has not been required to be
qualified, authorized, registered or licensed to do business as a foreign
corporation in any jurisdiction other than the jurisdictions identified in
Schedule 2.1 of the Disclosure Schedule, except where the failure to be so
qualified, authorized, registered or licensed has not had and will not have a
Material Adverse Effect on the Company. The Company is in good standing as a
foreign corporation in each of the jurisdictions identified in Schedule 2.1 of
the Disclosure Schedule.
(d) Schedule 2.1 of the Disclosure Schedule accurately sets
forth (i) the names of the members of the Company's board of directors, (ii) the
names of the members of each committee of the Company's board of directors, and
(iii) the names and titles of the Company's officers. Each member of the
Company's board of directors has been duly elected to serve on the Company's
board of directors. Each member of each committee of the Company's board of
directors and each of the Company's officers has been duly appointed to serve in
their respective capacities.
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(e) The Company has no subsidiaries and, except as set forth
in Schedule 2.1(e) of the Disclosure Schedule, the Company does not own any
controlling interest in any Entity and has never owned, beneficially or
otherwise, any direct or indirect equity interest in any Entity.
2.2 CERTIFICATE OF INCORPORATION AND BYLAWS; RECORDS. The Company has
delivered to Parent accurate and complete copies of: (a) the Company's
certificate of incorporation and bylaws, including all amendments thereto; (b)
the stock records of the Company; and (c) except as set forth in Schedule 2.2 of
the Disclosure Schedule, the minutes and other records of the meetings and other
proceedings (including any actions taken by written consent or otherwise without
a meeting) of the stockholders of the Company, the board of directors of the
Company and all committees of the board of directors of the Company. There has
not been any violation of any of the provisions of the Company's certificate of
incorporation or bylaws, and the Company has not taken any action that is
inconsistent in any material respect with any resolution adopted by the
Company's stockholders, the Company's board of directors or any committee of the
Company's board of directors. There have been no material corporate actions
taken by the Company that are required to be reflected in the minute books and
are not otherwise reflected in the minute books. The books of account, stock
records, minute books and other records of the Company are accurate, up to date
and complete in all material respects, and have been maintained in accordance
with prudent business practices.
2.3 CAPITALIZATION.
(a) As of October 3, 1996, the authorized capital stock of the
Company consists of: (i) 10,000,000 shares of Common Stock, $.01 par value, of
which 1,430,178 shares have been issued and are outstanding as of October 3,
1996; and (ii) 5,000,000 shares of Preferred Stock, $.01 par value, of which
500,000 have been designated "Non-Voting Preferred Stock," 220,000 have been
designated "Series A Preferred Stock," 80,000 have been designated Series B
Preferred Stock," and 3,000,000 have been designated "Series C Preferred Stock."
As of October 3, 1996, there were issued and outstanding 190,682 shares of
Non-Voting Preferred Stock, 220,000 shares of Series A Preferred Stock, 51,635
shares of Series B Preferred Stock and 637,003 shares of Series C Preferred
Stock. All of the outstanding shares of Company Common Stock, Non-Voting
Preferred Stock, Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock have been duly authorized and validly issued, and are fully paid
and non assessable. The Company shall provide to Parent an updated
capitalization table showing the capitalization of the Company immediately prior
to the Closing.
(b) As of October 3, 1996, the Company has reserved 900,000
shares of Company Common Stock for issuance under its 1988 Stock Plan, of which
options to purchase 820,752 shares are outstanding. As of October 3, 1996, the
Company had outstanding warrants to purchase 3,015,558 shares of Series C
Preferred Stock of the Company. Schedule 2.3 of the Disclosure Schedule
accurately sets forth, with respect to each Company Option and Company Warrant
that is outstanding as of October 3, 1996: (i) the name of the holder of such
Company Option or Company Warrant; and (ii) the total number of shares of
Company capital stock that are subject to such Company Option or Company Warrant
and the number of shares of Company
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capital stock with respect to which such Company Option or Company Warrant is
immediately exercisable; (iii) the exercise price per share of Company capital
stock purchasable under such Company Option or Company Warrant. The Company
shall update Schedule 2.3 to be accurate as of the Closing Date. Except as set
forth in Schedule 2.3 of the Disclosure Schedule and except for the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and the
Company Options and Company Warrants, there is no: (i) outstanding subscription,
option, call, warrant or right (whether or not currently exercisable) to acquire
any shares of the capital stock or other securities of the Company; (ii)
outstanding security, instrument or obligation that is or may become convertible
into or exchangeable for any shares of the capital stock or other securities of
the Company; (iii) Contract under which the Company is or may become obligated
to sell or otherwise issue any shares of its capital stock or any other
securities; or (iv) to the best of the knowledge of the Company, condition or
circumstance that may give rise to or provide a basis for the assertion of a
claim by any Person to the effect that such Person is entitled to acquire or
receive any shares of capital stock or other securities of the Company.
(c) All outstanding shares of Company Common Stock, and all
outstanding Company Options, have been issued and granted in compliance with (i)
all applicable securities laws and other applicable Legal Requirements, and (ii)
all requirements set forth in applicable Contracts.
(d) Except as set forth in Schedule 2.3 of the Disclosure
Schedule, the Company has never repurchased, redeemed or otherwise reacquired
any shares of capital stock or other securities of the Company. All securities
so reacquired by the Company were reacquired in compliance with (i) the
applicable provisions of the Delaware General Corporation Law and all other
applicable Legal Requirements, and (ii) all requirements set forth in applicable
restricted stock purchase agreements and other applicable Contracts.
(e) The Allocation Schedule sets forth an accurate and
complete schedule of (i) the name and address of each Equity Holder, (ii) the
name of each Equity Holder, if any, who has elected to receive his Liquidation
Preference; (iii) the Common Stock Percentage, NonVoting Preferred Stock
Percentage, Series A Preferred Stock Percentage, Series B Preferred Stock
Percentage, Series C Preferred Stock Percentage, Company Option Percentage and
Company Warrant Percentage, as appropriate, of each other Equity Holder; and
(iv) for each holder of Company Options, the exercise price under each of his
Company Options and, for each holder of Company Warrants, the exercise price
under each of his Company Warrants.
2.4 FINANCIAL STATEMENTS.
(a) The Company has delivered to Parent the following
financial statements and notes (collectively, the "Company Financial
Statements"):
(i) The audited balance sheet of the Company as of
January 31, 1996 and the related audited statement of income, statement of
shareholders' equity and statement of cash flows of the Company for the year
then ended, together with the notes thereto and the qualified report and opinion
of Arthur Andersen, LLP relating thereto; and
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(ii) the unaudited balance sheet of the Company as of
August 31, 1996 (the "Unaudited Interim Balance Sheet"), and the related
unaudited income statement of the Company for the eight months then ended.
(b) The Company Financial Statements present fairly the
financial position of the Company as of the respective dates thereof and the
results of operations and (in the case of the financial statements referred to
in Section 2.4(a)(i)) cash flows of the Company for the periods covered thereby
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods covered (except that the financial
statements referred to in Section 2.4(a)(ii) do not contain footnotes and are
subject to normal and recurring year-end audit adjustments, which will not,
individually or in the aggregate, be material in magnitude).
2.5 ABSENCE OF CHANGES. Except as set forth in Schedule 2.5 of the
Disclosure Schedule, since January 31, 1996:
(a) except for the fact that the Company has continued to lose
money and has insufficient cash to satisfactorily fund its operations, there has
not been any material adverse change in the assets, liabilities, condition,
results of operations, or business of the Company and, to the best of the
knowledge of the Company, no event has occurred that will, or could reasonably
be expected to have, a Material Adverse Effect on the Company;
(b) there has not been any material loss, damage or
destruction to, or any material interruption in the use of, any of the Company's
assets (whether or not covered by insurance);
(c) the Company has not declared, accrued, set aside or paid
any dividend or made any other distribution in respect of any shares of capital
stock, and has not repurchased, redeemed or otherwise reacquired any shares of
capital stock or other securities;
(d) the Company has not sold, issued or authorized the
issuance of (i) any capital stock (except for Company Common Stock issued upon
the exercise of outstanding Company Options), (ii) any option, warrant or right
to acquire any capital stock or any other security (except for Company Options
and Company Warrants described in Schedule 2.3 of the Disclosure Schedule), or
(iii) any instrument convertible into or exchangeable for any capital stock or
other security;
(e) except in connection with the transactions contemplated
hereby, the Company has not amended or waived any of its rights under, or
permitted the acceleration of vesting under, (i) any provision of its 1988 Stock
Option Plan, (ii) any provision of any agreement evidencing any outstanding
Company Option, (iii) any provision of any agreement evidencing any outstanding
Company Warrant, or (iv) any restricted stock purchase agreement;
(f) there has been no amendment to the Company's certificate
of incorporation or bylaws, and the Company has not effected or been a party to
any Acquisition Transaction, recapitalization, reclassification of shares, stock
split, reverse stock split or similar transaction;
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(g) the Company has not formed any subsidiary or acquired any
equity interest or other interest in any other Entity;
(h) the Company has not made any capital expenditure which,
when added to all other capital expenditures made on behalf of the Company since
January 31, 1996, exceeds $10,000;
(i) except in connection with the Bridge Debt, the Company has
not (i) entered into or permitted any of the assets owned or used by it to
become bound by any Contract that is or would constitute a Material Contract (as
defined in Section 2.10(a)), or (ii) amended or prematurely terminated, or
waived any material right or remedy under, any such Contract;
(j) the Company has not (i) acquired, leased or licensed any
material right or other asset from any other Person, (ii) sold or otherwise
disposed of, or leased or licensed, any material right or other asset to any
other Person, or (iii) waived or relinquished any right, except for immaterial
rights or other immaterial assets acquired, leased, licensed or disposed of in
the ordinary course of business and consistent with the Company's past
practices;
(k) the Company has not written off as uncollectible, or
established any extraordinary reserve with respect to, any account receivable or
other indebtedness;
(l) except in connection with the Bridge Debt, the Company has
not made any pledge of any of its assets or otherwise permitted any of its
assets to become subject to any Encumbrance, except for pledges of immaterial
assets made in the ordinary course of business and consistent with the Company's
past practices;
(m) the Company has not (i) lent money to any Person (other
than pursuant to routine travel and/or salary advances made to employees in the
ordinary course of business), or (ii) incurred except in connection with the
Bridge Debt or guaranteed any indebtedness for borrowed money;
(n) the Company has not (i) established or adopted any
Employee Benefit Plan, (ii) paid any bonus or made any profit sharing or similar
payment to, or increased the amount of the wages, salary, commissions, fringe
benefits or other compensation or remuneration payable to, any of its directors,
officers or employees, or (iii) hired any new employee;
(o) the Company has not changed any of its methods of
accounting or accounting practices in any respect;
(p) the Company has not made any Tax election;
(q) the Company has not commenced or settled any Legal
Proceeding;
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(r) the Company has not entered into any material transaction
or taken any other material action outside the ordinary course of business or
inconsistent with its past practices; and
(s) the Company has not agreed or committed to take any of the
actions referred to in subsections "(c)" through "(r)" above.
2.6 TITLE TO ASSETS.
(a) The Company owns, and has good, valid and marketable title
to, all assets purported to be owned by it, including: (i) all assets reflected
on the Unaudited Interim Balance Sheet; (ii) all assets referred to in Schedules
2.1, 2.7(b) and 2.9 of the Disclosure Schedule and all of the Company's rights
under the Contracts identified in Schedule 2.10 of the Disclosure Schedule; and
(iii) all other assets reflected in the Company's books and records as being
owned by the Company. Except as set forth in Schedule 2.6 of the Disclosure
Schedule, all of said assets are owned by the Company free and clear of any
liens or other Encumbrances, except for (x) any lien for current taxes not yet
due and payable, and (y) minor liens that have arisen in the ordinary course of
business and that do not (in any case or in the aggregate) materially detract
from the value of the assets subject thereto or materially impair the operations
of the Company.
(b) Schedule 2.6 of the Disclosure Schedule identifies all
assets that are material to the business of the Company and that are being
leased or licensed to the Company.
2.7 BANK ACCOUNTS; RECEIVABLES.
(a) Schedule 2.7(a) of the Disclosure Schedule accurately
lists each account maintained by or for the benefit of the Company at any bank
or other financial institution.
(b) Schedule 2.7(b) of the Disclosure Schedule provides an
accurate and complete breakdown and aging of all accounts receivable, notes
receivable and other receivables of the Company as of August 31, 1996. Except as
set forth in Schedule 2.7(b) of the Disclosure Schedule, all existing accounts
receivable of the Company (including those accounts receivable reflected on the
Unaudited Interim Balance Sheet that have not yet been collected and those
accounts receivable that have arisen since August 31, 1996 and have not yet been
collected) represent valid obligations of customers of the Company arising from
bona fide transactions entered into in the ordinary course of business.
2.8 EQUIPMENT; LEASEHOLD.
(a) Schedule 2.8 of the Disclosure Schedule accurately lists
all material items of equipment, fixtures, leaseholds, improvements and other
tangible assets owned by or leased to the Company. The assets identified in
Schedule 2.8 of the Disclosure Schedule are adequate for the uses to which they
are being put, are in all material respects in good condition and repair
(ordinary wear and tear excepted) and are adequate for the conduct of the
Company's business in the manner in which such business is currently being
conducted.
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(b) The Company does not own any real property or any interest
in real property, except for the leasehold created under the real property lease
identified in Schedule 2.10 of the Disclosure Schedule.
2.9 PROPRIETARY ASSETS.
(a) Schedule 2.9(a)(i) of the Disclosure Schedule sets forth,
with respect to each Company Proprietary Asset that has been registered,
recorded or filed by the Company (or assigned to the Company) with the U.S.
Patent and Trademark Office, the U.S. Copyright Office or any similar office in
a foreign jurisdiction, (i) a brief description of such Proprietary Asset, and
(ii) the names of the jurisdictions covered by the applicable registration,
recordation, filing or application. Schedule 2.9(a)(ii) of the Disclosure
Schedule identifies and provides a brief description of all other tangible
Company Proprietary Assets owned by the Company. Schedule 2.9(a)(iii) of the
Disclosure Schedule identifies and provides a brief description of each
Proprietary Asset licensed to the Company by any Person (except for any
Proprietary Asset that is licensed to the Company under any third party software
license generally available to the public at a cost of less than $10,000), and
identifies the license agreement under which such Proprietary Asset is being
licensed to the Company. Except as set forth in Schedule 2.9(a)(iv) of the
Disclosure Schedule, the Company has good, valid and marketable title to all of
the Company Proprietary Assets identified in Schedules 2.9(a)(i) and 2.9(a)(ii)
of the Disclosure Schedule, free and clear of all liens and other Encumbrances,
and has a valid right to use all Proprietary Assets identified in Schedule
2.9(a)(iii) of the Disclosure Schedule. Except as set forth in Schedule
2.9(a)(v) of the Disclosure Schedule, the Company is not obligated to make any
payment to any Person for the use of any Company Proprietary Asset. Except as
set forth in Schedule 2.9(a)(vi) of the Disclosure Schedule, the Company has not
developed jointly with any other Person any Company Proprietary Asset with
respect to which such other Person has any rights.
(b) The Company has taken reasonably prudent steps to protect
and maintain the confidentiality and secrecy of all Company Proprietary Assets
(except Company Proprietary Assets whose value would be unimpaired by public
disclosure) and otherwise to maintain and protect the value of all Company
Proprietary Assets. Except as set forth in Schedule 2.9(b) of the Disclosure
Schedule, the Company has not (other than pursuant to license agreements or
confidentiality agreements identified in Schedule 2.10 of the Disclosure
Schedule) disclosed or delivered to any Person, or permitted the disclosure or
delivery to any Person of, (i) the source code, or any portion or aspect of the
source code, of any Company Proprietary Asset, or (ii) the object code, or any
portion or aspect of the object code, of any Company Proprietary Asset.
(c) None of the Company Proprietary Assets infringes or
conflicts with any Proprietary Asset owned or used by any other Person. The
Company is not infringing, misappropriating or making any unlawful use of, and
the Company has not at any time infringed, misappropriated or made any unlawful
use of, or received any notice or other communication (in writing or otherwise)
of any actual, alleged, possible or potential infringement, misappropriation or
unlawful use of, any Proprietary Asset owned or used by any other Person. To the
best of the knowledge of the Company, no other Person is infringing,
misappropriating or making any
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unlawful use of, and no Proprietary Asset owned or used by any other Person
infringes or conflicts with, any Company Proprietary Asset.
(d) Except as set forth in Schedule 2.9(d) of the Disclosure
Schedule: (i) each Company Proprietary Asset conforms in all material respects
with any specification, documentation, performance standard, representation or
statement made or provided with respect thereto by or on behalf of the Company.
(e) The Company Proprietary Assets constitute all the
Proprietary Assets necessary to enable the Company to conduct its business in
the manner in which such business has been and is being conducted. Except as set
forth in Schedule 2.9(e) of the Disclosure Schedule, (i) the Company has not
licensed any of the Company Proprietary Assets to any Person on an exclusive
basis, and (ii) the Company has not entered into any covenant not to compete or
Contract limiting its ability to exploit fully any of its Proprietary Assets or
to transact business in any market or geographical area or with any Person.
