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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1999
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to ____________________
Commission file number 0-19724
PROTEIN POLYMER TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0311631
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10655 Sorrento Valley Road, San Diego, CA 92121
(Address of principal executive offices)
(619) 558-6064
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
-----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 1, 1999, 13,443,510
shares of common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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PROTEIN POLYMER TECHNOLOGIES, INC.
FORM 10-QSB
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets -
September 30, 1999 and December 31, 1998................... 3
Condensed Statements of Operations -
For the Three and Nine Months ended September 30, 1999
and 1998 and the period July 6, 1988 (inception) to
September 30, 1999......................................... 4
Condensed Statements of Cash Flows -
For the Nine Months ended September 30, 1999
and 1998 and the period July 6, 1988 (inception)
to September 30, 1999...................................... 5
Notes to Condensed Financial Statements.................... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 15
Signature.................................................. 16
2
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PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 997,920 $ 1,383,148
Short-term investments - -
Other current assets 49,205 66,459
------------ ------------
Total current assets 1,047,125 1,449,607
Deposits 36,977 36,177
Notes receivable from officers 140,000 141,000
Equipment and leasehold improvements, net 409,811 598,447
------------ ------------
$ 1,633,913 $ 2,225,231
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 108,362 $ 515,413
Accrued employee benefits 29,640 167,849
Other accrued expenses 37,807 21,574
Current portion capital lease obligations 81,284 84,518
Deferred rent 60,668 60,668
------------ ------------
Total current liabilities 317,761 850,022
Long-term portion capital lease obligations 46,339 105,548
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, 188,917 shares
authorized, 91,065 and 79,202 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively;
liquidation preference - $9,106,500 and $7,480,200, at
September 30, 1999 and December 31, 1998, respectively 8,761,072 7,600,226
Common stock, $.01 par value, 25,000,000 shares
authorized,13,443,510 and 10,827,240 shares issued and
outstanding at September 30, 1999 and December 31, 1998,
respectively 134,447 108,274
Additional paid-in capital 28,397,157 26,549,125
Deficit accumulated during development stage (36,022,862) (32,987,964)
------------ ------------
Total stockholders' equity 1,269,813 1,269,661
------------ ------------
$ 1,633,913 $ 2,225,231
============ ============
</TABLE>
See accompanying notes.
3
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PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 6, 1988
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ----------------------------- --------------
1999 1998 1999 1998 1999
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue $ 2,320 $ - $ 2,320 $ 50,000 $ 4,357,285
Interest income 10,017 41,772 29,575 90,337 1,110,504
Product and other income 14,111 6,725 50,627 41,019 680,641
----------- ----------- ----------- ----------- --------------
Total revenues 26,448 48,497 82,522 181,356 6,148,430
Expenses:
Cost of sales (145) - (467) 4,373 279,212
Research and development 498,614 1,123,299 1,946,693 3,040,682 23,331,947
Selling, general and
administrative 285,454 378,624 1,158,693 1,304,681 14,314,995
Royalties - 6,250 12,500 18,750 302,671
----------- ----------- ----------- ----------- --------------
Total expenses 783,923 1,508,173 3,117,419 4,368,486 38,228,825
----------- ----------- ----------- ----------- --------------
Net loss (757,475) (1,459,676) (3,034,897) (4,187,130) (32,080,395)
----------- ----------- ----------- ----------- --------------
Undeclared, imputed
and/or paid dividends
on preferred stock 69,220 69,410 207,659 3,474,913 5,169,674
----------- ----------- ----------- ----------- --------------
Net loss applicable to
common shareholders $ (826,696) $(1,529,086) $(3,242,556) $(7,662,043) $ (37,250,069)
=========== =========== =========== =========== ==============
Basic and diluted net loss
per common share $ (0.06) $ (0.14) $ (0.26) $ (0.73)
=========== =========== =========== ===========
Shares used in computing
basic and diluted net
loss per common share 13,367,249 10,575,811 12,280,147 10,492,508
========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
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PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 6, 1988
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------
1999 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,034,897) $(4,187,130) $(32,080,395)
Adjustments to reconcile net loss to net cash
used for operating activities:
Stock issued for compensation and interest 18,000 37,500 122,895
Interest expense associated with issuance
of warrant 2,700 - 2,700
Depreciation and amortization 214,736 273,697 1,843,032
Write-off of purchased technology - - 503,500
Changes in assets and liabilities:
Deposits (800) (860) (36,977)
Notes receivable from officers 1,000 9,000 (140,000)
Other current assets 17,254 23,020 (49,205)
Accounts payable (407,051) (23,282) 108,362
Accrued employee benefits (138,209) (2,483) 29,640
Other accrued expenses 16,233 (20,430) 37,807
Deferred rent - - 60,668
----------- ----------- ------------
Net cash used for operating activities (3,311,034) (3,890,968) (29,597,973)
INVESTING ACTIVITIES
Purchase of technology - - (570,000)
Purchase of equipment and improvements (26,100) (188,038) (1,810,814)
Purchases of short-term investments - (893,180) (16,161,667)
Sales of short-term investments - 974,817 16,161,667
----------- ----------- -------------
Net cash used for investing activities $ (26,100) $ (106,401) $ (2,380,814)
</TABLE>
See accompanying notes.
5
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PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
FOR THE PERIOD
JULY 6, 1988
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------
1999 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net proceeds from exercise of options and
warrants, and sale of common stock $ 939,754 $ 117,311 $ 17,537,666
Net proceeds from issuance of preferred
stock 2,074,595 5,277,813 14,290,160
Net proceeds from convertible notes and
detachable warrants - - 1,068,457
Payment on capital lease obligations (62,443) (55,496) (161,149)
Payment on note payable (150,000) - (242,750)
Proceeds from note payable 150,000 - 484,323
---------- ---------- -------------
Net cash used for financing activities 2,951,906 5,339,628 32,976,707
---------- ---------- -------------
Net increase (decrease) in cash and cash
equivalents (385,228) 1,342,259 997,920
Cash and cash equivalents at beginning of
period 1,383,148 325,021 -
---------- ---------- -------------
Cash and cash equivalents at end of period $ 997,920 $1,667,280 $ 997,920
========== ========== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Equipment purchased by capital leases $ - $ - $ 288,772
Interest paid 16,592 20,848 114,520
Imputed dividend on Series E stock - - 3,266,250
Conversion of Series D preferred stock to
Series F preferred stock - 2,497,795 2,497,795
Conversion of Series D preferred stock to
common stock - 44,990 2,142,332
Conversion of Series E preferred stock to
common stock 913,750 1,213,750
Series D stock issued for Series C stock - 2,073,925
Series C dividends paid with Series D stock - - 253,875
Series D dividends paid with common stock $ - $ - $ 422,341
</TABLE>
See accompanying notes.
6
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PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(unaudited)
September 30, 1999
1. BASIS OF PRESENTATION
The condensed financial statements of Protein Polymer Technologies, Inc. (the
"Company") for the three and nine months ended September 30, 1999 and 1998 are
unaudited. These financial statements reflect all adjustments, consisting of
only normal recurring adjustments which, in the opinion of management, are
necessary to state fairly the financial position at September 30, 1999 and the
results of operations for the three and nine months ended September 30, 1999 and
1998. The results of operations for the three and nine months ended September
30, 1999 are not necessarily indicative of the results to be expected for the
year ended December 31, 1999. For more complete financial information, these
financial statements and the notes thereto should be read in conjunction with
the audited financial statements included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. The net loss figures used for this
calculation recognize accumulated dividends on the Company's Series D and Series
F Preferred Stock. Such dividends are payable when declared by the Board of
Directors in cash or common stock.
3. BASIC AND DILUTED LOSS PER SHARE
As required, the Company adopted Financial Accounting Standards Board Statement
No. 128, "Earnings Per Share," ("FAS No. 128") during 1998. FAS No. 128 changes
the method used to calculate earnings per share and requires the restatement of
all prior periods reported. Under FAS No. 128, the Company is required to
present basic and diluted earnings per share if applicable. Basic and diluted
earnings per share are determined based on the weighted average number of shares
outstanding during the period. Diluted earnings per share also includes
potentially dilutive securities such as options and warrants outstanding and
securities convertible into common stock.
Both the basic and diluted loss per share for the three and nine months ended
September 30, 1999 and 1998 are based on the weighted average number of shares
of common stock outstanding during the periods. Since potentially dilutive
securities have not been included in the calculation of the diluted loss per
share for both periods as their affect is antidilutive, there is no difference
between the basic and diluted loss per share calculations.
4. NOTE RECEIVABLE WITH OFFICER
A loan for $140,000, secured by a pledge of stock, was made to an officer of the
Company on April 16, 1997, solely to meet tax obligations arising from the
exercise of a stock option. Interest accrues at the annual rate of 8% on the
unpaid principal balance. In July 1999, the loan term was extended for five
years. All remaining principal and accrued interest thereon is to be paid to the
Company in full by April 2005.
7
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5. EXERCISE OF WARRANTS
Between April 1 and April 15, 1999, the Company received approximately $508,000
from the exercise of redeemable, publicly traded, warrants originally issued as
part of PPTI's Initial Public Offering. Following the close of business on April
15, the remaining unexercised redeemable, publicly traded, warrants expired. On
May 12, 1999, the Company received approximately $416,000 from the exercise of
warrants issued in conjunction with the private placement of the Company's
Series E Convertible Preferred Stock.
6. SERIES G PREFERRED STOCK OFFERING
On August 16, 1999, the Company received $1,775,000 for 17,750 shares of Series
G Preferred Stock from several institutional and accredited individual
investors. On September 15, 1999, the Company received an additional $325,000
for 3,250 shares of Series G Preferred Stock, for total proceeds of $2,100,000.
Each share of Series G Convertible Preferred Stock was priced at $100 per share.
Each share can be converted at any time by the holder into common stock at a
price of $0.50 per share, subject to certain antidilution adjustments. Each
share of Preferred Stock also receives a common stock warrant, exercisable for
12 months, that allows the holder to acquire 200 shares of PPTI common stock at
a price of $0.50 per share. The Preferred Stock, warrants and underlying common
stock have not been registered under the Securities Act of 1933, as amended, and
may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements.
7. NASDAQ DELISTING; TRADING CONDUCTED IN THE OVER-THE-COUNTER MARKET
The Company's Common Stock was delisted from the NASDAQ Small Cap Quotation
System, effective September 20, 1999. The reasons for the delisting were failure
to maintain the minimum bid requirement of $1.00 per share for PPTI common
stock, and failure to meet the minimum net asset requirement of $2 million. The
Company's Common Stock is now traded on "over-the-counter" NASD Bulletin Board.
8. LIQUIDITY
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company believes its existing
available cash and cash equivalents as of September 30, 1999 are sufficient to
meet its anticipated capital requirements until February 2000, including the on-
going external expenses associated with the conduct of pilot human clinical
trials of the Company's product for the treatment of female stress urinary
incontinence. Substantial additional capital resources will be required to fund
continuing expenditures related to the Company's research, development and
product marketing activities. If adequate funds are not available in the future,
the Company will be required to significantly curtail its operating plans and
may have to sell or license out significant portions of the Company's technology
or potential products.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this Quarterly
Report on Form 10-QSB constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements of the Company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by forward-looking statements.
Such risks and uncertainties include, among others, history of operating losses,
raising adequate capital for continuing operations, early stage of product
development, compliance with NASDAQ listing requirements, scientific and
technical uncertainties, competitive products and approaches, reliance upon
collaborative partnership agreements and funding, regulatory testing and
approvals, patent protection uncertainties and manufacturing scale-up. While
these statements represent management's current judgment and expectations for
the Company, such risks and uncertainties could cause actual results to differ
materially from any future results suggested herein. The Company undertakes no
obligation to release publicly the results of any revisions to these forward-
looking statements to reflect events or circumstances arising after the date
hereof. The reader is encouraged to refer to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, as well as other recent filings
with the Securities and Exchange Commission, to ascertain the risks associated
with these statements.
GENERAL OVERVIEW
Protein Polymer Technologies, Inc., a Delaware corporation ("PPTI" or "the
Company"), is a development-stage biotechnology company incorporated on July 6,
1988 and is engaged in the research, development and production of medical
products based on its proprietary protein-based biomaterials technology. The
Company has been unprofitable to date, and has an accumulated deficit of
$36,020,000. Since 1992, the Company has primarily focused on developing
materials technology and products to be used in the surgical repair of tissue:
soft tissue augmentation; surgical adhesives and sealants; wound healing and
tissue engineering matrices; and drug delivery devices. The Company also has
developed coating technology that can efficiently modify and improve the surface
properties of more traditional biomedical devices. A common goal is to develop
materials that beneficially interact with human cells, enabling cell growth and
the regeneration of tissues with improved outcomes as compared to current
products and practices.
In December 1998, the Company filed its first Investigational Device Exemption
("IDE") with the U.S. Food and Drug Administration ("FDA") to request approval
to begin human clinical testing of its urethral bulking agent for the treatment
of female stress urinary incontinence. In May 1999, the FDA approved the IDE
conditionally and in August, gave the IDE full approval. The Company expects to
start enrolling patients in these clinical trials during the 4th Quarter of
1999. The Company intends to submit an additional IDE to the FDA in the first
quarter of 2000 to request approval to begin human clinical testing of its
dermal bulking agent for use in cosmetic and reconstructive surgery
applications. PPTI began studies of what it believes to be its most promising
biomaterial formulations for use in these soft tissue augmentation products in
1997 and has devoted increasing resources to this program area through 1998 and
1999 in preparation for beginning human clinical testing.
On June 30, 1999, the Company laid off eighteen employees, approximately 60% of
its work force, as part of a broad cost cutting measure to preserve cash. In
late July, several employees
9
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were brought back on the payroll in order to prevent delays in beginning the
clinical testing of the Company's lead product, scheduled to begin in December,
1999. In addition, a number of remaining employees agreed to take 50% of their
salary in the form of a promissory note until the current cash balance was
improved, and reductions in non-employee expenditures across the board have been
taken. With the closing of the Series G Preferred stock offering, several of the
laid off employees were rehired. All current employees are receiving full salary
and all promisory notes have been paid. There can be no assurance that these
employees will choose to remain with the Company, or that there will not be
further personnel changes. As of September 30, 1999, the Company had 19 full
time and 2 part time employees.
Between 1994 and 1997, the Company's efforts were focused predominantly on the
development of its surgical adhesive and sealant technology. As part of this
effort, the Company targeted the establishment of a strategic alliance with a
market leader in the field of surgical wound closure products which lead to the
execution of comprehensive license, supply and development agreements in
September 1995, with Ethicon, Inc. ("Ethicon"), a subsidiary of the Johnson &
Johnson Company ("J&J"). Ethicon elected to terminate these agreements in
December 1997.
PPTI is committed to the commercial development of its adhesive and sealant
technology. The Company has demonstrated both the adhesive performance and the
biocompatibility of its product formulations in animal models, including the
resorption of the adhesive matrix in conjunction with the progression of wound
healing. Following the termination of the Ethicon agreements, the Company worked
to determine the specific markets and products providing the most significant
opportunities for its use. As a result, the Company currently is focusing
project activities on the development of products to repair spinal discs for the
treatment of chronic lower back pain. PPTI is seeking to establish a strategic
alliance with a leader in the market for such products.
To the extent sufficient resources are available, the Company will continue to
research the use of its protein polymers for other tissue repair and medical
device applications, principally for use in tissue engineering matrices and drug
delivery devices.
PPTI is aggressively pursuing domestic and international patent protection for
its technology, making claim to an extensive range of recombinantly prepared
structural and functional proteins, methods for preparing synthetic repetitive
DNA, methods for the production and purification of protein polymers, end-use
products incorporating such materials and methods for their use. To date, the
United States Patent and Trademark Office ("USPTO") has issued fourteen patents
to the Company, eight of which were issued in 1998. In addition, PPTI has filed
corresponding patent applications in most other relevant commercial
jurisdictions.
In 1992, the Company raised approximately $8.9 million through its initial
public offering of common stock and redeemable warrants. The Company used a
major portion of these proceeds to generate substantive in vitro laboratory
evidence and in vivo animal test data demonstrating the biocompatibility and
performance of its protein polymers and derived biomaterials, and to establish a
materials science group which has developed important materials modification and
fabrication technology.
In July 1994, the Company raised approximately $2.1 million from the sale of its
unregistered Series C Preferred Stock to private investors. In September 1995,
the Company raised approximately $2.4 million from the sale of its unregistered
Series D Preferred Stock to the same private investors. Also at this time these
investors exchanged all of their holdings of Series C Preferred Stock and
accumulated dividends into Series D Preferred Stock. In January 1997, the
Company raised approximately $4.6 million from a private placement of the
Company's common stock with a number of institutional and accredited investors.
10
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In April and May 1998, the Company raised approximately $5.4 million from the
sale of 54,437.5 shares of the Company's unregistered Series E Convertible
Preferred Stock ("Series E Stock") priced at $100 per share with warrants to
purchase an aggregate of 3,266,250 shares of common stock to a small group of
institutional and accredited investors. In connection with this transaction, the
Company issued 26,240 shares of Series F Convertible Preferred Stock in exchange
for the same number of shares of outstanding Series D Convertible Preferred
Stock.
In April 1999 the Company received approximately $508,000 from the exercise of
redeemable, publicly traded, warrants issued as part of the initial public
offering. In May 1999 the Company received $416,000 from the exercise of
warrants issued in conjunction with the sale of its Series E Convertible
Preferred Stock.
In August and September 1999, the Company raised approximately $2.1 million from
the sale of 21,000 shares of the Company's unregistered Series G Preferred Stock
priced at $100 per share with warrants to purchase an aggregate of 4,200,000
shares of common stock to a small group of institutional and accredited
individual investors.
The Company's strategy with most of its programs is to enter into collaborative
development agreements with major medical product marketing and distribution
companies. Although these relationships, to the extent any are consummated, may
provide significant near-term revenues through up front licensing fees, research
and development reimbursements and milestone payments, the Company expects to
continue incurring operating losses for several more years. In their report for
the year ended December 31, 1998, our independent auditors stated that without
additional financing, there is substantial doubt about our ability to continue
as a going concern. We believe there are a number of alternatives available to
meet our continuing capital requirements. See the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations for further discussion.
RESULTS OF OPERATIONS
Since the termination of the R&D agreements with Ethicon in December 1997, the
Company has received minimal contract research revenue. Contract revenue for the
three months and the nine months ended September 30, 1999 was $2,300.
Interest income was $10,000 for the three months ended September 30, 1999,
versus $42,000 for the same period in 1998. Interest income for the nine months
ended September 30, 1999 and 1998 were $30,000 and $90,000 respectively. The
decreases resulted from less cash available for investing.
For the three months ended September 30, 1999 and 1998, sales and license fees
of the Company's ProNectin(R) and SmartPlastic(R) products were $14,000 and
$6,700, respectively, and for the nine month period ended September 30, 1999 and
1998 were $51,000 and $41,000 respectively. Although there has been a slow
growth in sales, the differences are due primarily to fluctuations in reorders
by distributors.
Research and development expenses for the three and nine months ended September
30, 1999 were $499,000 and $1,947,000 respectively, compared to $1,123,000 and
$3,041,000 respectively for the same period in 1998, decreases of 56% and 36%
respectively. Throughout 1999 the Company has been systematically increasing the
focus of its efforts and reducing its expenditures across the board, including
personnel downsizing. The decrease is also attributable to completion of
external contracts and consulting services related to the Company's soft tissue
augmentation program, including preclinical testing and preparation of the
Investigational Device Exemption submitted to the Food and Drug Administration
("FDA") in December 1998. However, external expenses are expected to increase as
the Company begins the clinical testing
11
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of its urethral bulking product later this year. In the future, the Company
expects, in general, that its research and development expenses will continue to
increase over time if its other products in development and other contemplated
projects successfully progress and additional capital is obtained.
Selling, general and administrative expenses for the three and nine months ended
September 30, 1999 were $285,000 and $1,159,000 respectively, as compared to
$379,000 and $1,305,000 for the same periods in 1998. Although baseline
expenditures have decreased, the total selling, general and administrative
expenditures remained similar to previous periods due to increases in legal and
other professional services primarily related to Securities and Exchange
Commission filings and other regulatory expenses. In general, the Company
expects its selling, general and administrative expenses to continue to decrease
in the near term, but will increase in the future as support for its research
and development efforts may require and to the extent additional capital is
obtained.
For the three months ended September 30, 1999, the Company recorded a net loss
applicable to common shareholders of $827,000, or $0.06 per share compared to a
loss of $1,529,000, or $0.14 per share for the same period in 1998. For the nine
months ended September 30, 1999, the Company recorded a net loss applicable to
common shareholders of $3,243,000, or $0.26 per share compared to a loss of
$7,662,000 or $0.73 per share for the same period in 1998. Included in the net
loss figures for the nine month period of 1998 were imputed non-cash dividends
of $3,266,000 to record the difference between the conversion price of the newly
issued Series E preferred stock and the fair market value of the common stock on
the preferred stock issuance date. Also included in each of the three and nine
month periods of 1999 and 1998 was $69,000 and $208,000 respectively, for
undeclared dividends related to the Company's preferred stock.
The Company expects to incur similar or increasing operating losses in the
future (to the extent additional capital is obtained), due primarily to
increases in the Company's soft tissue augmentation program's development,
manufacturing and business development activities. The Company's results depend
on its ability to establish strategic alliances and generate contract revenues,
increased research, development and manufacturing efforts, preclinical and
clinical product testing and commercialization expenditures, expenses incurred
for regulatory compliance and patent prosecution, and other factors. The
Company's results will also fluctuate from period to period due to timing
differences.
To date the Company believes that inflation and changing prices have not had a
material effect on its continuing operations.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash, cash equivalents and short-term
investments of $998,000 as compared to $1,383,000 at December 31, 1998. As of
September 30, 1999, the Company had working capital of $729,000 as compared to
$600,000 at December 31, 1998. In August and September 1999, the Company
received approximately $2,100,000 from the private placement of the Company's
Series G Convertible Preferred Stock.
The Company had long-term debt obligations as of September 30, 1999 of $46,000
in the form of capital lease obligations, versus $106,000 as of December 31,
1998. For the nine months ending September 30, 1999, the Company's expenditures
for capital equipment and leasehold improvements totaled $26,100 compared with
$188,000 for the same period last year. The Company is expecting to increase its
capital expenditures in the next few quarters (to the extent additional capital
is obtained), as the Company improves existing space to expand capacity to meet
materials manufacturing requirements for clinical testing. The Company may enter
into additional capital lease arrangements if available at appropriate rates and
terms.
12
<PAGE>
Substantial additional capital resources will be required to fund continuing
expenditures related to the Company's research, development, manufacturing and
business development activities. The Company believes there may be a number of
alternatives to meeting the continuing capital requirements of its operations,
including collaborative agreements and additional public or private financings.
The Company is currently in discussions at various stages with several potential
collaborative partners that, based on the results of various in vitro and in
vivo product performance evaluations, could result in generating revenues in the
form of license fees, milestone payments or research and development
reimbursements. For example, the Company is in discussions with potential
strategic partners regarding the provision of cash and services in return for
product marketing rights following FDA approvals. The extent to which these
partnership arrangements are realized is expected to decrease the amount of cash
the Company will have to spend each quarter. However, there can be no assurance
that any of these fundings will be consummated in the necessary time frames
needed for continuing operations or on terms favorable to the Company. If
adequate funds are not available, the Company will be required to significantly
curtail its operating plans and may have to sell or license out significant
portions of the Company's technology or potential products.
YEAR 2000 COMPLIANCE
The Company continues to modify its information technology in recognition of the
year 2000 issue. The "Year 2000" issue concerns potential exposure related to
the interruption of business practice and financial misinformation resulting
from the application of computer programs which have been written using two
digits, rather than four, to define the applicable year of business
transactions.
The Company has undertaken initiatives to ensure that its computer systems are
Year 2000 compliant. To date, the Company has not incurred any material costs in
connection with its Year 2000 plan. Based on its assessments to date, the
Company does not expect to incur any further significant costs, or anticipate
any significant problems or uncertainties associated with becoming Year 2000
compliant.
The following is a breakdown by phase of the progress the Company has made to
date on its Year 2000 plan:
Phase Timeframe % Complete
Initial identification and assessment Q-4 1998 95%
Remediation Q-4 1998 95%
Testing Q-4 1999 95%
Contingency planning Q-4 1999 80%
The Company is reliant on its vendors and suppliers and may be reliant on
strategic partners to provide Year 2000 compliant systems prior to December 31,
1999. The Company is in the process of surveying all of its major vendors and
suppliers to determine whether their systems are Year 2000 compliant. At this
time, the impact on the Company of significant vendors and suppliers not being
in full compliance cannot be reasonably estimated. However, the Company believes
that any of its vendors and suppliers can be replaced with minimal cost impact.