(f) Except as set forth in Schedule 2.9(f) of the Disclosure
Schedule, (i) all current employees of and consultants to the Company have
executed and delivered to the Company a confidential information and inventions
assignment agreement (containing no exceptions to or exclusions from the scope
of its coverage) that is substantially identical to the form of such agreement
previously delivered to Parent.
2.10 CONTRACTS.
(a) Schedule 2.10 of the Disclosure Schedule identifies each
Company Contract currently in effect:
(i) relating to the employment of, or the performance
of services by, any employee, consultant or independent contractor;
(ii) relating to the acquisition, transfer, use,
development, sharing or license of any technology or any Proprietary Asset;
(iii) imposing any restriction on the Company's right
or ability (A) to compete with any other Person, (B) to acquire any product or
other asset or any services from any other Person, to sell any product or other
asset to or perform any services for any other Person or to transact business or
deal in any other manner with any other Person, or (C) develop or distribute any
technology;
(iv) creating or involving any agency relationship,
distribution arrangement or franchise relationship;
(v) relating to the acquisition, issuance or transfer
of any securities;
(vi) relating to the creation of any Encumbrance with
respect to any asset of the Company;
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(vii) involving or incorporating any guaranty, any
pledge, any performance or completion bond, any indemnity or any surety
arrangement;
(viii) creating or relating to any partnership or
joint venture or any sharing of revenues, profits, losses, costs or liabilities;
(ix) relating to the purchase or sale of any product
or other asset by or to, or the performance of any services by or for, any
Related Party (as defined in Section 2.18);
(x) constituting or relating to a Government Contract
or Government Bid;
(xi) that was entered into outside the ordinary
course of business or was inconsistent with the Company's past practices and is
material to the Company's business;
(xii) that has a term of more than 60 days and that
may not be terminated by the Company (without penalty) within 60 days after the
delivery of a termination notice by the Company; and
(xiii) that contemplates or involves (A) the payment
or delivery of cash or other consideration in an amount or having a value in
excess of $10,000 in the aggregate, or (B) the performance of services having a
value in excess of $10,000 in the aggregate.
(Contracts in the respective categories described in subsections "(i)" through
"(xiii)" above are referred to in this Agreement as "Material Contracts").
(b) The Company has delivered to Parent accurate and complete
copies of all written Contracts identified in Schedule 2.10 of the Disclosure
Schedule, including all amendments thereto. Schedule 2.10 of the Disclosure
Schedule provides an accurate description of the terms of each Company Contract
that is not in written form. Each Contract identified in Schedule 2.10 of the
Disclosure Schedule is valid and in full force and effect, and, to the best of
the knowledge of the Company, is enforceable by the Company in accordance with
its terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
(c) Except as set forth in Schedule 2.10 of the Disclosure
Schedule:
(i) the Company has not violated or breached, or
committed any default under, any Material Contract, and, to the best of the
knowledge of the Company, no other Person has violated or breached, or committed
any default under, any Material Contract;
(ii) to the best of the knowledge of the Company, no
event has occurred, and no circumstance or condition exists, that (with or
without notice or lapse of time) will, or could reasonably be expected to, (A)
result in a violation or breach of any of the provisions of any Material
Contract, (B) give any Person the right to declare a default or exercise
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any remedy under any Material Contract, (C) give any Person the right to
accelerate the maturity or performance of any Material Contract, or (D) give any
Person the right to cancel, terminate or modify any Material Contract;
(iii) the Company has not received any notice or
other communication regarding any (i) actual or possible violation or breach of,
or default under, any Material Contract; or (ii) any actual or possible
termination of any Material Contract; and
(iv) the Company has not waived any of its material
rights under any Material Contract.
(d) No Person is renegotiating, or has a right pursuant to the
terms of any Material Contract to renegotiate, any amount paid or payable to the
Company under any Material Contract or any other material term or provision of
any Material Contract.
(e) The Contracts identified in Schedule 2.10 of the
Disclosure Schedule collectively constitute all of the Contracts necessary to
enable the Company to conduct its business in the manner in which its business
is currently being conducted.
(f) Schedule 2.10 of the Disclosure Schedule identifies and
provides a brief description of each proposed Contract as to which any bid,
offer, award, written proposal, term sheet or similar document has been
submitted or received by the Company and such bid, offer, award, written
proposal or term sheet has not yet expired by its terms.
2.11 LIABILITIES.
(a) The Company has no accrued, contingent or other
liabilities of any nature, either matured or unmatured (whether or not required
to be reflected in financial statements in accordance with generally accepted
accounting principles, and whether due or to become due), except for: (i)
liabilities identified as such in the "liabilities" column of the Unaudited
Interim Balance Sheet; (ii) liabilities that have been incurred by the Company
since August 31, 1996 in the ordinary course of business and consistent with the
Company's past practices in an aggregate amount that does not exceed $75,000;
(iii) liabilities under the Company Contracts currently in effect; and (iv) the
liabilities identified in Schedule 2.11(a) of the Disclosure Schedule.
(b) Schedule 2.11(b) of the Disclosure Schedule provides an
accurate and complete breakdown of all (i) accounts payable of the Company as of
August 31, 1996, and (ii) all notes payable and all outstanding indebtedness of
the Company for borrowed money, including all amounts owed as accrued interest
thereon as of August 31, 1996.
(c) BRIDGE DEBT AND OTHER CERTAIN LIABILITIES. As of the
Closing Date, (i) the aggregate amount of the Company's Bridge Debt and all
Additional Bridge Debt (including all accrued and unpaid interest thereon) shall
not exceed $4,800,000, (ii) all fees incurred by the Company's investment
banking and other financial advisors in connection with the transactions
contemplated by this Agreement, all as set forth in Schedule 2.11(c), shall not
exceed $120,000, (iii) all fees incurred by the Company's legal and accounting
advisors to be
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borne by the Company shall not exceed $100,000, and (iv) all fees of the Bridge
Debtholders' legal advisors to be borne by the Company shall not exceed $15,000.
In addition, the amounts of $100,000 and $15,000 contemplated under clauses
(iii) and (iv) above shall have been paid at Closing with Additional Bridge Debt
or available cash of the Company and shall not cause the amounts contemplated
under clause (i) to exceed $4,800,000.
(d) Schedule 2.11(d) of the Disclosure Schedule sets forth all
liabilities of the Company, including all out-of-pocket costs and expenses
incurred by the Company's investment banking, legal and accounting advisors and
the Bridge Debtholders' legal advisors, that are accrued or accruable, exclusive
of all amounts set forth on Schedule 2.11(c) (the "Company Liabilities
Schedule"), in sufficient detail to reasonably enable Parent to determine which
liabilities were incurred by the Company, exclusive of all amounts set forth in
Schedule 2.11(c), except with respect to the aforesaid out-of-pocket costs and
expenses otherwise than in connection with the transactions contemplated by this
Agreement (the "Pre-Transaction Liabilities"). The Company shall deliver on the
Closing Date an updated Company Liabilities Schedule setting forth the total
Pre-Transaction Liabilities as of the Closing Date. As of the Closing Date, the
Pre-Transaction Liabilities, net of any cash and accounts receivable of the
Company, shall not be in excess of $200,000.
2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. The Company is, and has at all
times since inception been, in compliance with all applicable Legal
Requirements, except where the failure to comply with such Legal Requirements
has not had and will not have a Material Adverse Effect on the Company. Except
as set forth in Schedule 2.12 of the Disclosure Schedule, since inception, the
Company has not received any notice or other communication from any Governmental
Body regarding any actual or possible violation of, or failure to comply with,
any Legal Requirement, the failure to comply with which could have a Material
Adverse Effect on the Company.
2.13 GOVERNMENTAL AUTHORIZATIONS. Schedule 2.13 of the Disclosure
Schedule identifies each material Governmental Authorization held by the
Company, and the Company has delivered to Parent accurate and complete copies of
all Governmental Authorizations identified in Schedule 2.13 of the Disclosure
Schedule. The Governmental Authorizations identified in Schedule 2.13 of the
Disclosure Schedule are valid and in full force and effect, and to the best of
the Company's knowledge, collectively constitute all Governmental Authorizations
necessary to enable the Company to conduct its business in the manner in which
its business is currently being conducted. The Company is, and at all times
since inception has been, in substantial compliance with the terms and
requirements of the respective Governmental Authorizations identified in
Schedule 2.13 of the Disclosure Schedule. Since inception, the Company has not
received any notice or other communication from any Governmental Body regarding
(a) any actual or possible violation of or failure to comply with any term or
requirement of any Governmental Authorization, or (b) any actual or possible
revocation, withdrawal, suspension, cancellation, termination or modification of
any Governmental Authorization.
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2.14 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf of
the Company with any Governmental Body with respect to any taxable period ending
on or before the Closing Date (the "Company Returns") (i) have been or will be
filed on or before the applicable due date (including any extensions of such due
date), and (ii) have been, or will be when filed, accurately and completely
prepared in all material respects in compliance with all applicable Legal
Requirements. All amounts shown on the Company Tax Returns to be due on or
before the Closing Date have been or will be paid on or before the Closing Date.
The Company has delivered to Parent accurate and complete copies of all Company
Tax Returns filed since inception.
(b) The Company Financial Statements fully accrue all actual
and contingent liabilities for Taxes with respect to all periods through the
dates thereof in accordance with generally accepted accounting principles. The
Company will establish, in the ordinary course of business and consistent with
its past practices, reserves adequate for the payment of all Taxes for the
period from January 31, 1995 through the Closing Date, and the Company will
disclose the dollar amount of such reserves to Parent on or prior to the Closing
Date.
(c) Except as set forth in Schedule 2.14 of the Disclosure
Schedule, there have been no examinations or audits of any Company Tax Return by
any Governmental Body. The Company has delivered to Parent accurate and complete
copies of all audit reports and similar documents (to which the Company has
access) of any Governmental Body relating to the Company Returns. Except as set
forth in Schedule 2.14 of the Disclosure Schedule, no extension or waiver of the
limitation period applicable to any of the Company Tax Returns has been granted
(by the Company or any other Person), and no such extension or waiver has been
requested from the Company.
(d) Except as set forth in Schedule 2.14 of the Disclosure
Schedule, no claim or proceeding is pending or has been threatened against or
with respect to the Company in respect of any Tax. There are no unsatisfied
liabilities for Taxes (including liabilities for interest, additions to tax and
penalties thereon and related expenses) with respect to any notice of deficiency
or similar document received by the Company with respect to any Tax (other than
liabilities for Taxes asserted under any such notice of deficiency or similar
document which are being contested in good faith by the Company and with respect
to which adequate reserves for payment have been established). There are no
liens for Taxes upon any of the assets of the Company except liens for current
Taxes not yet due and payable. The Company has not entered into or become bound
by any agreement or consent pursuant to Section 341(f) of the Code. The Company
has not been, and the Company will not be, required to include any adjustment in
taxable income for any tax period (or portion thereof) pursuant to Section 481
or 263A of the Code or any comparable provision under state or foreign Tax laws
as a result of transactions or events occurring, or accounting methods employed,
prior to the Closing.
(e) There is no agreement, plan, arrangement or other Contract
covering any employee or independent contractor or former employee or
independent contractor of the
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Company that, considered individually or considered collectively with any other
such Contracts, will, or could reasonably be expected to, give rise directly or
indirectly to the payment of any amount that would not be deductible pursuant to
Section 280G or Section 162 of the Code. The Company is not, and has never been,
a party to or bound by any tax indemnity agreement, tax sharing agreement, tax
allocation agreement or similar Contract.
(f) The Company is not subject to the reporting requirements
of FIRPTA.
2.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) Schedule 2.15(a) of the Disclosure Schedule identifies
each salary, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, severance pay, termination pay, hospitalization,
medical, life or other insurance, supplemental unemployment benefits,
profit-sharing, pension or retirement plan, program or agreement (collectively,
the "Employee Benefit Plans") sponsored, maintained, contributed to or required
to be contributed to by the Company for the benefit of any employee of the
Company ("Employee"), except for Employee Benefit Plans which would not require
the Company to make payments or provide benefits having a value in excess of
$25,000 in the aggregate.
(b) Except as set forth in Schedule 2.15(a) of the Disclosure
Schedule, the Company does not maintain, sponsor or contribute to, and, to the
best of the knowledge of the Company, has not at any time in the past
maintained, sponsored or contributed to, any employee pension benefit plan (as
defined in Section 3(2) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), whether or not excluded from coverage under specific
Titles or Merger Subtitles of ERISA) for the benefit of Employees or former
Employees (a "Pension Plan").
(c) The Company maintains, sponsors or contributes only to
those employee welfare benefit plans (as defined in Section 3(1) of ERISA,
whether or not excluded from coverage under specific Titles Subtitles of ERISA)
for the benefit of Employees or former Employees which are described in Schedule
2.15(c) of the Disclosure Schedule (the "Welfare Plans"), none of which is a
multiemployer plan (within the meaning of Section 3(37) of ERISA).
(d) With respect to each Employee Benefit Plan, the Company
has delivered to Parent:
(i) an accurate and complete copy of such Employee
Benefit Plan (including all amendments thereto);
(ii) an accurate and complete copy of the annual
report, if required under ERISA, with respect to such Employee Benefit Plan for
1995, 1994 and 1993;
(iii) an accurate and complete copy of the most
recent summary plan description, together with each Summary of Material
Modifications, if required under ERISA, with respect to such Employee Benefit
Plan, and all material employee communications relating to such Employee Benefit
Plan;
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(iv) if such Employee Benefit Plan is funded through
a trust or any third party funding vehicle, an accurate and complete copy of the
trust or other funding agreement (including all amendments thereto) and accurate
and complete copies the most recent financial statements thereof;
(v) accurate and complete copies of all Material
Contracts relating to such Employee Benefit Plan, including service provider
agreements, insurance contracts, minimum premium contracts, stop-loss
agreements, investment management agreements, subscription and participation
agreements and recordkeeping agreements; and
(vi) an accurate and complete copy of the most recent
determination letter received from the Internal Revenue Service with respect to
such Employee Benefit Plan (if such Employee Benefit Plan is intended to be
qualified under Section 401(a) of the Code).
(e) The Company is not required to be, and, to the best of the
knowledge of the Company, has never been required to be, treated as a single
employer with any other Person under Section 4001(b)(1) of ERISA or Section
414(b), (c), (m) or (o) of the Code. The Company has never been a member of an
"affiliated service group" within the meaning of Section 414(m) of the Code. To
the best of the knowledge of the Company, the Company has never made a complete
or partial withdrawal from a multiemployer plan, as such term is defined in
Section 3(37) of ERISA, resulting in "withdrawal liability," as such term is
defined in Section 4201 of ERISA (without regard to subsequent reduction or
waiver of such liability under either Section 4207 or 4208 of ERISA).
(f) The Company does not have any plan or commitment to create
any additional Welfare Plan or any Pension Plan, or to modify or change any
existing Welfare Plan or Pension Plan (other than to comply with applicable law)
in a manner that would affect any Employee.
(g) Except as set forth in Schedule 2.15(g) of the Disclosure
Schedule, no Welfare Plan provides death, medical or health benefits (whether or
not insured) with respect to any current or former Employee after any such
Employee's termination of service (other than (i) benefit coverage mandated by
applicable law, including coverage provided pursuant to Section 4980B of the
Code, (ii) deferred compensation benefits accrued as liabilities on the
Unaudited Interim Balance Sheet, and (iii) benefits the full cost of which are
borne by current or former Employees (or the Employees' beneficiaries)).
(h) With respect to each of the Welfare Plans constituting a
group health plan within the meaning of Section 4980B(g)(2) of the Code, the
provisions of Section 4980B of the Code ("COBRA") have been complied with in all
material respects.
(i) Each of the Employee Benefit Plans has been operated and
administered in all material respects in accordance with applicable Legal
Requirements, including but not limited to ERISA and the Code.
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(j) Each of the Employee Benefit Plans intended to be
qualified under Section 401(a) of the Code has received a favorable
determination from the Internal Revenue Service, and the Company is not aware of
any reason why any such determination letter should be revoked.
(k) Except as set forth in Schedule 2.15(k) of the Disclosure
Schedule, neither the execution, delivery or performance of this Agreement, nor
the consummation of the Merger or any of the other transactions contemplated by
this Agreement, will require the Company to make any payment (including any
bonus, golden parachute or severance payment) to any current or former Employee
or director of the Company (whether or not under any Employee Benefit Plan), or
materially increase the benefits payable under any Employee Benefit Plan, or
result in any acceleration of the time of payment or vesting of any such
benefits.
(l) Schedule 2.15(l) of the Disclosure Schedule contains a
list of all salaried employees of the Company as of the date of this Agreement,
and correctly reflects, in all material respects, their salaries, any other
compensation payable to them (including compensation payable pursuant to bonus,
deferred compensation or commission arrangements), their dates of employment and
their positions. The Company is not a party to any collective bargaining
contract or other Contract with a labor union involving any of its Employees.
All of the Company's employees are "at will" employees.
(m) Schedule 2.15(m) of the Disclosure Schedule identifies
each Employee who is not fully available to perform work because of disability
or other leave and sets forth the basis of such leave and the anticipated date
of return to full service.
(n) The Company is in compliance in all material respects with
all applicable Legal Requirements and Contracts relating to employment,
employment practices, wages, bonuses and terms and conditions of employment,
including employee compensation matters.