The Company is developing a plan to mitigate the impact of vendors and suppliers
who are not in compliance with issues related to the Year 2000.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit
Number Description
------ -----------
10.38 Securities Purchase Agreement related to the sale of the
Company's Series G Convertible Preferred Stock
10.39 Form of Warrant to Purchase Common Stock issued in connection
with the Series G Preferred Stock
10.40 Second Amendment to Stockholder Protection Agreement, dated July
26, 1999 between the Company and Continental Stock Transfer and
Trust Company as rights agent
27 Financial Data Schedule
b. Reports on Form 8-K
On August 17, 1999, the Company filed a Current Report on Form 8-K with the
Commission. In Item 5 of the report, the Company reported an initial private
placement of 17,750 shares of the Company's Series G Convertible Preferred
Stock, and warrants to purchase an aggregate of 3,550,000 shares of common
stock.
On September 20, 1999, the Company filed a Current Report on Form 8-K with
the Commission. In Item 5 of the report, the Company reported the delisting
of the Company's common stock from the NASDAQ Small Cap Market. The Company
also reported a subsequent closing of a private placement of the Company's
Series G Convertible Preferred Stock which, including the previous closing,
was for a total of 21,000 shares and warrants to purchase an aggregate of
4,200,000 shares of common stock.
14
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROTEIN POLYMER TECHNOLOGIES, INC.
Date November 10, 1999 By /s/ J. Thomas Parmeter
----------------- -------------------------------
J. Thomas Parmeter
Chairman of the Board, Chief
Executive Officer, President
Date November 10, 1999 By /s/ Janis Y. Neves
----------------- -------------------------------
Janis Y. Neves
Director of Finance, Controller
and Assistant Secretary
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.38 Securities Purchase Agreement related to the sale of the
Company's Series G Convertible Preferred Stock
10.39 Form of Warrant to Purchase Common Stock issued in connection
with the Series G Preferred Stock
10.40 Second Amendment to Stockholder Protection Agreement, dated July
26, 1999 between the Company and Continental Stock Transfer and
Trust Company as rights agent
27 Financial Data Schedule
16
<PAGE>
EXHIBIT 10.38
SERIES G
SECURITIES PURCHASE AGREEMENT
-----------------------------
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is entered into
---------
as of July 30, 1999, as amended August 9, 1999, among Protein Polymer
Technologies, Inc., a Delaware corporation (the "Company"), and the other
-------
Persons listed on Annex A hereto (sometimes referred to herein individually as
"Investor" and sometimes collectively as "Investors").
- --------- ---------
1. Definitions. Unless the context otherwise requires, the terms
-----------
defined in this Section 1 shall have the meanings herein specified for all
purposes of this Agreement, applicable to both the singular and plural forms of
any of the terms herein defined. All accounting terms defined in this Section 1
and those accounting terms used in this Agreement not defined in this Section 1
shall, except as otherwise provided for herein, be construed in accordance with
those generally accepted accounting principles that the Company is required to
employ by the terms of this Agreement. If and so long as the Company has any
Subsidiary, the accounting terms defined in this Section 1 and those accounting
terms appearing in this Agreement but not defined in this Section 1 shall be
determined on a consolidated basis for the Company and each of its Subsidiaries,
and the financial statements and other financial information to be furnished by
the Company pursuant to this Agreement shall be consolidated.
"1998 Annual Report" shall mean the Company's Report on Form
------------------
10-KSB for the fiscal year ended December 31, 1998.
"Action" shall mean any action, suit, arbitration or other
------
legal, administrative or other proceeding by or before any court, arbitrator or
Governmental Entity.
"Agreement" shall mean this Securities Purchase Agreement.
---------
"Board" shall mean the Board of Directors of the Company.
-----
"California Securities Law" shall mean the California
-------------------------
Corporate Securities Law of 1968, as amended.
"Certificate" shall have the meaning assigned to it in
-----------
Section 2 hereof.
<PAGE>
"Closing" and "Closing Date" shall have the meanings
------- ------------
assigned to such terms in Section 3(b) hereof.
"Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
"Common Stock" shall mean the Company's common stock, par
------------
value $0.01 per share.
"Commission" shall mean the Securities and Exchange
----------
Commission.
"Conversion Stock" shall have the meaning assigned to it in
----------------
Section 2 hereof.
"Equity Security" shall mean the Common Stock, or any
---------------
security convertible into the Common Stock, or any security carrying any warrant
or right to subscribe to or purchase the Common Stock, or any such warrant or
right.
"Form 10-QSB" shall mean the Company's Quarterly Report on
-----------
Form 10-QSB for the quarterly period ended March 31, 1999.
"Governmental Entity" shall mean any federal, state, local or
-------------------
foreign governmental bureau, commission, board, agency or instrumentality.
"Holder" of any security shall mean the record or beneficial
------
owner of such security. A Holder of Preferred Stock shall be treated as the
Holder of the Conversion Stock underlying the Preferred Stock and a Holder of a
Warrant shall be treated as the Holder of the Warrant Stock underlying the
Warrant.
"Holders of a Majority of the Preferred Stock" shall mean, on
--------------------------------------------
a given date, the Person or Persons who are the Holders of greater than 50% of
the outstanding Preferred Stock.
"Initial Investors" shall mean those Investors purchasing
-----------------
Preferred Stock and Warrants at the Closing.
"Investor" shall have the meaning assigned to it in the
--------
introductory paragraph of this Agreement.
<PAGE>
"Material Adverse Effect" shall mean a material and adverse
-----------------------
effect on the business, assets, property, business prospects, or financial
condition of the Company.
"Person" shall mean any natural person, corporation, trust,
------
association, company, partnership, joint venture and other entity and any
government, governmental agency, instrumentality or political subdivision.
"Preferred Stock" shall have the meaning assigned to it in
---------------
Section 2 hereof.
"Required Payment" shall mean, with respect to each Investor,
----------------
the number of shares of Preferred Stock purchased by such Investor, multiplied
by $100.00, as set forth on Annex A hereto.
"Restricted Stock" means (i) the Common Stock issued or
----------------
issuable to the Investors upon conversion of the Preferred Stock issued and sold
pursuant to this Agreement or upon exercise of the Warrants and (ii) any Common
Stock issued or issuable (either directly or upon the conversion or exercise of
any warrant, right, or other security) with respect to the Common Stock referred
to in clause (i) above by way of a stock dividend or stock split or in
connection with a combination of shares, reclassification, recapitalization,
merger or consolidation or reorganization; provided, however, that such shares
-------- -------
of Common Stock shall only be treated as Restricted Stock if and so long as they
have not been (x) sold to or through a broker or dealer or underwriter in a
public distribution or a public securities transaction, or (y) sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act under Section 4(1) thereof so that all transfer restrictions
and restrictive legends with respect to such Common Stock are removed upon the
consummation of such sale and the Company receives an opinion of counsel for the
Company (with a copy to the seller of such Common Stock), which shall be in form
and content reasonably satisfactory to the Company, to the effect that such
Common Stock in the hands of the purchaser is freely transferable without
restriction or registration under the Securities Act in any public or private
transaction.
"Rule 144" shall mean Rule 144 of the Commission under the
--------
Securities Act.
"Securities" shall have the meaning assigned to it in
----------
Section 2 hereof.
<PAGE>
"Securities Act" shall mean the Securities Act of 1933, as
--------------
amended.
"Stock Plans" shall mean the Company's 1989 Stock Option
-----------
Plan, 1992 Stock Option Plan, 1996 Non-Employee Directors' Stock Option Plan and
Employee Stock Purchase Plan, collectively.
"Subsequent Closing" and "Subsequent Closing Date" shall have
------------------ -----------------------
the meanings assigned to such terms in Section 3(c) hereof.
"Subsidiary" shall mean any Person, at least 50% of the
----------
outstanding voting stock of which is at the time owned or controlled directly or
indirectly by the Company or by one or more of such subsidiary entities or both,
where "voting stock" means any shares of stock having general voting power in
electing the board of directors.
"Warrants" shall have the meaning assigned to such term in
--------
Section 2 hereof.
"Warrant Stock" shall have the meaning assigned to such term
-------------
in Section 2 hereof.
2. Authorization of Securities. The Company has authorized the issue and
---------------------------
sale of up to (i) 35,000 shares of its Series G Convertible Preferred Stock, par
value $0.01 per share (the "Preferred Stock"), having the rights, preferences
---------------
and privileges set forth in the Certificate of Designation (hereinafter referred
to as the "Certificate") attached hereto as Annex B and (ii) warrants, having
-----------
terms and conditions in the form of Warrant attached hereto as Annex C
(collectively, the "Warrants"), to purchase up to an aggregate of 7,000,000
--------
shares of Common Stock (the "Warrant Stock"). The Common Stock into which the
-------------
Preferred Stock is convertible is sometimes referred to herein as the
"Conversion Stock"; and the Preferred Stock, the Warrants, the Warrant Stock and
----------------
the Conversion Stock are sometimes referred to herein individually and
collectively as the "Securities."
----------
3. Sale and Purchase of Preferred Stock and Warrants.
-------------------------------------------------
(a) Upon the terms and subject to the conditions herein
contained, the Company agrees to sell to each Initial Investor, and each Initial
Investor severally agrees to purchase from the Company, at the Closing on the
Closing Date, (i) the number of shares of Preferred Stock, and (ii) the First
Warrants and the Second Warrants to purchase the number of shares of First
Warrant Stock and Second Warrant
<PAGE>
Stock, in each case as set forth opposite its name on Annex A hereto, and each
Initial Investor shall pay to the Company the Required Payment.
(b) The initial closing of the sale to and purchase by the
Initial Investors of the Preferred Stock and Warrants (the "Closing") shall
-------
occur at the offices of Paul, Hastings, Janofsky & Walker, 555 South Flower
Street, Los Angeles, California, at the hour of 10 o'clock A.M., California
time, on August 9, 1999 or at such different time or day as the Initial
Investors and the Company shall agree (the "Closing Date"). At the Closing, the
------------
Company will deliver to each Investor instruments or certificates evidencing the
Securities being purchased by it, each of which shall be registered in such
Initial Investor's name as stated on Annex A hereto, against delivery to the
Company of payment by cashier's check or wire transfer, or such other form
acceptable to the Company, in an amount equal to the Required Payment of such
Initial Investor.
(c) After the Closing, additional shares of Preferred Stock
(which, together with the Preferred Stock issued at the Closing, shall not
exceed 35,000 shares in the aggregate) and additional Warrants (which, together
with the Warrants issued at the Closing, shall not represent the right to
acquire more than 7,000,000 shares of Warrant Stock in the aggregate), may be
issued at one or more subsequent closings (each, a "Subsequent Closing") which
------------------
are held on or before September 15, 1999. Each Subsequent Closing shall be
effective upon the date (a "Subsequent Closing Date") of the Company's receipt
-----------------------
from an Investor of a cashier's check or wire transfer funds in the amount of
such Investor's Required Payment. Effective upon each such Subsequent Closing,
the applicable Investor shall also enter into and become a party to this
Agreement and the Registration Rights Agreement as if such Investor had executed
such agreements at the Closing.
(d) Notwithstanding the foregoing, no shares of Preferred Stock,
and no Warrants, shall be offered or sold after the Closing to any Investor if,
in the opinion of the Company and its counsel, (i) such offer and sale would not
be exempt from the registration and prospectus delivery requirements of the
Securities Act and exempt from the registration or qualification requirements of
all applicable state securities laws, or (ii) such offers and sales would
detract from or adversely affect the availability and effectiveness of the
exemption from or compliance with such federal and state requirements relied
upon in respect of the offer and sale of Preferred Stock and Warrants to the
Initial Investors at the Closing.
(e) At the Closing, the Company shall prepare Annex A with
respect to the Investors purchasing Preferred Stock and Warrants at the Closing.
Promptly after each Subsequent Closing, the Company shall amend Annex A as
appropriate.
<PAGE>
4. Register of Securities; Restrictions on Transfer of Securities;
---------------------------------------------------------------
Removal of Restrictions on Transfer of Securities.
- -------------------------------------------------
4.1 Register of Securities. The Company or its duly appointed
----------------------
agent shall maintain a separate register for the shares of Preferred Stock,
Warrants and Common Stock, in which it shall register the issue and sale of all
such securities. All transfers of the Securities shall be recorded on the
register maintained by the Company or its agent, and the Company shall be
entitled to regard the registered holder of the Securities as the actual holder
of the Securities so registered until the Company or its agent is required to
record a transfer of such Securities on its register. Subject to Section 4.2(c)
hereof, the Company or its agent shall be required to record any such transfer
when it receives the Security to be transferred duly and properly endorsed by
the registered holder thereof or by its attorney duly authorized in writing.
4.2 Restrictions on Transfer.
------------------------
(a) Each Investor understands and agrees that the Securities it
will be acquiring have not been registered under the Securities Act, and that
accordingly they will not be fully transferable except as permitted under
various exemptions contained in the Securities Act, or upon satisfaction of the
registration and prospectus delivery requirements of the Securities Act. Each
Investor acknowledges that it must bear the economic risk of its investment in
the Securities for an indefinite period of time since they have not been
registered under the Securities Act and therefore cannot be sold unless they are
subsequently registered or an exemption from registration is available.
(b) Each Investor hereby represents and warrants to the Company
that:
(i) Such Investor is acquiring the Securities it has
agreed to purchase (and, if applicable, will acquire the Warrant Stock and
Conversion Stock) for investment purposes only, for its own account, and not as
nominee or agent for any other Person, and not with the view to, or for resale
in connection with, any distribution thereof within the meaning of the
Securities Act.
(ii) Such Investor knows of no public solicitation or
advertisement of an offer in connection with the Securities.
(iii) Such Investor has carefully reviewed this
Agreement. Such Investor has had, during the course of the transaction and prior
to its purchase of the Preferred Stock and Warrants, the opportunity to ask
questions of and receive answers from the Company concerning the terms and
conditions of the offering
<PAGE>
and to obtain additional information necessary to verify the accuracy of any
information furnished to it or to which it had access. Such Investor has
received all information that it has requested regarding the Company and
believes that such information is sufficient to make an informed decision with
respect to the purchase of the Preferred Stock and Warrants. Without limiting
the generality of the foregoing, such Investor has received a copy of (A) the
1998 Annual Report, (B) the Form 10-QSB, and (C) the Risk Factors attached as
Annex D hereto.
(iv) Such Investor is able to bear the economic risk
of its investment in the Preferred Stock and Warrants and has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of, and protecting its interests with respect to, its
investment in the Preferred Stock and Warrants. Such Investor is aware of the
risk involved in its investment in the Preferred Stock and Warrants and has
determined that such investment is suitable for it in light of its financial
circumstances and available investment opportunities.
(v) This Agreement, when executed and delivered by
such Investor, constitutes the legal, valid and binding obligation of such
Investor and is enforceable against such Investor in accordance with its terms.
(vi) Such Investor is an "accredited investor" as
that term is defined in Rule 501 of Regulation D promulgated under the
Securities Act.
(vii) Such Investor's jurisdiction of formation or
incorporation (if applicable) and principal place of business or its residency
as set forth on the signature page hereof or the annexes hereto by such Investor
are accurate.
(viii) The purchase by such Investor of the Preferred
Stock and Warrants hereunder does not violate or conflict with any law or
regulation applicable to such Investor.
(ix) No Person engaged by such Investor has, or will
have, any right or claim against the Company for any commission, fee or other
compensation as a finder or broker, or in any similar capacity.
(c) Each Investor hereby further agrees with the Company as
follows:
(i) Subject to Section 4.3 hereof, the instruments
or certificates evidencing the Securities it has agreed to purchase, and each
instrument or certificate issued in transfer thereof, will bear the following
legend:
<PAGE>
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 and have been taken for investment
purposes only and not with a view to the distribution thereof, and,
except as stated in an agreement between the holder of this
certificate, or its predecessor in interest, and the issuer
corporation, such securities may not be sold or transferred unless
there is an effective registration statement under such Act covering
such securities or the issuer corporation receives an opinion, in form
and content reasonably satisfactory to the issuer corporation, of
counsel reasonably acceptable to the issuer corporation (which may be
counsel for the issuer corporation) stating that such sale or transfer
is exempt from the registration and prospectus delivery requirements
of such Act."
(ii) The instruments or certificates representing
such Securities, and each instrument or certificate issued in transfer thereof,
will also bear any legend required under any applicable state securities law.
(iii) Prior to any proposed sale, assignment, transfer
or pledge of any Securities by an Investor, unless there is in effect a
registration statement under the Securities Act covering the proposed transfer,
the Investor shall give written notice to the Company of such Investor's
intention to effect such transfer, sale, assignment or pledge. Each such notice
shall describe the manner and circumstances of the proposed transfer, sale,
assignment or pledge in sufficient detail and shall be accompanied at such
holder's expense by either (A) an unqualified written opinion of legal counsel
who shall, and whose legal opinion shall, be reasonably satisfactory to the
Company addressed to the Company, to the effect that the proposed transfer of
the Securities may be effected without registration under the Securities Act, or
(B) a "no action" letter from the Commission to the effect that the transfer of
such securities without registration will not result in a recommendation by the
staff of the Commission that action be taken with respect thereto, whereupon the
holder of such Securities shall be entitled to transfer such Securities in
accordance with the terms of the notice delivered by the holder to the Company.
The Company will not require such a legal opinion or "no action" letter in any
transaction in compliance with Rule 144, unless otherwise required by the
Company's independent transfer agent.
(iv) Such Investor consents to the Company's making a
notation on its records or giving instructions to any transfer agent of the
Common Stock, Warrants or Preferred Stock in order to implement the restrictions
on transfer of the Securities mentioned in this subsection (c).
(d) Each Investor, or each Person executing this Agreement on
behalf of an Investor, further represents and warrants to the Company that
<PAGE>
such Investor or other Person, as the case may be, has been duly authorized to,
and has, and as of the Closing, and Subsequent Closing if applicable, will have,
full power and authority (including corporate, if applicable) to, execute and
deliver this Agreement and the Registration Rights Agreement on behalf of such
Investor, and to make the representations and warranties to the Company in this
Section 4 on behalf of such Investor, and to perform the obligations of such
Investor, if any, under this Agreement and the Registration Rights Agreement.
4.3 Removal of Transfer Restrictions. Any legend endorsed on a
--------------------------------
certificate evidencing a Security pursuant to Section 4.2(c)(i) hereof and the
stop transfer instructions and record notations with respect to such Security
shall be removed and the Company shall issue a certificate without such legend
to the holder of such Security (a) if such Security is registered under the
Securities Act, (b) if such holder provides the Company with an opinion, in form
and content reasonably satisfactory to the Company, of counsel (which may be
counsel for the Company) reasonably acceptable to the Company to the effect that
a public sale or transfer of such Security may be made without registration
under the Securities Act or (c) if such Security may be sold under Rule 144.
5. Representations and Warranties by and Covenants of the Company. In
--------------------------------------------------------------
order to induce each Investor to enter into this Agreement and to purchase the
Preferred Stock and Warrants, the Company hereby represents and warrants to each
Investor that, except as set forth on Annex E hereto:
5.1 Organization, Standing, etc. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to carry on its
business as presently conducted and as proposed to be conducted, to own and hold
its properties and assets, to enter into this Agreement, to issue the Securities
and to carry out the provisions hereof and the terms of the Certificate and the
Securities.
5.2 Certificate and Bylaws. The copies of the Certificate of
----------------------
Incorporation and Bylaws of the Company which have been delivered to (or made
available for inspection by) the Investors prior to the execution of this
Agreement are true and complete and have not been amended or repealed, except
for the amendments to the Certificate of Incorporation that will be accomplished
by the filing of the Certificate with the Delaware Secretary of State.
5.3 Subsidiaries. The Company has no Subsidiaries or affiliated
------------
companies and does not otherwise own or control, directly or indirectly, any
equity interest in any corporation, association or business entity.
<PAGE>
5.4 Qualification. The Company is duly qualified as a foreign
-------------
corporation and in good standing in the State of California. The Company is not
qualified to do business as a foreign corporation in any other jurisdiction and
such qualification is not required as of the date hereof, except where the
failure to be so qualified would not have a Material Adverse Effect.
5.5 Capital Stock.
-------------
(a) As of the Closing Date, the authorized capital stock of the
Company will consist of (i) 5,000,000 shares of preferred stock, par value $0.01
per share, 71,600 shares of which have been designated as Series D Preferred
Stock, 2,000,000 shares of which have been designated as Series X Junior
Participating Preferred Stock, 55,000 shares of which have been designated as
the Series E Preferred Stock, 27,317 shares of which have been designated as the
Series F Preferred Stock, and 35,000 shares of which have been designated as the
Series G preferred Stock; and (ii) 40,000,000 shares of Common Stock; and the
Company will have no authority to issue any other capital stock. There are
1,344.01 shares of Series D Preferred Stock issued and outstanding, (A) of which
447.01 shares may be converted into Common Stock and (B) 897 shares may be
exchanged for an equal number of shares of Series F Preferred Stock after the
Closing, no shares of Series X Preferred issued and outstanding, 42,787.50
shares of Series E Preferred Stock issued and outstanding, 26,420.00 shares of
Series F Preferred Stock issued and outstanding and no shares of Series G
Preferred Stock issued and outstanding, and, as of the Closing, before giving
effect to the transactions contemplated by this Agreement, 13,429,882 shares of
Common Stock are issued and outstanding, and all such outstanding shares of
Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock and
Common Stock have been duly authorized, validly issued, fully paid and
nonassessable.
(b) The Company has reserved a total of 10,293,143 shares of
Common Stock for issuance upon the exercise of stock options or purchase rights
granted under the Stock Plans or under other stock option agreements or
warrants.
(c) Except as contemplated by this Agreement or as expressly
provided in Annex E to this Agreement, the Company has no outstanding
subscription, option, warrant, right of first refusal, preemptive right, call,
contract, demand, commitment, convertible security or other instrument,
agreement or arrangement of any character or nature whatever under which the
Company is or may be obligated to issue Common Stock, preferred stock or other
Equity Security of any kind.
5.6 Corporate Acts and Proceedings. The Company has, and as of the
------------------------------
Closing will have, full corporate power and authority to execute and deliver
this Agreement and to perform its obligations hereunder and the transactions
contemplated
<PAGE>
hereby. All corporate acts and proceedings required for the authorization,
execution and delivery of this Agreement and the offer, issuance and delivery of
the Securities and the performance of this Agreement and the terms of the
Certificate have been lawfully and validly taken or will have been so taken
prior to the Closing.
5.7 Compliance with Other Instruments. The execution, delivery and
---------------------------------
performance by the Company of this Agreement and the observance of the terms of
the Certificate (a) will not require from the Board or stockholders of the
Company any consent or approval that has not been validly and lawfully obtained,
(b) will not require the Company to obtain or effect any authorization, consent,
approval, license, exemption of or filing or registration with any Person,
except such as shall have been lawfully and validly obtained prior to the
Closing, (c) will not cause the Company to violate or contravene, except where
such violation or contravention would not have a Material Adverse Effect, (i)
any provision of law, (ii) any rule or regulation of any Governmental Entity or
the National Association of Securities Dealers, (iii) any order, writ, judgment,
injunction, decree, determination or award binding upon the Company, or (iv) any
provision of the Certificate of Incorporation or Bylaws of the Company, (d) will
not cause the Company to violate or be in conflict with, result in a breach by
the Company of or constitute (with or without notice or lapse of time or both) a
default by the Company under, any material agreement, lease or instrument,
commitment or arrangement to which the Company is a party or by which the
Company or any of its properties, assets or rights are bound or affected, except
where such violation, conflict, breach or default would not have a Material
Adverse Effect, and (e) will not result in the creation or imposition of any
lien. The Company is not in violation of, or (with or without notice or lapse
of time or both) in default under, any term or provision of its Certificate of
Incorporation or Bylaws or of any indenture, loan or credit agreement, note
agreement, deed of trust, mortgage, security agreement or other agreement, lease
or other instrument, commitment or arrangement to which the Company is a party
or by which any of the Company's properties, assets or rights are bound or
affected, except where such violation or default would not have a Material
Adverse Effect.
5.8 Binding Obligations.
-------------------
(a) This Agreement constitutes the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
its terms, except as such enforcement is limited by bankruptcy, insolvency and
other similar laws affecting the enforcement of creditors' rights generally, and
by general equitable principles.
(b) The Warrants are duly authorized and, when executed,
delivered and paid for in accordance with the terms of this Agreement, will be
free and clear of all liens and restrictions, other than liens that may have
been created or suffered
<PAGE>
by the Investor and restrictions imposed by the Securities Act, state securities
laws or this Agreement.