(o) Except as set forth in Schedule 2.15(o) of the Disclosure
Schedule, the Company has no reason to believe that (i) the consummation of the
Merger or any of the other transactions contemplated by this Agreement will have
a material adverse effect on the Company's labor relations, or (ii) any of the
Company's employees intends to terminate his or her employment with the Company.
(p) Each current employee of and consultant to the Company
has, as of the Closing Date, entered into a confidential invention and
assignment agreement with the Company.
2.16 ENVIRONMENTAL MATTERS. The Company is in compliance in all
material respects with all applicable Environmental Laws, which compliance
includes the possession by the Company of all permits and other Governmental
Authorizations known by the Company to be required under applicable
Environmental Laws, and compliance with the terms and conditions thereof. The
Company has not received any notice or other communication (in writing or
otherwise), whether from a Governmental Body, citizens group, employee or
otherwise, that alleges that the Company is not in compliance with any
Environmental Law, and, to the best of the knowledge of the Company, there are
no circumstances that may prevent or interfere with the
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Company's compliance with any Environmental Law in the future. To the best of
the knowledge of the Company, no current or prior owner of any property leased
or controlled by the Company has received any notice or other communication (in
writing or otherwise), whether from a Government Body, citizens group, employee
or otherwise, that alleges that such current or prior owner or the Company is
not in compliance with any Environmental Law. All Governmental Authorizations
currently held by the Company pursuant to Environmental Laws are identified in
Schedule 2.16 of the Disclosure Schedule.
2.17 INSURANCE. Schedule 2.17 of the Disclosure Schedule identifies all
insurance policies maintained by, at the expense of or for the benefit of the
Company and identifies any material claims made thereunder, and the Company has
delivered to Parent accurate and complete copies of the insurance policies
identified on Schedule 2.17 of the Disclosure Schedule. Each of the insurance
policies identified in Schedule 2.17 of the Disclosure Schedule is in full force
and effect. Since January 1, 1996, the Company has not received any notice or
other communication regarding any actual or possible (a) cancellation or
invalidation of any insurance policy, (b) refusal of any coverage or rejection
of any claim under any insurance policy, or (c) material adjustment in the
amount of the premiums payable with respect to any insurance policy.
2.18 RELATED PARTY TRANSACTIONS. Except as set forth in Schedule 2.18
of the Disclosure Schedule, to the best of the Company's knowledge, since
January 1, 1993; (a) no Related Party has, and no director, officer or 5%
stockholder of the Company has, any direct or indirect interest in any material
asset used in or otherwise relating to the business of the Company; (b) no
Related Party is, and no director, officer or 5% stockholder of the Company has
been, indebted to the Company; (c) no director, officer or 5% stockholder of the
Company and no Related Party has entered into, or has had any direct or indirect
financial interest in, any material Contract, transaction or business dealing
involving the Company; (d) no director, officer, 5% stockholder of the Company,
or Related Party is competing, or has at any time since inception competed,
directly or indirectly, with the Company; and (e) no director, officer, 5%
stockholder of the Company or Related Party has any claim or right against the
Company (other than rights under Company Options and Company Warrants and rights
relating to the Bridge Debt or to receive compensation for services performed as
an employee of or consultant to the Company). (For purposes of this Section 2.18
each of the following shall be deemed to be a "Related Party:" (i) each of the
Bridge Debtholders; (ii) each of the Equity Holders; (iii) each individual who
is, or who has at any time since inception been, an officer of the Company; (iv)
each member of the immediate family of each of the individuals referred to in
clauses "(ii)" and "(iii)" above; and (v) any trust or other Entity (other than
the Company) in which any one of the individuals referred to in clauses "(ii)",
"(iii)" and "(iv)" above holds (or in which more than one of such individuals
collectively hold), beneficially or otherwise, a material voting, proprietary or
equity interest.)
2.19 LEGAL PROCEEDINGS; ORDERS.
(a) Except as set forth in Schedule 2.19 of the Disclosure
Schedule, there is no pending Legal Proceeding, and to the best of the knowledge
of the Company, no Person has
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threatened to commence any Legal Proceeding: (i) that involves the Company or
any of the assets owned or used by the Company or any Person whose liability the
Company has or may have retained or assumed, either contractually or by
operation of law; or (ii) that challenges, or that may have the effect of
preventing, delaying, making illegal or otherwise interfering with, the Merger
or any of the other transactions contemplated by this Agreement. To the best of
the knowledge of the Company, except as set forth in Schedule 2.19 of the
Disclosure Schedule, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that will, or that could reasonably be
expected to, give rise to or serve as a basis for the commencement of any such
Legal Proceeding.
(b) There is no order, writ, injunction, judgment or decree to
which the Company, or any of the assets owned or used by the Company, is
subject. To the best knowledge of the Company, none of the Equity Holders or
Bridge Debtholders are subject to any order, writ, injunction, judgment or
decree that relates to the Company's business or to any of the assets owned or
used by the Company. To the best of the knowledge of the Company, no officer or
other employee of the Company is subject to any order, writ, injunction,
judgment or decree that prohibits such officer or other employee from engaging
in or continuing any conduct, activity or practice relating to the Company's
business.
2.20 AUTHORITY; BINDING NATURE OF AGREEMENT. The Company has the
corporate power and authority to enter into and to perform its obligations under
this Agreement; and subsequent to approval of this Agreement by the Company's
stockholders, the execution, delivery and performance by the Company of this
Agreement have been duly authorized by all necessary action on the part of the
Company. This Agreement constitutes the legal, valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
subject to (i) laws of general application relating to bankruptcy, insolvency
and the relief of debtors, and (ii) rules of law governing specific performance,
injunctive relief and other equitable remedies.
2.21 NON-CONTRAVENTION; CONSENTS. Except as set forth in Schedule 2.21
of the Disclosure Schedule, neither (i) the execution, delivery or performance
of this Agreement or any of the other agreements referred to in this Agreement
to which the Company is a party, nor (ii) the consummation of the Merger or any
of the other transactions contemplated by this Agreement, will directly or
indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i)
any of the provisions of the Company's certificate of incorporation or bylaws,
or (ii) any resolution adopted by the Company's stockholders, the Company's
board of directors or any committee of the Company's board of directors;
(b) with respect to the Company, contravene, conflict with or
result in a violation of, or give any Governmental Body or other Person the
right to challenge any of the transactions contemplated by this Agreement or to
exercise any remedy or obtain any relief under, any Legal Requirement or any
order, writ, injunction, judgment or decree to which the Company, or any of the
assets owned or used by the Company, is subject;
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(c) with respect to the Company, contravene, conflict with or
result in a violation of any of the terms or requirements of, or give any
Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or
modify, any Governmental Authorization that is held by the Company or that
otherwise relates to the Company's business or to any of the assets owned or
used by the Company;
(d) with respect to the Company, contravene, conflict with or
result in a violation or breach of, or result in a default under, any provision
of any Material Contract, or give any Person the right to (i) declare a default
or exercise any remedy under any Material Contract, (ii) accelerate the maturity
or performance of any such Material Contract, or (iii) cancel, terminate or
modify any such Material Contract; or
(e) result in the imposition or creation of any lien or other
Encumbrance upon or with respect to any asset owned or used by the Company
(except for minor liens that will not, in any case or in the aggregate,
materially detract from the value of the assets subject thereto or materially
impair the operations of the Company).
Except as set forth in Schedule 2.21 of the Disclosure Schedule and except for
approval of this Agreement by the Company's stockholders and the filing of the
Certificate of Merger with the Delaware Secretary of State, the Company is not
and will not be required to make any filing with or give any notice to, or to
obtain any Consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, or (y) the consummation of the Merger or any of
the other transactions contemplated by this Agreement.
2.22 BROKERS AND FINDERS. Except as set forth in Schedule 2.22, neither
the Company nor any of its officers, directors or employees has employed any
broker or finder or incurred liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has acted
directly or indirectly for the Company in connection with this Agreement or the
transactions contemplated hereby.
2.23 FULL DISCLOSURE. This Agreement (including the Disclosure
Schedule) does not, with respect to the representations, warranties and
information made or provided by the Company, (i) contain any untrue statement of
any material fact, or (ii) omit to state any material fact necessary in order to
make the representations, warranties and information contained herein (in the
light of the circumstances under which such representations, warranties and
information were made or provided) not misleading.
3. REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB. Parent and
Merger Sub, severally and jointly, represent and warrant as follows:
3.1 DUE ORGANIZATION; CAPITALIZATION.
(a) Parent and Merger Sub are corporations duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Each of the corporations is duly qualified to do business and is in good
standing in all jurisdictions where its ownership or leasing
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of property or the conduct of its business requires it to be so qualified and
failure to be so qualified would have a Material Adverse Effect on Parent and
its subsidiaries taken as a whole; and each has all necessary power and
authority: (i) to conduct its business in the manner in which its business is
currently being conducted; (ii) to own and use its assets in the manner in which
its assets are currently owned and used; and (iii) to perform its obligations
under all Contracts by which it is bound.
(b) The authorized capital stock of Parent consists of
60,000,000 shares of Parent Common Stock, of which approximately 28,853,239
shares have been issued and are outstanding as of the date hereof and 15,000,000
shares of Preferred Stock, of which no shares were outstanding as of the date
hereof. The authorized capital stock of Merger Sub consists of 1,000 shares of
Merger Sub Common Stock, of which 100 shares have been issued and are
outstanding as of the date hereof. All of the outstanding shares of capital
stock of Parent and Merger Sub have been duly and validly authorized and issued
and are fully paid and nonassessable. Except as disclosed in Parent's reports
filed with the SEC and Schedule 3.1(b) and as otherwise contemplated by this
Agreement, there are no preemptive rights, warrants, subscriptions, options,
puts, calls, or commitments of any character or obligating Parent or Merger Sub
to issue, transfer, sell, purchase, deliver or redeem or cause to be issued,
sold or repurchased, any shares of capital stock of Parent or Merger Sub or
obligating Parent or Merger Sub to grant, extend or enter into any such option,
warrant call, right, commitment or agreement.
(c) The Shares of Parent Common Stock comprising the Units
(including the shares of Parent Common Stock to be issued upon exercise of the
Parent Warrants comprising the Units) to be issued to the Bridge Debtholders of
the Company pursuant to Section 1.5(a), and any shares of Parent Common Stock
that may be issued to Equity Holders pursuant to Section 1.5(c) when delivered
and issued by Parent pursuant to the terms of this Agreement, will be validly
issued, fully paid and nonassessable, will be issued in compliance with all
applicable federal and state securities laws (or applicable exemptions
therefrom) and will be free and clear of all Encumbrances (other than those
arising from the application of the securities laws and those imposed by virtue
of any acts or omissions of the respective Bridge Debtholders and Equity Holders
of the Company).
3.2 PARENT FINANCIAL STATEMENTS. The consolidated balance sheets of
Parent as of December 31, 1995 and 1994 and related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1995, together with the notes thereto, audited by
Ernst & Young LLP and included in Parent's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 as filed with the SEC, and the unaudited
consolidated balance sheet of Parent as of June 30, 1996 and the related
unaudited consolidated statements of operations and cash flows for the six
months then ended contained in Parent's Quarterly Report or Form 10-Q filed for
the six months ended June 30, 1996 have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis and
present fairly (except that financial statements for interim periods may not
contain certain footnotes and are subject to normal and recurring year-end audit
adjustments which will not, individually or in the aggregate, be material in
magnitude) the consolidated financial
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position of Parent at the dates and the results of operations, changes in
financial position and cash flows of Parent for the periods stated therein.
3.3 AUTHORITY; BINDING NATURE OF AGREEMENT; NO CONFLICT. Parent and
Merger Sub each has the corporate power and authority to enter into and to
perform its obligations under this Agreement; and the execution, delivery and
performance by Parent and Merger Sub of this Agreement have been duly authorized
by all necessary action on the part of Parent and Merger Sub. This Agreement
constitutes the legal, valid and binding obligation of Parent and Merger Sub,
enforceable against each of them in accordance with its terms, subject to (i)
laws of general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies.
Neither the execution, delivery and performance by Parent and Merger
Sub of this Agreement nor the consummation of the transactions contemplated
hereby, nor compliance by Parent and Merger Sub with any of the provisions
hereof, will require the approval of the stockholders of Parent, whether by
operation of law, pursuant to the rules and regulations of the NASD, or
otherwise, or (i) violate, conflict with, or result in a breach of any provision
of, or constitute a default (or an event which, with notice or lapse of time or
both, would constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of termination or
acceleration of, or result in the creation of, any lien, security interest,
charge or encumbrance upon any of the properties or assets of Parent under any
of the terms, conditions or provisions of (x) Parent's or Merger Sub's
certificate of incorporation or bylaws or (y) any material note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Parent is a party or by which Parent may be bound, or to
which the properties or assets of Parent may be subject, (ii) subject to
compliance with the statutes and regulations referred to in the next paragraph,
violate any judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to Parent or any of its properties or assets, or (iii)
result in the creation of any Encumbrance upon any of the assets of Parent or
Merger Sub.
Other than in connection with or in compliance with the provisions of
the Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "Securities Act"), the securities or blue sky laws of the various states or
filings and the requirements of Section 251 of the Delaware General Corporation
Law, no notice to, filing with, exemption or review by, or authorization,
consent or approval of, any public body or authority is necessary for the
consummation by Parent and Merger Sub of the transactions contemplated by this
Agreement, except for the filing of the Certificate of Merger.
3.4 SEC FILINGS. Parent has delivered to the Company accurate and
complete copies (excluding copies of exhibits) of each report, registration
statement (on a form other than Form S-8) and definitive proxy statement filed
by Parent with the SEC between January 1, 1995 and the date of this Agreement
(the "Parent SEC Documents"). As of the time it was filed with the SEC (or, if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing): (i) each of Parent SEC Documents complied in all
material respects with the applicable requirements of the Securities Act or the
Exchange Act (as the case may be); and (ii) none of Parent SEC Documents
contained any untrue statement of a material fact or omitted
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to state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. The consolidated financial statements contained in
Parent SEC Documents complied as to form in all material respects with the
published rules and regulations of the SEC applicable thereto.
3.5 MATERIAL CHANGE. Except for the fact that Parent has continued to
lose money since June 30, 1996, there has been no material adverse change in the
assets, liabilities, condition, results of operations or business of Parent,
and, to the best of the knowledge of Parent, no event has occurred that will, or
could reasonably be expected to have, a Material Adverse Effect on the Company.
3.6 APPROVAL OF MERGER. The Board of Directors of Merger Sub has
recommended to its sole stockholder approval of this Agreement. Parent, as the
sole stockholder of Merger Sub, has approved this Agreement and such approval
will not be modified, rescinded or revoked.
3.7 FULL DISCLOSURE. This Agreement does not, with respect to the
representations, warranties and information made or provided by Parent or Merger
Sub, (i) contain any untrue statement of any material fact, or (ii) omit to
state any material fact necessary in order to make the representations,
warranties and information contained herein (in the light of the circumstances
under which such representations, warranties and information were made or
provided) not misleading.
4. CERTAIN COVENANTS OF THE COMPANY.
4.1 ACCESS AND INVESTIGATION. During the period from the date of this
Agreement through the Effective Time (the "Pre-Closing Period"), the Company
shall, and shall cause its Representatives to: (a) provide Parent and Parent's
Representatives with reasonable access to the Company's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to the Company; and (b)
provide Parent and Parent's Representatives with copies of such existing books,
records, Tax Returns, work papers and other documents and information relating
to the Company, and with such additional financial, operating and other data and
information regarding the Company, as Parent may reasonably request. Parent and
Parent's Representatives shall hold all information furnished to them pursuant
to this Section 4.1 in confidence to the extent required by, and in accordance
with, the provisions of the Mutual Nondisclosure Agreement.