(c) The Preferred Stock is duly authorized and, when issued in
accordance with the terms of this Agreement, will be duly authorized, validly
issued and outstanding, fully paid and nonassessable and free and clear of all
liens and restrictions, other than liens that might have been created or
suffered by the Investors and restrictions imposed by the Securities Act, state
securities laws or this Agreement.
(d) The Conversion Stock and Warrant Stock have been duly
authorized and, when issued in accordance with the terms of the Certificate and
the Warrants, respectively, will be duly authorized, validly issued and
outstanding, fully paid and nonassessable and free and clear of all liens and
restrictions, other than liens that might have been created or suffered by the
Investors and restrictions imposed by the Securities Act, state securities laws
or this Agreement.
5.9 Securities Laws. Subject to the accuracy of the
---------------
representations and warranties contained in Section 4.2, the offer, issue and
sale of the Preferred Stock, Warrants, Conversion Stock and (assuming no
transfers of the Warrants and no change in applicable law between the date
hereof and the date of exercise of the Warrants) the Warrant Stock are and will
be exempt from the registration and prospectus delivery requirements of the
Securities Act, and are and will be exempt from qualification under the
California Securities Law and the state securities laws of the jurisdictions
where the Investors are resident.
5.10 Financial Statements. Included in the Form 10-QSB are the
--------------------
Company's unaudited balance sheet (the "Balance Sheet") as of March 31, 1999
-------------
(the "Balance Sheet Date"), and the unaudited statement of operations for the
------------------
three-month period then ended. Included in the 1998 Annual Report are the
Company's audited balance sheets as of December 31, 1997 and 1998 and the
audited statements of operations, cash flow and shareholders' equity for the
period then ended, together with the related opinion of Ernst & Young LLP,
independent certified public accountants. The foregoing financial statements
(i) are complete and correct in all material respects and are in accordance with
the books and records of the Company, (ii) present fairly the financial
condition of the Company at the Balance Sheet Date and other dates therein
specified and the results of operations and changes in financial position of the
Company for the periods therein specified, and (iii) have been prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with prior accounting periods, except that the unaudited financial
statements are subject to year-end audit adjustments and do not contain
footnotes or statements of shareholders' equity and cash flow.
<PAGE>
5.11 Changes. Since the Balance Sheet Date, except as disclosed
-------
in the Form 10-QSB or on Annex E, there has been no event which would have a
Material Adverse Effect, and the Company has not (a) mortgaged, pledged or
subjected to Lien any of its material assets, tangible or intangible, (b) sold,
transferred or leased any of its assets, (c) cancelled or compromised any
material debt or claim, or waived or released any right, of material value, (d)
suffered any physical damage, destruction or loss (whether or not covered by
insurance) having a material effect, (e) declared or paid any dividends on or
made any other distributions with respect to, or purchased or redeemed, any of
its outstanding Equity Securities, except for accrued dividends on the Series D
Preferred Stock, or (f) suffered or experienced any material adverse change or
loss in its business other than its continuing losses from operations.
5.12 Material Agreements of the Company. The Company is not a
----------------------------------
party to or otherwise bound by any written or oral agreement, instrument or
arrangement that is material to the Company except for those agreements listed
in Item 13 of the 1998 Annual Report or as set forth on Annex E hereto. The
Company has furnished or made available to each Investor true and complete
copies of all such agreements and all other agreements, instruments and other
documents requested by any Investor or its authorized representative.
5.13 Litigation. There is no Action pending and, to the best
----------
knowledge of the Company, there is no material Action threatened against the
Company or its properties, assets or business. To the Company's best knowledge,
the Company is not in default with respect to any order, writ, judgment,
injunction, decree, determination or award of any court or of any Governmental
Entity.
5.14 Brokers or Finders. Except as set forth on Annex E hereto,
------------------
the Company has not incurred, and will not incur, directly or indirectly, as a
result of any action taken by the Company, any liability for brokerage or
finders' fees or agents' commissions or any similar charges in connection with
this Agreement. The Company agrees to indemnify and hold harmless the Investors
from any damages they incur as a result of any claims for such fees, commissions
or charges.
5.15 Disclosure. The representations and warranties of the
----------
Company contained herein, when read together with the annexes hereto and the
Form 10-QSB and the 1998 Annual Report do not contain any untrue statement of
material fact or omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
<PAGE>
5.16 Intellectual Property.
---------------------
(a) To the best of its knowledge, the Company has sufficient
title to and ownership of, free and clear of all liens, claims and encumbrances
of any nature, all patents, patent rights, patent applications, inventions,
trademarks, service marks, trade names, copyrights and information, proprietary
rights and processes necessary for the conduct of its business; and the use by
the Company of the foregoing does not conflict with or constitute an
infringement of the rights of others.
(b) The Company has not received any communications alleging that
it has violated, and has no knowledge that the Company has violated, or by
conducting its business, the Company will not, to the best of its knowledge,
violate, any of the patents, patent applications, inventions, trademarks,
service marks, trade names, copyrights or trade secrets, confidential
information, proprietary rights or processes of any other person.
5.17 Retirement Obligations. Except as set forth on Annex E
----------------------
hereto, the Company does not have any Employee Benefit Plan as defined in the
Employee Retirement Income Security Act of 1974, as amended, other than as
disclosed in the 1998 Annual Report.
5.18 No Governmental Consent or Approval Required. Based in part
--------------------------------------------
on the representations made by the Investors in Section 4 of this Agreement, no
authorization, consent, approval or other order of, declaration to, or
registration, qualification, designation or filing with, any federal, state or
local governmental agency or body is required by or from the Company for or in
connection with the valid and lawful authorization, execution and delivery by
the Company of this Agreement or any other agreement entered into by the Company
in connection with this Agreement, and consummation of the transactions
contemplated hereby or thereby, or for or in connection with the valid and
lawful authorization, issuance, sale and delivery of the Preferred Stock and the
Warrants or for or in connection with the valid and lawful authorization,
reservation, issuance, sale and delivery of the Conversion Stock and the Warrant
Stock, other than the filing of the Certificate with the Delaware Secretary of
State, the qualification (or taking of such action as may be necessary to secure
an exemption from qualification, if available) of the offer and sale of the
Preferred Stock and Warrants under the California Securities Law and other
applicable state or federal securities laws, which filings and qualifications,
if required, will be accomplished in a timely manner so as to comply with such
qualification or exemption from qualification requirements.
5.19 NASD Compliance. The Company's Common Stock is registered
---------------
pursuant to Section 12(g) of the Exchange Act and is listed on the the Nasdaq
SmallCap Market and, except as set forth on Annex E hereto, the Company has
taken no action
<PAGE>
designed to, or likely to have the effect of, terminating the registration of
the Common Stock under the Exchange Act or de-listing the Common Stock from the
Nasdaq SmallCap Market, nor has the Company received any notification that the
Securities and Exchange Commission or the National Association of Securities
Dealers, Inc. is contemplating terminating such registration or listing.
5.20 Reporting Status. The Company has filed in a timely manner
----------------
all documents that the Company was required to file under the Exchange Act
during the 12 months preceding the date of this Agreement and such documents
complied in all material respects with the Commission's requirements as of their
respective filing dates, and the information contained therein as of the date
thereof did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they were made not
misleading.
5.21 Listing. The Company shall use its best efforts to comply
-------
with all requirements of the National Association of Securities Dealers, Inc.
with respect to the issuance of the Securities and the listing of the Common
Stock issuable upon exercise of the Warrants and conversion of the Preferred
Stock on the Nasdaq SmallCap Market.
6. Conditions of Parties' Obligations.
----------------------------------
6.1 Conditions of Investors' Obligations at the Closing. The
----------------------------------------------------
obligation of each Investor to purchase and pay for the Preferred Stock and
Warrants which it has agreed to purchase on the Closing Date (or, if applicable,
the Subsequent Closing Date) is subject to the fulfillment prior to or on the
Closing Date (or, if applicable, the Subsequent Closing Date) of the following
conditions, any of which may be waived in whole or in part by such Investor.
(a) No Errors, etc. The representations and warranties of the
--------------
Company under this Agreement shall be deemed to have been made again on the
Closing Date (or, if applicable, the Subsequent Closing Date) and shall then be
true and correct in all material respects.
(b) Compliance with Agreement. The Company shall have performed
-------------------------
and complied with, in all material respects, all agreements and conditions
required by this Agreement to be performed or complied with by it on or before
the Closing Date (or, if applicable, the Subsequent Closing Date).
(c) Certificate of the Company. With respect to the Closing
--------------------------
only, the Company shall have delivered to each Investor a certificate of the
Company dated the Closing Date, executed by its President, certifying the
satisfaction of the conditions specified in subsections (a), (b), (e) and (f) of
this Section 6.1.
<PAGE>
(d) Opinion of Counsel. Paul, Hastings, Janofsky & Walker LLP,
------------------
counsel to the Company, shall have furnished an opinion to the Investors
covering the matters set forth in Sections 5.1, 5.5(a), 5.6, 5.8 and 5.9.
(e) Certificate. The Certificate shall have been filed with the
-----------
Delaware Secretary of State.
(f) Qualification. All authorizations, approvals or permits, if
-------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required from the Company in connection with the lawful
issuance and sale of the Preferred Stock and Warrants to the Investors pursuant
to this Agreement shall have been duly obtained and shall be effective on and as
of the Closing.
(g) Minimum Investment. The Initial Investors shall be
------------------
committed to purchase not less than 20,000 shares of Preferred Stock at the
Closing.
(h) Proceedings and Documents. All corporate and other
-------------------------
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to the Investors and their counsel, and the Investors shall have
received all such counterpart originals and certified or other copies of such
documents as they may reasonably request.
(i) Expiration of Stockholder Notification Period. In
---------------------------------------------
accordance with the corporate governance requirements of the National
Association of Securities Dealers applicable to the Company and the financial
viability exception applied for by the Company from Nasdaq in lieu of
stockholder approval of the transactions contemplated by this Agreement, Nasdaq
shall have granted such exception and the Company shall have mailed the
notification required by Nasdaq to its stockholders at least ten days prior to
the Closing Date and such ten day period shall have lapsed.
6.2 Conditions of Company's Obligations. The Company's obligation
-----------------------------------
to issue and sell the Preferred Stock and Warrants to the Investors on the
Closing Date (or, if applicable, the Subsequent Closing Date) is subject to the
fulfillment prior to or at such date of (i) the conditions precedent specified
in paragraphs (e), (f) and and (g) of Section 6.1 hereof, (ii) the condition
described in Section 3(c) hereof, if applicable, and (iii) the representations
and warranties of the Investors under this Agreement shall be deemed to have
been made again on the Closing Date (or, if applicable, the Subsequent Closing
Date) and shall then be true and correct.
7. Rights of First Refusal.
-----------------------
7.1 Subsequent Offerings. Each Investor shall have the right of
--------------------
first refusal to purchase, pro rata, all (or any part of all) Equity Securities
that the Company may, from time to time, propose to sell and issue after the
Closing Date, other than the Equity Securities excluded by Section 7.5 hereof.
Each Investor's pro rata share of such Equity Securities is the ratio of the
number of shares of Common Stock with respect to which such Investor is deemed
to be a Holder immediately prior to the issuance of such Equity Securities to
the total number of shares of Common Stock with respect to which all Investors
are deemed to be Holders immediately prior to the issuance of such Equity
Securities.
<PAGE>
7.2 Exercise of Rights. If and each time the Company proposes to
------------------
issue any Equity Securities, it shall give each Investor written notice of its
intention, describing the Equity Securities, the price, and the general terms
and conditions upon which the Company proposes to issue the same. Each Investor
shall have twenty (20) days from the giving of such notice to agree to purchase
its pro rata share of such Equity Securities for the price and upon the terms
and conditions specified in the notice by giving written notice to the Company
and stating therein the quantity of Equity Securities to be purchased. Each
Investor shall have a right of over allotment such that if any Investor fails to
exercise its rights hereunder to agree to purchase its pro rata portion of the
Equity Securities, the other Investors may agree to purchase the nonpurchasing
Investor's portion on a pro rata basis, within ten (10) days from the end of
such twenty (20) day period.
7.3 Issuance of Equity Securities to Other Persons. If the Investors
----------------------------------------------
fail to exercise in full the rights of first refusal within such twenty (20)
plus ten (10) days, the Company shall have sixty (60) days thereafter to
complete the sale of the Equity Securities in respect of which the Investors'
rights were not exercised, at a price and upon general terms and conditions no
more favorable to the purchasers thereof than specified in the Company's notice
to the Investors pursuant to Section 7.2 hereof. If the Company has not sold all
of such Equity Securities within such sixty (60) days, the Company shall not
thereafter issue or sell any of such Equity Securities, without first offering
such securities to the Investors in the manner provided above.