4.2 OPERATION OF THE COMPANY'S BUSINESS. Unless Parent otherwise
agrees, during the Pre-Closing Period:
(a) the Company shall conduct its business and operations in
the ordinary course and in substantially the same manner as such business and
operations have been conducted prior to the date of this Agreement;
(b) the Company shall use reasonable efforts to preserve
intact its current business organization, keep available the services of its
current officers and employees and maintain its relations and good will with all
suppliers, customers, landlords, creditors, employees
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and other Persons having business relationships with the Company, provided that
the Company shall not be required to make any payments outside the ordinary
course of business or enter into or amend any Company Contract outside the
ordinary course of business, to the extent such Company Contract or amendment
would have a Material Adverse Effect on the Company, to satisfy the foregoing
obligation;
(c) the Company shall keep in full force all insurance
policies identified in Schedule 2.17 of the Disclosure Schedule;
(d) the Company shall cause its officers to report regularly
(but in no event less frequently than weekly) to Parent concerning the status of
the Company's business;
(e) the Company shall not declare, accrue, set aside or pay
any dividend or make any other distribution in respect of any shares of capital
stock, and shall not repurchase, redeem or otherwise reacquire any shares of
capital stock or other securities (except that the Company may repurchase
Company Common Stock from former employees pursuant to the terms of existing
restricted stock purchase agreements);
(f) the Company shall not sell, issue or authorize the
issuance of (i) any capital stock or other security, (ii) any option or right to
acquire any capital stock or other security, or (iii) any instrument convertible
into or exchangeable for any capital stock or other security (except that the
Company shall be permitted (x) to issue Company Common Stock upon the exercise
of outstanding Company Options, and (y) to issue shares of Series C Preferred
Stock upon exercise of Company Warrants;
(g) except in connection with the transactions contemplated
hereby, the Company shall not amend or waive any of its rights under, or permit
the acceleration of vesting under, (i) any provision of its 1988 Stock Option
Plan, (ii) any provision of any agreement evidencing any outstanding Company
Option or Company Warrant, or (iii) any provision of any restricted stock
purchase agreement;
(h) the Company shall not amend or permit the adoption of any
amendment to the Company's certificate of incorporation or bylaws, or effect or
permit the Company to become a party to any Acquisition Transaction,
recapitalization, reclassification of shares, stock split, reverse stock split
or similar transaction;
(i) the Company shall not form any subsidiary or acquire any
equity interest or other interest in any other Entity;
(j) the Company shall not make any capital expenditure, except
for capital expenditures that, when added to all other capital expenditures made
on behalf of the Company during the Pre-Closing Period, do not exceed $5,000 per
month;
(k) the Company shall not (i) enter into, or permit any of the
assets owned or used by it to become bound by, any Contract that is or would
constitute a Material Contract, or
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(ii) amend or prematurely terminate, or waive any material right or remedy
under, any such Contract;
(l) the Company shall not (i) acquire, lease or license any
right or other asset from any other Person, (ii) sell or otherwise dispose of,
or lease or license, any right or other asset to any other Person, or (iii)
waive or relinquish any right, except for assets acquired, leased, licensed or
disposed of by the Company pursuant to Contracts that are not Material
Contracts;
(m) the Company shall not (i) lend money to any Person (except
that the Company may make routine travel and/or salary advances to employees in
the ordinary course of business), or (ii) incur (except to the extent
contemplated by this Agreement) or guarantee any indebtedness, or (iii) repay
any indebtedness to any of its stockholders or holders of any Company Promissory
Notes;
(n) the Company shall not (i) establish, adopt or amend any
Employee Benefit Plan, (ii) pay any bonus or make any profit-sharing payment,
cash incentive payment or similar payment to, or increase the amount of the
wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees, or (iii)
hire any new employee whose aggregate annual compensation is expected to exceed
$40,000;
(o) the Company shall not change any of its methods of
accounting or accounting practices in any material respect;
(p) the Company shall not make any Tax election;
(q) the Company shall not commence or settle any material
Legal Proceeding;
(r) the Company shall not agree or commit to take any of the
actions described in clauses "(e)" through "(q)" above.
4.3 NO SHOP. During the Pre-Closing Period, the Company shall not (and
the Company shall cause their respective Affiliates not to), directly or
indirectly through any officer, director, agent, partner, representative
(including without limitation, investment bankers, attorneys and accountants) or
otherwise:
(a) solicit, initiate, encourage the submission of or consider
proposals or offers from any Person (other than Parent) relating to a possible
Acquisition Transaction;
(b) participate in any discussions or negotiations or enter
into any agreement with, or provide any non-public information to or otherwise
cooperate with any Person (other than Parent) or assist or participate in any
effort or attempt by any Person, relating to or in connection with a possible
Acquisition Transaction; or
(c) consider, entertain or accept any proposal or offer from
any Person (other than Parent) relating to a possible Acquisition Transaction;
provided, however, that notwithstanding any other provision of this Agreement
(i) the Company may engage in
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discussion or negotiations with a third party who (without any solicitation,
initiation, encouragement, discussion or negotiation, directly or indirectly, by
or with the Company or any Company Representatives after August 26, 1996) seeks
to initiate such discussions or negotiations and may furnish such third party
information concerning the Company and its business, properties and assets and
(ii) following receipt of a proposal for an Acquisition Transaction made in
accordance with the foregoing clause (i), the Board of Directors of the Company
may make disclosure thereof to the Company's stockholders, but in each case
referred to in the foregoing clauses (i) and (ii) only to the extent that the
Board of Directors of the Company shall conclude in good faith after
consultation with the Company's counsel that failure to take such action would
constitute a breach by the Board of Directors of the Company of its fiduciary
obligations under applicable law. In the event that the Board of Directors makes
any disclosure to the Company's stockholders as contemplated above, the Board of
Directors shall also disclose to the Company's stockholders the existence of
this Agreement and the potential liability of the Company for any breach of this
Agreement.
(d) The Company shall promptly notify Parent in writing (in
reasonable detail) of any material inquiry, proposal or offer relating to a
possible Acquisition Transaction that is received by the Company the Equity
Holders or Bridge Debtholders during the Pre-Closing Period, except to the
extent it is advised by its counsel that to do so would constitute a breach of
the Board of Directors' fiduciary duties to the Company's stockholders under
Delaware law.
4.4 APPROVAL OF MERGER. The Company shall use its best efforts to
encourage each Equity Holder entitled to vote on the Merger and each Bridge
Debtholder whose vote is required to approve the terms of this Agreement and the
Merger to vote in favor of this Agreement and the Merger; provided that the
Company shall not be required to make any payments outside the ordinary course
of business or enter into or amend any Company Contract outside the ordinary
course of business to the extent such Company Contract or amendment would have a
Material Adverse Affect on the Company to satisfy the foregoing obligation.
4.5 NO TRANSFER OF SHARES. The Company shall not register the transfer
of any shares of capital stock of the Company on the stock transfer ledger of
the Company at any time prior to the Closing Date.
5. ADDITIONAL COVENANTS OF THE PARTIES.
5.1 FILINGS AND CONSENTS. As promptly as practicable after the
execution of this Agreement, each party to this Agreement (a) shall make all
filings (if any) and give all notices (if any) required to be made and given by
such party in connection with the Merger and the other transactions contemplated
by this Agreement, and (b) shall use all commercially reasonable efforts to
obtain all Consents (if any) required to be obtained (pursuant to any applicable
Legal Requirement or Contract, or otherwise) by such party in connection with
the Merger and the other transactions contemplated by this Agreement. The
Company shall (upon request) promptly deliver to Parent a copy of each such
filing made, each such notice given and each such Consent obtained by the
Company during the Pre-Closing Period.
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5.2 COMPANY STOCKHOLDERS' MEETING. The Company shall, in accordance
with its certificate of incorporation and bylaws and the applicable requirements
of the Delaware General Corporation Law, call and hold a special meeting of its
stockholders as promptly as practicable for the purpose of permitting them to
consider and to vote upon and approve the Merger and this Agreement (the
"Company Stockholders' Meeting").
5.3 PUBLIC ANNOUNCEMENTS. During the Pre-Closing Period, (a) neither
party shall issue any press release or make any public statement regarding this
Agreement or the Merger, or regarding any of the other transactions contemplated
by this Agreement, except as otherwise required by law as reasonably deemed
necessary or appropriate by the parties, without the other party's prior written
consent, and (b) in the event either party determines public disclosure is
necessary, it will use its best efforts to consult with and review such
disclosure in advance with the other party.
5.4 PRE-TRANSACTION FEE PAYMENTS. Parent shall promptly pay in cash
following the Closing the Pre-Transaction Liabilities of the Company as set
forth on the Company Liabilities Schedule; provided, however, that Parent shall
not be obligated to pay any Pre-Transaction Liabilities in excess of $200,000.
5.5 BEST EFFORTS. During the Pre-Closing Period, (a) the Company shall
use its best efforts to cause the conditions set forth in Section 7 to be
satisfied on a timely basis, and (b) Parent and Merger Sub shall use their best
efforts to cause the conditions set forth in Section 8 to be satisfied on a
timely basis.
5.6 TERMINATION OF EMPLOYEE PLANS. At the Closing, the Company shall
terminate its 1988 Stock Option Plan, and shall ensure that no employee or
former employee of the Company has any rights under such plan and that any
liabilities of the Company under such plan (including any such liabilities
relating to services performed prior to the Closing) are fully extinguished at
no cost to the Company.
5.7 BREAK-UP FEE. In the event, on or after September 30, 1996, Parent
and the Company are no longer engaged in negotiations regarding the transactions
contemplated by this Agreement, whether in the form of transaction specifically
contemplated hereunder or otherwise, and (i) the Company shall not have
unilaterally discontinued negotiations regarding the transactions contemplated
under this Agreement, (ii) neither the Company nor any of the Equity Holders
have breached any provision of this Agreement, (iii) the Company, the Equity
Holders and the Bridge Debtholders have acted in good faith at all times during
the negotiation process and (iv) Parent shall not have received or discovered
any information (whether or not relating to the period prior to the date of this
Agreement) that was not disclosed to Parent prior to the date of this Agreement,
and that could reasonably be expected to have a Material Adverse Effect on
Parent's willingness to pursue the transactions contemplated under this
Agreement, then, on September 30, 1996 or, if later, the date thereafter that
Parent and the Company have ceased to engage in negotiations regarding the
transactions contemplated under this Agreement, Parent will pay to the Company
the sum of $100,000. Nothing contained in this Section 5.7 shall be deemed
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to limit any other rights or remedies available to the Company arising by reason
of the terms of this Agreement.
5.8 DIRECTOR AND OFFICER LIABILITY.
(a) From and after the Effective Time, Parent shall indemnify,
defend and hold harmless each person who, immediately prior to the Effective
Time, is a current or former officer or director of the Company or who prior to
the Effective Time acted as a fiduciary under any employee benefit plan, and the
heirs, executors and administrators of any such person to the same extent Parent
indemnifies, defends and holds harmless each of its current officers and
directors. Such indemnification obligations shall apply to any action, suit or
proceeding, whether commenced before or after the Effective Time. Without
limiting the foregoing, Parent shall periodically advance expenses as incurred
with respect to the foregoing to the fullest extent permitted under applicable
law provided that the person to whom the expenses are advanced provides an
undertaking to repay such advance if it is ultimately determined that such
person is not entitled to indemnification.
(b) Any determination which is required to be made with
respect to whether an indemnified party's conduct complies with the standards
set forth under Delaware law and any decision which is made as to the necessity
for such determination shall be made by independent counsel chosen by Parent and
reasonably satisfactory to the indemnified party. The fees and expenses of such
counsel will be paid by Parent promptly after the submission of invoices by such
counsel in accordance with its standard practices.
(c) This Section 5.8 shall survive the Effective Time, is
intended to benefit the officers and directors of the Company (each of whom
shall be entitled to enforce this Section 5.8 against Parent), and shall be
binding on all successors and assigns of Parent.
5.9 NOTIFICATION; UPDATES TO DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, each party shall promptly
notify the others in writing of the discovery by such party of:
(i) any event, condition, fact or circumstance that
occurred or existed on or prior to the date of this Agreement and that caused or
constitutes an inaccuracy in or breach of any representation or warranty made by
such party in this Agreement;
(ii) any event, condition, fact or circumstance that
occurs, arises or exists after the date of this Agreement and that would cause
or constitute an inaccuracy in or breach of any representation or warranty made
by such party in this Agreement if (A) such representation or warranty had been
made as of the time of the occurrence, existence or discovery of such event,
condition, fact or circumstance, or (B) such event, condition, fact or
circumstance had occurred, arisen or existed on or prior to the date of this
Agreement;
(iii) any breach of any covenant or obligation of
such party; and
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(iv) any event, condition, fact or circumstance that
would make the timely satisfaction of any of the conditions set forth in Section
7 or Section 8 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is
required to be disclosed pursuant to Section 5.9(a) requires any change in the
Disclosure Schedule, or if any such event, condition, fact or circumstance would
require such a change assuming the Disclosure Schedule were dated as of the date
of the occurrence, existence or discovery of such event, condition, fact or
circumstance, then the Company shall promptly deliver to Parent an update to the
Disclosure Schedule specifying such change. No such update shall be deemed to
supplement or amend the Disclosure Schedule for the purpose of (i) determining
the accuracy of any of the representations and warranties made by the Company in
this Agreement, or (ii) determining whether any of the conditions set forth in
Section 7 has been satisfied.
5.10 SECURITIES AND BLUE SKY LAWS. Parent shall take such steps as may
be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable to the issuance of the Units in connection
with the transactions contemplated by this Agreement.
5.11 EMPLOYEES AND EMPLOYEE BENEFITS.
(a) Employees of the Surviving Corporation shall be entitled
to participate in plans generally applicable to all employees of Parent and its
subsidiaries ("Parent Plans").
(b) From and after the Effective Time, the Surviving
Corporation shall grant all employees of the Company who become employees of the
Surviving Corporation credit for all services with the Company prior to the
Effective Time for all purposes as if such service was service with the Parent.
To the extent permissible under its applicable plans, the Surviving Corporation
shall waive any pre-existing condition exclusion and actively-at-work
requirements under any medical or dental benefit plan; provided, however, that
no such waiver shall apply to a pre-existing condition of any employee of the
Company who was, as of the Effective Time, excluded from participation in such
plan by virtue of such pre-existing condition. To the extent permissible under
its applicable plans, the Surviving Corporation shall provide that any covered
expenses incurred on or before the Effective Time by an employee of the Company
or such an employee's covered dependent shall be taken into account for purposes
of satisfying applicable deductible, coinsurance and maximum out-of-pocket
provisions after the Effective Time to the same extent as such expenses are
taken into account for the benefit of employees of Parent.
6. POST-CLOSING COVENANTS OF PARENT.
6.1 USE OF PRIVATE PLACEMENT PROCEEDS; COMMERCIALLY REASONABLE EFFORTS.
(a) Parent shall spend $4.0 million to commercialize and
advance IPM as a principal product of Parent and warrants Parent's highest
priority efforts. The only circumstances under which Parent may decrease or
cease commercialization of IPM prior to expending $4.0 million would be if
Parent encounters critical problems with the commercialization of IPM, including
problems related to IPM's safety, efficacy or economic
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viability, such as would render IPM, on a stand-alone basis, unsafe, ineffective
or incapable of generating a reasonable, positive cash flow. After Parent has
expended $4.0 million on the commercialization of IPM, Parent agrees to use
commercially reasonable efforts to optimize commercialization of Earn-Out
Products. For purposes of this Section 6.1, "commercially reasonable efforts"
shall mean efforts consistent with sound and reasonable business practices.
(b) Upon the written request of Equity Holders'
Representatives, Parent shall provide to such Equity Holders' Representatives
within 10 business days of receipt of such request, a written report of all
amounts expended by Parent on the commercialization of IPM as of the most recent
practicable date. Parent shall make available to the Equity Holders'
Representatives during normal business hours such records of Parent and its
Affiliates as may be reasonably necessary to verify the accuracy of the written
reports provided by Parent hereunder. The Equity Holders' Representatives may,
at its sole expense, select an independent public accountant from a nationally
recognized accounting firm and acceptable to Parent to assist the Equity
Holders' Representatives in verifying the accuracy of the written reports
provided by Parent hereunder. Equity Holders' Representatives may request a
written report hereunder no more than one time during any consecutive
twelve-month period.
6.2 PATENT MATTERS.
(a) From and after the Effective Time, so long as it is
consistent with sound and reasonable business practices and judgments, Parent
shall, (i) prosecute all patent applications included in the Company Patents
with a view toward obtaining the broadest coverage reasonably available, (ii)
file and prosecute corresponding patent applications in other jurisdictions
where patent protection on one or more claims may be available and (iii)
maintain all patents included in the Company Patents or issued pursuant to a
patent application referred to in clauses (i) and (ii).
(b) From and after the Effective Time, so long as it is
consistent with sound and reasonable business practices and judgments, Parent
shall prosecute any infringements of Company Patents of which it becomes aware.
In the event any amount is recovered by Parent from the infringer, whether by
judgment, award, decree or settlement, the amount of such recovery (after
deducting all fees and expenses of prosecuting such infringement claim including
attorneys' fees and expenses), including all amounts received for actual,
special, consequential and punitive damages, shall be added to Total Net Sales
for the period in which a settlement becomes effective or the judgment, award or
decree becomes final after exhaustion or expiration of all available appeals for
the purposes of calculating the Earn-Out Payments due to the Equity Holders.
6.3 STATUS REPORTS. No less than annually, Parent shall deliver to the
Equity Holders' Representatives a status report in reasonable detail with
respect to those matters covered by the foregoing provisions of this Section 6.
6.4 TRANSFER OF RIGHTS. Parent shall not sell or otherwise transfer its
rights to any Earn-Out Products unless the purchaser or other transferee
expressly assumes the obligations of Parent under this Agreement with respect to
such Earn-Out Products.
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7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB.
The obligations of Parent and Merger Sub to effect the Merger and
otherwise consummate the transactions contemplated by this Agreement are subject
to the satisfaction, at or prior to the Closing, of each of the following
conditions:
7.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties made by the Company in this Agreement and in each of the other
agreements and instruments delivered to Parent in connection with the
transactions contemplated by this Agreement shall have been accurate in all
material respects as of the date of this Agreement (without giving double effect
to any "Material Adverse Effect" or other materiality qualifications contained
in such representations and warranties), and shall be accurate in all material
respects as of the Closing Date as if made at the Closing Date (without giving
effect to any update to the Disclosure Schedule other than the Disclosure
Schedule Amendment, and without giving double effect to any "Material Adverse
Effect" or other materiality qualifications contained in such representations
and warranties).