7.4 Termination of Rights of First Refusal. The rights of first
--------------------------------------
refusal established by this Section 7 shall terminate when there are no longer
more than 10,000 shares of Preferred Stock outstanding.
7.5 Excluded Securities. The rights of first refusal established
-------------------
by this Section 7 shall have no application to any of the following Equity
Securities: (a) Preferred Stock or Warrants issued pursuant to this Agreement,
including without limitation pursuant to Section 3(c) hereof, (b) the Conversion
Stock or the Warrant Stock, (c) stock issued pursuant to any rights or
agreements (including, without limitation, convertible securities, options and
warrants) outstanding on the date hereof as set forth on Annex E pursuant to
Section 5.5(c) hereof, (d) any Common Stock issued to employees, officers,
directors, consultants or advisors of the Company for the primary purpose of
soliciting or retaining their services, whether issued pursuant to the Stock
Plans or otherwise, (e) any Equity Securities issued for a consideration other
than cash pursuant to a merger, consolidation, acquisition or similar business
combination, (f) any Equity Securities issued in connection with any stock
split, stock dividend or reverse stock split, (g) any Equity Securities issued
in a bona fide, firmly underwritten public offering registered under the
Securities Act, (h) any Equity Securities which the Holders of a Majority of
Preferred Stock agree shall not be subject to this Section 7 and (i) shares of
the Company's Series D Preferred Stock, Series E Preferred Stock or Series F
Preferred Stock outstanding on the date hereof and shares of Common Stock
issuable upon conversion thereof or as a dividend thereon.
7.6 Prior Rights. Nothwithstanding anything to the contrary herein,
------------
the rights set forth in this Section 7 are subject to the prior rights of first
refusal of the Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock.
<PAGE>
8. Registration of Restricted Stock.
--------------------------------
8.1 Required Registration.
---------------------
(a) Subject to the existing registration rights of the holders of
Series D Preferred Stock and Series F Preferred Stock within ninety (90) to one
hundred twenty (120) days after the Closing Date, the Company shall prepare and
file a registration statement under the Securities Act, on a form selected by
the Company, covering the Restricted Stock and shall use its commercially
reasonable efforts to cause such registration statement to become effective as
expeditiously as possible and to remain effective until the earlier to occur of
the date (i) the Restricted Stock covered thereby have been sold, or (ii) by
which all Restricted Stock covered thereby may be sold under Rule 144, without
volume limitations.
(b) Following the effectiveness of a registration statement filed
pursuant to this section, the Company may, at any time, suspend the
effectiveness of such registration for up to 45 days, as appropriate (a
"Suspension Period"), by giving notice to the Holders of Restricted Stock, if
- ------------------
the Company shall have determined that the Company may be required to disclose
any material corporate development which disclosure may have a Material Adverse
Effect on the Company. Notwithstanding the foregoing, no more than two
Suspension Periods (i.e., 90 days) may occur in immediate succession. The
Company shall use its best efforts to limit the duration and number of any
Suspension Periods. The Holders of Restricted Stock agree that, upon receipt of
any notice from the Company of a Suspension Period, the Holders of Restricted
Stock shall forthwith discontinue disposition of Restricted Stock covered by
such registration statement or prospectus until the Holders of Restricted Stock
(i) are advised in writing by the Company that the use of the applicable
prospectus may be resumed, (ii) have received copies of a supplemental or
amended prospectus, if applicable, and (iii) have received copies of any
additional or supplemental filings which are incorporated or deemed to be
incorporated by reference into such prospectus.
8.2 Registration Procedures. When the Company effects the
-----------------------
registration of the Securities under the Securities Act pursuant to Section
8.1(a) hereof, the Company will, at its expense, as expeditiously as possible:
(a) In accordance with the Securities Act and the rules and
regulations of the Commission, prepare and file with the Commission a
registration statement with respect to such securities and use its commercially
reasonable efforts to cause such registration statement to become and remain
effective for the period described herein, and prepare and file with the
Commission such amendments to such registration statement and supplements to the
prospectus contained therein as may be necessary to keep such registration
statement effective for such period and such registration statement and
prospectus accurate and complete for such period;
(b) Furnish to the Holders of securities participating in such
registration such reasonable number of copies of the registration statement,
preliminary prospectus, final prospectus and such other documents as such
Holders may reasonably request in order to facilitate the public offering of
such securities;
(c) Use its commercially reasonable efforts to register or
qualify the securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as such participating Holders
may reasonably request within twenty (20) days following the original filing of
such registration
<PAGE>
statement, except that the Company shall not for any purpose be required to
execute a general consent to service of process or to qualify to do business as
a foreign corporation in any jurisdiction where it is not so qualified;
(d) Notify the Holders participating in such registration,
promptly after it shall receive notice thereof, of the date and time when such
registration statement and each post-effective amendment thereto has become
effective or a supplement to any prospectus forming a part of such registration
statement has been filed;
(e) Notify such Holders promptly of any request by the Commission
for the amending or supplementing of such registration statement or prospectus
or for additional information;
(f) Prepare and file with the Commission, promptly upon the
request of any such Holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such Holders, is
required under the Securities Act or the rules and regulations thereunder in
connection with the distribution of the Restricted Stock by such Holders;
(g) Prepare and promptly file with the Commission, and promptly
notify such Holders of the filing of, such amendments or supplements to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event has
occurred as the result of which any such prospectus or any other prospectus as
then in effect would include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading;
(h) In case any of such Holders is required to deliver a
prospectus at a time when the prospectus then in circulation is not in
compliance with the Securities Act or the rules and regulations of the
Commission, prepare promptly upon request such amendments or supplements to such
registration statement and such prospectus as may be necessary in order for such
prospectus to comply with the requirements of the Securities Act and such rules
and regulations; and
(i) Advise such Holders, promptly after it shall receive notice
or obtain knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued.
8.3 Expenses. With respect to any registration effected pursuant to
--------
Section 8.1 hereof, all fees, costs and expenses of and incidental to such
registration and the public offering in connection therewith shall be borne by
the Company; provided, however, that the Holders of Restricted Stock shall bear
their own legal fees, if any, and their pro rata share of any underwriting
discounts or commissions, if any.
8.4 Indemnification.
---------------
(a) The Company will indemnify and hold harmless each Holder of
shares of Restricted Stock which are included in a registration statement
pursuant to the provisions of Section 8 hereof and any underwriter (as defined
in the
<PAGE>
Securities Act) for such Holder, and any person who controls such Holder
or such underwriter within the meaning of the Securities Act, and any officer,
director, employee, agent, partner or affiliate of such Holder, from and
against, and will reimburse such Holder and each such underwriter, controlling
person, officer, director, employee, agent, partner and affiliate with respect
to, any and all claims, actions, demands, losses, damages, liabilities, costs
and expenses to which such Holder or any such underwriter or controlling person
or any such officer, director, employee, agent, partner or affiliate may become
subject under the Securities Act or otherwise, insofar as such claims, actions,
demands, losses, damages, liabilities, costs or expenses arise out of or are
based upon (i) any untrue statement or alleged untrue statement of any material
fact contained in such registration statement, any prospectus contained therein
or any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(ii) any breach of any representation, warranty, agreement or covenant of the
Company contained herein; provided, however, that the Company will not be liable
in any such case to the extent that any such claim, action, demand, loss,
damage, liability, cost or expense is caused by an untrue statement or alleged
untrue statement or omission or alleged omission so made in strict conformity
with information furnished by such Holder, such underwriter or such controlling
person or such officer, director, employee, agent, partner or affiliate in
writing specifically for use in the preparation thereof.
(b) Each Holder of shares of the Restricted Stock which are
included in a registration pursuant to the provisions of Section 8 hereof will
indemnify and hold harmless the Company, and any Person who controls the Company
within the meaning of the Securities Act, from and against, and will reimburse
the Company and such controlling Persons with respect to, any and all losses,
damages, liabilities, costs or expenses to which the Company or such controlling
Person may become subject under the Securities Act or otherwise, insofar as such
losses, damages, liabilities, costs or expenses are caused by any untrue or
alleged untrue statement of any material fact contained in such registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or are caused by the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was so
made in reliance upon and in strict conformity with written information
furnished by such Holder specifically for use in the preparation thereof.
Notwithstanding the foregoing, the liability of any Holder of Restricted Stock
pursuant to this subsection (b) shall be limited to an amount equal to the per
share sale price (less any underwriting discount and commissions) multiplied by
the number of shares of Restricted Stock sold by such Holder pursuant to the
registration statement which gives rise to such obligation to indemnify (less
the aggregate amount of any damages which such Holder has otherwise been
required to pay in respect of such losses, damages, liabilities, costs or
expenses or any substantially similar losses, damages, liabilities, costs or
expenses arising from the sale of such Restricted Stock).
(c) Promptly after receipt by a party indemnified pursuant to the
provisions of paragraph (a) or (b) of this Section 8.4 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of paragraph (a)
or (b), notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to an
<PAGE>
indemnified party otherwise than under this Section 8.4 and shall not relieve
the indemnifying party from liability under this Section 8.4 unless such
indemnifying party is prejudiced by such omission. In case such action is
brought against any indemnified party and it notifies the indemnifying party of
the commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party pursuant to the provisions of such paragraph (a) or (b) for
any legal or other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall be liable to an indemnified party for
any settlement of any action or claim without the consent of the indemnifying
party. No indemnifying party will consent to entry of any judgment or enter into
any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release from
all liability in respect to such claim or litigation.
(d) If the indemnification provided for in subsection (a) or (b)
of this Section 8.4 is held by a court of competent jurisdiction to be
unavailable to a party to be indemnified with respect to any claims, actions,
demands, losses, damages, liabilities, costs or expenses referred to therein,
then each indemnifying party under any such subsection, in lieu of indemnifying
such indemnified party thereunder, hereby agrees to contribute to the amount
paid or payable by such indemnified party as a result of such claims, actions,
demands, losses, damages, liabilities, costs or expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party on the
one hand and of the indemnified party on the other in connection with the
statements or omissions which resulted in such claims, actions, demands, losses,
damages, liabilities, costs or expenses, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
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 the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. Notwithstanding the foregoing, the amount
any Holder of Restricted Stock shall be obligated to contribute pursuant to this
subsection (d) shall be limited to an amount equal to the per share sale price
(less any underwriting discount and commissions) multiplied by the number of
shares of Restricted Stock sold by such Holder pursuant to the registration
statement which gives rise to such obligation to contribute (less the aggregate
amount of any damages which such Holder has otherwise been required to pay in
respect of such claim, action, demand, loss, damage, liability, cost or expense
or any substantially similar claim, action, demand, loss, damage, liability,
cost or expense arising from the sale of such Restricted Stock). No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution hereunder from any person
who was not guilty of such fraudulent misrepresentation.
8.5 Reporting Requirements Under the Exchange Act. The Company shall
---------------------------------------------
timely file such information, documents and reports as the Commission may
require or prescribe under Section 13 of the Exchange Act. The Company
acknowledges and agrees that the purposes of the requirements contained in this
Section 7.5 are (a) to enable the Holders of Restricted Stock to comply with the
current public information requirement contained in paragraph (c) of Rule 144
should any such Holder
<PAGE>
ever wish to dispose of any of the Restricted Stock without registration under
the Securities Act in reliance upon Rule 144 (or any other similar exemptive
provision) and (b) to qualify the Company for the use of registration statements
on Form S-3.
8.6 Stockholder Information. The Company may require each Holder of
-----------------------
Restricted Stock to furnish the Company such information with respect to such
Holder and the distribution of its Restricted Stock as the Company may from time
to time reasonably request in writing as shall be required by law or by the
Commission in connection therewith.
9. Miscellaneous.
-------------
9.1 Waivers and Amendments.
----------------------
(a) With the written consent of the Holders of a Majority of the
Preferred Stock then outstanding, the obligations of the Company and the rights
of the Holders of the Securities under this Agreement may be waived (either
generally or in a particular instance, either retroactively or prospectively and
either for a specified period of time or indefinitely), and with the same
consent the Company, when authorized by resolution of its Board, may enter into
a supplementary agreement for the purpose of changing in any manner or
eliminating any of the provisions of this Agreement or of any supplemental
agreement or modifying in any manner the rights hereunder of the Holders of the
Securities and the Company; provided, however, that no such waiver or
-------- -------
supplemental agreement shall reduce the aforesaid proportion of Preferred Stock,
the Holders of which are required to consent to any waiver or supplemental
agreement, without the consent of the Holders of all of the Preferred Stock.