7.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that
the Company is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all respects.
7.3 STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been
duly approved by the holders of shares of capital stock of the Company entitled
to cast a majority of the votes entitled to be cast with respect to the approval
thereof. In addition, the holders of a majority of the outstanding shares of
Company Common Stock voting as a separate class shall have approved this
Agreement and the Merger.
7.4 CONSENTS. All Consents required to be obtained in connection with
the Merger and the other transactions contemplated by this Agreement (including
the Consents identified in Schedule 2.21 of the Disclosure Schedule) shall have
been obtained and shall be in full force and effect.
7.5 AGREEMENTS AND DOCUMENTS. Parent shall have received the following
agreements and documents, each of which shall be in full force and effect:
(a) an estoppel certificate, dated as of a date not more than
five days prior to the Closing Date and satisfactory in form and content to
Parent, executed by Metro Realty Trust;
(b) a legal opinion of Nutter, McClennen & Fish, LP, dated as
of the Closing Date, to the effect of Exhibit G; and
(c) written resignations of all directors of the Company,
effective as of the Effective Time.
7.6 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by
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any court of competent jurisdiction and remain in effect, and there shall not be
any Legal Requirement enacted or deemed applicable to the Merger that makes
consummation of the Merger illegal.
7.7 NO LEGAL PROCEEDINGS. No Governmental Authority shall have
commenced or threatened to commence and no Person shall have commenced any Legal
Proceeding challenging or seeking the recovery of a material amount of damages
in connection with the Merger or seeking to prohibit or limit the exercise by
Parent of any material right pertaining to its ownership of stock of the
Surviving Corporation.
7.8 TERMINATION OF EMPLOYEE PLANS. The Company shall have provided
Parent with evidence, reasonably satisfactory to Parent, as to the termination
of the benefit plans referred to in Section 2.15.
7.9 LOCK-UP AGREEMENTS. Each of the Bridge Debtholders identified on
Schedule 1.5(a) who receive Units of Parent under Section 1.5(a) shall enter
into lock-up agreements substantially in the form of Exhibit H. Such agreements
may be modified, rescinded or revoked only upon the approval of (i) Parent and
(ii) the Bridge Debtholders holding a majority of the shares of Common Stock (on
an as-if-converted basis) subject to such lock-up agreements.
7.10 EXCHANGE OF BRIDGE DEBT AND WARRANT TERMINATION AGREEMENT. Each of
the Bridge Debtholders of the Company, as set forth in Schedule 1.5(a), shall
have entered into and delivered to Parent the Exchange of Bridge Debt and
Warrant Termination Agreement substantially in the form of Exhibit E.
7.11 PRE-TRANSACTION LIABILITIES. The Pre-Transaction Liabilities, net
of any cash and accounts receivable of the Company as of the Closing Date, shall
not be in excess of an aggregate of $200,000.
7.12 DISSENTING SHARES. The Company shall have provided Parent a true
and complete list of the names of all Dissenting Equity Holders and the number
and class of shares of capital stock of the Company held by such Dissenting
Equity Holders. The Dissenting Equity Holders, if any, shall beneficially hold
an aggregate of no more than ten percent (10%) of the total number of shares of
capital stock of the Company, determined on a fully diluted, as-if-converted to
Common Stock basis, outstanding immediately prior to the Effective Time.
7.13 NO MATERIAL CHANGE. Except for the fact that the Company continues
to lose money, there shall not have been a material adverse change in the
assets, liabilities, results of operation or business of the Company since
August 31, 1996.
7.14 NOTICE OF LIQUIDATION PREFERENCE ELECTION. Parent shall have
received from the Company a copy of all written notices delivered to the Company
by the holders of Company Series A Preferred Stock and Company Series C
Preferred Stock pursuant to Section 1.5(e)(iii).
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7.15 RECEIPT OF COMPANY PROMISSORY NOTES OR AFFIDAVITS AND INDEMNITY
AGREEMENTS. Parent shall have received from the Bridge Debtholders the Company
Promissory Notes held by such Bridge Debtholders or, if any of such Company
Promissory Notes shall have been lost, stolen or destroyed, an affidavit of loss
and indemnity agreement reasonably satisfactory to Parent with respect to such
Company Promissory Notes; provided, however, that this condition shall be deemed
satisfied if the aggregate amount of Bridge Debt with respect to which Company
Promissory Notes or affidavits or indemnity agreements relating thereto are not
received does not exceed $415,000 (which amount shall include any accrued
interest thereon).
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY.
The obligations of the Company to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of the following conditions:
8.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties made by Parent and Merger Sub in this Agreement and in each of the
other agreements and instruments delivered to the Company in connection with the
transactions contemplated by this Agreement shall have been accurate in all
material respects as of the date of this Agreement (without giving double effect
to any "Material Adverse Effect" or other materiality qualifications contained
in such representations and warranties), and shall be accurate in all material
respects as of the Closing Date as if made at the Closing Date (without giving
double effect to any "Material Adverse Effect" or other materiality
qualifications contained in such representations and warranties).
8.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations that
Parent and Merger Sub are required to comply with or to perform at or prior to
the Closing shall have been complied with and performed in all respects.
8.3 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
8.4 PRIVATE PLACEMENT. The Private Placement shall have been completed
and the proceeds thereof received by Parent without restriction on Parent's
ability to use such proceeds for the purpose set forth in Section 6.1(a).
8.5 LISTING OF ADDITIONAL SHARES. The filing with the Nasdaq Stock
Market, Inc. of a Notification Form for Listing of Additional Shares with
respect to the shares of Parent's Common Stock issuable as part of the Units
shall have been made.
8.6 NO MATERIAL CHANGE. Except for the fact that Parent continues to
lose money, there shall not have been a material adverse change in the assets,
liabilities, conditions, results of operations or business of Parent since June
30, 1996.
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8.7 DELIVERY OF UNITS. The Units to be issued to each of the Bridge
Debtholders upon Closing shall have been delivered to the Bridge Debtholders or
their counsel.
8.8 COOLEY GODWARD LLP LEGAL OPINION. The Company shall have received a
legal opinion of Cooley Godward LLP, dated as of the Closing Date, to the effect
of Exhibit I.
8.9 STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been
duly approved by the holders of shares of capital stock of the Company entitled
to cast a majority of the votes entitled to be cast with respect to the approval
thereof. In addition, the holders of a majority of the outstanding shares of
Company Common Stock voting as a separate class shall have approved this
Agreement and the Merger.
8.10 CONSENTS. All Consents required to be obtained in connection with
the Merger and the other transactions contemplated by this Agreement (including
the Consents identified in Section 2.21 of the Disclosure Schedule) shall have
been obtained and shall be in full force and effect.
8.11 NO LEGAL PROCEEDINGS. No Governmental Authority shall have
commenced or threatened to commence and no Person shall have commenced any Legal
Proceeding challenging or seeking the recovery of a material amount of damages
in connection with the Merger or seeking to prohibit or limit the exercise by
the Bridge Debtholders or Equity Holders of any material right granted to such
Bridge Debtholders and Equity Holders hereunder.
9. TERMINATION AND AMENDMENT.
9.1 TERMINATION EVENTS. This Agreement may be terminated prior to the
Closing:
(a) by Parent if Parent reasonably determines that the timely
satisfaction of any condition set forth in Section 7 has become impossible
(other than as a result of any failure on the part of Parent or Merger Sub to
comply with or perform any covenant or obligation of Parent or Merger Sub set
forth in this Agreement);
(b) by the Company if the Company reasonably determines that
the timely satisfaction of any condition set forth in Section 8 has become
impossible (other than as a result of any failure on the part of the Company to
comply with or perform any covenant or obligation set forth in this Agreement or
in any other agreement or instrument delivered to Parent);
(c) by Parent if the Closing has not taken place on or before
November 15, 1996 (other than as a result of any failure on the part of Parent
to comply with or perform any covenant or obligation of Parent set forth in this
Agreement);
(d) by the Company if the Closing has not taken place on or
before November 15, 1996 (other than as a result of the failure on the part of
the Company to comply with or perform any covenant or obligation set forth in
this Agreement or in any other agreement or instrument delivered to Parent); or
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(e) by the mutual consent of Parent and the Company.
9.2 TERMINATION PROCEDURES. If Parent wishes to terminate this
Agreement pursuant to Section 9.1(a) or Section 9.1(c), Parent shall deliver to
the Company a written notice stating that Parent is terminating this Agreement
and setting forth a brief description of the basis on which Parent is
terminating this Agreement. If the Company wishes to terminate this Agreement
pursuant to Section 9.1(b) or Section 9.1(d), the Company shall deliver to
Parent a written notice stating that the Company is terminating this Agreement
and setting forth a brief description of the basis on which the Company is
terminating this Agreement.
9.3 EFFECT OF TERMINATION. If this Agreement is terminated pursuant to
Section 9.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that: (a) neither the Company nor Parent shall be
relieved of any obligation or liability arising from any prior breach by such
party of any provision of this Agreement; (b) the parties shall, in all events,
remain bound by and continue to be subject to Section 5.3; (c) the parties
shall, in all events, remain bound by and continue to be subject to Section 4.1,
with respect to the parties' obligations to maintain information furnished to
the other party confidential in accordance with the Mutual Nondisclosure
Agreement, and (d) Parent shall, in all events, remain bound by and continue to
be subject to Section 5.7.
9.4 AMENDMENT. Subject to compliance with applicable law, this
Agreement may be amended by the parties hereto, by action taken or authorized by
their respective Boards of Directors, at any time before or after approval of
the matters presented in connection with the Merger by the stockholders of the
Company or Merger Sub; provided, however, that after any approval of the
transactions contemplated by this Agreement by a party's stockholders, there may
not be, without further approval of such stockholders, any amendment of this
Agreement which is not in compliance with Section 251(d) of the Delaware General
Corporation Law.
9.5 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, subject to Section 9.4, (a)
extend the time for the performance of any of the obligations or other acts of
the other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant thereto and
(c) waive compliance with any of the agreements or conditions contained here.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in a written instrument signed on behalf of
such party, but such extension or waiver or failure to insist on strict
compliance with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
10. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; INDEMNIFICATION.
10.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) The representations, warranties and covenants made by the
Company (including the representations, warranties and covenants set forth in
Section 2, Section 4 and Section 5) shall survive the Closing and shall expire
on the first anniversary of the Closing Date;
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provided, however, that if, at any time prior to the first anniversary of the
Closing Date, any Parent Indemnitee (acting in good faith) delivers to the
Equity Holders' Representatives a written notice alleging the existence of an
inaccuracy in or a breach of any of the representations, warranties or covenants
made by the Company (and setting forth in reasonable detail the basis for such
Parent Indemnitee's belief that such an inaccuracy or breach may exist) and
asserting a claim for recovery under Section 10.2 based on such alleged
inaccuracy or breach, then the claim asserted in such notice shall survive the
first anniversary of the Closing until such time as such claim is fully and
finally resolved. The representations, warranties, covenants and obligations of
the Company and the rights and remedies that may be exercised by the Parent
Indemnitees, shall not be limited or otherwise affected by or as a result of any
information furnished to, or any investigation made by or knowledge of, any of
the Parent Indemnitees or any of their Representatives, provided, however, that
there shall be no liability for any matter disclosed to Parent pursuant to
Section 5.9 and which Parent expressly waives as a condition to closing. For
purposes of this Agreement, each statement or other item of information set
forth in the Disclosure Schedule or in any update to the Disclosure Schedule
shall be deemed to be a representation and warranty made by the Company in this
Agreement.
(b) Except with respect to Section 5.8 and except that the
representations of Parent set forth in Section 3.1(c) with respect to the shares
of Parent Common Stock that may be issued to Equity Holders pursuant to Section
1.5(c) shall expire on the first anniversary of the date of any such issuance,
the representations, warranties and covenants made by Parent and
Merger Sub (including the representations, warranties and covenants set forth in
Section 3 and Section 5) shall survive the Closing and shall expire on the first
anniversary of the Closing Date, provided however, that if, at any time prior to
the first anniversary of the Closing Date or the date of issuance of Parent
Common Stock pursuant to Section 1.5(c), as the case may be, any Company
Indemnitee (acting in good faith) delivers to Parent a written notice alleging
the existence of an inaccuracy in or a breach of any of the representations,
warranties and covenants made by Parent or Merger Sub (and setting forth in
reasonable detail the basis for such Company Indemnitee's belief that such an
inaccuracy or breach may exist) and asserting a claim based on such alleged
inaccuracy or breach, and asserting a claim for recovery under Section 10.2
based on such alleged inaccuracy or breach then the claim asserted in such
notice shall survive the first anniversary of the Closing Date or the date of
issuance of Parent Common Stock pursuant to Section 1.5(c), as the case may be,
until such time as such claim is fully and finally resolved. The
representations, warranties, covenants and obligations of the Parent and Merger
Sub and the rights and remedies that may be exercised by the Company
Indemnitees, shall not be limited or otherwise affected by or as a result of any
information furnished to, or any investigation made by or knowledge of, any of
the Company Indemnitees or any of their Representatives, provided, however, that
there shall be no liability for any matter disclosed to the Company pursuant to
Section 5.9 and which the Company expressly waives as a condition to closing.
10.2 INDEMNIFICATION.
(a) From and after the Effective Time (but subject to Section
10.1(a) and Section 10.3), the Equity Holders shall hold harmless and indemnify
each of the Parent Indemnitees from and against, and shall compensate and
reimburse each of the Parent
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Indemnitees for, any Damages which are directly or indirectly suffered or
incurred by any of the Parent Indemnitees or to which any of the Parent
Indemnitees may otherwise become subject (regardless of whether or not such
Damages relate to any third-party claim) and which arise from or as a result of,
or are directly or indirectly connected with any inaccuracy in or breach of any
representation or warranty, or covenant set forth in Section 4. If the Surviving
Corporation suffers, incurs or otherwise becomes subject to any Damages as a
result of or in connection with any inaccuracy in or breach of any such
representation, warranty, covenant set forth in Section 4, or obligation, then
(without limiting any of the rights of the Surviving Corporation as a Parent
Indemnitee) Parent shall also be deemed, by virtue of its ownership of the stock
of the Surviving Corporation, to have incurred Damages as a result of and in
connection with such inaccuracy or breach.
(b) From and after the Effective Time (but subject to Section
10.1(b)), Parent shall hold harmless and indemnify each of the Company
Indemnitees from and against, and shall compensate and reimburse each of the
Company Indemnitees for, any Damages which are directly or indirectly suffered
or incurred by any of the Company Indemnitees or to which any of the Company
Indemnitees may otherwise become subject (regardless of whether or not such
Damages relate to any third-party claim) and which arise from or as a result of,
or are directly or indirectly connected with any inaccuracy in or breach of any
representation or warranty, or covenant set forth in Section 5.
10.3 LIMITATIONS ON INDEMNIFICATION.
(a) RIGHT OF OFFSET FOR INDEMNIFICATION CLAIMS BY PARENT. In
the event Parent or the Surviving Corporation shall suffer any Damages entitled
to indemnification under this Section 10, Parent's and the Surviving
Corporation's sole recourse, other than claims related to fraud, shall be to
offset any such Damages against any Earn-Out Payments, Milestone Payment or any
other payments otherwise due to the Equity Holders in an aggregate amount not to
exceed (i) $500,000 plus (ii) an additional amount equal to ten percent (10%) of
any Earn-Out Payments, Milestone Payment or any other payments paid or otherwise
payable (without reduction for the $500,000 referred to in clause (i)) to the
Equity Holders.
(b) INDEMNIFICATION BY PARENT. In the event a Company
Indemnitee shall suffer any Damages and be entitled to indemnification under
this Section 10 as a result of a breach of a representation or warranty of
Parent or Merger Sub contained in Section 3 of this Agreement, Parent's
liability for indemnification shall be limited to (i) $500,000 plus (ii) an
additional amount equal to ten percent (10%) of any Earn-Out Payments, Milestone
Payment or any other payments paid or otherwise payable (without reduction for
the $500,000 referred to in clause (i)) to the Equity Holders. The foregoing
limitations on indemnification do not apply to Damages for which a Company
Indemnitee may be entitled to indemnification and arising out of a breach of any
post-closing covenant of Parent contained in Section 6 of this Agreement.
10.4 NO CONTRIBUTION. Each Equity Holder and each Company Indemnitee
waives, and acknowledges and agrees that he shall not have and shall not
exercise or assert (or attempt to exercise or assert), any right of
contribution, right of indemnity or other right or remedy against
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the Surviving Corporation in connection with any indemnification obligation or
any other liability to which he may become subject under or in connection with
this Agreement.