(b) Upon the effectuation of each such waiver, consent or
agreement of amendment or modification, the Company shall promptly give written
notice thereof to the Holders of the Preferred Stock who have not previously
consented thereto in writing.
9.2 Effect of Waiver or Amendment. Each Investor acknowledges that
-----------------------------
by operation of Section 9.1 hereof the Holders of a Majority of the Preferred
Stock then outstanding will, subject to the limitations contained in such
Section 9.1, have the right and power to diminish or eliminate certain rights of
such Investor under this Agreement.
9.3 Rights of Holders Inter Se. Each Holder of Securities shall
--------------------------
have the absolute right to exercise or refrain from exercising any right or
rights which such Holder may have by reason of this Agreement or any Security,
including, without limitation, the right to consent to the waiver of any
obligation of the Company under this Agreement and to enter into an agreement
with the Company for the purpose of modifying this Agreement or any agreement
effecting any such modification, and such Holder shall not incur any liability
to any other Holder or Holders of Securities with respect to exercising or
refraining from exercising any such right or rights.
9.4 Exculpation Among Investors and Holders. Each Investor
---------------------------------------
acknowledges that it is not relying upon any other Investor, or any officer,
director, employee, agent, partner or affiliate of any such other Investor, in
making its investment
<PAGE>
or decision to invest in the Company or in monitoring such investment. Each
Investor agrees that no Investor nor any controlling person, officer, director,
stockholder, partner, agent or employee of any Investor shall be liable for any
action heretofore or hereafter taken or omitted to be taken by any of them
relating to or in connection with the Company or the Securities, or both.
Without limiting the generality of the foregoing, no Investor (nor any of its
affiliates, officers, directors, stockholders, partners, agents or employees) or
other Holder of any Security shall have any obligation, liability or
responsibility whatsoever for the accuracy, completeness or fairness of any or
all information about the Company or any Subsidiary or their respective
properties, business or financial and other affairs, acquired by such Investor
or Holder from the Company or the respective officers, directors, employees,
agents, representatives, counsel or auditors of either, and in turn provided to
another Investor or Holder, nor shall any such Investor (or such other Person)
have any obligation or responsibility whatsoever to provide any such information
to any other Investor (or such other Person) or Holder or to continue to provide
any such information if any information is provided.
9.5 Brokers or Finders. Each Investor represents and warrants to
------------------
the Company and each other Investor that, as a result of such Investor's
actions, except as set forth under Section 5.14 of Annex E, no Person has, or as
a result of the transaction as contemplated herein will have, any right or valid
claim against the Company or any other Investor for any commission, fee or other
compensation as a finder or broker, or in a similar capacity.
9.6 Notices. All notices, requests, consents and other
-------
communications required or permitted hereunder shall be in writing and shall be
given personally, by air courier (with signed acknowledgment of receipt) or by
facsimile transmission (with confirmation of transmission):
(a) If to any Holder of any of the Securities, addressed to such
Holder at its address (or to its telecopier number) shown on his
or its signature page hereto, or at such other address (or
telecopier number) as such Holder may specify by written notice to
the Company, or
(b) If to the Company, addressed to it at 10655 Sorrento Valley
Road, San Diego, California 92121 (or, if by telecopier, to (619)
558-6477) or at such other address (or telecopier number) as the
Company may specify by written notice to the Investors,
and each such notice, request, consent and other communication shall for all
purposes of the Agreement be treated as being effective or having been given
upon receipt.
9.7 Severability. Should any one or more of the provisions of this
------------
Agreement or of any agreement entered into pursuant to this Agreement be
determined to be illegal or unenforceable, all other provisions of this
Agreement and of each other agreement entered into pursuant to this Agreement,
shall be given effect separately from the provision or provisions determined to
be illegal or unenforceable and shall not be affected thereby.
<PAGE>
9.8 Parties in Interest. All the terms and provisions of this
-------------------
Agreement shall be binding upon and inure to the benefit of the respective
successors of the parties hereto. This Agreement shall not run to the benefit
of or be enforceable by any Person other than a party to this Agreement and his
or its successors and permitted assigns.
9.9 Headings. The headings of the Sections and paragraphs of this
--------
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
9.10 Choice of Law. Except where the issue for determination is
-------------
one of corporate law, in which case the Delaware General Corporation Law shall
govern, it is the intention of the parties that the internal substantive laws,
and not the laws of conflicts, of California should govern the enforceability
and validity of this Agreement, the construction of its terms and the
interpretation of the rights and duties of the parties.
9.11 Expenses. Each party to this Agreement shall bear its own
--------
costs and expenses incurred with the negotiation and execution of this Agreement
and the performance of the transactions contemplated hereby.
9.12 Counterparts. This Agreement may be executed in any number
------------
of counterparts and by different parties hereto in separate counterparts, with
the same effect as if all parties had signed the same document. All such
counterparts shall be deemed an original, shall be construed together and shall
constitute one and the same instrument.
9.13 Publicity. No party hereto shall originate any press release
---------
or other public announcement, written or oral, relating to this Agreement, or to
performance hereunder or the existence of any arrangement among the parties
hereto without the prior approval of the other parties hereto which may be the
subject of such press release or announcement, except to the extent that such
press release or announcement is reasonably concluded by a party to be required
by applicable law. The Investors acknowledge that the Company will be required
to file a copy of this Agreement, and the other agreements and instruments
contemplated hereby, with the Commission and to describe these transactions in
its public filings.
9.14 Board Seat. The Company shall use its best efforts to nominate
----------
one person acceptable to the Holders of a Majority of the Preferred Stock to
serve as a director on the Board.
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
duly executed as of the date first above written.
PROTEIN POLYMER TECHNOLOGIES, INC.
By: /s/ J. THOMAS PARMETER
------------------------------
J. Thomas Parmeter, President
<PAGE>
[INVESTOR SIGNATURE PAGE TO PURCHASE AGREEMENT]
The foregoing Agreement is
hereby accepted as of the
date first above written.
/s/ TAURUS ADVISORY GROUP
By: J. TAGLIAFERRI
/s/ J. THOMAS PARMETER
/s/ STEVEN M. LAMON
/s/ PHILIP J. DAVIS
/s/ DANIEL I.C. WANG
/s/ RUSSELL T. STERN, JR.
/s/ RICHARD W. HURCKES
/s/ HURCKES CHILDREN TRUST
By: RICHARD W. HURCKES
<PAGE>
EXHIBIT 10.39
WARRANT
TO PURCHASE SHARES OF COMMON STOCK
OF
PROTEIN POLYMER TECHNOLOGIES, INC.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AND NEITHER THESE WARRANTS NOR ANY INTEREST THEREIN MAY
BE TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF WITHOUT REGISTRATION UNDER
THAT ACT OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
No. G-__ Warrant to Purchase _______ Shares
August __, 1999 of Common Stock, $.01 Par Value
WARRANT TO PURCHASE COMMON STOCK
of
PROTEIN POLYMER TECHNOLOGIES, INC.,
a Delaware corporation
Void after the date set forth in the first paragraph hereof
This certifies that, for value received, ______________, or registered
assigns ("Holder") is entitled, subject to the terms set forth below, to
------
purchase from Protein Polymer Technologies, Inc., a Delaware corporation (the
"Company"), ______ shares of Common Stock, $.01 par value, of the Company (such
- --------
class of stock being referred to herein as "Common Stock"), as constituted on
------------
August ___, 1999 (the "Issue Date"), upon surrender of this Warrant, at the
principal office of the Company referred to below, with the subscription form
attached hereto duly executed, and simultaneous payment therefor in the
consideration specified in Section 1 hereof, at the price of $0.50 per share
(the "Purchase Price"). This Warrant must be exercised, if at all, prior to the
--------------
last day of the twelfth calendar month after the Issue Date. The shares of
Common Stock issued or issuable upon exercise of this Warrant are sometimes
referred to as the "Warrant Shares." The term "Warrants" as used herein shall
-------------- --------
include this Warrant and any warrants delivered in substitution or exchange
therefor as provided herein.
1. Exercise. This Warrant may be exercised at any time or from time
--------
to time, on any business day, for all or part of the full number of shares of
Common Stock during the period of time called for hereby, by surrendering it at
the principal office of the Company, 10655 Sorrento Valley Road, First Floor,
San Diego, California 92121, with the subscription form duly executed, together
with payment for the Warrant Shares payable in cash, by check for same day funds
and/or by delivery and cancellation of promissory notes evidencing indebtedness
of the Company. No other form of
<PAGE>
consideration shall be acceptable for the exercise of this Warrant. A Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the date of its surrender for exercise as provided above, and the
person entitled to receive the shares of Common Stock issuable upon such
exercise shall be treated for all purposes as the holder of such shares of
record as of the close of business on such date. As soon as practicable on or
after such date, and in any event within 10 days thereof, the Company shall
issue and deliver to the person or persons entitled to receive the same a
certificate or certificates for the number of shares of Common Stock issuable
upon such exercise. Upon any partial exercise, the Company will issue and
deliver to Holder a new Warrant or Warrants with respect to the shares of Common
Stock not so transferred. No fractional shares of Common Stock shall be issued
upon exercise of a Warrant. In lieu of any fractional share to which Holder
would be entitled upon exercise, the Company shall pay cash equal to the product
of such fraction multiplied by the Common Stock Value (as defined in the
Company's Certificate of Designation of Series G Preferred Stock) on the date of
exercise.
2. Payment of Taxes. All shares of Common Stock issued upon the
----------------
exercise of a Warrant shall be duly authorized, validly issued and outstanding,
fully paid and non-assessable. Holder shall pay all taxes and other
governmental charges that may be imposed in respect of the issue or delivery
thereof and any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of Common Stock in any name
other than that of the registered Holder of the Warrant surrendered in
connection with the purchase of such shares, and in such case the Company shall
not be required to issue or deliver any stock certificate until such tax or
other charge has been paid or it has been established to the Company's
satisfaction that no tax or other charge is due.
3. Transfer and Exchange. This Warrant and all rights hereunder are
---------------------
transferable, in whole but not in part, only with the prior approval of the
Company, which consent shall not be unreasonably withheld. If such a proposed
transfer is so approved, this Warrant is transferable on the books of the
Company maintained for such purpose at its principal office referred to above by
Holder in person or by duly authorized attorney, upon surrender of this Warrant
properly endorsed and upon payment of any necessary transfer tax or other
governmental charge imposed upon such transfer. Each taker and holder of this
Warrant, by taking or holding the same, consents and agrees that this Warrant,
when endorsed in blank, shall be deemed negotiable and that when this Warrant
shall have been so endorsed, the Holder hereof may be treated by the Company and
all other persons dealing with this Warrant as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented hereby or
to the transfer hereof on the books of the Company, any notice to the contrary
notwithstanding; but until such transfer on such books, the Company may treat
the registered Holder hereof as the owner for all purposes.
4. Certain Adjustments.
-------------------
4.1 Adjustment for Reorganization, Consolidation, Merger. In case
----------------------------------------------------
of any reorganization of the Company (or any other corporation, the stock or
other securities of which are at the time receivable on the exercise of this
Warrant) after the
-2-
<PAGE>
Issue Date, or in case, after such date, the Company (or any such other
corporation) shall consolidate with or merge into another corporation (other
than the merger of a wholly owned subsidiary into the Company) or convey all or
substantially all its assets to another corporation, then and in each such case
Holder, upon the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation, merger or conveyance, shall
be entitled to receive, in lieu of the stock receivable upon the exercise of
this Warrant prior to such consummation, the stock or other securities or
property to which such Holder would have been entitled upon such consummation if
such Holder had exercised this Warrant immediately prior thereto.
4.2 Adjustments for Dividends in Common Stock. If the Company at
-----------------------------------------
any time or from time to time after the Issue Date makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive, a dividend
payable in additional shares of Common Stock, then and in each such event the
Purchase Price then in effect shall be decreased as of the time of such issuance
or, in the event such record date is fixed, as of the close of business on such
record date, by multiplying the Purchase Price then in effect by a fraction (1)
the numerator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date, and (2) the denominator of which shall be the
total number of shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such record date plus
the number of shares of Common Stock issuable in payment of such dividend;
provided, however, that if such record date is fixed and such dividend is not
fully paid on the date fixed therefor, the Purchase Price shall be recomputed
accordingly as of the close of business on such record date and thereafter the
Purchase Price shall be adjusted pursuant to this Section 4.2 as of the time of
actual payment of such dividends.