10.5 PROCEDURE FOR INDEMNIFICATION.
(a) If any party entitled to indemnification under Section
10.2 (which for purposes of this Section 10.5 and Section 10.7 shall include the
Surviving Corporation and Parent) (the "Indemnified Party") shall receive notice
or otherwise learn of the assertion by any other Person of any claim or of the
commencement by any such Person of any action (a "Third Party Claim") with
respect to which a party may be obligated to provide indemnification pursuant to
Section 10.2 (the "Indemnifying Party"), such Indemnified Party shall give
written notice thereof to the Indemnifying Party (or to the Equity Holders'
Representatives if the Indemnifying Party is an Equity Holder) within 10
business days after becoming aware of such Third Party Claim; provided, however,
that the failure of any Indemnified Party to give notice as provided in this
Section 10.5 shall not relieve the Indemnifying Party of its obligations under
Section 10.2, except to the extent that the Indemnifying Party actually is
prejudiced by such failure to give notice. Such notice shall describe the Third
Party Claim in reasonable detail, and shall indicate the amount (estimated if
necessary) of the Damages that has been or may be sustained by such Indemnified
Party. Thereafter, such Indemnified Party shall deliver to the Indemnifying
Party (or to the Equity Holders' Representatives if the Indemnifying Party is an
Equity Holder) within 5 business days after the Indemnified Party's receipt
thereof, copies of all notices and documents received by the Indemnified Party
relating to the Third Party Claim (including court papers).
(b) In case any Third Party Claim is brought against a Parent
Indemnitee, the Equity Holders' Representatives will be entitled to participate
in and to assume the defense thereof to the extent that they may wish, with
counsel reasonably satisfactory to such Parent Indemnitee, and after notice from
the Equity Holders' Representatives of their election so to assume the defense
thereof, the Equity Holders will not be liable to such Parent Indemnitee for any
legal or other expenses subsequently incurred by such Parent Indemnitee in
connection with the defense thereof.
(c) If the Equity Holders' Representatives choose to defend or
to seek to compromise or settle any Third Party Claim, each related Parent
Indemnitee shall make available to the Equity Holders' Representatives any
personnel or any books, records or other documents within its control or which
it otherwise has the ability to make available that are necessary or appropriate
for such defense, settlement or compromise, and shall otherwise cooperate in the
defense, settlement or compromise of such Third Party Claim.
(d) No Third Party Claim made against any Indemnified Party
shall be settled without the prior written consent of the Indemnifying Party.
Notwithstanding anything else in this Section 10.5 to the contrary, neither the
Equity Holders' Representatives nor any Parent Indemnitee shall settle or
compromise any Third Party Claim unless such settlement or compromise
contemplates as an unconditional term thereof of the giving by such claimant or
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plaintiff to each related Parent Indemnitee a written release from all liability
with respect to such Third Party Claim.
(e) In the event of payment by the Equity Holders to any
Parent Indemnitee in connection with any Third Party Claim of the full amount
payable under Section 10.2 in respect thereof, the Equity Holders shall be
subrogated to and shall stand in the place of such Parent Indemnitee as to any
events or circumstances in respect of which such Parent Indemnitee may have any
right or claim relating to such Third Party Claim against any claimant or
plaintiff asserting such Third Party Claim or as against any other Person. In
such event, such Parent Indemnitee shall cooperate with the Equity Holders in a
reasonable manner, and at the cost and expense of the Equity Holders, in
prospecting any subrogated right or claim.
10.6 EXERCISE OF REMEDIES BY PARENT INDEMNITEES OTHER THAN PARENT. No
Parent Indemnitee (other than Parent or any successor thereto or assign thereof)
shall be permitted to assert any indemnification claim or exercise any other
remedy under this Agreement unless Parent (or any successor thereto or assign
thereof) shall have consented to the assertion of such indemnification claim or
the exercise of such other remedy.
10.7 LIMITATIONS ON INDEMNIFICATION.
(a) No Indemnifying Party shall have liability under Section
10.2 except to the extent that the damages exceed $100,000 in the aggregate, in
which event the Indemnifying Party shall be liable for all damages, subject to
the provisions of this Section 10.
(b) Damages shall be reduced (including, without limitation,
retroactively) by any insurance proceeds actually recovered by or on behalf of
such Indemnified Party in reduction of the loss giving rise to the claim for
Damages.
11. REGISTRATION OF THE SECURITIES; COMPLIANCE WITH THE SECURITIES ACT.
11.1 RESTRICTIONS ON TRANSFER.
(a) Each certificate representing shares of Parent Common
Stock and Parent Warrants (including any shares of Parent Common Stock issued
upon exercise of Parent Warrants) to be issued to Equity Holders and/or Bridge
Debtholders pursuant to this Agreement (collectively, the "Securities") shall
(unless otherwise permitted by the provisions of the Agreement) be stamped or
otherwise imprinted with a legend substantially similar to the following (in
addition to any legend required under applicable state securities laws or as
provided elsewhere in the Agreement):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR CERTAIN STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED,
PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND
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PARENT SHALL HAVE RECEIVED AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL FOR PARENT, THAT SUCH AN EXEMPTION FROM
REGISTRATION UNDER THE ACT IS AVAILABLE.
(b) Parent shall be obligated to reissue promptly unlegended
certificates at the request of any holder thereof if the Securities shall have
been registered under the Securities Act or if the holder shall have obtained an
opinion of counsel (which counsel may be counsel to Parent) reasonably
acceptable to Parent to the effect that the Securities proposed to be disposed
of may lawfully be so disposed of without registration or qualification.
(c) any legend endorsed on an instrument pursuant to
applicable state securities laws and the stop-transfer instructions with respect
to such Securities shall be removed upon receipt by Parent of an order of the
appropriate blue sky authority authorizing such removal.
11.2 REGISTRATION PROCEDURES AND EXPENSES. Parent shall:
(a) as soon as practicable (but in any event within 3 business
days following the issuance of Securities pursuant to Section 1.5(a) and within
30 days following the issuance of Securities pursuant to Section 1.5(c) (each an
"Issuance")), prepare and file with the SEC a registration statement (each a
"Registration Statement" and collectively, the "Registration Statements") in
order to register with the SEC the sale of such Securities by the Equity Holders
or Bridge Debtholders from time to time through underwriters, agents or
otherwise, in negotiated or market transactions or through the automated
quotation system of the Nasdaq or the facilities of any national securities
exchange on which Parent's Common Stock or Warrants are then traded or in
privately negotiated transactions;
(b) use commercially reasonable efforts, subject to the
receipt of necessary information from the Equity Holders and Bridge Debtholders,
to cause each Registration Statement to become effective promptly after such
Registration Statement is filed by Parent,
(c) use commercially reasonable efforts to prepare and file
with the SEC such amendments and supplements to each Registration Statement and
each prospectus used in connection therewith as may be necessary to keep the
Registration Statements effective for a period of three years following the
Issuance (the "Registration Period") or, if earlier, until all of the Securities
have been sold pursuant thereto (provided that Parent shall not be deemed to
have used its best efforts to keep the Registration Statements effective if it
voluntarily takes any action that would result in the Equity Holders or Bridge
Debtholders not being able to sell any of their respective Securities pursuant
to the Registration Statement unless (i) such action is required under
applicable law or taken by Parent in good faith and for valid business reasons,
including without limitation the acquisition or divestiture of assets and (ii)
Parent promptly (but in any event within 30 days) files such amendments and
supplements with the SEC; provided, however, that Parent may not exercise its
rights under this Section more frequently than one time in any twelve-month
period);
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(d) furnish to the Equity Holders and Bridge Debtholders with
respect to the Securities registered under the Registration Statement such
number of copies of the Registration Statement (and exhibits thereto),
prospectuses and preliminary prospectuses in conformity with the requirements of
the Securities Act, in order to facilitate the public sale or other disposition
of all or any of the Securities by the Purchaser; provided, however, that the
obligation of Parent to deliver copies of prospectuses or preliminary
prospectuses to the Equity Holders and Bridge Debtholders shall be subject to
the receipt by Parent of reasonable assurances from the Equity Holders and
Bridge Debtholders that the Equity Holders and Bridge Debtholders will comply
with the applicable provisions of the Securities Act and of such other
securities or blue sky laws as may be applicable in connection with any use of
such prospectuses or preliminary prospectuses;
(e) file documents required of Parent for normal blue sky
clearance in states reasonably specified in writing by any Equity Holder and
Bridge Debtholder; provided, however, that Parent shall not be required to
qualify to do business or consent to service of process in any jurisdiction in
which it is not now so qualified or has not so consented;
(f) file with the Nasdaq Stock Market, Inc. a Notification
Form for Listing of Additional Shares with respect to the Securities and pay all
fees and expenses incurred in connection therewith;
(g) bear all expenses in connection with the procedures of
this Section 11.2 and the registration of the Securities pursuant to the
Registration Statement; and
(h) file the reports required to be filed by it under the
Securities Act and the Exchange Act and the rules and regulations adopted by the
SEC thereunder (or, if Parent is not required to file such reports, it will,
upon the request of any Equity Holder and Bridge Debtholder, timely make
publicly available other information so long as necessary to permit sales
pursuant to Rule 144 under the Securities Act) and it will take such further
action as any Equity Holder and Bridge Debtholder may reasonably request, all to
the extent required from time to time to enable the Equity Holders and Bridge
Debtholders to sell their respective Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144
under the Securities Act, as such rule may be amended from time to time, or (b)
any similar rule or regulation hereafter adopted by the SEC. Upon the request of
an Equity Holder or Bridge Debtholder, Parent shall deliver to such Equity
Holder or Bridge Debtholder a written statement as to whether it has complied
with such requirements.
11.3 TRANSFER OF SECURITIES AFTER REGISTRATION. The Equity Holders and
Bridge Debtholders agree that they will not effect any disposition of the
Securities or their right to purchase the Securities that would constitute a
sale within the meaning of the Securities Act in violation of the Securities Act
and that they will promptly notify Parent of any changes in the information set
forth in the Registration Statement regarding the Equity Holders or the Bridge
Debtholders as provided by the Equity Holders or Bridge Debtholders in writing
to Parent or their plan of distribution.
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11.4 INDEMNIFICATION.
(a) the term "Selling Securityholder" shall mean the Equity
Holders who receive Securities pursuant to the terms of this Agreement, if any,
and the Bridge Debtholders and, if any of the Equity Holders or Bridge
Debtholders is an institution, then such Equity Holder's or Bridge Debtholder's
directors or trustees, officers and employees and each person who controls the
Equity Holder or Bridge Debtholder within the meaning of the Securities Act;
(b) the term "Registration Statement" shall include any final
prospectus, exhibit, supplement or amendment included in or relating to the
Registration Statement referred to in Section 11.2; and
(c) the term "untrue statement" shall include any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any omission or alleged omission to state in the
Registration Statement of a material fact required to be stated therein or
necessary to make the statements therein.
Parent agrees to indemnify and hold harmless each Selling
Securityholder and their respective partners, directors and officers and each
person, if any, who controls the Selling Securityholders within the meaning of
Section 15 of the Securities Act, from and against any losses, claims, damages
or liabilities to which such Selling Securityholder may become subject (under
the Securities Act or otherwise) insofar as such losses, claims, damages or
liabilities (including legal fees and other expenses incurred in the
investigation and defense thereof) arise out of, or are based upon, any untrue
statement or arise out of any failure by Parent to fulfill any undertaking
included in the Registration Statements or any violation by Parent of any rule
or regulation promulgated under the Securities Act or any state securities laws
applicable to Parent, and Parent will reimburse such Selling Securityholder or
such officer, director or controlling person for any reasonable legal or other
expenses reasonably incurred in investigating, defending or preparing to defend
any such action, proceeding or claim; provided, however, that Parent shall not
be liable in any such case to the extent that such loss, claim, damage or
liability arises out of, or is based upon, an untrue statement made in such
Registration Statements in reliance upon and in conformity with written
information furnished to Parent by or on behalf of such Selling Securityholder
specifically for use in preparation of the Registration Statements, or the
failure of such Selling Securityholder to comply with the covenants and
agreements contained in Section 11.3 hereof respecting sale of the Securities or
any statement or omission in any prospectus that is corrected in any subsequent
prospectus that was delivered to the Selling Securityholder prior to the written
confirmation of the pertinent sale or sales by the Selling Securityholder.
The Selling Securityholders agree to indemnify and hold harmless Parent
(and each person, if any, who controls Parent within the meaning of Section 15
of the Securities Act, each officer of Parent who signs the Registration
Statement and each director of Parent) from and against any losses, claims,
damages or liabilities to which Parent (or any such officer, director or
controlling person) may become subject (under the Securities Act or otherwise),
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or
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are based upon, any failure to comply with the covenants and agreements
contained in Section 11.3 hereof respecting sale of the Securities, or any
untrue statement contained in the Registration Statement on their respective
dates of effectiveness if such untrue statement was made in reliance upon and in
conformity with written information furnished by or on behalf of the Selling
Securityholder specifically for use in preparation of the Registration
Statement, and the Selling Securityholder will reimburse Parent (or such
officer, director or controlling person), as the case may be, for any reasonable
legal or other expenses reasonably incurred in investigating, defending or
preparing to defend any such action, proceeding or claim. In no event shall the
liability of the Selling Securityholder hereunder be greater in amount than the
dollar amount of the proceeds received by the Selling Securityholder upon the
sale of Securities giving rise to such indemnification obligation.
Promptly after receipt by any indemnified person of a notice of a claim
or the beginning of any action in respect of which indemnity is to be sought
against an indemnifying person pursuant to this Section 11.4, such indemnified
person shall notify the indemnifying person in writing of such claim or of the
commencement of such action, and, subject to the provisions hereinafter stated,
in case any such action shall be brought against an indemnified person and such
indemnifying person shall have been notified thereof, such indemnifying person
shall be entitled to participate therein, and, to the extent it shall wish, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified person. After notice from the indemnifying person to such
indemnified person of its election to assume the defense thereof, such
indemnifying person shall not be liable to such indemnified person for any legal
expenses subsequently incurred by such indemnified person in connection with the
defense thereof; provided, however, that if there exists or shall exist a
conflict of interest that would make it inappropriate, in the opinion of counsel
to the indemnified person, for the same counsel to represent both the
indemnified person and such indemnifying person or any affiliate or associate
thereof, the indemnified person shall be entitled to retain its own counsel at
the expense of such indemnifying person; provided, however, that no indemnifying
person shall be responsible for the fees and expenses of more than one separate
counsel for all indemnified parties. The failure of any indemnified party to
notify an indemnifying party of any claim against such indemnified party in
respect of which indemnity may be sought hereunder shall not relieve the
indemnifying party from any liability unless (and only to the extent) the
indemnifying party was prejudiced by such failure, and in no event shall such
failure relieve the indemnifying party from any other liability which it may
have to such indemnified party.
11.5 CONTRIBUTION. If the indemnification provided for in this Section
11 is unavailable to the indemnified parties in respect of any losses, claims,
damages, liabilities or judgments referred to herein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities and judgments in such proproportion as to reflect
the relative fault of Parent on the one hand and each Selling Securityholder on
the other in connection with the statements, omissions or acts which resulted in
such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative fault of Parent on the one hand
and of each Selling Securityholder on the other shall be determined by reference
to, among other things, the acts of Parent and of each Selling Securityholder
that gave
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rise to the losses, claims, damages, liabilities or judgments referred to
herein, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such party, and the party's relative intent, knowledge, access to
information and opportunity to correct of fraudulent misrepresentation (within
the meaning of subsection 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
11.6 TERMINATION OF CONDITIONS AND OBLIGATIONS. Notwithstanding
anything stated herein to the contrary, the conditions precedent imposed by this
Section 11 upon the transferability of the Securities shall cease and terminate
as to any particular number of the Securities when such Securities shall have
been effectively registered under the Securities Act and sold or otherwise
disposed of in accordance with the intended method of disposition set forth in
the Registration Statement covering such Securities or at such time as an
opinion of counsel satisfactory to Parent shall have been rendered to the effect
that such conditions are not necessary in order to comply with the Securities
Act; provided, however, the indemnity and contribution agreements contained in
this Section 10 shall remain operative and in full force and effect regardless
of (i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any indemnified party or by or on behalf of Parent and (iii) the
consummation of the sale or successive resale of the Securities.
11.7 INFORMATION AVAILABLE. So long as the Registration Statement is
effective covering the resale of Securities owned by the Selling
Securityholders, Parent will furnish to the Selling Securityholders:
(a) as soon as practicable after available (but, in the case
of Parent's Annual Report to Stockholders, within 120 days after the end of each
fiscal year of Parent), one copy of (i) its Annual Report to Stockholders (which
Annual Report shall contain financial statements audited in accordance with
generally accepted accounting principles by a national firm of certified public
accountants), (ii) its Annual Report on Form 10-K, (iii) its quarterly reports
on Form 10-Q, and (iv) a full copy of the particular Registration Statement
covering the Securities (the foregoing, in each case, excluding exhibits);
(b) upon the reasonable request of any Selling Securityholder,
all exhibits excluded by Parenthetical to paragraph (a) of this Section 11.7;
and
(c) upon the reasonable request of any Selling Securityholder,
an adequate number of copies of the prospectuses to supply to any other party
requiring such prospectuses.
11.8 SUCCESSORS AND ASSIGNS. The provisions of this Section 11 shall
inure to the benefit of, and be binding upon, any and all transferees of the
Securities by any Selling Securityholder.
12. EQUITY HOLDERS' REPRESENTATIVES
12.1 APPOINTMENT. By virtue of the affirmative vote approving the
Merger and this Agreement, the stockholders of the Company shall irrevocably
appoint Johanna T. Chao,
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Dynamics Technology, Inc., and Tullis-Dickerson & Co., Inc. (the "Equity
Holders' Representatives") to act as attorneys-in fact of said stockholders with
authority to make all decisions on behalf of said stockholders with respect to
any matters arising with respect to any Earn-Out Payments or Milestone Payment
(including matters arising under Section 6 or any claims for indemnification
under Section 10 or Section 11 hereof); and any decisions of the Equity Holders'
Representatives with respect to any thereof shall be final and binding on them.