4.3 Stock Split and Reverse Stock Split. If the Company at any
-----------------------------------
time or from time to time after the Issue Date effects a subdivision of the
outstanding Common Stock, the Purchase Price then in effect immediately before
that subdivision shall be proportionately decreased and the number of shares of
Common Stock theretofore receivable upon the exercise of this Warrant shall be
proportionately increased. If the Company at any time or from time to time after
the Issue Date combines the outstanding shares of Common Stock into a smaller
number of shares, the Purchase Price then in effect immediately before that
combination shall be proportionately increased and the number of shares of
Common Stock theretofore receivable upon the exercise of this Warrant shall be
proportionately decreased. Each adjustment under this Section 4.3 shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
4.4 Accountants' Certificate as to Adjustment. In each case of an
-----------------------------------------
adjustment in the shares of Common Stock receivable on the exercise of the
Warrants, the Company at its expense shall cause independent public accountants
of recognized standing selected by the Company (who may be the independent
public accountants then auditing the books of the Company) to compute such
adjustment in accordance with the terms of the Warrants and prepare a
certificate setting forth such adjustment and showing the facts upon which such
adjustment is based. The Company will forthwith mail a copy of each such
certificate to each holder of a Warrant at the time outstanding.
-3-
<PAGE>
5. Loss or Mutilation. Upon receipt by the Company of evidence
------------------
satisfactory to it (in the exercise of reasonable discretion) of the ownership
of and the loss, theft, destruction or mutilation of any Warrant and (in the
case of loss, theft or destruction) of indemnity satisfactory to it (in the
exercise of reasonable discretion), and (in the case of mutilation) upon
surrender and cancellation thereof, the Company will execute and deliver in lieu
thereof a new Warrant of like tenor.
6. Reservation of Common Stock. The Company shall at all times
---------------------------
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the exercise of the Warrant, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect exercise of the Warrant; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect such exercise,
the Company will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
7. Notices of Record Date. In the event of (i) any taking by the
----------------------
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company, any
merger or consolidation of the Company with or into any other corporation (other
than a merger of a wholly owned subsidiary into the Company), or any transfer of
all or substantially all of the assets of the Company to any other person or any
voluntary or involuntary dissolution, liquidation or winding up of the Company,
the Company shall mail to the Holder at least thirty (30) days prior to the
record date specified therein, a notice specifying (1) the date on which any
such record is to be taken for the purpose of such dividend or distribution and
a description of such dividend or distribution, (2) the date on which any such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up is expected to become effective, and (3) the date, if
any, that is to be fixed, as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up.
8. Investment Representation and Restriction on Transfer.
-----------------------------------------------------
8.1 Securities Law Requirements.
---------------------------
(a) By its acceptance of this Warrant, Holder hereby
represents and warrants to the Company that this Warrant and the Warrant Shares
will be acquired for investment for its own account, not as a nominee or agent,
and not with a view to the sale or distribution of any part thereof, and that it
has no present intention of selling, granting participations in or otherwise
distributing the same. By acceptance of this Warrant, Holder further represents
and warrants that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to any
person, with respect to this Warrant or the Warrant Shares.
-4-
<PAGE>
(b) By its acceptance of this Warrant, Holder understands
that this Warrant is not, and the Warrant Shares will not be, registered under
the Securities Act of 1933, as amended (the "Act"), on the basis that the
issuance of this Warrant and the Warrant Shares are exempt from registration
under the Act pursuant to Section 4(2) thereof, and that the Company's reliance
on such exemption is predicated on Holder's representations and warranties set
forth herein.
(c) By its acceptance of this Warrant, Holder understands
that the Warrant and the Warrant Shares may not be sold, transferred, or
otherwise disposed of without registration under the Act, or an exemption
therefrom, and that in the absence of an effective registration statement
covering the Warrant and the Warrant Shares or an available exemption from
registration under the Act, the Warrant and the Warrant Shares must be held
indefinitely. In particular, Holder is aware that the Warrant and the Warrant
Shares may not be sold pursuant to Rule 144 promulgated under the Act unless all
of the conditions of Rule 144 are satisfied. Among the conditions for use of
Rule 144 are the availability of current information about the Company to the
public, prescribed holding periods which will commence only upon Holder's
payment for the securities being sold, manner of sale restrictions, volume
limitations and certain other restrictions. By its acceptance of this Warrant,
Holder represents and warrants that, in the absence of an effective registration
statement covering the Warrant or the Warrant Shares, it will sell, transfer or
otherwise dispose of the Warrant and the Warrant Shares only in a manner
consistent with its representations and warranties set forth herein and then
only in accordance with the provisions of Section 8.1(d).
(d) By its acceptance of this Warrant, Holder agrees that in
no event will it transfer or dispose of any of the Warrants or the Warrant
Shares other than pursuant to an effective registration statement under the Act,
unless and until (i) Holder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a statement of the
circumstances surrounding the disposition, and (ii) if reasonably requested by
the Company, at the expense of the Holder or transferee, it shall have furnished
to the Company an opinion of counsel, reasonably satisfactory to the Company, to
the effect that (A) such transfer may be made without registration under the Act
and (B) such transfer or disposition will not cause the termination or the non-
applicability of any exemption to the registration and prospectus delivery
requirements of the Act or to the qualification or registration requirements of
the securities laws of any other jurisdiction on which the Company relied in
issuing the Warrant or the Warrant Shares.
8.2 Legends; Stop Transfer.
----------------------
(a) All certificates evidencing the Warrant Shares shall
bear a legend in substantially the following form:
The securities represented by this certificate have not been
registered under the Securities Act of 1933. These securities have
been acquired for investment and not with a view to distribution and
may not be offered for sale, sold, pledged or otherwise transferred in
the absence of an effective registration statement for such securities
under the Securities Act of 1933 or an opinion of counsel reasonably
satisfactory in form and content to the issuer that such registration
is not required under such Act.
-5-
<PAGE>
(b) The certificates evidencing the Warrant Shares shall
also bear any legend required by any applicable state securities law.
(c) In addition, the Company shall make, or cause its
transfer agent to make, a notation regarding the transfer restrictions of the
Warrant and the Warrant Shares in its stock books, and the Warrant and the
Warrant Shares shall be transferred on the books of the Company only if
transferred or sold pursuant to an effective registration statement under the
Act covering the same or pursuant to and in compliance with the provisions of
Section 8.1(d).
9. Notices. All notices and other communications from the Company to
-------
the Holder of this Warrant shall be mailed by first-class registered or
certified mail, postage prepaid, to the address furnished to the Company by
Holder.
10. Change; Waiver. Neither this Warrant nor any term hereof may be
--------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
11. Headings. The headings in this Warrant are for purposes of
--------
convenience in reference only, and shall not be deemed to constitute a part
hereof.
12. Governing Law. This Warrant is delivered in California and shall
-------------
be construed and enforced in accordance with and governed by the internal laws,
and not the law of conflicts, of such State; provided however, that to the
extent that an issue of determination is one of corporation law, then the
Delaware General Corporation Law shall govern.
PROTEIN POLYMER TECHNOLOGIES, INC.,
A DELAWARE CORPORATION
By______________________________________
J. Thomas Parmeter, President
-6-
<PAGE>
SUBSCRIPTION FORM
-----------------
(To be executed only upon exercise of Warrant)
The undersigned, registered owner of this Warrant, irrevocably
exercises this Warrant and purchases ____________ of the number of shares of
Common Stock, $.01 par value, of PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware
corporation, purchasable with this Warrant, and herewith makes payment therefor,
all at the price and on the terms and conditions specified in this Warrant.
DATED:______________
---------------------------------------
(Signature of Registered Owner)
---------------------------------------
(Street Address)
---------------------------------------
(City) (State) (Zip)
<PAGE>
FORM OF ASSIGNMENT
------------------
FOR VALUE RECEIVED the undersigned, registered owner of this Warrant,
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of shares of Common Stock, $.01 par value, set forth below:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint _________________________
_________________________________________________ Attorney to make such transfer
on the books of PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware corporation,
maintained for the purpose, with full power of substitution in the premises.
DATED: ___________________
-------------------------------
(Signature)
--------------------------------
(Witness)
<PAGE>
EXHIBIT 10.40
SECOND AMENDMENT TO STOCKHOLDER PROTECTION AGREEMENT
THIS SECOND AMENDMENT TO STOCKHOLDER PROTECTION AGREEMENT (this
"Amendment") is entered into as of the 26th day of July, 1999 by and between
- ----------
PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and
-------
CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Rights Agent (the "Rights
------
Agent").
R E C I T A L S:
- - - - - - - -
A. Pursuant to Section 4.4 of that certain Stockholder Protection
Agreement dated as of August 22, 1997 ( the "Stockholder Protection Agreement")
--------------------------------
by and between the Company and the Rights Agent, prior to the Separation Time,
the Company may supplement or amend any provision of the Stockholder Protection
Agreement in any respect without the approval of any holders of Rights.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings given to such terms in the Stockholder Protection Agreement.
B. The Rights Agent has agreed pursuant to Section 4.4 of the
Stockholder Protection Agreement to execute any supplement or amendment to the
Stockholder Protection Agreement upon delivery of a certificate (the "Officer's
---------
Certificate") from an appropriate officer of the Company stating that the
- -----------
proposed supplement or amendment is in compliance with such Section.
C. The Company has delivered an Officer's Certificate to the Rights
Agent with respect to this Amendment.
NOW THEREFORE, in consideration of the foregoing facts and such other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Company and Rights Agent hereby agree as follows:
AGREEMENT
---------
Section 1. MODIFICATION OF STOCKHOLDER PROTECTION AGREEMENT.
------------------------------------------------
The definition of "Minority Investor" in Section 1.1(m) of the
Stockholder Protection Agreement is hereby amended in its entirety to read as
follows:
"`Minority Investor' shall mean any Person (together with such
-----------------
Minority Investor's Affiliates and Associates) who, with the express
written approval of the Board of Directors of the Company, acquires
aggregate Beneficial Ownership of 15% or more but less than or equal
to that percentage expressly approved in writing by the Company, as
approved by its Board of Directors, but in no event greater than 60%
of the outstanding Common Stock of the Company."
<PAGE>
Section 2. MISCELLANEOUS PROVISIONS
------------------------
(a) Descriptive Headings. Descriptive headings appear herein for
--------------------
convenience of reference only and shall not control or affect the meaning or
construction of any provisions hereof.
(b) Governing Law. This Amendment shall be construed, interpreted
-------------
and applied in accordance with the internal laws of the State of New York
without giving effect to doctrines relating to conflicts of laws.
(c) Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be an original, but all of which taken
together shall constitute one and the same instrument.
(d) Stockholder Protection Agreement References. As of the date
-------------------------------------------
hereof any references to "this Agreement" in the Stockholder Protection
Agreement or any other agreement, document or instrument related thereto shall
mean the Stockholder Protection Agreement as modified by this Amendment.
[SIGNATURE PAGE FOLLOWS]
-2-
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
date first above written.
Company: PROTEIN POLYMER TECHNOLOGIES, INC.
- -------
By: /s/ J. THOMAS PARMETER
--------------------------------------
J. Thomas Parmeter,
President and Chief Executive Officer
Rights Agent: CONTINENTAL STOCK TRANSFER & TRUST COMPANY
- ------------
By: /s/ WILLIAM F. SEEGRABER
--------------------------------------
Name: William F. Seegraber
Title: Vice President
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 997,920 997,920
<SECURITIES> 0 0
<RECEIVABLES> 31,945 31,945
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,047,125 1,047,125
<PP&E> 2,099,586 2,099,586
<DEPRECIATION> 1,689,775 1,689,775
<TOTAL-ASSETS> 1,633,913 1,633,913
<CURRENT-LIABILITIES> 317,761 317,761
<BONDS> 0 0
0 0
8,761,072 8,761,072
<COMMON> 28,531,604 28,531,604
<OTHER-SE> (36,022,862) (36,022,862)
<TOTAL-LIABILITY-AND-EQUITY> 1,633,913 1,633,913
<SALES> 14,111 50,627
<TOTAL-REVENUES> 26,448 82,522
<CGS> (145) (467)
<TOTAL-COSTS> (145) 12,033
<OTHER-EXPENSES> 784,068 3,105,386
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,667 16,592
<INCOME-PRETAX> (826,696) (3,242,556)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (826,696) (3,242,556)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (826,696) (3,242,556)
<EPS-BASIC> (0.06) (0.26)
<EPS-DILUTED> (0.06) (0.26)
</TABLE>