Without limiting the foregoing, the Equity Holders' Representatives are
authorized on behalf of all stockholders of the Company to (i) object to a claim
for indemnification under Section 10 hereof, (ii) settle or compromise any claim
for such indemnification; (iii) assume responsibility for all matters arising
under Section 6 hereof; (iv) interpret on behalf of all such stockholders all of
the terms and provisions of this Agreement; (v) generally to represent all
stockholders of the Company and their heirs, personal representatives,
successors and assigns with respect to all matters arising under this Agreement;
and (vi) to vary the amount of Earn-Out Payments due on sales of Earn-Out
Products, to negotiate a buy-out of the Earn-Out Payments or make any other
similar decision on behalf of the Equity Holders; provided, however, that any
such change contemplated by this subsection (vi) (but not by any other
subsection) shall be subject to approval of the holders of a majority of the
percentages reflected in the Allocation Schedule. The Equity Holders'
Representatives are authorized to retain counsel to assist them in matters
relating to this Agreement and their obligations hereunder or thereunder,
including the dispute of any claims. The Equity Holders' Representatives shall
act by majority vote.
12.2 COMPENSATION.
(a) In consideration of the services to be provided to the
Equity Holders by the Equity Holders' Representatives, each Equity Holders'
Representative shall be compensated at the rate of $1,000 per day. In addition,
the Equity Holders' Representatives shall be entitled to reimbursement of all
expenses incurred by them in connection with this Agreement and their
obligations hereunder, including fees and expenses of counsel retained by them.
(b) In order to assist in the fulfillment of the Equity
Holders' obligations under Section 12.2(a), Parent shall, at the beginning of
each calendar year, pay to the Equity Holders' Representatives the total sum of
$12,000. Upon the payment by Parent of the initial Milestone Payment or Earn-Out
Payment, Parent shall be entitled to reimbursement, prior to any payments to be
made to the Equity Holders pursuant to Section 1.5(b) and 1.5(c), of all amounts
previously paid to the Equity Holders' Representatives pursuant to this
subsection (b). In the event the Milestone Payment or Earn-Out Payments are not
sufficient to reimburse in full all amounts due to Parent under this subsection
(b), the amounts not reimbursed shall be carried forward and deducted from the
next payment(s) of Milestone Payment or Earn-Out Payment until all amounts due
to Parent hereunder have been reimbursed.
(c) After the initial distribution of the Milestone Payment or
Earn-Out Payments to the Equity Holders, to further assist in the fulfillment of
the Equity Holders' obligations under Section 12.2(a), Parent shall, at the
beginning of each calendar year, pay to the Equity Holders' Representatives out
of the Milestone Payment or Earn-Out Payments and prior
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to any payments to be made to the Equity Holders pursuant to Section 1.5(b) or
1.5(c), the total sum of $12,000.
(d) All compensation due the Equity Holders' Representatives
and all expenses incurred by the Equity Holders' Representatives in connection
with this Agreement that are not otherwise covered by the amounts to be paid to
the Equity Holders' Representatives under subsection (b) or subsection (c)
above, shall be paid by the Equity Holders pro rata in accordance with their
respective interests as Equity Holders. The Equity Holders' Representatives may
direct Parent to pay from any Earn-Out Payments or Milestone Payment otherwise
due to the Equity Holders, prior to such payment and pro rata among Equity
Holders in accordance with their respective interests as Equity Holders, any
amounts due the Equity Holders' Representatives pursuant to this subsection (d),
and Parent shall honor any such direction and pay to the Equity Holders only
such amounts, if any, remaining after making the payments to the Equity Holders'
Representatives required by this Section .
(e) No less than annually, the Equity Holders' Representatives
shall deliver to the Equity Holders a status report in reasonable detail with
respect to all matters affecting the Equity Holders' rights granted hereunder,
including any relevant information obtained by the Observer in connection with
such Observer's attendance at Board meetings.
12.3 SUCCESSION. Any Equity Holders' Representatives, or any successor
to him or her hereafter appointed, may resign and shall be prospectively
discharged of his or her duties. In case of such resignation, or the death or
inability to act of any such member, a successor or successors shall be named by
the remaining Equity Holders' Representatives or, if no replacement is so
appointed within forty-five (45) days of such resignation, death or inability to
act, by written agreement of the Equity Holders holding a majority of the
interests of the Equity Holders in the Earn-Out Payments and the Milestone
Payment. Each successor Equity Holders' Representatives shall have all the
power, authority, rights and privileges hereby conferred upon the original
Equity Holders' Representatives, and the Equity Holders' Representatives as used
herein shall be deemed to include such successor(s).
12.4 LIABILITY OF THE EQUITY HOLDERS' REPRESENTATIVES TO EACH OTHER AND
TO THE EQUITY HOLDERS. The Equity Holders' Representatives shall have no duties
or responsibilities except those expressly set forth in this Agreement. The
Equity Holders' Representatives may act upon any instrument or other writing
believed by them in good faith to be genuine and to be signed or presented by
the proper person and shall not be liable in connection herewith or therewith,
except for their own willful misconduct. The Equity Holders' Representatives may
retain counsel and act with respect to this Agreement and their obligations
hereunder on the advice of such counsel. The Equity Holders' Representatives
shall be, and each of them hereby is, jointly and severally indemnified and
saved harmless by the Equity Holders from all losses, liabilities, damages,
penalties, judgments, suits, costs and expenses (including legal fees) which
they, or any of them, may incur in connection with this Agreement, provided that
there shall be no such indemnification for any action taken or omitted by the
Equity Holders' Representatives, or any of them, for which they, or any of them,
shall have been adjudged to have committed willful misconduct. The Equity
Holders' Representatives shall not be responsible to the Equity
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Holders for any failure by any party hereto to perform their obligations
hereunder. As to any matters not expressly provided for in this Agreement, the
Equity Holders' Representatives shall in all cases be fully protected in acting,
or in refraining from acting, hereunder in accordance with the written
instructions of Equity Holders holding a majority of the interests of the Equity
Holders in the Earn-Out Payments and the Milestone Payment (including members of
the Equity Holders' Representatives), and such instructions or any action or
failure to act pursuant thereto shall be binding upon all Equity Holders.
12.5 RIGHT OF PARENT TO RELY; EXCULPATION OF PARENT. From and after the
Effective Time, Parent shall be entitled to deal exclusively with the Equity
Holders' Representatives on all matters relating to this Agreement, and shall be
entitled to rely conclusively (without further evidence of any kind whatsoever)
on any document executed or purported to be executed on behalf of any Equity
Holder by the Equity Holders' Representatives, and on any other action taken or
purported to be taken on behalf of any Equity Holder by the Equity Holders'
Representatives, as fully binding upon such Equity Holder. Parent may act upon
any directions, instrument or other writing presented by the Equity Holders'
Representatives and believed by Parent in good faith to be genuine and to be
signed or presented by the proper person and shall not be liable in connection
with any acts so undertaken by Parent.
13. MISCELLANEOUS PROVISIONS.
13.1 FURTHER ASSURANCES. Each party hereto shall execute and cause to
be delivered to each other party hereto such instruments and other documents,
and shall take such other actions, as such other party may reasonably request
(prior to, at or after the Closing) for the purpose of carrying out or
evidencing any of the transactions contemplated by this Agreement.
13.2 ARBITRATION. Any dispute, controversy or claim arising out of or
relating to the Earn-Out Payments, Milestone Payments or post-closing covenants
contained in Section 6 hereof, shall be settled by binding arbitration held in
Chicago, Illinois in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect.
13.3 FEES AND EXPENSES. Except as set forth in Section 1.5(a), each
party to this Agreement shall bear and pay all fees, costs and expenses
(including legal fees and accounting fees) that have been incurred or that are
incurred by such party in connection with the transactions contemplated by this
Agreement, including all fees, costs and expenses incurred by such party in
connection with or by virtue of (i) the investigation and review conducted by
Parent and its Representatives with respect to the Company's business (and the
furnishing of information to Parent and its Representatives in connection with
such investigation and review), (ii) the negotiation, preparation and review of
this Agreement (including the Disclosure Schedule) and all agreements,
certificates, opinions and other instruments and documents delivered or to be
delivered in connection with the transactions contemplated by this Agreement,
(iii) the preparation and submission of any filing or notice required to be made
or given in connection with any of the transactions contemplated by this
Agreement, and the obtaining of any Consent required to be obtained in
connection with any of such transactions, and (iv) the consummation of the
Merger.
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13.4 ATTORNEYS' FEES. If any action or proceeding relating to this
Agreement or the enforcement of any provision of this Agreement is brought
against any party hereto, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
13.5 NOTICES. Any notice or other communication required or permitted
to be delivered to any party under this Agreement shall be in writing and shall
be deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
IF TO PARENT:
4350 Executive Drive, Suite 325
San Diego, CA 92121
Attn: Chief Executive Officer
WITH A COPY TO:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attn: Carl R. Sanchez, Esq.
IF TO THE COMPANY:
313 Pleasant Street
Watertown, MA 02172
Attn: Chief Executive Officer
WITH A COPY TO:
Nutter, McClennen & Fish, LLP
One International Place
Boston, MA 02110
Attn: Constantine Alexander, Esq.
IF TO THE EQUITY HOLDERS' REPRESENTATIVES:
Tullis-Dickerson & Co., Inc.
1 Greenwich Plaza
Greenwich, CT 06830-6352
Attn: Thomas P. Dickerson
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WITH COPIES TO:
Battle Fowler LLP
75 East 55th Street
New York, NY 10022
Attn: Frank T. Cannone, Esq.
Nutter, McClennen & Fish, LLP
One International Place
Boston, MA 02110
Attn: Constantine Alexander, Esq.
IF TO BRIDGE DEBTHOLDERS:
Battle Fowler LLP
75 East 55th Street
New York, NY 10022
Attn: Thomas E. Kruger, Esq.
13.6 CONFIDENTIALITY. Without limiting the generality of anything
contained in Section 5.3, on and at all times after the Closing Date, each
Equity Holder and Bridge Debtholder shall keep confidential, and shall not use
or disclose to any other Person, any non-public document or other non-public
information in such Equity Holders' and Bridge Debtholders' possession that
relates to the business of the Company or Parent; provided, however, that the
obligations contained in this Section shall terminate as to any information
which is, or becomes, in the public domain other than as a result of any breach
of this Section .
13.7 TIME OF THE ESSENCE. Time is of the essence of this Agreement.
13.8 HEADINGS. The underlined headings contained in this Agreement are
for convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
13.9 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one agreement.
13.10 GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed in all respects by, the internal laws of the State of
Delaware (without giving effect to principles of conflicts of laws).
13.11 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon: the
Company and its successors and assigns (if any); Parent and its successors and
assigns (if any); and Merger Sub and its successors and assigns (if any). This
Agreement shall inure to the benefit of: the Company; the Equity Holders; the
Bridge Debtholders; Parent; Merger Sub; the Parent Indemnitees (subject to
Section 10.6); the Company Indemnitees; and the respective heirs,
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personal representatives, successors and assigns (if any) of the foregoing.
Parent may freely assign any or all of its rights under this Agreement
(including its indemnification rights under Section 10), and the Equity Holders,
Bridge Debtholders and EGS Securities Corp. may freely assign any or all of
their rights under this Agreement, in whole or in part, to any other Person
without obtaining the consent or approval of any other party hereto or of any
other Person.
13.12 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE. The rights and
remedies of the parties hereto shall be cumulative (and not alternative). The
parties to this Agreement agree that, in the event of any breach or threatened
breach by any party to this Agreement of any covenant, obligation or other
provision set forth in this Agreement for the benefit of any other party to this
Agreement, such other party shall be entitled (in addition to any other remedy
that may be available to it) to seek (a) a decree or order of specific
performance or mandamus to enforce the observance and performance of such
covenant, obligation or other provision, and (b) an injunction restraining such
breach or threatened breach.
13.13 WAIVER.
(a) No failure on the part of any Person to exercise any
power, right, privilege or remedy under this Agreement, and no delay on the part
of any Person in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising
out of this Agreement, or any power, right, privilege or remedy under this
Agreement, unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of such Person; and any such waiver shall not be applicable or have any
effect except in the specific instance in which it is given.
13.14 AMENDMENTS. This Agreement may not be amended, modified, altered
or supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto, except as otherwise
specifically contemplated by Section 12.1.
13.15 SEVERABILITY. In the event that any provision of this Agreement,
or the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
13.16 PARTIES IN INTEREST. Except for the provisions of Sections 1.5,
(including 1.5(a) and 1.5(e)(v) with respect to EGS Securities Corp.), 1.6,
1.10, 5.11, 10, 11 (with respect to indemnification) none of the provisions of
this Agreement is intended to provide any rights or remedies to any Person other
than the parties hereto and their respective successors and assigns (if any) and
the Bridge Debtholders to the extent contemplated by Section 13.19.
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13.17 ENTIRE AGREEMENT. This Agreement and the other agreements
referred to herein set forth the entire understanding of the parties hereto
relating to the subject matter hereof and thereof and supersede all prior
agreements and understandings among or between any of the parties relating to
the subject matter hereof and thereof; provided, however, that the Mutual
NonDisclosure Agreement shall not be superseded by this Agreement and shall
remain in effect in accordance with its terms until the earlier of (a) the
Effective Time, or (b) the date on which such Mutual Non-Disclosure Agreement is
terminated in accordance with its terms.
13.18 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to
the effect that ambiguities are to be resolved against the drafting party shall
not be applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(d) Except as otherwise indicated, all references in this
Agreement to "Sections " and "Exhibits" are intended to refer to Sections of
this Agreement and Exhibits to this Agreement.
13.19 BRIDGE DEBTHOLDERS AND OTHERS AS THIRD PARTY BENEFICIARIES.
Subject to the limitations set forth herein, the terms of this Agreement,
including without limitation, the representations and warranties of Parent and
Merger Sub contained in this Agreement are intended to benefit the Bridge
Debtholders and shall inure to and benefit such Bridge Debtholders as third
party beneficiaries. Solely with respect to the indemnification obligations of
Parent under Section 5.8, the persons referred to in Section 5.8 are intended to
be third party beneficiaries and such indemnification obligations shall inure to
and benefit such persons as third party beneficiaries. EGS Securities Corp. is
intended to be a third party beneficiary of the agreements contained in Section
1.5(a)(i), Section 1.5(a)(ii) and Section 1.5(e)(v) and Section 11 as such
sections apply to EGS Securities Corp. and such agreements shall inure to and
benefit EGS Securities Corp. as a third party beneficiary. The Equity Holders
are intended to be third party beneficiaries of the agreements contained in
Section 10 and Section 11 and such agreements shall inure to and benefit the
Equity Holders as third party beneficiaries.
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The parties hereto have caused this Agreement to be executed and
delivered as of the date first above written.
CYPRESS BIOSCIENCE, INC.,
a Delaware corporation
By:___________________________________________
Jay Kranzler, Chief Executive Officer
CYPRESS ACQUISITION SUB, INC.,
a Delaware corporation
By:___________________________________________
Jay Kranzler, Chief Executive Officer
PRP, INC.,
a Delaware corporation
By:___________________________________________
Name:________________________________
Title:_______________________________
SIGNATURE PAGE TO AGREEMENT AND
PLAN OF MERGER AND REORGANIZATION
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EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
ACQUISITION TRANSACTION. "Acquisition Transaction" shall mean any
transaction involving:
the sale, license, disposition or acquisition of all or a
material portion of the Company's business or assets (or any interest therein);
the issuance, disposition or acquisition of (i) any capital
stock or other equity security of the Company (other than common stock issued to
employees of the Company, upon exercise of Company Options or otherwise, in
routine transactions in accordance with the Company's past practices), (ii) any
option, call, warrant or right (whether or not immediately exercisable) to
acquire any capital stock or other equity security of the Company (other than
stock options granted to employees of the Company in routine transactions in
accordance with the Company's past practices), or (iii) any security, instrument
or obligation that is or may become convertible into or exchangeable for any
capital stock or other equity security of the Company;
any merger, consolidation, business combination,
reorganization or similar transaction involving the Company or any liquidation,
dissolution or winding up of the Company; or
the incurrence of any additional debt by or the encumbrance of
any assets of the Company not otherwise contemplated by the Agreement.
ADDITIONAL BRIDGE DEBT. "Additional Bridge Debt" shall have the meaning
set forth in Section 1.5(a)(i).
AFFILIATES. "Affiliates" shall mean any Person that directly, or
indirectly through one or more intermediaries, controls or is controlled by or
is under common control with, a specified Person.
AGREEMENT. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit A is attached (including the Disclosure
Schedule), as it may be amended from time to time.
ALLOCATION SCHEDULE. "Allocation Schedule" shall have the meaning set
forth in Section 1.5(e)(i).
AUDITOR. "Auditor" shall have the meaning set forth in Section
1.5(b)(v).
AUDITOR'S DECISION. "Auditor's Decision" shall have the meaning set
forth in Section 1.5(b)(v).
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BOARD. "Board" shall have the meaning set forth in Section 1.10.
BRIDGE DEBT. "Bridge Debt" shall mean the aggregate amount of all
outstanding indebtedness under Company Promissory Notes, plus all accrued and
unpaid interest and late charges, if any, thereon.
BRIDGE DEBTHOLDERS. "Bridge Debtholders" shall mean those Persons set
forth on Schedule 1.5(a).
CERTIFICATE OF MERGER. "Certificate of Merger" shall mean that document
set forth as Exhibit B of the Agreement.
CLOSING. "Closing" shall have the meaning set forth in Section 1.3.
CLOSING DATE. "Closing Date" shall have the meaning set forth in
Section 1.3.
CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended.
COMMON STOCK PERCENTAGE. "Common Stock Percentage" shall have the
meaning set forth in Section 1.5(e)(ii)(2).
COMPANY. "Company" shall mean PRP, Inc.
COMPANY CONTRACT. "Company Contract" shall mean any Contract: (a) to
which the Company is a party; (b) by which the Company or any of its assets is
or may become bound or under which the Company has, or may become subject to,
any obligation; or (c) under which the Company has or may acquire any right or
interest.
COMPANY FINANCIAL STATEMENTS. "Company Financial Statements" shall mean
those financial statements set forth in Section 2.4(a).
COMPANY INDEMNITEES. "Company Indemnitees" shall mean the following
Persons: (a) the Equity Holders; (b) the Bridge Debtholders; (c) the Company's
current Affiliates; (d) the respective Representatives of the Persons referred
to in clauses "(a)", "(b)" and "(c)" above; and (e) the respective successors
and assigns of the Persons referred to in clauses "(a)", "(b)", "(c)" and "(d)"
above.
COMPANY LIABILITIES SCHEDULE. "Company Liabilities Schedule" shall have
the meaning set forth in Section 2.11(c).
COMPANY OPTIONS. "Company Options" shall mean all issued and
outstanding options to purchase shares of the Company's Common Stock, whether
vested or unvested, granted pursuant to the Company's 1988 Stock Option Plan.
COMPANY OPTION PERCENTAGE. "Company Option Percentage" shall have the
meaning set forth in Section 1.5(e)(ii)(7).
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COMPANY PATENTS. "Company Patents" shall mean the U.S. and foreign
patents and patent applications set forth on Schedule 2.9(a) of the Disclosure
Schedule, including without limitation all substitutions, continuations,
continuations-in-part, reissues, renewals, divisions and extensions of such
patents and patent applications. In addition, for purposes of Section 1.5(b)
only, Company Patents shall include all foreign equivalents of the foregoing
patents and patent applications filed in any jurisdiction after the Closing
Date.
COMPANY PROMISSORY NOTES. "Company Promissory Notes" shall mean all
evidences of indebtedness of the Company held by the Bridge Debtholders.
COMPANY PROPRIETARY ASSET. "Company Proprietary Asset" shall mean any
Proprietary Asset owned by or licensed to the Company or otherwise used by the
Company.
COMPANY STOCK CERTIFICATE. "Company Stock Certificate" shall have the
meaning specified in Section 1.7.
COMPANY STOCKHOLDERS' MEETING. "Company Stockholders' Meeting" shall
have the meaning set forth in Section 5.2.
COMPANY WARRANTS. "Company Warrants" shall mean those certain warrants
to purchase shares of Series C Preferred Stock of the Company set forth on
Schedule 2.3.
COMPANY WARRANT PERCENTAGE. "Company Warrant Percentage" shall have the
meaning set forth in Section 1.5(e)(ii)(8).
CONSENT. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
CONTRACT. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan or legally binding commitment or undertaking of
any nature.
DAMAGES. "Damages" shall include any loss, damage, injury, liability,
claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including
reasonable attorneys' fees), charge, cost (including costs of investigation) or
expense of any nature. Damages shall not include lost profits, lost savings, or
other indirect, special, incidental or consequential damages whether such
damages are based on tort, contract, or any other legal theory, and even if the
Indemnitee has been advised of the possibility of such damages.
DISCLOSURE SCHEDULE. "Disclosure Schedule" shall mean the schedule
(dated as of the date of the Agreement) delivered to Parent on behalf of the
Company.
DISSENTING EQUITY HOLDERS. "Dissenting Equity Holders" shall have the
meaning set forth in Section 1.9.
DISTRIBUTION DATE. "Distribution Date" shall have the meaning set forth
in Section 1.5(b)(iii).
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EARN-OUT DIFFERENCE. "Earn-Out Difference" shall have the meaning set
forth in Section 1.5(b)(v).
EARN-OUT PAYMENT. "Earn-Out Payment" shall mean that amount as
calculated under Section 1.5(b).
EARN-OUT PERIOD. "Earn-Out Period" shall have the meaning set forth in
Section 1.5(b)(ii).
EARN-OUT PRODUCTS. "Earn-Out Products" shall mean any product covered
by Company Patents or is based substantially upon technology of the Company in
existence as of the Effective Time.
EFFECTIVE TIME. "Effective Time" shall be that time set forth in
Section 1.3.
EMPLOYEE. "Employee" shall have the meaning set forth in Section
2.15(a).
EMPLOYEE BENEFIT PLAN. "Employee Benefit Plan" shall have the meaning
set forth in Section 2.15(a).
ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
ENTITY. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
ENVIRONMENTAL LAW. "Environmental Law" shall mean any federal, state,
local or foreign Legal Requirement relating to pollution or protection of human
health or the environment (including ambient air, surface water, ground water,
land surface or subsurface strata), including any law or regulation relating to
emissions, discharges, releases or threatened releases of Materials of
Environmental Concern, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Materials of Environmental Concern.
EQUITY HOLDER. "Equity Holder" shall mean any holder, other than
Dissenting Equity Holders, of Company Common Stock, Company Non-Voting Preferred
Stock, Company Series A Preferred Stock, Company Series B Preferred Stock,
Company Series C Preferred Stock, Company Options or Company Warrants as set
forth on the Allocation Schedule delivered in accordance with Section 1.5(e)(i).
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EQUITY HOLDERS' REPRESENTATIVES. "Equity Holders' Representatives"
shall mean those persons specified in Section 12.1.
EQUITY HOLDERS' TOTAL. Equity Holders' Total shall have the meaning set
forth in Section 1.5(e)(ii)(1).
ERISA. "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
FDA APPROVABLE LETTER. "FDA Approvable Letter" shall mean an approvable
letter or other substantially similar form of approval from the United States
Food and Drug Administration relating to the approval of the use of IPM for the
treatment of thrombocytopenia.
GOVERNMENT BID. "Government Bid" shall mean any quotation, bid or
proposal submitted to any Governmental Body or any proposed prime contractor or
higher-tier subcontractor of any Governmental Body.
GOVERNMENT CONTRACT. "Government Contract" shall mean any prime
contract, subcontract, letter contract, purchase order or delivery order
executed or submitted to or on behalf of any Governmental Body or any prime
contractor or higher-tier subcontractor, or under which any Governmental Body or
any such prime contractor or subcontractor otherwise has or may acquire any
right or interest.
GOVERNMENTAL AUTHORIZATION. "Governmental Authorization" shall mean
any: (a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
GOVERNMENTAL BODY. "Governmental Body" shall mean any: nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
IPM. "IPM" shall mean Infusible Platelet Membrane(TM), the Company's
lead product in Phase II clinical trials.
ISSUANCE. "Issuance" shall have the meaning set forth in Section
10.2(a).
LEGAL PROCEEDING. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding),
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hearing, inquiry, audit, examination or investigation commenced, brought,
conducted or heard by or before, or otherwise involving, any court or other
Governmental Body or any arbitrator or arbitration panel.
LIQUIDATION PREFERENCE. "Liquidation Preference" shall have the meaning
set forth in Section 1.5(e)(iii).
LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
MATERIAL ADVERSE EFFECT. A violation or other matter will be deemed to
have a "Material Adverse Effect" on the Company or Parent if such violation or
other matter but for the presence of would have a material adverse effect on the
Company's or Parent's, as the case may be, business, condition, assets,
liabilities, operations, financial or performance.
MATERIAL CONTRACTS. "Material Contracts" shall mean those contracts
referred to in clauses (i) through (xiii) of Section 2.10(a).
MATERIALS OF ENVIRONMENTAL CONCERN. "Materials of Environmental
Concern" shall mean all chemicals, pollutants, contaminants, wastes, toxic
substances, petroleum and petroleum products and any other substance that is now
or hereafter regulated by any Environmental Law or that is otherwise a danger to
health, reproduction or the environment.
MERGER. "Merger" shall have the meaning set forth in Recital A.
MERGER SUB. "Merger Sub" shall mean Cypress Acquisition Sub, Inc.
MILESTONE PAYMENT. "Milestone Payment" shall have the meaning set forth
in Section 1.5(c)(i).
MUTUAL NONDISCLOSURE AGREEMENT. "Mutual Nondisclosure Agreement" shall
mean such agreement between Parent and the Company.
NASD. "NASD" shall mean the National Association of Securities Dealers,
Inc.
NASDAQ. "Nasdaq" shall mean the National Association of Securities
Dealers Automatic Quotation System.
NASDAQ/NMS. "Nasdaq/NMS" shall mean the Nasdaq National Market System.
NON-VOTING PREFERRED STOCK PERCENTAGE. "Non-Voting Preferred Stock
Percentage" shall have the meaning set forth in Section 1.5(e)(ii)(3).
OBSERVER. "Observer" shall have the meaning set forth in Section 1.10.
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OBSERVER RIGHTS. "Observer Rights" shall have the meaning set forth in
Section 1.10.
PARENT. "Parent" shall mean Cypress Bioscience, Inc.
PARENT INDEMNITEES. "Indemnitees" shall mean the following Persons: (a)
Parent; (b) Parent's current and future Affiliates (including the Surviving
Corporation); (c) the respective Representatives of the Persons referred to in
clauses "(a)" and ("b") above; and (d) the respective successors and assigns of
the Persons referred to in clauses "(a)", "(b)" and "(c)" above.
PARENT SEC DOCUMENTS. "Parent SEC Documents" shall have the meaning set
forth in Section 3.14.
PENSION PLAN. "Pension Plan" shall have the meaning set forth in
Section 2.15(b).
PERSON. "Person" shall mean any individual, Entity or Governmental
Body.
PRE-CLOSING PERIOD. "Pre-Closing Period" shall have the meaning set
forth in Section 4.1.
PRE-TRANSACTION LIABILITIES. "Pre-Transaction Liabilities" shall have
the meaning set forth in Section 2.11(d).
PRIVATE PLACEMENT. "Private Placement" shall mean the financing
transaction undertaken by Parent in connection with the transactions
contemplated under this Agreement and completed in connection with the execution
of this Agreement pursuant to which Parent sells Units of Parent to certain
investors for minimum aggregate gross proceeds of no less than $4,000,000.
PROPRIETARY ASSET. "Proprietary Asset" shall mean any: (a) patent,
patent application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, invention, design, blueprint, engineering drawing,
proprietary product, technology, proprietary right or other intellectual
property right or intangible asset; or (b) right to use or exploit any of the
foregoing.
REGISTRATION PERIOD. "Registration Period" shall have the meaning set
forth in Section 10.2(c)
REGISTRATION STATEMENT. "Registration Statement" shall have the meaning
set forth in Section 10.2(a).
RELATED PARTY. "Related Party" shall have the meaning set forth in
Section 2.18.
REPRESENTATIVES. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
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SEC. "SEC" shall mean the United States Securities and Exchange
Commission.
SECURITIES. "Securities" shall have the meaning set forth in Section
11.1.
SECURITIES ACT. "Securities Act" shall mean the Securities Act of 1933,
as amended.
SELLING SECURITYHOLDER. "Selling Securityholder" shall have the meaning
set forth in Section 10.4(a).
SERIES A PREFERRED STOCK PERCENTAGE. "Series A Preferred Stock
Percentage" shall have the meaning set forth in Section 1.5(e)(ii)(4)
SERIES B PREFERRED STOCK PERCENTAGE. "Series B Preferred Stock
Percentage" shall have the meaning set forth in Section 1.5(e)(ii)(5).
SERIES C PREFERRED STOCK PERCENTAGE. "Series C Preferred Stock
Percentage" shall have the meaning set forth in Section 1.5(e)(ii)(6).
SURVIVING CORPORATION. "Surviving Corporation" shall have the meaning
set forth in Section 1.1.
TAX. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
TAX RETURN. "Tax Return" shall mean any return (including any
information return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
THIRD PARTY. "Third Party" shall mean any entity or person other than
Parent, Merger Sub, or their Affiliates.
TOTAL NET SALES. "Total Net Sales" shall mean all amounts invoiced by
Parent, its Affiliates or licensees in connection with worldwide sales of
Earn-Out Products to independent third parties calculated in United States
Dollars (provided that where payments in respect of Total Net Sales are based on
Total Net Sales in non-U.S. currencies, the amount of Total Net Sales and any
deductions used to calculate Total Net Sales, if any, shall be converted monthly
to United States dollars at the average daily "bid" and "asked" exchange rates
as provided by Reuters for the applicable month), less deductions for: (i)
transportation charges, including insurance relating thereto; (ii) sales and
excise taxes or customs duties and any other
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governmental charges imposed upon the sale of Earn-Out Products; (iii) rebates
or allowances actually granted, allowed or incurred; (iv) quantity discounts,
cash discounts or chargebacks actually granted, allowed or incurred in
connection with the sale of Earn-Out Products; (v) allowances or credits to
customers, in each case not in excess of the selling price of Earn-Out Products,
on account of governmental requirements, rejection, outdating, recalls or
return. All amounts recovered by Parent in connection with any judgment, award,
decree or settlement from any successful patent infringement claims, as set
forth in Section 6.2(b) shall be added to Total Net Sales. Notwithstanding the
foregoing, sales of Earn-Out Products between Parent and its Affiliates shall be
excluded from the computation of Total Net Sales. In the event of a sale by
Parent or an affiliate of Parent to an affiliate of Parent or licensee of
Parent, only the subsequent sale by the affiliate or licensee will be included
in Total Net Sales. In the event any Earn-Out Product is sold in the form of a
combination product (the "Combination Product") containing one or more active
ingredients or medical devices acquired from the Company pursuant to this
Agreement (the "Company Contributed Product") and one or more active ingredients
or medical devices of Parent (the "Parent Contributed Product"), Total Net Sales
of such Combination Product will be calculated by multiplying actual Total Net
Sales of such Combination Product by the fraction A/(A+B), where A is the
invoice price of the Company Contributed Product if sold separately, and B is
the total invoice price of any Parent Contributed Product used in the
Combination Product if such Parent Contributed Product is sold separately. If on
a country-by-country basis, Parent Contributed Product is not sold separately in
said country, Total Net Sales for the purposes of determining Earn-Out Payments
to be paid on sales of the Combination Product shall be calculated by
multiplying actual Total Net Sales of the Combination Product by the fraction
A/C, where A is the invoice price of the Company Contributed Product, if sold
separately, and C is the invoice price of the Combination Product. If on a
country-by-country basis, neither the Company Contributed Product nor Parent
Contributed Product is sold separately in said country or the alternatives
provided above are otherwise inapplicable, Total Net Sales for the purposes of
determining Earn-Out Payments due on the sales of the Combination Products shall
be determined by the parties in good faith.
UNAUDITED INTERIM BALANCE SHEET. "Unaudited Interim Balance Sheet"
Shall have the meaning set forth in Section 2.4(a)(ii).
UNIT. "Unit" shall mean and consist of two shares of Common Stock of
Parent and one warrant to purchase one share of Common Stock of Parent in the
form issued by Parent to purchasers of Units of Parent in the Private Placement.
The valuation of the Units for the purposes of this Agreement and the issuance
of Units to the Bridge Debtholders in accordance with Section 1.5(a) of the
Agreement shall be the same as that of the Units issued in the Private
Placement.
WELFARE PLAN. "Welfare Plan" shall have the meaning set forth in
Section 2.15(c).
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EXHIBITS
Exhibit A - Definitions
Exhibit B - Certificate of Merger
Exhibit C - Certificate of Incorporation of Surviving Corporation
Exhibit D - Directors and Officers of Surviving Corporation
Exhibit E - Form of Exchange of Bridge Debt and Warrant Termination Agreement
Exhibit F - Form of Equity Holder's Consent and Release
Exhibit G - Form of Opinion of Nutter, McClennen & Fish, LP
Exhibit H - Form of Lock-Up Agreement
Exhibit I - Form of Opinion of Cooley Godward LLP
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 23, 1996, in Amendment No. 1 to the Registration
Statement (Form S-3) and related Prospectus of Cypress Bioscience, Inc. for the
registration of shares of its common stock.
/s/ Ernst & Young LLP
-----------------------------
ERNST & YOUNG LLP
Seattle, Washington
November 8, 1996
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement on
Form S-3 dated November 4, 1996 (No. 333-15483) of our report dated March 15,
1994 on our audit of the consolidated statements of operations, cash flows and
stockholders' equity of IMRE Corporation for the year ended December 31, 1993,
which report is included in the Annual Report on Form 10-K for the year ended
December 31, 1995 which is incorporated herein by reference. We also consent to
the reference to our Firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
- -----------------------------
COOPERS & LYBRAND L.L.P.
Seattle, Washington
November 8, 1996
